The Amgen class action law suit shows the potential impact of TP risks on M&A
On 13 March 2023, a claim was filed against Amgen Inc, the biopharmaceutical group, as part of a proposed class action by investors. It’s an interesting example of how the management of TP risks can have far wider implications than just tax compliance.
The claim relates to failure to disclose potential TP liabilities, including as regards attribution of profits as between the US and Puerto Rico. In particular, the claim alleges that, during the relevant period, the company failed to disclose to investors that:
(1) the US government claimed Amgen owed more than $3 billion in back taxes for tax years 2010, 2011, and 2012
(2) the US government claimed Amgen owed more than $5 billion in back taxes for tax years 2013, 2014, and 2015
(3) the US government was likely to claim that Amgen owed materially more to the US government than investors had been led to believe for subsequent tax years for which Amgen had used the same profit allocation treatment between its US and Puerto Rico operations
(4) Amgen had not taken sufficient accruals to account for its outstanding tax liabilities
(5) Amgen had failed to comply with ASC 450 and other rules and regulations regarding the preparation of its periodic US Securities and Exchange Commission filings
(6) Amgen's refusal to pay taxes claimed by the US government exposed Amgen to a substantial risk of severe financial penalties imposed by the US Internal Revenue Service (IRS)
(7) as a result, Defendants' positive statements about the Company's business, operations, and prospects were materially misleading and/or lacked a reasonable basis at all relevant times.
The context of this claim is corporate governance / market regulation rather than M&A. However, it led me to think about how TP risks are managed in M&A transactions.
The slide above shows a sample TP warranty adapted from a commercially available precedent. I find it interesting, because from a seller’s perspective, I would not want to give this kind of warranty: compliance with the ALP is surely too subjective. And I would not be satisfied as a buyer either, again on the basis that the warranty is too subjective and vague, and doesn’t provide a basis for quantifiable recourse.
As a former M&A lawyer, I’m sceptical about the idea of writing (and negotiating) pages and pages of TP warranties and indemnities in share purchase agreements and investment agreements. Especially since TP risks may take long periods to crystallise.
So my guess is that the significance of TP due diligence in M&A will continue to grow, and this will of course need to include a review of the legal implementation of TP policies.
I would also expect that the use of TP insurance will continue to expand, and this may become the primary route for managing TP risks in M&A transactions.
What are your thoughts? I would, as always, very much like to hear your views.
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