“Prior to
their discussions with respect to the Offer and the Merger as described below,
Ethicon, Inc., a wholly owned subsidiary of Parent, and Seller held discussions
in the context of their operating relationship under the agreements between
Seller and Ethicon described above in Section 8--“Certain Information Concerning
Parent and the Purchaser”. In 2004, those discussions resulted in an
amendment to those commercial agreements in connection with which Johnson &
Johnson Development Corporation, a wholly owned subsidiary of Parent, made an
investment in Seller which resulted in it being currently a 2.6% stockholder of
Seller. In 2005, after learning of Seller’s plans to move forward
with an initial public offering, Ethicon expressed a possible interest in an
acquisition of Seller or alternatively an increased investment in Seller as part
of or concurrent with the initial public offering. These discussions
did not result in either an offer by Parent or any of its subsidiaries to
acquire Seller at a specified price or any additional investment by Parent or
any of its subsidiaries in Seller at that time. Certain information
below with respect to alternative bidders and Seller’s deliberative process was
provided by Seller.
During a
June 13, 2008 telephonic Seller Board meeting, Mr. Taub informed Seller Board
that he had been approached by a group of investors (the “Investor Group”) with
a verbal proposal for making an acquisition of Seller. During this meeting,
representatives from Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”)
gave a presentation to Seller Board on its fiduciary duties in connection with a
potential transaction. In addition, Seller Board appointed a special committee
of independent directors (the “Special Committee”), made up of Messrs. Larry
Ellberger, Chairman of the Special Committee, Steven St. Peter, M.D. and Kevin
Rakin, to review and evaluate any proposal made by the Investor Group or any
other parties for an acquisition, or other business combination with,
Seller.
Later
that day, the Special Committee met telephonically to discuss the Investor
Group’s request for certain information regarding Seller in connection with a
possible acquisition proposal. After extensive discussion, the committee members
authorized a representative of Seller to advise the Investor Group that Seller
was not prepared to share non-public information until it determined if and how
it wished to proceed. During this meeting, the Special Committee members also
discussed the possibility of approaching Parent about a possible business
combination with Parent given, among other things, Seller’s existing commercial
relationship with Parent, Parent’s knowledge of Seller and its products derived
from that commercial arrangement, Parent’s previously expressed interest in a
possible acquisition of Seller, and Parent’s financial ability to acquire Seller
without the need for external financing. The Special Committee also
retained Skadden as the Special Committee’s legal advisor.
On June
17, 2008, the Special Committee retained UBS Securities LLC (“UBS”) as Seller’s
financial advisor and reviewed, together with Seller’s management and
representatives of Seller’s legal and financial advisors, Seller’s response to
the Investor Group. During this meeting, the Special Committee authorized
Seller’s financial advisor to inform the Investor Group that Seller was not
prepared to share non-public information of Seller until such time as Seller
were to commence a sale process.
On June
25, 2008, Seller received a non-binding preliminary proposal from the Investor
Group, in which the Investor Group indicated its interest in pursuing an
acquisition of all or a controlling interest of the Shares at a target range
cash price of $21.00 to $25.00 per Share. The Investor Group also indicated that
they intended to invite Mr. Taub to participate in the transaction.
On June
26, 2008, the Special Committee met telephonically, together with
representatives of Seller’s legal and financial advisors, to discuss the
proposal, during which representatives of Skadden provided an overview of Seller
Board’s fiduciary duties in connection with the proposal. After discussion, the
Special Committee determined that a review of the prospects of Seller on a
stand-alone basis was important to enable the Special Committee to formulate a
view regarding the Investor Group’s proposal. The Special Committee then
authorized Seller’s financial advisor to inform the Investor Group that its
proposal was under consideration.
On July
9, 2008, the Special Committee met, together with Seller’s management and
representatives of Seller’s legal and financial advisors, to discuss the
prospects of Seller on a standalone basis.
On July
14, 2008, the Special Committee also authorized Seller’s financial advisor to
contact Parent to determine its potential interest in pursuing an acquisition of
Seller. The Special Committee also instructed Seller’s financial
advisor to inform the Investor Group that, in order for its proposal to be
considered, its proposed purchase price would need to be above or at the high
end of the Investor Group’s proposed range of $21.00 to $25.00 per
Share.
On July
23, 2008, Seller Board met, together with representatives of Seller’s legal and
financial advisors, and received an update from the Special Committee regarding
its activities to date. Representatives of Seller’s financial advisor
provided Seller Board with an update on discussions with the Investor
Group. In addition, the Board was informed that, in accordance with
the Special Committee’s directives, Parent also had been contacted to determine
its current level of interest in a potential transaction and that Parent had
expressed interest, had provided a preliminary due diligence list and was
reviewing Seller’s proposed nondisclosure agreement.
On July
30, 2008, at the invitation of the Special Committee, Mr. Taub participated in a
telephonic meeting of the Special Committee, together with representatives of
Seller’s legal and financial advisors, during which he advised the Special
Committee of his decision not to become a party to the bid of the Investor Group
for Seller. Mr. Taub indicated that, despite this decision, the Investor Group
had decided to proceed with its bid without him. The Special Committee was then
updated on the status of negotiations of Parent’s nondisclosure agreement. At
this meeting, the Special Committee authorized Seller’s financial advisor to
begin contacting potential bidders regarding a possible sale of Seller in its
entirety.
During
the first half of August 2008, ten potential bidders, in addition to Parent and
the Investor Group, were contacted regarding a possible acquisition of
Seller. A list of potential bidders to be contacted was developed by
Seller’s management in consultation with Seller’s financial advisor and was
reviewed and approved by the Special Committee. These potential
bidders were all large strategic companies with substantial financial resources
and which already had exposure, or had publicly expressed interest in obtaining
or increasing their exposure, to products and markets similar to Seller’s
products and markets. Potential financial bidders were not contacted
given the view of the Special Committee, in consultation with Seller’s
management and financial advisor, as to the likely difficulty of financial
bidders to obtain the requisite financing in the current economic
environment.
During
these weeks, in accordance with Seller’s directives, Seller’s financial advisor
contacted the ten potential bidders, distributed to them some information about
Seller that had been prepared by Seller and, to the extent any potential bidders
responded to such efforts, followed up by offering them an opportunity to
execute a non-disclosure agreement with Seller in order to obtain access to more
detailed information concerning Seller. Other than as noted below,
none of the potential bidders executed non-disclosure agreements.
On August
1, 2008, Seller and Parent executed the Non-Disclosure Agreement, and Parent
commenced its due diligence review of Seller.
On August
13, 2008, representatives of Parent and of Seller met to discuss the terms of a
potential acquisition by Parent of Seller. Representatives of Seller conducted a
management presentation.
On August
15, 2008, during a telephonic meeting of the Special Committee, representatives
of Seller’s financial advisor provided the committee members with an update on
the status of discussions with potential bidders regarding a possible
transaction with Seller. The Special Committee was informed that of the ten
companies that had been approached, five had declined to express interest and
five had yet to respond, and that potential bidders had been informed that
indications of interest were due on August 26, 2008. Following this meeting,
Seller’s financial advisor continued to work with the other parties that had not
yet responded to assess if any would be interested in participating in a
potential transaction with Seller.
On August
22, 2008, one of the other potential bidders (the “Other Potential Bidder”) that
had been contacted signed a non-disclosure agreement with Seller, received some
selected due diligence information concerning Seller and was requested to submit
an indicative proposal by no later than September 12, 2008. Over the next weeks,
the Other Potential Bidder received additional due diligence information and
access to Seller’s management team. During the period, Seller held telephonic
due diligence meetings with the Other Potential Bidder.
On August
26, 2008, Parent submitted a non-binding, preliminary proposal letter offering
to purchase Seller for $25.00 per Share. The letter also outlined certain
significant terms and conditions under which Parent would be prepared to acquire
Seller. After such submission, Parent continued its due diligence of
Seller.
Also on
August 26, 2008, at a telephonic meeting of Seller Board with representatives of
Seller’s financial advisor, the Board was provided with an update regarding the
Special Committee’s activities.
On August
27, 2008, at a telephonic meeting of the Special Committee with Mr. Taub and
representatives of Seller’s legal and financial advisors, the Special Committee
was briefed on the non-binding, preliminary proposal letter received from Parent
on August 26, 2008 and on other discussions with Parent and the Investor Group.
After extensive deliberation, the Special Committee instructed Seller’s
financial advisor to convey to Parent that the proposal it submitted was below
what would be acceptable to the Board.
Between
August 26, 2008 and September 8, 2008, representatives of Parent and of Seller
participated in several discussions concerning Parent’s non-binding preliminary
proposal of August 26, 2008.
On
September 8, 2008, Parent submitted a revised non-binding preliminary proposal
to purchase Seller for $29.00 in cash per Share and outlining certain
significant terms and conditions under which Parent would be prepared to acquire
Seller. Given the competitive bidding process, Parent increased its proposed
purchase price based on information that was then available to it, as well as
more Seller-favorable assumptions made with respect to information that had not
yet been made available by Seller, recognizing that (and communicating to Seller
through UBS that) the revised proposed purchase price would be subject to the
validation of such assumptions in further due diligence. Upon
completion of further due diligence Parent determined that those more favorable
assumptions underlying its revised proposed purchase price could not be
supported (as described below).
During a
September 9, 2008 telephonic meeting of the Special Committee also attended by a
representative of Skadden, Mr. Taub and Seller’s financial advisor discussed
with the Special Committee Parent’s revised non-binding preliminary proposal and
provided an update on discussions held with the Other Potential Bidder. After
extensive deliberation, the Special Committee decided to allow Parent to
continue in a sale process.
On
September 12, 2008, the Other Potential Bidder informed Seller’s financial
advisor, via telephone, that it would not be submitting an indicative offer for
Seller and was withdrawing from the process. The Other Potential Bidder
subsequently returned due diligence information provided to it. No other bids
were received from the other potential bidders contacted regarding a potential
transaction with Seller or from the Investor Group.
By a
letter dated September 17, 2008, Parent was invited to participate in a second
round of the sale process, and was asked to submit a final binding written offer
by October 15, 2008.
On
September 18, 2008, Seller Board met and received an update from the Special
Committee on its activities.
On
September 23, 2008, representatives of Parent attended a management presentation
conducted by Seller.
During a
telephonic meeting on September 29, 2008, the Special Committee received an
update on the process and the due diligence that was being conducted by Parent.
In addition, representatives from Skadden provided the Special Committee with an
overview of a draft merger agreement that it prepared on behalf of Seller and
the timing of the proposed process. After this discussion, the Special Committee
decided that this draft merger agreement should be provided to Parent. Later
that day, the draft merger agreement was forwarded to Parent, and Parent was
provided access to a virtual data-room. Thereafter, Parent continued its due
diligence review of Seller.
On
October 9, 2008, Seller extended the due date for submission of Parent’s final
binding written offer to October 22, 2008.
On
October 22, 2008, Parent sent a non-binding proposal proposing to acquire Seller
at $25.00 in cash per Share and outlining the significant terms and conditions
under which Parent would be prepared to acquire Seller. Parent decreased its bid
based on a determination, after further due diligence, that the assumptions used
by Parent in its September 8 bid could not be supported, including its
assumptions with respect to Seller’s capital expansion plans and the period of
overcapacity likely to result from such plans, the manufacturing process and
relationships between Seller’s product lines in terms of Seller’s total cost
structure, the level of investment required to upgrade Seller’s information,
infrastructure and control systems to integrate such systems with Parent’s and
the overall risks relating to business integration and the immunotherapy product
line. Parent also submitted a markup prepared by Parent’s counsel,
Cravath, Swaine & Moore LLP, reflecting their proposed revisions to the
draft merger agreement that had been provided by Seller.
On
October 26, 2008, the Special Committee met with Seller Board and
representatives of Seller’s legal and financial advisors to discuss the status
of the discussions, including Parent’s proposed purchase price. During this
meeting, representatives of Seller’s financial advisor informed Seller Board
that Parent expressed an unwillingness to increase its offer beyond $25.00 in
cash per Share. Mr. Taub then presented Seller Board with an update on Seller’s
business potential, and recommended that Seller Board reject Parent’s offer.
During an executive session, the Special Committee voted, two in favor, and one
opposed, to reject Parent’s offer. Seller Board meeting was then reconvened, and
the Special Committee then conveyed its recommendation to Seller Board, which
recommendation was adopted by Seller Board. Seller Board then instructed
Seller’s financial advisor to convey the Board’s decision to Parent, which
decision was subsequently conveyed.
On
November 10, 2008, in accordance with Seller’s directives, representatives of
Seller’s financial advisor called representatives of Parent to discuss Parent’s
offer price. Parent was informed that they would be contacted the following day
for further discussions.
On
November 11, 2008, Mr. Taub spoke with Alex Gorsky, Company Group Chairman and
Worldwide Franchise Chairman of Ethicon, Inc., to discuss the offer price. No
agreement was reached on such date. Mr. Gorsky reiterated that Parent was not
willing to increase its offer beyond $25.00 in cash per Share. Mr. Gorsky agreed
to meet in person with representatives of Seller the following week to continue
their discussions.
Discussions
regarding the offer price also took place on November 11, 2008 between
representatives of Parent and Seller’s financial advisor. A representative of
Parent advised that, should the parties proceed with a transaction, Parent would
like to announce and close the transaction before year-end.
On
November 13, 2008, the Special Committee met telephonically, together with
Seller’s management and representatives of Seller’s legal and financial
advisors. The Special Committee received an update on discussions with
Parent. Seller’s financial advisor also provided an update on recent
financial market conditions and market volatility and the potential negative
impact on Seller’s ability to finance its capital expansion plans if it needed
to do so from external sources. Mr. Taub then presented an update on
Seller’s business potential and potential risks facing Seller, including
expected delays in obtaining certain regulatory approvals and product
introductions and other potential weaknesses in the business and current market
conditions. Mr. Taub explained that these considerations influenced
his decision to change his recommendation to a recommendation in favor of
Parent’s offer. After extensive discussion, the Special Committee
voted unanimously to accept Parent’s offer subject to negotiating an acceptable
merger agreement, and authorized Seller’s financial advisor to communicate to
Parent the committee’s acceptance of Parent’s offer. The Special
Committee then requested that Mr. Taub and Mr. Ellberger notify the other
members of the Seller Board of the Special Committee’s decision.
On
November 17, 2008, Mr. Taub met with Mr. Gorsky to discuss the terms of the
potential acquisition, including Parent’s offer price. Mr. Gorsky stated that
Parent’s offer would remain $25.00 in cash per Share.
Also on
November 17, 2008, Skadden circulated a revised draft of the merger agreement to
Parent and its counsel.
From
November 17, 2008 to November 23, 2008, representatives of Seller and Parent had
frequent discussions regarding finalizing the Merger Agreement and the related
documents, and Parent continued to conduct its due diligence. Also, during this
period, Mr. Taub, Seller and Parent finalized the Tender and Support Agreement,
and Messrs. Taub and Mashaich had frequent discussions with Parent regarding
certain amendments Parent required relating to their employment arrangements,
which were pre-conditions to Parent’s signing of the Merger
Agreement.
On
November 20, 2008, Seller Board met and received a presentation from
representatives of Skadden on the terms of the Merger Agreement, and the
material issues that were under discussion among the parties. Also at this
meeting, UBS discussed with Seller Board financial aspects of the proposed
transaction with Parent.
On
November 23, 2008, Seller Board approved the Merger Agreement, the Offer and the
Tender and Support Agreement. Also at this meeting, UBS updated for Seller Board
UBS’ financial analysis of the $25.00 per Share consideration provided at the
November 20 meeting and delivered to the Board an oral opinion, which opinion
was confirmed by delivery of a written opinion dated November 23, 2008, to the
effect that, as of that date and based on and subject to various assumptions,
matters considered and limitations described in its opinion, the $25.00 per
Share consideration to be received in the Offer and the Merger, taken together,
by holders of Shares (other than Parent, Purchaser and their respective
affiliates) was fair, from a financial point of view, to such holders. During
this meeting, the Board also approved the modifications requested by Parent to
Mr. Taub’s and Mr. Mashiach’s employment arrangements described elsewhere in
this Statement. Following such meeting, Parent, Sub and Seller executed and
delivered the Merger Agreement and related documents.
On
November 24, 2008, Parent and Seller issued a joint press release announcing the
execution of the Merger Agreement.
On
November 25, 2008, Purchaser commenced the Offer. During the pendency of the
Offer, Seller and its directors and officers and Parent, Purchaser and their
representatives intend to have ongoing contacts.”