Several Medtronic shareholders on Thursday criticized a controversial proposed merger between the company and Covidien, an Irish-based medical device maker.
At Medtronic's annual shareholder meeting, the shareholders expressed concern that the deal will expose them to hefty capital gains taxes. The $42.9 billion deal would let Medtronic move its legal headquarters for tax purposes from the Twin Cities to Dublin.
Medtronic is proceeding with the plan, despite intense political heat.
That's drawn criticism from some Democrats — including President Obama — who say so-called tax inversion arrangements are unpatriotic and while legal, are not the right thing to do.
Medtronic officials says the deal with Covidien won't reduce its U.S. taxes. Instead, they argue that the transaction will enable it to invest billions of dollars in foreign profits in the United States — while avoiding U.S. taxes on overseas profits that have already been taxed by foreign governments.
The company says that, like many multi-national corporations, it has kept foreign profits outside the U.S. to avoid double taxation.
But the greatest point of contention at Medtronic's annual meeting was the capital gains hit the deal would create for individual shareholders. They'll be forced to exchange current Medtronic stock for shares in the new company &mash; and pay taxes on all the profits from the transaction.
"This is the least shareholder-friendly proposal I have ever seen," said Arthur Binger of Maple Grove.
Binger, a Medtronic shareholder for more than 20 years, was among the small investors criticizing the Covidien deal.
"Shareholders may need to sell stock to pay taxes," he said. "They will have to pay capital gains taxes anywhere in the range of 20 to 35 percent. They may need to sell stock in order to accomplish that."
Another older investor, Patricia Hartlaub, of New Brighton, told Ishrak that many long-time, loyal Medtronic investors in their golden years don't have much time to wait for new stock price gains to offset capital gains taxes.
"If you look out at the group of people here, as well as long-term stock holders, long-term for us is short," she said. "So, it's difficult to make up 35 to 40 percent."
Ishrak said he sympathizes with the predicament shareholders face. He said the company will provide tax advice.
Medtronic's stock price has doubled in the past three years. But depending on when they bought shares, shareholders may have seen far greater investment gains.
Ishrak repeated his defense of the deal. He lamented that U.S. tax policies have prompted companies to keep trillions of dollars in profits off shore.
"All we're doing is we're using that cash and investing it in the U.S. and how can that be bad for the U.S.," he said. "We're going to invest it in medtech in an area where we've got proven capability to improve patients' lives and make a difference in health care. And that'll improve jobs. High paying jobs will be brought to the U.S. in medtech."
Ishrak said Medtronic's U.S. tax bill won't change.
"We're not going to pay any less taxes in the U.S. after the transaction than before," he said. "In fact, we've committed to invest $10 billion into the U.S., into Minnesota, over the next ten years. So, we pay the same taxes and we invest more."
Assuming it wins required shareholder, regulatory and government approvals, Medtronic expects the deal for Covidien will close late this year or early next year.