Federal judge hears lawsuit vs. JCI
Company at odds with shareholders
Shareholders of Johnson Controls International and the company now based in Ireland squared off in federal court in Milwaukee Wednesday over whether the firm’s tax-saving strategies unfairly penalized longtime shareholders, many of them retirees.
In a suit filed last summer, shareholders are asking a federal judge to relieve the tax burden faced by the retirees who had their Johnson Controls shares in taxable accounts.
The company’s acquisition by Tyco International shifted the merged company’s headquarters to Cork, Ireland, in a move expected to produce savings of $150 million a year.
But those savings are coming on the backs of longtime shareholders, who say the company’s board of directors breached its fiduciary duty by not taking the impact of the deal on their taxes into account.
At the federal courthouse Wednesday, lawyers for shareholders and the company debated whether Judge Pamela Pepper should issue a preliminary injunction that would delay the issuance of tax forms to shareholders at the end of the month.
The move to shift taxes from the company to its longtime shareholders “takes the notion of corporate greed to a whole new level, inflicting taxes on retirees and employees for whom this is a major portion of their net worth,” said Vernon Vander Weide, a Minnesota lawyer representing the shareholders.
Employees were encouraged to invest in the company’s stock over the years, and many of them relied on their Johnson Controls holdings for a significant portion of their retirement savings, he said.
Shareholder Gary Wierschem of Grafton, who was among nearly a dozen shareholders at the hearing, worked for Johnson Controls for 27 years, until 1999. Wierschem said, “It never crossed my mind” that the company he was proud to work for and that’s been around for more
than 100 years would “jeopardize our faith in continuing to hold the stock by an action like this.
“It never crossed my financial adviser’s mind, either,” Wierschem said. “This is really sad, that something like this could happen to affect me in such a negative way.”
However, the company’s attorney said Johnson Controls made it abundantly clear since January that the merger would have tax repercussions for its shareholders and advised them to consult with their financial advisers.
“Johnson Controls believes this is a great transaction for all shareholders,” said Jonathan Moses, a New York City attorney representing Johnson Controls.
Vander Weide said the company and its board of directors were negligent by failing to account for the impact of the merger on the shareholders who are bringing the suit, but Moses said the company and its board acted appropriately by considering the interests of multiple parties, including Tyco shareholders, other Johnson Controls shareholders, employees and suppliers.
Company executives said they expect shareholders will benefit over time through savings of more than $1 billion generated from cutting costs, eliminating jobs that overlap, and other restructuring and integration initiatives.
Among the legal questions that Pepper must decide is whether the shareholders bringing suit would suffer “irreparable harm” if she sides with the company at this time.
Just the fact that some shareholders face a capital gains tax hit doesn’t constitute irreparable harm, said Moses, citing court rulings that found that injuries aren’t irreparable if they are “compensable.”
Pepper said she would rule as soon as possible but didn’t give a definitive time frame for a decision.