By Lorraine Bailey, Courthouse News Service

(CN) — Johnson Controls' planned tax inversion via its acquisition of the Irish-based Tyco International will leave U.S. shareholders with a huge tax bill and reduced equity in the new company, investors claim.

In January 2016, Johnson Controls and Tyco, two home products companies, announced a $16.5 billion merger agreement representing a 13 percent premium to Tyco shareholders.

Johnson Controls and Tyco shareholders voted Wednesday to approve the merger. 97 percent of votes cast at Johnson Controls' shareholder meeting voted in favor of the transaction, accounting for 81 percent of outstanding shares.

The combined company will be reorganized under Tyco International in order to maintain Tyco's Irish legal domicile in Cork, then renamed Johnson Controls. Johnson Controls shareholders will own approximately 56 percent of the new company.

This acquisition allows Johnson Controls, Wisconsin's largest company based on sales, to move its headquarters to Ireland and take advantage of more favorable corporate tax laws, a strategy called a corporate inversion.

The proposed merger immediately drew comment from presidential candidate Hillary Clinton, who said, "I have a detailed and targeted plan to immediately put a stop to inversions and invest in the U.S., block deals like Johnson Controls and Tyco, and place an 'exit tax' on corporations that leave the country to lower their tax bill."

It also drew criticism from prominent Republican Senator Orrin Hatch, who said, "Congress ought to examine viable bipartisan solutions that will effectively target and combat inversions and not tip the balance to tax-driven foreign acquisitions of U.S. firms."

Fewer companies have attempted a corporate inversion after the Obama administration took steps to rein in the practice in 2014, following Burger King's move to Canada through its acquisition of Tim Horton's.

The new rules impose heavy penalties for inversions in which shareholders of the inverting U.S. corporation end up owning 60 percent or more of the new foreign parent corporations. This change killed a $160 billion proposed merger between U.S. pharmaceutical company Pfizer and Ireland-based Allergan.

However, the penalties did not eliminate companies' motivation to move overseas. The average U.S. corporate income tax rate, combining federal and state rates, is 39 percent, compared with an average of 25 percent in other developed nations. Ireland taxes corporations at 12.5 percent, the lowest corporate income tax rate in the industrialized world.

The shareholder class action filed Tuesday in Wisconsin by lead plaintiff Arlene Gumm attacks the Johnson Controls inversion, claiming that the company's anticipated tax savings are the sole purpose of the merger and come at the expense of minority taxpaying shareholders.

As a result of the merger, "JCI shareholders will be forced to recognize capital gains (and for a minority of JCI shareholders to pay taxes thereon)," the 130-page complaint says.

While the deal has been structured to allow the company and its executives to avoid the adverse tax consequences imposed by the Obama administration to discourage such mergers, shareholders claim they will bear the burden of the corporation's savings.

"JCI's future tax savings and the JCI defendants' avoidance of other inversion-related adverse tax consequences will come at the direct expense of its taxpaying shareholders," Gumm says. "JCI will shift its liability for future U.S. taxes on its foreign earnings to its taxpaying shareholders by forcing them to pay capital gains taxes upon consummation of the transaction and at the direct expense of all JCI public shareholders by improperly diluting their equity interest in JC plc."

In order to ensure that JCI shareholders will own less than 60 percent of the new company and avoid the inversion penalty, JCI will pay $3.86 billion in cash to its shareholders in lieu of stock — essentially buying back its own shares — thereby "manipulating the exchange ratio of JCI and Tyco shares," according to the complaint.

The prominent investment blog Seeking Alpha posted an article by Johnson Controls stockholder Willow Street Investments, which shares the plaintiffs' dim view of the merger.

"We are less than thrilled with Johnson Controls' actions over the past several months to 'enhance' shareholder value through a tax inversion," Willow Street said in the article. "Our trepidation with the JCI and TYC merger is principally based on the tax bill that is coming our way when the deal closes."

Gumm's complaint also asserts that Johnson Controls should not be allowed to escape U.S. taxation after it received $300 million in grants from the U.S. Department of Energy and state of Michigan to research and produce hybrid batteries.

The class seeks a court order enjoining the inversion for diluting minority shareholders' equity in Johnson Controls and damages for breach of fiduciary duty, unjust enrichment, and breach of contract.

It is represented by K. Scott Wagner with Wagner Law Group in Milwaukee.

Johnson Controls spokesman Fraser Engerman declined to comment on the lawsuit but said, "We are moving forward with the merger."

Tyco did not immediately respond to a request for comment.

To Learn More:

Treasury Dept. Sets New Rules to Stop Companies from Moving Headquarters Abroad to Avoid Paying U.S. Taxes (by Martin Crutsinger, Associated Press)

Another Way for Corporations to Avoid Paying Taxes (by Steven Davidoff Solomon, New York Times)

Pfizer Tax Shelter Move and Price Increases Led by Valeant Compound Image of Drug Industry Greed (by Noel Brinkerhoff and Steve Straehley, AllGov)

U.S. Corporations Moving Overseas to Avoid Taxes May Find Ways to Skirt New Fed Rules to Stop Them (by Danny Biederman and Noel Brinkerhoff, AllGov)

Pfizer, Chiquita and Medtronic Try to Merge with Foreign Firms to Avoid U.S. Taxes (by Noel Brinkerhoff and Steve Straehley, AllGov)