                             In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 02-3500
ROBERT FAIT, as Trustee of the
Robert L. and Judith R. Trust,
                                               Plaintiff-Appellant,
                                 v.

ALBERT HUMMEL, JAMES LUMSDEN,
HOWARD MYLES, FF-PENTECH, L.P.,
PENTECH INVESTORS, LLC and
PENTECH PHARMACEUTICALS, INC.,
an Illinois corporation,
                                            Defendants-Appellees.
                          ____________
            Appeal from the United States District Court
       for the Northern District of Illinois, Eastern Division.
            No. 01 C 2771—Suzanne B. Conlon, Judge.
                          ____________
      ARGUED MAY 13, 2003—DECIDED JUNE 27, 2003
                    ____________


 Before ROVNER, DIANE P. WOOD, and EVANS, Circuit
Judges.
  EVANS, Circuit Judge. In May 2001, the board of direc-
tors of Pentech Pharmaceuticals, Inc. approved a stock
offering they hoped would ward off bankruptcy by infus-
ing the company with more than $4 million. But the abil-
ity to keep the company afloat wasn’t the transaction’s
only selling point to the board. In addition, the offering
diluted the voting power of the existing common stock,
2                                              No. 02-3500

allowing the preferred shareholders (who had elected all
of the board members at the time) to keep control of the
company out of the hands of Fait—Robert Fait, who, along
with Pentech founder Ragab El-Rashidy, owned more
than two-thirds of Pentech’s common stock. In this ap-
peal, as Fait would have it, the power grab was the
board’s sole motivation for the transaction and the offer-
ing was not fair to the corporation and its shareholders.
  In order to understand how the preferred shareholders
had the chance to seize control of the company, we must
look back to 1998 when Pentech, a pharmaceutical com-
pany in the business of developing drugs, issued Series A
preferred shares to a number of investors, including sev-
eral of our defendants. As part of that offering, the Series
A shareholders entered into an investor rights agree-
ment that gave them the right of first refusal on any
newly issued stock. The agreement also gave the pre-
ferred shareholders the right to elect two of the five
board members and the power to elect four of the five for
a period of 2 years if Pentech violated certain covenants
in the agreement.
  The Series A shareholders took advantage of the latter
provision in the fall of 2000 when an Illinois court
agreed with the Series A shareholders’ contention that
Pentech had violated the rights agreement, giving the
preferred shareholders the right to elect four of the five
directors. They used their opportunity to replace Fait
and another director elected by the common shareholders
and then placed El-Rashidy on administrative leave from
his duties as CEO. El-Rashidy resigned from the board
of directors soon after and was not immediately replaced,
leaving just four board members (all elected by the pre-
ferred shareholders) at the time of the offering—Dr. Bruce
Ronsen and defendants James Lumsden, Albert Hummel,
and Howard Myles.
No. 02-3500                                                  3

  On May 3, 2001, Ronsen, Hummel, and Myles voted
unanimously to offer 4,220,921 shares of common stock
for $1/share (because of his close ties to many of the
Series A shareholders, Lumsden abstained). On the ad-
vice of Lumsden, the Series A shareholders exercised
their right of first refusal and bought all of the available
shares. Fait challenged the validity of the transaction,
claiming it was unfair because it diluted the interest of
the common shareholders and because the $1/share
price was inadequate. He thinks Pentech would have
been better off raising capital by taking on an investor,
specifically Julphar Pharmaceuticals, Inc. Julphar had
been discussing the possibility of buying up to $20 million
worth of Series B preferred stock from Pentech, but the
talks broke down. Fait claims the Pentech board gave up
on the deal with Julphar prematurely because the May 3
offering gave the Series A shareholders a chance to
achieve their true objective of retaining permanent con-
trol of Pentech. As such, he says the board should have
had to prove that the offering was the best option for
Pentech and that it was fair. The district court denied
the board’s motion for summary judgment but found in
favor of the board after a 7-day bench trial, concluding
that Fait had the burden of proving that the offering
was not fair and that he did not meet that burden. Fait
appeals that ruling.
  Under Illinois law (which applies in this diversity case)
a director who receives a personal benefit from a cor-
porate transaction has the burden of showing that the
transaction was fair to the corporation, unless the trans-
action was approved by disinterested directors or share-
holders with knowledge of all material facts. 805 ILCS
5/8.60; Olsen v. Floit, 219 F.3d 655, 657 (7th Cir. 2000). Fait
admits that the transaction was approved by a majority
of the disinterested directors (as a Series A shareholder,
Hummel benefitted from the offering, but Myles and
4                                            No. 02-3500

Ronsen were disinterested). Instead, Fait argues that the
interested directors should have borne the burden of
proving the fairness of the offering because Myles and
Ronsen did not have sufficient knowledge of all material
facts. Fait wants us to review the knowledge require-
ment de novo, but his argument ignores the fact that
the district court’s interpretation of the knowledge re-
quirement was based on her factual findings, which
we review only for clear error. See, e.g., Olsen, 219 F.3d
at 657.
  Although Illinois courts have rarely explored what
constitutes “knowledge” in this context, some factors
include whether the disinterested directors knew the
market value of the proposed shares, whether they knew
of the effects of the deal on the existing shareholders,
and whether they knew of possible alternative sources
of revenue. See, e.g., Shlensky v. South Parkway Bldg.
Corp., 166 N.E.2d 793, 801-02 (Ill. 1960) (outlining fac-
tors to examine in deciding whether a transaction was
“fair”). Myles and Ronsen knew all of that and more.
   Fait admits that Myles had general knowledge of
Pentech’s financial condition but says that he should
have had more specific information and done more inde-
pendent research, especially as to an appropriate share
price, before making his decision. Similarly, Fait argues
that Ronsen, who has a doctorate in pharmacology, knew
a lot about the drugs Pentech was developing but very
little about the business side of the company. Fait also
claims that any information Myles and Ronsen had
about the transaction was tainted because it came from
Lumsden and Hummel, who stood to gain financially if
the offering went through.
  Although Myles and Ronsen could have hired outside
experts or done more research, both had sufficient knowl-
edge to meet the requirements of 805 ILCS 5/8.60. Myles
No. 02-3500                                              5

worked as an independent consultant for pharmaceutical
medical device companies, so he was very familiar with
the industry. In addition, he had spent nearly 5 years
during two stints on the Pentech board, reviewed monthly
reports on Pentech’s financial condition, and frequently
attended meetings and discussed Pentech’s financial
condition and options with other members of the board.
Ronsen was equally well-informed. He voted for the offer-
ing after spending 7 years as Pentech’s senior vice-presi-
dent. During that time he was in charge of all of Pentech’s
daily operations, making him, as the district judge accu-
rately noted, “personally familiar with Pentech’s financial
history and the value of its stock.” In addition, both
Myles and Ronsen had first-hand information about
Julphar and other opportunities for outside investment.
They knew about Pentech’s dire financial situation, and
they knew of the risks of trying to strike a deal with
Julphar (which had never done business in the United
States) or waiting for another outside investor. And al-
though much of their information came from discus-
sions with Lumsden and Hummel, they knew that their
fellow board members had personal stakes in seeing
the deal go through and were able to evaluate those con-
versations accordingly. Put together, Myles and Ronsen
had knowledge of all material facts, leaving Fait with
the burden to prove that the offering was not fair to the
corporation.
  Almost by his own admission, Fait cannot meet that
burden. He fails to offer any experts or evidence to coun-
teract the board’s two expert witnesses, who testified
that $1/share was a fair price. In fact, at oral argument,
Fait was unable to offer a price he would have considered
fair. In addition, neither side disputes that Pentech
was experiencing serious financial problems, with bank-
ruptcy (which would have left the common stock virtually
worthless) a real possibility. Although Fait and the board
6                                              No. 02-3500

disagreed about the best place to secure the capital
they agree Pentech needed, the ultimate decision rested
with the board as long as that decision was fair to Pentech,
and Fait has not proven that it was not.
  Because we find that Fait did not prove the trans-
action was unfair, we do not have to reach the issues
he appeals regarding an appropriate remedy.
                                            AFFIRMED.

A true Copy:
      Teste:

                        ________________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit




                   USCA-02-C-0072—6-27-03
