A federal judge in Minnesota last week declined to bar a Medtronic (NYSE:MDT) plan to cover more than $63 million in taxes its $43 billion buyout of Covidien (NYSE:COV) would incur for its top executives and directors.
U.S. tax laws impose a 15% excise tax on stock owned by executives and directors for the 6 months before and after a merger transaction. Although it’s said all along that it will offer an excise tax "gross-up" to cover executives from the tax, Medtronic revealed in an August 26 regulatory filing the details of the coverage.
Marilyn Clark filed a shareholders derivatives lawsuit Oct. 3 in the U.S. District Court for Minnesota over the "wrongful decision to force the company to indemnify and reimburse Medtronic’s officers and directors for millions of dollars of their personal tax liability in connection with an ‘inversion’ merger that Medtronic entered into with an overseas entity, Covidien plc," according to court documents. "The multi-million dollar windfall tax reimbursement is wholly self-serving, counter to public policy, and harmful to Medtronic its shareholders," Clark alleged.
Medtronic has said that the reimbursement plan is necessary to maintain its ability "not be discouraged from taking action that they believe is in the best interest of Medtronic and its shareholders." But that, in effect, means that Medtronic "has admitted that the board is incapable of acting in Medtronic’s best interests when their personal interests are at stake," according to the lawsuit.
The plaintiffs asked Judge Susan Nelson of the U.S. District Court for Minnesota for a preliminary injunction barring the gross-up plan.
The judge declined to grant an injunction, ruling that the plaintiffs failed to exhaust their remedies under Minnesota law before filing the derivatives lawsuit.
"The law requires plaintiffs to exhaust available remedies and make a demand before bringing suit," Nelson wrote. "Here, plaintiffs have no chance of success on the merits because they failed to bring a pre-suit demand on the board."
Nelson wrote that Medtronic has already shown a willingness to create special litigation committees to review shareholders’ complaints and noted that shareholders will have a chance to approve the merger’s terms, including the gross-up, at a meeting slated for Jan. 6.
"If past is prologue, then the board’s past reliance on an SLC demonstrates that there is a possibility that the board would again consider the merits of plaintiffs’ demand by convening another SLC," she wrote in the Dec. 22 order. "Moreover, the parties agree that not all members of the board are self-interested with respect to the gross-up payments. One board member, Dr. Elizabeth Nabel, will not receive a tax reimbursement. Since an SLC may consist of a single ‘independent director,’ Dr. Nabel is fully competent to consider plaintiffs’ demand. Furthermore, even if Dr. Nabel did benefit from the gross-up payments, the board could appoint an SLC consisting of ‘other independent persons’ to address plaintiffs’ concerns."
The reimbursement plan
CEO Omar Ishrak would owe some $24.8 million in excise taxes; Medtronic’s 4 other named executives would owe a collective $22.3 million. Five other executives not named in the filing would share $10.5 million to cover their excise tax liabilities, while Medtronic’s 10 non-executive directors would share $5.5 million.
The gross-ups for executives aroused the ire of shareholders who will be exposed to capital gains taxes once the deal closes, which is expected to happen later this year or early in 2015. Another tax aspect of the deal, the so-called"inversion" that would see Medtronic reincorporate in Ireland, has the U.S. Congress and even President Barack Obama up in arms. But Medtronic argues that the deal will be a net gain for the U.S. economy, because the inversion frees up billions in cash that it plans to spend here on R&D and acquisitions.
|Omar Ishrak, chairman & CEO||$24,750,381|
|Gary Ellis, CFO||$7,623,633|
|Christopher O’Connell, restorative therapies group president||$6,685,665|
|Michael Coyle, cardiac & vascular group president||$5,348,569|
|Carol Surface, chief human resources officer||$2,617,141|
|Total for named executives:||$47,025,389|
|5 unnamed executives:||$10,500,000|
|Total for 10 key executives:||$57,525,389|