In re Medtronic, Inc. Derivative Litig

68 F.Supp.3d 1054

In re MEDTRONIC, INC. DERIVATIVE LITIGATION.

This Order Relates to: All Actions.

Case No. 14–cv–3540 SRN/JJK.

United States District Court, D. Minnesota.

Signed Dec. 22, 2014.

Brett D. Stecker, James M. Ficaro, Jeffrey J. Ciarlanto, and Robert B. Weiser, The Weiser Law Firm, Berwyn, PA, Edward B. Gerard, Justin D. Rieger, and Stephen J. Oddo, Robbins Arroyo, LLP, San Diego, CA, June Pineda Hoidal, Patricia A. Bloodgood, and Carolyn G. Anderson, Zimmerman Reed PLLP, Minneapolis, MN, for Plaintiffs.

Peter W. Carter, Michelle S. Grant, James K. Nichols, Dorsey & Whitney LLP, Gerardo Alcazar, Robbins Kaplan Miller & Ciresi LLP, Jerry W. Blackwell and S. Jamal Faleel, Blackwell Burke PA, Minneapolis, MN, for Defendants.

MEMORANDUM OPINION AND ORDER

SUSAN RICHARD NELSON, District Judge.

I. INTRODUCTION

This matter is before the Court on Plaintiffs' Motion for Preliminary Injunction [Doc. No. 24]. For the reasons set forth below, the Court denies Plaintiffs' motion.

II. BACKGROUND

Plaintiffs William A. Houston (“Houston”) and Marilyn Clark (“Clark”) [collectively, “Plaintiffs”], on behalf of Nominal Defendant Medtronic, Inc. (“Medtronic” or “the Company”), bringing this Motion for Preliminary Injunction seeking to enjoin Medtronic's Board of Directors (“the Board”) from using Medtronic shareholder funds to reimburse Defendants for their personal tax liabilities owed to the United States government. (See Pls.' Mem. at 1 [Doc. No. 26].) The Defendants' personal tax liabilities stem from Medtronic's proposed merger with Covidien plc. (“Covidien”). Below, the Court discusses in more detail the identity of the parties, the proposed merger, the proposed tax reimbursements, and Plaintiffs' claims.

A. Parties

Plaintiffs currently hold an undisclosed number of shares of Medtronic. (Compl. ¶ 4 [Doc. No. 1]; see In re Medtronic, Inc. Derivative Litigation, No. 14–cv–4142, Compl. ¶ 11 [Doc. No. 1].) As mentioned above, Plaintiffs bring this derivative action on behalf of themselves and Medtronic's other shareholders.

Defendants are members of Medtronic's Board of Directors and Does 1–5. Defendant Omar Ishrak has served as the Company's president, Chief Executive Officer (“CEO”), and Chairman of the Board since 2011. (Compl. ¶ 6 [Doc. No. 1].) Defendant Gary L. Ellis has served as the Company's Vice President and Chief Financial Officer (“CFO”) since 2005. (Id. ¶ 7.) Defendant Christopher J. O'Connell is Medtronic's Executive Vice President and Group President of Restorative Therapies Group. (Id. ¶ 8.) He has been in this role since 2009. (Id. ) Defendant Michael J. Coyle has served as Medtronic's Executive Vice President and Group President of the Cardiac and Vascular Group since 2009. (Id. ¶ 9.) Defendant Carol A. Surface is Medtronic's Senior Vice President and Chief Human Resources Officer. (Id. ¶ 10.) Surface has been in this position since September 2013. (Id. )

Medtronic's Board of Directors is composed of Ishrak, Ellis, O'Connell, Coyle, Surface, and nine other individuals, including: Richard H. Anderson, Scott C. Donnelly, Shirley Ann Jackson, Michael O. Leavitt, James T. Lenehan, Denise M. O'Leary, Kendall J. Powell, Robert C. Pozen, and Preetha Reddy. (Id. ¶¶ 11–21.) While Ishrak, Ellis, O'Connell, Coyle, and Surface are employed by Medtronic, Anderson, Donnelly, Jackson, Leavitt, Lenehan, O'Leary, Powell, Pozen, and Reddy are “Non–Employee Director Defendants.” (Id. ¶ 22.)

Does 1–5 are individuals whose identities are presently unknown to Plaintiffs. (Id. ¶ 20.) Plaintiffs refer to Defendants Ishrak, Ellis, O'Connell, Coyle, Surface, Anderson, Donnelly, Jackson, Leavitt, Lenehan, O'Leary, Powell, Pozen, Reddy, and Does 1–5, collectively, as “Defendants.” (Id. ¶ 21.)

Plaintiffs claim that because of their positions as Directors, “Defendants owe[ ] Medtronic and its shareholders fiduciary obligations of good faith, loyalty, candor, and were and are required to use their utmost ability to control and manage Medtronic in a fair, just, honest, and equitable manner.” (Id. ¶ 23.) Moreover, Plaintiffs claim that Defendants must act to further the best interests of Medtronic and its shareholders, “so as to benefit all shareholders equally and not in furtherance of their personal interest or benefit.” (Id. )

B. Proposed Merger or Proposed Inversion

Plaintiffs' lawsuit arises from “Defendants' efforts to complete the sale of Covidien ... to the Company, Medtronic Holdings Limited ... a private limited company organized under the laws of Ireland that will be registered as a public limited company and renamed Medtronic plc. [“New Medtronic”] at or prior to the completion” of the proposed transaction. (Id. ¶ 26.) Simply put, if the shareholders approve this transaction, Medtronic would be re-incorporated under the laws of Ireland, and become the “New Medtronic.” (See id. ) This transaction is known as an “inversion.” (Id. ¶ 27.) “An inversion is a corporate merger where a U.S. based company merges with a foreign corporation to create a new corporate entity that is incorporated outside the United States of America. For tax purposes, the new entity becomes foreign owned, which reduces the company's overall tax liability.” (Id. ) Accordingly, the Court proceeds by referring to this proposed merger, as the “Proposed Inversion.” As a result of the Proposed Inversion, current shareholders of Metronic would receive one share of New Medtronic for each share of Medtronic common stock they own. (See Pls.' Mem. at 4 [Doc. No. 26].)

On July 14, 2014, Defendants filed a preliminary joint Proxy statement (“the Proxy”), on behalf of New Medtronic. (Id. ¶ 26.) Defense counsel provided a bound hard copy of the most recent version of the Proxy to the Court during the hearing. (See also Grant Decl., Ex. A “Medtronic Holdings Limited Registration Statement on Form S4” [Doc. No. 37–1].) The Proxy represents that the transactions contemplated are in the best interest of the Company and its shareholders, and recommends “that the Company's shareholders vote in favor” of the Proposed Inversion. (Compl. ¶ 26 [Doc. No. 1].)

C. Tax Liability Resulting From Inversions

Section 4985 of the U.S. Tax Code imposes an excise tax on officers and directors of an inverting corporation who are subject to the reporting requirements of section 16(a) of the Securities Exchange Act of 1934. See 26 U.S.C. § 4985. The excise tax amounts to fifteen percent of a covered officer or director's stock-based compensation, including stock options, held during the period beginning six months before and ending six months after the close of the inversion transaction. Plaintiffs allege that the House of Representatives' Committee on Ways and Means explained that this tax was imposed in order to ensure that officers and directors were taxed at an equivalent rate as shareholders, who are taxed at a fifteen percent capital gains rate, upon the completion of an inversion. (Compl. ¶ 29 [Doc. No. 1].) Thus, shareholders of a company who own half or more, by vote or value, of the outstanding stock of the foreign parent immediately after the inversion is complete, must pay taxes on any gain from the transaction. (Id. ¶ 30.)

D. Tax Reimbursements and Gross–Up Payments

The Board announced that if the Proposed Inversion is approved by the shareholders, then the Company will reimburse Board members for their excise tax burdens. (Id. ¶ 31.) Since the payment of the excise tax to each director or officer is itself a taxable event, see 26 U.S.C. § 4985, Medtronic plans to pay Defendants additional money in order to cover the tax liability that would result from receiving the excise tax reimbursements. (Compl. ¶ 37 [Doc. No. 1].) Plaintiffs refer to (1) the tax reimbursements, and (2) the additional payment used to cover the tax liability that would result from receiving the tax reimbursements, collectively as the “Gross–Up Payments.” (See Pls.' Mem. at 1 [Doc. No. 26].) Thus, the Court uses this term throughout its Order.

Plaintiffs allege that in total, Defendants, including Does 1–5, will be reimbursed $63 million. (Id. ¶ 31.) Ishrak will allegedly receive $24,750,381. (Id. ¶ 6.) Ellis will allegedly receive $7,623,633. (Id. ¶ 7.) O'Connell will allegedly receive $6,685,665 in tax reimbursements from the Company. (Id. ¶ 8.) Coyle will allegedly receive $5,348,569 in tax reimbursements. (Id. ¶ 9.) And, Surface will allegedly receive $2,617,141 in tax reimbursements. (Id. ¶ 10.) The Non–Employee Directors will allegedly collectively receive $5.5 million in tax reimbursements. (Id. ¶ 42(b).) Further, “upon information and belief,” Plaintiffs allege that Does 1–5 will collectively receive tax reimbursements of $10.5 million. (Id. ¶ 20.).

Although Plaintiffs allege in their Complaint that the Proxy did not “disclose that Defendants intended to ‘reimburse’ themselves with respect to the excise tax requirement,” (id. ¶ 35), in fact, the Proxy details precisely the amount of money that each officer would be reimbursed (see Grant Decl., Ex. A “Medtronic Holdings Limited Registration Statement on Form S–4” at 125–28 [Doc. No. 37–1] ). Moreover, in Plaintiffs' memorandum, they explicitly rely on the precise reimbursements set forth in the Proxy. (See Pls.' Mem. at 6 [Doc. No. 26].)

E. Procedural Posture and Plaintiffs' Claims

Plaintiffs claim that by simply recommending the Gross–Up Payments, the Board is liable for breaching their fiduciary duties and unjustly enriching themselves. (Compl. ¶¶ 43–58 [Doc. No. 1].)

Plaintiffs did not make any demand on the present Board to institute this action because Plaintiffs allege that “such a demand would be a futile, wasteful, and useless act.” (Id. ¶ 42.) Thus, on September 19, 2014, Plaintiffs brought this action, derivatively in the right and for the benefit of Medtronic, to redress the alleged breaches of fiduciary duty. (Id. ¶ 40.)

Plaintiffs state four counts against Defendants. In Count One, Plaintiffs allege that Defendants breached their fiduciary duties because they...