INDEX NO.

  ?-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
     _______________________~_~~~~~~~~~~~~~~~~~~~~~~~~~~~~_______~~~~~~_~~~~ X

     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
     (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

                                                    s                               s
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

amended complaint.

       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 [1996]; 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
this action.

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                      .

                                      /        J.S.C.


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