Medtronic Suit Shows Tension in Inversion Tax Savings

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By Laura Davison

Oct. 6 — Corporate inversions have gained popularity because of the tax savings they generate, but in order to complete the deal, some shareholders can be forced to pay taxes on only-on-paper capital gains.

A group of Medtronic Inc. shareholders is suing the company saying the medical device maker's 2014 inversion with Irish Covidien Plc caused them injury because they were forced to pay tax on gains when they exchanged their Medtronic shares for stock in the combined company ( Merenstein v. Medtronic, Inc., Minn., No. A15-0858, oral arguments 10/5/16 ).

The company's management didn't uphold its fiduciary duty to a minority of the shareholders, the plaintiff's attorneys said.

Tax attorneys representing the investors told the Minnesota Supreme Court Oct. 5 some shareholders were unequally treated because tax-exempt investors, such as pension funds, didn't have to pay tax on the transaction. Medtronic's attorneys said all stockholders faced a “taxable event” and the amount they did—or didn't—have to pay because of that isn't relevant. The share price increase—from about $64 before the merger announcement up to the nearly $86 it trades for now—shows the deal benefited all the corporation's shareholders, the Medtronic attorneys said (116 DTR G-1, 6/17/14).

Merenstein highlights the complicated accounting that companies face when structuring these deals to avoid Treasury Department penalties. Government regulations require U.S. shareholders to own less than 60 percent of the combined company, which can dilute the investors' stake. If U.S. shareholders own more than 50 percent, exchanging the old stock for the new stock can trigger capital gain.

To save tax in the long run, shareholders are hit with a capital gains tax in the short run and a lesser portion of the company.

Inversion ‘Nirvana.'

“Nirvana is if you fall below 50 percent,” Robert Willens, a tax consultant in New York, told Bloomberg BNA Oct. 6. “If you fall below that then the shareholders are protected as well as the corporation.”

The Minnesota Supreme Court usually issues opinions within 90 days, though there is no formal deadline. A favorable outcome for the shareholders could set a precedent for future cases that pit an inverted company against its shareholders.

Lockridge Grindal Nauen PLLP represents Merenstein. Robins Kaplan LLP is representing Medtronic.

Similar Case

A similar lawsuit, Gumm v. Molinaroli, was filed in the U.S. District Court for the Eastern District of Wisconsin in August. Shareholders of Johnson Controls Inc. are suing the company over the capital gain they had to pay in the inversion with Tyco International Plc. That deal closed in September.

Many of the large-scale inversions attempted in recent years were structured so that shareholders of the U.S. corporation held as close as possible to 60 percent, but without going over that threshold to avoid adverse Treasury action. That threshold, however, could change as foreign companies gain size through organic growth and acquisitions, Willens said.

A foreign acquirer larger than its domestic target isn't usually inclined to give U.S. shareholders more than half of the control of the company. A recent example is Henderson Group Plc’s merger with Janus Capital Group Inc. to create a $320 billion asset manager announced Oct. 2. The Janus shareholders will hold 43 percent of the company, Willens said.

“When the foreign companies are larger and more muscular,” Willens said, “you can avoid more pitfalls.”

To contact the reporter on this story: Laura Davison in Washington at

To contact the editor responsible for this story: Meg Shreve at

For More Information

A video of the Minnesota Supreme Court oral arguments is at

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