Eric Talley has posted Corporate Inversions and the Unbundling of Regulatory Competition (October 15, 2014). USC CLASS Research Paper No. CLASS14-32. Available at SSRN: http://ssrn.com/abstract=2511723:
Abstract: A sizable number of US public companies have recently executed “tax inversions” – acquisitions that move a corporation’s residency abroad while maintaining its listing in domestic securities markets. When appropriately structured, inversions replace American with foreign tax treatment of extraterritorial earnings, often at far lower effective rates. Regulators and politicians have reacted with alarm to the “inversionitis” pandemic, with many championing radical tax reforms. This paper questions the prudence of such extreme reactions, both on practical and on conceptual grounds. Practically, I argue that inversions are simply not a viable strategy for many firms, and thus the ongoing wave may abate naturally (or with only modest tax reforms). Conceptually, I assess the inversion trend through the lens of regulatory competition theory, in which jurisdictions compete not only in tax policy, but also along other dimensions, such as the quality of their corporate law and governance rules. I argue that just as US companies have a strong aversion to high tax rates, they have a strong affinity for strong corporate governance rules, a traditional strength of American corporate law. This affinity has historically given the US enough market power to keep taxes high without chasing off incorporations, because US law specifically bundles tax residency and state corporate law into a conjoined regulatory package. To the extent this market power remains durable, radical tax overhauls would be unhelpful (and even counterproductive). A more blameworthy culprit for inversionitis, I argue, can be found in an unlikely source: Securities Law. Over the last fifteen years, financial regulators have progressively suffused US securities regulations with mandates relating to internal corporate governance matters – traditionally the domain of state law. Those federal mandates, in turn, have displaced and/or preempted state law as a primary source of governance regulation for US-traded issuers. And, because US securities law applies to all listed issuers (regardless of tax residence), this displacement has gradually “unbundled” domestic tax law from corporate governance, eroding the US’s market power in regulatory competition. The most effective elixir for this erosion, then, may also lie in securities regulation. I propose two alternative reform paths: either (a) domestic exchanges should charge listed foreign issuers for their consumption of federal corporate governance policies; or (b) federal law should cede corporate governance back to the states by rolling back many of the governance mandates promulgated over the last fifteen years.
There are some very handy deal diagrams that I likely will swipe borrow when I teach Mergers & Acquisitions in the spring semester. There's also a whole bunch of math, which I just sort of skip over the I do those unpronounceable names in Russian literature. But the conclusion seems sound. In any case, highly recommended (even for the math phobic).