A Medtronic (NYSE:MDT) shareholder sued the company last week over its plan to cover nearly $58 million in taxes its pending, $43 billion buyout of Covidien (NYSE:COV) would incur for its top executives.
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 the company’s 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.
"By law, however, the board is duty bound to always take actions that are in the best interests of the company and its shareholders, whether or not those interests affect the officers and directors’ personal tax liabilities. Therefore, the board’s reasoning is specious and serves as no cover for the individual defendants’ self-dealing," according to the documents.
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 |
| Non-executive directors: | $5,500,000 |
| TOTAL |
$63,025,389 |
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