United States District Court, E.D. Wisconsin
ARLENE D. GUMM ET AL, Plaintiffs,
ALEX A. MOLINAROLI ET AL, Defendants.
DECISION AND ORDER DENYING PLAINTIFFS' MOTION FOR
A PRELIMINARY INJUNCTION (DKT. NO. 14)
PAMELA PEPPER United States District Judge.
of Wisconsin citizens are familiar with a company called,
until recently, Johnson Controls. Born in Wisconsin in the
1880s, for much of its lifespan the company manufactured,
installed and serviced thermostats- actually, devices that
could control the temperature in commercial buildings. In
January 2016, the Wisconsin company announced that it was
going to merge with an Irish company named Tyco. Among other
things, the merger agreement would move the company
headquarters from Wisconsin to Ireland. The named plaintiffs
hold shares of common stock in the merged company (now called
“Johnson Controls, Inc.”, or “JCI”),
and they hold those shares in taxable accounts. They
challenge the tax structure that resulted from the merger-one
that, they argue, improperly places the tax burden on them,
rather than on the newly-formed company. In their motion
seeking a preliminary injunction, they ask the court to
enjoin JCI “from continuing to act in a manner that
will force [the plaintiffs and others similarly situated] to
pay taxes and from falsely reporting to the IRS that JCI
shareholders owe capital gains taxes in connection”
with JCI's current tax structure. Dkt. No. 15 at 32. The
court denies the motion, because the plaintiffs have not
demonstrated that they would suffer irreparable harm in the
absence of the injunction.
Tyco International (a company domiciled in Ireland) entered
into the merger plan on January 24, 2016. Dkt. No. 1 at
¶1. The plan came to fruition after “months of
negotiations between the companies . . . .” Dkt. No. 36
at 8. In its January 25, 2016 announcement of the merger, JCI
stated that the merger would be tax-free to Tyco shareholders
and taxable to JCI shareholders. Dkt. No. 1 at ¶6. The
shareholders voted to approve the merger. Dkt. No. 36 at 5.
JCI and Tyco finalized the merger on September 2, 2016.
Id. at 5.
August 16, 2016 complaint names certain senior executive
officers of JCI, all members of JCI's board of directors,
JCI itself, Jagara Merger Sub LLC (a wholly-owned subsidiary
of Tyco), and Tyco. Dkt. No. 1 at ¶29-45. It asserts
that the defendants structured the merger in such a way as to
allow JCI to gain tax benefits by reincorporating in Ireland.
Id. at ¶¶3, 5. Citing various provisions
of the tax code, the plaintiffs allege that, to gain these
tax benefits, JCI diluted the stock to a point that any tax
liability for reincorporating in Ireland shifted to the
shareholders. Id. at ¶¶11, 12.
Specifically, they argue that because the merger resulted in
the shareholders of JCI owning a particular percentage of the
“parent” corporation (Tyco, dkt. no. 1 at
¶2), the Internal Revenue Code triggers capital gains
taxes for the shareholders. Id. at ¶¶10,
11. The complaint alleges that this result has damaged two
groups: (1) all public shareholders of JCI, and (2) the
“minority taxpaying shareholders”-people like the
named plaintiffs, who hold their shares in taxable accounts.
Id. at ¶1.
The Motion for Preliminary Injunction
the complaint states twelve causes of action, the preliminary
injunction motion focuses on the third one. Dkt. No. 15 at 1.
Count III of the complaint alleges that the individual
defendants breached their fiduciary duties to the plaintiffs
by failing to disclose, or failing to seek advice about,
several issues. Dkt. No. 1 at 104-112. For example, Count III
alleges that the individual defendants either should have
sought advice about the possible capital gains consequences
of the merger structure they ultimately chose, or should have
disclosed those possible consequences to the plaintiffs (and
other shareholders). Id. at ¶256. It alleges
that in choosing the merger structure that they did, the
individual defendants elevated their own interests over those
of the plaintiffs. Id. at ¶257. It alleges that
the individual defendants failed to disclose the true costs,
in terms of tax consequences to shareholders, of locating the
new company's global headquarters outside the United
States. Id. at ¶258. The motion for preliminary
injunction states that all of these alleged breaches of
fiduciary duty have resulted in a situation in which the
plaintiffs are facing large capital gains tax consequences
for the 2016 tax year, which, they argue, constitute
irreparable harm to them, and which cannot be remedied at
law. See generally, Dkt. No. 29.
PRELIMINARY INJUNCTION STANDARD
preliminary injunction is an extraordinary equitable remedy
that is available only when the movant shows clear
need.” Turnell v. CentiMark Corp., 796 F.3d
656, 661 (7th Cir. 2015) (citing Goodman v. Ill.
Dep't of Fin. and Prof'l Regulation, 430 F.3d
432, 437 (7th Cir. 2005)). “An equitable, interlocutory
form of relief, ‘a preliminary injunction is an
exercise of a very far-reaching power, never to be indulged
in except in a case clearly demanding it.'”
Girl Scouts of Manitou Council, Inc. v. Girl Scouts of
USA, Inc., 549 F.3d 1079, 1085 (7th Cir. 2008) (quoting
Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d
380, 389 (7th Cir. 1984)) To determine whether such
extraordinary relief is warranted, the district court
“proceeds in two distinct phases: a threshold phase and
a balancing phase.” Id. at 1085-86.
The Threshold Phase
first phase of the preliminary injunction analysis requires
the “party seeking a preliminary injunction [to] make a
threshold showing that: (1) absent preliminary injunctive
relief, he will suffer irreparable harm in the interim prior
to a final resolution; (2) there is no adequate remedy at
law; and (3) he has a reasonable likelihood of success on the
merits.” Turnell, 796 F.3d at 661-62.
“If the court determines that the moving party has
failed to demonstrate any one of these three threshold
requirements, it must deny the injunction.”
Girl Scouts, 549 F.3d at 1086 (citing
Abbott Labs v. Mead Johnson & Co., 971 F.2d 6,
11 (7th Cir. 1992)) (emphasis added).
The Balancing Phase
the movant satisfies the three criteria of the threshold
phase will the court move on to the second phase. The second
phase requires the court to consider: “(4) the
irreparable harm the moving party will endure if the
preliminary injunction is wrongfully denied versus the
irreparable harm to the nonmoving party if it is wrongfully
granted; and (5) the effects, if any, that the grant or
denial of the preliminary injunction would have on nonparties
(the ‘public interest').” Turnell,
796 F.3d at 662. This second phase is often referred to as
“balancing the harms.” Girl Scouts, 549
F.3d at 1086 (citing Abbott Labs, 971 F.2d at 11).
“The court weighs the balance of potential harms on a
‘sliding scale' against the movant's likelihood
of success: the more likely [the plaintiff] is to win, the
less the balance of harms must weigh in his favor; the less
likely he is to win, the more it must weigh in his
favor.” Turnell, 796 F.3d at 662. But a court
never reaches this balancing of harms-this use of the sliding
scale-if the plaintiff fails to make the threshold showing in
the first phase. Under that circumstance, the court does not
move onto the second phase. See Girl Scouts, 549
F.3d at 1086 (citing Abbott Labs, 971 F.2d at 11).
plaintiffs' brief in support of the motion for
preliminary injunction explains in detail the intricacies of
the tax code. In particular, it focuses on the tax code in
the context of explaining why the plaintiffs believe that the
defendants chose a merger structure in which a company with a
foreign domicile-Tyco-would essentially purchase a company
with a U.S. domicile- the former Johnson Controls-and thus
change the U.S. company's country of residence. Dkt. No.
15. The brief explains “inversions”-“a
process by which a U.S.-domiciled corporation becomes a
subsidiary of a foreign parent corporation and the
shareholders of the U.S. corporation become shareholders of
the new foreign parent in an exchange of their U.S.
corporation's stock for stock in the new parent
corporation.” Id. at 4. It explains
various provisions of the tax code, of Treasury Department
regulations (with such colorful names as “anti-Helen of
Troy regulations, ” or “HOT Regs, ” for
short, and “anti-Killer B” regulations),
id. at 9, nn. 7, 8, and of tax notices. It cites to
learned articles in which experts comment on the issue of
companies incorporating abroad for tax reasons. The
plaintiffs attached forty-seven exhibits-everything from
offering documents for the merger to the affidavit of an
expert in these sorts of transactions to newspaper articles
to stock reports. See Dkt. Nos. 16-1 through 16-47.
preliminary injunction stage, this detailed information is
relevant to the question of whether the plaintiffs have a
reasonable likelihood of success on the merits of the
litigation-the third part of the three-part threshold phase
inquiry. The plaintiffs' brief in support of the motion
spends some nine pages focusing on that question. The
information is less relevant, however, to the first two parts
of that threshold inquiry-whether the plaintiffs have an
adequate remedy at law, and whether they will suffer
irreparable harm in the absence of an injunction. For the
court to answer those questions, it looks less to how and why
the plaintiffs are facing significant tax obligations on
their stock shares, and more to the harm that they argue
those tax obligations will cause.
The Plaintiffs Have Not Demonstrated that They Have No
Adequate Remedy at Law.
absence of an adequate remedy at law is a precondition to any
form of equitable relief.” Roland Mach. Co.,
749 F.2d at 386. To show that they have no adequate remedy at
law, the plaintiffs must show “that traditional legal
remedies would be inadequate.” Girl Scouts,
549 F.3d at 1086 (citation omitted). Money damages are
“traditional legal remedies.” Id. at
obligations are obligations to pay money. The plaintiffs
argue that the harm they will suffer is the requirement that
they pay taxes which, but for the merger structure the
defendants chose, they would not have been obligated to pay.
If they are right-if the litigation results in a conclusion
that the plaintiffs should not have been obligated to pay
those taxes-the obvious remedy would be for the defendants to
refund to them the taxes they paid (along with, perhaps, any
fees or penalties).
plaintiffs did not argue in their opening brief, or in their
reply brief, or at oral argument, that they had no remedy at
law. They have not-because they cannot-argue that the
traditional remedy of money damages is not available. Rather,
they argue that money damages would be inadequate to repair
the harm they will suffer. This argument bleeds into another
of the three parts of the threshold phase-the question of
whether the plaintiffs will suffer “irreparable
injury” if the court does not issue an injunction.
The Plaintiffs Have Not Demonstrated that They Will
Suffer Irreparable Harm in the Absence of an Injunction.
The Harm the Plaintiffs Will Suffer
support of the motion for preliminary injunction, the
plaintiffs filed affidavits, describing the harm they will
suffer as a result of the tax liability. The court read every
affidavit the plaintiffs filed. The affidavits describe
longtime, 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. They describe dashed
expectations and unexpected uncertainty at a time in their