SUPREME COURT OF THE STATE OF NEW YORK - NEW YORK COUIiTY
?-54+JrrJJ?Q4 MOTION DATE
MOTION SEQ. NO.
MOTION CAL. NO.
The following papers, numbered 1 to were read on this motion to/for
I PAPERS NUMBERED
Notice of IMotion/ Order to Show Cause - Affidavits - Exhibits . . .
Answering Affidavits - Exhibits I
Replying Affidavits I
Cross-Motion: Cl Yes Cl No
Upon the foregoing papers, it is ordered that this motion
Check one: 0 FINAL DISPOSITION NON-FINAL DISPOSITION
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: IAS PART 49
ROBERT MURPHY and JONATHAN SHEER,
derivatively on behalf of Market News International,
Inc., a Nevada corporation,
ROBERT A. JONES, GRAHAM R. TAYLOR, Index No.
JONES FINANCIAL NETWORK, INC., 602225/O 1
DIGITAL INTEGRATOR, INC., and
MARKET NEWS INTERNATIONAL
(as nominal defendant),
Motion Sequence Nos. 001 and 002 are consolidated for disposition.
Defendants Robert Jones, Graham Taylor, Jones Financial Network, Inc (“JFN”) and
Digital Integrator, Inc., (“DGI”) move to dismiss the first amended complaint, CPLR 32 11 (a)(7),
and, pursuant to CPLR 3024 (b),’for an order striking certain matters from the pleading as being
scandalous and prejudicial. Nominal defendant, Market News International (“MN,“)moves to
dismiss the first amended complaint or in the alternative, removing Jonathan Sheer as a plaintiff
in this action, CPLR 32 11.
The first amended complaint essentially alleges that defendant Robert Jones, a director of
‘The motion papers recite CPLR 3016(b), but this is an obvious error. CPLR 3024 is the
section which refers to removal of scandalous and prejudicial matter.
MNI, and other directors controlled by him, breached a fiduciary duty in causing or permitting
business opportunities of MN1 to be diverted to JFN and DGI, two corporations in which Jones
has a controlling interest and in which plaintiffs do not have any interest.*
MN1 is in the business of providing financial news to subscribers. The news is sent to
subscribers, either*by means of a third-party distribution network or directly by means of
specially designed computer software.
Jones founded MN1 in 1983, and continues to be its majority shareholder. Plaintiffs
Robert Murphy and Jonathan Sheer are the next largest shareholders of MNI. Murphy was
president of MN1 for several years in the 1980’ Sheer served as Chairman and CEO of the
company from 1989 to 1993. From 1993 until October 2000, Jones was chairman of MNI’s
board of directors.
In 1990, Jones founded JFN, which plaintiffs claim, competes directly with MN1 in the
distribution of financial news to subscribers. Defendants allege that ,JFN is in the business of
providing computer software by which its customers could obtain financial news.
In 1990, JFN and MN1 entered into an agreement under which JFN was to distribute
MNI’ news product, along with other quotation and analytical services, to smaller firms and
firms outside metropolitan areas. Pursuant to the agreement, JFN promised that “it will not sell
to any firm, or any office of any firm, with which MN1 does business.” At the time that
agreement was entered into, plaintiff Jonathan Sheer was both the CEO and chairman of the
board of MNI.
In its earlier years, MN1 had distributed its news to subscribers by means of third-party
‘According to plaintiffs, JFN is a wholly owned subsidiary of DGI.
information networks, such as Telerate, Reuters and Bloomberg. The fees paid to the third-party
network companies cut into its profits. Thus, it became advantageous to develop a means for
transmitting information directly to subscribers. JFN developed a “real-time” software system,
known as PC-Trader, designed to transmit news directly to subscribers. In 1997, MN1 developed
its own counterpart to PC-Trader, known as PC-3. The first amended complaint alleges that
Jones (who, according to plaintiffs, controlled MNI’ board of directors) caused MNI’ resources
and personnel to be diverted away from MN1 towards JFN. For example, it is alleged that
defendants discouraged MNI’ customers from using PC-3, and instead urged them to switch to
JFN and its PC-Trader system.
In seeking dismissal, defendants raise two primary contentions:
(1) Plaintiff did not make a demand upon the MN1 board of directors prior to bringing the
instant action, and the complaint fails to allege adequate reasons for not making the demand
(i.e. plaintiffs have not shown that such a demand would have been futile);
(2) Even if plaintiffs were to get past the demand issue, the first amended complaint fails
to set forth a cognizable cause of action.
After the motion was made, plaintiffs served a proposed second amended complaint. In
Sage Realty v Proskauer, Rose, Goetz & Mendelsohn 25 1 AD2d 35 [l” Dept 19981) the court
held that where a motion to dismiss a pleading has been made, and a plaintiff tenders an amended
complaint, the movant has the option of addressing the motion to either the original or the
In Johnson v Snence, 286 AD2d 481 [2d Dept 2001]), the court held that a motion to
dismiss extended the time to amend as of right, and that where an amended pleading was timely
served, the court could consider the amended complaint. However, even assuming that Johnson
is not in conflict with the controlling First Department case, i.e. &e, the statute does not permit
plaintiffs to serve a second amended complaint as of right. Hence, in arguing their motion,
defendants may choose between addressing the first amended complaint and the second amended
complaint. Although defendants mention the second amended complaint in passing, all their legal
arguments are directed to the first amended complaint. -Thus, this court presumes that defendants
intend to address the first amended complaint, and shall proceed accordingly.
Where, as here, there is a dispute relating to the internal management of a corporation, the
parties are governed by the law of the state of incorporation. Thus, Nevada law applies here.
There are relatively few cases interpreting Nevada law, although certain state statutes (discussed
below) govern pleadings in shareholders’derivative cases.
Rule 23.1 of the Nevada Rules of Civil Procedure states, in pertinent part:
In a derivative action...the complaint shall also allege with
particularity the efforts, if any, made by the plaintiff to obtain the
action he desires from the directors...and the reasons for his failure
to obtain the action or for not making the effort. The derivative
action shall not be maintained if it appears that the plaintiff does
not fairly and adequately represent the interest of the shareholders
or members...similarly situated in enforcing the right of the
corporation. . .
There are very few Nevada cases interpreting the statute. In Johnson v. Steel, Inc. (678
P.2d 676 [ 19781) the court said that where plaintiffs can show that the board of directors
participated in the wrongful act or is controlled by the principal wrongdoer, plaintiffs can
maintain the shareholders’derivative action even though no demand was made. Since Nevada
law does not appear to differ significantly from New York or Delaware law this court wil1
consider authorities from those states as well as those from Nevada.
In order to survive a motion to dismiss, the complaint must set forth sufficient facts from
which it may be inferred that the making of a demand would have been futile (Bernsbach v Zinn,
258 AD2d 710 [3d Dept 19991). Demand will not be excused based on conclusory allegations of
wrongdoing (Marx v Akers, 88 NY2d 189 ; Miller v Schrever, 200 AD2d 492 [ 1” Dept
19941). Where board members without a direct self-interest are involved, it must be shown that
the interested directors have coercive power over them (Health Loom Corn. v Soho Plaza Corn..
209 AD2d 194 [ 1” Dept 19941).
The mere fact that .the holder of a majority interest in a corporation appointed a board
member does not per se establish that such member lacks independence (Batkin v Softbank
Holdings. Inc., 270 AD2d 177 [lst Dept. 20001).
On the other hand, the fact that a controlling officer was in a position to affect the
compensation of a director is one factor to consider in assessing independence (Rales v Blasband,
634 A2d 927 [Del. 19931). It is permissible to allege that a director took a particular action to
secure his or her own position, so long as the complaint indicates specifically the manner in
which the desire to secure a position affected the ultimate decision (Lewis v Graves, 70 1 F2d 145
[2d Cir 19831).
The fact that a director receives compensation in the form of directors’fees will not
establish that such director lacks independence, unless the amount involved is so substantial that
3Since so many major corporations are incorporated in Delaware, the courts of that state
have developed an extensive body of corporate law, and Delaware cases are frequently cited by
New York courts.
the director would be beholden to the majority shareholder for his or her livelihood (Langner v
Brown, 9 13 F Supp 260 [SDNY 19961).
Futility can exist where a majority of the members of the board of directors are interested
The “majority” may be made up of those directors who
in a transaction (Marx v Akers, supra).
have a self-interest in the transaction, in addition to those who have no direct self-interest but
who are controlled by directors having a self-interest (Id.). Alternatively, demand may be
excused where the majority of directors either have a direct selfiinterest, or failed to exercise due
diligence in informing themselves of the facts regarding the challenged transaction or failed to
exercise business judgment in approving the transaction (Id.).
A demand may be excused where it is alleged that a director approved the challenged
transaction to secure his or her own employment (Lewis v Graves, 701 F2d 260 [2d Cir. 19831).
In order to survive a dismissal motion based on the demand issue, plaintiffs must show
that a majority of members of the board lacked independence, so that a demand on them would
have been futile.
On May 3,200 1, the date of service of the complaint, the MN1 board consisted of five
(1) Graham Taylor, Esq., who is Jones’personal attorney and is the current Chairman;
(2) CEO Michael Connor;
(3) Three purportedly “outside” directors, Didier Perez, Buford Smith and Julian Childs.
The complaint alleges that Taylor has been Jones’attorney for many years, has earned
4Another “outside” director, Havlicek, later joined the board, but the question here is
whether or not the board had sufficient independent members as of the time of commencement of
substantial fees from representing Jones, and would lose a major client if he were to act contrary
to Jones’ wishes. Plaintiffs allege that Connor receives his livelihood from MN1 since he is a full
time employee, and would lose his substantial executive salary if he failed to follow Jones ’
directions. The complaint thus alleges sufficient facts to establish that Taylor and Connor were
not independent directors.
However, since the only allegation relating to Smith and Childs is that Jones chose them
as board members, there are insufficient facts pleaded to establish their lack of independence.
Thus, at the pleadings stage, this court will assume as true plaintiffs’allegation that Jones
controlled two out of the five seats on the board of directors.
In order to establish that the making of a demand would have been futile, plaintiffs must
show that Jones controlled a third director, i.e. Perez. The first amended complaint alleges that
Perez is employed by MN1 on a short-term contract that could provide him with substantial
compensation, and that if Perez were to vote to initiate a lawsuit against Jones, Jones and Taylor
would remove Perez from his position. Moreover, plaintiffs contknd, Perez has been promised a
substantial finder’ fee in connection with certain transactions. Since the papers do not set forth
sufficient facts to determine whether or not Jones was truly an independent director, the court
shall refer the issue of Perez’independence to a referee to hear and report.
Defendants deny that they misappropriated any corporate opportunities of MNI, and
contend that the first amended complaint fails to state a cause of action. Defendants further
contend that Scheer is not a proper plaintiff in a derivative action because he was on the board
during some of the transactions alleged in the complaint. Moreover, defendant Taylor seeks an
order striking allegations in the first amended complaint relating to violations of the attorneys’
Code of Professional Responsibility, contending that during the time of the transactions in
question, he was performing legal work for Jones personally, but did not represent MNI.
Consideration of these issues is deferred until after a determination whether or not plaintiffs have
established a sufficient basis for not having made a demand on the board of directors prior to
institution of the lawsuit, since such determination may be dispositive.
Accordingly, it is
ORDERED that the issue of whether or not, at the time of commencement of this action,
Didier Perez was a sufficiently independent director to be expected to render an independent
decision as to whether or not to have MN1 commence a lawsuit similar to the within action, is
respectfully referred to a Special Referee to hear and report with recommendations, except that.
in the event of and upon the filing of a stipulation of the parties, as permitted by CPLR 43 17. the
Special Referee may determine the aforesaid issue; and it is further
ORDERED that the balance of the motion is held in abeyance pending receipt of the
report and recommendations of the Special Referee and a motion pursuant to CPLR 4403 or
receipt of the determination of the Special Referee; and it is further
ORDERED that a copy of this order with notice of entry shall be served on the Clerk of
the Judicial Support Office (Room 3 11) to schedule a date for the hearing.
Dated: April a?, 2002 .