In re Medtronic, Inc. Derivative Litigation
2014 WL 7323402, 68 F.Supp.3d 1054, 2014 U.S. Dist. LEXIS 176088 (2014)
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Rule of Law:
Under Minnesota law, a shareholder's pre-suit demand upon a corporate board is not excused as futile, even when a majority of directors are self-interested in the challenged transaction, because Minnesota Statute § 302A.241 allows the board to appoint a Special Litigation Committee (SLC) of independent directors or other independent persons to evaluate the demand.
Facts:
- Medtronic, Inc., a Minnesota corporation, proposed a merger with Covidien plc, an Irish company, in a transaction known as an 'inversion' designed to reduce its corporate tax liability.
- The inversion transaction triggered a 15% federal excise tax on the stock-based compensation of Medtronic's officers and directors under 26 U.S.C. § 4985.
- Medtronic's Board of Directors proposed to use corporate funds to reimburse the officers and directors for their personal excise tax liabilities.
- These reimbursements, plus additional payments to cover the taxes on the reimbursements themselves (collectively, 'Gross-Up Payments'), were estimated to cost Medtronic approximately $63 million.
- All members of the Board of Directors, with the exception of one director, Dr. Elizabeth Nabel, were slated to receive these Gross-Up Payments.
- The Board recommended that Medtronic shareholders vote to approve both the inversion merger and the Gross-Up Payments.
Procedural Posture:
- Shareholders William A. Houston and Marilyn Clark filed a derivative lawsuit on behalf of Medtronic, Inc. against the company's Board of Directors in the U.S. District Court for the District of Minnesota, a federal trial court.
- The complaint alleged breach of fiduciary duty, unjust enrichment, and corporate waste related to planned tax reimbursements for the directors.
- Plaintiffs did not make a pre-suit demand on the Board, alleging that such a demand would have been a futile act.
- Plaintiffs filed a Motion for a Preliminary Injunction to enjoin the Board from using corporate funds to make the 'Gross-Up Payments' to themselves.
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Issue:
Is a shareholder's pre-suit demand on a corporate board excused as futile under Minnesota law when every director but one will personally benefit from the challenged transaction, given the board's statutory authority to appoint a Special Litigation Committee to consider the demand?
Opinions:
Majority - Susan Richard Nelson
No, a shareholder's pre-suit demand is not excused as futile under these circumstances. Minnesota law provides a mechanism for a board, even a self-interested one, to address a shareholder demand through a Special Litigation Committee (SLC), meaning it is not 'plain from the circumstances' that a demand would be a useless act. Plaintiffs must make a demand before bringing a derivative suit because they have not demonstrated there is no possibility the Board will consider the merits of the demand. Since the likelihood of success on the merits is a crucial factor for a preliminary injunction, and plaintiffs cannot succeed without first making a demand, the injunction is denied. The court's reasoning is that Minnesota has a very stringent test for demand futility, established in Winter v. Farmers Educ. & Co-op. Union of Am., which excuses demand only when it is 'plainly futile.' The key development since Winter is the enactment of Minnesota Statute § 302A.241, which explicitly allows a board to appoint an SLC composed of 'one or more independent directors or other independent persons' to investigate and decide on a shareholder's demand. Because the Medtronic board could appoint the one disinterested director, Dr. Nabel, or even independent non-directors to an SLC, there remains a viable 'road to redress' for the shareholders. This statutory option distinguishes Minnesota law from Delaware law, rendering plaintiffs' reliance on Delaware precedent misplaced and making it exceedingly difficult to ever prove demand futility in Minnesota.
Analysis:
This decision significantly distinguishes Minnesota's corporate law from Delaware's on the issue of demand futility in shareholder derivative suits. By emphasizing the power of the Special Litigation Committee (SLC) statute, the court effectively transforms Minnesota into a near-universal demand jurisdiction. This ruling makes it extremely difficult for shareholders to bypass a corporate board to initiate litigation, even in clear cases of director self-dealing, thereby strengthening the board's control over corporate litigation. The opinion serves as a strong precedent against shareholder derivative actions in Minnesota, reinforcing the board's authority and creating a high procedural bar for plaintiffs.
