Bensinger v. Denbury Resources Inc. et al
ORDER granting #44 Motion to Certify Class and denying #48 Motion for Judgment on the Pleadings. Ordered by Judge John Gleeson on 9/28/2012. (O'Reilly, Helen)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
FOR ONLINE PUBLICATION ONLY
ELI BENSINGER, Individually and On Behalf
of All Others Similarly Situated,
- versus -
DENBURY RESOURCES INC.,
WEISS & LURIE
551 Fifth Avenue, Suite 1600
New York, New York 10176
David Corey Katz
Joshua M. Rubin
Joseph Harry Weiss
Attorney for Plaintiff
BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, New York 10111
Jessica Morgan Gabriel
Jerry R. Linscott
Attorney for Defendant
JOHN GLEESON, United States District Judge:
Eli Bensinger brings this putative class action against Denbury Resources Inc.
(“Denbury”) for federal securities law violations arising from Denbury’s merger with Encore
Acquisition Company (“Encore”) on March 9, 2010. Bensinger now moves for class
certification, for appointment as class representative, for appointment of WeissLaw LLP1 as class
Effective September 1, 2012, the firm representing Bensinger changed its name from Weiss &
Lurie to WeissLaw LLP. See Notice of Change of Firm Name, Sept. 7, 2012, ECF No. 86.
counsel, and for judgment on the pleadings. For the reasons set forth herein, I grant in part and
deny in part Bensinger’s motions.
On October 31, 2009, Denbury and Encore entered into a merger agreement (the
“Merger Agreement”). Merger Agreement, Gabriel Decl. Ex. 1, ECF No. 60 (“MA”). The
Merger Agreement provided that Encore would merge with and into Denbury and that, upon the
merger, Encore stockholders would receive $50 for each of their shares. Encore stockholders
could elect to receive their $50 in one of three ways: (1) they could receive $50 in cash; (2) they
could receive $15 in cash and $35 in Denbury stock; or (3) they could receive $50 in Denbury
For those Encore stockholders who elected to receive all or part of their $50 in
Denbury stock, the number of Denbury shares to which they were entitled hinged upon the value
of Denbury stock. The higher the value of Denbury stock, the fewer shares they would receive
for their money, and the lower the value, the more shares they would receive. For example, if
Denbury shares were worth $1, an Encore shareholder who had elected to receive his $50
entirely in stock would receive 50 shares of Denbury stock. But if Denbury shares were worth
$2,2 the same Encore shareholder would receive only 25 shares. The dispute in this case is about
what the value of Denbury stock was.
The Merger Agreement set the value of Denbury stock as the “volume weighted
average price of [Denbury] Common Stock for the period of twenty (20) consecutive trading
days ending on the second full trading day prior to the Effective Time,” MA § 2.1(a)(i), and it
defined the “Effective Time” to mean “the date and time” of the filing of a certificate of merger
The value of Denbury stock was subject to a collar mechanism that would have prevented the
value from dropping as low as $1 or $2. I use these figures only to simplify my illustration.
with the Delaware Secretary of State, MA § 1.2. The Proxy Statement filed by Denbury with the
SEC on February 8, 2010, used equivalent language except in one material aspect: It defined the
“Effective Time” or “Closing” as simply the “date” (not the date and time) that a certificate of
merger is filed with the Delaware Secretary of State. Proxy Statement 2, 101, Gabriel Decl. Ex.
3-1, ECF No. 60 (“PS”). Furthermore, several of Denbury’s earlier filings with the SEC,
including Denbury’s January 26, 2010 amendment to its Form S-4 Registration Statement, stated
that the value of Denbury stock would be set at the “volume-weighted average price of Denbury
common stock . . . for the twenty-day trading period ending on the second day prior to closing.”
Compl. ¶ 19; Answer ¶ 19; accord Compl. ¶¶ 15-17; Answer ¶¶ 15-17. Thus these filings
dropped the language in the Proxy Statement and Merger Agreement that the relevant period
ended on the second full trading day prior to closing.
The merger was ultimately approved by shareholders and consummated, and the
certificate of merger was filed with the Delaware Secretary of State on the evening of Tuesday,
March 9, 2010, after the trading day ended. Compl. ¶ 27; Answer ¶ 27. In calculating the
number of Denbury shares to be doled out to Encore stockholders, the value of Denbury stock
was set as the weighted average price of Denbury common stock for the twenty-day period
ending on March 8, 2010. Bensinger contends that, pursuant to the terms of the Proxy Statement
and earlier SEC filings incorporated by the Proxy Statement, the value of Denbury stock should
have been set as the weighted average price of Denbury common stock for the twenty-day period
ending on March 5, 2010. The difference between the two calculations is that the former counts
March 9, 2010, as a day prior to closing and the latter does not.
Bensinger alleges that he held 42,100 shares of Encore stock on the date of the
merger and that he disposed of his Denbury shares (via short sales) prior to the merger. He
contends that if Denbury had used the 20-day period specified in the Proxy Statement, the value
of Denbury stock would have been set lower and, as a result, he would have received a larger
number of Denbury shares.
Bensinger filed the initial complaint in this action on April 28, 2010, and he filed
an amended complaint on May 27, 2010 (the “Complaint”). The Complaint asserts violations of
Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, and Section 14(a) of the Securities and
Exchange Act of 1934, 15 U.S.C. § 78n.3 Denbury moved to dismiss on March 15, 2011,
arguing, inter alia, that it had not made any material misrepresentations in the Proxy Statement.
I denied Denbury’s motion on August 17, 2011, concluding that the Proxy Statement was
misrepresentative and that the misrepresentations therein were not immaterial as a matter of law.
See Memorandum and Order dated Aug. 17, 2011, at 14, ECF No. 33. Bensinger now moves for
judgment on the pleadings. He also asks that I (1) certify a class of all Encore shareholders who
received stock or a combination of stock and cash and were damaged by the failure of Denbury
to calculate the merger consideration in accordance with the representations made in the Proxy
Statement; (2) appoint him as class representative; and (3) appoint his counsel, WeissLaw LLP,
as class counsel.
Denbury argues that the allegations in the Complaint demonstrate that Bensinger
lacks standing to bring either of the claims he asserts. Because the absence of standing would
deprive the Court of subject matter jurisdiction, see Lujan v. Defenders of Wildlife, 504 U.S. 555
Although the Complaint also asserts a breach of contract claim, Compl. ¶¶ 49-54, Bensinger has
voluntarily dismissed that claim, see Pl.’s Letter dated Feb. 4, 2011, ECF No. 17.
(1992), the Court must assure itself that Bensinger has standing before reaching the merits of
Bensinger’s motions, see Herrick Co., Inc. v. SCS Commn’ns., Inc., 251 F.3d 315, 321 (2d Cir.
2001) (“[S]ubject matter jurisdiction remains ‘an unwaivable sine qua non for the exercise of
federal judicial power.’” (quoting Curley v. Brignoli, Curley & Roberts Assocs., 915 F.2d 81, 83
(2d Cir. 1990))). In reviewing the facial jurisdictional challenge made here – that is, the
objection to the legal sufficiency of plaintiff’s jurisdictional allegations as set forth in the
complaint – I “take all facts alleged in the complaint as true and draw all reasonable inferences in
favor of plaintiff” and determine whether standing exists on those facts. Robinson v. Gov’t of
Malaysia, 269 F.3d 133, 140 (2d Cir. 2001) (quoting Sweet v. Sheahan, 235 F.3d 80, 83 (2d Cir.
2000)) (internal quotation marks omitted).
Section 11 Claim
Denbury suggests that a § 11 suit may only be brought to recover out-of-pocket
losses, see 15 U.S.C. § 77k(e) (authorizing suits to “recover such damages as shall represent the
difference between the amount paid for the security . . . and . . . the price at which such security
shall have been disposed of in the market before suit”), and that Bensinger suffered no out-ofpocket losses. Accordingly, Denbury contends that Bensinger lacks standing to bring his § 11
claim because he does not fall within the zone of interests that § 11 was designed to protect and
because his injury is not redressable through a § 11 claim.
The basic premise underlying Denbury’s argument is that Bensinger ultimately
profited on the merger – he disposed of his Denbury shares for more money than he spent to
acquire the Encore shares from which they were converted – and thus did not suffer out-ofpocket losses. Acknowledging that Bensinger might have profited even more if Denbury
conformed to its representations in the Proxy Statement, Denbury suggests that these lost profits
represent benefit-of-the-bargain damages, not out-of-pocket losses, and such damages do not
suffice do not confer standing to bring a § 11 claim.
Even assuming arguendo that Denbury’s argument is appropriately styled as a
standing argument5 and that only individuals with out-of-pocket losses may succeed on a § 11
claim, I conclude I have subject matter jurisdiction to entertain Bensinger’s § 11 claim.
Bensinger adequately alleges that he suffered out-of-pocket losses. According to the allegations
of the Complaint, the Proxy Statement represented that Bensinger’s Encore shares would be
converted into a certain number of Denbury shares. In actuality, Bensinger received fewer than
that represented number of Denbury shares in exchange for his Encore shares. Accordingly,
Bensinger paid (in Encore shares) for Denbury shares that he never received. This is an out-ofpocket loss. Bensinger may bring a § 11 suit for the “difference between the amount [he] paid
for [the missing Denbury shares] . . . and . . . the price at which such security shall have been
disposed of,” 15 U.S.C. § 77k(e), which was $0 because those shares were never given to him.
In this context, where Bensinger alleges he paid for Denbury shares he never received, that
Bensinger may have earned an overall profit through his short sales prior to the merger is
Denbury also contends that Bensinger lacks standing to bring his § 11 claim
because he cannot trace the lineage of his Denbury shares. Only individuals who “‘purchased a
security that was originally registered under the allegedly defective registration’” have standing
to bring a claim under § 11. DeMaria v. Anderson, 318 F.3d 170, 176 (2d Cir. 2003) (quoting
The mere fact that a plaintiff’s claim is deficient on the merits does not mean that he lacks
standing to bring it. See Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89 (1998) (“It is firmly established in
our cases that the absence of a valid (as opposed to arguable) cause of action does not implicate subject-matter
jurisdiction, i.e., the courts’ statutory or constitutional power to adjudicate the case.”).
Lee v. Ernst & Young, LLP, 294 F.3d 969, 976-77 (8th Cir. 2002); accord Barnes v. Osofsky, 373
F.2d 269 (1967). Accordingly, the owner of a corporation’s shares who wants to challenge that
corporation’s registration statement must be able to trace his shares to that registration statement.
DiMaria, 318 F.3d at 176. Here, Bensinger contends that his injury derives from the conversion
of his Encore shares into Denbury shares pursuant to the merger of the two corporations. In such
circumstances, it should go without saying that Bensinger has satisfied the traceability
requirement, as the injury he complains of is necessarily tied to shares that were registered by the
Section 14 Claim
Denbury argues that Bensinger may not bring his § 14(a) claim because he falls
outside of the zone of interests protected by that provision as well. Specifically, Denbury claims
that § 14(a) was designed to protect shareholders’ voting rights and Bensinger lacked any
relevant voting rights because he was ineligible to vote on the merger.7 Bensinger does not
contest either of these arguments, but suggests that § 14(a) protects another voting right that he
did have: the right to elect whether he wanted to receive the $50 for each of his Encore shares in
all cash, cash and Denbury stock, or all Denbury stock.
The “purpose of § 14(a) is to prevent management or others from obtaining
authorization for corporation action by means of deceptive or inadequate disclosure in proxy
solicitation.” J.I. Case Co. v. Borak, 377 U.S. 426, 431 (1964) (emphasis added). Congress
believed that “‘[f]air corporate suffrage is an important right that should attach to every equity
security bought on a public exchange.’” Id. (quoting H.R. Rep. No. 1383, 73d Cong., 2d Sess.,
Denbury does not contest that the Proxy Agreement was a registration statement for purposes of
It is undisputed that Bensinger could not vote on the merger because he acquired his Encore shares
after the record date for the merger vote.
13) (emphasis added), abrogated on other grounds by Cort v. Ash, 422 U.S. 66, 78 (1975).
Thus the “provision was intended to promote ‘the free exercise of the voting rights of
stockholders’ by insuring that proxies would be solicited with ‘explanation to the stockholder of
the real nature of the questions for which authority to cast his vote is sought.’” Werfel v.
Kramarsky, 61 F.R.D. 674, 678 (E.D.N.Y. 1974) (quoting Mills v. Elec. Auto-Lite Co., 396 U.S.
375, 381 (1970)).
The kind of voting right that that Bensinger possessed – the right to choose
whether he personally would prefer to receive his allotment of $50 per Encore share in all cash,
cash and Denbury stock, or all Denbury stock – is not the kind of voting right that Congress
intended to protect through § 14(a). Rather, Congress aimed to protect corporate suffrage rights,
that is, the right of shareholders to participate in corporate governance. See Va. Bankshares v.
Sandberg, 501 U.S. 1083, 1103 (1991) (holding that Congress did not intend for shareholders
who lack the power to influence corporate action to bring § 14(a) actions); Mills, 396 U.S. at 385
(noting that underlying § 14(a) is a “congressional policy of ensuring that the shareholders are
able to make an informed choice when they are consulted on corporate transactions”). Thus,
although Bensinger had the right under the Merger Agreement to decide among the three options
for the form of his payout for Encore stock, and although the Proxy Statement advised him of
that fact, see PS at 2, the Proxy Statement was not soliciting a proxy with respect to this choice
and none of the options constituted corporate action. The relevant corporate action for which
proxies were solicited in this case was the proposed merger, and because Bensinger lacked the
right to vote on the merger, he lacks standing to bring a § 14(a) claim. See, e.g., 7547 Corp. v.
Parker & Parsley Dev. Partners, 38 F.3d 211, 230 (5th Cir. 1994) (“[W]e are unwilling to
expand standing under section 14(a) of the Exchange Act to interest-holders who are not
qualified to vote.”); DCML LLC v. Danka Bus. Sys. PLC, A.D., No. 08 Civ. 5829, 2008 WL
5069528, at *2 (S.D.N.Y. 2008) (“It is generally accepted that only shareholders who were
entitled to vote on a transaction have standing under section 14(a) to challenge the proxy
materials issued by a corporation regarding that transaction.”); In re AOL Time Warner, Inc. Sec.
& “ERISA” Litig., 381 F. Supp. 2d 192, 241 (S.D.N.Y. 2004) (“[O]nly shareholders who owned
Time Warner common stock on the record date of the Merger are permitted to bring Section
14(a) claims . . . .”); Wulc v. Gulf & W. Indus., Inc., 400 F. Supp. 99, 104 (E.D. Pa. 1975)
(because plaintiff lacked suffrage rights, he lacked standing to bring § 14(a) claim); Werfel, 61
F.R.D. at 678 (plaintiff has no private right of action to bring § 14(a) claim because he “never
had any voting rights”). Accordingly, the § 14(a) claim is dismissed.
Motion for Judgment on the Pleadings
On a motion for judgment on the pleadings, a district court determines whether,
accepting as true all factual allegations in the non-moving party’s pleading and drawing all
reasonable inferences in the non-movant’s favor, judgment must be entered as a matter of law.
DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 110-11 (2d Cir. 2010). For Bensinger to be
entitled to judgment in his favor on his remaining claim (i.e., his § 11 claim), the
misrepresentations made by Denbury must be material as a matter of law. See In re Morgan
Stanley Info. Fund Sec. Litig., 592 F.3d 347, 358-59 (2d Cir. 2010). In the context of a § 11
claim, a statement is material when “a reasonable investor would have considered [it] significant
in making investment decisions.” Ganino v. Citizens Utils. Co., 228 F.3d 154, 161-62 (2d Cir.
2000). Our inquiry is whether the misrepresentations were material at the time they were made,
Spielman v. Gen. Host Corp., 402 F. Supp. 190, 194 (S.D.N.Y. 1975), and we consider the
misrepresentations in light of all of the available information, see Basic v. Levinson, 485 U.S.
224, 232 (1988) (holding that a misrepresentation is material when a reasonable investor would
have viewed the omitted or misrepresented information as having altered the total mix of
Thus the question I confront is how a reasonable investor would have viewed the
misrepresented fact that Denbury had the discretion to choose which of two consecutive 20-day
periods to use in setting the value for Denbury stock (for purposes of the payout to Encore
shareholders): a period including or a period excluding the actual date of the merger, March 9,
2010. I conclude that I cannot answer this question as a matter of law. A reasonable investor
would have anticipated that there might be significant fluctuation in the market value of Denbury
stock on the day of the merger, which counsels in favor of a finding of materiality. However, a
reasonable investor would also have recognized that taking the weighted average of the value of
the stock over a 20-day period would have blunted the effect of those fluctuations, which
counsels against a materiality finding. Furthermore, although a reasonable investor would have
been unaware that the difference between the two 20-day periods would turn out to be as small
as it was, he might have felt that such a small difference – had he believed it to be the most likely
outcome – was insignificant. In short, reasonable minds could reach different answers in the
materiality inquiry before me, and I thus deny Bensinger’s motion for judgment on the pleadings
with respect to its § 11 claim.
Motion to Certify a Class
Denbury also moves to certify a class of all Encore shareholders who received
stock or a combination of stock and cash and were damaged by the failure of Denbury to
calculate the merger consideration in accordance with the representations made in the Proxy
Statement. As Denbury effectively concedes, this suit easily meets the numerosity,
commonality, typicality, and adequacy requirements of Rule 23 of the Federal Rules of Civil
Procedure. Fed. R. Civ. Proc. 23(a)(1)-(4). That Bensinger may be an arbitrageur and that he
disposed of his Denbury shares through short sales prior to the merger is immaterial; he suffered
the same kind of injury (he paid for Denbury shares he never received) because of the same
conduct (Denbury’s issuance of a misrepresentative Proxy Statement) as the other members of
the proposed class.
This is a textbook example of the kind of case that is appropriate for a class
action. Whether the Proxy Statement was materially misrepresentative is the central question in
all of the class members’ claims. Apart from the number of shares they held and whether they
elected to receive a mix of cash and Denbury stock or only Denbury stock, the class members are
identically situated for purposes of the remaining claim. Accordingly, and taking into account all
the factors set forth in Rule 23(b)(3)(A)-(D), I conclude that the legal and factual questions
common to class members predominate over any questions affecting only individual members
and that a class action is superior to other available methods for fairly and efficiently
adjudicating the controversy. See Fed. R. Civ. Proc. 23(b)(3).
For the reasons provided, Bensinger’s § 14 claim is dismissed and his motion for
judgment on the pleadings of his § 11 claim is denied. Bensinger’s motion to certify a class, to
be appointed class representive, and to appoint WeissLaw LLP as class counsel is granted.
John Gleeson, U.S.D.J.
Dated: September 28, 2012
Brooklyn, New York
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