Medtronic shareholders who opposed the company's move to Ireland a year ago won a legal victory on Monday reopening a lawsuit that seeks to pay back investors who had to shell out for taxes after the medical device maker's corporate changes.
A three-judge panel of the Minnesota Appeals Court ruled that a lower court should not have thrown out 11 of the 12 claims that class-action shareholders filed against the company in July 2014. The ruling removes procedural barriers to the lawsuit and potentially sets the stage for a judge or jury to decide whether Medtronic shareholders were treated unfairly by Medtronic's executives and directors.
Medtronic lawyers plan to appeal Monday's decision to the Minnesota Supreme Court. "We respectfully disagree with the appellate court's decision and believe it is inconsistent with clear legal precedent," spokesman Fernando Vivanco said in an e-mail.
Tuesday is the anniversary of Medtronic's $49.9 billion stock-and-cash acquisition of surgical-supply maker Covidien PLC. On that day a year ago, Fridley-based Medtronic Inc. became a subsidiary of a new company called Medtronic PLC, which also acquired Covidien and established its legal residency at the same Dublin, Ireland, address that Covidien had been at before the deal.
Such deals are called inversions because they result in a company "inverting" its headquarters to a different country, typically one with lower tax rates, as Ireland has.
The deal proved controversial among longtime shareholders because the inversion required Medtronic to cancel its old stock and issue new shares, triggering a taxable capital gain on the liquidated stock. Many longtime shareholders have said they bought the stock when it cost $5 or $10 per share, and then had to dispose of it about $76 a share.
Stockholders at Medtronic's last shareholder meeting before the Covidien deal discussed how they had placed stock in trusts with the intention of passing it on to children without incurring capital gains. Instead, they had to decide whether to sell some of the stock, or strategically donate it, in order to avoid large tax bills.
Meanwhile, a handful of Medtronic executives and directors received a total of more than $60 million from the firm to cover special federal taxes they incurred as a result of running a company that inverts.
Lewis Merenstein filed a class-action lawsuit in Hennepin County District Court asking for a judge to halt the deal and decide whether executives and directors were, among other things, self-dealing and breaching their fiduciary duties and standards of conduct under Minnesota law.
Medtronic said such claims weren't true, and the company won several legal victories that cleared the way for shareholders to vote to approve the Covidien deal last January. In one of those legal wins, a state judge ruled that Merenstein's legal claims were barred from court because of the complex procedural question of whether they are considered direct or "derivative" claims.
The original judge ruled the claims were derivative, which effectively meant the plaintiffs couldn't pursue them. On Monday, the appeals court panel ruled that all but one of the claims were direct, giving shareholders the right to argue their merits in court.
The panel sent the revived claims back to trial court, which may ultimately get past the procedural questions and consider whether the facts raised are strong enough to support the case, pending Medtronic's appeal.
Vernon Vander Weide, one of the lawyers representing Merenstein, declined to say Monday whether the plaintiff's ultimate goals include somehow trying to unwind the year-old Medtronic-Covidien tie-up. He also said it's too early to estimate the plaintiffs' financial damages. But those will probably be based on capital gains taxes and the dilution of value suffered by shareholders when Medtronic increased its number of outstanding shares.