A Medtronic Inc. shareholder wants a federal court to throw out the company's plan to pay $63 million in taxes that senior executives and directors will incur in the proposed acquisition of Covidien and order individuals getting the compensation to pay back the company.

The legal action filed by California resident Marilyn Clark "on behalf of Medtronic, Inc." calls the decision to pay so-called "gross-up" taxes on stock options of senior managers and some board members an unjust waste of assets that violates management's legal responsibilities to shareholders.

"The multimillion-dollar windfall tax reimbursement is wholly self-serving, counter to public policy, and harmful to Medtronic shareholders," Clark claims in the suit filed Oct. 3.

Clark not only wants a judge to order those having their taxes paid to give back the money, but also wants a judge to order Fridley-based Medtronic to change its corporate governance procedures so similar proposals cannot be made in the future.

Medtronic officials say the suit is without merit and they will "vigorously defend" the decision to pay the taxes.

Certain officers and directors are subject to an excise tax on stock options in the Covidien deal, a spokesman told the Star Tribune in an e-mail statement. "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."

Paying the excise tax for the senior managers and board members will allow them "to focus on the welfare of the company, not their personal finances," the statement said.

One of the main contentions of the suit is that Congress put the excise tax on stock options to discourage corporate reorganizations in which companies move their legal residences outside the United States to avoid taxes, while maintaining most of their operations in this country. Clark contends that by structuring a deal that makes shareholders pay excise taxes for managers, the executives and board members looked out for themselves instead of the shareholders they are legally bound to represent.

The excise tax gross-up payments have been a source of controversy among shareholders who face a separate kind of tax bill in the Covidien purchase. The deal is structured so that many shareholders, including longtime employees, will face unanticipated capital gains taxes. People without the cash to pay those taxes will have to sell shares they intended to use as long-term investments or retirement income.

Forcing shareholders to also pay the stock option excise tax gross ups for highly compensated executives and board members strikes some as unfair and of no business benefit to Medtronic. In fact, Clark claims it actually hurts the company. In her suit, she says the $63 million shareholders are being forced to pay is nearly twice the $32.7 million in excise taxes that officers and directors would collectively pay as individuals.

Medtronic CEO Omar Ishrak benefits the most from the excise tax payment plan. Under terms of the Covidien acquisition, shareholders will cover roughly $25 million in excise tax payments for him. Four other 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 Ishrak and others benefit financially, the shareholders also stand to benefit from improved value of the new company that will emerge if the Medtronic-Covidien deal closes, said Daniel Kleinberger, a business law expert at William Mitchell College of Law in St. Paul. That means paying the excise tax is "not necessarily a bad business judgment.

"This is a version of a lawsuit that says the officers and directors are paid too much," Kleinberger said. "The optics of it look pretty bad. But these kinds of lawsuits usually fail."

Jim Spencer • 1-202-383-6123