Medtronic PLC wants the Minnesota Supreme Court to consider overturning a lower court decision that would let a shareholder sue the company and its board for financial injuries stemming from the medical device maker's move to Ireland.
Medtronic argues Supreme Court should boot shareholder lawsuit
The plaintiff alleged company directors hid information about the move to Ireland and ignored a tax hit for its shareholders.
March 5, 2016 at 2:29AM
"If left uncorrected, the decision below will incite more litigation and will undermine a developed body of law that contributes to the robust corporate presence Minnesota enjoys and by which its economy thrives," Medtronic wrote in its petition for review to the state's highest court. The lower court ruling would "open the doors wide for shareholder challenges to board decisions."
On Friday, plaintiff Kenneth Steiner filed his response, arguing that the Supreme Court should take no action. Doing nothing would resolve procedural hurdles and allow the case to move toward a trial on the actual allegations, though a second procedural fight may still loom over whether to certify the case as a class action.
Steiner, a longtime activist shareholder, argues that Medtronic's board of directors hid key information about the move to Ireland and ignored the negative tax implications for individual shareholders so that the company could lower its own taxes by reincorporating overseas using a type of acquisition known as an "inversion."
"Medtronic structured its acquisition of Covidien as an inversion to obtain tax benefits at the direct expense of its public shareholders, a minority of whom consequently suffered adverse tax consequences and all of whom suffered the dilution" of their stock, Friday's filing said.
The legal fight is heating up just as longtime individual shareholders are preparing their 2015 income tax returns.
Many longtime stockholders are reckoning with capital gains taxes in their filings this year. Medtronic's inversion to Ireland resulted in issuance of new stock in an Irish company, a taxable event for longtime individual investors and retirees with stock. The lawsuit notes that stockholders who held Medtronic stock in tax-deferred accounts would not face the same immediate capital gains taxes.
Medtronic was founded in Minneapolis in 1949. In January 2015, the company acquired surgical supplier Covidien in a $49.9 billion cash-and-stock inversion deal that broadened its product base and combined two companies with complementary missions.
Critics like Steiner said Medtronic could have accomplished those goals without moving to Ireland — and without penalizing longtime shareholders.
Indeed, according to Steiner's lawsuit, Medtronic board members and executives considered effects the deal would have on individual shareholders, and also evaluated another option for structuring the deal. In the end, those details were not included in the 600-page proxy statement to shareholders, nor was there any explanation of why the other alternative was not implemented, the lawsuit said.
The legal filings redact the information that was allegedly not included in the proxy filing.
But it doesn't really matter, Medtronic attorneys argued in their filing to the Supreme Court, because Steiner's lawsuit should not be allowed to move forward.
Medtronic wants the Supreme Court to uphold the opinion of the initial state district court, which ruled that Steiner's claims were "derivative" actions that he effectively didn't have standing to bring. But Steiner's attorneys want to uphold the unanimous ruling of a three-judge state Court of Appeals, which in January revived the lawsuit by ruling the claims direct instead of derivative.
Mitchell Hamline Law School professor emeritus Daniel Kleinberger said it's far less attractive for shareholders to bring a derivative case because those are generally dependent on first making a demand for the board to file the claim itself. The lawsuit against Medtronic claims the directors would never have done that, partly because the company had agreed to cover millions in special excise taxes stemming from the deal.
"One can argue that it was good in the long run for the company, and therefore for all shareholders, because it basically made Medtronic a ton of money, by saving on taxes," Kleinberger said. "But that is different than saying they (the individual shareholders) weren't harmed."
Joe Carlson • 612-673-4779
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