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Gumm v. Molinaroli

United States District Court, E.D. Wisconsin

January 25, 2017

ARLENE D. GUMM ET AL, Plaintiffs,


          HON. PAMELA PEPPER United States District Judge.

         Generations 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.

         1. BACKGROUND

         A. The Merger

         JCI and 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.

         B. The Complaint

         The 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.

         C. The Motion for Preliminary Injunction

         Although 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.


         “A 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.

         A. The Threshold Phase

         The 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).

         B. The Balancing Phase

         Only if 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).

         III. ANALYSIS

         The 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.[1] 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.

         At the 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.

         A. The Plaintiffs Have Not Demonstrated that They Have No Adequate Remedy at Law.

         “The 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 1095.

         Tax 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).

         The 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.

         B. The Plaintiffs Have Not Demonstrated that They Will Suffer Irreparable Harm in the Absence of an Injunction.

         1. The Harm the Plaintiffs Will Suffer

         In 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 ...

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