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In re Medtronic, Inc.

United States District Court, D. Minnesota

December 22, 2014

IN RE MEDTRONIC, INC. DERIVATIVE LITIGATION This Order Relates to: ALL ACTIONS

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For Plaintiffs: Brett D. Stecker, James. M. Ficaro, Jeffrey J. Ciarlanto, and Robert B. Weiser, The Weiser Law Firm, PC, Berwyn, PA; Edward B. Gerard, Justin D. Rieger, and Stephen J. Oddo, Robbins Arroyo, LLP, San Diego, CA; June Pineda Hoidal, Patricia A. Bloodgood, and Carolyn G. Anderson, Zimmerman Reed PLLP, Minneapolis, MN.

For Defendants: Peter W. Carter, Michelle S. Grant, James K. Nichols, Dorsey & Whitney LLP, Minneapolis, MN; Gerardo Alcazar, Robbins Kaplan Miller & Ciresi LLP, Minneapolis, MN; Jerry W. Blackwell and S. Jamal Faleel, Blackwell Burke PA, Minneapolis, MN.

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MEMORANDUM OPINION AND ORDER

SUSAN RICHARD NELSON, United States District Judge.

I. INTRODUCTION

This matter is before the Court on Plaintiffs' Motion for Preliminary Injunction [Doc. No. 24]. For the reasons set forth below, the Court denies Plaintiffs' motion.

II. BACKGROUND

Plaintiffs William A. Houston (" Houston" ) and Marilyn Clark (" Clark" ) [collectively, " Plaintiffs" ], on behalf of Nominal Defendant Medtronic, Inc. (" Medtronic" or " the Company" ), bringing this Motion for Preliminary Injunction seeking to enjoin Medtronic's Board of Directors (" the Board" ) from using Medtronic shareholder funds to reimburse Defendants for their personal tax liabilities owed to the United States government. (See Pls.' Mem. at 1 [Doc. No. 26].) The Defendants' personal tax liabilities stem from Medtronic's proposed merger with Covidien plc (" Covidien" ). Below, the Court discusses in more detail the identity of the parties, the proposed merger, the proposed tax reimbursements, and Plaintiffs' claims.

A. Parties

Plaintiffs currently hold an undisclosed number of shares of Medtronic. (Compl. ¶ 4 [Doc. No. 1]; see In re Medtronic, Inc. Derivative Litigation, No. 14-cv-4142, Compl. ¶ 11 [Doc. No. 1].) As mentioned above, Plaintiffs bring this derivative action on behalf of themselves and Medtronic's other shareholders.

Defendants are members of Medtronic's Board of Directors and Does 1-5. Defendant Omar Ishrak has served as the Company's president, Chief Executive Officer (" CEO" ), and Chairman of the Board since 2011. (Compl. ¶ 6 [Doc. No. 1].) Defendant

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Gary L. Ellis has served as the Company's Vice President and Chief Financial Officer (" CFO" ) since 2005. (Id. ¶ 7.) Defendant Christopher J. O'Connell is Medtronic's Executive Vice President and Group President of Restorative Therapies Group. (Id. ¶ 8.) He has been in this role since 2009. (Id.) Defendant Michael J. Coyle has served as Medtronic's Executive Vice President and Group President of the Cardiac and Vascular Group since 2009. (Id. ¶ 9.) Defendant Carol A. Surface is Medtronic's Senior Vice President and Chief Human Resources Officer. (Id. ¶ 10.) Surface has been in this position since September 2013. (Id.)

Medtronic's Board of Directors is composed of Ishrak, Ellis, O'Connell, Coyle, Surface, and nine other individuals, including: Richard H. Anderson, Scott C. Donnelly, Shirley Ann Jackson, Michael O. Leavitt, James T. Lenehan, Denise M. O'Leary, Kendall J. Powell, Robert C. Pozen, and Preetha Reddy. (Id. ¶ ¶ 11-21.) While Ishrak, Ellis, O'Connell, Coyle, and Surface are employed by Medtronic, Anderson, Donnelly, Jackson, Leavitt, Lenehan, O'Leary, Powell, Pozen, and Reddy are " Non-Employee Director Defendants." (Id. ¶ 22.)

Does 1-5 are individuals whose identities are presently unknown to Plaintiffs. (Id. ¶ 20.) Plaintiffs refer to Defendants Ishrak, Ellis, O'Connell, Coyle, Surface, Anderson, Donnelly, Jackson, Leavitt, Lenehan, O'Leary, Powell, Pozen, Reddy, and Does 1-5, collectively, as " Defendants." (Id. ¶ 21.)

Plaintiffs claim that because of their positions as Directors, " Defendants owe[] Medtronic and its shareholders fiduciary obligations of good faith, loyalty, candor, and were and are required to use their utmost ability to control and manage Medtronic in a fair, just, honest, and equitable manner." (Id. ¶ 23.) Moreover, Plaintiffs claim that Defendants must act to further the best interests of Medtronic and its shareholders, " so as to benefit all shareholders equally and not in furtherance of their personal interest or benefit." (Id.)

B. Proposed Merger or Proposed Inversion

Plaintiffs' lawsuit arises from " Defendants' efforts to complete the sale of Covidien . . . to the Company, Medtronic Holdings Limited . . . a private limited company organized under the laws of Ireland that will be registered as a public limited company and renamed Medtronic plc [" New Medtronic" ] at or prior to the completion" of the proposed transaction. (Id. ¶ 26.) Simply put, if the shareholders approve this transaction, Medtronic would be re-incorporated under the laws of Ireland, and become the " New Medtronic." (See id.) This transaction is known as an " inversion." (Id. ¶ 27.) " An inversion is a corporate merger where a U.S. based company merges with a foreign corporation to create a new corporate entity that is incorporated outside the United States of America. For tax purposes, the new entity becomes foreign owned, which reduces the company's overall tax liability." (Id.) Accordingly, the Court proceeds by referring to this proposed merger, as the " Proposed Inversion." As a result of the Proposed Inversion, current shareholders of Metronic would receive one share of New Medtronic for each share of Medtronic common stock they own. (See Pls.' Mem. at 4 [Doc. No. 26].)

On July 14, 2014, Defendants filed a preliminary joint Proxy statement (" the Proxy" ), on behalf of New Medtronic. (Id. ¶ 26.) Defense counsel provided a bound hard copy of the most recent version of the Proxy to the Court during the hearing. (See also Grant Decl., Ex. A " Medtronic Holdings Limited Registration Statement on Form S-4" [Doc. No. 37-1].) The Proxy represents that the transactions contemplated

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are in the best interest of the Company and its shareholders, and recommends " that the Company's shareholders vote in favor" of the Proposed Inversion. (Compl. ¶ 26 [Doc. No. 1].)

C. Tax Liability Resulting From Inversions

Section 4985 of the U.S. Tax Code imposes an excise tax on officers and directors of an inverting corporation who are subject to the reporting requirements of section 16(a) of the Securities Exchange Act of 1934. See 26 U.S.C. § 4985. The excise tax amounts to fifteen percent of a covered officer or director's stock-based compensation, including stock options, held during the period beginning six months before and ending six months after the close of the inversion transaction. Plaintiffs allege that the House of Representatives' Committee on Ways and Means explained that this tax was imposed in order to ensure that officers and directors were taxed at an equivalent rate as shareholders, who are taxed at a fifteen percent capital gains rate, upon the completion of an inversion. (Compl. ¶ 29 [Doc. No. 1].) Thus, ...


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