Mumbai: Sun Pharmaceutical Industries Ltd will be able to secure management control in Taro Pharmaceuticals Ltd even if public shareholders in the Israeli drug maker reject its open offer in the US for all Taro shares, according to corporate lawyers and investment bankers here.
On Monday, Sun Pharma, India’s most valuable drug maker by market capitalization, launched an open offer in the US to acquire all shares held by promoters and public investors in Taro at $7.75 (Rs335) a share, after a May 2007 merger deal between the two companies ran into trouble. By making this offer, Sun also exercised an option granted to it by Taro’s chairman Barrie Levitt to acquire all founder shares held by him in the company for free.
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“Sun will gain management control in Taro as the option agreement mandates that the 4.8 million ordinary shares held by the promoters and another 2,600 founder shares have to be sold to Sun,” said a person closely involved in the May 2007 deal.
“These shares will give Sun voting rights of 8% and 33%, respectively,” added this person, who didn’t wish to be identified.
Sun already has 24% voting rights in Taro from the 36% stake that it acquired in two separate transactions following the 2007 merger agreement.
After the open offer, Sun will hold 65% voting rights and at least 51% of the stake in Taro. It also has 3.8 million warrants, which can be converted into a further 3% stake in the company.
Taro’s promoters currently hold 12% stake in the company.
Mint has reviewed the merger and option agreements signed between Sun Pharma’s subsidiary Alkaloida Chemical Co. Exclusive Group Ltd and the promoters of Taro, and these suggest that Sun’s position in the so-called hostile bid, the first by an Indian drug company, is strong.
The option letter signed on 18 May 2007, by Levitt and other promoters, Tal Levitt and Dan Moros, states that they “...hereby grant to the option holder or purchaser (Sun Pharma and its subsidiary Alkaloida Chemical) the option to acquire Taro Development Corp. (a promoter company that holds about 2.4 million ordinary shares of Taro), and 2,405,925 ordinary shares held by the grantors at a purchase price of $7.75 per ordinary share.”
The letter also states that the option holder has “an option to acquire all Class B Common Stock of Morley and Co. Inc. held by Levitt (founder shares) for no consideration.”
“The option agreement very well permits the purchaser to exercise its option to acquire the said shares of the target company, in circumstances which suit the conditions mentioned,” said Anoop Narayanan, partner, Majmudar and Co., a Mumbai-based law firm.
However, this interpretation “is subject to the target company’s chartered documents and shareholders’ agreement”, he added.
“Taro has no further comment beyond its prior filings, releases and letters, at this point in time,” company spokesperson Roanne Kulakoff said in an email response.
Taro had earlier said Sun’s valuation of its shares was inadequate and advised its shareholders to ignore the company’s offer, but it hasn’t yet discussed the option agreement and its implications.
“Sun’s tender offer is absolutely valid, and as per the terms in the option agreement is fully binding on Taro promoters, which will force them to sell their stake to Sun at the consideration that is determined by the signatories,” said Tarun Shah of MP Advisors, an investment banker who deals in global health care mergers and acquisitions.
Taro, one of Israel’s leading makers of generic or off-patent drugs that has a significant presence in the US, informed Sun last month that it had decided to terminate the 2007 merger deal as the valuation ($7.75 per share) was inadequate.
“Firstly, Taro cannot terminate the deal as they have defaulted an obligation to call a shareholder meeting before the date (31 December 2007)” said the same person closely involved in that deal.
He added that Taro has moved an Israeli court seeking an order to prevent Sun from exercising the option agreement.
But, “since all the litigations on the merger agreement as well as the option agreement are under US jurisdiction, the two cases filed by Taro to prevent Sun from exercising the option agreement and from blocking the Irish deal in Israel will get nullified, as the deal does not fall under Israeli law,” he added.
Taro’s recent announcement that it would sell its Irish subsidiary has met with resistance from Sun.