Cohen v. LyondellBasell Industries N.V.

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

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EDWARD COHEN,

Plaintiff, MEMORANDUM & ORDER

19-CV-2622(EK)(SMG)

-against-

LYONDELLBASELL INDUSTRIES N.V.,

Defendant.

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ERIC KOMITEE, United States District Judge:

Plaintiff Edward Cohen sued LyondellBasell Industries

N.V., alleging a deficiency in a proxy statement Lyondell filed

in connection with a shareholder vote to extend its stock

incentive plan. The alleged deficiency was that the proxy

statement failed to state the number of eligible plan

participants, as required by the Securities and Exchange

Commission’s (“SEC”) proxy rules. After Plaintiff sued, but

prior to the actual vote, Defendant supplemented the proxy

statement with the omitted information. The parties agree this

mooted Plaintiff’s claim, but they dispute whether Plaintiff is

now entitled to attorneys’ fees and costs.

Before the Court is Magistrate Judge Steven M. Gold’s

report and recommendation (“R&R”) on Plaintiff’s motion for over

$60,000 in attorneys’ fees and costs pursuant to the “common

benefit doctrine.” Judge Gold recommends that the Court deny

this motion because Plaintiff did not confer a “substantial

benefit” on Defendant’s shareholders, as required by the

doctrine. Plaintiff filed timely objections to the R&R, to

which Defendant responded. After conducting a de novo review,

the Court adopts the R&R in its entirety, with one modest

exception.

Background

On April 9, 2019, Defendant filed a definitive proxy

statement with the SEC in advance of its annual meeting on May

31, 2019 (the “Proxy Statement”).1 Compl. ¶ 1, ECF No. 1. It

contained numerous items to be voted on, including Item 10 —

Amendment of the Company’s Long-Term Incentive Plan (the

“Plan”). Compl. ¶ 12; Proxy Statement at 58-60, ECF No. 1-1.

The Plan was originally created in April 2010 to provide stock

options to eligible employees and directors for a ten-year term

ending in April 2020. Proxy Statement at 58. In the 2019 vote,

the Board asked shareholders to approve certain amendments to

the Plan, including “to approve the extension of the term of the

Plan for so long as the previously approved shares remain

available for issuance.” Id. The Board made clear that it was

“not asking for the approval of any additional shares.” Id. At

1 The Court assumes familiarity with the factual and procedural history

of this case, as set forth in greater detail in Judge Gold’s R&R.

that time, there were approximately 4.2 million shares still

available for issuance under the Plan. Id. In its recitation

of the Plan’s “material terms,” the Proxy Statement recited that

“[a]ll regular employees of the Company and its subsidiaries and

Board members are eligible to participate in the [Plan], if

selected by the Compensation Committee.” Id. The Proxy

Statement did not, however, say how many employees the company

had at that time.

On May 3, 2019, Plaintiff filed this action alleging

that the Proxy Statement violated Section 14(a) of the

Securities Exchange Act and SEC regulations thereunder. In

particular, Plaintiff claimed that it contravened Item 10(a)(1)

of Schedule 14A, which instructs: “Describe briefly the material

features of the plan being acted upon, identify each class of

persons who will be eligible to participate therein, indicate

the approximate number of persons in each such class, and state

the basis of such participation.” 17 C.F.R. § 240.14a-101

(emphasis added).

On May 9, 2019, Defendant filed a supplement to the

Proxy Statement (the “Supplement”) stating, in relevant part:

“As of May 1, 2019, there were approximately 19,000 employees

and 11 non-employee directors eligible to participate in the

[Plan].” Supplement at 3, ECF No. 14-5. At the annual meeting

on May 31, 2019, the shareholders approved Item 10, with 97.5%

of the vote in favor. See Form 8-K at 6, ECF No. 16-5. In the

days following the meeting, Defendant issued approximately

35,000 shares under the Plan. Pl.’s Mem. of Law at 10, ECF No.

14-2.

Plaintiff then filed a motion for attorneys’ fees and

costs, ECF No. 14, which was referred to Judge Gold.2 Judge Gold

issued an R&R on June 23, 2020, to which Plaintiff objected on

July 7, 2020. R&R, ECF No. 20; Pl.’s Obj., ECF No. 21.

Legal Standard

A district court reviewing a magistrate judge’s R&R

“may accept, reject, or modify, in whole or in part, the

findings or recommendations made by the magistrate judge.”

28 U.S.C. § 636(b)(1)(C). The district court reviews de novo

those portions of an R&R to which a party has specifically

objected. Id.; Fed. R. Civ. P. 72(b)(3); see also Kruger v.

Virgin Atl. Airways, Ltd., 976 F. Supp. 2d 290, 296 (E.D.N.Y.

2013) (“A proper objection is one that identifies the specific

portions of the R&R that the objector asserts are erroneous and

provides a basis for this assertion.”), aff'd, 578 F. App'x 51

(2d Cir. 2014). Objections that are general, conclusory, or

“merely recite the same arguments presented to the magistrate

2 Judge Margo K. Brodie referred this motion for an R&R. The case was

subsequently transferred to the undersigned.

judge” do not constitute proper objections and are reviewed only

for clear error. See Sanders v. City of New York, No. 12-cv-

113, 2015 WL 1469506, at *1 (E.D.N.Y. Mar. 30, 2015).

Discussion

The common-benefit doctrine “permits a prevailing

party to obtain reimbursement of attorneys’ fees ‘in cases where

the litigation has conferred a substantial benefit on the

members of an ascertainable class’ and where it is possible to

spread the costs proportionately among the members of the

class.” Amalgamated Clothing & Textile Workers Union v. Wal-

Mart Stores, Inc., 54 F.3d 69, 71 (2d Cir. 1995) (quoting Mills

v. Elec. Auto-Lite Co., 396 U.S. 375, 393-94 (1970). The

benefit “must be something more than technical in its

consequence and be one that accomplishes a result which corrects

or prevents an abuse which would. . . affect the enjoyment or

protection of an essential right to the stockholder's interest.”

Mills, 396 U.S. at 396.

Judge Gold recommends denying Plaintiff’s motion for

attorneys’ fees and costs because Defendant’s supplemental

disclosure merely corrected a “technical” omission, and

therefore Plaintiff did not confer a “substantial benefit” on

shareholders, as required by Mills and its progeny. R&R at 8.

Plaintiff objects to this conclusion and to most of Judge Gold’s

reasoning. Although some of these objections are repurposed

from Plaintiff’s moving papers, the Court will review the R&R de

novo.

A. Plaintiff’s Chevron Argument

Plaintiff claims that Judge Gold erred by resting his

conclusion, in part, on the fact that shareholders were

primarily asked to extend the term of the Plan, and not to (for

example) increase the number of shares available, or take

another action that would dilute shareholder value or impact

overall compensation levels. Pl.’s Obj. at 2-4. In support of

this objection, Plaintiff argues that the Supplement corrected a

“material omission.” Id. at 4. Essentially, Plaintiff’s

argument appears to be that any omission of information called

for by Schedule 14 is material by definition, because the SEC

would not have instructed proxy filers to include such

information if the Commission did not think it material, and the

Commission’s view in that regard is entitled to Chevron

deference (or at least something like it). See id. at 3 (noting

that the SEC’s Disclosure Interpretations require proxy filers

to include all information in Item 10, regardless of whether the

proxy seeks to issue new shares or merely modify the terms of an

existing plan); see also id. (stating that the “SEC’s

requirements, expressed in its own regulations, are entitled to

deference” and citing Chevron, U.S.A. v. Nat. Res. Def. Council,

Inc., 467 U.S. 837 (1984)).

This argument misses the point of Mills, which holds

clearly that the “substantial benefit” standard, and not the

materiality threshold, is what determines a plaintiff’s

entitlement to attorneys’ fees. Mills, 396 U.S. at 396

(shareholder-plaintiff is entitled to recover fees for

instituting an action that “results in a substantial benefit to

[the] corporation”). The “materiality by definition” test urged

by Plaintiff would effectively write Mills’ “substantial

benefit” test out of existence; instead, any action identifying

a violation of Schedule 14A’s instructions, no matter how

“technical,” would result in an entitlement to fees. This

result would be inconsistent with Mills’ admonition that the

substantial entitlement “must be something more than technical

in its consequence and be one that accomplishes a result which

corrects or prevents an abuse which would be prejudicial to the

rights and interests of the corporation or affect the enjoyment

or protection of an essential right to the stockholder's

interest.” Id. Plaintiff’s argument is also undermined by the

fact that Mills itself considered (in separate sections) both

the materiality threshold and the “substantial benefit” test.

Compare Mills, 396 U.S. at 384-85 (applying materiality

threshold to the underlying violation), with id. at 393-97

(discussing “substantial benefit” test for attorneys’ fees). If

Mills intended these to be the same thing, presumably the Court

would have used the same terminology for the same test in the

same opinion.

The original Proxy Statement in this case — that is,

the one Plaintiff challenged — went a long stretch of the way

towards the full disclosure required by the SEC, even before

Plaintiff brought suit. That version had already informed

shareholders that “[a]ll regular employees of the Company and

its subsidiaries and Board members” could participate — even if

it didn’t explicitly state the approximate number of those

employees. Proxy Statement at 58. Given this, and given (as

Judge Gold pointed out) that the number of shares being issued

was not changing, it is difficult to imagine a more “technical”

amendment than the one at issue.

In support of its materiality argument, Plaintiff

cites two cases in this district — Stein v. Medtronic plc, No.

17-CV-5343 (E.D.N.Y.) (“Medtronic”) and Stein v. Raymond James

Financial, Inc., No. 16-CV-379 (E.D.N.Y) (“Raymond James”) —

that ascribe significance to defendants’ failure to comply with

Item 10(a)(1). See Pl.’s Obj. at 4. Those cases, however, are

distinguishable because they involved votes to increase the

number of shares available for issuance under the plans — by an

additional 50 million shares in Medtronic and 16 million in

Raymond James. See Medtronic, Compl. ¶ 11, ECF No. 1; Raymond

James, Transcript dated Feb. 9, 2016 at 6:25-7:3, ECF No. 16.

The corrective litigation in those cases thus clearly conferred

a “substantial benefit” on shareholders generally: as the SEC

has observed, shareholders have a “strong interest in

understanding” equity compensation programs because of the

“dilution of their ownership interests” that follows as

“companies issue more shares of their stock to employees.”

Disclosure of Equity Compensation Plan Information, Securities

Act Release No. 8048, Exchange Act Release No. 45189, 67 Fed.

Reg. 232-01, 2002 WL 4156 (Jan. 2, 2002) (noting, as well, that

equity compensation plans “may result in a significant

reallocation of ownership in an enterprise between existing

security holders and management and employees”).

Those substantial benefits are not present here. The

instant Proxy Statement stated that the Board was “not asking

for the approval of any additional shares” beyond those

previously approved. Proxy Statement at 58. It reiterated that

the Plan had been approved in April 2010 for a ten-year term and

that approximately 4.2 million shares were still available for

issuance. Id. The Proxy Statement also included almost two

pages setting out the terms of the Plan under the following

headers: purpose, eligibility for participation, administration,

authorized shares, types of awards, maximum awards payable to an

employee, grants to non-employee directors, amendment and

termination, income tax consequences, and plan benefits. Id. at

58-60. As noted above, the “eligibility for participation”

section did provide the following meaningful information about

the universe of eligible employees: “[a]ll regular employees of

the Company and its subsidiaries and Board members are eligible

to participate in the [Plan], if selected by the Compensation

Committee.” Id. at 58. Under the circumstances, the Court

cannot conclude that the benefit conferred here was “so

significant as to warrant the award of attorneys’ fees.”

Amalgamated Clothing, 54 F.3d at 71 (emphasis added).

Plaintiff also argues the R&R failed to recognize that

the right “to cast an informed vote” is, in and of itself, a

substantial benefit, as the Second Circuit held in Amalgamated

Clothing, 54 F.3d at 71. See Pl.’s Obj. at 6. Judge Gold did

not dispute this principle, however; rather, he correctly

distinguished Amalgamated Clothing based on its facts. In that

case, the defendant — Walmart — had initially excluded the

relevant proposal (relating to its affirmative-action policies)

from the proxy statement in its entirety; absent the plaintiff’s

action, the proposal would not have gone to a shareholder vote

at all. Amalgamated Clothing, 54 F.3d at 70; see also R&R at 7.

Judge Gold also distinguished the facts in Chen v. Select Income

REIT, No. 18-CV-10418, 2019 WL 6139014 (S.D.N.Y. Oct. 11, 2019),

in which a supplemental disclosure provided information

essential to evaluate a change-of-control transaction. Id. at

*13 (supplement provided “information necessary for . . . common

stock shareholders to cast an informed vote concerning [a]

proposed merger,” including previously omitted unlevered free

cash flow projections, valuation analyses, and various conflicts

of interest); see also R&R at 7 (citing Chen, 2019 WL 6139014,

at *13-15).

Here, in contrast, the supplemental disclosure of the

specific number of corporate employees and directors did not

substantially help to inform shareholders, as required by Mills.

Plaintiff cites no case supporting his novel argument that the

correction of any and every omission from a proxy statement

constitutes, by definition, a “substantial benefit,” and this

Court is aware of none — notwithstanding Amalgamated Clothing’s

discussion of the importance of informed shareholder voting.

B. Plaintiff’s Contention that Shares Issued Would Have

Been Rendered Void, Absent the Correction

Plaintiff’s next argument alludes to a more tangible

benefit than his generic reference to informed shareholders: he

argues that, had he not sued to correct the proxy, the shares

issued under the Plan would have been subject to rescission.

Pl.’s Obj. at 7 (arguing that “absent a properly authorized

shareholder approval of the Proposal, no shares would be legally

granted after the [Plan] expired in April of 2020”). Rescission

is a strong remedy, and if the Plaintiff had actually saved the

corporation from it, he might indeed have a stronger

“substantial benefit” argument to make. But he cites no

authority for the proposition that the omission he identified

would have required that remedy, and again the Court is aware of

none. Indeed, Mills itself undermines his assertion: it notes

that district courts have broad discretion as to remedies for

proxy violations. See 396 U.S. at 386-88 (holding that “nothing

in the statutory policy [of Section 14] ‘requires the court to

unscramble a corporate transaction merely because a violation

occurred,’” and that the transaction “should be set aside only

if a court of equity concludes, from all the circumstances, that

it would be equitable to do so”).3 Thus it remains far from

certain — indeed, it seems highly doubtful — that the remedy for

the foot fault here would have been rescission of any shares

issued after April 2020, as Plaintiff suggests.

C. Plaintiff’s Argument Concerning the Number of Votes

in Favor of the Proposal

Finally, Plaintiff argues the R&R should not have

relied on the percentage of votes cast in favor of extending the

3 Notably, Plaintiff did not object to Judge Gold’s finding that the

litigation did not save Defendant from having to void shares issued in May

2019. As Judge Gold noted, the issuance of the 35,000 shares following the

annual meeting had already been authorized under the original Plan that

extended through April 2020. R&R at 8.

Plan, in part because doing so is contrary to Amalgamated

Clothing. Pl.’s Obj. 5-6. The Second Circuit has held that

“[t]he percentage of shares voted against a proposal is

insignificant” to the question of whether a plaintiff vindicated

the shareholders’ right to cast an informed vote. Amalgamated

Clothing, 54 F.3d at 71. Based on this admonition, the R&R

shall be modified to strike the following sentence: “More than

97% of shareholders voted in favor of Item 10, suggesting that

the disclosure triggered by this lawsuit was not of great

import.” R&R at 8. This change, however, does not alter the

analysis above or the conclusion that the Plaintiff’s action did

not meet the “substantial benefit” test.

Conclusion

As set forth above, the Court adopts in part and

modifies in part Judge Gold’s Report and Recommendation dated

June 23, 2020. Plaintiff’s motion for attorneys’ fees and costs

is denied.

SO ORDERED.

_/s Eric Komitee_____________

ERIC KOMITEE

United States District Judge

Dated: September 30, 2020

Brooklyn, New York