Johnson Controls shareholders seek to block tax hit

Minority group could pay $700 million on gains from Tyco merger

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

A group of Johnson Controls shareholders are seeking to have a federal judge force the company to take responsibility for any taxes related to its inversion, arguing the current structure puts the burden on a small minority of shareholders.

Johnson Controls Inc. headquarters

The group filed a lawsuit in the U.S. District court for Eastern Wisconsin in August arguing company executives and board members were breaching their fiduciary responsibility to minority shareholders. The plaintiffs obtained their shares during employment with Johnson Controls or from parents employed at JCI and generally saw the investment “as a demonstration of their loyalty to JCI.”

In a motion for a preliminary injunction filed last week the plaintiffs argued the company should be blocked from reporting a tax obligation to the IRS that would cause the shareholders to pay taxes. The motion also seeks to have the company compare its tax liability with an estimate of what the shareholders would have to pay and to “assume responsibility for any inversion-related tax.”

Johnson Controls spokesman Fraser Engerman said the company’s policy is to not comment on pending litigation.

Johnson Controls completed its merger with Tyco International on Sept. 2, moving its legal domicile from Glendale to Cork, Ireland. The company expects to save $150 million in taxes through the inversion by taking advantage of Ireland’s 12.5 percent corporate tax rate. Executives have said the combination could result in $1 billion in savings through synergies and productivity initiatives.

Johnson Controls came under fire after announcing the deal for skirting U.S. taxes. Executives from the company have repeatedly said the deal was not motivated by tax savings, but added they have a responsibility to shareholders.

The plaintiffs argue the structure of Johnson Controls’ inversion will force about 20 percent of shareholders to pay as much as $700 million in taxes so the company can avoid paying $1 billion in income taxes.

The motion claims the inversion will cause severe hardship for some of plaintiffs, including those with dependent family members requiring medical care. It notes a one-time spike in income may deprive some of health care subsidies while others rely on the JCI dividend for fixed retirement income.

The motion notes class action securities lawsuits that survive a motion to dismiss are often settled, but only after years of litigation.

“The JCI defendants know this,” the motion says. “For them, forcing the minority subclass to pursue damages is likely to be far cheaper than it would have been to obey the law.”

The plaintiffs are seeking to have oral arguments held on the motion. No date has been set.

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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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