Law School Case Brief
In re Medtronic, Inc. S'holder Litig. - 900 N.W.2d 401 (Minn. 2017)
As an entity distinct from its stockholders, a corporation holds the separate right to sue in its own name. 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. 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. Claims based on an alleged diversion of corporate funds are derivative when the wrongs complained of are wrongs against the corporation and the funds diverted should be restored to the corporation. A shareholder must sue in a representative capacity for the benefit of the corporation, and not for the damages to him individually.
When the corporation is injured, any injury to shareholders is only by reason of the injury to the corporation. This observation does not establish a requirement that a shareholder's injury must be separate and distinct from any injuries to all other shareholders to bring a direct action. Rather, the observation is simply a useful shorthand for the basic questions of who is injured and who is entitled to any recovery. Put more simply, when shareholders are injured only indirectly, the action is derivative; when shareholders show an injury that is not shared with the corporation, the action is direct.
This is a consolidated amended class action complaint, which alleges that Medtronic, Inc. announced its acquisition of an Irish company, which converted the original stock of Medtronic to shares in the new holding company on a one-for-one basis. Plaintiff Steiner, a shareholder, alleged that Medtronic reduced the interest of its shareholders to 70% in order to secure and protect the tax benefits it sought in this transaction; the Medtronic shareholders then incurred a capital-gains tax on Medtronic shares held in taxable accounts but received no compensation from the company for the tax liability. Plaintiff then filed the present suit against Medtronic and its Board of Directors, alleging three types of harm: injury due to the capital-gains tax liability imposed on shareholders; injury due to the excise-tax reimbursement made to Medtronic officers and directors; and injury due to the dilution of shareholders’ interest in Medtronic.. Medtronic asserted that his claim is a derivative on that affects all shareholders while Steiner, in contrast, alleged that it was direct. The district court concluded that the harms are direct to Medtronic and derivative to the shareholders; therefore these were dismissed.
Are the claims filed by an individual shareholder derivative in nature?
Yes (in part)
The district court erred in dismissing, as derivative, claims alleging injuries to shareholders due to a capital-gains tax liability and diluted shareholder interests but did not err in dismissing claims that asserted an injury due to an excise-tax reimbursement made to corporate officers and directors. The claims were based on harm to the corporation, with only indirect harm to the shareholders and were derivative. The test for distinguishing direct from derivative shareholder claims for purposes of determining the application of Minn. R. Civ. P. 23.09 focuses on the nature of the injury alleged to determine to whom any recovery is owed.
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