In re Medtronic, Inc. Shareholder Litigation
900 N.W.2d 401 (2017)
Rule of Law:
To distinguish between a direct and a derivative shareholder claim under Minnesota law, the court asks two questions: (1) who suffered the alleged injury (the corporation or the shareholders directly)? and (2) who would receive the benefit of any recovery? An injury to the corporation that only indirectly harms shareholders is derivative, while an injury suffered directly by shareholders and not by the corporation is direct.
Facts:
- Medtronic, Inc., a Minnesota corporation, announced a merger with Covidien plc, an Irish company, to be structured as a corporate inversion.
- The inversion created a new Irish holding company, Medtronic plc, which acquired both original Medtronic and Covidien, with the original companies becoming wholly owned subsidiaries.
- Shareholders of the original Medtronic had their stock converted one-for-one into shares of the new Irish company, resulting in them collectively owning approximately 70% of the new entity.
- This transaction was a taxable event for Medtronic shareholders, who incurred a capital-gains tax liability.
- Medtronic did not compensate its shareholders for this tax liability.
- Medtronic did, however, use corporate funds to reimburse its officers and directors for the excise-tax liability they incurred on their stock-based compensation as a result of the transaction.
- Shareholder Kenneth Steiner alleged the transaction was structured to secure tax benefits for Medtronic at the direct expense of its shareholders by diluting their ownership interest and imposing personal tax liabilities.
- Steiner did not challenge the business decision to merge but specifically challenged the inversion structure chosen by the board.
Procedural Posture:
- Kenneth Steiner filed a class-action lawsuit against Medtronic and its Board of Directors in a Minnesota district court, which is the trial court of first instance.
- Medtronic filed a motion to dismiss, arguing the claims were derivative and Steiner failed to comply with the demand requirement of Minnesota Rule of Civil Procedure 23.09.
- The district court granted the motion to dismiss, finding that the claims in Counts I-X were derivative in nature.
- Steiner, as the appellant, appealed the dismissal to the Minnesota Court of Appeals, the intermediate appellate court.
- The Court of Appeals reversed in part, holding that most of the claims were direct, but affirmed that the claim regarding executive excise-tax reimbursement was derivative.
- Medtronic, as the petitioner, successfully petitioned the Minnesota Supreme Court for review of the Court of Appeals' decision.
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Issue:
Under Minnesota law, are shareholder claims challenging a merger's structure—which imposed capital-gains taxes on shareholders, diluted their ownership interest, and involved reimbursing executives for their own taxes—direct claims or derivative claims subject to pre-suit demand requirements?
Opinions:
Majority - Chief Justice Gildea
Yes, in part, and No, in part. Shareholder claims based on personal capital-gains tax liability and dilution of ownership interests are direct, while a claim based on the corporation's reimbursement of executive taxes is derivative. The proper test to distinguish between direct and derivative claims is to identify who suffered the injury and who would receive the benefit of any recovery. The court's reasoning is as follows: 1. Minnesota's Test Reaffirmed: The court rejected the need to adopt Delaware's 'Tooley' test, affirming Minnesota's long-standing precedent. The analysis focuses on two questions: who was injured and who gets the recovery. If the injury is to the corporation and recovery would go to the corporate treasury, the claim is derivative. If the injury is directly to the shareholders and recovery would go to them, the claim is direct. 2. Excise-Tax Reimbursement (Derivative): The claim that Medtronic improperly reimbursed its officers and directors for their excise taxes alleges a waste of corporate assets. The injury is to the corporation, whose funds were depleted. Any recovery would be a return of those funds to the corporation itself, not the shareholders. Therefore, this claim is derivative and was properly dismissed for failure to make a pre-suit demand. 3. Capital-Gains Tax Liability (Direct): The capital-gains tax was imposed directly on the individual shareholders, not on the corporation. Medtronic suffered no injury from this tax. Because the injury was personal to the shareholders and any recovery would compensate them directly, this claim is direct. 4. Ownership Dilution (Direct): The court distinguished this claim from a typical overpayment claim (which would be derivative). Steiner alleged not a mere decrease in the value of his shares, but a transfer of a portion of his ownership and voting power for the corporation's benefit—to protect its tax advantages from the inversion. This is an injury to the shareholders' personal ownership rights, not an injury to corporate assets, and is therefore a direct claim.
Analysis:
This decision solidifies Minnesota’s distinct two-part test for distinguishing direct from derivative shareholder actions, consciously diverging from the influential Delaware 'Tooley' standard. It clarifies that a harm affecting all shareholders equally is not automatically derivative; the pivotal question is whether the injury and recovery belong to the corporation or to the shareholders themselves. The ruling provides a clear framework for analyzing shareholder harms in complex transactions like mergers and inversions, separating corporate waste (derivative) from harms imposed on shareholders' personal finances or ownership rights (direct). This precedent will guide future corporate litigation in Minnesota by empowering shareholders to bring direct claims for certain merger-related injuries without first having to make a demand on the board of directors.
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