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Medtronic Shortchanging Shareholders, Lawsuit Claims

A shareholder has sued Medtronic executives and board members over their $63-million tax-compensation plan related to the company's acquisition of Covidien. The lawsuit--filed October 3 in U.S. District Court in Minnesota--claims the defendants reimbursed themselves for taxes they would owe in an inversion, a deal to relocate a corporation's U.S. headquarters overseas to take advantage of lower tax rates. The $43 billion Covidien acquisition would move Medtronic's headquarters to Ireland. The lawsuits allegations are a bit embarrassing for top Medtronic executives, to say the least, because there are longtime shareholders who are going to have to pay a tax bill over the deal. The deal would cause the shareholders, some of whom worked for the company during its early years, to exchange their present stock for stock in the new Ireland-based Medtronic plc, and in the process they would be stuck with a surprise capital gains tax on all the extra value the stock gained over the decades. CEO Omar Ishrak reportedly told some of the longtime shareholders that he understood their pain during the company's annual meeting in August. Medtronic believes that the allegations are without merit, and will "vigorously defend our position in court," according to a statement by company spokesperson Fernando Vivanco. Meanwhile, Medtronic has said it would proceed with the Covidien acquisition, despite the federal government's decision to make it harder for the medtech giant to see tax benefits from moving its official headquarters to Ireland through the deal, Qmed recently reported. Medtronic--which was said to be looking to draw on its billions in foreign reserves to help pay for the deal interest-free--will instead use approximately $16 billion in external financing to complete the deal. The latest shareholder lawsuit, on behalf of California shareholder Marilyn Clark, calls the compensation a "waste of corporate assets" that will cause substantial damages to the Fridley, MN-based company. It also alleges breach of fiduciary duty, unjust enrichment, self-dealing, and conspiracy by the defendants. The suit demands that they compensate the company. An August 29 lawsuit, filed in the same court on behalf of Pennsylvania shareholder William Houston, claims that Medtronic "utterly failed to disclose that defendants intended to 'reimburse' themselves with respect to the excise tax requirement to the tune of $63 million," in an July 11, 2014 proxy statement filed with the U.S. Securities and Exchange Commission. The compensation plan would reimburse Medtronic's top five executives approximately $47 million. This sum would cover the millions of dollars in taxes stemming from a 15% tax on stock and option awards designed dissuade companies from pursuing inversion deals. Of the $47 million, nearly $24.8 million is for Ishrak, according to The Wall Street Journal. (Ishrak received about $12 million in total compensation in fiscal 2014, Medtronic said in a July 11 filing.) Five unnamed executives would collectively receive about $10.5 million and non-employee directors a total of about $5.5 million, the lawsuit says. Minneapolis law firm Zimmerman Reed filed both suits, but declined comment. The SEC may require that directors, officers, and principal stockholders who own more than 10% of a company to pay an additional excise tax that is applied to unvested, restricted stock units and unexercised stock options, vested and unvested, the statement said. "This excise tax is in addition to the capital gains tax and it is not applicable to any other shareholder, employees or retirees of the company," the statement continued. The company will assist these officers and directors because they "should not be discouraged from taking action that they believe is in the best interest of Medtronic and its shareholders. It allows them to focus on the welfare of the company, not their personal finances."

Related article

Medtronic-Covidien Deal: A Timeline
Refresh your medical device industry knowledge at MD&M Chicago, October 15-16, 2014, and MD&M Minneapolis, October 29-30, 2014.

Nancy Crotti is a contributor to Qmed and MPMN.

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