The mega-merger between Medtronic (NYSE:MDT) and Covidien (NYSE:COV) has ruffled some feathers among shareholders concerned about the looming capital gains tax that’s going to hit when the deal closes, but regular shareholders aren’t the only ones facing a bill. Executives and board members are no more insulated from the tax than any other shareholders, according to a Medtronic presentation.
The merger includes a provision to cover costs of an extra excise tax that applies only to certain "Section 16b" officers of the company as well as members of the board of directors, but those individuals are still on the hook for paying the capital gains tax on their shares once the deal closes.
"Medtronic has agreed to provide a gross up to those Medtronic, Inc. Section 16(b) officers and members of the Medtronic, Inc. Board of Directors with respect to the excise tax, so that, on a net after-tax basis, they will be in the same position as if no such excise tax had been applied, because the Medtronic, Inc. Board of Directors did not feel that these individuals should be economically penalized for taking action that they believe is in the best interest of Medtronic, Inc. and its shareholders," according to a company merger FAQ.
The acquisition is structured in a rather unusual way that requires that existing shareholders trade in their stock for shares of the "new" Medtronic, an Irish holding company that will be formed after the companies merge. That means that shareholders will be subject to a capital gains tax that could run anywhere from 15%-30%.
Medtronic’s acquisitions have never been a taxable event in the past, and the structure of the new deal has already spurred at least one lawsuit from shareholders who claim the deal leaves them in the cold.
"Medtronic stockholders will be forced to pay taxes on any gains in Medtronic stock," according to the complaint, which seeks class action status. "But because the sale does not generate cash proceeds that would allow stockholders to pay the taxes, Medtronic stockholders who have held the stock for over a year could see federal tax rates of 15 to 30 percent on the gain."
Medtronic did not immediately respond to requests for comment.
