Covidien (NYSE:COV) is under fire again as a new shareholder lawsuit accused the company of breaching its fiduciary duties in the $43 billion acquisition by Medtronic (NYSE:MDT).
The Rosenfeld Family Foundation filed the lawsuit this week accusing Covidien’s leadership of short-changing shareholders by pushing the Medtronic deal without properly evaluating alternatives.
The lawsuit states in near identical terms the complaints made in a lawsuit filed last month by Richard Taxman, accusing Covidien’s leaders and board members of acting in their personal interest rather than in the interest of the company and its shareholders. Both lawsuits seek to block the merger from moving forward.
"The Proposed Transaction is the result of a flawed single-bidder sale process controlled and orchestrated by the Company’s conflicted Board and management," shareholders accused in court documents. "More specifically, after deciding to sell the Company, the Board failed to contact any potential suitors, perform any sort of market check and otherwise utterly failed to investigate or confirm the fair market value of the company.”
The plaintiffs claimed that the mega-merger undervalues Covidien and it’s "bright future" in light of the $2 billion spin-off of the company’s pharma division. Covidien’s shares rose more than 85% from the time of the spin-off to the day before the announcement of the Medtronic merger.
"The Merger Consideration fails to adequately compensate Covidien shareholders for the intrinsic value of the company," according to the complaint. "Notably, at least 3 analysts set price targets for the Company above the Merger Consideration. Moreover, the premium offered to Covidien shareholders is significantly below the average 1-day, 1-week, and 1-month premiums offered in similarly-sized deals within the last 5 years."
Read more about the Medtronic-Covidien mega-merger.
The lawsuit further accuses Covidien board members of vital conflicts of interest that prevented them from objectively evaluating Medtronic’s offer.
"The Board and members of management own an illiquid block of approximately 2,688,052 shares of Covidien common stock, and seek to monetize their illiquid holdings through the Proposed Transaction," the complaint states. "If the Proposed Transaction closes, the Board and members of management will receive over $95.9 million in cash and approximately 2,569,778 New Medtronic shares from the sale of their illiquid holdings."
Under the terms of the deal, Covidien insiders are also entitled to accelerated vesting of certain COV shares and 2 of Covidien’s board members will also get seats on the board of the new company post-merger.
Medtronic announced in June that it had agreed to acquire Covidien in a cash-and-stock deal worth nearly $43 billion. Terms of the deal, expected to close during the 4th quarter or in early 2015, call for Medtronic to pay $93.22 per share for Covidien. Each COV share will be converted to the right for $35.19 in cash and 0.956 MDT shares. Medtronic said that equates to a 29% premium on COV’s $75.02 closing price June 13. The deal will leave Covidien stockholders with about a 30% stake in Medtronic, the world’s largest-pure-play medical device company.
