In the case of Robert Fait v. Albert Hummel, James Lumsden, Howard Myles, FF-Pentech, L.P., and Pentech Investors, LLC and Pentech Pharmaceuticals, Inc., No. 01 C 2771, in a bench trial before Judge Suzanne B. Conlon in the U.S. District Court, Northern District of Illinois, Eastern Division, the court has recently found in favor of the defendants, Pentech preferred stockholders, FF-Pentech, L.P. and Pentech Investors, LLC, and James Lumsden, Albert Hummel and Howard Myles, who were members of the board of directors. The dispute involved control of Pentech Pharmaceuticals, Inc., a Wheeling, Illinois company, established in 1993 to develop new drugs addressing problems of sexual dysfunction, urology, Parkinson’s Disease and other lifestyle and quality of life conditions. Pentech is in the process of developing generic substitutes for the male impotence drug, Viagraâ, and the anti-anxiety drug, Paxilâ.

The Chicago-based law firm of Novack and Macey and the Raleigh, N.C. firm of Hartzell & Whiteman, successfully represented the defendants, with the exception of Pentech Pharmaceuticals, Inc., a nominal participant.

The court held that actions by the defendants, primarily an offering of more than 4 million shares of Pentech common stock, did not breach fiduciary duties and did not violate the Illinois Business Corporation Act. The act states that a director who receives a personal benefit from a corporate transaction must show that the transaction was fair to the corporation, unless the transaction was approved by disinterested directors with knowledge of all material facts. The offering was approved by directors Hummel, Myles and Bruce Ronsen. As a preferred shareholder, Hummel benefited from the offering, because it allowed preferred shareholders to take control of the company. However, because Myles, an independent consultant in the pharmaceutical industry who owned only common stock, and Ronsen, the company’s senior vice president for seven years who did not own any Pentech stock, were shown to be clearly knowledgeable and not personally benefiting from the offering, the majority of the directors who approved the offering were disinterested as set forth in the act. Director Lumsden recused himself because of his association with the major preferred shareholder.

As result of the stock offering, Fait and Dr. Ragab El-Rashidy, Pentech founder and former chief executive officer, lost supermajority control of the company and filed this law suit. Under Illinois law, a supermajority consists of shareholders who control 66 2/3% of the outstanding common stock. El-Rashidy later withdrew from this suit and is pursuing a similar action in Illinois state court.

Mr. Fait failed to prove that the defendants acted imprudently or in bad faith,” said partner Eric Macey of Novack and Macey. “Quite the opposite. The infusion of more than $4 million capital from the stock offering kept Pentech operating, saved the company from bankruptcy and preserved everyone’s investment. Every action taken by Messrs. Lumsden, Hummel and Myles to save the company was made in good faith and with Pentech’s best interest in mind.”

In October 2000, Mr. Fait was removed from the board of directors, after a bringing a failed law suit seeking to prevent preferred shareholders, including Hummel and Lumsden, from exercising their rights under a 1998 investors’ rights agreement. El-Rashidy was then removed as CEO. He later resigned from the board in 2001. Preferred shareholders then took control of the board of directors, appointing Hummel, Lumsden and Myles as directors.

As the company’s financial condition deteriorated, Fait and El-Rashidy attempted to obtain outside investor financing from Julphar Pharma, Inc., a wholly-owned subsidiary of Gulf Pharmaceutical Industries, based in the United Arab Emirates. Julphar has never done business in the U.S., nor has it ever invested in an American company. By March 2001, no agreement had been reached with Julphar and significant issues remained unresolved.

With bankruptcy a looming possibility, the offering of 4,220,921 shares of common stock at the fair market price of $1 per share was approved. The company’s fair market value was estimated at from $12 to $14 million with its principal assets in the form of pharmaceutical patents still in the development stage.

The court’s decision makes plain that the actions of directors Hummel, Lumsden and Myles were prudent business decisions that permit Pentech to move forward in a growing market for much-needed pharmaceutical products,” said attorney Macey.

Founded in 1984, Novack and Macey is a litigation firm that concentrates on complex commercial cases. The firm has successfully represented clients in a wide variety of business disputes, including matters involving banking, contracts, class actions, RICO, securities, real estate, partnerships and close corporations, antitrust, insurance coverage, environmental matters, business torts and employment-related issues. Novack and Macey attorneys have honed their skills in court rooms, mediations and arbitrations nationwide. Clients have included corporations, institutions, investment ventures, partnerships and individuals, as well as the United States government. For further information about this case, please contact Eric Macey, Esq., Novack and Macey, Attorneys at Law, 100 North Riverside Plaza
Chicago, IL 60606, telephone 312-419-6900, e-mail at emacey@novackandmacey.com or www.novackandmacey.com.