A shareholder’s lawsuit against Fridley-based Medtronic contends the proposed acquisition of Ireland-based Covidien will wrongly force longtime investors to suffer a near-term tax hit.
In a lawsuit filed July 2 in Hennepin County District Court, shareholder Lewis Merenstein objects to the “reverse merger” structure of the deal, where each Medtronic share will be converted into a share of stock in a new company called Medtronic PLC.
“It will result in a substantial loss to Medtronic shareholders,” the lawsuit states. “Medtronic stockholders will be forced to pay taxes on any gains in Medtronic stock.
“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,” according to the lawsuit.
In a statement, Medtronic said it believes the allegations in the complaint are without merit and that the company would “vigorously defend our position in court.”
“Covidien is an Irish-domiciled company and therefore, the most financially efficient structure for us is to locate our headquarters in Ireland,” the company 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.”
Last month, Medtronic announced plans to acquire Covidien in a $42.9 billion cash-and-stock deal. The purchase would move the medical device manufacturer’s headquarters to Ireland, and has been criticized as a way for Medtronic to dodge certain U.S. taxes.
While the deal has been described as an acquisition by Medtronic, it won’t be treated that way for tax purposes, the lawsuit states. Instead, the transaction will be viewed as a sale, according to the lawsuit, so Medtronic shareholders will be forced to pay taxes on any gains in Medtronic stock.
That’s a problem for shareholders who were looking to hold the stock and pass it on to heirs or an estate, said Gregg Fishbein, an attorney in Minneapolis who filed the lawsuit.
“There are certain amounts of an estate that you’re allowed to give tax-free,” Fishbein said.
He added: “If I have 100 shares, and I have to pay capital gains … I may have to sell half of that stock. That leaves only 50 shares available to pass on to my heirs.”
The lawsuit is filed as a class-action complaint.