Alpert v National Assn. of Sec. Dealers, LLC

[*1] Alpert v National Assn. of Sec. Dealers, LLC 2004 NY Slip Op 51872(U) Decided on July 28, 2004 Supreme Court, New York County Lowe, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on July 28, 2004
Supreme Court, New York County

STUART H. ALPERT, JONATHAN Q. FREY GEORGE REICHHELM, MELVIN LECHNER, JOEL L. LOVETT, BRENDAN E. CRYAN, SAM KOVLER GEORGE A. PIRRONE, STEVEN A. WILLIAMS, JOSEPH C. DeMARCO, PAUL L. MORIGI, MARK COHEN, FRANCIS CORROZZO, MARK C. MEADE, WILLIAM KANTOR, WILLIAM TOLL, JEROLD WICHTEL, JOHN JAY MANN SR., RAYMOND IPPOLITO, MICHAEL GOLDEN, CARMINE CORNETTE, KEVIN ARNONE, BRUCE A. ROSEN, JAMES STOFF, W. JAMES MORGAN, JEFFREY C. BARTHEL, JAMES BOTWINA, DAVID BERKOWITZ, SUSAN J. BENDER, HARTMAN E. BLANCHARD individually and on behalf of the AMERICAN STOCK EXCHANGE, LLC, and on behalf of the AMEX MEMBERSHIP CORPORATION, , Plaintiffs,

against

NATIONAL ASSOCIATION OF SECURITIES DEALERS, LLC, SALVATORE F. SODANO, FRANK G. ZARB, RICHARD F. SYRON, RICHARD G. KETCHUM, ANTHONY J. BOGLIOLI, PETER QUICK, MICHAEL J. RYAN, KENNETH M. DUBERSTEIN, MARIO J. GABELLI, ROBERT GLAUBER, JAMES R. HYDE, DONALD J. KIRK, IRA S. KOONDEL, PHILIP R. LOCHNER, JR., JOSEPH PALMERI, HAL S. SCOTT, THOMAS SHERIDAN, NEW NASD HOLDING, INC., WILLIAM C. ALSOVER, JR., JOHN W. BACHMANN, M. LARAE BAKERINK, CHARLES A. BOWSHER, JOHN J. BRENNAN, RICHARD F. BUECKNER, HARRY P. KAMEN, RAYMOND A. MASON, JOHN RUTHERFORD, JR., MARY L. SCHAPIRO, JOEL SELIGMAN, JAMES E. BURTON, SIR BRIAN CORBY, DAVID A. DEMURO, and SHARON P. SMITH, Defendants.



600657/04

Richard B. Lowe, J.

In this action, plaintiffs seek to prevent the Amex Membership Corporation (AMC) from acquiring the National Association of Securities Dealers, LLC's (NASD) interest in the American Stock Exchange, LLC (Amex). The amended complaint asserts 11 causes of action, including individual claims and derivative claims on behalf of AMC, as follows: (1) injunctive relief; (2) breach of contract, derivatively; (3) breach of the implied covenant of good faith and fair dealing, derivatively; (4) a request to compel arbitration; (5) breach of fiduciary duty and violations of New York's not-for-profit and business corporation laws, derivatively; (6) breach of fiduciary duty, derivatively; (7) fraud and conspiracy, individually and derivatively; (8) conspiracy, individually and derivatively; (9) corporate waste and mismanagement of corporate affairs, derivatively; (10) negligence and negligent misrepresentation, derivatively; and (11) breach of fiduciary duty, individually.

Plaintiffs now move (in motion sequence 002), by order to show cause, to enjoin AMC from acquiring NASD's interest in Amex. Plaintiffs also move (in motion sequence 005) to remove Joel L. Lovett as a party-plaintiff in this action.

NASD moves (in motion sequence number 006) to dismiss the complaint for failure to state a cause of action. NASD also argues that plaintiffs lack standing, and incorporates by reference AMC's arguments (in motion sequence number 007) regarding plaintiffs' lack of standing.

AMC, defendant Anthony J. Boglioni (Boglioli), defendant James R. Hyde (Hyde), defendant Ira S. Koondel (Koondel) and defendant Joesph Palmeri (Palmeri) (together, AMC Defendants) move (in motion sequence number 007) to dismiss the complaint due to plaintiffs' lack of capacity to sue and for failure to state a cause of action.

Amex moves (in motion sequence number 008) to dismiss the complaint based on plaintiffs' lack of capacity to sue. The court granted Amex's motion at a hearing held on May 3, 2004, saying that there was no basis to allow a double derivative suit to go forward.

Background

The facts are taken from the amended complaint, except as where otherwise indicated.

NASD registers its member firms and regulates their behavior in financial and investment markets. NASD Holding Inc. (NAHO) is a wholly-owned subsidiary of NASD (together, NASD). Amex is an auction market where securities prices are determined by public bids. Amex's ownership is divided into two classes of ownership interests: Class B interests, in which voting power is exclusively vested; and Class A interests, which are ownership interests without control. The individual defendants are NASD officers and members of its board of governors (together with NASD, NASD Defendants), Amex officers and members of its board of governors (together with Amex, Amex Defendants), and directors of AMC.

AMC is a New York not-for-profit corporation, wholly-owned by the owners and lessees of Amex's 837 active seats (AMC Members). The individual plaintiffs in this action are AMC Members. Boglioli, Hyde, Koondel and Palmeri are AMC's directors (AMC Directors). [*2]

Non-party National Association of Securities Dealers Automated Quotations (Nasdaq) is an electronic trade exchange, which, until 2002, was wholly-owned by NASD.

Amex was wholly-owned by AMC, and governed by AMC Members through AMC, until October 1998, when the AMC Members voted in favor of NASD's acquisition of all of Amex's Class B voting interests, and created NAHO to hold the Class B interests. That transaction was memorialized in an agreement (1998 Merger Agreement). Consequently, NASD held a controlling interest in Amex, and Amex and Nasdaq became sister companies under NASD. Pursuant to that agreement, NASD intended to create a "market of markets" by combining the operations of Amex and Nasdaq, seeking to create synergies and efficiencies for investors. Amended Complaint, ¶ 29; see also 1998 Merger Agreement, Epstein Aff., Ex. C, at 1.

It is undisputed that the transaction that is the subject of this action, AMC's acquisition of NASD's interest in Amex (2004 Transaction), would unwind the 1998 Merger Agreement, release NASD from obligations under that agreement, and restore AMC's exclusive ownership of Amex. Among the obligations involved, NASD was required to provide Amex with a $110 million technology budget to upgrade Amex's order system to make it comparable to Nasdaq's technology. Without the upgraded system, Amex relies upon the technology of the New York Stock Exchange (NYSE), pursuant to agreements that prohibit Amex from trading NYSE stocks; whereas, the new technology was intended to remove limitations on Amex's ability to trade NYSE stocks. Plaintiffs claim that NASD failed to satisfy its obligations relating to the technology budget.

The 1998 Merger Agreement also required defendants to provide new stock listings by implementing a program to identify stocks listed on Nasdaq that were appropriate to switch to Amex. NASD was also required to spend $30 million to promote the "market of markets" concept, and to establish a $40 million "Seat Fund" for the AMC Members, to be used for the purpose of stabilizing Amex seat value, and/or for new technology. Amended Complaint, ¶¶ 31 (ii) and (iii). Plaintiffs claim that these obligations have not been fulfilled, and, by releasing NASD from its obligations under the 1998 Merger Agreement, the 2004 Transaction would harm plaintiffs, Amex and AMC.

The 1998 Merger Agreement also provides that:

the parties hereto agree that arbitration pursuant to this Section shall be the sole means of resolving Disputes, and that no party shall commence any proceeding in any court or tribunal with respect to a Dispute. All such Disputes shall be arbitrated in New York, New York pursuant to the Rules of the American Arbitration Association . . . .

Epstein Aff., Ex. C, § 13.10 (c). However, the 1998 Merger Agreement permits the parties to seek "equitable relief from a court of competent jurisdiction." Id., § 13.10 (d). The 1998 Merger Agreement also provides that it "shall not confer any rights or remedies upon any person or entity other than the parties hereto and their respective permitted successors and assigns." Id., § 13.5 (b).

In 2000, NASD announced its intention to focus on regulation, rather than ownership of exchanges, and, subsequently, as part of a recapitalization, NASD sold a significant portion of its interest in Nasdaq. Information Memorandum, Epstein Aff., Ex. D, at 39-40. Pursuant to the recapitalization, NASD relinquished 80% of its ownership interest in Nasdaq, thereby allegedly [*3]frustrating the "market of markets" concept of the 1998 Merger Agreement, because the recapitalization resulted in Amex and Nasdaq becoming direct competitors rather than sister companies. Consequently, Amex became responsible for increased license fee payments to Nasdaq, and allegedly lost revenues from: new listings that were diverted to Nasdaq; delayed options trading; and the inability to sell transaction data. Plaintiffs claim that the spin-off of Nasdaq resulted in $1.04 billion in damages to Amex and AMC.

In 2002, NASD, AMC and Amex entered into a non-binding agreement, whereby NASD earmarked $215 million of proceeds from the recapitalization of Nasdaq for potential payment to AMC Members. The earmarked funds were to be used to satisfy NASD's obligations under the 1998 Merger Agreement. To date, only $40 million of the earmarked funds have been paid to Amex by NASD. The 2004 Transaction will release NASD from obligations relating to the earmarked funds.

In April 2002, NASD loaned $50 million to Amex, which became due on April 30, 2004. Because the circumstances surrounding the loan, and the loan itself, are central to plaintiffs' case, the court recites below the relevant facts pertaining to the loan, as described in the affidavits of Todd Diganci (Diganci), NASD's executive vice president and chief financial officer, and Mike D'Emic (D'Emic), Amex's controller.

In late 2000 or early 2001, D'Emic first discussed the idea of a credit facility with Amex's officers, including Salvatore Sodano (Sodano), Amex's chief executive officer, Peter Quick (Quick), Amex's president, and Michael Ryan (Ryan), Amex's vice president and general counsel. D'Emic claims that he was involved in every aspect of the negotiation of the loan.

D'Emic first discussed the $50 million credit line with NASD's treasurer on March 28, 2001, including the possibility of obtaining financing from a third-party lender. Diganci expressed reservations about involving a third-party lender, because Amex, as an NASD subsidiary, could receive support from NASD for short-term liquidity needs. NASD had available cash at that time due to the completion of the first phase of the recapitalization of Nasdaq. Diganci also did not want to subject Amex to restrictive oversight by a third-party lender, or other loan conditions.

Nevertheless, over the next several months, D'Emic and NASD's treasurer met with several banks to discuss credit facilities, and, in April 2001, NASD commenced negotiations with Riggs Bank and SunTrust Bank, which contemplated NASD acting as guarantor on a loan. Discussions regarding the credit facility continued through the summer of 2001, but ceased on September 11, 2001 because of the terrorist attacks, which resulted in Amex closing from September 12 through October 1, 2001, causing losses to Amex exceeding $16 million. As a result, D'Emic maintains, by the end of 2001, Amex's need for additional liquidity had become a more pressing matter.

D'Emic contacted Diganci in January 2002 to continue discussions regarding Amex's short-term working capital needs, at which time Amex had capital investment projects underway. At that time, Amex's revenues were insufficient to cover both operating expenses and its continuing capital expenditures for the further modernization of Amex.

NASD and Amex considered several alternatives to NASD making the loan. According to Diganci, Amex could have liquidated $45 million in investments, cut back on its modernization and technology efforts, or approached commercial banks to pursue lines of credit. [*4]However, Diganci claims that an inter-company loan made good business sense, because it maintained Amex's liquidity and ensured more flexibility than a costly bank loan that would require NASD to serve as guarantor and subject Amex to collateral requirements. Without the loan, Amex's available cash and investments would have plunged from $58.8 million in January 2002 to $11 million in February 2002. NASD had sufficient cash reserves to extend a $50 million line of credit, and Amex had sufficient investments and cash reserves to cover its financial obligations to NASD under that line of credit.

Thus, Amex and NASD commenced negotiations for the credit facility, using the Riggs Bank proposal as a model. NASD drafted a proposed credit agreement for the $50 million line of credit (Credit Agreement), and allegedly negotiated its terms with Amex's outside counsel and business representatives. Diganci claims that the Credit Agreement was negotiated at arm's-length.

On February 22, 2002, before the Credit Agreement was executed, NASD issued an informal interim loan to Amex in the amount of $35 million, to cover Amex's short-term needs. The interim loan was allegedly discussed three days later during a quarterly business review between the managements of Amex and NASD. Thus, D'Emic states that, as of February 2002, Amex and NASD had an informal inter-company credit facility in place, pending the completion of the Credit Agreement.

On March 1, 2002, D'Emic provided an update to Amex's executive management regarding the credit line. On March 13, 2002, at Amex's next board of governors meeting, Sodano's written comments to the board indicate that he informed the board about the credit line with NASD, stating "[w]e have a $50 million working capital line of credit with NASD to ensure adequate liquidity at all times." D'Emic Aff., Ex. G, at 7. The Credit Agreement was executed on June 11, 2002.

The Credit Agreement provides that:

The obligation of the NASD to make the initial Loan is subject to the condition precedent that the NASD shall have received . . . (c) Certified copies of the resolutions of the Board of Directors of the Amex approving each Loan Document, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to each such Loan Document.

Id., Ex. H, § 4.1 (c). The Credit Agreement also defines "Events of Default." Id., § 7.1. For instance, in the event of a change in control of Amex, NASD could demand repayment of the entire amount borrowed by Amex, in which case Amex agreed to make any such repayment to NASD 30 days prior to the change of control. Id., § 7.1 (c). Under the Credit Agreement, NASD agreed to make loans at Amex's option, that is, whenever Amex requested the money, with no obligation upon Amex to take loans if it chose not to. Id., § 2.1. The Credit Agreement also provided a fixed "Termination Date," April 30, 2004, "or any earlier date of the acceleration of the Loans" pursuant to an event of default. Id., § 1.1.

Under the Credit Agreement, interest was to be paid at commercial rates, that is, at the same rates proposed by Riggs Bank, and payments were to be paid in full each month. According to Diganci, during 2002, Amex exercised its option to take out several loans under the Credit Agreement. Amex repaid the loans, and then made several "reborrowings" (id., § 2.1), ultimately borrowing up to the full $50 million limit. Amex has allegedly fulfilled its interest [*5]obligations by making timely and complete monthly payments. Amex disclosed the existence of the line of credit, including the $35 million interim loan, in its 2001 financial statement, dated May 9, 2002, and both Amex and NASD described it in their 2002 financial statements, including full disclosure of the outstanding balance and applicable interest rates. Diganci Aff., ¶¶ 35-36 and Exs. G and H.

According to Diganci's affidavit, the chairman of NASD's finance committee, and NASD's audit committee, were also informed of the Credit Agreement prior to its execution. NASD and Amex's audited financial statements, which described the terms of the Credit Agreement, were also presented to NASD's audit committee before the Credit Agreement was executed. Sodano, Amex's CEO, executed the Credit Agreement on behalf of Amex, and Amex represented in the Credit Agreement that execution of the loan documents was duly authorized by all corporate action. Credit Agreement, § 5.1. While plaintiffs claim that the loan was neither authorized nor approved by AMC Members, Diganci states that Amex's Class A interest holders had no right to review, negotiate, or vote on the terms of the Credit Agreement. Therefore, he did not discuss the loan with holders of Amex's Class A interests.

In 2002, NASD sought to dispose of its interest in Amex in connection with its desire to focus its business on the regulation of its members, rather than ownership of exchanges or markets. However, unable to identify a purchaser, in October 2003, AMC and NASD began to negotiate the 2004 Transaction. On October 31, 2003, discussions of the 2004 Transaction were memorialized in a non-binding "Memorandum of Understanding" between AMC and NASD (MOU). Id.

After the execution of the MOU, AMC retained outside legal counsel and a financial advisor to assist in negotiating the 2004 Transaction. In recognition of possible conflicts of interest due to some Amex governors also serving as NASD governors and AMC directors, on December 11, 2003, Amex formed a "Special Committee," consisting solely of governors who were not NASD governors or AMC directors (Special Committee), to analyze whether the 2004 Transaction was in Amex's best interests, and to make recommendations to Amex's board of governors regarding the 2004 Transaction. Information Memorandum, at 42; Scott Affidavit, ¶ 5. Named defendant Hal Scott (Scott),[FN1] a Harvard Law School professor and a governor of Amex, served as chairman of the Special Committee, and submits an affidavit in opposition to plaintiffs' application for injunctive relief. The other two members of the three-member Special Committee were defendants Philip Lochner (Lochner) and Thomas Sheridan (Sheridan), both of whom are Amex governors. Lochner is a former SEC Commissioner, and Sheridan is an employee of Citigroup Global Markets, Inc.

Scott states that the Special Committee retained outside legal counsel and an investment banking firm as its financial advisor, and met with these advisors on December 21, 2003 and January 14, 2004 to discuss the status of the negotiations of the 2004 Transaction, the financial condition of Amex, drafts of agreements, and the impact of the $50 million loan. On January 15, 2004, representatives of AMC, NASD and Amex, and their respective legal advisors, met to [*6]discuss the concerns of the Special Committee, and NASD agreed to restructure the $50 million loan.

The Special Committee met again on January 27, 2004 to review the terms and conditions of the 2004 Transaction. At that meeting, presentations regarding the terms and consequences of the 2004 Transaction were made to the Special Committee by AMC, NASD, Amex's management, Amex's financial advisor, and The American Seat Owners Association (ASOA), which allegedly represents approximately 400 AMC Members. According to Scott, at that meeting, the Special Committee also had extensive discussions with Amex's management regarding the restructuring of Amex's balance sheet, and the financing that would be made available by virtue of the 2004 Transaction.

On February 7, 2004, AMC's board of directors, all of whom were Amex governors, and one of whom was also a governor of NASD, unanimously approved the 2004 Transaction, and executed agreements to consummate the 2004 Transaction (2004 Transaction Agreement). The 2004 Transaction Agreement conditioned the closing of the 2004 Transaction upon AMC Member approval and Amex board approval. The 2004 Transaction Agreement required AMC to prepare an information memorandum to be sent to AMC Members to notify them of an AMC Member meeting that would be held in order to consider approval and adoption of the 2004 Transaction Agreement (Information Memorandum). Information Memorandum, Annex A, at 20. AMC was also required to provide Amex and NAHO with a reasonable opportunity to comment on drafts of the Information Memorandum, and to reflect those comments in the Information Memorandum. Id.

AMC sent a "Notice of Special Meeting" to AMC Members on February 17, 2004, notifying them of the AMC Member meeting, scheduled for March 18, 2004 (Special Meeting), and inviting them to consider and vote upon the 2004 Transaction (Special Meeting Vote), as described in the Information Memorandum, which was attached to the Notice of Special Meeting. The Information Memorandum contains a description of the 2004 Transaction, including a 12-page description of "Risk Factors" associated with the 2004 Transaction, financial information, and disclosures regarding compensation arrangements. Information Memorandum, at 26, 47-50, 80. The Information Memorandum also includes a copy of the 2004 Transaction Agreement, and amended loan agreements relating to the restructuring of the $50 million loan. It explains the formation of the Special Committee and lists its members, and describes the circumstances surrounding the Credit Agreement and the proposed restructuring of that agreement. Id., at 40-43.

The restructured Credit Agreement allegedly provides Amex with an opportunity to satisfy all of its obligations under the loan for a payment of $25 million plus interest, if repaid within the first year. Pursuant to the restructured Credit Agreement, NASD also allegedly agreed to provide Amex with a seven-year credit facility, whereby Amex could borrow an additional $25 million.

The Special Committee met with its financial advisor again on February 11 and February 22, 2004. On February 27, 2004, the Special Committee's financial advisor presented its final report determining that the 2004 Transaction was in the best interests of Amex. The Special Committee then unanimously recommended that Amex's board vote to approve the 2004 Transaction. [*7]

On March 11, 2004, plaintiffs commenced this action by obtaining an ex parte temporary restraining order to enjoin the Special Meeting Vote until plaintiffs' preliminary injunction motion was heard. On March 16, 2004, this court vacated the TRO and denied plaintiffs' request to enjoin the Special Meeting Vote.

The Special Meeting Vote was held on March 18, 2004, when approximately 80% of AMC Members voted in favor of the 2004 Transaction. On March 30, 2004, plaintiffs moved, by order to show cause, to enjoin the consummation of the 2004 Transaction. On March 31, 2004, Amex's board of governors held a special meeting to consider whether to approve the 2004 Transaction. At the meeting, the board members were provided with, among other things, a review of the Special Committee's work. AMC, the Special Committee, and Amex's financial advisor made presentations to Amex's board of governors. Amex's board unanimously approved the 2004 Transaction, with the AMC Directors abstaining, thereby adopting the recommendation of the Special Committee.

Boglioli was allegedly "in the midst of receiving a $1 million payment" from NASD while he was negotiating the 2004 Transaction on behalf of AMC, Amex and NASD, in order "to thank him for his efforts on behalf of the NASD in securing the disposal of the NASD's interests in [Amex]." Amended Complaint, ¶ 136. Boglioli was, and still is, a "hold-over Director" of AMC, because his two-year directorship term expired, but he continued to serve as an AMC director through February 7, 2004, at which time AMC approved the 2004 Transaction. Id., ¶ 137.

In December 2003, one of AMC's four directors resigned, creating a vacancy on the board, but NASD allegedly refused to hold an election to fill that seat, or Boglioli's alleged hold-over seat. At the same time, Hyde allegedly became ineligible to continue his position as the "options market maker" member of AMC's board of directors. Id., ¶ 138. Instead of resigning, Boglioli, with NASD's approval, allegedly appointed Hyde to assume the vacant board position. In January 2004, Boglioli, with NASD's approval, allegedly appointed his "friend and professional colleague," Koondel, to serve in Hyde's former position of options market maker. Id., ¶ 139. Boglioli, Hyde and Koondel all continue to receive compensation for their work as AMC directors. Plaintiffs claim that Boglioli controlled Hyde and Koondel, because he appointed them to their positions as AMC directors with NASD's approval. Id., ¶ 141.

Discussion

Derivative Standing Under

Not-For-Profit Corporation Law § 623 (a)

Defendants argue that plaintiffs' derivative claims should be dismissed, because plaintiffs fail to plead with particularity that they comprise the necessary five percent of AMC to entitle them to bring a derivative action on behalf of AMC, a not-for-profit corporation.[FN2] In opposition, plaintiffs argue that they are not subject to a particularized pleading requirement. [*8]

New York's Not-For-Profit Corporation Law § 623 (a) provides that "[a]n action may be brought in the right of a domestic . . . corporation to procure a judgment in its favor by five percent or more of any class of members . . . ."

Defendants cite Segal v Powers (180 Misc 2d 57 [Sup Ct, NY County 1999]) in support of their argument. In Segal, the court held that plaintiff's "bald allegation" that he represented 5% of the members was "insufficient and that his failure to name in his pleading the persons who he asserts constitute 5% of the members . . . warrants dismissal of the action." 180 Misc 2d at 59. However, in Segal, Segal named only himself, and, therefore, failed to name the fellow members who, together with Segal, made up the 5% of membership which he claimed to represent in his derivative action. Id. Here, conversely, the amended complaint is verified, names 30 individual plaintiffs, and claims that these plaintiffs "comprise in excess of 5% of the AMC Members . . . ." Amended Complaint, ¶ 8.

While Plaintiff's do not offer additional proof, other than the pleading asserting thirty named plaintiffs, defendants do not come forth with anything refuting that these thirty plaintiffs establish 5% ownership. Moreover, while AMC challenges plaintiffs' contention that they comprise 5% of the AMC Members, information regarding AMC's own membership interests would be in the possession of AMC. Yet, AMC fails to demonstrate that plaintiffs do not comprise 5% of the AMC Members.

The Segal case is the only case which addresses the issue of sufficiently pleading 5% ownership pursuant to § 623 (a). However, it does not provide authority as to what is enough when pleading 5%. This matter is distinguishable for the facts in the Segal case because that matter was dismissed where the plaintiff goes no further than making a bald allegation that he represents 5% and does not name the alleged plaintiffs. Here the plaintiff's names are provided. Defendant has failed to refute that these 30 names comprise the required 5%.

Therefore, defendants' motions to dismiss for failure to satisfy § 623 (a) are denied.

Derivative Standing and Demand Futility Under

Not-For-Profit Corporation Law § 623 (c)

Defendants next move to dismiss plaintiffs' derivative claims, arguing that plaintiffs failed to make a demand on AMC's board that it commence an action, and that plaintiffs fail to allege demand futility. In opposition, plaintiffs do not dispute that they have not made a demand, but rather, argue that they have satisfied the demand futility requirements under New York law.

Not-For-Profit Corporation Law § 623 (c) provides that, in a derivative action, "the complaint shall set forth with particularity the efforts of the . . . plaintiffs to secure the initiation of such action by the board [or] the reason for not making such effort." Plaintiffs are excused from making a demand upon the board if such demand would be futile. Marx v Akers, 88 NY2d 189, 198 (1996). Under New York law,

a demand would be futile if a complaint alleges with particularity that (1) a majority of the directors are interested in the transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgment in approving the transaction.

Id. at 198. [*9]

Director interest is shown when the

complaint alleges with particularity that a majority of the board of directors is interested in the challenged transaction. Director interest may either be self-interest in the transaction at issue [citation omitted], or a loss of independence because a director with no direct interest in a transaction is "controlled" by a self-interested director.

Marx, 88 NY2d at 200. However, "[s]imply naming a majority of the board as defendants with conclusory allegations of wrongdoing or control is insufficient to circumvent the requirement of demand." Bansbach v Zinn, 1 NY3d 1, 11 (2003).

The amended complaint alleges that Boglioli was interested in the 2004 Transaction, due to his conflicting positions as chairman of AMC, vice chairman of Amex and a governor of NASD, and NASD's alleged agreement to pay Boglioli a $1 million bonus in connection with his assistance in consummating the 2004 Transaction. Assuming these facts to be true, Boglioli was interested in the 2004 Transaction, because he was in a position to use his conflicting roles in order to receive the $1 million bonus payment, thereby creating in Boglioli "self-interest in the transaction at issue." Marx, 88 NY2d at 200. However, plaintiffs fail to show that any of AMC's other directors were interested in the 2004 Transaction.

Plaintiffs argue that Koondel and Hyde are "beholden to the NASD," because they were appointed by Boglioli, and serve "at his whim and pleasure in concert with the NASD . . . ." Plaintiffs' Opp. Mem. of Law, at 10; Amended Complaint, ¶ 141. Plaintiffs claim that NASD, as the owner of Amex's voting stock, selected Amex's board of governors, and that NASD controls AMC through the AMC Directors, because the AMC Directors are selected from among Amex's governors. Amended Complaint, ¶¶ 26-27. However, plaintiffs fail to explain with particularity how Koondel and Hyde, by virtue of their positions as alleged hold-over directors or appointees of Boglioli, were dominated by Boglioli or NASD. Nor have plaintiffs shown that Boglioli or NASD controls the AMC Directors. Thus, even if Hyde and Koondel were appointed as hold-over directors by Boglioli, plaintiffs fail to show that Hyde and Koondel were beholden to NASD, or controlled by Boglioli.

Plaintiffs also allege that demand would be futile, because the AMC Directors already agreed to, and approved of, the 2004 Transaction. However, this allegation fails to explain how the AMC Directors' approval of the 2004 Transaction renders them interested, thereby supporting the conclusion that demand would be futile. This allegation also fails to establish that the self-interest of a majority of AMC's directors resulted in their decision to approve the 2004 Transaction. Thus, these "conclusory allegations of wrongdoing . . . are insufficient to excuse demand." Id. at 202 (internal citation and quotation marks omitted).

Moreover, "the receipt of directors' fees is not sufficient to show self-interest by a board member," and plaintiffs fail to allege that payments to Koondel and Hyde were "substantially in excess of normal directors' fees." The British Printing & Communication Corp. PLC v Harcourt Brace Jovanovich, Inc., 664 F Supp 1519, 1530 (SD NY 1987). Therefore, allegations regarding Hyde and Koondel's receipt of "significant economic benefits," vis-à-vis compensation as AMC directors, are insufficient to demonstrate a conflict of interest. Amended Complaint, ¶ 138. [*10]

Nor are allegations regarding Boglioli's personal relationship with Koondel sufficient to demonstrate Koondel's lack of independence. Strougo v Padegs, 27 F Supp 2d 442, 450 (SD NY 1998); see also Bansbach v Zinn, 294 AD2d 762, 763 (3d Dept 2002) ("directors' personal relationships and prior business dealings with [defendant] were insufficient to create a question of fact regarding the directors' independence"), affd as mod 1 NY3d 1 (2003).

Thus, even assuming that these facts support plaintiffs' argument that Boglioli is an interested director, Boglioli "was only one member of the [four-member] Board. There is no allegation of wrongdoing against the other Board members . . . ." Tomczak v Trepel, 283 AD2d 229, 230 (1st Dept 2001); Health-Loom Corp. v Soho Plaza Corp., 209 AD2d 197 (1st Dept 1994). The amended complaint does not allege that Palmeri was an interested director. "It is not sufficient . . . merely to name a majority of the directors as parties defendant with conclusory allegations of wrongdoing or control by wrongdoers to justify failure to make a demand." Marx, 88 NY2d at 199-200 (internal citation and quotation marks omitted). Plaintiffs' allegations fail to show that Hyde, Koondel or Palmeri were interested directors, or that they lost independence due to the control of a self-interested director. Id. at 200. Therefore, plaintiffs' allegations fail to show that a majority of AMC's four-member board of directors was interested in the 2004 Transaction.

Plaintiffs also argue, pursuant to Marx, that AMC's directors failed to "fully inform themselves about the challenged transaction to the extent reasonably appropriate under the circumstances." 88 NY2d at 200.

The amended complaint recites a litany of alleged improper conduct leading up to, and culminating in, the 2004 Transaction, including NASD's spin-off of Nasdaq, NASD's failure to provide the promised technology budget to Amex, the diminution of Amex listings, the payment of excessive employee compensation, conduct leading up to an investigation by the Securities and Exchange Commission (SEC) into Amex's practices regarding options order-handling rules, Amex's alleged improper bookkeeping practices, and the $50 million loan. Plaintiffs argue that "no one has assumed any responsibility for negotiating and/or authorizing a loan of $50 million," and that "the AMC Defendants have adopted the loan as their primary excuse for approving the [2004 Transaction] and as the primary factor the Members had no choice but to vote 'yes' on the proposed [2004 Transaction]." Plaintiffs' Opp. Mem. of Law, at 7-8 (emphasis in original). According to plaintiffs, these facts are sufficient to show that a demand upon the AMC Directors would be futile. The court disagrees.

While plaintiffs claim that defendants engaged in several instances of improper conduct, the amended complaint fails to allege with particularity that the AMC Directors were not fully informed about conduct leading up to, or including, the 2004 Transaction. Instead, plaintiffs state, in conclusory fashion, that the AMC Directors rubber-stamped the $50 million loan, claiming that the AMC Directors "knew nothing about the $50 million loan until they began discussing the [2004 Transaction] in or about October 2003." Amended Complaint, ¶ 132. However, even assuming this allegation to be true, the AMC Directors' awareness of the loan in October 2003 is irrelevant. What is relevant is whether the AMC Directors were fully informed when they approved the 2004 Transaction. The amended complaint does not allege that the AMC Directors were unaware of the loan when they approved the 2004 Transaction on February [*11]7, 2004, but rather, it alleges that they "conducted no independent investigation into the alleged $50 million loan . . . ." Id., ¶ 134. This allegation is irrelevant, because it fails to show that the AMC Directors were not fully informed when they approved the 2004 Transaction.[FN3] Thus, plaintiffs have not shown that the AMC Directors were not fully informed.

To the contrary, the affidavits of Diganci, D'Emic, Boglioli, and Scott, and the Information Memorandum, establish that the AMC Directors intensely negotiated the MOU, between AMC and NASD, in October 2003. Plaintiffs do not dispute that, after the MOU was executed, the AMC Directors retained legal and financial advisors to assist in negotiating and memorializing in writing the 2004 Transaction. In addition, Amex's 2001 financial statement, and both Amex and NASD's 2002 financial statements, demonstrate that information regarding the $50 million loan was publicly disclosed long before February 7, 2004.

Moreover, according to Boglioli's affidavit, "between October 2003 and February 2004, there were telephonic or formal discussions amongst some combination of [AMC] Board members and their advisors on an almost daily basis regarding the [2004 Transaction]." Boglioli Aff., ¶ 13. In particular, the Information Memorandum states that a special meeting of the AMC Directors was held on January 28, 2004 to consider the 2004 Transaction, which was attended by Amex's management and AMC's legal and financial advisors. Information Memorandum, at 41. On January 31, 2004, representatives of AMC and NASD, and their legal advisors, met to resolve outstanding issues relating to the 2004 Transaction. Id. The Information Memorandum states that another meeting was held on February 3, 2004, with representatives of the AMC Directors and NASD, to discuss concerns about the terms of the 2004 Transaction, and that negotiations continued on February 5 and 6, 2004. Id. Moreover, prior to approving the 2004 Transaction on [*12]February 7, 2004, the AMC Directors heard presentations from Amex's senior management, Amex's legal and financial advisors, and AMC's counsel. Id. at 41-42; Boglioli Aff., ¶ 18.

During these negotiations, changes were made to the 2004 Transaction Agreement in order to make it more favorable to AMC and AMC Members, including the restructuring of the $50 million loan on an unsecured basis, and fewer events of default and restrictive covenants, further evidencing that the AMC Directors were fully informed, and actively involved in the negotiation process. In addition, the restructured loan provides Amex with an additional $25 million credit facility, and potentially forgives $25 million of the loan and extends its terms.

Furthermore, as discussed supra, the Information Memorandum contained ample information regarding the $50 million loan, unwinding the 1998 Merger Agreement, the earmarked funds relating to the Nasdaq recapitalization, the technology budget, reduced listings, the seat fund, potential conflicts of interest and employment agreements,[FN4] the SEC investigation, and twelve pages of other "Risk Factors" associated with the 2004 Transaction. Information Memorandum, at 26-38. The fact that the AMC Directors are all signatories to the Information Memorandum evidences that they were fully informed, and that the AMC Members were duly notified, prior to the Special Meeting Vote on March 18, 2004. Moreover, D'Emic has assumed responsibility for negotiating the $50 million loan, and, according to D'Emic's affidavit and the exhibits submitted therewith, the evidence demonstrates that Amex's management and board knew about the loan prior to the consummation of the Credit Agreement. D'Emic Aff., Exs. E, F, G.

Plaintiffs maintain that defendants used the $50 million loan as leverage to coerce a vote in favor of the 2004 Transaction. However, NASD was under no obligation to forgive any part of the loan. The loan term expired on April 30, 2004, at which time NASD was free to demand the entire $50 million from Amex. Therefore, the loan could not have been used to coerce a vote in favor of the 2004 Transaction.

Plaintiffs argue that, under the Credit Agreement, a "condition precedent" was not satisfied, because the $50 million loan was not approved by Amex's board of directors. Credit Agreement, D'Emic Aff., Ex. H, § 4.1 (c). As a result, plaintiffs argue, the loan is "void," "non-existent," and "improper." Hearing Transcript, May 3, 2004, at 15. However, plaintiffs' characterization of the condition precedent is inaccurate. Under the Credit Agreement, NASD's obligation to make the initial loan to Amex was subject to Amex obtaining authorization. In other words, the condition precedent pertains to NASD's obligation to make the loan, not any obligation of Amex to obtain its own authorization prior to receiving loan proceeds. Without Amex's authorization, NASD was not required to make the initial loan.

In any event, plaintiffs fail to show that the alleged failure to satisfy the condition [*13]precedent rendered the AMC Directors uninformed about the loan prior to their approval of the 2004 Transaction. To the contrary, plaintiffs do not refute the allegations contained in the Diganci or D'Emic affidavits, or the evidence submitted therewith, which demonstrate that the $50 million loan was negotiated at arm's-length by Amex's outside counsel, and approved by Amex's senior management. The evidence demonstrates that the AMC Directors, and AMC's legal and financial advisors, met several times and discussed the loan prior to approving the 2004 Transaction, thereby refuting plaintiffs' contention that the AMC Directors failed to investigate the loan. Based upon the evidence, the loan was issued in order to enable Amex to bridge a gap between revenues and expenditures, while permitting Amex to continue its capital investment projects vis-à-vis the modernization of Amex, and, at the same time, preventing Amex's cash position from being reduced from approximately $58.8 million to $11 million. Plaintiffs fail to refute this evidence or demonstrate that Amex did not retain the benefit of the Credit Agreement, and cannot now claim that the loan is ultra vires and of no effect, particularly in the absence of evidence in support of that claim. State Bank of Commerce of Brockport, NY v Stone, 261 NY 175 (1933); International Supply Corp. v Lifton, 183 Misc 555 (1st Dept 1944); Quintal v Fidelity & Deposit Co. of Maryland, 142 Misc 657 (Sup Ct, NY County 1932), affd 238 App Div 820 (1st Dept 1933).

The essence of plaintiffs' argument is not that the AMC Directors were not fully informed about the 2004 Transaction, but rather, that the AMC Directors "had ample information," yet rendered a decision with which plaintiffs are dissatisfied. Plaintiffs' Opp. Mem. of Law, at 8. The amended complaint simply fails to show that AMC's directors were not fully informed, and "does not allege particular facts in contending that the [AMC] board failed to deliberate" to the extent necessary to become fully informed, under the circumstances, about the 2004 Transaction. Marx, 88 NY2d at 202; compare Miller v Schreyer, 257 AD2d 358, 362 (1st Dept 1999) (finding that a rudimentary audit should have informed senior management of the illegal purpose of the transaction, and that it is reasonable "to require directors to implement basic financial oversight procedures sufficient to disclose a patently improper scheme extending over a five-year period."). Conversely, the evidence demonstrates, if anything, that the AMC Directors were fully informed about the challenged transactions.

Plaintiffs next argue, pursuant to Marx, that demand should be excused because "the challenged transaction was so egregious on its face that it could not have been the product of sound business judgment of the directors." 88 NY2d at 200-01.

Developed in the context of commercial enterprises, the business judgment rule prohibits judicial inquiry into actions of corporate directors "taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes." So long as the corporation's directors have not breached their fiduciary obligation to the corporation, "the exercise of [their powers] for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient."

Matter of Levandusky v One Fifth Ave. Apt. Corp., 75 NY2d 530, 537-38 (1990) (citations omitted). "Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left [*14]solely to [corporate directors'] honest and unselfish decision, for their powers therein are without limitation and free from restraint . . . ." Auerbach v Bennett, 47 NY2d 619, 629 (1979) (internal quotation marks omitted).

According to plaintiffs, approval of the 2004 Transaction could not have been the product of sound business judgment, because it assumes the validity of the $50 million loan, without investigating it; it will destroy AMC and Amex's alleged $1.04 billion claim against NASD regarding the recapitalization of Nasdaq; it will release NASD from its obligation to spend $110 million on a technology budget for Amex; it will allow NASD the benefit of alleged questionable bookkeeping practices; and it will release the NASD Defendants from obligations under the pending SEC investigation. Amended Complaint, ¶ 143. According to the amended complaint, in exchange for these alleged benefits to NASD, the only consideration that AMC will receive is the return of a controlling interest in Amex. Id.

These allegations fail to show demand futility, because they assume the alleged egregiousness of the AMC Directors' approval of the 2004 Transaction without explaining with particularity why their approval could not have been the product of sound business judgment. Bansbach v Zinn, 258 AD2d 710, 713 n 1 (3d Dept 1999), affd 1 NY3d 1 (2003). "The complaint does not allege particular facts in contending that the board failed to deliberate or exercise its business judgment" in connection with the 2004 Transaction, and plaintiffs's "conclusory allegations of wrongdoing . . . are insufficient to excuse demand." Marx, 88 NY2d at 202 (internal citation and quotation marks omitted).

To the contrary, several business rationales are provided for approving the 2004 Transaction, which demonstrate that the AMC Directors' approval was not so egregious that it could not have been the product of sound business judgment. With respect to the $50 million loan, plaintiffs do not refute defendants' contention that the loan was issued at a time when Amex was in need of working capital, that it was negotiated at arm's-length by Amex's outside counsel and business representatives, that the loan was issued at commercial rates and on commercial terms while offering more flexibility than a bank loan, and that Amex possessed the financial means to satisfy its obligations under the loan. Moreover, D'Emic's affidavit demonstrates that Amex's senior management was informed about the loan, and Amex represented in the Credit Agreement that execution of the loan documents was authorized by all corporate action. Furthermore, the AMC Directors participated in several meetings with representatives of Amex, NASD, and the parties' legal and financial advisors, in which the loan was discussed and restructured, thereby evidencing the AMC Directors' consideration of the loan during their deliberations over the 2004 Transaction.

Plaintiffs fail to refute these business justifications, and fail to show the alleged egregiousness of the AMC Directors' approval of the 2004 Transaction based upon the $50 million loan. At most, plaintiffs allege the possibility that a condition precedent was not satisfied under the Credit Agreement. Even assuming that a condition precedent was not satisfied, plaintiffs fail to show that the AMC Directors' business decision to approve the 2004 Transaction failed to consider the potential implications of the failure to satisfy that condition, or that approval of the 2004 Transaction could not have been the product of sound business judgment, notwithstanding the alleged failure to satisfy the condition. [*15]

Plaintiffs argue that consummation of the 2004 Transaction will destroy AMC and Amex's $1.04 billion claims arising from the recapitalization of Nasdaq, release NASD from its $110 million technology budget obligations, permit NASD the benefit of alleged questionable bookkeeping practices, and release the NASD Defendants from obligations under a pending SEC investigation. The essence of plaintiffs' argument is that the AMC Directors' decision to abandon these claims was inexpedient, or insufficient consideration for the benefit received by Amex or AMC under the 2004 Transaction. However, "[q]uestions of . . . expediency of contracts or action [and] adequacy of consideration . . . are left solely to [directors'] honest and unselfish decision . . . ." Auerbach, 47 NY2d at 629.

Even if the court examined the expediency of the AMC Directors' decision, or the adequacy of consideration, defendants provide ample business justifications in support of their decision to approve the 2004 Transaction. While the value of AMC regaining exclusive ownership and control of Amex cannot be estimated by the court, it is undisputed that the 2004 Transaction would enable Amex to restructure the Credit Agreement, including the opportunity to satisfy all obligations relating to the $50 million loan for $25 million if it is repaid within the first year of the closing of the 2004 Transaction. This would purportedly enable Amex to refinance the loan through a commercial lender.

The 2004 Transaction would also provide Amex with additional time and resources for future planning, technology improvements, and restructured corporate governance, and, pursuant to the 2004 Transaction, NAHO will allegedly pay in full its remaining commitment under the seat fund, an aggregate amount of approximately $17 million. NASD also agreed to extend to Amex a new, seven-year $25 million credit facility.

In addition, despite plaintiffs' argument that "[d]efendants cannot seriously contend that these actions represent sound business judgment" (Plaintiffs' Opp. Mem. of Law, at 12), plaintiffs do not refute defendants' contention that the AMC Directors consulted with the AMC Members, Amex's senior management, its financial and outside legal advisors, and considered a number of other factors, as outlined in the Information Memorandum, prior to approving the 2004 Transaction. The 2004 Transaction was approved by the Special Committee, after examination by outside legal counsel and financial advisors, and was unanimously approved by Amex's board and the AMC Directors, and, subsequently, by over 80% of the AMC Members after disclosures contained in the Information Memorandum. Thus, the evidence demonstrates, if anything, that the AMC Directors' approval of the 2004 Transaction was the product of intense negotiation and deliberation, thereby supporting the conclusion that the AMC Directors exercised sound business judgment in approving the 2004 Transaction.

Furthermore, plaintiffs fail to cite, and the court is unable to identify, a single case where demand was excused because a transaction, of the type contemplated here, was so egregious on its face that it could not have been the product of sound business judgment. Nor do plaintiffs present any legal authority in support of their contention that AMC's receipt of Amex's Class B interests, in exchange for the release of liabilities, obligations and claims, is insufficient consideration, or that such an exchange is so egregious that it could not have been the product of sound business judgment.

Plaintiffs have not shown that the AMC Directors acted in bad faith or breached their [*16]fiduciary obligations by approving the 2004 Transaction. Matter of Levandusky, 75 NY2d 530, supra. Plaintiffs' allegations show, if anything, that they are unhappy with the transfer of control of Amex to NASD pursuant to the 1998 Merger Agreement and the deal struck in the 2004 Transaction, and that they believe approval of the 2004 Transaction to be unwise or inexpedient, all of which are insufficient to support the conclusion "that the challenged transaction [is] so egregious on its face that it could not have been the product of sound business judgment of the directors." Marx, 88 NY2d at 200-01; Auerbach, 47 NY2d at 629. Because plaintiffs fail to show that the AMC Directors' business decisions were the product of bad faith or fraud, the court must respect their determinations. Auerbach, 47 NY2d 619.

For the foregoing reasons, the amended complaint fails to establish demand futility with respect to plaintiffs' derivative claims. Accordingly, defendants' motions to dismiss the second, third, fifth, sixth, ninth and tenth causes of action are granted, and defendants' motions to dismiss the seventh and eighth causes of action are granted to the extent that those causes of action are asserted derivatively.

Challenges to Plaintiffs' Individual Standing

Defendants move to dismiss plaintiffs' individual shareholder claims, which are raised in the seventh, eighth and eleventh causes of action, arguing that plaintiffs, as individuals, lack standing to recover damages for a wrong against a corporation. In opposition, plaintiffs argue that they will suffer individual harm if the 2004 Transaction is consummated, due to NASD's control over NASD, Amex and AMC, including different effects on Amex's Class A and Class B interests, lost value of Amex seats, and lost business and investment opportunities.

Under New York law,

[i]t is the general rule that, because a shareholders' derivative suit seeks to vindicate a wrong done to the corporation through enforcement of a corporate cause of action, any recovery obtained is for the benefit of the injured corporation. Where, however, the plaintiff sues in an individual capacity to recover damages resulting in harm, not to the corporation, but to individual shareholders, the suit is personal, not derivative, and it is appropriate for damages to be awarded directly to those shareholders.

Glenn v Hoteltron Sys., Inc., 74 NY2d 386, 392 (1989) (internal citations omitted). Under Delaware law,[FN5] in order to determine whether plaintiffs' claims are derivative or individual, the

court should look to the nature of the wrong and to whom the relief should go. The stockholder's [*17]claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.

Tooley v Donaldson, Lufkin, & Jenrette, Inc., 845 A2d 1031, 1039 (Del Supr 2004). Under Tooley, "[t]he analysis must be based solely on . . . : Who suffered the alleged harm the corporation or the suing stockholder individually and who would receive the benefit of the recovery or other remedy[.]" Id. at 1035. Thus, under both New York and Delaware law, plaintiffs' individual claims must allege harm independent from the alleged injury suffered by the corporation.

Plaintiffs argue that the 2004 Transaction affects Amex's Class A and Class B interests differently, to the benefit of Class B interests, and to the detriment of Class A interests. Specifically, the seventh and eighth causes of action for fraud and conspiracy allege that Class A interests will be individually harmed by having to repay the $50 million loan, releasing defendants from obligations under the 1998 Merger Agreement, the Nasdaq recapitalization, the pending SEC investigation, and NASD service agreements.[FN6] The essence of plaintiffs' argument is that the 2004 Transaction

would permanently absolve the defendants of virtually all liability and 'dispose' of the [Amex] by giving it back to its members as an entity close to technological obsolescence, overwhelmingly burdened in debt to defendant NASD, and with a customer base which has been cherry picked by the NASD, on behalf of the Nasdaq.

Amended Complaint, ¶ 3. Based upon these allegations, however, the 2004 Transaction would result in plaintiffs regaining full ownership of Amex, and any injury sustained by plaintiffs would be suffered by Amex as a whole, not by the individual plaintiffs as holders of Amex's Class A interests. Therefore, according to the amended complaint, there is no injury to plaintiffs independent from the alleged harm to Amex or AMC that is based upon different ownership interests. Accordingly, defendants' motions to dismiss plaintiffs' individual claims asserted in the seventh and eighth causes of action are granted.

The eleventh cause of action for breach of fiduciary duty, which is the only cause of action asserted solely individually against the NASD Defendants, alleges that the NASD Defendants, as Amex's controlling shareholders, caused plaintiffs to suffer "special injury" that is distinct from that suffered by AMC and Amex, in failing to fully disclose information regarding the 2004 Transaction, the $50 million loan, the earmarked funds, and the failed technology budget expenditures. Amended Complaint, ¶¶ 222, 224. [*18]

Based on the allegations of the amended complaint, NASD owed Amex's minority shareholders a fiduciary duty, by virtue of its majority ownership and control over Amex. Ibar v Field, 1999 WL 461815 (SD NY 1999), affd 213 F3d 626 (2d Cir 2000). However, a claim for a breach of that duty "would not be an individual claim on behalf of [plaintiffs], but instead would be a derivative claim on behalf of all shareholders." Id. As discussed supra, plaintiffs have not satisfied the demand futility requirements of a derivative claim.

Moreover, the Delaware Supreme Court expressly rejected the concept of "special injury."[FN7] Tooley, 845 A2d at 1039. In any event, the amended complaint fails to allege any injury to plaintiffs that is distinct from injury to Class B interests, AMC or Amex, upon consummation of the 2004 Transaction. Because the 2004 Transaction will result in AMC owning all of Amex's Class A and B interests outright, any injury will be sustained by Amex, or AMC, as Amex's exclusive owner, not by Class A interests.

Additionally, the amended complaint alleges that the harm caused by the alleged breach of fiduciary duty is suffered by "plaintiffs as Members of [Amex]" (Amended Complaint, ¶ 222), thereby conceding that the injury allegedly suffered by plaintiffs is inherently linked to both AMC and Amex. Plaintiffs also allege that, "[h]aving breached their duty of loyalty to the plaintiffs, the NASD Defendants are liable to the plaintiffs individually." Amended Complaint, ¶ 223. However, plaintiffs' allegations regarding individual injury fail to explain what constitutes an individual injury independent from the injury sustained by other Amex seat holders, AMC or Amex.

Furthermore, to the extent that plaintiffs' allegations are based upon a loss in Amex seat value, or lost business and investment opportunities, "a shareholder has no individual cause of action" for losing "the value of his investment," and "allegations of mismanagement or diversion of assets by officers or directors to their own enrichment, without more, plead a wrong to the corporation only . . . ." Abrams v Donati, 66 NY2d 951, 953 (1985).

Moreover, plaintiffs' reliance upon Brinckerhoff v JAC Holding Corp. (2 AD3d 250 [1st Dept 2003]) is misplaced. In Brinckerhoff, the First Department, applying Delaware law, held that "special injury" was alleged where an investment opportunity was offered to some, but not all, shareholders. However, since Brinckerhoff, the Delaware Supreme Court has rejected the special injury standard, as discussed supra. In any event, the amended complaint fails to identify any investment opportunity that was offered to Class B interests, but denied to Amex's Class A interests. Thus, plaintiffs fail to allege that holders of Amex's Class A interests suffered an injury [*19]distinct from Amex or AMC, and they fail to differentiate between the harm they allegedly suffered, and the harm suffered by Amex or AMC.

To the extent that plaintiffs argue that the sale of Class B interests to AMC is discriminatory to Class A interest holders, that argument is unpersuasive. As buyers and sellers of Class B interests, the interests of AMC and NASD are different. The 2004 Transaction will affect Class A and Class B interests "differently" (Plaintiffs' Opp. Mem. of Law, at 14), because it involves the sale by one group of its controlling interest in Amex to another group of willing buyers. However, the fact that the interests of Amex's Class A holders are different from Class B holders is irrelevant. What is relevant is whether plaintiffs have shown that Class A holders suffered an injury distinct from Amex or AMC, or differentiated between the harm they allegedly suffered, and the harm suffered by Amex or AMC. As discussed supra, plaintiffs have shown neither. For the foregoing reasons, plaintiffs fail to show that the alleged breach of fiduciary duty caused plaintiffs independent harm. Accordingly, the NASD Defendants' motion to dismiss the eleventh cause of action is granted.

Preliminary Injunction

Plaintiffs move, by order to show cause, to enjoin the consummation of the 2004 Transaction, which is the subject of their first cause of action. In order to be entitled to an injunction, plaintiffs must show a likelihood of success on the merits of their claims, irreparable injury in the absence of an injunction, and a balancing of the equities in their favor. Aetna Ins. Co. v Capasso, 75 NY2d 860 (1990).

As discussed supra, plaintiffs' second, third, fifth, sixth, seventh, eighth, ninth, tenth and eleventh causes of action are dismissed for lack of standing. Plaintiffs' only remaining claim is the fourth cause of action, which seeks to compel AMC to commence arbitration in the event that plaintiffs lack standing to do so. Thus, plaintiffs' fourth cause of action is unrelated to plaintiffs' claim for injunctive relief, which seeks to enjoin the consummation of the 2004 Transaction. Therefore, plaintiffs have no likelihood of success on the merits of their claims that pertain to their request for injunctive relief. Accordingly, plaintiffs' request for injunctive relief is denied, and plaintiffs' first cause of action for injunctive relief is dismissed.

Claims Subject To Arbitration

While the second, third, seventh, eighth and tenth causes of action are dismissed for lack of standing, the court notes that NASD and AMC also move to dismiss these causes of action, on the ground that, pursuant to the 1998 Merger Agreement, those claims must be submitted to arbitration. In opposition, plaintiffs argue that defendants' assertion regarding the propriety of arbitration "is essentially irrelevant to this motion," and that "the question of the appropriate forum is not before the Court on this motion to dismiss." Plaintiff Opp. Mem. of Law, at 28, 29.

New York public policy favors and encourages arbitration "as a means of conserving the time and resources of the courts and the contracting parties. Therefore, New York courts interfere as little as possible with the freedom of consenting parties to submit disputes to arbitration." Matter of Smith Barney Shearson Inc. v Sacharow, 91 NY2d 39, 49-50 (1997) (internal citations and quotation marks omitted); see also Brower v Gateway 2000, Inc., 246 AD2d 246 (1st Dept 1998) (dismissing complaint where arbitration agreement existed between [*20]parties).

It is undisputed that the 1998 Merger Agreement required the parties to submit disputes arising out of that agreement to arbitration. Plaintiffs cite Utica Mutual Ins. Co. v Gulf Ins. Co. (306 AD2d 877 [4th Dept 2003]), in which the court stated that a party may resist the enforcement of an agreement to arbitrate where "fraud permeated an agreement" and "the agreement was not the result of arm's length negotiation," or "the arbitration clause was inserted into the [agreement] in order to effect the fraudulent scheme." Id. at 880 (internal quotation marks omitted). The court held that the plaintiff failed to make a prima facie showing that the defendant knew of the fraudulent nature of the transaction when it entered into the agreement, and that bare, conclusory allegations of fraud were insufficient to demonstrate that "the alleged fraud was part of a grand scheme that permeated the entire [agreement] including the arbitration provision." Id. at 880 (internal quotation marks omitted).

Here, plaintiffs fail to allege that the 1998 Merger Agreement was not the result of arm's length negotiation, or that the arbitration clause was inserted into that agreement in order to effectuate a fraudulent scheme. Therefore, the arbitration provision governs the claims that arise out of the 1998 Merger Agreement.

The second cause of action alleges that plaintiffs were the intended beneficiaries of the 1998 Merger Agreement, and that defendants breached their contractual obligations under the 1998 Merger Agreement. The third cause of action avers that defendants breached the implied covenant of good faith and fair dealing by destroying the right of Amex, AMC, AMC Members and plaintiffs to receive the benefits of the 1998 Merger Agreement. The seventh cause of action maintains that, in the 1998 Merger Agreement, NASD fraudulently misrepresented its intention to create the "market of markets" and promote "synergies" that would result from the merger, under the 1998 Merger Agreement. Amended Complaint, ¶ 200. The eighth cause of action for conspiracy claims that defendants intentionally failed to abide by their contractual commitments in the 1998 Merger Agreement, and are continuing their alleged conspiracy by disposing of the Amex pursuant to the 2004 Transaction Agreement. The tenth cause of action alleges that defendants negligently disregarded their fiduciary duties "as officers, directors and governors of the corporate plaintiffs . . . in making the representations alleged as a proximate result of which plaintiffs sustained the injuries and damages requested." Amended Complaint, ¶ 217. The tenth cause of action also avers that the misrepresentations were made by defendants "in the context of actual privity between plaintiffs and defendants or in a relationship between them that was so close as to approach that of privity." Id., ¶ 219.

All of these allegations of misconduct and breaches, on their face, arise under the 1998 Merger Agreement. Moreover, the parties concede that these claims should be arbitrated, pursuant to the 1998 Merger Agreement, which undercuts any attempt by plaintiffs to rely upon section 13.10 (d), which permits the parties to forgo arbitration when seeking equitable relief.[FN8] [*21]NASD Mem. of Law, at 8 ("[p]laintiffs must submit their claims to arbitration"); NASD Reply Mem. of Law, at 4 ("arbitration is appropriate in this case"); Amended Complaint, ¶ 176 ("[i]f it is determined that the significant breaches of the 1998 Merger Agreement may only be remedied by arbitration by a party to the 1998 Merger Agreement, then the only possible way for the plaintiffs to potentially secure the billion dollar damages arising out of the NASD's breaches of the 1998 Merger Agreement would be by the Court compelling that the AMC initiate such arbitration."). Therefore, while these causes of action are dismissed for lack of standing, as discussed supra, the court notes that these claims are subject to arbitration pursuant to the 1998 Merger Agreement.

Fourth Cause of Action to Compel Arbitration

Plaintiffs' fourth cause of action seeks to compel AMC to initiate arbitration, pursuant to the 1998 Merger Agreement, to the extent that plaintiffs lack standing to initiate arbitration.[FN9] The fourth cause of action alleges that a demand upon the AMC Defendants to initiate arbitration would be futile for the reasons set forth in the amended complaint, and because, "[u]pon information and belief, the AMC Defendants have represented to the NASD Defendants and assured the NASD Defendants that they would not bring such an action." Amended Complaint, ¶ 178.

The amended complaint fails to allege that plaintiffs made a demand upon AMC to initiate arbitration, or plaintiffs' reason for not making such an effort, pursuant to New York's Not-For-Profit Corporation Law § 623 (c). Nor have plaintiffs satisfied the demand futility requirements under New York law, as discussed supra. Thus, plaintiffs' allegation, that the AMC Defendants assured the NASD Defendants that arbitration would not be initiated, is insufficient to establish demand futility, because plaintiffs fail to establish that they have made a demand upon the AMC Directors to initiate arbitration, or that they have satisfied the demand futility requirements under New York law.

Moreover, to the extent that plaintiffs assert third-party beneficiary status under the 1998 Merger Agreement, "[o]nly an intended beneficiary of a contract may maintain an action as a third party; an incidental beneficiary may not." Artwear, Inc. v Hughes, 202 AD2d 76, 81 (1st Dept 1994). "In order for a contract to confer enforceable third-party beneficiary rights, it must appear 'that no one other than the third party can recover if the promisor breaches the contract' or [*22]the contract language should otherwise clearly evidence 'an intent to permit enforcement by the third party.'" Id. at 82.

Here, the 1998 Merger Agreement expressly states that it "shall not confer any rights or remedies upon any person or entity other than the parties hereto . . . ." Epstein Aff., Ex. C, § 13.5 (b). Thus, the 1998 Merger Agreement clearly evidences an intent not to permit enforcement by third parties. Plaintiffs are not signatories to the 1998 Merger Agreement. Therefore, plaintiffs may not, as shareholders, claim third-party beneficiary status under the 1998 Merger Agreement, which, by its terms, explicitly states that rights and remedies under the agreement belong solely to the parties thereto. Bordereaux v Salomon Smith Barney Holdings, Inc., 269 AD2d 217 (1st Dept 2000).

Thus, AMC was the intended beneficiary of the 1998 Merger Agreement, not plaintiffs. Plaintiffs conceded this point before the court at the hearing held on May 3, 2004. Tr., at 7. The amended complaint alleges no facts to justify permitting plaintiffs to proceed with this lawsuit except on AMC's behalf. Bordereaux, 269 AD2d 217. As discussed supra, plaintiffs fail to allege derivative standing. Therefore, plaintiffs fail to allege a basis upon which the court could compel AMC to initiate arbitration.

The court notes that the parties' papers do not fully address the fourth cause of action. Accordingly, nothing contained herein shall prevent the parties from commencing arbitration.

Conclusion

Accordingly, it is hereby

ORDERED that defendants' motions (motion sequence numbers 006, 007 and 008) to dismiss are granted and the complaint is dismissed with costs and disbursements as taxed by the Clerk of the Court; and it is further

ORDERED that plaintiffs' motion (motion sequence number 002) to enjoin Amex Membership Corporation from acquiring National Association of Securities Dealers, LLC's interest in American Stock Exchange, LLC is denied; and it is further

ORDERED that plaintiffs' motion (motion sequence 005) to remove Joel L. Lovett as a party-plaintiff in this action is denied as moot; and it is further

ORDERED that the Clerk is directed to enter judgment accordingly.

Dated: July 28, 2004

ENTER:

_____________________

J.S.C. Footnotes

Footnote 1: In his affidavit, Scott states that, while he is named as a defendant, he was not served with a summons and has not appeared in this action.

Footnote 2: In addition to its own arguments regarding lack of standing, NASD incorporates by reference AMC's legal arguments and briefs in their entirety. NASD Mem. of Law, at 2 n 3, and 9; NASD Reply Mem. of Law, at 5 n 6.

Footnote 3: In support of their motion to enjoin the 2004 Transaction, plaintiffs submit the affidavits of plaintiffs Stuart H. Alpert, Mark C. Meade, Michael Golden and Jonathan Q. Frey. The affidavits state that Sodano told them that he neither knew about, nor approved, the $50 million loan, and that the loan did not require board approval. Michael Golden's affidavit also states that, on May 8, 2004, Boglioli said that he was unable to provide additional information regarding the $50 million loan, such as what the money was used for, the dates when loans were made, and the loan approval process. The affidavits also dispute Boglioli's contention that the loan was "one of many issues . . . that the Members talked about in assessing the [2004 Transaction]." Boglioli Aff., ¶ 9. However, these affidavits fail to demonstrate that the AMC Directors were not fully informed when they approved the 2004 Transaction. Moreover, plaintiffs fail to show that they were entitled to receive any additional information about the loan. Furthermore, while Michael Golden may have been dissatisfied with the loan information disclosed in the Information Memorandum, over 80% of AMC's other members voted in favor of the 2004 Transaction based upon that information.

Footnote 4: The 2004 Transaction would allegedly terminate Sodano's employment agreement, entitling him to a payment of approximately $22 million; Quick would be entitled to approximately $7 million; and Ryan would be entitled to certain "enhancements." Amended Complaint, ¶ 107.

Footnote 5: The law of a company's state of incorporation is the law that traditionally applies. Hart v General Motors Corp., 129 AD2d 179, 183 (1st Dept 1987). Here, the amended complaint alleges that NASD is a Delaware limited liability corporation, that Amex is a Delaware limited liability company, and that both companies are foreign corporations licensed to do business in New York. Therefore, the court's analysis considers New York and Delaware law.

Footnote 6: Plaintiffs' basis for these claims is that defendants intentionally misrepresented facts regarding these transactions, contractual obligations, and releases from liabilities, in order to induce the AMC Members into voting in favor of the 2004 Transaction.

Footnote 7: Prior to Tooley, under Delaware law, courts analyzed individual, versus derivative, claims under a "special injury" test. "A special injury is a wrong that 'is separate and distinct from that suffered by other shareholders, . . . or a wrong involving a contractual right of a shareholder, such as the right to vote, or to assert majority control, which exists independently of any right of the corporation.'" Tooley v Donaldson, Lufkin & Jenrette, Inc., 2003 WL 203060, at *3 (Del Ch 2003), affd in part, revd in part, 845 A2d 1031.

Footnote 8: The court also notes that, while the amended complaint states that defendants will continue their wrongful conduct "[u]nless enjoined by this Court" (Amended Complaint, ¶¶ 170, 174, 188, 194, 215, 220, 226), the amended complaint fails to allege that plaintiffs have no adequate remedy at law. Fisher v Health Ins. Plan of Greater NY, 67 Misc 2d 674, 678 (Sup Ct, Kings County 1971), citing Kane v Walsh, 295 NY 198 (1946).

Footnote 9: Plaintiffs' argument that the question of the appropriate forum is not before the court is inaccurate. Both NASD and AMC's notices of motions move to dismiss the amended complaint in its entirety, pursuant to CPLR 3211 (a) (3) and (7). While NASD's notice of motion moves to dismiss the amended complaint pursuant to CPLR 3211 (a) (7), as discussed supra, NASD incorporates by reference AMC's standing arguments.