In re Medtronic Inc.: Distinguishing Direct versus Derivative Claims under Minnesota Law

In In re Medtronic Inc., Shareholder Litigation., 2016 WL 6066253 (Minn. 2017), the Supreme Court of Minnesota affirmed in part, and reversed in part Kenneth Steiner’s (“Respondent”) claims asserted in a class-action challenge to Medtronic, Inc.’s (“Medtronic”) acquisition of Covidien plc (“Covidien”). The court held Respondent’s claim of injury due to an excise tax was derivative and thus subject to Minn. R. Civ. P. 23.09, while the claims asserting injury due to dilution of shareholder’s interest in Medtronic and capital-gains tax liability were direct and thus not subject to the requirements of Minn. R. Civ. P. 23.09.

The complaint alleged, in June 2014, Medtronic, a Minnesota corporation, announced it would acquire Covidien, a public Irish company, and the resulting corporation would be organized under a new holding company, Medtronic plc (“New Medtronic”), incorporated in Ireland. The complaint alleged transaction would be structured as an inversion, enabling Medtronic to avoid future U.S. federal income tax. Medtronic shareholders incurred capital gains taxes on shares in taxable accounts. Additionally, Medtronic reimbursed excise taxes for officers and directors. In response to the acquisition announcement, Respondent filed a class action suit, alleging Medtronic’s use of an inversion structure resulted in (1) disparate treatment of Medtronic versus Covidien shareholders; (2) disparate treatment with respect to the tax liability incurred by Medtronic shareholders compared to Medtronic’s officers and directors; (3) violations of the Minnesota Business Corporation Act; and (4) the possibility of the dilution of the shareholders’ interest in New Medtronic.

Under Minnesota law, “identifying who suffered the injury and therefore who is entitled to the recovery for that injury, provides the answer to the direct-versus-derivative question.” Direct claims allege injury to the shareholder, while derivative claims allege injury to the corporation.

The court concluded that the excise tax reimbursement was derivative because the injury was primarily a waste of corporate resources and, thus, suffered by the corporation, not the shareholders. In contrast, Respondent’s claim that they incurred capital gains taxes, while the officers and directors did not, was a direct claim because the shareholders incurred the injury. Similarly, the court found Respondent’s claim of dilution was direct. The court noted that the complaint did not allege dilution based on the decreased value of the corporation, but rather that the use of an inversion structure protected the corporations’ expected tax benefit by taking a portion of the shareholder’s interest and therefore decreasing the shareholders’ interest in New Medtronic. 

As such, the Supreme Court of Minnesota affirmed the court of appeals decision in part and reversed in part, and remanded the case to the district court for further proceedings.

The primary materials for this case may be found on the DU Corporate Governance website.