SHORT FORM ORDER. Present: HON. GEOFFREY J. O CONNELL Justice TRIAL/IAS, PART 10 NASSAU COUNTY. NORMAN KAMINSKY, derivatively on behalf of

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1 SHORT FORM ORDER Present: SUPREME COURT - STATE OF NEW YORK HON. GEOFFREY J. O CONNELL Justice NORMAN KAMINSKY, derivatively on behalf of AMERICAN BIOGENETIC SCIENCES, INC., TRIAL/IAS, PART 10 NASSAU COUNTY -against- Plaintiffs, INDEX No ALFRED J. ROACH, RONALD I. HELLER, DAVID S. NAGELBERG, KENNETH J. KOOCK, MARTIN H. MEYERSON, M.H. MYERSON & CO., INC. LAWRENCE KUPFERBERG, in his individual capacity and as trustee of the RACHEL BETH HELLER 1997 TRUST, and the EVAN TODD HELLER 1997 TRUST, DONEHEW FUND LIMITED PARTNERSHIP, ROBERT DONEHEW, R. DAVE GARWOOD, DAVID BIGGS, TYLER RUNNELS, KEVIN CHAROS, ANTHONY CHAROS, DELAWARE CHARTER GUARANTY AND TRUST COMPANY, in its capacity as trustee of the RONALD I. HELLER IRA, DAVIS S. NAGELBERG IRA, and the MARTIN H. MEYERSON IRA, JACQUELINE KNAPP, JANICE HALL-NESSES, JOHN DAVIES INVEST, INC. And PETER W. JANSSEN, MOTION DATE:4/ 19/02 MOTION SEQ. No. 1,2,3,4 Defendants, and AMERICAN BIOGENETIC SCIENCES, INC., Nominal Defendant.

2 The following papers read on this motion: Notice of Motion/Affidavit/Attachments Roach Notice of Motion/Affirmation/Exhibits Memorandum of Law Attachments Jansenn Notice of Cross Motion/Affirmation/Attachments Memorandum of Law Heller Notice of Cross Motion/Affidavit/Affirmation/Exhibits Memorandum of Law Defendants seek an Order dismissing the Complaint for failing to state a cause of action. Plaintiff opposes and seeks an Order admitting out of state counsel Mathew Millerpro hat vice is Granted. 22 NYCRR 690.3(a). Plaintiff KAMINSKY is a shareholder of AMERICAN BIOGENETIC SCIENCES, INC. ( a bipharmaceutical company in the business of researching developing and marketing cardiovascular and neurobiology products for commercial development. Defendant ALFRED ROACH is the Chairman of ABS. Defendant M.H. KAMINSKY claims that the M.H. MEYERSON & CO. defendants have served as financial advisors to ABS since August, 1998, and as such had access to non-public information about the financial condition of the company. He claims that they acted to conceal such information and use it to their advantage. Defendant PETER W. JANSSEN is an investment banker and stockbroker with Janssen Partners. Plaintiff claims that JANSENN has a longstanding relationship with ABS. Plaintiff claims that Martin MEYERSON, KOOCK, HELLER, CHAROS, NAGELBERG and JANSENN were all purchasers of stock in an October 27, 1998 transaction which is the subject of the plaintiffs Complaint. MEYERSON & CO., INC. is a New Jersey corporation. Defendants MARTIN MEYERSON, KENNETH KOOCK, RONALD HELLER, DAVIS NAGELBERG and ANTHONY CHAROS, are all officers, directors or employees of M.H. The remaining Defendants are referred to by the Plaintiff as purchases of stock in the October 27, 1998 transaction. hat vice. There being no opposition and good cause having been demonstrated, plaintiffs motion to admit pro MEYERSON & CO. ABS ), outside purchasers also having made 2

3 Plaintiff contends that on May 20, 1998 ABS completed a private placement of certain Convertible Debentures due on May 20,200 1, and three series of Warrants to purchase the aggregate of 26 1,228 shares of the Company s Class A Common Stock. The shares were issuable upon conversion of the Debentures and exercise of the Warrants. The Debentures were sold to three offshore hedge funds. The AGR Halifax Fund, Inc., The Heracles Fund, and Themis Partners, LP. The Debentures were to become convertible in stages. The conversion price of the Debentures was set at a discount off of the market price of ABS stock. There was no minimum conversion price agreed to between the Company and the debenture purchasers. ABS apparently reserved the right to issue more that 4 million shares of its Class A Common stock upon conversion of all of the Debentures, to pay cash to the holder in an amount equal to the principal amount of Debentures being converted, plus an amount equal to the number of shares of Class A Common Stock that would otherwise be issuable upon conversion of the Debentures, multiplied by the difference between the highest sales price of the Company s Common Stock on the date of conversion and the applicable Debenture conversion price. This above described arrangement is referred to by the plaintiff as the Buyout Option. Plaintiff complains that this Buyout Option, without a minimum conversion price, is extremely risky for the company, as a purchaser of such a floor-less convertible debenture has a strong incentive to sell short of the issuer s stock. The selling of the stock short can cause the stock s price to drop, which could enable purchasers to obtain even more stock upon conversion of their debentures. In addition, plaintiff claims that there is little risk to the purchaser to do so, as the issuer is required to sell stock at lower than market price, which they can use to cover their short sales. If the stock price falls, purchasers can make huge profits on the short sales. Plaintiff contends that following the May 20, 1998 Debenture sale, the price of ABS Common stock plummeted from $1.50 per share to $0.19 per share at the time of the transaction of October 27, Plaintiff contends that during this dramatic decrease in the stock price, ABS entered into an agreement to retain M.H. MEYERSON & CO. as a financial advisor on or about August 13, Pursuant to this Financial Advisory Agreement, M.H. MEYERSON & CO. was to render financial advice, concerning if necessary, financing through banks and/or insurance companies. The Agreement provided that M.H. 3

4 MEYERSON & CO. would be paid in the form of warrants to purchase ABS common stock. ABS agreed to pay M.H. MEYERSON & CO., 150,000 warrants to purchase ABS stock at $1.50 per share, 150,000 warrant to purchase the stock at $2.50 per share, vesting on the seven month anniversary of the Agreement, and in addition, 100,000 warrants to purchase the stock at $3.00 per share vesting on the thirteen month anniversary of the Agreement. On August 20, 1998 ABS announced that there was no business or operating reason for the fall in its stock price. Plaintiff alleges that on October 27, 1998, ABS opted to exercise the Buyout Option to eliminate overhang created by the existence of outstanding convertible Debentures. This decision cost ABS approximately $3,852, This included the outstanding principal amount of the Debentures, a 16% penalty, and a repurchase of 26 1,228 warrants issued to Debenture Holders in the May sale. Plaintiff claims that these monies came from the funds in ABS possession, with an additional 2.7 million dollars raised in a private placement of 10.8 million shares of Class A Common Stock at a price of $0.25 per share. This Private Placement Sale was developed and held by the M.H. MEYERSON & CO. defendants according to plaintiff. This sale, and the purchase of stock by the named defendants, is the transaction at issue. Plaintiff claims that most of the shares sold in this Sale were purchased by ABS President, ROACH, and the officers, directors and employees of M.H. MEYERSON & CO., all insiders to ABS finances. The plaintiff also complains that the purchase price for the shares, $0.25, was a grossly inadequate price. He claims that the defendants knew that this price was artificially depressed on October dramatically to $1.72 per share on November 12,1998, a single day after the buyout was announced publicly, and ten days after ABS hired a new President and Chief Executive Officer, whose hiring was only known to insiders, and not announced publically until November 17, ,1998, due to the overhang created by the existence of the outstanding debentures, coupled with the unusually high level of short selling. He claims that the defendants knew it was artificially depressed, as demonstrated in an August, 1998 statement that there was no business or operating reason for the stock. The Plaintiff also notes that immediately after the Buyout Option was exercised on October 27, 1998, the stock price increased 4

5 Kaminskv v. Roach. et al. Plaintiff alleges that the foregoing demonstrates the defendants were involved with an insider deal that was fundamentally unfair to the company. He claims that these individuals knew that (1) the overhang that caused the price to decline would be removed, and (2) that the company was hiring a renowned President and CEO. He claims that this knowledge was insider knowledge, not shared with the public, and based upon it the defendants purchased a substantial portion of the company s shares, and inherent voting power, for a very small investment. He claims that the profit they made on their investment in the stock should have been enjoyed by the Company and its shareholders at the time, and that these purchases are breach of fiduciary duty by ROACH, and the MEYERSON & CO. defendants resulting in a lost opportunity for the ABS Company to earn $9 million in revenues from stock sales. Plaintiff alleges breach of fiduciary duty of loyalty; breach of fiduciary duty of care; by ROACH and the MEYERSON & CO. defendants. He also alleges breach of contract against the MEYERSON & CO. defendants as they had a contractual obligation to ABS to use their best effort to provide financial advise to benefit ABS, and instead benefitted themselves. In his fourth cause of action, KAMINSKY seeks a constructive trust against all of the defendants due to their unjust enrichment at the expense of ABS. ROACH and ABS seek a dismissal pursuant to CPLR $321 l(a)(7) contending that KAMINSKY has not pled a valid cause of action due to his failure to make a Demand on the Board of Directors of ABS as required under Delaware Law, Delaware Chancery Rule They contend that the Plaintiff has not demonstrated that such a demand would have been futile. Defendants PETER W. JANSENN, as well as the MEYERSON & CO. defendants, HELLER, NAGELBERG, KOOCK, MARTIN MEYERSON, M.H. MEYERSON & CO., KUPFERBERG, RUNNELS, KEVIN CHAROS, ANTHONY CHAROS, the DELAWARE CHARTER GUARANTY & TRUST COMPANY, also move to dismiss the Complaint on the basis of no Demand on ABS. In the Complaint, plaintiff contends that a demand on the board for the relief sought would be futile, as ROACH controls the ABS s Board of Directors, owns all of the Class B Stock, with the related voting rights, and the inability of the Class A stockholders to vote cumulatively. At the time of the Private Placement at issue, defendant ROACH apparently had between 55% to 60% of the stock voting power of ABS. Because shareholders are not permitted to vote cumulatively, ROACH had 5

6 Kaminskv v. Roach. et al. the power to select the entire Board of Directors. At the time, ROACH was Chairman of the Board, which was also made up by his son, three officers working for the corporation, and an individual who was also a Director of another ROACH controlled entity. Plaintiff alleges that at the time this action was commenced, in October, 2001, ROACH had approximately 48% of the stock voting power, which again left him the effective power to control the Board. At that time, the Board members were, ROACH, his son, the President and Executive Vice President of the company, and an individual who was also a Director of another ROACH controlled entity. Plaintiff contends that based on the make-up of the Board and the facts in dispute, he has established a reasonable doubt that a demand on the Board would have been futile. To make a sufficient showing that a Demand would be futile, a plaintiff must set forth particularized facts creating a reasonable doubt that either (1) a majority of the directors are disinterested and independent; or (2) the challenged transaction was other than the product of a valid exercise of business judgment. Razes v. Blasband, 634 A.2d 927 (Del. 1993); Grobow v. Perot, 539 A.2d 180 (Del. 1988). In this instance the plaintiff has alleged that the Directors were not disinterested and lacked independence. Interest exists whenever divided loyalties are present, or as a director has received, or is entitled to receive a personal financial benefit from the challenged transaction which is not equally shared by the stockholders. The question of independence flows from an analysis of the factual allegations pertaining to the influence upon the director s performance of their duties generally, an with respect to the challenged transaction. Pogostin v. Rice, 480 A.2d 619 (Del. 1984). A review of the relevant facts, including the transaction in dispute, the members of the Board at the time of the transaction, as well as the time of commencement, demonstrates a reasonable doubt that the Board lacked the independence necessary to impartially consider a Demand. The Court agrees with the Defendants that ALFRED ROACH s control of a substantial minority stock interest alone, would be insufficient. However, the Court finds that this fact is not the sole factor to be reviewed in determining the issue of futility. This stock control is accompanied by additional indicia of control, including the familial relationship and employment control of other Board members. Razes, supra.; M izel v. Connolly, 1999 Del.Ch. LEXIS 157 (Del.Ch. July 22, 1999). 6

7 Based on a review of the Complaint the Court finds that the Plaintiff has demonstrated that there is a reasonable doubt that the Board of Directors was independent, which would have made a Demand on the Board futile. Lewisv. Aronson,No. 6919,1985 WL (DelCh. May 1,1985);Accord, In re Cooper Cos., Inc. Shareholder Derivative Litig., 2000 Del.Ch. LEXIS 158 (Del.Ch. October 3 1,200O). In addition, the Court finds that Plaintiff has also sufficiently alleged that the Private Placement was not a product of a valid exercise of Business judgment, which would also render a Demand on the Board futile. Lewis v. Aronson, No. 6919, 1985 WL (Del.Ch. May 1, 1985). In this case the Plaintiff has demonstrated that there is a reasonable doubt that there was a rational business purpose to hold the Private Placement. The Plaintiff does not challenge the sole decision to repurchase the debentures, and agrees that it was appropriate. The plaintiff challenges the manner in which the funds were raised, in the Private Placement. Plaintiff complains that the transfer of stock or other assets for inadequate consideration is not a product of a valid exercise of business judgment, but in reality corporate waste.where a corporation sells or purchases securities for a price that is clearly inadequate, it may constitute corporate waste. Here, Plaintiff alleges that the Defendants caused ABS to acquire no consideration for the issuance of its shares, which were purchased by the Defendants in large quantity prior to its increase in value for reasons known to insiders and not the public or other shareholders. Plaintiff argues that the company should have borrowed the funds or sought alternative financing, and that this route was chosen to make the Defendants rich, at the expense of ABS and its other shareholders. KAMINSKY claims that with other financing, the ABS stock sold in October 1998, could have been sold at a non-discounted price creating great profits for the company, at or around $9 million dollars. The Court finds the plaintiff has demonstrated a reasonable doubt that the decision to sell these shares at the reduced price at the Private Placement was not an exercise of valid business judgment. Thus, based on the foregoing, the defendants motions to dismiss are Denied. CPLR $ 321 l(a)(7). A preliminary conference (see 22 NYCRR ) shall be held on September 13,2002 at 9:30 a.m. before the Commercial Division Coordinator, Catherine Romano, telephone no. (5 16) This 7

8 directive with respect to the date of the conference is subject to the right of the undersigned to fix an alternative date should scheduling require. Counsel may execute and return a completed original enclosed Preliminary Conference Order for approval by the undersigned no later than 10 days prior to this scheduled date. This will obviate the need for a personal appearance. The Court will set the date for certification and return a signed copy to counsel. Counsel for the movant shall serve a copy of this Order on all parties. A copy of the Order with affidavits of service shall be served on the Clerk of the Court within 8 days after entry. Counsel for all parties are reminded that this matter has been assigned to the Commercial Division of the Supreme Court of Nassau County,. and directed to follow the Rules of this Division with respect to all further applications. It is, SO ORDERED. Dated: CONNELL, J.S.C.