Taro Pharmaceutical Industries Ltd. (Pink Sheets: TAROF.PK) will file a notice of an invitation to an extraordinary shareholders meeting within two weeks to approve the sale of the company to Indian drug company Sun Pharmaceutical Industries Ltd. for $7.75 per share, a total of $230 million in cash, plus the payment of $224 million in debts.
This deal has another part to it which has already taken place, prior to the approval by the shareholders' meeting: the injection of $40.7 million in interim financing from Sun at $6 a share, and a similar option for a period of three years. It is this part of the deal that has infuriated Taro's large institutional shareholder, mutual fund manager Franklin Templeton, which holds 9.5% of the company. It claims that there were flaws in the approval of the deal and it is therefore null and void. Franklin Templeton issued a letter to this effect to Taro in recent days, although the company has dismissed its claims.
The allocation at $6 per share was approved solely by the Taro board, headed by Dr. Barry Levitt, and the company intends to seek approval for the acquisition at the shareholders meeting to be held towards the end of July. Pinhas Rubin of law firm Gornitzky & Co, one of the attorneys representing Franklin Templeton, says that his client feels that the private allocation should be also proposed to the shareholders meeting, where it will need to be approved by at least one third of the shareholders. "Any such decision, approved by the board, which does not get the support of one third of the shareholders at the meeting is considered null and void, and we have seen a number of similar cases where companies had to return funds and bonuses," he says, a statement which is probably referring to the executives at Bank Hapoalim.
Franklin Templeton acquired its stake at an average price of $11.50, so it will lose out at the price that Taro is being acquired at. "Even if the share price was $20, and that, incidentally, is the price we want, we would claim that the flaws are the same," says Rubin. "Controlling shareholders cannot hand out gifts to a third party when they have an interest in the move, without having a shareholders meeting. They're selling cheap, by way of an allocation, what everyone else buys for a dearer price." Franklin Templeton's attorneys plan to apply to the courts for a motion declaring the allocation void, and a request to sue the company officers. The request will be heard in court on July 5.
Taro's attorneys claim that there was no personal interest. "The transaction of the deal was accompanied by daily and ongoing guidance over the past six to seven months and all the moves and meetings were conducted in accordance with the law," says David Schapiro of law firm Yigal Arnon & Co. "Not one company shareholder had a personal interest any more or any less than anyone else. Everyone is selling at $7.75. Moreover, Dr. Levitt's private company holds ordinary shares, founder's shares that gave him one third of the voting rights, and 50% of the shares of Taro's US subsidiary. Taro is now being sold at a time when his founder's shares and the holding in the US subsidiary have no value, so if anything, Dr. Levitt's position is a lot worse."
Schapiro adds that since there were no flaws in the allocation, the company can allocate stock without the approval of the shareholders meeting. "True, Sun is indeed investing in the company at $6 a share in a private allocation that does not give it a controlling interest. That's why the price is lower - you quote one price where there is control and a different one when there isn't. Were you to approach any entity and ask whether it would be willing to invest in a company like Taro, without any rights, seat on the company board, or any upside at all, I can guarantee you that they would call such an offer insane.
"Franklin Templeton made a mistake," insists Schapiro. "They didn't have any information, and in the notice of the meeting that we will put out, everyone will be able to see the deal and the background. They might not be happy about it, but at least they'll understand. Franklin Templeton is trying to sabotage the company, and legal sanctions can be taken against entities like these."
Published by Globes [online], Israel business news - www.globes.co.il - on May 31, 2007
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