## Facts

- Medtronic, Inc. announced a 2014 acquisition of Covidien plc structured as a tax-motivated inversion creating an Irish parent, Medtronic plc.
- Medtronic shareholders exchanged shares for stock in the new Irish parent and ended with approximately 70% ownership (Covidien shareholders held about 30%).
- The exchange was treated as a taxable event to Medtronic shareholders, who incurred capital-gains tax without reimbursement.
- Officers and directors incurred an excise tax tied to certain stock-based compensation, and Medtronic reimbursed those insiders using corporate funds.
- A shareholder brought a putative class action alleging (1) unreimbursed capital-gains tax liability, (2) dilution of shareholder ownership and voting power, and (3) corporate waste from insider excise-tax reimbursements.
- Medtronic moved to dismiss on the ground that the claims were derivative and subject to Minn. R. Civ. P. 23.09 demand/pleading requirements; the district court dismissed the excise-tax reimbursement claim and treated other claims as derivative.
- The court of appeals largely reversed, treating the tax and dilution claims as direct; the Minnesota Supreme Court granted review.

## Issues

1. What test governs whether a shareholder claim is direct or derivative under Minnesota law for purposes of Minn. R. Civ. P. 23.09?
2. Are claims based on shareholders’ capital-gains tax liability from the inversion merger direct or derivative?
3. Are claims based on dilution of shareholders’ ownership and voting power direct or derivative?
4. Is a claim challenging the company’s reimbursement of insiders’ excise-tax liability direct or derivative?

## Decision

- The court clarified that the direct/derivative inquiry “focuses on the nature of the injury alleged to determine to whom any recovery is owed.”
- The court held the capital-gains tax liability claim alleged shareholder-specific injury with recovery owed to shareholders, and therefore was direct.
- The court held the dilution claim alleged injury to shareholders’ equity and voting power with recovery owed to shareholders, and therefore was direct.
- The court held the excise-tax reimbursement claim alleged depletion of corporate assets with recovery owed to the corporation, and therefore was derivative and properly dismissed for failure to satisfy Rule 23.09.
- The court affirmed in part, reversed in part, and remanded for further proceedings.

## Legal Principles

- A claim is derivative when it alleges injury to the corporation and any recovery would belong to the corporation; it is direct when it alleges a shareholder injury that is separate and distinct and recovery would belong to shareholders.
- For Minn. R. Civ. P. 23.09 purposes, the key determinants are the nature of the alleged injury and the proper recipient of the remedy.
- Shareholder tax liabilities imposed on shareholders by transaction structure can constitute direct injuries when relief would compensate shareholders rather than restore corporate assets.
- Alleged dilution of shareholders’ ownership and voting power can constitute a direct injury when it concerns shareholders’ personal equity and control interests.
- Claims alleging misuse of corporate funds to pay insiders’ personal obligations (corporate waste) are typically derivative because the remedy restores the corporate treasury.

## Conclusion

The Minnesota Supreme Court clarified that Minnesota’s direct-versus-derivative classification turns on the nature of the injury and who would receive any recovery, allowing shareholders to pursue direct class claims for merger-related personal tax burdens and dilution while requiring a derivative action (and Rule 23.09 compliance) for corporate-waste claims based on insider reimbursements.


In re Medtronic, Inc. S’holder Litig., 900 N.W.2d 401 (Minn. 2017)