January 28, 2016

Minnesota Court of Appeals Articulates Test for Direct Shareholder Claims in In re Medtronic, Inc. Shareholder Litigation

On January 25, 2016, the Minnesota Court of Appeals decided In re Medtronic, Inc. Shareholder Litigation, holding that a shareholder’s claim is properly characterized as a direct claim, not a derivative claim, even where all shareholders share the same injury, so long as the shareholders would receive the benefit of the recovery or remedy, and the injury is not suffered by the corporation.

Beginning in March 2014, executives of Covidien, an Irish company, contacted executives at Medtronic, then a Minnesota company, to discuss a potential merger between the companies. The companies ultimately determined that Medtronic would acquire Covidien through an “inversion”—in which Medtronic would change its place of incorporation to Ireland so that Medtronic’s future earnings would not be subject to U.S. federal income taxes. To deter such transactions, the Internal Revenue Service (IRS) imposes certain excise (or capital gains) taxes on shareholders of companies that execute inversions. But as part of the merger, Medtronic provided senior executives with tax “gross-up” payments of more than $60 million as reimbursement for these taxes. Medtronic and Covidien publicly announced the merger agreement on June 15, 2014.

On July 2, 2014, Medtronic shareholder Lewis Merenstein filed a class-action complaint against Medtronic, generally alleging that the decision to structure the acquisition as an inversion harmed him by forcing him to pay excise taxes and by diluting the value of his shares. He pleaded numerous counts under the Minnesota Business Corporation Act (MBCA), as well as claims against the Board of Directors for self-dealing and breach of fiduciary duty. In pertinent part, the district court granted Medtronic’s motion to dismiss, concluding that the self-dealing, breach-of-fiduciary duty and MBCA claims were derivative claims that failed because Merenstein had not followed the procedures required by Minnesota Rule of Civil Procedure 23.09 for derivative claims.

A three-judge panel of the Minnesota Court of Appeals reversed. The principal issue it considered—and upon which the parties disagreed—was whether a claim can be characterized as “direct” in these circumstances if it injures all shareholders in the same way. Relying upon Delaware law, the court held that all shareholders of a Minnesota corporation may bring a direct claim even if (1) all shareholders share the same injury, as long as (2) the shareholders would receive the benefit of the recovery or remedy; and (3) the injury is not suffered by the corporation. These requirements, the court reasoned, were consistent with the purposes behind shareholder derivative claims—i.e., to preserve a corporation’s claims to itself.

Applying that standard, the court held that all but one of the self-dealing, breach-of-fiduciary duty, and MBCA claims were direct: all Medtronic shareholders alleged they were injured when the inversion diluted their stock and imposed additional taxes; shareholders would receive the benefit of a recovery; and that injury was not suffered by Medtronic. The one exception was a claim seeking to void the tax gross-up payments: that was a derivative claim because if the plaintiff prevailed, the money would be returned to Medtronic, not shareholders. And because Merenstein had not followed the requirements of Rule 23.09 for derivative claims, that count was dismissed.

The opinion is noteworthy for having imported its standard from Delaware law, which was a departure from some past decisions in this area. See, e.g., Reimel v. MacFarlane, 9 F. Supp. 2d 1062, 1067 n.7 (D. Minn. 1998) (“The Court will not adhere to the test articulated by the Delaware courts because, at least in [the shareholder derivative] context, that approach would be at odds with general principles of Minnesota law.”). It remains to be seen how future courts will apply this new guidance regarding “direct” v. “derivative” claims, and whether either party will petition for further review in the Minnesota Supreme Court.

Download Opinion of the Court.

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