NOT PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

_____________ No. 15

- 3751

_____________ ALAN SCHMIDT

v. JOHN A. SKOLAS; LEANNE KELLY; JOHN L. ARMSTRONG, JR.; ZOLA B. HOROVITZ, Ph. D.; OSAGIE O. IMASOGIE; MITCHELL D. KAYE; ROBERT F. SHAPIRO; PAUL K. WOTTON; ROBERT DELUCCIA; DAVID LUCI; STEVE ROUHANDEH; JEFFREY DAVIS; MARK ALVINO; GENAERA LIQUIDATING TRUST; BIOTECHNOLOGY VALUE FUND, INC; LIGAND PHARMACEUTICALS, INC.; XMARK CAPITAL PARTNERS, LLC; ARGYCE, LLC; JOHN L. HIGGINS; GE NAERA CORPORATION; SCO FINANCIAL GROUP; MARK N. LAMPERT; DIPEXIUM PHARMACEUTICALS, LLC; MACROCHEM CORPORATION; ACCESS PHARMACEUTICALS INC; BIOTECHNOLOGY VALUE FUND, LP; BIOTECHNOLOGY VALUE FUND II, LP; BVF, INC; XMARK OPPORTUNITY FUND, LP; XMARK OPPORTU NITY FUND LTD; XMARK JV INVESTMENT PARTNERS LLC; XMARK OPPORTUNITY PARTNERS LLC Alan W. Schmidt, Appellant

_____________ Appeal from the United States District Court for the Eastern District of Pennsylvania ( No. 2

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- cv - 03265 ) Distri ct Judge: Honorable Berle M. Schiller Submitted Pursuant to Third Circuit L

. A

. R

. 34.1(a)

September 12 , 2016

____________ Before: CHAGARES, GREENAWAY , JR. , and RESTREPO Circuit Judges2 (Filed: August 25, 2017 )

____________ OPINI ON *

____________ CHAGARES, Circuit Judge

. Alan Schmidt, a former shareholder of Genaera Corporation (“Genaera”), appeals
the dismissal of his class action shareholder derivative suit under Federal Rule of Civil Procedure 12(b)(6) . He allege s breach of fiduciary duty against a number of individuals and entities with respect to Genaera’s dissolution . We will vacate and remand in part, and affirm in part.
I

. We write solely for the parties’ benefit and recite only the facts essential to our disposit ion. According to the complaint, the board of directors of biotechnology company Genaera voted in April 2009 to dissolve the company. On June 4, 2009, the Genaera shareholders , includ ing Genaera’s largest shareholder, XMark Capital Partners, LLC (“XMark” ) , approved the dissolution. Genaera director Mitchell Kaye was an officer of XMark. The next day, XMark sold a third of its Genaera shares at a price that was 1.6 times the average selling price for recent trading days. “Upon information and belief,” S chmidt alleges that sale was prearranged. Appendix (“ App. ”) 169

. Genaera was dissolved on June 12, 2009 . I ts assets were transferred to a trust , pursuant to a trust agreement between Genaera and trustee Argyce LLC, an entity run by

* This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding precedent.3

John Skolas, a fo rmer Genaera CFO. Genaera shareholders received an interest in the

trust. Argyce LLC allegedly sold three of Genaera’s assets for less than th eir worth. First, Genaera owned an interest in certain aminosterol compounds ( the

“ Aminosterol Assets ”)

. In July 2009, the Trustee 1 sold the Aminosterol Assets for $200,000 without public bidding. The complaint alleges that the board did not have the Aminosterol Assets appraised

. Second, Genaera owned an interest in Pexiganan , a treatment for diabetic foot infections , which i t licensed to MacroChem Corporation (“MacroChem”)

. In 2007, MacroChem paid $1 million for the license. Under the licensing agreement, MacroChem
agree d to pay Genaera approximately $7 million upon approval of clinical and regulatory
mil estones for Pexiganan, up to $35 million based on sales milestones, and a ten percent royalty on net sales. App. 155

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. In June 2008, MacroChem issued a press release discussing its development of Pexiganan and its belief that the medication “could fill an important unmet medical need and provide a significant commercial opportunity for [MacroChem] in an addressable market of millions of diabetic foot infections annually.” App. 159. The complaint asserts the Genaera directors knew that the Pexiganan sa les potential was between $100 million and $500 million annually. But, MacroChem spent only $45,110 on developing Pexiganan in 2008. As a result of MacroChem’s failure to

1 The Trustee is technically Argyce LLC. However, the complaint does not clearly define the term “Trustee , ” and in his briefs, Schmidt use s the term “Trustee” to refer to defendants Argyce LLC and Skolas, collectively . We will do the same here for consistency, but we note that as discussed infra note 4 , Skolas cannot be held personally liable under a theory of gross negligence

.4

develop the asset, i n late 2009 the Trustee terminated MacroChem ’s licensing agreem ent

. On January 11, 2010, the Trustee publicly announced that it would be accepting bids for the Pexiganan license. Bids were due by Febr uary 12, 2010 . Schmidt alleges this short deadline advantaged insiders. MacroChem executives Robert DeLuccia and Da vid Luci
formed an entity called Dipexium Pharmaceuticals, Inc. on January 14, 2010 that purchased the Pexiganan license for $272,500 . The sale lacked the royalty or sales

milestone payment obligations of MacroChem’s agreement. Third, Genaera owned an interest in an IL9 antibody program for asthma, which it licensed to MedImmune, LLC (“MedImmune”) , a subsidiary of AstraZeneca Corporation. In February 2008, Genaera indicated at an investor conference that the value of the IL9 program was $48 million. I n May 2008, Genaera stated at its annual meeting that “we believe firmly that one reason AstraZeneca bought MedImmune was that they think IL9 is significant.” App. 153. But by November 2009, the Trustee stated that the IL9 program value was worth a “frac tion” of the earlier valuation of $ 33 million

to $ 43 million. App. 172. In May 2010, the Trustee sold the IL9 program to Ligand Pharmaceuticals (“Ligand”) for $2.75 million. Ligand then sold half of it s interest in the
program to BVF, Inc., Biotechnolog y Value Fund, L.P. , and /or Biotechnology Value Fund II, L.P. (collectively, “BVF”) , where Kaye is currently a managing director (it is not
clear when he assumed that role). Schmidt filed suit. He alleged breach of fiduciary duty against the Trustee and the directors and officers of Genaera (“D&O Defendants”), and aiding and abetting the5

breaches by the Trustee and the D&O Defendants against Dipexium (“Dipexium Defendants”), among other claims. 2 The District Court granted the D efendants’ motion s to dism iss. First, the District Court considered the breach of fiduciary duty c l aim against the D&O Defendants. The claim was based on allegations of wrongful dissolution and misrepresentations in the shareholder proxy that accompanied the dissolution vote . As to the former, the District Court determined Schmidt had not alleged facts sufficient to state a breach of the duty of loyalty. Despite Kaye’s involvement with XMark, the District Court concluded t he XMark sale of Genaera stock after the dissolution anno uncement did not show disloyalty

. Kaye’s alleged business and personal connections with the entities that purchased the IL9

asset did not establish a lack of independence either. Nor were the facts alleged
sufficient , according to the District Court, to state a claim that the D&O Defendants breached their duty of care by “fail[ing] to inform themselves about alternatives” to dissolution. App. 16.
T he District Court then rejected each alleged misrepresentation in the proxy

statement

. Schmidt asserted that the proxy bound the Genaera directors to oversee the dissolution themselves, and that the proxy promised that the directors who voted on dissolution wou ld not benefit from it . B ut the District Court determined that the plain

2 The D&O D efendants include Genaera director Mitchell Kaye, Genaera director and CEO John Armstrong, Genaera director Zola Horovitz, Genaera director Osagie Imasogie, Genaera director Robert Shapiro, Genaera director Paul Wot ton, and Genaera CFO, Senior Vice Preside nt, and Secretary Leanne Kelly. The Dipexium Defendants include Luci, DeLuccia, Dipexium Pharmaceuticals, Inc., and Dipexium Pharmaceuticals, LLC

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language of t he proxy sta ted otherwise. Schmidt argued that the proxy should have disclosed the alternative option of selling the company as a whole. B ut Delaware law does not require directors to disclose all alternatives , the District Court concluded

. Schmidt alleged that the proxy should have included more information about the value of Genaera’s assets. A ccording to the District Court, however, Schmidt did not allege that current valuations were within the board’s control. Second, the District Court considered the breach of fiduciary duty claim against the Trustee for unlawful asset sales. The District Court noted that the t rust a greement limited the Trustee’s liability to gross negligence. The District Court concluded that
Schmidt failed to allege gross negligen ce with the necessary specificity. Although Schmidt alleged that the asset sales were rushed, the District Court held that the facts
asserted did not support an inference of unreasonableness. Schmidt failed to allege that the sale prices of the assets we re below a contemporaneous valuation or existing offer , according to the District Court

. Third, the District Court considered the claim against the Dipexium Defendants for aiding and abetting the breaches of fiduciary duty by the Trustee and the D&O Defe ndants. The District Court determined that Schmidt did not allege anything besides an arm’s length transaction , despite the connection between Dipexium and MacroChem. Schmidt timely appealed.7 II. The District Court had jurisdiction over this matter p ursuant to 28 U.S.C. § 1332(a) and (d). We have jurisdiction over this matter pursuant to 28 U.S.C. § 1291. We exercise plenary review over a district court’s decision to grant a motion to dismiss pursuant to Rule 12(b)(6)

. Eid v. Thompson , 740 F.3d 1 18, 122 (3d Cir. 2014). We accept all factual allegations as true and construe the complaint in the light most favorable to the plaintiff. Id. To survive, t he allegations must stat e a “plausible claim for
relief. ” Ashcroft v. Iqbal , 556 U.S. 662, 679 ( 2009). Where the complaint alleges fraud, the “circumstances constituting fraud” must be pled with “particularity.” Fed. R. Civ. P. 9(b).
III. On appeal, Schmidt challenges dismissal of claims against the Trustee, the D&O Defendants, and the Dipexi um Defendants. We will vacate dismissal of the claim against the Trustee (except for the allegations concerning the IL9 program) , and affirm dismissal of the claims against the D&O and Dipexium Defendants.
A. The District Court erred in dismissing the breach of fiduciary d uty claim against the Trustee

. D irectors, as fiduciaries, owe shareholders a duty of care. Malpiede v.
Townson , 780 A.2d 1075, 1083 (Del. 2001). 3 I n the sale context, th is duty is performed

3 The parties agree , as do we, that Delaware law applies because that is where Genaera was incorporated

. See Banjo Buddies, Inc. v. Renosky , 399 F.3d 168, 17 9 n.10 (3d Cir. 2005).8

in the “service of a specific objective: m aximizing the sale price of the enterprise.” Id. The Trustee here owes th at dut y as well. 4 See In re Toys “R” Us, I nc. S’ holder Litig. , 877 A.2d 975, 999 n.30 (Del. Ch. 2005) (“[W] hen a trustee or other fiduciary sells an asset for cash, his duty is to seek the single goal of getting the best available price.” ( quoting Paramount Commc’ns Inc. v. Time, Inc. , No. 10670, 1989 WL 79880, at *25 (Del. Ch. July 14, 1989) )); see also Wilmington Trust Co. v. Coulter , 200 A.2d 441, 448 (Del. 1964))

. 5 F iduciaries must “possess a body of reliable evidence with which to evaluate the fairness of a transaction .” Barkan v. Amsted Indus., Inc. , 567 A.2d 1279,
128 7 (Del. 1989)

. Although t here is “no single blueprint” by which a fiduciary “fulfill[s] its obligation to se ek the best value reasonabl y available to the stockholders, ” alternative options are often identified by “conducting an auction” or “ canvassing the market .” Paramount Commc’ns Inc. v. QVC Network Inc. , 637 A.2d 34, 44 (Del. 1994)

. The Trustee’s perform ance here i s subject to “enhanced scrutiny

. ” Id. at 45 (“Such scrutiny is mandated by . . . the fact that an asset belonging to public stockholders

4 Schmidt argues that Skolas can be personally liable as the President and CEO of Argyce LLC because he was one of Argyce LLC’s two employees, and he signed the agreement as Pre sident and CEO. In support of his argument, Schmidt cites In re USACafes, L.P. Litig. , 600 A.2d 43 (Del. Ch. 1991), which observed that fiduciary duties may be extended to those who control fiduciaries. However, USACafes has not been applied to duty of c are claims, see Feeley v. NHAOCG, LLC , 62 A.3d 649, 671

- 72 (Del. Ch. 2012), and so Skolas cannot be personally liable under a gross negligence theory of liability.
5 We acknowledge that the fiduciary duties owed by directors and trustees are not always id entical. See , e.g., Stegemeier v. Magness , 728 A.2d 557, 562 (Del. 1999)

. W hen , as here, a trustee is selling assets, the trustee , like a director, is “required to obtain the best price obtainable,” unless particular circumstances exist

. Wilmington Trus t , 200 A.2d at 448. Because such circumstanc es do not exist here, the Trustee was “bound to obtain the best price obtainable. ” Id.9

. . . is being sold . . . .”). The enhanced scrutiny test involves : 1) inquiry into the adequacy of the d ecisionmaking process, “including the information on which the [fiduciary] based [its] decision ” ; and 2) “ examination of the reasonableness of the . . . action in light of the circumstances then existing.” Id. Under enhanced scrutiny, it is the Trustee’s ultimate burden on the merits to prove that they were “adequately informed and

act ed reasonably.” Id. Finally, the Trustee asserts, and Schmidt does not dispute, that the trust agreement limits the Trustee’s liability to instances of “gross negligence, fraud or willful misconduct knowingly and intentionally committed in bad faith. ” App. 317

- 18. The Trustee refers us to the oft

- quoted phrase that a fiduciary need not follow a “single blueprint” when selling assets. Skolas Br. 25 (quotation marks om itted). That may be so. But t he Trustee fails to identify any case involving a sale where there was no
auction and no canvass of the market

. See, e.g. , i d. at 27 (citing cases approving short bidding periods). Schmidt alleges that the Trustee sold the Aminosterol Assets without a public auction or an objective appraisal

. And t he Trustee sold the Pexiganan license , after only a one - month bid period , to Dipexium, an entity formed three days after the Pexiganan sale period opened by executives from MacroC hem (the previous Pexiganan licensee)

. Dipexium’s license terms were more favorable than MacroChem ’s

. Moreover, this appeal comes to us on a motion to dismiss. Viewing all reasonable inferences in favor of Schmidt, and under enhanced scrutiny review, it is plausible that the Trustee acted with gross negligence and failed to maximize asset values

. For example, pursuing open bidding for the Aminosterol Assets and longer bidding for Pexiganan could have led10

to higher sale prices. The allegations are suffi cient to state a claim for a breach of the duty of care against the Trustee. 6 Accordingly, w e will reinstate the claim against the T rustee (Argyce LLC) premised on the sale of the Aminoster ol Assets and Pexiganan . However, we will affirm
dismissal of th e allegations based on the sale of the IL9 program. Schmidt has asserted only that the Trustee sold the IL9 program , which was valued by Genaera at $48 million in 2008, to Lig and in 2009 for $2.75 million, and that Ligand then sold half of its interest

to BVF, where fo rmer Genaera director Kaye is now a managing director. Allegations of the difference in valuation and the subsequent sale to a n entity affiliated with a former Genaera director ( a sale that did not involve the Trustee ) are insufficient alone to survive a motion to dismiss

. B.

The District Court correctly dismissed Schmidt’s claim for breach of fiduciary duty against the D&O Defendants. The business judgment rule applies , and the directors’ action s are presumptively valid

. Cede & Co. v. Technicolor, Inc. , 634 A.2d 345, 360

- 61 (Del. 1993) . Schmidt bears the initial burden of showing a breach of the duties of care, loyalty , or disclosure

. Id. at 361. He adequately alleges none .

6 The Trustee also challenges Schmidt’s claim that the Trustee’s fees were excessive. As Schmidt points out, the trust ag reement provides that the Trustee would be paid $250 per hour and one to three percent of the distributions to beneficiaries. App. 406

- 07. Because the $687,000 alleged in fees represents over twenty percent of the distribution, the allegations of excess are plausible and may go forward

. We also conclude that Schmidt does not sufficiently allege knowing participation by the Dipexium Defendants in order to subject them to liability for aiding and abetting the Trustee’s purported violation. See Malpiede  ̧ 780 A.2d at 1096

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The duty of care requires directors to inform themselves of material and reasonably available information. Id. at 367. Schmidt includes no plausible allegations in this regard. As the District Court noted, Schmidt alleges that he himself discussed with board members alternative options for Genaera. App. 162, 165, 171. The duty of loyalty mandates that the interests of the stockholders take precedence over any interest of a director “not shared by the stockholders generally.” Cede , 634 A.2d at 361. As an initial matter, Schmidt makes no real ch allenge to the loyalty of the majority of board members, which “undercuts any inference that the decisions of the . . . board can be attributed to disloyalty.” McMillan v. Intercargo Corp. , 768 A.2d 492, 503 (Del. Ch. 2000). 7 Schmidt argues that director Kaye breached his duty of loyalty because he received his current position with BVF after favoring Ligand acquiring IL9

. And, according to Schmidt, “Kaye provided BVF with propriety [sic] information about Genaera’s assets which gave BVF an advantage in acquiring the IL9 Asset.” Schmidt Br.
39. Schmidt additionally claims that XMark ’s sale of its Genaera stock at a premium in a prearranged sale after the dissolution announcement showed Kaye’s interest in the unwinding. None of those speculative allegat ions plausibly state s a claim against the D&O Defendants. The complaint includes no explanation of the information Kaye passed on to BVF or how XMark’s sale of Genaera stock was prearranged. Schmidt asks

7 Schmidt claims the D&O Defendants other than Kaye breached their duties because they were beholden to Kaye. That allegation is conclusory and therefore ignored in our analysis.12

for inferential leaps beyond those permitted in th e plaintiff’s favor on a Rule 12(b)(6)
motion. Finally, Schmidt claims the D&O Defendants breached their disclosure duty. The duty to disclose is not an independent duty “but the application in a specific context of the . . . fiduciary duties of care, good faith, and loyalty.” Malpiede , 780 A.2d at 1086. Directors must disclose what a reasonable shareholder would view as “having significantly altered the total mix of information” available

. Id. (quotation marks omitted)

. T he District Court appropria tely dismissed the allegations regarding nondisclosures in the proxy statement. First, Schmidt argues, the proxy deceitfully stated that the board members who participated in the proxy vote would not materially benefit from Genaera ’s dissolution . Kaye di d not vote, and Schmidt asserts that Kaye received a benefit through the XMark stock sale. Thus, Schmidt has not alleged a misrepresentation because the proxy says nothing about board members who did not vote on the dissolution. App. 166

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. Second, Sch midt complains that the proxy did not disclose that the shareholders could have s old Genaera as a whole and monetize d its net operating loss. But it is generally known that a company can be sold as a whole, and Genaera’s net operating loss was disclosed i n the financial s tatements attached to the proxy. App. 298 ; see also Rodman v. Grant Found. , 608 F.2d 64, 70 (2d Cir. 1979) ( “In determining whether [a proxy] constituted full and adequate disclosure, the district court properly took into account informat ion already in the public domain and facts known or reasonably available to the shareholders.”). Third, Schmidt states that the proxy failed to disclose valuations for the assets. He does not identify the valuations. Fourth, Schmidt alleges13

that the pro xy did not indicate that the IL9 program development had been placed on hold by MedImmune voluntarily and would be resumed. But the complaint includes no well

pled allegations as to whether the D&O Defendants knew about MedImmune’s plans or why they shoul d have predicted the actions of another company. Fifth, Schmidt argues that the proxy failed to indicate that there existed “two active bidders ” for the Aminosterol Assets. App. 165. However, i nterested parties were disclosed in the proxy

. App. 214. The complaint fails to state a claim for breach of fiduciary duty against the D&O Defendants. And, as a result , the Dipexium Defendants cannot be liable for aiding and abetting that insufficiently

- pled breach

. IV. For the foregoing reasons, we will vacate and remand the District Court’s order dismissing the breach of fiduciary duty claim against the Trustee (except as to the IL9 program sale allegations and as to Skolas , personally ) , and affirm the order dismissing the remaining claims.