Home >Companies >Taro sues Sun Pharma over ‘lapses’

New Delhi / Mumbai: Israeli drug maker Taro Pharmaceutical Industries Ltd on Tuesday filed a lawsuit against Sun Pharmaceutical Industries Ltd in a US federal court alleging the Indian firm had failed to disclose relevant information on the US drug regulator’s actions against its US subsidiary Caraco Laboratories Inc.

The lawsuit, which comes on the heels of Caraco entering into a consent decree with the US Food and Drug Administration (FDA), is the latest development in a merger agreement that collapsed earlier this year.

New woes: Scientists in a Sun Pharma lab. The firm has been in a legal row with Taro since the latter scrapped a 2007 merger deal with it. Santosh Verma / Bloomberg

Taro, in a lawsuit filed in the district court for the southern district of New York, claimed that Sun’s tender offer violates the Williams Act by failing to disclose such matters as FDA’s seizure of Caraco products worth $20 million (Rs96 crore) and the effective closure of its manufacturing operations.

In a filing to the US Securities and Exchange Commission, Taro alleged that the FDA action grew out of a long pattern of failure to comply with regulatory requirements for manufacture of drugs at Caraco, which was under Sun’s management control.

The Williams Act in the US, an amendment in the US Securities Exchange Act regarding tender offers, requires that bidders must include all details of their tender offer in their filing to SEC and the target company.

Their file must include the terms, cash source and their plans for the company after takeover. Taro said in the filing that the Caraco events and other lapses of operational diligence and corporate governance would have an impact on Taro’s operations and business and its shareholders if Sun were to gain control.

The Israeli drug manufacturer also alleged that Sun misappropriated confidential information about Taro gathered as part of the proposed merger transaction. It claimed that Sun illegally used such confidential information to disrupt and harm Taro’s customer relationships and undermine revenue, it said in the filing to the SEC.

“Taro’s previous attempt to thwart Sun’s contractual rights has already resulted in a stunning denunciation of the Taro directors by the Tel Aviv District Court, and Sun has no doubt that the current proceeding will lead to a similar result," a Sun spokesman said in a Wednesday statement.

Terming the lawsuit as another “unfortunate attempt" to divert Taro’s limited resources to assist promoters Barrie Levitt and family in their continued refusal to comply with the merger agreement, Sun Pharma said it will “fight this action vigorously, and will take all legal steps available to it to ensure that the Taro resources being expended on this baseless litigation be restored to the company".

Industry analysts tracking Sun Pharma, however, believe that Taro’s allegations are simply part of its ongoing battle with Sun and are only to be expected.

A corporate adviser familiar with the merger deal and subsequent developments said that Sun as a stakeholder in Taro is not directly bound by any law to disclose another subsidiary’s material developments to Taro shareholders.

Another analyst dismissed Taro’s claim out of hand. “The allegation that the open offer is below market price is not true because it is in accordance with Israeli Supreme Court guideline. I don’t see most of the allegations having any material content... They are just to drag this on," said Heman Bakhru, an analyst with CLSA.

Meanwhile, Caraco has entered into a consent decree with the FDA, which means its manufacturing operations will remain closed until it receives written notification from independent experts and the regulator that it is in compliance with the decree and regulations and can resume operations.

Sun Pharma closed 0.61% higher on Wednesday at Rs1,399.30 on a day the benchmark Sensex rose 1.63% to 17.126.84 points.

The two companies have been engaged in a legal tussle for almost two years after Taro Pharma unilaterally terminated a 2007 merger agreement signed with Sun Pharma last year.

Sun Pharma, which had acquired about 36% of Taro in 2007, had in early 2008 launched a tender offer to acquire the rest of the shares in the company currently held by Taro promoters as well as its public and institutional shareholders. This tender offer was launched by Sun Pharma after the Taro pulled out of the transaction.

Sun Pharma had in May 2007 agreed to buy Taro for $454 million. But, after a year, Taro unilaterally terminated the agreement alleging that the deal was at a discounted valuation. Since then, Sun Pharma has been fighting a legal battle to force the Israeli company to honour the deal. A tender offer issued by Sun Pharma to US-listed Taro shareholders is also pending due to the ongoing law suits in the Israeli Supreme Court.

“The consent decree will gradually unfold and the FDA will keep on guiding them on how to go along. It is a court-mediated process and means that resolution of the problems will take more time than usual," added Bakhru.


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