A Medtronic (NYSE:MDT) shareholder is suing in a Minnesota state court to block the pending, $43 billion merger with Covidien (NYSE:COV), claiming that the deal leaves shareholders on the hook for significant tax liabilities.
Plaintiff Lewis Merenstein sued in Hennepin County District Court July 2, arguing that the proposed merger’s conversion of Medtronic stock into the new stock of the combined company "will result in a substantial loss to Medtronic shareholders," the St. Cloud Times reported.
Terms of the deal, expected to close during the 4th quarter or in early 2015, call for Medtronic to pay $93.22 per share for Covidien. Each COV share will be converted to the right for $35.19 in cash and 0.956 MDT shares. Medtronic said that equates to a 29% premium on COV’s $75.02 closing price June 13. The deal will leave Covidien stockholders with about a 30% stake in Medtronic, the world’s largest-pure-play medical device company.
"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 said it believes the allegations in the complaint are without merit and that the company would "vigorously defend our position in court," the newspaper reported.
"Covidien is an Irish-domiciled company and therefore, the most financially efficient structure for us is to locate our headquarters in Ireland," Medtronic said. "The Covidien acquisition is driven by a strategic decision to combine the companies to become the world’s premier medical technology and services company."
It’s the 2nd lawsuit seeking to block the Medtronic/Covidien merger. Earlier this month, Richard Taxman accused Covidien, its board of directors and chairman, president & CEO José Almeida of breaching their fiduciary duties in agreeing to the acquisition, which values COV shares at $93.22 apiece.