Judge sides with Johnson Controls over shareholders

Plaintiffs sought to block tax filings related to merger

Last updated on May 13th, 2019 at 10:45 pm

A federal judge this week denied a motion seeking to block Johnson Controls International plc from filing tax documents that a group of shareholders said would force them to a significant amount in taxes.

The shareholders, many of them Johnson Controls retirees or the children of former employees, sued the company in August in the U.S. District Court for Eastern Wisconsin alleging the Johnson Controls board members and executives breached their fiduciary duties by reincorporating in Ireland to reduce its taxes, in what is known as a corporate tax inversion.

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The plaintiffs argued the structure of the deal would force a subset of shareholders with stock in taxable accounts to pay capital gains tax on the deal. They sought a preliminary injunction blocking JCI from filling forms with the IRS that would trigger those taxes.

U.S. District Judge Pamela Pepper ruled against the shareholders, finding they did not demonstrate an irreparable harm.

Pepper noted the plaintiffs had described themselves as “long-time, loyal Johnson Controls employees who feel betrayed.”

“They describe generations of employees who painstakingly accrued stock and assumed that that stock, and the income from it, would be there in the way they’d come to expect, for them and for their heirs,” Pepper wrote. “They describe dashed expectations and unexpected uncertainty at a time in their lives when they anticipated certainty and security—not just for themselves, but for others who rely on them. The affidavits express anger, hurt, frustration and fear.”

Some of the plaintiffs said the merger was going to force them into higher tax brackets or change their retirement plans. Pepper noted many were depending on dividends from the shares for living and medical expenses but would have to sell their shares instead.

“All talk of reduction in income or loss of income, and many indicate that the lost or reduced income was part of the money they have relied upon for living expenses, or for medical expenses for loved ones. None, however, state that paying these taxes will render them insolvent. None argue that they will ‘go broke’ if they have to wait until the end of the litigation to collect money damages,” Pepper wrote, adding that she did not mean “to trivialize the harm the plaintiffs describe.”

She also said that even if the plaintiffs had demonstrated an irreparable harm, they were not likely to succeed on the merits of their case.

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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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