900 N.W.2d 401
Minn.2017Background
- Medtronic, a Minnesota corporation, announced a 2014 merger with Covidien structured as an inversion; former Medtronic shareholders received 70% of the new Irish holding company.
- Steiner filed a consolidated class-action complaint alleging breaches of fiduciary duty and statutory violations based on (1) shareholders bearing capital-gains tax liability, (2) reimbursement to officers/directors for excise-tax liability, and (3) dilution of shareholder ownership/voting interest.
- Medtronic moved to dismiss under Minn. R. Civ. P. 23.09 (derivative-action demand/pleading requirements) and Rule 12.02; district court dismissed most claims as derivative and dismissed two securities claims for failure to state a claim.
- The court of appeals reversed as to most claims (except Count VII concerning excise-tax reimbursement), holding most alleged injuries were direct; this Court granted review.
- The Supreme Court reaffirmed Minnesota’s test: determine who suffered the injury and who would receive the recovery, and applied that test to Counts I–X.
- Holding: claims premised on excise-tax reimbursement are derivative and were properly dismissed; claims premised on capital-gains tax liability and alleged dilution of shareholder interest are direct and were improperly dismissed.
Issues
| Issue | Plaintiff's Argument (Steiner) | Defendant's Argument (Medtronic) | Held |
|---|---|---|---|
| Whether claims challenging the inversion structure are derivative or direct | Claims allege shareholder injuries (tax liability, dilution) and thus are direct; no demand required | Claims allege harms common to all shareholders (overpayment/dilution) and thus are derivative; Rule 23.09 applies | Use Minnesota test: identify who was injured and who gets recovery; capital-gains and dilution claims are direct; excise-tax reimbursement claims are derivative |
| Whether Minnesota should adopt Tooley three-part test (Delaware) | Tooley is consistent with Minnesota law; directness depends on who is injured and who benefits | Tooley conflicts with Minnesota law; focus should be on whether injury is an indirect, shareholder-wide effect | Court declined to adopt Tooley as necessary, relying on Minnesota precedent: focus on who suffered the injury and who would receive recovery |
| Whether statutory claims under Minn. Stat. ch. 302A are automatically direct | Statutory rights give shareholders personal causes of action and thus are direct | Direct/derivative distinction still applies; look to the injury, not the label of the claim | Rejected automatic-direct rule; apply the same injury/recovery test regardless of statutory or common-law label |
| Whether excise-tax reimbursement allegations require retention of those counts for evidence only | Even if evidence of breach, excise-tax reimbursement caused injury to the corporation and any recovery would go to the corporation | Reimbursement is waste of corporate assets; derivative | Excise-tax reimbursement claims are derivative; district court properly dismissed them (and plaintiff conceded no shareholder damages tied to them) |
Key Cases Cited
- Sipe v. STS Mfg., Inc., 834 N.W.2d 683 (Minn. 2013) (standard of review on motion to dismiss; accept complaint facts as true)
- Nw. Racquet Swim & Health Clubs, Inc. v. Deloitte & Touche, 535 N.W.2d 612 (Minn. 1995) (distinguishing direct versus derivative by whether plaintiff’s injury is separate and distinct)
- Wessin v. Archives Corp., 592 N.W.2d 460 (Minn. 1999) (look to the injury itself, not the claim label, to decide directness)
- In re UnitedHealth Grp. Inc. S’holder Derivative Litig., 754 N.W.2d 544 (Minn. 2008) (derivative suits step into the corporation’s shoes; recovery belongs to corporation)
- Janssen v. Best & Flanagan, 662 N.W.2d 876 (Minn. 2003) (derivative actions require relief to compensate the corporation)
- Seitz v. Michel, 148 Minn. 80, 181 N.W. 102 (Minn. 1921) (wrongful diversion of corporate funds is derivative; recovery belongs to corporation)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (Delaware articulation of direct/derivative inquiry; addressed by court but not adopted as controlling in Minnesota)