CLEVELAND (CN) - The Steris' Corporation's plan to buy a Swindon, England based sterilization services provider for $1.9 billion will expose its shareholders to massive capital gains tax losses, a lawsuit filed by a pension fund claims.
Steris, an Ohio-based medical technology company, has said the deal would create a new entity in the United Kingdom, allowing it to redomicile there and dramatically trim its annual tax bill.
In accounting term, the purchase is an "inversion," and it is the second such transaction to occur since the U.S. Department of Treasury tightened regulations in September on U.S. companies seeking to avoid U.S. taxes by establishing headquarters overseas.
The company maintains the proposed deal will not draw the Treasury Department's ire because it is not dramatically decreasing its business activity in the U.S., and because its shareholders will own about 70 percent of the shares in the new entity.
However, it's already taking flake from the St. Lucie County Fire District Firefighters' Pension Trust Fund, which sued Steris in the Cuyahoga County, Ohio common pleas court.
The complaint says "on October 13, 2014, Steris announced that it plans to undergo a "corporate inversion" transaction involving Synergy Health PLC, a U.K.-based company incorporated under the laws of England and Wales. The Treasury Department defines an inversion transaction, such as the inversion herein, as one where a U.S. corporation "restructures so that the U.S. parent is replaced by a foreign parent, in order to avoid U.S. taxes."
It goes on to say that 45 companies have completed similar inversions since 1982, and that stricter regulations from the Treasury Department have done little to curb the practice.
In this case, the plaintiff says, the inversion, "is merely a reorganization of Steris ... the purpose of which is to avoid paying taxes in the U.S. as Steris is simply reincorporating in a tax-friendlier country while maintaining much of its operations in the U.S.," the complaint says.
And this inversion, "will be a taxable event to all of Steris' stockholders" upon its closing," the complaint continues.
It says that in addition to capital gains taxes, the "inversion also subjects Steris's executive officers and directors to a one-time 15% excise tax on the value of certain stock compensation."
The shareholders allege that Steris "has disclosed that, pursuant to the approval of the entire Steris board, Steris (and its shareholders) will foot the bill for the excise taxes incurred by Steris's officers and directors in connection with the inversion, as well as any taxes due on the excise tax payments, [collectively known as 'gross up payments]."
The complaint says "the company disclosed that the gross up payments for its officers and directors are estimated to cost Steris and its stockholders approximately $17.2 million."
But those payments could rise, the complaint says, as "during the six-month period following the closing of the inversion, any additional grants of stock based compensation to Steris's directors and officers would compel the company to make additional payments to its directors and officers in satisfaction of the excise tax relating to those compensation grants."
The shareholders seek damages for breach of fiduciary duty, unjust enrichment and waste of corporate assets, as well as a judgment declaring the gross up payments void and unenforceable.
The shareholders are represented by Scott Simpkins of Climaco, Wilcox, Peca, Tarantino and Garofoli, of Cleveland.
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