In re Medtronic, Inc. S’holder Litig.

900 N.W.2d 401

IN RE MEDTRONIC, INC. SHAREHOLDER LITIGATION

A15-0858

Supreme Court of Minnesota.

Filed: August 16, 2017

Eric J. Magnuson, Robins Kaplan L.L.P., Minneapolis, Minnesota; and James K. Langdon, Michelle S. Grant, James K. Nichols, Dorsey & Whitney LLP, Minneapolis, Minnesota, for appellants.

Vernon J. Vander Weide, Gregg M. Fishbein, Richard A. Lockridge, Kate M. Baxter-Kauf, Lockridge Grindal Nauen P.L.L.P., Minneapolis, Minnesota; Mark C. Gardy, James S. Notis, Jennifer Sarnelli, Gardy & Notis, LLP, New York, New York; and Emily Komlossy, Ross Appel, Komlossy Law, P.A., Hollywood, Florida, for respondent.

David R. Marshall, Leah C. Janus, Fredrikson & Byron, P.A., Minneapolis, Minnesota, for amicus curiae Minnesota Chamber of Commerce.

OPINION

GILDEA, Chief Justice.

This appeal requires that we decide whether claims that respondent and shareholder Kenneth Steiner asserts in a class-action challenge to a merger transaction were properly dismissed. As relevant here, the district court determined that some claims are derivative, rather than direct, and therefore are subject to the demand and pleading requirements of Minn. R. Civ. P. 23.09. Because Steiner failed to comply with that rule, the district court granted the company's motion to dismiss. With the exception of one claim, the court of appeals reversed, holding that most of the claims are direct and therefore Rule 23.09 does not apply. In re Medtronic, Inc. S'holder Litig. , No. A15-0858, 2016 WL 281237, at *2-5 (Minn. App. Jan. 25, 2016). We affirm in part, reverse in part, and remand to the district court for further proceedings.

FACTS

The Consolidated Amended Class Action Complaint ("Amended Complaint") alleges the following facts. On June 15, 2014, Medtronic, Inc., a Minnesota corporation, announced its decision to acquire Covidien plc, a public Irish company, in a transaction to be structured as an inversion.¹ In this transaction, Medtronic acquired Covidien through a new holding company, Medtronic plc, incorporated in Ireland, with Medtronic and Covidien then becoming wholly owned subsidiaries of the Irish holding company ("new Medtronic"). Shareholders of Medtronic had their stock converted into shares in new Medtronic on a one-for-one basis, while shareholders of Covidien received $35.19 and 0.956 shares of new Medtronic for every share of Covidien stock held. Ultimately, former Medtronic shareholders collectively owned approximately 70 percent of new Medtronic and former Covidien shareholders collectively owned approximately 30 percent of new Medtronic.

As a result of the inversion transaction, Medtronic, previously a Minnesota corporation, now operates as a wholly owned subsidiary of an Irish company and thus is subject to Ireland's tax laws. Steiner alleged that Medtronic reduced the interest of its shareholders to 70 percent of new Medtronic in order to secure and protect the tax benefits it sought in this transaction. In addition, because the Internal Revenue Service treats an inversion transaction as a taxable event for the shareholders of the U.S. company, Medtronic shareholders incurred a capital-gains tax on Medtronic shares held in taxable accounts but received no compensation from the company for this tax liability. On the other hand, Steiner alleged, Medtronic officers and directors who incurred an excise-tax liability on their stock-based compensation as a result of the transaction were reimbursed by Medtronic for that expense.

After the transaction was announced, Steiner filed a class-action lawsuit against Medtronic and members of its Board of Directors (collectively, "Medtronic").² The Amended Complaint alleged claims for breach of fiduciary duty (Counts I-II); claims for violations of the Minnesota Business Corporation Act, Minn. Stat. ch. 302A (2016) (Counts III-X); and claims for violation of the Minnesota Securities Act, Minn. Stat. ch. 80A (2016) (Counts XI-XII). The Amended Complaint specifically alleged the following injuries to Medtronic shareholders:

(1) disparate treatment of Medtronic, as compared to Covidien, shareholders;

(2) disparate treatment with respect to the tax liability incurred by Medtronic shareholders and the lack of compensation for that liability as compared to the reimbursement paid to Medtronic's officers and directors for their excise-tax liability;

(3) violation of provisions of the Minnesota Business Corporation Act that were intended to protect shareholders of Minnesota corporations;

(4) the possibility of a "reduction of shareholders['] interest in the combined company to 60% causing significant dilution to shareholders ['] interest in New Medtronic."

In the Amended Complaint, Steiner did not allege that Medtronic, as a corporation, was harmed; rather, he alleged that Medtronic's shareholders were harmed as a result of the wrongful conduct, regardless of the lack of harm (or even any benefit) to Medtronic itself. Additionally, Steiner does not challenge the business decision to merge with Covidien, but instead challenges the Board's decision to structure the transaction as an inversion.

Before the district court, Medtronic moved to dismiss the claims under Minn. R. Civ. P. 23.09, for failure to make a demand on the Medtronic Board; and under Minn. R. Civ. P. 12.02, for failure to state a claim upon which relief could be granted. Medtronic asserted that Steiner's claims essentially alleged that Medtronic paid too much for Covidien, which the company argued is "quintessentially" a derivative claim that affects all shareholders equally. Steiner asserted that because he alleged injuries suffered by the shareholders, the claims are direct, not derivative, and therefore Rule 23.09 does not apply. The district court concluded that the harms alleged due to the violations stated in Counts I-X of the Amended Complaint "relate [to] the structure of the merger as an inversion," and as such, "are direct to Medtronic and derivative to Medtronic's shareholders." Thus, these claims were dismissed for failure to comply with Minn. R. Civ. P. 23.09. Counts XI and XII were dismissed under Minn. R. Civ. P. 12.02(e) for failure to state a claim upon which relief could be granted.

Steiner appealed. The court of appeals affirmed in part and reversed in part. Specifically, the court of appeals agreed with the district court that Count VII of the Amended Complaint, which alleged that the excise-tax reimbursement violated Minn. Stat. § 302A.521, alleged "a harm that belongs to the corporation because voiding the Excise Tax Reimbursement would result in a return of funds to the corporation." In re Medtronic, Inc. S'holder Litig. , 2016 WL 281237, at *5. The court of appeals concluded, however, that the remaining claims that the district court dismissed under Minn. R. Civ. P. 23.09 are direct claims. In re Medtronic, Inc. S'holder Litig. , 2016 WL 281237, at *4.³

We granted Medtronic's petition for review to determine whether the court of appeals correctly concluded, under Minnesota law, that Steiner's claims are direct, rather than derivative.

ANALYSIS

This case comes to us on review of an order granting a motion to dismiss. We review de novo the district court's decision on a motion to dismiss, considering "only the facts alleged in the complaint, [and] accepting those facts as true." Sipe v. STS Mfg., Inc. , 834 N.W.2d 683, 686 (Minn. 2013) (citation and internal quotation marks omitted). The determination of whether shareholder claims are direct or derivative presents a question of law subject to de novo review. See, e.g. , Nw. Racquet Swim & Health Clubs, Inc. v. Deloitte & Touche , 535 N.W.2d 612, 617 (Minn. 1995) (explaining that the question was "whether the trial court erred in concluding as a matter of law" that the investor's claims "are nonderivative").

I.

As an entity distinct from its stockholders, a corporation holds the separate right to sue in its own name. Singer v. Allied Factors, Inc. , 216 Minn. 443, 13 N.W.2d 378, 380 (1944). Thus, "Minnesota has long adhered to the general principle that an individual shareholder may not assert a cause of action that belongs to the corporation," but instead must sue in a representative capacity on behalf of the corporation if asserting a claim alleging an injury to the corporate entity. Nw. Racquet , 535 N.W.2d at 617 ; see also Singer , 13 N.W.2d at 380 ; In re UnitedHealth Grp. Inc. S'holder Derivative Litig. , 754 N.W.2d 544, 550 (Minn. 2008) (explaining that a shareholder bringing a derivative claim "step[s] into the corporation's shoes" to "bring suit against wrongdoers on behalf of the corporation" (citations and internal quotation marks omitted)); Janssen v. Best & Flanagan , 662 N.W.2d 876, 882 (Minn. 2003) ("Derivative suits allow shareholders to bring suit against wrongdoers on behalf of the corporation, and force liable parties to compensate the corporation for injuries so caused."). When a derivative claim is brought, the complaining shareholder-plaintiff must, among other things, "allege with particularity the efforts ... made ... to obtain the desired action from the directors" of the corporation and the failure of the corporation to take such action. Minn. R. Civ. P. 23.09.

A direct claim, on the other hand, alleges an injury to the shareholder rather than an injury to the corporation. See Nw. Racquet , 535 N.W.2d at 619 (explaining that allegations of "specific misrepresentations" that "affected Northwest directly in its decision to purchase the debentures" stated a "claim of direct fraud and ... injury" to an investor); Seitz v. Michel , 148 Minn. 80, 181 N.W. 102, 105 (1921) (explaining that a shareholder asserting a claim alleging only an injury to the shareholder "may sue in his own right"); see also 12B William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations § 5908 (perm. ed., rev. vol. 2000) ("[I]n a direct shareholder action, the shareholder need only show an injury to himself that is distinct from any injury suffered by...