Richard Taxman accuses Covidien, its board of directors and chairman, president & CEO José Almeida of breaching their fiduciary duties in agreeing to the acquisition, which values COV shares at $93.22 apiece.
"The proposed acquisition is the result of a conflicted and unfair process that is designed to ensure the sale of Covidien to Medtronic on terms preferential to Medtronic and defendants and to subvert the interests of plaintiff and the other public stockholders of the Company. The Board and members of management own an illiquid block of 2,688,052 shares of Covidien common stock, and by the proposed acquisition seek liquidity for their illiquid Covidien holdings. If the proposed acquisition closes, the Board and members of management will receive over $95.9 million in cash and approximately 2,569,778 Medtronic plc shares from the sale of their illiquid holdings," according to the complaint [emphasis theirs]. "From the beginning of 2012 to just before the announcement of the proposed acquisition , the market price of Covidien common stock has increased by 86%, from an adjusted closing price on January 3, 2012 of $38.80 per share to $72.02 per share on June 13, 2014, the last trading day before the deal was made public. Furthermore, the proposed acquisition will make the combined company a "cash machine," with an estimated $7 billion in free cash flow annually, according to Bill George, Medtronic’s former Chief Executive Officer ("CEO") and now a professor at Harvard Business School in Boston.
Taxman alleges that the Covidien/Medtronic deal also includes provisions designed to "preclude a fair sales process for the company and lock out competing bidders," according to the lawsuit. Those include a no-solicitation clause preventing Covidien from seeking other bids "except under very limited circumstances," according to the complaint. There’s also "an illusory ‘fiduciary out’ for the no-shop provision that requires the company to provide Medtronic with advance notice before providing any competing bidder with any confidential company information, even after the Board has determined that the competing bid is reasonably likely to lead to a superior proposal and that the board is breaching its fiduciary duties by not providing the competing bidder with confidential company information," according to the lawsuit.
The lawsuit also objects to an "information rights" provision requiring Covidien to provide Medtronic with confidential, non-public information about competing proposals "which Medtronic can then use to formulate a matching bid" and a "matching rights" provision requiring Covidien to give Medtronic a chance to match any competing bids.
"In essence, the proposed acquisition is the product of a hopelessly flawed process that was designed to ensure the merger of Covidien with Medtronic on terms preferential to Medtronic and defendants, and detrimental to plaintiff and Covidien’s shareholders," according to the lawsuit.
Taxman wants the U.S. District Court for Massachusetts to certify the lawsuit as a class action, find that the deal is a breach of the defendants’ fiduciary duties, issue an injunction blocking the acquisition "unless and until the company adopts and implements a procedure or process to obtain the highest possible value for shareholders," direct the defendants to "obtain a transaction that is in the best interests of Covidien’s shareholders and to refrain from entering into any transaction until the process for the sale or merger of the company is completed and the highest possible value is obtained," rescind the merger agreement and award legal costs.