Photographer: Simon Dawson/Bloomberg

Allergan Vows to Pay Golden Parachute Taxes After Pfizer Deal

Three days before Allergan Plc announced a $160 billion deal with Pfizer Inc. last year, its board sent a message of reassurance to its executive team: if you’re let go after the acquisition closes, we’ll cover the tax bill for your severance packages.

As a result, Allergan could end up reimbursing its five top managers as much as $86 million for taxes they’d have to pay on top of ordinary income taxes if they aren’t offered jobs in the combined company, according to a preliminary proxy filing Friday. The payments were outlined in agreements signed on Nov. 20 last year and are specifically tied to the Pfizer deal.

Several top Allergan executives are slated to take jobs at the merged drug company and wouldn’t get the payouts. That includes Allergan Chief Executive Officer Brent Saunders, who is to be president and chief operating officer of the combined company, and Executive Vice President Bill Meury, who is in line to be group president of global specialty and consumer brands.

Mark Marmur, an Allergan spokesman, declined to comment.

The tax reimbursements would come on top of exit packages worth a combined $300 million for the five executives if they were let go. If Saunders’s situation changed and he was left without a job, he’d receive $140.7 million in severance, bonuses and equity awards that would vest early, based on an Allergan share price of $295.91. He would get reimbursed $55.1 million to cover excise taxes under those circumstances, the filing said.

Board Decision

The promise to pay its top managers’ taxes came after the board considered “the significant value delivered” by the executives, according to the filing. It’s a deviation from the previously stated governance practice by the directors at Allergan’s predecessor Actavis Plc, to only provide “limited” excise tax gross-ups.

The excise tax is a 20 percent levy that applies to certain golden parachute payments awarded to executives after they’re fired or have their responsibilities reduced, oftentimes following a change in control of the company. Once a common feature in employment agreements, many companies have faced investor pressure to scrap excise tax payments since they’re considered an excessive perquisite by some.

Pfizer and Allergan reached a $160 billion merger agreement in November that allows Pfizer to move its tax address abroad. The deal is structured so that Dublin-based Allergan technically bought New York-based Pfizer. Ireland’s corporate tax rate is 12.5 percent, compared with the U.S. rate of 35 percent, the highest in the Western world.

Past Payouts

Last year, the board last year also made early payouts of part a bonus program that was set up for executives in 2014 after Actavis merged with Forest Laboratories Inc. Saunders’ share was $14.3 million in cash, based on synergies achieved from the deal. The board said it chose to accelerate the bonuses, initially scheduled for 2017, to “mitigate the potential impact” from excise taxes the executives would be due if they’re fired after the planned Pfizer deal closes. The early payouts came on top of the board’s promise to cover their executives’ excise tax bills.

Saunders’s total compensation for 2015 amounted to $21.6 million, including $1 million in salary and a $6 million annual bonus that came in addition to the payout from the Forest Laboratories deal. Executive Chairman Paul Bisaro received $19 million for the year, including $13 million in early bonus payments and a $5 million retention award earned after Actavis’s 2013 acquisition of Warner Chilcott Plc.

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