Johnson Controls settles lawsuit over Tyco merger

Case sought to block transaction from moving forward

Johnson Controls Inc. headquarters
The Johnson Controls Inc. operational headquarters in Glendale.

Glendale-based Johnson Controls Inc. has reached a settlement in a lawsuit that sought to block the company’s proposed merger with Tyco International plc.

Johnson Controls Inc. headquarters
The Johnson Controls Inc. headquarters in Glendale.

Johnson Controls and Tyco have both set shareholder votes for Aug. 17 on the $3.9 billion deal that will place the company’s headquarters to Ireland. The companies are hoping to close on the transaction by Sept. 2, a month ahead of the original target when the deal was announced in January.

The lawsuit was brought by Chana Laufer, a Johnson Controls shareholder who lives in New York. The suit was intended to be a class action case and was filed in Milwaukee County Circuit Court in May. It alleged company executives and directors had breached their fiduciary responsibility to shareholders in agreeing to the merger.

The settlement would still need to be approved by a judge, but Johnson Controls has filed documents amending its proxy statement related to the merger. Those changes are part of a memorandum of understanding developed by the two sides.

“We have reached an agreement in principle with the plaintiff’s attorneys to resolve the litigation. Our merger plans with Tyco remain on schedule,” said Fraser Engerman, Johnson Controls spokesman.

The changes include an additional explanation of why Johnson Controls turned down a strategic transaction with another company just weeks before the Tyco merger was announced.

Johnson Controls had been in talks with a number of companies about different possibilities in the summer of 2015. One of those companies sought to restart discussions in early January. Johnson Controls’ previous proxy statement said the company didn’t pursue the deal because it was less likely to be completed than the Tyco merger and could potentially adversely affect its planned spin-off of Adient, its automotive seating business.

The amended proxy says specifically the deal with the unnamed company could have affected the timing of the Adient spin-off. Johnson Controls plans to spin-off the new company officially on Oct. 31, after the Tyco merger is set to close. Spinning Adient off after allows the new company to also have its headquarters in Ireland and take advantage of a lower tax rate.

Besides citing disagreements over management and governance, the amended document also says Johnson Controls management determined the unnamed company did not have the financial capacity to complete the deal on terms similar to the Tyco merger.

The company’s filings also add details about comparisons the company’s financial advisors made to comparable firms before the merger was announced. The original proxy included names of companies, but not specific results of the analysis.

The lawsuit had alleged the Tyco merger was the “result of a flawed process” and that the company “utterly failed to investigate or confirm the fair market value of the company.”

The Johnson Controls filing says the settlement will not affect the consideration to be paid to company shareholders.

The lawsuit said that any tax benefit from moving the combined company’s headquarters to Ireland would be outweighed by Johnson Controls shareholders having to pay taxes on their gains from the merger.

“The inversion will force thousands of JCI shareholders to dig into their pockets and pay taxes on their gains just to remain shareholders,” the lawsuit says.

Attorneys for the plaintiff did return emails seeking additional comment on the settlement.

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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