7th Circuit Court of Appeals
Case Name: Peter Smykla v. Alex Molinaroli
Case No.: 21-3234, 21-3308
Officials: Wood, Scudder, and Jackson-Akiwumi, Circuit Judges.
Focus: Securities Law
Wisconsin-based company Johnson merged with Irish company Tyco, forming the entity Johnson International, which is now headquartered in Ireland. The details of the merger, outlined in a joint proxy statement/prospectus filed with the SEC, included financial advisors’ opinions affirming the overall fairness of the merger. The statement explicitly mentioned that the market price of shares might fluctuate. Shareholders of Johnson had the option to either convert each share of common stock into an ordinary share of International or opt for a cash payout, both of which would result in taxable transactions.
To ensure compliance with tax regulations (specifically 26 U.S.C. 7874), Johnson shareholders were anticipated to own approximately 56% of International, preventing the imposition of “inversion gain” taxes. The Treasury Department had proposed regulations affecting the calculation of Johnson’s equity, potentially eliminating the tax advantages associated with the “reverse merger.” The proxy statement cautioned that if these regulations were finalized, the anticipated tax benefits might not materialize. Despite these potential hurdles, Johnson shareholders voted in favor of the merger.
The Seventh Circuit upheld the dismissal of a putative class action, which alleged breaches of fiduciary duties and wrongful structuring of the merger as taxable for Johnson’s former shareholders. The court noted that the plaintiffs, although claiming not to challenge the business and financial merits of the merger, essentially sought a more favorable deal. The court found the lack of allegations regarding materially misleading statements or omissions, affirming the dismissal of the case.