5 years later, a lawsuit challenging a $49.9B Medtronic acquisition churns on

Five and a half years ago, medical device maker Medtronic announced a controversial acquisition that almost doubled its revenue and set the stage for a rise in stock value that has outpaced a surging bull market. Yet an unusual shareholder lawsuit is moving though Minnesota courtrooms arguing that thousands of shareholders were injured by the deal.

The aggrieved shareholders — including many Medtronic retirees — argue that the growth of Medtronic shares since the 2015 acquisition of surgical supplier Covidien doesn't change the fact that they were forced to collectively shell out more than $2 billion in capital-gains taxes, while most Medtronic shareholders did not face that tax.

Subjecting a minority of shareholders to a tax, while hiding the fact that other options were available, was "wrongdoing" by Medtronic, plaintiffs' attorney Vernon Vander Weide told a court Dec. 9, according to a transcript.

Medtronic denies any wrongdoing in crafting an acquisition that enhanced the company's value and benefited its shareholders. Company attorneys said all relevant information was disclosed to shareholders, and some of the plaintiffs voted in favor of the deal. The deal has led to the creation of 1,200 jobs in Minnesota, Medtronic said.

"As the plaintiffs themselves have noted, 'wondrous things' have happened at Medtronic because of the business merits of this acquisition," a Medtronic spokesman said via e-mail Friday. "Medtronic shareholders have experienced a 92% increase in the value of their stock since the acquisition was announced. And we continue to create innovative medical technology to alleviate pain, restore health, and extend life for millions of patients around the world."

Hennepin County District Judge Edward Wahl has urged the two sides to settle the dispute. Though 27 plaintiffs from five states have joined the case so far, Wahl is expected to rule in coming months on whether as many as half a million plaintiffs can sue as a group.

The business deal at the center of the case is Medtronic's $49.9 billion acquisition of Covidien, which became final in January 2015. Medtronic directors offered Covidien shareholders upfront cash and a 30% stake of the combined company to persuade Covidien to sell. The deal proved controversial in Minnesota and Washington, D.C., because Medtronic's board structured the deal as a corporate "inversion," which happens when an acquiring company moves its headquarters to the foreign jurisdiction where its acquisition target is based.

Covidien was headquartered on Lower Hatch Street in Dublin, Ireland. That meant that Medtronic, a Minnesota med-tech institution for decades, would move its legal address overseas, lowering its corporate taxes and allowing it to spend money on dividends and investments that would have been subject to tax if "repatriated" back to the United States.

The lawsuit survived a motion to dismiss at the Minnesota Supreme Court in 2018, and is now back in trial court. The lawsuit survived a motion to dismiss at the Minnesota Supreme Court in 2018, and is now back in trial court. Appeals and final motions for summary judgment would have to be exhausted before a trial could take place.

Plaintiff's lawyers argue that the class should include as many as 530,000 Medtronic stockholders — about 15% of the company's shareholders — who were forced to take a capital gain in 2015 as a result of the Covidien deal. Medtronic attorneys said the number of people who actually lost money on the deal is much smaller, because plaintiffs are ignoring the dividends and rise in stock price that offset any capital-gains taxes.

The litigation is rife with redacted and sealed documents, but new details emerged from a hearing before Judge Wahl on Dec. 9.

During oral arguments, attorneys revealed that Medtronic's directors in 2014 considered structuring the deal in ways that would have prevented more than $2 billion in taxes from hitting shareholders. Vander Weide said in court that some of those options had "superior financial metrics," but shareholders never knew that. Instead, Medtronic asked for a vote on a structure that minimized corporate taxes and compensated executives for special excise taxes, while triggering sudden capital-gains taxes on former employees and other "retail" shareholders.

"The bottom line here is that as a result of the defendants' choices — voluntary, intentional, planned choices — a minority of Medtronic shareholders are forced to pay the inversion penalty imposed by Congress so that Medtronic could [invert overseas] to avoid taxes," Vander Weide told Wahl at the Dec. 9 hearing.

"We're going to prove it couldn't have been done a different way," Medtronic outside counsel Linda Coberly said later in the same hearing. "There was nothing non-disclosed at all."

Besides, Coberly noted, the stock price rose 26% in the seven months between when the deal was announced and completed. That rise in value alone could have covered capital -ains taxes for many people.

The judge said he was deeply conflicted by the case, because without a class-action, thousands of people could be deprived of the chance to obtain compensation for legitimate financial injuries. On the other hand, Medtronic argued cogently that it was hard to see how so many people could have similar injuries, when financial planning requires such personalized decisions.

Wahl repeatedly urged the parties during the hearing to work with an independent mediator and find a way to resolve the dispute quickly using profits from the deal.

"I know whatever I'll do, you'll go talk to the Court of Appeals and then you'll go talk to the Supreme Court. I've only got eight more years, and then they make me retire," Wahl said in court. "So I mean we need to find a solution that is good for this company to go on with and we need to find a solution that compensates people who were genuinely injured."