Medtronic spokesman Fernando Vivanco told CNBC the company is picking up the cost of the excise tax for executives and directors to avoid a situation where they are faced with a personal financial liability if they approve a deal involving the company.
"The company believes they should not be discouraged from action that they believe is in the best interests of Medtronic and the shareholders," Vivanco said. "It allows individuals to consider the financials of the company rather than their person financials." Medtronic has noted that it is not picking up the cost of the capital gains taxes owed by executives or directors who are subject to the excise tax.
David Toung, a senior analyst with Argus Research, said he thinks "the reaction of these shareholders is a bit of a surprise to management."
"I'm not sure if Medtronic management really understood all the ramifications of this," Toung said. "There's a bifurcation of interests here. You've got the long-term shareholders who are going to get hit with capital gains taxes. It's a forced sale ... and they didn't expect it."
"I also think that Medtronic really needs to do this deal, because they really need additional avenues of growth that Covidien brings," said Toung, who noted that an inversion-based deal has financial advantages for the company that a normal purchase of Covidien wouldn't bring.
The deal has yet to be voted on by shareholders, but the company said it expects it to close by early 2015.
Even the long-term individual shareholders who object to the deal expect it to easily win approval, because more than 85 percent of Medtronic shares are owned by institutional investors.
"My strong-held opinion is that the institutions will vote for this deal," David Schall said.
CNBC reached out to a number of large institutional shareholders in Medtronic for comment. In most cases, the institutions either did not reply or declined to comment.
Asked about the plan to reimburse executives' and directors' personal excise tax liability, the CEO of Franklin Mutual Series, which owns about 23 million shares, said: "I can't say we feel good about it. ... But, I think we understand it."
"This is a case where, number one, Medtronic has, as does Covidien, substantial amounts of capital [overseas] that are not accessible at this point, which will become accessible," Franklin CEO Peter Langerman,said. "I think on balance, we are convinced this transaction was better for shareholders than not."
"I don't know if there was a way of getting around this problem," he said of Medtronic's agreement to reimburse the excise taxes. While calling criticism of that move "justified," Langerman asked, "Is it a show-stopper? Not if you think as we do."