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In re Medtronic, Inc. Shareholder Litigation

Supreme Court of Minnesota

August 16, 2017

In re Medtronic, Inc. Shareholder Litigation

         Court of Appeals Office of Appellate Courts

          Eric J. Magnuson, Robins Kaplan L.L.P., Minneapolis, Minnesota; and James K. Langdon, Michelle S. Grant, James K. Nichols, Dorsey & Whitney LLP, Minneapolis, Minnesota, for appellants.

          Vernon J. Vander Weide, Gregg M. Fishbein, Richard A. Lockridge, Kate M. Baxter-Kauf, Lockridge Grindal Nauen P.L.L.P., Minneapolis, Minnesota;

          Mark C. Gardy, James S. Notis, Jennifer Sarnelli, Gardy & Notis, LLP, New York, New York; and Emily Komlossy, Ross Appel, Komlossy Law, P.A., Hollywood, Florida, for respondent.

          David R. Marshall, Leah C. Janus, Fredrikson & Byron, P.A., Minneapolis, Minnesota, for amicus curiae Minnesota Chamber of Commerce.

         SYLLABUS

         1. The test for distinguishing direct from derivative shareholder claims for purposes of determining the application of Minn. R. Civ. P. 23.09 focuses on the nature of the injury alleged to determine to whom any recovery is owed.

         2. Taking the allegations of injury in the amended complaint as true for purposes of a motion to dismiss, the district court erred in dismissing, as derivative, claims alleging injuries to shareholders due to a capital-gains tax liability and diluted shareholder interests, but did not err in dismissing claims that asserted an injury due to an excise-tax reimbursement made to corporate officers and directors.

         Affirmed in part, reversed in part, and remanded.

          OPINION

          GILDEA, CHIEF JUSTICE.

         This appeal requires that we decide whether claims that respondent and shareholder Kenneth Steiner asserts in a class-action challenge to a merger transaction were properly dismissed. As relevant here, the district court determined that some claims are derivative, rather than direct, and therefore are subject to the demand and pleading requirements of Minn. R. Civ. P. 23.09. Because Steiner failed to comply with that rule, the district court granted the company's motion to dismiss. With the exception of one claim, the court of appeals reversed, holding that most of the claims are direct and therefore Rule 23.09 does not apply. In re Medtronic, Inc. S'holder Litig., No. A15-0858, 2016 WL 281237, at *2-5 (Minn.App. Jan. 25, 2016). We affirm in part, reverse in part, and remand to the district court for further proceedings.

         FACTS

         The Consolidated Amended Class Action Complaint ("Amended Complaint") alleges the following facts. On June 15, 2014, Medtronic, Inc., a Minnesota corporation, announced its decision to acquire Covidien plc, a public Irish company, in a transaction to be structured as an inversion.[1] In this transaction, Medtronic acquired Covidien through a new holding company, Medtronic plc, incorporated in Ireland, with Medtronic and Covidien then becoming wholly owned subsidiaries of the Irish holding company ("new Medtronic"). Shareholders of Medtronic had their stock converted into shares in new Medtronic on a one-for-one basis, while shareholders of Covidien received $35.19 and 0.956 shares of new Medtronic for every share of Covidien stock held. Ultimately, former Medtronic shareholders collectively owned approximately 70 percent of new Medtronic and former Covidien shareholders collectively owned approximately 30 percent of new Medtronic.

         As a result of the inversion transaction, Medtronic, previously a Minnesota corporation, now operates as a wholly owned subsidiary of an Irish company and thus is subject to Ireland's tax laws. Steiner alleged that Medtronic reduced the interest of its shareholders to 70 percent of new Medtronic in order to secure and protect the tax benefits it sought in this transaction. In addition, because the Internal Revenue Service treats an inversion transaction as a taxable event for the shareholders of the U.S. company, Medtronic shareholders incurred a capital-gains tax on Medtronic shares held in taxable accounts but received no compensation from the company for this tax liability. On the other hand, Steiner alleged, Medtronic officers and directors who incurred an excise-tax liability on their stock-based compensation as a result of the transaction were reimbursed by Medtronic for that expense.

         After the transaction was announced, Steiner filed a class-action lawsuit against Medtronic and members of its Board of Directors (collectively, "Medtronic").[2] The Amended Complaint alleged claims for breach of fiduciary duty (Counts I-II); claims for violations of the Minnesota Business Corporation Act, Minn. Stat. ch. 302A (2016) (Counts III-X); and claims for violation of the Minnesota Securities Act, Minn. Stat. ch. 80A (2016) (Counts XI-XII). The Amended Complaint specifically alleged the following injuries to Medtronic shareholders:

(1)disparate treatment of Medtronic, as compared to Covidien, shareholders;
(2)disparate treatment with respect to the tax liability incurred by Medtronic shareholders and the lack of compensation for that liability as compared to the reimbursement paid to Medtronic's ...

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