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Judge gives Medtronic shareholders another chance in lawsuit over Covidien deal

August 31, 2018

It’s been more than two years since medical-device maker Medtronic acquired health care supplier Covidien and moved its legal headquarters to Ireland, but shareholder litigation continues to dog the $50 billion transformation.

A Hennepin County judge this week ruled against Medtronic and decided not to throw out six claims from class-action shareholders who are still suing over the deal. The same court threw out a similar lawsuit two years ago, but the Minnesota Supreme Court later reinstated it.

The shareholders say that Medtronic diluted their shares in the company and forced them to pay capital gains taxes because of the move to Ireland. The lawsuit says company records discovered through the litigation show that some Medtronic executives knew that buying Covidien without moving the headquarters overseas would have been less harmful financially for many shareholders.

The lawsuit says Medtronic covered the cost of special taxes for executives to make sure that they voted in favor of the company’s interests and against the shareholder’s interests. The plaintiffs also accuse Medtronic of withholding information that would have let shareholders cast better-educated votes on the deal.

“Defendants disclosed the forced taxes on Medtronic shareholders, but did not disclose that such forced taxes could have been avoided and were imposed to preserve undisclosed tax-avoidance schemes,” lawyers for plaintiff Lewis Merenstein wrote in a response to Medtronic’s new motion to throw out the case in April.

The value of Medtronic shares has risen about 25 percent since the deal closed in January 2015, though many shareholders have said they had to sell or donate some of their stock to cover the capital-gains tax that were triggered when Medtronic moved from Fridley to Dublin.

Medtronic has argued repeatedly in court filings that the shareholders didn’t have the right to file such a lawsuit, because Minnesota corporate law typically gives corporate boards the right to determine whether a company’s actions harmed shareholders.

That argument convinced the Hennepin County court in March 2015 to throw out the first version of the shareholder lawsuit. But the Minnesota Supreme Court ruled last year that a deal such as Medtronic’s, known as a corporate “inversion,” can produce competing outcomes for the company and shareholders, which gives shareholders the right to sue.

“We are disappointed with the decision, but we recognize it is just a decision on preliminary legal issues,” Medtronic spokesman Fernando Vivanco said by e-mail Friday.

He noted that Judge Frank J. Magill took care to say in his ruling that the decision not to throw out the shareholder’s case doesn’t express any opinion on whether the shareholders will ultimately prevail on their claims.

“We intend to vigorously defend against the plaintiffs’ surviving claims, which we believe are meritless and should ultimately be dismissed. Medtronic’s acquisition of Covidien was undertaken for strategic reasons, has created a company that has provided value for shareholders, and is positively impacting the lives of more patients, in more ways and in more places around the world,” Vivanco said.

Magill did throw out three of the nine claims the revived Merenstein lawsuit. The claims that were dismissed accused Medtronic and company officials on unjust enrichment, conspiracy to aid and abet unjust enrichment, and conversion.

Joe Carlson • 612-673-4779

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