Smykla v. Molinaroli, No. 21-3234 (7th Cir. 2023)
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Johnson, a Wisconsin company, merged with Tyco, an Irish company. The combined entity, Johnson International, is domiciled in Ireland. The merger's terms were disclosed in a joint proxy statement/prospectus filed with the SEC, along with the opinions of financial advisors that the merger was overall “fair.” The statement stated that the market price of the shares would fluctuate. Each share of Johnson’s common stock would be, at the election of the shareholder, either converted into an ordinary share of International or cashed out; either would be a taxable transaction. Johnson shareholders were expected to own approximately 56% of International to prevent triggering 26 U.S.C. 7874: when a domestic corporation is acquired by a foreign entity, but its former shareholders retain at least 60% of the stock, the expatriated entity must pay “inversion gain” taxes. The Treasury Department had announced proposed regulations that affected how Johnson’s equity would be calculated, eliminating the tax benefits of the “reverse merger.” The proxy statement warned that if those regulations were finalized, the tax benefits would not be realized. Johnson shareholders voted in favor of the merger.
The Seventh Circuit affirmed the dismissal of a putative class action, alleging that the defendants breached their fiduciary duties and wrongfully structured the merger as taxable for Johnson’s former shareholders. “Although plaintiffs allege that they are not challenging the business and financial merits of the merger, their arguments boil down to a demand for a better deal;” they failed to allege any materially misleading statements or omissions.
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