Medtronic will pay costs meant to discourage firms moving overseas.
Medtronic Inc., which plans to cover its top leaders for certain taxes they face as part of a controversial merger plan, has calculated the cost for the CEO’s tab alone at $25 million.
The Fridley-based medical device giant disclosed to shareholders this week that it would pay an estimated total of $63 million to compensate high-ranking executives for special excise taxes they would incur if Medtronic acquires surgical supplier Covidien and moves overseas in the process.
Medtronic officials argue that paying executives’ excise taxes — which are on top of the capital gains taxes all shareholders pay — actually puts the officers and executives on a level playing field with the rest of the company’s shareholders. Additionally, the company says its leaders wanted to evaluate the merits of the deal without facing a personal financial disincentive to proceed.
“The company believes these individuals should not be discouraged from taking action that they believe is in the best interest of Medtronic and its shareholders,” Medtronic spokesman Fernando Vivanco said in an e-mail. The payments allow them to “focus on what is in the best interests of the company, and not on their personal finances.”
The $42.9 billion deal, which the companies say offers significant strategic benefits, is controversial primarily because incorporating in Covidien’s home of Ireland would also bring tax advantages to Medtronic. President Obama and others have attacked such tax “inversion” deals as unpatriotic, and there are moves afoot in Washington to stop them.
But the tax payments for CEO Omar Ishrak and other top Medtronic figures have also raised the ire of some shareholders — even before the amounts were known — because the company won’t be covering the significant capital-gains taxes that the deal will trigger for longtime shareholders.
“I thought it looked really bad,” said Minneapolis corporate consultant David Schall, who acts as a proxy for his father, longtime former Medtronic board member and shareholder Richard Schall. “I thought it was disingenuous to say they were acting in the best interest of the shareholders, but then … they took care of themselves.”
The deal could close by the end of the year, pending approval from shareholders and the Federal Trade Commission.
In filings with the Securities and Exchange Commission, Medtronic disclosed for the first time late Tuesday how it will pay an estimated $63 million to company officers and directors for their excise tax payments. Four top executives would get more than $5 million each, 11 other current executives would share in $13.1 million in payments, and 10 company directors would benefit from another pool of $5.5 million.
While these tax “gross-ups” were discussed at a tense annual shareholders meeting last week, the company didn’t reveal specific amounts until days after the meeting convened.
Ishrak has pointed out that he and other executives would still pay the same taxes on gains in stock values as all Medtronic investors — taxes that are triggered because the move to Ireland would liquidate existing Medtronic Inc. stock and cause the issuance of new shares of an Irish holding company called Medtronic PLC. Stockholders have to pay capital-gains taxes when they sell shares of stock at a profit.
But the $63 million in gross-ups will primarily cover a different tax: namely, the 15 percent special federal excise tax on future stock options that is faced by executives of companies that move overseas in deals called corporate inversions. The company would also cover state excise taxes.
It’s common for companies to help executives avoid such taxes during corporate inversions. An analysis published in January by financial-news outlet Bloomberg News examined seven large companies that inverted their headquarters overseas and found that all of them took steps to shield their executives from excise taxes.
Steven Davidoff Solomon, a law professor with finance expertise at the University of California Berkeley, said payments like Medtronic’s gross-ups make a mockery of a U.S. tax policy that was designed to force executives to think twice about inversions by imposing taxes on their future stock options.
“The excise tax was put on corporations to slow or inhibit or try to prevent corporate inversions. It has done nothing of the sort. Instead it is costing shareholders more” by taking the cost of the excise taxes out of the company’s bottom line, Solomon said.
Solomon questioned whether Ishrak would support the Covidien acquisition if he had to personally pay $25 million in excise taxes — an amount that handily exceeded his $12 million in total compensation in fiscal year 2014.
At the Aug. 21 annual meeting, Ishrak acknowledged that “the taxes are almost prohibitive in terms of its amount.”
“To the degree that it penalizes those individuals … excessively,” Ishrak told the shareholders, “I think the position the board of directors took is that that should not be a factor, a personal financial impact, to the decision for the broader interest of the company. And that is why that was removed from the table.”