Filer says Covidien shareholders will lose on undervalued stocks as its board members benefit.
A Covidien shareholder has challenged Medtronic Inc.’s proposed $42.9 billion purchase of the Irish company in federal court.
Shareholder Richard Taxman’s proposed class-action suit asks a judge to stop the marriage of the two giant medical device companies. He filed the suit Thursday in a federal court in Massachusetts, home to much of Covidien’s business operations.
Taxman asserts that the merger improperly favors Fridley-based Medtronic and its shareholders at the expense of Covidien’s owners.
He accuses Covidien board members and senior executives of violating their legal duty to care for company shareholders. Instead, he claims, they took a deal that brings $95 million in cash and millions of Medtronic shares to board members and some top managers while undervaluing shares that rank-and-file Covidien owners must convert.
In addition, the suit continues, the purchase price does not adequately reflect a massive tax benefit Medtronic realizes in the acquisition.
“Rather than acting in the best interests of the [Covidien] shareholders,” the suit states, board members and executives tailored the terms of the acquisition “to aggrandize their own personal interests and to meet the specific needs of Medtronic.”
Neither Medtronic nor Covidien immediately responded to requests for comment on the lawsuit.
Some Medtronic shareholders have expressed frustration with the way the deal favors Medtronic executives and board members with subsidies that keep them from taking some tax hits while leaving regular shareholders on the hook for payments to the Internal Revenue Service. The issue is of particular concern for longtime Medtronic employees who hold the vast amounts of their retirement savings in company stock purchased at low share prices.
Business law expert Daniel Kleinberger of the William Mitchell College of Law says Taxman’s suit likely will turn on Irish law, because that is where Covidien is now incorporated. Ireland is also where a new holding company called Medtronic PLC will be incorporated if Medtronic succeeds in purchasing Covidien.
Jurisdictional issues may come into play with the suit and could undermine it, Kleinberger added. But if allegations that Covidien board members put their personal interests ahead of shareholders by undervaluing the company can be proven, the suit becomes much more than a nuisance.
“I don’t see a summary judgment except on jurisdictional grounds,” Kleinberger said. “If the facts are anything like they are alleged, this is a case in controversy.”
As Taxman took Covidien’s board to task, he also accused Medtronic’s leadership of being driven by tax avoidance. By relocating its corporate headquarters to Ireland, he says, Medtronic will be able to spend $14 billion in foreign profits without paying U.S. taxes on them. What Medtronic is paying for Covidien does not reflect that tax relief, the suit alleges.
But Taxman’s primary reason for suing is the conversion of Covidien shares to shares of the new company, Medtronic PLC.
The proposed acquisition would give Covidien owners $35.19 in cash and 0.956 of an ordinary share of Medtronic PLC for each share of Covidien.
Taxman says the proposal “significantly undervalues Covidien.” Based on Medtronic’s share price just before the purchase was announced, “the Proposed Acquisition consideration is valued at approximately $93.22 per share, well below at least one analyst’s estimate value of $97 per share,” the suit says.
The deal further ignores a recent history of very strong growth by Covidien, according to Taxman. The company’s share price rose from $38.80 on Jan. 3, 2012, to $72.02 per share on June 13, 2014, the last trading day before Medtronic and Covidien announced the acquisition.
Rules of the proposed purchase offer no way for the free market to correct this oversight, Taxman contends. Those rules restrict competing offers to buy Covidien by prohibiting Covidien from giving certain critical information to other potential suitors.
At the same time, the deal gives Medtronic the right to confidential information offered by other companies interested in buying Covidien and the right to match any competing purchase proposal.
The result, Taxman concludes, is “a hopelessly flawed process that was designed to ensure the merger of Covidien with Medtronic on terms preferential to Medtronic” and top Covidien executives and board members.
Jim Spencer • 202-383-6123