Medtronic shareholders out for blood in case over Covidien tax inversion deal

Medtronic ($MDT) may have closed its $50 billion tax inversion deal with Covidien last year, but not everyone is popping the bubbly. A group of shareholders is trying to throw a wrench into the deal by suing the devicemaker in Minnesota Supreme Court.

About 20% of the shareholders who owned stock in Medtronic when it bought Covidien are trying to bring a lawsuit against the company to recoup cash that they were forced to spend in the deal, the StarTribune reports. When Medtronic moved its legal headquarters to Covidien’s Irish base, it prompted some shareholders to pay thousands of dollars to cover capital gains taxes, the group is arguing.

Medtronic’s board members knew that the inversion would impose taxes on the small group of shareholders whose stock wasn’t protected. But board members pushed for the deal anyway, which presented a conflict of interest, plaintiffs argue.

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“Can a Minnesota corporation ... enter into a transaction to save income taxes that otherwise it would have to pay, and in the process of doing so, shift that tax burden to a small minority?” said Vernon Vander Weide, the Minneapolis attorney representing activist shareholder Kenneth Steiner, as quoted by the StarTribune.

According to Medtronic, that answer is “yes.” Minnesota business law gives boards of directors certain legal powers so that they can run a company without facing disgruntled shareholders, Eric Magnuson, Medtronic’s attorney, told the Minnesota Supreme Court this week in oral arguments.

A Minnesota law gives shareholders the right to file suit for direct injuries without going through a company first if the company’s actions only hurt a certain number of shareholders. But Medtronic is arguing that all shareholders were affected by the taxes.

Still, one Supreme Court justice isn’t buying it. "That argument seems to have an air of unreality about it, because there certainly will be shareholders who will not end up paying a capital-gains tax, through a nonprofit, or they’ve got their shares in an IRA or something like that,” Associate Justice David Lillehaug said, as quoted by the StarTribune.

The court hasn’t said when it will issue a ruling. But a little help from Minnesota’s business community could swing things in Medtronic’s favor.

The Minnesota Chamber of Commerce filed a brief in June to convince the Supreme Court justices to toss out a lower court’s decision. Upholding that decision would “result in shareholder claims being characterized as direct claims,” leaving Minnesota businesses “exposed to increased litigation expense and liability risks,” the chamber’s lawyers wrote, as quoted by the StarTribune.

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