In re Medtronic, Inc., Shareholder Litigation

Medtronic, Inc., a Minnesota corporation, agreed to merge with Covidien plc, an Irish company. The merged entity became an Irish corporation. Under the merger agreement, Medtronic shareholders retained a reduced, 70 percent interest in the merged entity. Further, the Internal Revenue Service taxed the merger, subjecting Medtronic shareholders to a capital gains tax. Medtronic did not compensate the shareholders for this tax liability. In contrast, the Medtronic directors were required to pay an excise tax on their stock compensation as part of the merger, but Medtronic reimbursed the directors for that tax liability. Kenneth Steiner (plaintiff) brought a class action suit against Medtronic and its board of directors (defendants). Steiner alleged three injuries: (1) on account of the shareholders’ unreimbursed capital gains tax liability; (2) on account of the corporation’s excise tax reimbursement to directors; and (3) on account of the shareholders’ diluted voting power in the new corporation. Medtronic filed a motion to dismiss, arguing that the suit was actually a shareholder derivate suit and that Steiner had failed to make a demand of the board of directors. The district court granted the motion. The court of appeals affirmed in part and reversed in part, agreeing with the district court that the excise tax reimbursement claim was derivative but finding that the other two claims were direct and could proceed. The Minnesota Supreme Court granted review.