Post by actcfan on Nov 23, 2015 20:54:22 GMT
Figured this was worth having it own's thread for ease of reference. From Ocata Schedule 14D www.sec.gov/Archives/edgar/data/1140098/000119312515382140/d45216dsc14d9.htm
Background of the Merger
Ocata is a clinical stage biotechnology company focused on the development and commercialization of regenerative medicine and cell therapy technology. Ocata’s most advanced products are in clinical trials for the treatment of dry age-related macular degeneration (“AMD”) and Stargardt’s macular degeneration (“SMD”) through therapeutic deployment of the retinal pigment epithelium (RPE) cells generated from Ocata’s proprietary pluripotent stem cell sources into the eye, which we refer to, collectively, as Ocata’s “RPE program.”
As part of their ongoing activities and review of Ocata’s business and financial performance, the Board and Ocata’s management team regularly evaluate potential product development and other strategic opportunities in order to advance the clinical development of its products and clinical programs, finance Ocata’s clinical development efforts, expand the range of commercial resources available for its products that may be approved through collaboration and licensing arrangements, capital raising transactions and strategic transactions as well as its continued operations as an independent company, each with a view toward enhancing stockholder value.
Between January 2014 and January 2015, members of Ocata’s management team and representatives of Astellas had multiple brief in-person meetings at certain industry conferences. During these meetings, Ocata and Astellas expressed mutual interest in evaluating a potential licensing relationship between the parties regarding Ocata’s RPE program. Astellas’ interest at the time was focused on potential sales into Japanese markets. None of these meetings resulted in any specific proposals from either party.
On July 24, 2014, Ocata and Astellas entered into a mutual confidentiality agreement (which did not contain a standstill provision) to enable discussions for evaluating a potential licensing relationship between the parties and to permit Ocata to share certain non-public information with Astellas. Thereafter, Astellas conducted preliminary due diligence on Ocata’s RPE program.
On October 14, 2014, Ocata announced that Phase 1/2 clinical data published online in The Lancet medical journal demonstrated positive long-term safety results using Ocata’s proprietary RPE cells for the treatment of SMD and AMD.
In December 2014, following an approximately two-month process of seeking to access the public markets to raise additional capital, Ocata filed a preliminary prospectus with the SEC to commence the process for an underwritten offering of up to 10,000,000 Shares. Jefferies LLC (“Jefferies”) acted as a joint bookrunner for this
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proposed offering. Given market conditions and the then-current trading price of the Shares, and after weighing the potential advantages and disadvantages, including the potential for significant dilution to Ocata’s existing stockholders, Ocata determined that it was in the best interests of Ocata stockholders to defer the capital raise to February 2015, at which time the market conditions were again not favorable for Ocata and the offering was withdrawn.
During December 2014 and through February 2015, members of Ocata management had periodic and preliminary discussions with a financial advisor to a non-U.S., publicly-traded pharmaceutical company (which we refer to as “Company A”) which had approached Ocata and expressed interest in exploring a potential strategic and/or licensing transaction with Ocata.
In January 2015, Astellas expressed interest in expanding the evaluation of a licensing relationship with Ocata to include broader geographic coverage than only Japanese markets, which had been the focus of the parties’ preliminary discussions until that time. Ocata’s senior vice president for business development advised Astellas that Ocata would evaluate any proposal received from Astellas. Astellas did not make a proposal at that time.
On January 5, 2015, to facilitate further discussions, Ocata and Company A entered into a mutual confidentiality agreement containing a standstill provision that would terminate if Ocata entered into a definitive agreement with a third party to effect a business combination.
On February 3, 2015, Ocata received a preliminary, non-binding proposal from Company A for a strategic stock-for-stock business combination of the two companies to effect a corporate inversion. The preliminary proposal provided for, among other things, a pro forma ownership in the combined company for Ocata stockholders of 55% and for Company A’s stockholders of 45%, which transaction would be funded with approximately $90 million of cash from Company A. Ocata’s chief executive officer updated the Board regarding Company A’s proposal. Following receipt of this preliminary proposal, Ocata management contacted Jefferies to inquire whether it would be available to act as a financial advisor to Ocata in connection with its evaluation of Company A’s preliminary proposal. Ocata considered Jefferies as a potential financial advisor candidate to assist and advise the Board because of Jefferies’ substantial experience in merger and acquisition transactions and its knowledge of and familiarity with Ocata and the industries in which it operates, including through its prior involvement in assisting Ocata in connection with Ocata’s proposed underwritten offering discussed above.
Between February 26, 2015 and April 7, 2015, Ocata and Company A engaged in discussions regarding Company A’s preliminary proposal. During that time, Ocata management, representatives of Jefferies and representatives of Ocata’s outside legal counsel, Goodwin Procter LLP (“Goodwin Procter”), conducted a review of Company A and the proposed transaction, particularly with respect to corporate inversion aspects.
On March 5, 2015, the Board held a meeting to discuss, among other things, Company A’s preliminary proposal. Also present at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Representatives of Goodwin Procter reviewed with the Board its fiduciary duties in the context of evaluating Company A’s proposal. Ocata management and representatives of Jefferies and Goodwin Procter provided the Board with an overview of the status of discussions with Company A’s representatives concerning the terms of its proposal and the parties’ respective diligence efforts to date. The Board then engaged in a discussion concerning the potential benefits and risks associated with Company A’s preliminary proposal, including the ability to create a combined company having greater capital resources in view of Company A’s cash on hand and the challenges that Ocata was facing with respect to the ability to raise capital, the overall complexity of the transaction structure proposed by Company A, the uncertainties associated with the tax treatment and potential tax benefits of the transaction, and the significant period likely required to negotiate and complete any such transaction (including the need to seek approval of Ocata’s and Company A’s stockholders) and the resulting risks to Ocata’s business of such a protracted timeframe. The Board also expressed concern
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about the relative valuations of Ocata and Company A contemplated by Company A’s preliminary proposal. Following this discussion, the Board authorized management to engage in further discussions with Company A regarding the preliminary proposal and to review further the proposed corporate inversion structure and relative valuations of the two companies.
On March 13, 2015, Astellas’ associate director of business development emailed to Ocata’s senior vice president for business development a preliminary non-binding proposal for a worldwide co-exclusive licensing agreement concerning Ocata’s RPE program.
From March 14, 2015 through August 18, 2015, members of Ocata management and representatives of Astellas, together with their respective legal advisors, discussed the potential terms of an RPE program licensing arrangement on telephone calls, emails and in person. Those discussions did not include any discussion of a potential acquisition of Ocata by Astellas.
On March 16, 2015, the Board held a meeting at which it further evaluated the preliminary proposal from Company A. Also present at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Ocata management and representatives of Jefferies and Goodwin Procter updated the Board on the discussions with Company A and indicated that while the evaluation of the proposed transaction was continuing and certain proposed terms had been modified, Company A continued to require that the proposed transaction be structured as a corporate inversion, with a revised 52%/48% ownership split as between Ocata’s stockholders and Company A’s stockholders, respectively, based on an implied valuation for the Shares within a range of $5.00-$8.00. The Board reviewed Company A’s proposal in the context of Ocata’s short- and long-term business strategies, and Jefferies reviewed preliminary financial aspects of the proposal. Following this discussion, the Board authorized management to engage in further discussions with Company A regarding the preliminary proposal in an effort to cause Company A to improve upon the terms of the proposal from a valuation standpoint. Ocata management also informed the Board of the receipt of the licensing proposal from Astellas, and that management was beginning to evaluate the licensing proposal and there would be a further update at the next Board meeting.
On April 2, 2015, the Board held a meeting, among other things, to discuss the potential transaction under discussion with Company A and the licensing proposal received from Astellas. Also present at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Ocata management and representatives of Jefferies and Goodwin Procter updated the Board on the discussions with Company A. The Board again considered the perceived risks and benefits of the proposed corporate inversion structure to Ocata and its stockholders and the valuation proposed by Company A, all of which remained materially unchanged since the parties began their dialogue. The Board concluded that the terms proposed by Company A presented potential uncertainties and risks to Ocata stockholders that outweighed the potential benefits. However, the Board deemed it advisable to continue engaging with Company A and authorized management to propose revised terms to Company A that included a reduced valuation for Company A in the transaction and a larger percentage ownership of the combined company for Ocata stockholders, and required that the transaction not be structured as a corporate inversion. Ocata management also reported to the Board on its evaluation of the licensing proposal from Astellas.
By April 7, 2015, Company A and Ocata had reached an impasse in their discussions concerning a potential strategic transaction, including with respect to the inversion structure and relative valuations. Accordingly, on such date, the parties terminated discussions.
On April 7, 2015, Ocata made available to Astellas and its advisors an online data room containing due diligence information regarding Ocata’s RPE program to facilitate the licensing relationship discussions.
On June 2, 2015 through June 4, 2015, representatives of Astellas met with representatives of Ocata at Ocata’s corporate headquarters to conduct diligence sessions related to the RPE program licensing discussions.
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On June 16, 2015, Ocata announced a registered direct equity offering of common stock and warrants to be sold in combination, with one warrant to purchase 0.50 of a share of common stock for each outstanding share of common stock sold. The combined purchase price for each share of common stock and accompanying warrant was $5.50, for an aggregate of approximately $28.2 million after deducting applicable underwriting discounts and estimated offering expenses payable by the Company. Jefferies served as lead joint bookrunning manager for Ocata in this offering.
On August 18, 2015, Ocata entered into a loan and security agreement with Silicon Valley Bank for a loan amount of up to $10 million.
On August 18, 2015, Astellas’ associate director of business development contacted Ocata’s senior vice president for business development and stated that Astellas would deliver the final draft of the license agreement within a few days and that it did not anticipate any significant issues in finalizing the agreement.
On August 25, 2015, Eastern time (August 26, 2015, Tokyo time) Astellas’ chief executive officer called Ocata’s chief executive officer and indicated that Astellas planned to send a proposal that would outline Astellas’ proposed terms of an acquisition of Ocata at a price of $8.00 per Share. During the call, Astellas’ chief executive officer and Ocata’s chief executive officer discussed the possibility of meeting on September 6, 2015 in Boston, Massachusetts. Ocata’s chief executive officer indicated that he would inform the Board of Astellas’ interest and the possible in-person meeting.
On August 25, 2015, Astellas’ vice president of business development sent to Ocata’s chief executive officer a written preliminary non-binding expression of interest in an acquisition of Ocata by Astellas at a price of $8.00 per Share in cash (the “Initial Proposal”). The Initial Proposal was subject to completion of due diligence, negotiation of a definitive merger agreement, and receipt of all necessary internal approvals by Astellas. The Initial Proposal also requested a 30-day exclusivity period to negotiate a transaction between the parties. The Initial Proposal also mentioned that Astellas had retained Citigroup Global Markets Inc. and Citigroup Global Markets Japan Inc. (together, “Citi”) as Astellas’ financial advisor in connection with a potential acquisition of Ocata.
On August 26, 2015, the Board held a meeting to discuss, among other things, the Initial Proposal. Also present at the meeting were members of Ocata management and representatives of Goodwin Procter. Representatives of Goodwin Procter reviewed the Board’s fiduciary duties in the context of evaluating the Initial Proposal. The Board engaged in a preliminary discussion of the terms of the Initial Proposal. The Board concluded that it should further review the Initial Proposal and any response to Astellas in the context of Ocata’s short- and long-term business strategies and possible interest from other potential interested parties. The Board authorized Ocata’s chief executive officer to attend the proposed meeting with Astellas’ chief executive officer to be held on September 6, 2015 and to obtain further insight from Astellas in that meeting regarding its perspectives on the valuation and other terms contemplated by the Initial Proposal. The Board also discussed the advisability of engaging a financial advisor to provide advice to the Board with respect to the Initial Proposal and any other proposals from Astellas or other parties for a potential strategic transaction involving Ocata. The Board authorized management to inquire whether Jefferies would be available to act as a financial advisor to Ocata in connection with a potential strategic transaction. The Board considered Jefferies as a potential investment banking firm candidate to assist and advise the Board because of Jefferies’ substantial knowledge of and familiarity with Ocata and the industries in which it operates, including through its prior involvement in assisting Ocata in connection with Company A’s proposal and serving as lead joint bookrunning manager for Ocata’s registered direct equity offering in June 2015. The Board also authorized management to evaluate the Initial Proposal and explore potential strategic transactions with the assistance of Jefferies, subject to Jefferies’ engagement and confirmation that Jefferies did not have any material relationships with Astellas that would present a potential conflict of interest in Jefferies serving as Ocata’s financial advisor.
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On August 27, 2015, and again on August 30, 2015, at Ocata’s direction, representatives of Jefferies contacted representatives of Citi and had conversations to assist Jefferies in understanding Astellas’ valuation reflected in its Initial Proposal.
On August 27, 2015, Ocata’s senior vice president for business development spoke to Astellas’ associate director of business development by telephone and inquired as to whether Astellas still had interest in pursuing the potential licensing agreement that the parties were in the midst of negotiating as an alternative to Astellas’ acquisition of Ocata. Astellas informed Ocata that Astellas wished to acquire Ocata and would no longer be pursuing a licensing transaction.
On August 31, 2015, the Board held a meeting to further evaluate the Initial Proposal. Also in attendance at the meeting were members of Ocata management and representatives of Goodwin Procter. Representatives of Goodwin Procter reviewed with the Board its fiduciary duties in connection with considering a potential sale of Ocata. At the invitation of the Board, Jefferies then joined the meeting to discuss with the Board certain financial aspects of the Initial Proposal. In its consideration of the Initial Proposal, the Board reviewed Ocata’s short- and long-term business strategies and prospects as a standalone business, the competitive landscape and market trends in the industry, and the challenges confronting Ocata in achieving its strategic objectives, including Ocata’s significant capital funding needs for its ongoing clinical trials, the challenges in securing advantageous licensing partnerships to contribute to the funding of Ocata’s development operations, the performance and status of Ocata’s research and development programs, as well as the significant cost levels required to continue and maintain these programs and the long development period and inherent uncertainty in the development of the Company’s treatment programs, and in obtaining regulatory approvals for such treatments. In light of this discussion, the directors concluded that they should review the Initial Proposal in the context of Ocata’s standalone plan and possible interest from other potential strategic partners. While the Board determined to further evaluate the Initial Proposal, it concluded as a preliminary matter that Jefferies should contact Citi, and in an attempt to seek an improved price from Astellas, indicate that the Board believed that the Initial Proposal undervalued Ocata. The Board also concluded that it was not appropriate at this time to consider or respond to Astellas’ request to engage in exclusive negotiations.
On September 1, 2015, in accordance with the Board’s directives, representatives of Jefferies communicated to representatives of Citi that after considering the Initial Proposal, the Board believed that the Initial Proposal did not adequately value Ocata and its RPE program. It was determined that Astellas should conduct further due diligence, expanding the scope of its review to cover all relevant aspects of Ocata’s business, operations and assets so that Astellas could consider making a potential revised proposal.
On September 3, 2015, the Board held a meeting to further discuss the Initial Proposal and management’s standalone plan. In attendance at the meeting were members of Ocata management and representatives of Goodwin Procter. Ocata management discussed with the Board the standalone plan and management’s preliminary forecasts for 2016 – 2023 and underlying assumptions. Jefferies then joined the meeting and discussed the financial terms of the Initial Proposal. The Board further discussed the terms of the Initial Proposal, as well as potential responses to Astellas. The Board also discussed the possibility of contacting other parties that might be interested in a strategic transaction with Ocata. The Board concluded that it would defer a decision regarding any such solicitation until later in its consideration of the Initial Proposal in an effort to first determine whether a proposal by Astellas might lead to a transaction that could be in the best interests of Ocata’s stockholders.
Following the Board’s consideration of the opportunities and risks if Ocata were to remain independent and further discussion regarding the Initial Proposal, the Board decided to reject the Initial Proposal as not in the best interests of Ocata’s stockholders and also decided that granting Astellas a right to exclusive negotiations was not appropriate at this time, particularly in view of the fact that the Board had not yet determined whether to contact other potentially interested parties. However, the Board determined that Ocata should continue its discussions with Astellas and authorized management to provide Astellas with additional due diligence access and again to
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seek a price increase from Astellas. The Board authorized Ocata’s chief executive officer to convey this conclusion to Astellas’ chief executive officer at their upcoming meeting, but also to indicate that Ocata remained receptive to an ongoing dialogue.
On September 4, 2015, to facilitate further discussions, Ocata and Astellas entered into a new confidentiality agreement, which superseded the first confidentiality agreement between the parties and included a standstill provision that would terminate if Ocata entered into a definitive agreement with a third party to effect a business combination.
On September 6, 2015, Ocata’s chief executive officer and Astellas’ chief executive officer met in Boston, Massachusetts. At the meeting, Ocata’s chief executive officer gave a presentation regarding Ocata, including a review of Ocata’s preclinical programs that were not included as part of the RPE program. At the meeting, Ocata’s chief executive officer also indicated that Astellas should increase its proposed price per Share in order for the proposal to be viewed more favorably by the Board. The parties agreed to revisit price discussions after completion of Astellas’ due diligence review of Ocata, and Astellas’ chief executive officer indicated that Astellas would consider submitting a revised proposal at that time. No specific terms of a potential strategic transaction were discussed during the meeting. Following the meeting, the Ocata chief executive officer updated the Board members regarding the meeting.
Beginning on September 9, 2015, Ocata made available to Astellas and its advisors in Ocata’s online data room additional nonpublic information regarding Ocata.
From September 9, 2015 through November 9, 2015, representatives of Ocata and Astellas engaged in various due diligence discussions concerning Ocata’s business. During that period, representatives of Astellas conducted due diligence on Ocata and numerous meetings and teleconferences were held between various representatives and legal advisors to the respective companies.
On September 10, 2015, the Board held a meeting, among other things, to discuss further the Initial Proposal. Also in attendance at the meeting were members of Ocata management and representatives of Goodwin Procter. Ocata’s chief executive officer reported to the Board on his September 6, 2015 meeting with Astellas’ chief executive officer. The Board authorized Ocata’s management and advisors to engage in further discussions with Astellas and its advisors.
On September 17, 2015, Ocata provided to Astellas certain prospective financial information regarding Ocata for the fiscal years 2015—2017, which was materially consistent with the operating model that Ocata management had prepared and provided to the Board on September 3, 2015 (see “—Certain Prospective Financial Information About Ocata” on page 30 of this Schedule 14D-9 for further detail).
On September 21, 2015, the Board held a meeting to, among other things, discuss further the Initial Proposal. Also in attendance at the meeting were members of Ocata management and representatives of Goodwin Procter. Ocata’s chief executive officer updated the Board on the status of Astellas’ due diligence and potential timing for receiving a revised proposal. The Board authorized Ocata’s management and advisors to continue discussions with Astellas and its advisors. The Board then considered the formal engagement of Jefferies and the material terms of the proposed Jefferies engagement letter, and after discussion determined to finalize Jefferies’ engagement as Ocata’s financial advisor to assist the Board in its evaluation of strategic alternatives, subject to a mutually satisfactory engagement letter with Jefferies. On September 22, 2015, Ocata formally entered into an engagement letter with Jefferies as authorized during the September 21, 2015 Board meeting.
On September 24 and 25, 2015, representatives of Ocata and representatives of Astellas, together with their respective advisors, held meetings in Boston, Massachusetts at which representatives of Ocata gave presentations to representatives of Astellas. The presentations included an overview of the Company, its research and development program, clinical development, human resources, legal and financial matters, as well as regulatory
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compliance matters. Neither the Ocata representatives nor the Astellas representatives made any proposals during these meetings or otherwise discussed the specific terms of a potential strategic transaction.
From September 28, 2015 to October 19, 2015, representatives of Ocata had follow-up discussions with representatives of Astellas to discuss Ocata’s business.
On October 1, 2015, the Board held a meeting to discuss the status of the discussions with Astellas and next steps. Also in attendance at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Ocata’s chief executive officer updated the Board on Astellas’ continued due diligence on Ocata. At the meeting, Jefferies updated the Board on its recent discussions with Citi and, based on these discussions, the expected timing for Astellas to submit a revised proposal. The Board concluded that any revised proposal from Astellas should be considered in light of the risks and opportunities facing Ocata and in consideration of the management standalone plan. The Board directed Ocata’s management and advisors to continue discussions with Astellas and its advisors in anticipation of receiving a revised proposal.
The Board then engaged in a general discussion concerning whether and when it might be advisable to approach and discuss a potential strategic transaction with other parties. The Board discussed the potential risks and benefits of commencing a process in which one or more parties could be invited to review confidential information and submit indications of interest with respect to a potential business combination involving Ocata. In particular, the Board discussed the potential disruptions to Ocata’s business during a protracted process, the risk of leaks that might arise from contacting other parties in the industry, and the potential impact of such leaks on Ocata’s business, including the potential loss of development partners and employees, and on the discussions with Astellas. The Board also discussed the potential need to disclose during such process proprietary and confidential information to competitors and potential competitors. The Board recognized that the type of solicitation process would in part depend upon the price and other terms presented by Astellas in its revised proposal and discussed the risk that Astellas might withdraw its proposal if Ocata approached other parties. Based on the benefits and risks discussed, the Board concluded that approaching other potential strategic buyers would be prudent and in the best interests of Ocata’s stockholders, but only those companies that the Board determined to be most likely interested and capable potential acquirors of Ocata.
The Board, with input from management and Jefferies, also discussed the general universe of potential acquirers that might be contacted. In determining potential likely strategic buyers, the Board considered various factors, including: each company’s potential interest in a strategic transaction with Ocata given such company’s industry position and perceived strategic priorities; such company’s financial strength and resources to pursue a strategic transaction in a timely manner and improve upon the terms of Astellas’ proposal; the risk of potential leaks in engaging with such company; and such company’s experience in efficiently evaluating, pursuing and consummating the acquisition of a public company of the size and nature of Ocata.
Following the October 1, 2015 Board meeting, and in accordance with the Board’s directives, members of Ocata management discussed with Jefferies strategic parties that were viewed as most likely to fit the criteria discussed with the Board at its October 1, 2015 meeting, five of which were viewed as parties that should be contacted following receipt of Astellas’ revised proposal. Company A was not included on the list because Ocata had negotiated with Company A, but did not reach an agreement regarding a business combination with Company A, in early 2015, and Company A was not viewed as a credible counterparty partner for Ocata as a result of Company A’s recent strategic transaction activities and financial position. Financial buyers also were not included because the Board concluded that the pre-revenue profile of Ocata was inconsistent with the type of acquisition targets pursued by financial buyers.
On October 9, 2015, Astellas’ outside counsel, Covington & Burling LLP (“Covington & Burling”), circulated a first draft of the Merger Agreement to Goodwin Procter. The draft Merger Agreement provided for a tender offer by an indirect wholly-owned subsidiary of Astellas for all of the outstanding Shares, to be promptly followed by a merger in which the Shares not tendered in the Offer would be entitled to receive the tender offer
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price, without interest and less applicable tax withholding. The draft Merger Agreement provided, among other things, for the payment by Ocata of a termination fee if the Merger Agreement were terminated under certain specified circumstances and reimbursement by Ocata of Astellas’ transaction expenses of up to $7 million if the Merger Agreement were terminated under certain other circumstances.
On October 19, 2015, Astellas’ chief executive officer and Ocata’s chief executive officer spoke by telephone. On this call, Astellas’ chief executive officer indicated that Astellas was willing to increase its proposed purchase price to $8.40 per Share. Ocata’s chief executive officer responded that he would discuss Astellas’ revised proposal with the Board. Later on October 19, 2015, Ocata received a revised written, non-binding proposal from Astellas to acquire Ocata for $8.40 per Share in cash (the “October 19 Proposal”). The October 19 Proposal was otherwise substantially identical to the Initial Proposal, except that it did not provide for an exclusive negotiation period. The Ocata chief executive informally updated the Board members of the receipt of the October 19 Proposal.
Between October 21, 2015 and October 22, 2015, in accordance with the Board’s directives, Jefferies contacted five strategic parties previously discussed with the management of Ocata following the Board meeting on October 1, 2015 meeting, to inquire whether they would have interest in a strategic transaction with Ocata, noting that Ocata had received an unsolicited proposal from a third party. In the following days thereafter, one of the parties indicated that a strategic transaction with a pre-revenue company of Ocata’s profile was not within its strategic focus, and the other four parties indicated that they were not interested in pursuing a strategic transaction with Ocata without specifying the reasons for such decision.
On October 25, 2015, the Board held a meeting to discuss, among other things, the October 19 Proposal, the solicitation of selected potential strategic acquirers, and management’s standalone plan. In attendance at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Representatives of Goodwin Procter reviewed with the Board its fiduciary duties in connection with considering a potential sale of Ocata. Jefferies discussed with the Board the mergers and acquisitions landscape generally and within Ocata’s industry, the status of discussions with Astellas and the other potential acquirers, including the fact that none of the parties contacted indicated interest in a potential strategic transaction with Ocata. Jefferies also discussed certain financial aspects of the October 19 Proposal.
At the meeting, members of Ocata management informed the Board that Ocata was anticipating a potential delay of approximately four months in randomizing patients in its AMD Phase 2 study as a result of a higher than anticipated screen failure rate among enrolled patients against the strict entry criteria for the study. It was anticipated that there could be a corresponding delay in the Company’s ability to access capital, which previously was expected to follow delivery of interim results of the clinical study. It was not anticipated that this screening delay would delay the overall study timetable. In light of this development, the Board requested that management prepare a plan for a reduction in near-term operating expenses to account for this potential delay.
The Board considered Astellas’ increased purchase price of $8.40 per Share in cash in light of the management standalone plan and risks and opportunities facing the business. In its consideration of the October 19 Proposal, the Board continued to review Ocata’s short- and long-term business strategies, the competitive landscape and market trends in the industry, and the challenges confronting Ocata in achieving its strategic objectives, including Ocata’s capital funding requirement for its ongoing clinical trials, the challenges in securing advantageous licensing partnerships to contribute to the funding of Ocata’s development operations, the performance and status of Ocata’s research and development programs, as well as the significant cost levels required to continue and maintain these programs and the long development period and inherent uncertainty in the development of the Company’s treatment programs, including obtaining regulatory approvals for such treatments. Ocata’s management discussed with the Board the potential benefits to Ocata’s stockholders of an acquisition of Ocata, including by providing immediate liquidity to stockholders while eliminating their exposure to the risks in Ocata’s standalone plan.
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Although the Board believed that Astellas’ proposed $8.40 per Share purchase price would provide substantial value to Ocata’s stockholders, the Board discussed how best to further enhance stockholder value and other potential strategic alternatives, including a possible sale or other strategic transaction involving Ocata. Representatives of Jefferies updated the Board on the status of discussions with other companies that had been approached and again noted that no indications of interest had been received from these parties. The Board again considered the potential advantages and disadvantages of contacting and discussing a potential transaction with additional third parties. Based on the benefits and risks discussed, the Board concluded that widening the solicitation efforts and approaching a limited number of additional potential strategic buyers that could have tangential interest in a strategic transaction with Ocata would be prudent and in the best interests of stockholders, and authorized Jefferies to contact additional parties based on the criteria previously discussed by the Board. The Board also discussed, with input from Jefferies and Goodwin Procter, the potential for other companies to pursue an acquisition of Ocata following announcement of a transaction with Astellas, provided that the merger agreement with Astellas contained appropriate provisions that allowed the Board to engage in discussions with such other companies.
Based on the discussion at this meeting and the earlier Board discussions, the Board concluded that the October 19 Proposal would, if consummated, provide substantial value to the Company’s stockholders and could exceed the potential stock price growth that otherwise would likely be achieved under management’s standalone strategic business plan, particularly in light of the execution risks in the plan as well as in the Company’s industry and the markets generally. The Board also concluded that continuing to approach and discuss a possible transaction with other parties as a means by which to test the adequacy of Astellas’ proposal was advisable. The Board also authorized Ocata’s management and advisors to continue discussions with Astellas and to seek a further price increase and other improved terms from Astellas, and concluded that Jefferies should contact Citi to indicate that the Board believed that Astellas’ October 19 Proposal could still be improved upon.
On October 26, 2015, in accordance with the Board’s directives, representatives of Jefferies communicated to representatives of Citi that after considering the October 19 Proposal, the Board believed that the revised proposal still did not adequately value Ocata and its RPE program, and requested that Astellas further increase its proposed price.
Between October 26, 2015 and October 29, 2015 in accordance with the Board’s directives, Jefferies contacted four additional strategic parties. One of these parties responded that it was not interested in pursuing a strategic transaction with Ocata because ophthalmology would not be a strategic fit. Two parties did not express interest in a transaction and did not give specific reasons. Jefferies had multiple conversations with a fourth party (which we refer to as “Company B”), indicating that Ocata was expected imminently to execute an agreement for a strategic transaction with a third party and that timing was of the essence. Although Company B indicated to Jefferies that it might have interest in considering a potential strategic transaction with Ocata, Company B did not promptly or actively act upon its stated interest. Ocata was aware through media reports that Company B was involved in its own evaluation of a potential strategic combination with a third party and assumed that this may in part have been a reason that its communications with Jefferies proceeded slowly.
On October 27, 2015, Astellas’ chief executive officer and Ocata’s chief executive officer spoke by telephone. Astellas’ chief executive officer indicated that Astellas was willing to increase its proposed purchase price to $8.50 per Share, that this was its best and final offer and that Astellas was prepared to move expeditiously to negotiate and sign a definitive agreement to effect the transaction. Ocata’s chief executive officer responded that he would discuss Astellas’ revised proposal with the Board.
On October 27, 2015, at the direction of Astellas, representatives of Citi informed representatives of Jefferies that Astellas’ $8.50 per Share proposed price was its best and final offer.
On October 28, 2015, Ocata received a revised written, non-binding proposal from Astellas to acquire Ocata for $8.50 per Share in cash (the “October 28 Proposal”). The October 28 Proposal was otherwise substantially identical to the October 19 Proposal.
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On October 29, 2015, the Board held a meeting to discuss, among other things, the October 28 Proposal, the solicitation of other potential strategic acquirers, and management’s standalone plan. In attendance at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Members of Ocata management updated the Board on developments since the last Board meeting. Representatives of Goodwin Procter reviewed with the Board its fiduciary duties in connection with considering a potential sale of Ocata.
Members of Ocata management reviewed with the Board management’s standalone plan, including financial forecasts that were substantially equivalent to the financial forecasts reviewed by the Board at the September 3, 2015 Board meeting except that to assist the Board and Jefferies in their review, the financial forecasts reviewed at this meeting included financial forecasts regarding Ocata’s anticipated future operations for the 11 years beyond 2023 (see “—Certain Prospective Financial Information About Ocata” on page 30 of this Schedule 14D-9 for further detail regarding Ocata’s projections). Members of Ocata management also reviewed with the Board a near-term cash preservation plan as requested by the Board at its October 25, 2015 meeting, and noted that a significant reduction in workforce likely would be required if Ocata were to remain independent in order to avoid a significant liquidity issue beginning in the fourth quarter of 2016. In this regard, the Board considered the fact that access to the capital markets for small biotech companies recently had slowed considerably, and that raising capital absent participation by company insiders and new positive pre-clinical data, and therefore at attractive valuations that would not be significantly dilutive to existing Ocata stockholders, could be difficult.
In order to assist the Board in evaluating the October 28 Proposal, Jefferies discussed management’s forecasts for 2016-2034 and preliminary financial perspectives regarding Ocata (see “—Certain Prospective Financial Information About Ocata” on page 30 of this Schedule 14D-9 for further detail regarding Ocata’s projections). The Board considered Astellas’ increased offer of $8.50 per Share in cash in light of the management standalone plan and risks and opportunities facing the business discussed by the Board at the prior meetings.
The Board discussed Ocata’s business and financial prospects, including management’s financial projections, and perceived risks associated with continuing the Company’s operations as an independent entity and the challenges in achieving its strategic objectives. In light of these discussions, the Board concluded that Astellas’ improved offer price would, if consummated, provide substantial value to Ocata’s stockholders and could exceed the potential share price growth that otherwise would likely be achieved under management’s standalone strategic business plan, particularly in light of the execution risks in the plan, capital markets trends, as well as the risks in Ocata’s industry and markets more generally. Ocata’s chief executive officer and representatives of Jefferies informed the Board that Astellas and Citi had stated that Astellas would not increase its offer beyond $8.50 per Share and that Astellas was prepared to move expeditiously to negotiate and sign a definitive agreement. Representatives of Jefferies reviewed with the Board the status of discussions with other companies that had been approached, including that none of the parties had expressed an interest in pursuing a strategic transaction with Ocata other than Company B, and that Company B remained slow to respond to Jefferies despite repeated requests to move quickly if interested in a strategic transaction with Ocata. The Board instructed Ocata management and its advisors to continue negotiation of the Merger Agreement with Astellas in accordance with the October 28 Proposal.
On October 30, 2015, Goodwin Procter sent a revised draft of the Merger Agreement to Covington & Burling. Thereafter, the parties negotiated the Merger Agreement, related documents and various issues via conference calls, and several drafts of the Merger Agreement and related documents were exchanged between the parties. The issues discussed and negotiated included, without limitation, the scope of the representations and warranties, the conduct of Ocata’s business between signing and closing of the transaction, the terms under which Ocata could respond to unsolicited proposals, the parties’ respective conditions to closing, Astellas’ obligation to indemnify and maintain insurance for Ocata’s directors and officers, the benefits to be offered to Ocata’s employees following the transaction, the rights of the parties to terminate the transaction, and the amount and conditions of payment by Ocata of the termination fee and expense reimbursement described above, and the terms of and the parties to be subject to Support Agreements requested by Astellas.
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On November 2, 2015, the Board held a meeting to discuss, among other things, the status of discussions with Astellas. Also in attendance at the meeting were members of Ocata management and representatives of Goodwin Procter. Representatives of Goodwin Procter provided an update on its negotiation with Covington & Burling regarding the Merger Agreement and the anticipated next steps in proceeding with negotiating a definitive merger agreement and related agreements with Astellas.
On November 8, 2015, the Board held a meeting to discuss the proposed terms of the transaction and the status of discussions with Astellas. Also in attendance at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Prior to the meeting, the Board received the most recent draft of the Merger Agreement and other relevant documents. Representatives of Goodwin Procter again reviewed the fiduciary duties of the Board in connection with a potential sale of Ocata. Representatives of Jefferies noted for the Board that, while Ocata had substantially completed negotiation of a confidentiality and standstill agreement with Company B, the negotiations regarding that agreement had proceeded slowly and an agreement had not been executed between the parties. Given the slow pace of the discussions with Company B, despite repeatedly informing Company B that it would need to proceed quickly if it was interested in a strategic transaction with Ocata, the Board concluded that Company B either did not have serious interest in a strategic transaction with Ocata at this time or was unable at this time to devote the necessary resources to fully engage with Ocata.
Representatives of Goodwin Procter provided an overview of the negotiation process to date with Astellas’ representatives, and discussed in detail Astellas’ proposed $8.50 per Share Offer Price, the material terms of the proposed Merger Agreement and form of Support Agreement. Representatives of Goodwin Procter reported that the following terms, among others, had been negotiated in the Merger Agreement: a substantial reduction, at Ocata’s request, in the termination fee to 3.25% of the equity value of the transaction; elimination of the requirement to reimburse Astellas for its expenses if the Merger Agreement were terminated under certain circumstances; the inclusion, at Ocata’s request, of the Board’s ability to revoke its recommendation to stockholders in the exercise of its fiduciary duties in the event of a material development that was not known or reasonably foreseeable to the Board as of or prior to the date of the Merger Agreement; the revision, at Ocata’s request, of the definition of “material adverse effect” to exclude general changes in the industry in which Ocata operates; the scope of each party’s representations and warranties; the parties’ respective conditions to closing; the conduct of Ocata’s business between signing and closing of the transaction; the benefits to be offered to Ocata employees following the transaction; Ocata’s ability to respond to unsolicited competing inquiries following the announcement of the transaction; the rights of the parties to terminate the transaction; and the terms of the Support Agreement to be signed by Ocata’s officers and directors.
The Board also again reviewed management’s forecasts for 2016-2034 (the management forecast for 2016-2034 is referred to as the “Ocata Projections” (see “—Certain Prospective Financial Information About Ocata” on page 30 of this Schedule 14D-9 for further detail regarding the Ocata Projections)) and Jefferies preliminarily reviewed its financial analysis of the Offer Price.
The Board then discussed the October 28 Proposal in the context of Ocata’s overall strategic alternatives, including continuing as a standalone company. The Board discussed in detail the advantages and risks of the proposed transaction that are described in “Reasons for the Recommendation of the Board” beginning on page 22 of this Schedule 14D-9, including, among other things, whether the Offer Price represented an attractive valuation of the Company for stockholders when considered in light of the Board’s knowledge and understanding of the business, operations, management, financial condition and prospects of the Company, including the various challenges presented if the Board were to reject Astellas’ offer and either pursue a strategic transaction at a later time or continue as a standalone company. In light of these discussions, the Board concluded that Astellas’ improved and final offer would, if consummated, provide greater certainty of value (and less risk) to Ocata stockholders relative to the potential trading price of the Shares over a longer period after accounting for the long-term risks to Ocata’s business resulting from operational execution risk and evolving industry dynamics. After considering the Company’s lack of strategic alternatives to the Astellas transaction and the uncertainty in the Company’s ability to continue as a standalone company given the challenges in achieving its strategic
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objectives, the Board directed the Company and its advisors to proceed toward the execution of a definitive agreement with Astellas expeditiously.
During the remainder of November 8, 2015 and on November 9, 2015, representatives of Ocata and Astellas had various telephonic discussions to finalize the Merger Agreement and related agreements.
On November 9, 2015, after the U.S. stock markets closed, the Board held a meeting to discuss the final terms of the proposed transaction and proposed definitive Merger Agreement and related documents. In attendance at that meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Jefferies reviewed its financial analysis of the $8.50 per Share cash consideration with the Board and rendered an oral opinion, confirmed by delivery of a written opinion dated November 9, 2015, to the Board to the effect that, as of that date and based on and subject to the various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken as described in such opinion, the $8.50 per Share cash consideration to be received in the Offer and the Merger, taken together as an integrated transaction, by holders of Shares (other than Astellas, Purchaser and their respective affiliates) pursuant to the Merger Agreement was fair, from a financial point of view, to such holders. After further discussion, the Board unanimously determined that the Merger Agreement, the Offer, the Merger and the other transactions contemplated thereby, were advisable and in the best interests of the Company and its stockholders, approved the Merger Agreement, the Offer, the Merger and the other transactions contemplated by the Merger Agreement in accordance with the DGCL, including Section 251(h), resolved to recommend that the stockholders of the Company accept the Offer and tender their Shares in the Offer, and took such actions as were necessary to render Section 203 of the DGCL inapplicable to the transactions contemplated by the Merger Agreement and the Support Agreements.
Later in the evening on November 9, 2015, the Merger Agreement was executed, and all signatories to the Support Agreements executed such agreements, and Ocata and Astellas jointly announced the execution of the Merger Agreement.
Reasons for the Recommendation of the Board
In evaluating the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, the Board consulted with Ocata’s management and legal and financial advisors. In the course of reaching its determination that the terms of the Offer and the Merger are advisable and in the best interests of Ocata and its stockholders and to recommend that holders of Shares accept the Offer and tender their Shares in the Offer, the Board considered numerous factors and benefits of the Offer and the Merger, each of which the Board believed supported its unanimous determination and recommendation. As a result, for the reasons set forth below, the Board recommends that Ocata’s stockholders tender their Shares in response to the Offer:
• Offer Price. The Board considered:
• the fact that the Offer Price represents a 90.6% premium to the trading price at which the Shares closed on November 9, 2015, the last trading day before the execution by Ocata and Astellas of the Merger Agreement;
• the fact that the Offer Price represents a premium of approximately 93.6% over the volume-weighted average trading prices for the Shares for the 30-day period ending on November 9, 2015;
• the fact that the Offer Price represents a premium of approximately 101.3% over the volume-weighted average trading prices for the Shares for the 90-day period ending on November 9, 2015;
• the Board’s belief that it had obtained Astellas’ best and final offer, and that, as of the date of the Merger Agreement, the Offer Price represented the highest per Share consideration reasonably obtainable.
•
Ocata’s Operating and Financial Condition; Prospects of Ocata. The Board considered that the Offer Price of $8.50 per Share to be received by our stockholders in the transaction provides greater certainty
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of value (and less risk) to our stockholders relative to the potential trading price of our common stock over a longer period after accounting for the long-term risks to our business resulting from operational execution risk and evolving industry dynamics, noting in particular the costs and risks associated with developing, testing, manufacturing and commercializing the clinical stage products in Ocata’s RPE program, that potential therapeutic products would require additional extensive pre-clinical and clinical testing prior to any possible regulatory approval in the United States and other countries and may additionally require post-authorization outcome studies, that Ocata would require additional significant capital in order to execute on its strategy before achieving profitability or acceptance of its products in the medical community and the potential cost of capital, including the potentially dilutive impact to existing stockholders, the terms and structure of any such capital-raising transactions, and the execution risks associated with transforming a clinical stage biotechnology company focused on product development into a profitable ophthalmology company with sufficient scale and sales execution ability to compete effectively. Additionally, the Board noted that while the Company had sufficient cash to fund its operations through 2016, given the clinical delay associated with patient screening, a significant reduction in Ocata’s personnel likely would be required if the Company were to remain independent in order to extend its financial resources into early 2017. The Board considered the risks and uncertainties associated with such personnel reductions and Ocata’s ability to continue to commence or continue its clinical trials for its products or commercialize any products.
• Strategic Process. The Board considered its belief that the value offered to holders of Shares in the Offer and the Merger was more favorable to holders of Shares than the potential value of remaining an independent public company and that the Offer Price obtained was the highest that was reasonably attainable. The Board also considered the process through which Ocata, with the assistance of its financial advisor, engaged in or sought to engage in discussions with other companies believed to be the most likely candidates to pursue a business combination with or acquisition of Ocata.
• Cash Consideration; Certainty of Value. The Board considered the fact that the Offer Price will be paid in cash, providing certainty, immediate value and liquidity to holders of Shares.
• No Financing Condition. The Board considered the representation of Astellas and Purchaser that they would have at the Offer acceptance time and the Effective Time sufficient cash resources to pay fully the amounts required to be paid under the Merger Agreement and that the Offer and the Merger are not subject to a financing condition.
• Opinion of Ocata’s Financial Advisor. The Board considered the opinion of Jefferies, dated November 9, 2015, to the Board as to the fairness, from a financial point of view and as of such date, of the $8.50 per Share cash consideration to be received in the Offer and the Merger, taken together as an integrated transaction, by holders of Shares (other than Astellas, Purchaser and their respective affiliates), which opinion was based on and subject to the various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Jefferies as more fully described under the caption “Opinion of Ocata’s Financial Advisor.” Jefferies’ opinion does not constitute a recommendation as to whether any stockholder should tender Shares in the Offer or how any stockholder should act with respect to the Offer, the Merger or any other matter.
•
The Merger Agreement. The Board considered the provisions of the Merger Agreement, including the agreed exclusions of certain events and conditions from the definition of “material adverse effect,” the ability of Ocata under certain circumstances to entertain unsolicited proposals for an acquisition that would reasonably be expected to lead to an offer that is superior to the Offer and the Merger, the ability of the Board under certain circumstances to withdraw or modify its recommendation that the holders of Shares accept the Offer and tender their Shares, including in connection with a superior offer, Ocata’s right to terminate the Merger Agreement under certain circumstances in order to accept a superior offer and enter into a definitive agreement with respect to such superior offer, the respective termination rights of Ocata and Astellas and the $11.8 million termination fee payable by Ocata under certain circumstances, which the Board believed was reasonable relative to termination fees in transactions of
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a similar size, would not likely deter competing bids and would not likely be payable unless the Board entered into a definitive agreement for a superior offer.
• Conditions to the Consummation of the Offer and Merger; Likelihood of Closing the Second Step Merger. Consummation of the Offer is conditioned upon stockholders tendering and not validly withdrawing a sufficient number of Shares such that Astellas will own at least a majority of the outstanding Shares (determined on a fully-diluted basis) immediately following closing of the Offer. The Board considered the likelihood of the consummation of the second-step Merger contemplated by the Merger Agreement if the Shares tendered pursuant to the Offer are accepted for payment.
• Timing of Completion. The Board considered the anticipated timing of the consummation of the transactions contemplated by the Merger Agreement, and the structure of the transaction as a cash tender offer for all outstanding Shares, including the fact that the parties elected to have the Merger effected pursuant to Section 251(h) of the DGCL to enable consummation of the Merger as soon as practicable following the consummation of the Offer, which should, subject to the satisfaction or waiver of certain closing conditions, allow holders of Shares to receive the Offer Price in a relatively short timeframe, followed by the Merger in which holders of Shares (other than Shares held (i) in the treasury of the Company or by Astellas or Purchaser and (ii) by stockholders who validly exercise appraisal rights under Delaware law with respect to such Shares) will receive the same consideration as received by those holders of Shares who tender their Shares in the Offer. The Board considered that the potential for closing in a relatively short timeframe could also reduce the amount of time in which Ocata’s business would be subject to the potential uncertainty of closing and related disruption.
• Extension of Offer Period. The Board considered that Purchaser must extend the Offer for one or more periods until March 9, 2016, if at any scheduled expiration date of the Offer any condition to the Offer has not been satisfied or waived (to the extent so waivable by Astellas or Purchaser).
• Appraisal Rights. The Board considered the availability of statutory appraisal rights to Ocata’s stockholders who do not tender their Shares in the Offer and otherwise comply with all required procedures under the DGCL.
• Support Agreements. The Board considered the fact that the Support Agreements with our directors and executive officers terminate in the event that Ocata terminates the Merger Agreement, which permits those persons to support a transaction involving a superior proposal.
In the course of its deliberations, the Board also considered a variety of material risks and other countervailing factors related to entering into the Merger Agreement that previously had been identified and discussed by management of Ocata and the Board, including, but not limited to the following:
• the fact that Ocata stockholders will not be entitled to participate in any potential future benefit from Ocata’s execution of management’s standalone strategic business plan;
• the Merger Agreement precludes Ocata from actively soliciting alternative transaction proposals and requires payment by Ocata of a termination fee to Astellas under certain circumstances, including in the event the Merger Agreement is terminated by Ocata to accept a superior offer;
• the possibility that the transactions contemplated by the Merger Agreement, including the Offer and the Merger, might not be consummated, and the fact that if the Offer and the Merger are not consummated, Ocata’s directors, senior management and other employees will have expended extensive time and effort and will have experienced significant distractions from their work during the pendency of the transaction, Ocata will have incurred significant transaction costs and Ocata’s relationships with its customers, key partners, employees and other third-parties may be adversely affected;
• the effect of the public announcement of the Merger Agreement, including effects on Ocata’s relationship with its development partners and other business relationships and Ocata’s ability to attract and retain key management and personnel;
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• the risk that the parties may not receive the necessary regulatory approvals or clearance to complete the Offer or the Merger or that governmental authorities could attempt to condition their approvals or clearances of the Offer or the Merger on one or more of the parties’ compliance with certain burdensome terms or conditions which may cause one of the Offer conditions not to be satisfied;
• the likelihood of litigation; and
• the treatment of the consideration to be received by the holders of Shares in the Offer and the Merger as taxable to the holders of Shares for federal income tax purposes.
The foregoing discussion of the information and factors considered by the Board in reaching its conclusions and recommendations is intended to be illustrative and not exhaustive, but includes the material reasons and factors considered by the Board. In view of the wide variety of reasons and factors considered, the Board did not find it practicable to, and did not, quantify, rank or otherwise assign any relative or specific weights to the various specific factors considered in reaching its determination and making its recommendation. In addition, the Board did not reach any specific conclusion with respect to any of the factors or reasons considered. Instead, the Board conducted an overall review of the factors and reasons described above and determined that, in the aggregate, the potential benefits considered outweighed the potential risks or possible negative consequences of the Offer and the Merger.
Background of the Merger
Ocata is a clinical stage biotechnology company focused on the development and commercialization of regenerative medicine and cell therapy technology. Ocata’s most advanced products are in clinical trials for the treatment of dry age-related macular degeneration (“AMD”) and Stargardt’s macular degeneration (“SMD”) through therapeutic deployment of the retinal pigment epithelium (RPE) cells generated from Ocata’s proprietary pluripotent stem cell sources into the eye, which we refer to, collectively, as Ocata’s “RPE program.”
As part of their ongoing activities and review of Ocata’s business and financial performance, the Board and Ocata’s management team regularly evaluate potential product development and other strategic opportunities in order to advance the clinical development of its products and clinical programs, finance Ocata’s clinical development efforts, expand the range of commercial resources available for its products that may be approved through collaboration and licensing arrangements, capital raising transactions and strategic transactions as well as its continued operations as an independent company, each with a view toward enhancing stockholder value.
Between January 2014 and January 2015, members of Ocata’s management team and representatives of Astellas had multiple brief in-person meetings at certain industry conferences. During these meetings, Ocata and Astellas expressed mutual interest in evaluating a potential licensing relationship between the parties regarding Ocata’s RPE program. Astellas’ interest at the time was focused on potential sales into Japanese markets. None of these meetings resulted in any specific proposals from either party.
On July 24, 2014, Ocata and Astellas entered into a mutual confidentiality agreement (which did not contain a standstill provision) to enable discussions for evaluating a potential licensing relationship between the parties and to permit Ocata to share certain non-public information with Astellas. Thereafter, Astellas conducted preliminary due diligence on Ocata’s RPE program.
On October 14, 2014, Ocata announced that Phase 1/2 clinical data published online in The Lancet medical journal demonstrated positive long-term safety results using Ocata’s proprietary RPE cells for the treatment of SMD and AMD.
In December 2014, following an approximately two-month process of seeking to access the public markets to raise additional capital, Ocata filed a preliminary prospectus with the SEC to commence the process for an underwritten offering of up to 10,000,000 Shares. Jefferies LLC (“Jefferies”) acted as a joint bookrunner for this
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proposed offering. Given market conditions and the then-current trading price of the Shares, and after weighing the potential advantages and disadvantages, including the potential for significant dilution to Ocata’s existing stockholders, Ocata determined that it was in the best interests of Ocata stockholders to defer the capital raise to February 2015, at which time the market conditions were again not favorable for Ocata and the offering was withdrawn.
During December 2014 and through February 2015, members of Ocata management had periodic and preliminary discussions with a financial advisor to a non-U.S., publicly-traded pharmaceutical company (which we refer to as “Company A”) which had approached Ocata and expressed interest in exploring a potential strategic and/or licensing transaction with Ocata.
In January 2015, Astellas expressed interest in expanding the evaluation of a licensing relationship with Ocata to include broader geographic coverage than only Japanese markets, which had been the focus of the parties’ preliminary discussions until that time. Ocata’s senior vice president for business development advised Astellas that Ocata would evaluate any proposal received from Astellas. Astellas did not make a proposal at that time.
On January 5, 2015, to facilitate further discussions, Ocata and Company A entered into a mutual confidentiality agreement containing a standstill provision that would terminate if Ocata entered into a definitive agreement with a third party to effect a business combination.
On February 3, 2015, Ocata received a preliminary, non-binding proposal from Company A for a strategic stock-for-stock business combination of the two companies to effect a corporate inversion. The preliminary proposal provided for, among other things, a pro forma ownership in the combined company for Ocata stockholders of 55% and for Company A’s stockholders of 45%, which transaction would be funded with approximately $90 million of cash from Company A. Ocata’s chief executive officer updated the Board regarding Company A’s proposal. Following receipt of this preliminary proposal, Ocata management contacted Jefferies to inquire whether it would be available to act as a financial advisor to Ocata in connection with its evaluation of Company A’s preliminary proposal. Ocata considered Jefferies as a potential financial advisor candidate to assist and advise the Board because of Jefferies’ substantial experience in merger and acquisition transactions and its knowledge of and familiarity with Ocata and the industries in which it operates, including through its prior involvement in assisting Ocata in connection with Ocata’s proposed underwritten offering discussed above.
Between February 26, 2015 and April 7, 2015, Ocata and Company A engaged in discussions regarding Company A’s preliminary proposal. During that time, Ocata management, representatives of Jefferies and representatives of Ocata’s outside legal counsel, Goodwin Procter LLP (“Goodwin Procter”), conducted a review of Company A and the proposed transaction, particularly with respect to corporate inversion aspects.
On March 5, 2015, the Board held a meeting to discuss, among other things, Company A’s preliminary proposal. Also present at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Representatives of Goodwin Procter reviewed with the Board its fiduciary duties in the context of evaluating Company A’s proposal. Ocata management and representatives of Jefferies and Goodwin Procter provided the Board with an overview of the status of discussions with Company A’s representatives concerning the terms of its proposal and the parties’ respective diligence efforts to date. The Board then engaged in a discussion concerning the potential benefits and risks associated with Company A’s preliminary proposal, including the ability to create a combined company having greater capital resources in view of Company A’s cash on hand and the challenges that Ocata was facing with respect to the ability to raise capital, the overall complexity of the transaction structure proposed by Company A, the uncertainties associated with the tax treatment and potential tax benefits of the transaction, and the significant period likely required to negotiate and complete any such transaction (including the need to seek approval of Ocata’s and Company A’s stockholders) and the resulting risks to Ocata’s business of such a protracted timeframe. The Board also expressed concern
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about the relative valuations of Ocata and Company A contemplated by Company A’s preliminary proposal. Following this discussion, the Board authorized management to engage in further discussions with Company A regarding the preliminary proposal and to review further the proposed corporate inversion structure and relative valuations of the two companies.
On March 13, 2015, Astellas’ associate director of business development emailed to Ocata’s senior vice president for business development a preliminary non-binding proposal for a worldwide co-exclusive licensing agreement concerning Ocata’s RPE program.
From March 14, 2015 through August 18, 2015, members of Ocata management and representatives of Astellas, together with their respective legal advisors, discussed the potential terms of an RPE program licensing arrangement on telephone calls, emails and in person. Those discussions did not include any discussion of a potential acquisition of Ocata by Astellas.
On March 16, 2015, the Board held a meeting at which it further evaluated the preliminary proposal from Company A. Also present at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Ocata management and representatives of Jefferies and Goodwin Procter updated the Board on the discussions with Company A and indicated that while the evaluation of the proposed transaction was continuing and certain proposed terms had been modified, Company A continued to require that the proposed transaction be structured as a corporate inversion, with a revised 52%/48% ownership split as between Ocata’s stockholders and Company A’s stockholders, respectively, based on an implied valuation for the Shares within a range of $5.00-$8.00. The Board reviewed Company A’s proposal in the context of Ocata’s short- and long-term business strategies, and Jefferies reviewed preliminary financial aspects of the proposal. Following this discussion, the Board authorized management to engage in further discussions with Company A regarding the preliminary proposal in an effort to cause Company A to improve upon the terms of the proposal from a valuation standpoint. Ocata management also informed the Board of the receipt of the licensing proposal from Astellas, and that management was beginning to evaluate the licensing proposal and there would be a further update at the next Board meeting.
On April 2, 2015, the Board held a meeting, among other things, to discuss the potential transaction under discussion with Company A and the licensing proposal received from Astellas. Also present at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Ocata management and representatives of Jefferies and Goodwin Procter updated the Board on the discussions with Company A. The Board again considered the perceived risks and benefits of the proposed corporate inversion structure to Ocata and its stockholders and the valuation proposed by Company A, all of which remained materially unchanged since the parties began their dialogue. The Board concluded that the terms proposed by Company A presented potential uncertainties and risks to Ocata stockholders that outweighed the potential benefits. However, the Board deemed it advisable to continue engaging with Company A and authorized management to propose revised terms to Company A that included a reduced valuation for Company A in the transaction and a larger percentage ownership of the combined company for Ocata stockholders, and required that the transaction not be structured as a corporate inversion. Ocata management also reported to the Board on its evaluation of the licensing proposal from Astellas.
By April 7, 2015, Company A and Ocata had reached an impasse in their discussions concerning a potential strategic transaction, including with respect to the inversion structure and relative valuations. Accordingly, on such date, the parties terminated discussions.
On April 7, 2015, Ocata made available to Astellas and its advisors an online data room containing due diligence information regarding Ocata’s RPE program to facilitate the licensing relationship discussions.
On June 2, 2015 through June 4, 2015, representatives of Astellas met with representatives of Ocata at Ocata’s corporate headquarters to conduct diligence sessions related to the RPE program licensing discussions.
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On June 16, 2015, Ocata announced a registered direct equity offering of common stock and warrants to be sold in combination, with one warrant to purchase 0.50 of a share of common stock for each outstanding share of common stock sold. The combined purchase price for each share of common stock and accompanying warrant was $5.50, for an aggregate of approximately $28.2 million after deducting applicable underwriting discounts and estimated offering expenses payable by the Company. Jefferies served as lead joint bookrunning manager for Ocata in this offering.
On August 18, 2015, Ocata entered into a loan and security agreement with Silicon Valley Bank for a loan amount of up to $10 million.
On August 18, 2015, Astellas’ associate director of business development contacted Ocata’s senior vice president for business development and stated that Astellas would deliver the final draft of the license agreement within a few days and that it did not anticipate any significant issues in finalizing the agreement.
On August 25, 2015, Eastern time (August 26, 2015, Tokyo time) Astellas’ chief executive officer called Ocata’s chief executive officer and indicated that Astellas planned to send a proposal that would outline Astellas’ proposed terms of an acquisition of Ocata at a price of $8.00 per Share. During the call, Astellas’ chief executive officer and Ocata’s chief executive officer discussed the possibility of meeting on September 6, 2015 in Boston, Massachusetts. Ocata’s chief executive officer indicated that he would inform the Board of Astellas’ interest and the possible in-person meeting.
On August 25, 2015, Astellas’ vice president of business development sent to Ocata’s chief executive officer a written preliminary non-binding expression of interest in an acquisition of Ocata by Astellas at a price of $8.00 per Share in cash (the “Initial Proposal”). The Initial Proposal was subject to completion of due diligence, negotiation of a definitive merger agreement, and receipt of all necessary internal approvals by Astellas. The Initial Proposal also requested a 30-day exclusivity period to negotiate a transaction between the parties. The Initial Proposal also mentioned that Astellas had retained Citigroup Global Markets Inc. and Citigroup Global Markets Japan Inc. (together, “Citi”) as Astellas’ financial advisor in connection with a potential acquisition of Ocata.
On August 26, 2015, the Board held a meeting to discuss, among other things, the Initial Proposal. Also present at the meeting were members of Ocata management and representatives of Goodwin Procter. Representatives of Goodwin Procter reviewed the Board’s fiduciary duties in the context of evaluating the Initial Proposal. The Board engaged in a preliminary discussion of the terms of the Initial Proposal. The Board concluded that it should further review the Initial Proposal and any response to Astellas in the context of Ocata’s short- and long-term business strategies and possible interest from other potential interested parties. The Board authorized Ocata’s chief executive officer to attend the proposed meeting with Astellas’ chief executive officer to be held on September 6, 2015 and to obtain further insight from Astellas in that meeting regarding its perspectives on the valuation and other terms contemplated by the Initial Proposal. The Board also discussed the advisability of engaging a financial advisor to provide advice to the Board with respect to the Initial Proposal and any other proposals from Astellas or other parties for a potential strategic transaction involving Ocata. The Board authorized management to inquire whether Jefferies would be available to act as a financial advisor to Ocata in connection with a potential strategic transaction. The Board considered Jefferies as a potential investment banking firm candidate to assist and advise the Board because of Jefferies’ substantial knowledge of and familiarity with Ocata and the industries in which it operates, including through its prior involvement in assisting Ocata in connection with Company A’s proposal and serving as lead joint bookrunning manager for Ocata’s registered direct equity offering in June 2015. The Board also authorized management to evaluate the Initial Proposal and explore potential strategic transactions with the assistance of Jefferies, subject to Jefferies’ engagement and confirmation that Jefferies did not have any material relationships with Astellas that would present a potential conflict of interest in Jefferies serving as Ocata’s financial advisor.
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On August 27, 2015, and again on August 30, 2015, at Ocata’s direction, representatives of Jefferies contacted representatives of Citi and had conversations to assist Jefferies in understanding Astellas’ valuation reflected in its Initial Proposal.
On August 27, 2015, Ocata’s senior vice president for business development spoke to Astellas’ associate director of business development by telephone and inquired as to whether Astellas still had interest in pursuing the potential licensing agreement that the parties were in the midst of negotiating as an alternative to Astellas’ acquisition of Ocata. Astellas informed Ocata that Astellas wished to acquire Ocata and would no longer be pursuing a licensing transaction.
On August 31, 2015, the Board held a meeting to further evaluate the Initial Proposal. Also in attendance at the meeting were members of Ocata management and representatives of Goodwin Procter. Representatives of Goodwin Procter reviewed with the Board its fiduciary duties in connection with considering a potential sale of Ocata. At the invitation of the Board, Jefferies then joined the meeting to discuss with the Board certain financial aspects of the Initial Proposal. In its consideration of the Initial Proposal, the Board reviewed Ocata’s short- and long-term business strategies and prospects as a standalone business, the competitive landscape and market trends in the industry, and the challenges confronting Ocata in achieving its strategic objectives, including Ocata’s significant capital funding needs for its ongoing clinical trials, the challenges in securing advantageous licensing partnerships to contribute to the funding of Ocata’s development operations, the performance and status of Ocata’s research and development programs, as well as the significant cost levels required to continue and maintain these programs and the long development period and inherent uncertainty in the development of the Company’s treatment programs, and in obtaining regulatory approvals for such treatments. In light of this discussion, the directors concluded that they should review the Initial Proposal in the context of Ocata’s standalone plan and possible interest from other potential strategic partners. While the Board determined to further evaluate the Initial Proposal, it concluded as a preliminary matter that Jefferies should contact Citi, and in an attempt to seek an improved price from Astellas, indicate that the Board believed that the Initial Proposal undervalued Ocata. The Board also concluded that it was not appropriate at this time to consider or respond to Astellas’ request to engage in exclusive negotiations.
On September 1, 2015, in accordance with the Board’s directives, representatives of Jefferies communicated to representatives of Citi that after considering the Initial Proposal, the Board believed that the Initial Proposal did not adequately value Ocata and its RPE program. It was determined that Astellas should conduct further due diligence, expanding the scope of its review to cover all relevant aspects of Ocata’s business, operations and assets so that Astellas could consider making a potential revised proposal.
On September 3, 2015, the Board held a meeting to further discuss the Initial Proposal and management’s standalone plan. In attendance at the meeting were members of Ocata management and representatives of Goodwin Procter. Ocata management discussed with the Board the standalone plan and management’s preliminary forecasts for 2016 – 2023 and underlying assumptions. Jefferies then joined the meeting and discussed the financial terms of the Initial Proposal. The Board further discussed the terms of the Initial Proposal, as well as potential responses to Astellas. The Board also discussed the possibility of contacting other parties that might be interested in a strategic transaction with Ocata. The Board concluded that it would defer a decision regarding any such solicitation until later in its consideration of the Initial Proposal in an effort to first determine whether a proposal by Astellas might lead to a transaction that could be in the best interests of Ocata’s stockholders.
Following the Board’s consideration of the opportunities and risks if Ocata were to remain independent and further discussion regarding the Initial Proposal, the Board decided to reject the Initial Proposal as not in the best interests of Ocata’s stockholders and also decided that granting Astellas a right to exclusive negotiations was not appropriate at this time, particularly in view of the fact that the Board had not yet determined whether to contact other potentially interested parties. However, the Board determined that Ocata should continue its discussions with Astellas and authorized management to provide Astellas with additional due diligence access and again to
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seek a price increase from Astellas. The Board authorized Ocata’s chief executive officer to convey this conclusion to Astellas’ chief executive officer at their upcoming meeting, but also to indicate that Ocata remained receptive to an ongoing dialogue.
On September 4, 2015, to facilitate further discussions, Ocata and Astellas entered into a new confidentiality agreement, which superseded the first confidentiality agreement between the parties and included a standstill provision that would terminate if Ocata entered into a definitive agreement with a third party to effect a business combination.
On September 6, 2015, Ocata’s chief executive officer and Astellas’ chief executive officer met in Boston, Massachusetts. At the meeting, Ocata’s chief executive officer gave a presentation regarding Ocata, including a review of Ocata’s preclinical programs that were not included as part of the RPE program. At the meeting, Ocata’s chief executive officer also indicated that Astellas should increase its proposed price per Share in order for the proposal to be viewed more favorably by the Board. The parties agreed to revisit price discussions after completion of Astellas’ due diligence review of Ocata, and Astellas’ chief executive officer indicated that Astellas would consider submitting a revised proposal at that time. No specific terms of a potential strategic transaction were discussed during the meeting. Following the meeting, the Ocata chief executive officer updated the Board members regarding the meeting.
Beginning on September 9, 2015, Ocata made available to Astellas and its advisors in Ocata’s online data room additional nonpublic information regarding Ocata.
From September 9, 2015 through November 9, 2015, representatives of Ocata and Astellas engaged in various due diligence discussions concerning Ocata’s business. During that period, representatives of Astellas conducted due diligence on Ocata and numerous meetings and teleconferences were held between various representatives and legal advisors to the respective companies.
On September 10, 2015, the Board held a meeting, among other things, to discuss further the Initial Proposal. Also in attendance at the meeting were members of Ocata management and representatives of Goodwin Procter. Ocata’s chief executive officer reported to the Board on his September 6, 2015 meeting with Astellas’ chief executive officer. The Board authorized Ocata’s management and advisors to engage in further discussions with Astellas and its advisors.
On September 17, 2015, Ocata provided to Astellas certain prospective financial information regarding Ocata for the fiscal years 2015—2017, which was materially consistent with the operating model that Ocata management had prepared and provided to the Board on September 3, 2015 (see “—Certain Prospective Financial Information About Ocata” on page 30 of this Schedule 14D-9 for further detail).
On September 21, 2015, the Board held a meeting to, among other things, discuss further the Initial Proposal. Also in attendance at the meeting were members of Ocata management and representatives of Goodwin Procter. Ocata’s chief executive officer updated the Board on the status of Astellas’ due diligence and potential timing for receiving a revised proposal. The Board authorized Ocata’s management and advisors to continue discussions with Astellas and its advisors. The Board then considered the formal engagement of Jefferies and the material terms of the proposed Jefferies engagement letter, and after discussion determined to finalize Jefferies’ engagement as Ocata’s financial advisor to assist the Board in its evaluation of strategic alternatives, subject to a mutually satisfactory engagement letter with Jefferies. On September 22, 2015, Ocata formally entered into an engagement letter with Jefferies as authorized during the September 21, 2015 Board meeting.
On September 24 and 25, 2015, representatives of Ocata and representatives of Astellas, together with their respective advisors, held meetings in Boston, Massachusetts at which representatives of Ocata gave presentations to representatives of Astellas. The presentations included an overview of the Company, its research and development program, clinical development, human resources, legal and financial matters, as well as regulatory
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compliance matters. Neither the Ocata representatives nor the Astellas representatives made any proposals during these meetings or otherwise discussed the specific terms of a potential strategic transaction.
From September 28, 2015 to October 19, 2015, representatives of Ocata had follow-up discussions with representatives of Astellas to discuss Ocata’s business.
On October 1, 2015, the Board held a meeting to discuss the status of the discussions with Astellas and next steps. Also in attendance at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Ocata’s chief executive officer updated the Board on Astellas’ continued due diligence on Ocata. At the meeting, Jefferies updated the Board on its recent discussions with Citi and, based on these discussions, the expected timing for Astellas to submit a revised proposal. The Board concluded that any revised proposal from Astellas should be considered in light of the risks and opportunities facing Ocata and in consideration of the management standalone plan. The Board directed Ocata’s management and advisors to continue discussions with Astellas and its advisors in anticipation of receiving a revised proposal.
The Board then engaged in a general discussion concerning whether and when it might be advisable to approach and discuss a potential strategic transaction with other parties. The Board discussed the potential risks and benefits of commencing a process in which one or more parties could be invited to review confidential information and submit indications of interest with respect to a potential business combination involving Ocata. In particular, the Board discussed the potential disruptions to Ocata’s business during a protracted process, the risk of leaks that might arise from contacting other parties in the industry, and the potential impact of such leaks on Ocata’s business, including the potential loss of development partners and employees, and on the discussions with Astellas. The Board also discussed the potential need to disclose during such process proprietary and confidential information to competitors and potential competitors. The Board recognized that the type of solicitation process would in part depend upon the price and other terms presented by Astellas in its revised proposal and discussed the risk that Astellas might withdraw its proposal if Ocata approached other parties. Based on the benefits and risks discussed, the Board concluded that approaching other potential strategic buyers would be prudent and in the best interests of Ocata’s stockholders, but only those companies that the Board determined to be most likely interested and capable potential acquirors of Ocata.
The Board, with input from management and Jefferies, also discussed the general universe of potential acquirers that might be contacted. In determining potential likely strategic buyers, the Board considered various factors, including: each company’s potential interest in a strategic transaction with Ocata given such company’s industry position and perceived strategic priorities; such company’s financial strength and resources to pursue a strategic transaction in a timely manner and improve upon the terms of Astellas’ proposal; the risk of potential leaks in engaging with such company; and such company’s experience in efficiently evaluating, pursuing and consummating the acquisition of a public company of the size and nature of Ocata.
Following the October 1, 2015 Board meeting, and in accordance with the Board’s directives, members of Ocata management discussed with Jefferies strategic parties that were viewed as most likely to fit the criteria discussed with the Board at its October 1, 2015 meeting, five of which were viewed as parties that should be contacted following receipt of Astellas’ revised proposal. Company A was not included on the list because Ocata had negotiated with Company A, but did not reach an agreement regarding a business combination with Company A, in early 2015, and Company A was not viewed as a credible counterparty partner for Ocata as a result of Company A’s recent strategic transaction activities and financial position. Financial buyers also were not included because the Board concluded that the pre-revenue profile of Ocata was inconsistent with the type of acquisition targets pursued by financial buyers.
On October 9, 2015, Astellas’ outside counsel, Covington & Burling LLP (“Covington & Burling”), circulated a first draft of the Merger Agreement to Goodwin Procter. The draft Merger Agreement provided for a tender offer by an indirect wholly-owned subsidiary of Astellas for all of the outstanding Shares, to be promptly followed by a merger in which the Shares not tendered in the Offer would be entitled to receive the tender offer
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price, without interest and less applicable tax withholding. The draft Merger Agreement provided, among other things, for the payment by Ocata of a termination fee if the Merger Agreement were terminated under certain specified circumstances and reimbursement by Ocata of Astellas’ transaction expenses of up to $7 million if the Merger Agreement were terminated under certain other circumstances.
On October 19, 2015, Astellas’ chief executive officer and Ocata’s chief executive officer spoke by telephone. On this call, Astellas’ chief executive officer indicated that Astellas was willing to increase its proposed purchase price to $8.40 per Share. Ocata’s chief executive officer responded that he would discuss Astellas’ revised proposal with the Board. Later on October 19, 2015, Ocata received a revised written, non-binding proposal from Astellas to acquire Ocata for $8.40 per Share in cash (the “October 19 Proposal”). The October 19 Proposal was otherwise substantially identical to the Initial Proposal, except that it did not provide for an exclusive negotiation period. The Ocata chief executive informally updated the Board members of the receipt of the October 19 Proposal.
Between October 21, 2015 and October 22, 2015, in accordance with the Board’s directives, Jefferies contacted five strategic parties previously discussed with the management of Ocata following the Board meeting on October 1, 2015 meeting, to inquire whether they would have interest in a strategic transaction with Ocata, noting that Ocata had received an unsolicited proposal from a third party. In the following days thereafter, one of the parties indicated that a strategic transaction with a pre-revenue company of Ocata’s profile was not within its strategic focus, and the other four parties indicated that they were not interested in pursuing a strategic transaction with Ocata without specifying the reasons for such decision.
On October 25, 2015, the Board held a meeting to discuss, among other things, the October 19 Proposal, the solicitation of selected potential strategic acquirers, and management’s standalone plan. In attendance at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Representatives of Goodwin Procter reviewed with the Board its fiduciary duties in connection with considering a potential sale of Ocata. Jefferies discussed with the Board the mergers and acquisitions landscape generally and within Ocata’s industry, the status of discussions with Astellas and the other potential acquirers, including the fact that none of the parties contacted indicated interest in a potential strategic transaction with Ocata. Jefferies also discussed certain financial aspects of the October 19 Proposal.
At the meeting, members of Ocata management informed the Board that Ocata was anticipating a potential delay of approximately four months in randomizing patients in its AMD Phase 2 study as a result of a higher than anticipated screen failure rate among enrolled patients against the strict entry criteria for the study. It was anticipated that there could be a corresponding delay in the Company’s ability to access capital, which previously was expected to follow delivery of interim results of the clinical study. It was not anticipated that this screening delay would delay the overall study timetable. In light of this development, the Board requested that management prepare a plan for a reduction in near-term operating expenses to account for this potential delay.
The Board considered Astellas’ increased purchase price of $8.40 per Share in cash in light of the management standalone plan and risks and opportunities facing the business. In its consideration of the October 19 Proposal, the Board continued to review Ocata’s short- and long-term business strategies, the competitive landscape and market trends in the industry, and the challenges confronting Ocata in achieving its strategic objectives, including Ocata’s capital funding requirement for its ongoing clinical trials, the challenges in securing advantageous licensing partnerships to contribute to the funding of Ocata’s development operations, the performance and status of Ocata’s research and development programs, as well as the significant cost levels required to continue and maintain these programs and the long development period and inherent uncertainty in the development of the Company’s treatment programs, including obtaining regulatory approvals for such treatments. Ocata’s management discussed with the Board the potential benefits to Ocata’s stockholders of an acquisition of Ocata, including by providing immediate liquidity to stockholders while eliminating their exposure to the risks in Ocata’s standalone plan.
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Although the Board believed that Astellas’ proposed $8.40 per Share purchase price would provide substantial value to Ocata’s stockholders, the Board discussed how best to further enhance stockholder value and other potential strategic alternatives, including a possible sale or other strategic transaction involving Ocata. Representatives of Jefferies updated the Board on the status of discussions with other companies that had been approached and again noted that no indications of interest had been received from these parties. The Board again considered the potential advantages and disadvantages of contacting and discussing a potential transaction with additional third parties. Based on the benefits and risks discussed, the Board concluded that widening the solicitation efforts and approaching a limited number of additional potential strategic buyers that could have tangential interest in a strategic transaction with Ocata would be prudent and in the best interests of stockholders, and authorized Jefferies to contact additional parties based on the criteria previously discussed by the Board. The Board also discussed, with input from Jefferies and Goodwin Procter, the potential for other companies to pursue an acquisition of Ocata following announcement of a transaction with Astellas, provided that the merger agreement with Astellas contained appropriate provisions that allowed the Board to engage in discussions with such other companies.
Based on the discussion at this meeting and the earlier Board discussions, the Board concluded that the October 19 Proposal would, if consummated, provide substantial value to the Company’s stockholders and could exceed the potential stock price growth that otherwise would likely be achieved under management’s standalone strategic business plan, particularly in light of the execution risks in the plan as well as in the Company’s industry and the markets generally. The Board also concluded that continuing to approach and discuss a possible transaction with other parties as a means by which to test the adequacy of Astellas’ proposal was advisable. The Board also authorized Ocata’s management and advisors to continue discussions with Astellas and to seek a further price increase and other improved terms from Astellas, and concluded that Jefferies should contact Citi to indicate that the Board believed that Astellas’ October 19 Proposal could still be improved upon.
On October 26, 2015, in accordance with the Board’s directives, representatives of Jefferies communicated to representatives of Citi that after considering the October 19 Proposal, the Board believed that the revised proposal still did not adequately value Ocata and its RPE program, and requested that Astellas further increase its proposed price.
Between October 26, 2015 and October 29, 2015 in accordance with the Board’s directives, Jefferies contacted four additional strategic parties. One of these parties responded that it was not interested in pursuing a strategic transaction with Ocata because ophthalmology would not be a strategic fit. Two parties did not express interest in a transaction and did not give specific reasons. Jefferies had multiple conversations with a fourth party (which we refer to as “Company B”), indicating that Ocata was expected imminently to execute an agreement for a strategic transaction with a third party and that timing was of the essence. Although Company B indicated to Jefferies that it might have interest in considering a potential strategic transaction with Ocata, Company B did not promptly or actively act upon its stated interest. Ocata was aware through media reports that Company B was involved in its own evaluation of a potential strategic combination with a third party and assumed that this may in part have been a reason that its communications with Jefferies proceeded slowly.
On October 27, 2015, Astellas’ chief executive officer and Ocata’s chief executive officer spoke by telephone. Astellas’ chief executive officer indicated that Astellas was willing to increase its proposed purchase price to $8.50 per Share, that this was its best and final offer and that Astellas was prepared to move expeditiously to negotiate and sign a definitive agreement to effect the transaction. Ocata’s chief executive officer responded that he would discuss Astellas’ revised proposal with the Board.
On October 27, 2015, at the direction of Astellas, representatives of Citi informed representatives of Jefferies that Astellas’ $8.50 per Share proposed price was its best and final offer.
On October 28, 2015, Ocata received a revised written, non-binding proposal from Astellas to acquire Ocata for $8.50 per Share in cash (the “October 28 Proposal”). The October 28 Proposal was otherwise substantially identical to the October 19 Proposal.
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On October 29, 2015, the Board held a meeting to discuss, among other things, the October 28 Proposal, the solicitation of other potential strategic acquirers, and management’s standalone plan. In attendance at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Members of Ocata management updated the Board on developments since the last Board meeting. Representatives of Goodwin Procter reviewed with the Board its fiduciary duties in connection with considering a potential sale of Ocata.
Members of Ocata management reviewed with the Board management’s standalone plan, including financial forecasts that were substantially equivalent to the financial forecasts reviewed by the Board at the September 3, 2015 Board meeting except that to assist the Board and Jefferies in their review, the financial forecasts reviewed at this meeting included financial forecasts regarding Ocata’s anticipated future operations for the 11 years beyond 2023 (see “—Certain Prospective Financial Information About Ocata” on page 30 of this Schedule 14D-9 for further detail regarding Ocata’s projections). Members of Ocata management also reviewed with the Board a near-term cash preservation plan as requested by the Board at its October 25, 2015 meeting, and noted that a significant reduction in workforce likely would be required if Ocata were to remain independent in order to avoid a significant liquidity issue beginning in the fourth quarter of 2016. In this regard, the Board considered the fact that access to the capital markets for small biotech companies recently had slowed considerably, and that raising capital absent participation by company insiders and new positive pre-clinical data, and therefore at attractive valuations that would not be significantly dilutive to existing Ocata stockholders, could be difficult.
In order to assist the Board in evaluating the October 28 Proposal, Jefferies discussed management’s forecasts for 2016-2034 and preliminary financial perspectives regarding Ocata (see “—Certain Prospective Financial Information About Ocata” on page 30 of this Schedule 14D-9 for further detail regarding Ocata’s projections). The Board considered Astellas’ increased offer of $8.50 per Share in cash in light of the management standalone plan and risks and opportunities facing the business discussed by the Board at the prior meetings.
The Board discussed Ocata’s business and financial prospects, including management’s financial projections, and perceived risks associated with continuing the Company’s operations as an independent entity and the challenges in achieving its strategic objectives. In light of these discussions, the Board concluded that Astellas’ improved offer price would, if consummated, provide substantial value to Ocata’s stockholders and could exceed the potential share price growth that otherwise would likely be achieved under management’s standalone strategic business plan, particularly in light of the execution risks in the plan, capital markets trends, as well as the risks in Ocata’s industry and markets more generally. Ocata’s chief executive officer and representatives of Jefferies informed the Board that Astellas and Citi had stated that Astellas would not increase its offer beyond $8.50 per Share and that Astellas was prepared to move expeditiously to negotiate and sign a definitive agreement. Representatives of Jefferies reviewed with the Board the status of discussions with other companies that had been approached, including that none of the parties had expressed an interest in pursuing a strategic transaction with Ocata other than Company B, and that Company B remained slow to respond to Jefferies despite repeated requests to move quickly if interested in a strategic transaction with Ocata. The Board instructed Ocata management and its advisors to continue negotiation of the Merger Agreement with Astellas in accordance with the October 28 Proposal.
On October 30, 2015, Goodwin Procter sent a revised draft of the Merger Agreement to Covington & Burling. Thereafter, the parties negotiated the Merger Agreement, related documents and various issues via conference calls, and several drafts of the Merger Agreement and related documents were exchanged between the parties. The issues discussed and negotiated included, without limitation, the scope of the representations and warranties, the conduct of Ocata’s business between signing and closing of the transaction, the terms under which Ocata could respond to unsolicited proposals, the parties’ respective conditions to closing, Astellas’ obligation to indemnify and maintain insurance for Ocata’s directors and officers, the benefits to be offered to Ocata’s employees following the transaction, the rights of the parties to terminate the transaction, and the amount and conditions of payment by Ocata of the termination fee and expense reimbursement described above, and the terms of and the parties to be subject to Support Agreements requested by Astellas.
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On November 2, 2015, the Board held a meeting to discuss, among other things, the status of discussions with Astellas. Also in attendance at the meeting were members of Ocata management and representatives of Goodwin Procter. Representatives of Goodwin Procter provided an update on its negotiation with Covington & Burling regarding the Merger Agreement and the anticipated next steps in proceeding with negotiating a definitive merger agreement and related agreements with Astellas.
On November 8, 2015, the Board held a meeting to discuss the proposed terms of the transaction and the status of discussions with Astellas. Also in attendance at the meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Prior to the meeting, the Board received the most recent draft of the Merger Agreement and other relevant documents. Representatives of Goodwin Procter again reviewed the fiduciary duties of the Board in connection with a potential sale of Ocata. Representatives of Jefferies noted for the Board that, while Ocata had substantially completed negotiation of a confidentiality and standstill agreement with Company B, the negotiations regarding that agreement had proceeded slowly and an agreement had not been executed between the parties. Given the slow pace of the discussions with Company B, despite repeatedly informing Company B that it would need to proceed quickly if it was interested in a strategic transaction with Ocata, the Board concluded that Company B either did not have serious interest in a strategic transaction with Ocata at this time or was unable at this time to devote the necessary resources to fully engage with Ocata.
Representatives of Goodwin Procter provided an overview of the negotiation process to date with Astellas’ representatives, and discussed in detail Astellas’ proposed $8.50 per Share Offer Price, the material terms of the proposed Merger Agreement and form of Support Agreement. Representatives of Goodwin Procter reported that the following terms, among others, had been negotiated in the Merger Agreement: a substantial reduction, at Ocata’s request, in the termination fee to 3.25% of the equity value of the transaction; elimination of the requirement to reimburse Astellas for its expenses if the Merger Agreement were terminated under certain circumstances; the inclusion, at Ocata’s request, of the Board’s ability to revoke its recommendation to stockholders in the exercise of its fiduciary duties in the event of a material development that was not known or reasonably foreseeable to the Board as of or prior to the date of the Merger Agreement; the revision, at Ocata’s request, of the definition of “material adverse effect” to exclude general changes in the industry in which Ocata operates; the scope of each party’s representations and warranties; the parties’ respective conditions to closing; the conduct of Ocata’s business between signing and closing of the transaction; the benefits to be offered to Ocata employees following the transaction; Ocata’s ability to respond to unsolicited competing inquiries following the announcement of the transaction; the rights of the parties to terminate the transaction; and the terms of the Support Agreement to be signed by Ocata’s officers and directors.
The Board also again reviewed management’s forecasts for 2016-2034 (the management forecast for 2016-2034 is referred to as the “Ocata Projections” (see “—Certain Prospective Financial Information About Ocata” on page 30 of this Schedule 14D-9 for further detail regarding the Ocata Projections)) and Jefferies preliminarily reviewed its financial analysis of the Offer Price.
The Board then discussed the October 28 Proposal in the context of Ocata’s overall strategic alternatives, including continuing as a standalone company. The Board discussed in detail the advantages and risks of the proposed transaction that are described in “Reasons for the Recommendation of the Board” beginning on page 22 of this Schedule 14D-9, including, among other things, whether the Offer Price represented an attractive valuation of the Company for stockholders when considered in light of the Board’s knowledge and understanding of the business, operations, management, financial condition and prospects of the Company, including the various challenges presented if the Board were to reject Astellas’ offer and either pursue a strategic transaction at a later time or continue as a standalone company. In light of these discussions, the Board concluded that Astellas’ improved and final offer would, if consummated, provide greater certainty of value (and less risk) to Ocata stockholders relative to the potential trading price of the Shares over a longer period after accounting for the long-term risks to Ocata’s business resulting from operational execution risk and evolving industry dynamics. After considering the Company’s lack of strategic alternatives to the Astellas transaction and the uncertainty in the Company’s ability to continue as a standalone company given the challenges in achieving its strategic
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objectives, the Board directed the Company and its advisors to proceed toward the execution of a definitive agreement with Astellas expeditiously.
During the remainder of November 8, 2015 and on November 9, 2015, representatives of Ocata and Astellas had various telephonic discussions to finalize the Merger Agreement and related agreements.
On November 9, 2015, after the U.S. stock markets closed, the Board held a meeting to discuss the final terms of the proposed transaction and proposed definitive Merger Agreement and related documents. In attendance at that meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Jefferies reviewed its financial analysis of the $8.50 per Share cash consideration with the Board and rendered an oral opinion, confirmed by delivery of a written opinion dated November 9, 2015, to the Board to the effect that, as of that date and based on and subject to the various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken as described in such opinion, the $8.50 per Share cash consideration to be received in the Offer and the Merger, taken together as an integrated transaction, by holders of Shares (other than Astellas, Purchaser and their respective affiliates) pursuant to the Merger Agreement was fair, from a financial point of view, to such holders. After further discussion, the Board unanimously determined that the Merger Agreement, the Offer, the Merger and the other transactions contemplated thereby, were advisable and in the best interests of the Company and its stockholders, approved the Merger Agreement, the Offer, the Merger and the other transactions contemplated by the Merger Agreement in accordance with the DGCL, including Section 251(h), resolved to recommend that the stockholders of the Company accept the Offer and tender their Shares in the Offer, and took such actions as were necessary to render Section 203 of the DGCL inapplicable to the transactions contemplated by the Merger Agreement and the Support Agreements.
Later in the evening on November 9, 2015, the Merger Agreement was executed, and all signatories to the Support Agreements executed such agreements, and Ocata and Astellas jointly announced the execution of the Merger Agreement.
Reasons for the Recommendation of the Board
In evaluating the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, the Board consulted with Ocata’s management and legal and financial advisors. In the course of reaching its determination that the terms of the Offer and the Merger are advisable and in the best interests of Ocata and its stockholders and to recommend that holders of Shares accept the Offer and tender their Shares in the Offer, the Board considered numerous factors and benefits of the Offer and the Merger, each of which the Board believed supported its unanimous determination and recommendation. As a result, for the reasons set forth below, the Board recommends that Ocata’s stockholders tender their Shares in response to the Offer:
• Offer Price. The Board considered:
• the fact that the Offer Price represents a 90.6% premium to the trading price at which the Shares closed on November 9, 2015, the last trading day before the execution by Ocata and Astellas of the Merger Agreement;
• the fact that the Offer Price represents a premium of approximately 93.6% over the volume-weighted average trading prices for the Shares for the 30-day period ending on November 9, 2015;
• the fact that the Offer Price represents a premium of approximately 101.3% over the volume-weighted average trading prices for the Shares for the 90-day period ending on November 9, 2015;
• the Board’s belief that it had obtained Astellas’ best and final offer, and that, as of the date of the Merger Agreement, the Offer Price represented the highest per Share consideration reasonably obtainable.
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Ocata’s Operating and Financial Condition; Prospects of Ocata. The Board considered that the Offer Price of $8.50 per Share to be received by our stockholders in the transaction provides greater certainty
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of value (and less risk) to our stockholders relative to the potential trading price of our common stock over a longer period after accounting for the long-term risks to our business resulting from operational execution risk and evolving industry dynamics, noting in particular the costs and risks associated with developing, testing, manufacturing and commercializing the clinical stage products in Ocata’s RPE program, that potential therapeutic products would require additional extensive pre-clinical and clinical testing prior to any possible regulatory approval in the United States and other countries and may additionally require post-authorization outcome studies, that Ocata would require additional significant capital in order to execute on its strategy before achieving profitability or acceptance of its products in the medical community and the potential cost of capital, including the potentially dilutive impact to existing stockholders, the terms and structure of any such capital-raising transactions, and the execution risks associated with transforming a clinical stage biotechnology company focused on product development into a profitable ophthalmology company with sufficient scale and sales execution ability to compete effectively. Additionally, the Board noted that while the Company had sufficient cash to fund its operations through 2016, given the clinical delay associated with patient screening, a significant reduction in Ocata’s personnel likely would be required if the Company were to remain independent in order to extend its financial resources into early 2017. The Board considered the risks and uncertainties associated with such personnel reductions and Ocata’s ability to continue to commence or continue its clinical trials for its products or commercialize any products.
• Strategic Process. The Board considered its belief that the value offered to holders of Shares in the Offer and the Merger was more favorable to holders of Shares than the potential value of remaining an independent public company and that the Offer Price obtained was the highest that was reasonably attainable. The Board also considered the process through which Ocata, with the assistance of its financial advisor, engaged in or sought to engage in discussions with other companies believed to be the most likely candidates to pursue a business combination with or acquisition of Ocata.
• Cash Consideration; Certainty of Value. The Board considered the fact that the Offer Price will be paid in cash, providing certainty, immediate value and liquidity to holders of Shares.
• No Financing Condition. The Board considered the representation of Astellas and Purchaser that they would have at the Offer acceptance time and the Effective Time sufficient cash resources to pay fully the amounts required to be paid under the Merger Agreement and that the Offer and the Merger are not subject to a financing condition.
• Opinion of Ocata’s Financial Advisor. The Board considered the opinion of Jefferies, dated November 9, 2015, to the Board as to the fairness, from a financial point of view and as of such date, of the $8.50 per Share cash consideration to be received in the Offer and the Merger, taken together as an integrated transaction, by holders of Shares (other than Astellas, Purchaser and their respective affiliates), which opinion was based on and subject to the various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Jefferies as more fully described under the caption “Opinion of Ocata’s Financial Advisor.” Jefferies’ opinion does not constitute a recommendation as to whether any stockholder should tender Shares in the Offer or how any stockholder should act with respect to the Offer, the Merger or any other matter.
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The Merger Agreement. The Board considered the provisions of the Merger Agreement, including the agreed exclusions of certain events and conditions from the definition of “material adverse effect,” the ability of Ocata under certain circumstances to entertain unsolicited proposals for an acquisition that would reasonably be expected to lead to an offer that is superior to the Offer and the Merger, the ability of the Board under certain circumstances to withdraw or modify its recommendation that the holders of Shares accept the Offer and tender their Shares, including in connection with a superior offer, Ocata’s right to terminate the Merger Agreement under certain circumstances in order to accept a superior offer and enter into a definitive agreement with respect to such superior offer, the respective termination rights of Ocata and Astellas and the $11.8 million termination fee payable by Ocata under certain circumstances, which the Board believed was reasonable relative to termination fees in transactions of
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a similar size, would not likely deter competing bids and would not likely be payable unless the Board entered into a definitive agreement for a superior offer.
• Conditions to the Consummation of the Offer and Merger; Likelihood of Closing the Second Step Merger. Consummation of the Offer is conditioned upon stockholders tendering and not validly withdrawing a sufficient number of Shares such that Astellas will own at least a majority of the outstanding Shares (determined on a fully-diluted basis) immediately following closing of the Offer. The Board considered the likelihood of the consummation of the second-step Merger contemplated by the Merger Agreement if the Shares tendered pursuant to the Offer are accepted for payment.
• Timing of Completion. The Board considered the anticipated timing of the consummation of the transactions contemplated by the Merger Agreement, and the structure of the transaction as a cash tender offer for all outstanding Shares, including the fact that the parties elected to have the Merger effected pursuant to Section 251(h) of the DGCL to enable consummation of the Merger as soon as practicable following the consummation of the Offer, which should, subject to the satisfaction or waiver of certain closing conditions, allow holders of Shares to receive the Offer Price in a relatively short timeframe, followed by the Merger in which holders of Shares (other than Shares held (i) in the treasury of the Company or by Astellas or Purchaser and (ii) by stockholders who validly exercise appraisal rights under Delaware law with respect to such Shares) will receive the same consideration as received by those holders of Shares who tender their Shares in the Offer. The Board considered that the potential for closing in a relatively short timeframe could also reduce the amount of time in which Ocata’s business would be subject to the potential uncertainty of closing and related disruption.
• Extension of Offer Period. The Board considered that Purchaser must extend the Offer for one or more periods until March 9, 2016, if at any scheduled expiration date of the Offer any condition to the Offer has not been satisfied or waived (to the extent so waivable by Astellas or Purchaser).
• Appraisal Rights. The Board considered the availability of statutory appraisal rights to Ocata’s stockholders who do not tender their Shares in the Offer and otherwise comply with all required procedures under the DGCL.
• Support Agreements. The Board considered the fact that the Support Agreements with our directors and executive officers terminate in the event that Ocata terminates the Merger Agreement, which permits those persons to support a transaction involving a superior proposal.
In the course of its deliberations, the Board also considered a variety of material risks and other countervailing factors related to entering into the Merger Agreement that previously had been identified and discussed by management of Ocata and the Board, including, but not limited to the following:
• the fact that Ocata stockholders will not be entitled to participate in any potential future benefit from Ocata’s execution of management’s standalone strategic business plan;
• the Merger Agreement precludes Ocata from actively soliciting alternative transaction proposals and requires payment by Ocata of a termination fee to Astellas under certain circumstances, including in the event the Merger Agreement is terminated by Ocata to accept a superior offer;
• the possibility that the transactions contemplated by the Merger Agreement, including the Offer and the Merger, might not be consummated, and the fact that if the Offer and the Merger are not consummated, Ocata’s directors, senior management and other employees will have expended extensive time and effort and will have experienced significant distractions from their work during the pendency of the transaction, Ocata will have incurred significant transaction costs and Ocata’s relationships with its customers, key partners, employees and other third-parties may be adversely affected;
• the effect of the public announcement of the Merger Agreement, including effects on Ocata’s relationship with its development partners and other business relationships and Ocata’s ability to attract and retain key management and personnel;
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• the risk that the parties may not receive the necessary regulatory approvals or clearance to complete the Offer or the Merger or that governmental authorities could attempt to condition their approvals or clearances of the Offer or the Merger on one or more of the parties’ compliance with certain burdensome terms or conditions which may cause one of the Offer conditions not to be satisfied;
• the likelihood of litigation; and
• the treatment of the consideration to be received by the holders of Shares in the Offer and the Merger as taxable to the holders of Shares for federal income tax purposes.
The foregoing discussion of the information and factors considered by the Board in reaching its conclusions and recommendations is intended to be illustrative and not exhaustive, but includes the material reasons and factors considered by the Board. In view of the wide variety of reasons and factors considered, the Board did not find it practicable to, and did not, quantify, rank or otherwise assign any relative or specific weights to the various specific factors considered in reaching its determination and making its recommendation. In addition, the Board did not reach any specific conclusion with respect to any of the factors or reasons considered. Instead, the Board conducted an overall review of the factors and reasons described above and determined that, in the aggregate, the potential benefits considered outweighed the potential risks or possible negative consequences of the Offer and the Merger.
