India’s Sun Pharmaceutical Industries said its subsidiary has exercised the option under its option agreement to acquire all the shares held by the controlling shareholders of Israel-based Taro Pharmaceuticals Industries.

Sun Pharma has filed an action in the Supreme Court of New York against Taro and its full Board of Directors. The action asserting fraud claims against Taro and its directors asks the Court to order the controlling shareholders to honor their promises under the option agreement. In addition, Sun Pharma asks for an order declaring that the merger agreement was not properly terminated.

On May 18, 2007, Taro and Sun Pharma's subsidiaries entered into a merger agreement whereby Sun Pharma's subsidiary would acquire Taro that the Taro Board of Directors unanimously approved. At that time, Taro was in a dire financial crisis and Sun Pharma agreed to invest nearly $60 million in cash to save Taro from bankruptcy.  In the event the merger was not consummated, Taro’s controlling shareholders led by Taro’s Chairman, Dr Barrie Levitt, granted Sun Pharma an option to acquire all their shares, including all of the founders’ shares of Taro.

Taro purported to terminate the merger agreement on May 28, 2008. Pursuant to the option agreement, Sun Pharma may exercise its options within 30 days after termination of the merger agreement. Although Sun Pharma believes that Taro’s purported  termination of the merger agreement was improper, it has exercised the options to preserve its rights under the option agreement and states that the exercise of the options shall not in any way be construed to be an acceptance or recognition of the purported termination of the Merger Agreement. In connection with the exercise of the options, Sun Pharma will commence a tender offer for all ordinary shares as required by the option agreement. The option agreement also requires that Sun Pharma specifically commence its tender offer at $7.75 per share.  

On the very same day that Taro purported to terminate the merger agreement, Taro and the non-Levitt family directors, who are not signatories to the option agreement, filed a motion in Israel designed to try to delay and ultimately block the consummation of the option agreement. This follows a continuous pattern whereby Dr Levitt and his Board of Directors delayed the consummation of the merger by failing to hold the requisite shareholders meetings to consider the merger, culminating in the improper termination of the merger agreement.