BlueMountain Capital Management Demands that Taro Pharmaceutical Industries LTD Publicly Disclose the Results of the Shareholder Vote Held at Its Annual General Meeting

Sep 13, 2013, 12:16 ET from BlueMountain Capital Management, LLC

NEW YORK, Sept. 13, 2013 /PRNewswire/ -- BlueMountain Capital Management, LLC ("BlueMountain"), one of the largest minority shareholders of Taro Pharmaceutical Industries LTD (NYSE: TARO; "Taro" or the "Company") demands that Taro immediately disclose the results of the shareholder vote at its Annual General Meeting (the "General Meeting") held yesterday at 10 a.m. Israel Time in Tel Aviv.  We further demand that such disclosure, consistent with applicable Israeli law, include the full details of the vote for each proposal on the ballot including separate total shareholder votes and minority shareholder votes for each relevant item.  We note that under Israeli law Taro was required to disclose this information at the meeting, but in any event the Company's representatives indicated that the results would be disclosed to the market yesterday.  The unexplained delay in announcing the vote should be of concern to all shareholders and, unfortunately, appears consistent with the Company's continued disregard for its minority shareholders.

It is our belief that regarding items 7a and 7b, which are the re-election of the Company's external directors, the required majority of minority shareholders who vote threshold was not attained and therefore that these external directors could not have been re-elected.

In light of the requirements to disclose this information and out of respect for the pending Jewish holy day of Yom Kippur, Taro must disclose the voting results to shareholders today.

Since making our initial demand to nominate two candidates to Taro's Board of Directors (the "Board") on August 1, 2013 BlueMountain has gone to great lengths to act in good faith in the interests of all minority shareholders and with the Company.  It should be noted that Taro made not a single effort to constructively communicate with BlueMountain on this matter.  BlueMountain has also gone to great lengths to inform the Company of its concerns regarding the form of the proxy process and the structure and integrity of the voting process.  Taro has dismissed these efforts. 

We believe that the stock price appreciation since the termination of the proposed acquisition by Sun and since our nomination of candidates in this process, together with the nearly unanimous public and private support of Taro's minority shareholders known to us and the endorsement of Institutional Shareholder Services ("ISS") all point convincingly to the widespread belief in the need for enhanced corporate governance at Taro.  On this latter point, this past Monday September 9, 2013 we exercised our rights under New York State law to inspect Taro's register of shareholders.  Based on the information Taro disclosed to us, we believe there are no material minority shareholders known to the company that were not also known to us and thus we have a reasonable understanding of the sentiment of the minority shareholder base.

BlueMountain's goal is to improve Taro's governance for the benefit of all shareholders.  We are not seeking to take control of the Company.  There is no reason, in our opinion, that Taro should not have engaged minority shareholders in a meaningful dialogue on this matter other than its pure disdain for minority shareholder rights.  For those who may have doubted this point, the evidence should now be clear.  We note that the major incentives of Taro's controlling shareholder Sun Pharmaceutical Industries LTD ("Sun") remain at odds with those of the minority shareholder.  Sun consolidates Taro's full results in its financial statements and thus enjoys the benefit of Taro's performance due to the very high valuation applied to Sun's shares.  Sun does not need a higher share price for Taro in order to enjoy the full financial benefits of its ownership.  Yet, we believe that Taro should take all reasonable steps to maximize value delivered to shareholders, including by installing external board members that are responsive to the interests of all shareholders.  Why should Sun's shareholders' ownership of Taro be more valuable than that of minority shareholders?

Consistent with all comments BlueMountain has made since our initial public opposition to the proposed Sun buyout in August 2012, BlueMountain will consider the appropriate actions to protect its rights in this matter.  It should be clear by now that we have serious reservations about the integrity of this voting process.  Consequently we have been working in parallel to this process on contingencies should they be necessary.

Update Regarding the Events at the Annual Shareholders Meeting

For the benefit of our fellow shareholders who could not attend yesterday's General Meeting in Tel Aviv, we wish to share some important details.

Contrary to best practices in Israel, no business executive of the Company attended the meeting. Officially, the meeting was chaired by Adv. Yael Stein (Taro's in-house legal counsel in Israel), and Adv. Cliff Felig (Taro's external legal counsel) served as Secretary. When certain of the shareholders, who participated in the General Meeting protested about the absence of any senior executive or Board member, Taro's representatives claimed that this was the Company's practice and is permitted under the Company's Articles, and that the meeting is not the forum for shareholder debate. This is nonsensical since the entire point of the meeting is a forum for shareholder debate.  It also specifically contradicts Item 11 of the proxy statement for the meeting which was "to discuss the Company's consolidated financial statements for the year ended March 31, 2013."  We believe, once again, that the form and structure of the actual meeting not only contradicts the relevant law and the Company's own proxy statement, but is yet further proof of Taro's disdain for its minority shareholders.

Unfortunately Taro decided to make no audio recording of the meeting. Instead, the Secretary stated that his team would summarize the comments made by each shareholder and include them in the minutes of the meeting. Again, some of the shareholders protested about this, and such protest was allegedly recorded.  

BlueMountain's representative at the meeting, Adv. Oren Shenkar, requested the right to speak on the record, which was granted to him.

Adv. Oren Shenkar stated that he was our representative and that to our knowledge we are the second largest minority shareholder in the Company. He explained that over the past weeks we have raised concerns both in terms of the Board's treatment of the minority shareholders in general, and how it handled the process of preparing for this meeting in particular. He emphasized that we feel the need to point out again a few of the material flaws in Taro's conduct in connection with the General Meeting, which may have a significant impact on its outcome.

Our representative asked for the count of the shareholders participating in the General Meeting, and in particular the number of minority shareholders who participated in person or by means of a written vote. While this information must have been readily available to the Company, it refused to announce it, and further refused to announce the results of the votes.  The Company claimed that it would do so later in the same day, so that all of the Company's shareholders would receive the information at the same time. We are of the opinion that under Israeli law, the Company was required to state at the opening of the meeting the number of shares participating in the General Meeting and the number of minority shareholders. Moreover, it is our understanding that pursuant to Section 86 of the Israeli Companies law, the Chairperson of the meeting was supposed to declare at the General Meeting the outcome of the vote on each proposal. Our representative voiced his said opinion before the Chairperson and was answered that his comment was also noted.

Adv. Shenkar then turned to Mr. [REDACTED] of IVS Associates, Inc. ("IVS"), who in accordance with the Company Secretary's declaration was appointed by the Company as an independent supervisor to verify the integrity of the voting process, and explained to him at length the Israeli legal requirements. Adv. Shenkar specifically noted that in respect of Proposals 1, 3, 4, 5, 7a, 7b, 8a, and 8b (together most of the proposals on the General Meeting's agenda) each shareholder participating in the General Meeting, whether in person, by proxy or through the use of a voting card, was required to declare that he or she has no personal interest in the outcome of the said proposals (such shareholder is deemed a "Disinterested Shareholder"). Our representative made reference to the specific provisions of the Israeli Companies Law (Section 267(a)(b) – with respect to Proposal 1 – Remuneration Policy; Section 276 with respect to Proposals 3, 4, and 5 – the interested party transactions; and Section 239(b)(i) with respect to Proposals 7a, 7b, 8a, and 8b – the reelection and election of the external directors). Adv. Shenkar then presented to Mr. [REDACTED] the physical voting card and the "internet voting card" issued by the Company through Broadridge Financial Services Inc., and asked IVS's representative if he was able to confirm who were the Disinterested Shareholders, as both types of voting cards provided no box for checking the existence or absence of such interest. Taro's Secretary responded that Taro is not responsible for voting cards issued by any other person other than the Company and that in any event the issue was moot in view of the legal public disclosure requirements applicable to Taro since its controlling shareholder was required to publicly disclose its holdings in the Company.   As such the Company has identified the shares voted by such shareholder.  Our representative responded by pointing out that we alerted Taro in writing of this issue and that Taro deliberately ignored the problem, so it must have been aware of it. Furthermore, contrary to the Secretary's explanation, there may be shareholders who are not affiliates of the controlling shareholder, and yet have a personal interest in the outcome of the meeting or any specific Proposal on the agenda. This is why the definition of an Interested Party extends merely beyond that of a controlling shareholder.  In view of the above, we are of the opinion that IVS was unable to identify who is and who is not an Interested Shareholder, and is thus unable to reliably perform its basic duty of ensuring a proper voting outcome.

BlueMountain's representative went on to further ask Mr. [REDACTED] of IVS whether he could confirm that any of the voting cards where only partly filled out by the voting shareholder (i.e., the shareholder did not indicate his or her vote on all of the Proposals) and that in such event the vote was automatically recorded as per the "recommendation of the board". IVS's representative confirmed that there were such voting cards. Taro's Secretary also confirmed that this was done and claimed that doing so was legitimate. Adv. Oren Shenkar responded that, to his professional opinion, this practice was completely illegal and constituted grounds for disqualifying the vote.  It should be pointed out to our fellow shareholders that prior to the General Meeting, BlueMountain made Taro's Board aware of our analysis of the Israeli law which prohibits such conduct, and Taro ignored such alert.

Finally, our representative expressed our opinion that Taro's Board's actions in connection with our nominees (namely intentionally refusing, despite multiple attempts, to obtain the required information regarding their qualifications to serve as directors having accounting and financial expertise) and in connection with its active support of the two incumbent nominees, is nothing less than outrageous, and that in his opinion such conduct constitutes a serious breach of the Board's fiduciary duties to the Company and its minority shareholders. The Chairperson of the meeting refused to respond to these concerns, and the Secretary commented that these statements and the other issues raised by Adv. Oren Shenkar have been noted in the minutes of the meeting.

In view of the importance of the outcome of this meeting and the need to maintain its integrity, we feel the need to provide our fellow shareholders with the exact provisions of Regulations 11 and 7(a)(8) of the Companies Regulations (Voting in Writing and Position Statements), 5756-2005 (the "Voting Regulations"), which state the following (emphasis added):

"11.  Results of Written Voting

(a)    The Board shall appoint a person on its behalf (hereinafter the – "Supervisor") for the count of the votes of the shareholders who voted by voting cards and via the internet.

(b)   The Supervisor shall draw up a report specifying the vote of the shareholders in reference to the existence of a link as stated in Reg. 7(a)(8), where such specification is required; if the vote shall have been carried out over the internet, the date and time at which the vote was received, the identification code, the control code and the number of shares shall also be stated.

(c)    The Supervisor shall declare, by signing the report, that these are the results of the written vote, and his identity shall be authenticated on the report by an attorney at law.

(d)   The report shall be presented to the General Meeting.

(e)   The proxy cards, the recordings of the votes through the internet and the report shall be kept at the offices of the Company for 7 years from the date of the meeting."

"7.   The Form of the Voting Card

(a)  A voting card shall be made up of two parts; the first part shall include the following details, in the following order:

(8) A notation – in a vote on the appointment of an external director, as stated in Section 239(b) of the Law, on a revision of Articles of Association as stated in Section 262(b) of the Law, on the approval of an interested party transaction with a controlling shareholder as stated in Section 275 of the Law, or on the approval of a merger as stated in Section 320(c) of the Law, as well as in a vote for adoption of a resolution according to Section 121(c), if the Company shall have determined in its Articles of Association that such resolutions also be adopted by way of a vote in writing – that in Part B of the voting card, space is allocated in the second part to check the existence or absence of a relation, as required by the said Sections, and for a description of the nature of the relevant relation, as well as a clarification that the vote of anyone having failed to check the box or describe the nature of the link as aforesaid, shall not be counted;"

In the context of the Voting Regulations, having a "relation" means that the voting shareholder has a personal interest in the outcome of the applicable resolutions (i.e., he or she is an "Interested Shareholder").

It is our understanding that in view of the above stated provisions of the Israeli Voting Regulations, the provisions of the Israeli Companies Law and the declaration of the Chairperson of the General Meeting at the outset thereof, that IVS was appointed Supervisor of the voting process, and therefore:

  1. IVS's report must state the vote of each of the Shareholders, making specific reference to whether such shareholder is a Disinterested Shareholder or an Interested Shareholder.
  2. Such statement must be in writing, signed by the Supervisor and authenticated by an attorney-at-law.
  3. The Voting Regulations require the report to be presented to the General Meeting, which cannot be interpreted other than as requiring the Company, through the Supervisor, to declare at (and not after) the General Meeting the number of shares participating in the vote and the outcome of the vote on each Proposal.

As explained above, the role of the Israeli Supervisor is much broader than that of a typical US counterpart whose responsibility may be limited to the mere recording of the information set forth on the face of the card. The Israeli Supervisor has clear responsibility to ensure the integrity of the entire voting process. While we have no reason to doubt the integrity of IVS and its representative, we fear that IVS may not have been fully informed by the Company of its duties and responsibilities. We also believe that the information given to IVS to be verified was not collected properly and was not an accurate reflection of shareholder voting, thus rendering its verification meaningless.

SOURCE BlueMountain Capital Management, LLC