Tax Reimbursements for Medtronic Executives Remain Intact Despite Lawsuit

According to a Star Tribune report, Medtroniuc Inc. will receive its promised $63 million in payments to executives tied to the Minneapolis, Minn.-based medical device company’s decision to move its headquarters to Ireland. The payments, which cover federal excise taxes that the executives will incur due to the tax inversion process, were previously at risk of being blocked via a shareholder lawsuit.

In October this year, California resident Marilyn Clark filed the suit on behalf of Medtronic, calling the decision to pay such reimbursements an unjust waste of assets that violates management’s legal responsibilities to shareholders.

All is not lost, however, for shareholders who believe the payments to be excessive. The company’s shareholders will get their own opportunity to pass judgment on the payments, including $24.8 million to CEO Omar Ishrak.

U.S. District Judge Susan Richard Nelson ruled on Dec. 22 that the three-month-old lawsuit to block the payments was unlikely to succeed, and therefore she denied a request to impose a preliminary injunction ahead of the Jan. 6 shareholders’ vote to approve the deal. But she noted that company officials plan to hold a second vote that day to approve the excise-tax payments.

“We are very disappointed in the court’s ruling,” plaintiff’s attorney Robert Weiser wrote in an email, asserting that the judge had chosen “to rewrite Minnesota law.”

Medtronic is on the verge of acquiring Covidien plc, which is the avenue by which the medtech giant will relocate its headquarters to Dublin, Ireland. Some shareholders will face large capital gains taxes, because all shares in the old Medtronic must be liquidated, and exchanged for stock in the new Medtronic. The U.Ss Internal Revenue Services interprets the issuance of new shares as a taxable event, even though shareholders are receiving a one-to-one exchange of ¬equities. Since Medtronic’s stock price has risen tenfold in 20 years, capital gains for longtime owners could be large.

While lawsuits have been filed to try to upend the deal, the case that Nelson ruled on this week in Minnesota federal court sought only to block the company’s decision to cover executives’ excise taxes.

The executives will face the same capital-gains taxes as any shareholder. But the company’s officers and board of directors are recommending that Medtronic cover the special 15 percent excise tax on stock options for executives like Ishrak. The company would also cover the tax on the income that will be used to pay the tax in what’s known as a “gross-up” payment.

Two shareholders filed a lawsuit against the plan in September, saying the recommendation amounted to a conflict of interest that subverted the purpose of the tax, which was to force executives to think about the personal consequences of inversions.

Shareholders William Houston and Marilyn Clark alleged, on behalf of a larger group of shareholders, that the board’s recommendation breached their fiduciary duty to act in shareholders’ best interests, unjustly enriched the executives, and wasted shareholder money. In a fourth count, they alleged the company made misleading statements by not immediately disclosing the ¬gross-ups.

The judge didn’t rule directly on those allegations. Rather, she said Houston and Clark had failed to exhaust their administrative remedies before filing their lawsuit, and therefore it was impossible for their case to succeed if it went to a trial.

Nelson said that the plaintiffs should have made a ¬formal “demand” to the board to withdraw their recommendation on the gross-up payments, which they didn’t do. Under Minnesota corporate law, a case like this cannot be filed until such a request is made. “The court finds that Minnesota law governs the demand issue as Medtronic is, at least for now, a Minnesota corporation,” Nelson wrote.

Her ruling rejected the litigants’ request to impose a preliminary injunction before the Jan. 6 shareholder vote, though technically the case is still active. However, Weiser said his clients haven’t decided whether to proceed.