Inversion Mergers Raise Compliance Concerns

In 2014, many firms merged with foreign firms to execute an inversion so that they will be subjects of a different tax jurisdiction. The idea was to answer to foreign taxation first, only paying the difference, if anything at all, to the US government, creating massive savings. Inversion is a cross-border merger where the smaller foreign firm takes over a larger domestic firm. It is truly an inversion of the classic merger, but for the recent inversions, this is legal mumble-jumble. While technically the foreign firm took over the larger firm, the larger domestic firm is assuming a subsidiary role in name only. For this reason, The Department of Treasury started cracking down on foreign inversions.
image from Bloomberg Business

Now that the mergers have happened, in order to maintain the inverted status, a true merger must take place. That requires merging the operations of the two firms. All of the usual headaches of merger implementations apply. One of those headaches is compliance.

Inversion generally took place outside of the financial services world because that was an industry already global in nature on a firm to firm basis. So, the regulatory compliance issues pertaining to inverted firms are unique to each merger.

What isn’t unique is the US operations having to comply with foreign regulators. Here is where the US firm will need to be guided by their foreign counterparts, who may not be all that eager to help since the executives at the smaller foreign firm might be out of a job by the end of the year if the merger implementation goes smoothly.

And then then there are labors laws. The EU has TUPE — Transfer of Undertakings Protection of Employment. (Most of the inversion took place between US and Europe.) This protects many employees when transferring to new employers. Americans have long left unions behind but Europe is much more labor friendly. Shedding the European workforce after the merger might get tricky. Even complying with simple issues like mandatory national holiday and vacation day rules might create an inequality on which the US counterparts may demand parity.

And then there is the tricky situation of US expatriates working for the newly formed non-US firm. Are they still expatriates or are they immigrants? How these employees get paid, now that they are no longer working abroad for their firms?

A successful merger is a one time expense and, hopefully, in the mad rush to find foreign dancing partners, Americans didn’t partner up with one with two left feet. Constantly replacing one shoes will get expensive.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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