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IsZo Capital Writes to Taro Pharmaceutical Board Commenting on Management Proposals for 2011 Annual Shareholder Meeting; Reflecting on Sun Pharma's Response to Similar 2009 Proposals

NEW YORK, Dec. 23, 2011 /PRNewswire/ -- 

IsZo Capital Management LP, one of the largest minority shareholders of Taro Pharmaceutical Industries Ltd. (Pink Sheets: TAROF), announced today that it delivered the following letter to the Board of Directors of Taro commenting on management's proposals on the agenda for the upcoming annual meeting of shareholders of Taro, scheduled for December 29, 2011, and reflecting on Sun Pharmaceutical Industries Ltd.'s response to similar management proposals on the agenda for Taro's 2009 annual meeting of shareholders.

December 23, 2011

Board of Directors of
Taro Pharmaceutical Industries Ltd.

Euro Park (Italy Building)

Yakum Business Park, Yakum 60972, Israel

Attention: Dilip Shanghvi, Chairman of the Board
                Dan Biran, Chairman of the Audit Committee
                Members of the Special Committee Evaluating Sun Acquisition Proposal

Re: Management Proposals for Taro's 2011 Annual General Meeting of Shareholders

Reference: our letters dated November 29, 2011 and December 13, 2011

Dear Members of the Board, Audit Committee and Special Committee:

            In our letter dated November 29, 2011, to which you have still not responded, we expressed our vehement dissatisfaction with the pending acquisition proposal of Sun Pharmaceutical Industries Ltd. ("Sun") and demanded that you exercise your fiduciary duties to all shareholders of Taro Pharmaceutical Industries ("Taro"), and reject Sun's proposal as the offer price is grossly inadequate, substantially undervalues Taro on both an absolute basis and relative to Sun and is not in the best interest of Taro and its shareholders as a whole.

            In our second letter dated December 13, 2011, to which you have also failed to respond, we reemphasized our dissatisfaction with Sun's opportunistic offer and cited the open-ended liability protection management proposals you have placed on the agenda for this year's annual shareholder meeting, which show your blatant disregard for our original demand. By recommending that Taro's shareholders approve these proposals, which seek to grant broad indemnification, insurance and exculpation protections to Taro's board (which is controlled by Sun), including for breaches of its duty of care, violations of securities laws and disclosure obligations and violations in connection with a going private transaction (coincidentally, such as Sun's acquisition proposal), without making proper disclosures or involving Taro's minority shareholders, you have, at best, shown disregard for the minority shareholders of Taro and cast doubt on your motives.

            In this letter, we are behooved to point out, on behalf of the Taro minority shareholders, that history has a peculiar way of repeating itself and, sadly, Sun has now become the new Barrie Levitt, and Dilip Shanghvi, the new frontman implementing the controlling shareholder's agenda to the detriment of Taro's minority shareholders. As recently as two years ago, Sun unleashed a public media campaign harshly criticizing the then Levitt family-controlled Taro board for placing on the annual shareholder meeting agenda similar proposals to those the Sun-controlled Taro board is now presenting to Taro's shareholders for approval at the upcoming 2011 meeting. Such proposals related to the re-election of board members beholden to the then controlling shareholder, the election of external directors to the board without soliciting feedback from Taro's minority shareholders (which at that time, included Sun) and seeking shareholder approval to implement overbroad and unconscionable liability protections for Taro's directors.         

          We wish to thank Sun for eloquently stating two years ago our current position, when Sun found itself on the receiving end of a Levitt family-controlled Taro board that had forgotten its fiduciary duties to Taro's minority shareholders. For the benefit of Taro's other minority shareholders and to create a complete record of the brazen breaches of fiduciary duty by the Sun-controlled Taro board unfolding before our very own eyes, we expose Sun's blatant hypocrisy below and reiterate our demand that you exercise your fiduciary duties by (i) removing immediately Items 4 through 8 from the agenda of the upcoming shareholders' meeting, (ii) publishing an updated proxy statement without those voting items and (iii) rejecting Sun's grossly inadequate acquisition proposal.

            On December 15, 2009, Sun filed a Schedule 13D with the U.S. Securities and Exchange Commission ("SEC") urging Taro's minority shareholders to vote against four proposals on the agenda for Taro's 2009 annual shareholder meeting advanced by the then Levitt family-controlled Taro board. These proposals included: (1) the election of nine insider directors, eight of whom were incumbents, (2) the election of two external directors, (3) the ratification of Taro's past exculpation and indemnification undertakings and (4) the approval of open-ended exculpation and indemnification protections for the new external directors upon their election. Sound familiar? These proposals are similar to proposals (1) and (4)-(8) in the 2011 Taro proxy statement recently released by the Sun-controlled Taro board, except that the current liability protection proposals are broader in scope and even more suspect in light of Sun's pending takeover of our company.

            Incumbent Director Nominations

            In response to Taro's 2009 annual shareholder meeting proxy statement, Sun criticized the nomination by Taro's board for election of nine directors, eight of whom were incumbents, as inappropriate because "these directors have demonstrated over and over again their willingness to put the interests of the Levitt/Moros family above the interests of other shareholders."  No more appropriate is the fact that the five directors the Taro board is currently nominating for election at the 2011 annual meeting are all incumbents, and three of them are also directors or executives of Sun: Dilip Shanghvi is Sun's Chairman and Managing Director, Sudhir Valia is a Sun director, and Aalok Shanghvi, is both the son of Dilip Shanghvi and a Sun executive. The same situation denounced by Sun in 2009 is now advocated by Sun in 2011.  Then, Sun stated:  "The current Board has and continues to promote the interests of Taro's controlling shareholders . . . to the detriment of all other shareholders, using the shareholders' money to [advance the controlling shareholder's] agenda."  In the same way Sun voted against the Levitt family director slate in 2009, we intend fully to vote against the re-election of the Sun-controlled directors at the 2011 annual meeting, even if Sun takes the same actions it previously denounced and holds the required vote to re-elect them.

            Special Committee Appointment  

            Criticizing the 2009 management proposal for the election of external directors selected by the Levitt family-controlled Taro board without input from Taro's minority shareholders (then including Sun), Sun rightly pointed out that "[a]lthough Israeli law specifically requires external directors to represent the interests of Taro's public shareholders, Taro's directors have not consulted with any public shareholders in the selection process." Instead, noted Sun, "Taro has chosen two of Barrie Levitt's old cronies." Sun continued, "Taro's shareholders have every reason to believe that these nominees, like Taro's current directors, will be beholden to the Levitt/Moros family." Despite denouncing this type of conduct in 2009 as illegal and improper, Sun now engages in the same conduct in 2011.  Specifically, the Sun-controlled Taro board recently appointed a Special Committee to evaluate Sun's grossly inadequate, opportunistic offer to buy our company on the cheap, but resisted revealing the identity of its members to Taro's minority shareholders until pressured to do so by our November 29, 2011 letter. In the same way that the Levitt family-controlled Taro board failed to consult Taro's public shareholders in choosing Taro's external directors, the Sun-controlled Taro board has failed to consult or involve Taro's minority shareholders in appointing the Special Committee formed to safeguard our interests in connection with Sun's takeover proposal. These actions are more egregious in 2011 given Sun's looming going private offer. Therefore, we ask the same questions today that Sun asked in 2009: are Taro's supposedly independent directors (namely, the members of the Special Committee in the present case), truly loyal to Taro and all of its shareholders, or are they merely implements of the controlling shareholder's whims?

            Liability Protection Proposals

            Most reprehensible is the audacity of Taro's board (controlled by Sun) in asking Taro's minority shareholders to approve overly broad, open-ended liability protection management proposals of the same type denounced by Sun before the 2009 annual meeting of shareholders. In 2009, Sun lambasted the Levitt family-controlled Taro directors for "asking shareholders to exempt them from any legal responsibility for their performance as directors." Sun noted that the proposed indemnification arrangements were "greatly expanded" and urged that one "need not be cynical to conclude that this vastly expanded indemnification is simply a payback from the Levitt/Moros family to these directors for their efforts on the family's behalf." We agree with Sun. One need not be cynical to conclude that the vastly expanded director liability protections recommended by the Sun-controlled Taro board for adoption at the upcoming annual shareholder meeting are simply payback from Sun to these Taro directors (which include Sun's chairman and his son) for their efforts in their anticipated approval of Sun's grossly inadequate offer.

            Sun and the Sun-controlled Taro directors appear to suffer from poor memory. They seem to think we suffer from memory loss too. Let us refresh our collective memories:

          "Taro has asked you to vote to grant special benefits for certain of its current and former directors. These same directors . . . are now asking you to exempt them from any legal responsibility for their performance as directors.  Moreover, Taro is also asking you to approve a widely expanded indemnification agreement for these directors.  This proposed indemnification agreement contains 28 additional exclusions when compared to the previous indemnification agreement purportedly entered into with these directors.  If these resolutions were to be approved and then upheld by an Israeli court, the result would be that upon these directors being held liable by a court for their failures as directors . . . your company will be required to pay their damages for them and reimburse them for their legal expenses.  Taro's directors are seeking to use your money to protect their failures." –Position Statement Concerning the 2009 Annual Shareholder Meeting Filed with the SEC by Alkaloida Chemical Company, a Sun Affiliate, on December 11, 2009 (emphasis added)

            Clearly, Sun believed (when it was a minority Taro shareholder) that it was improper for Taro's directors to ask Taro's minority shareholders to use their own money to protect the 2009 Taro board for its failures.  Nevertheless, in a complete turnabout, Sun now self-servingly thinks it is proper to ask us, the current minority Taro shareholders, to use our own money to protect the Sun-controlled Taro board for its breaches of its fiduciary duties arising from, among other things, breaches of its duty of care, violations of securities laws and disclosure obligations and violations in connection with potentially accepting Sun's grossly inadequate going private offer.  We are confident, however, that the Israeli courts will take note of the fact that Sun has publicly admitted that these same type of protections are improper and illegal.

            Sun and the Sun-controlled Taro board must think Taro's minority shareholders are fools. Just as Sun's affiliate concluded in the 2009 position statement quoted above, we equally believe that this hypocritical and unconscionable attempt by the Sun-controlled Taro board to indemnify its directors is defective in the face of Sun's impending acquisition proposal and that "this resolution will also not be upheld by the Israeli courts, not least because it has been effectively designed to serve the interests of Taro's controlling shareholders at the expense of the public shareholders." Just as Sun advocated in 2009 in a similar context, we urge all Taro shareholders unaffiliated with Sun to vote against these liability protection management proposals to spare our company the additional expenditure of defeating this brazen usurpation of the shareholders' trust in court.

          Apparently, we are not the only ones who think this way. As part of its 2009 campaign against the Levitt family-controlled Taro board, Sun also solicited the opinions of three independent proxy advisory firms to support its criticism of the board's director nominees and indemnification proposals. In particular, the opinion from PROXY Governance noted how "the net effect of the [liability protection management] proposal would be . . . to transfer liability for [the boards'] failures from the incumbent directors to the company (and thus the shareholders themselves)." The indemnification, exculpation and insurance coverage that the Sun-controlled Taro board is now proposing is more expansive than that which the predecessor board sought in 2009, indicating that the Taro board is seeking to leave the minority shareholders without recourse for the board's current and seemingly impending fiduciary duty breaches in connection with Sun's opportunistic offer.

            We believe the Taro board would do well in heeding the prior words of its current chairman whom, wearing the hat of Sun's chairman in 2009, advised the Levitt family-controlled Taro board in connection with these liability protection management proposals as follows:  "[P]lease be advised that we will take all necessary legal action to reverse the cynical attempt by the Levitt family to reward you . . . with the funds of Taro, for the actions you have taken at their behest by purporting to ratify and expand your indemnification agreements. We are confident that the Israeli courts will reject this unwarranted raid on Taro's treasury."

            The current proposals to indemnify, insure and exculpate the Sun-controlled Taro board are no less of a "raid on Taro's treasury." The situation in 2009 arising from the Levitt family-controlled Taro board is no different now, except that Sun has stepped into the Levitts' shoes. Is the Board so blinded by its ties to Sun that it cannot see history repeating itself?  How does the Taro Board justify approving measures that Sun itself has publicly admitted are illegal and improper?

            Fair Value of Taro Shares

            Let's not forget why we are writing this letter. At the end of the day, what we seek is to protect shareholder value for all Taro shareholders, not just Sun and its affiliates. In connection with the 2009 Sun statements quoted above objecting to the very same type of behavior Sun and the Taro directors are now attempting to perpetrate, Sun advocated that "all shareholders should push for full transparency, re-listing of Taro's shares on NASDAQ, and the introduction of a new, professional board that acts in the interest of all shareholders."  We could not agree more and intend to make the same push, which is why we recommended in a prior letter that the board focus its energy on relisting Taro's shares so a proper market can be established for them and their fair value can be determined instead of wasting resources on Sun's opportunistic offer.

            We would like to remind you that we fully expect the members of the Board of Directors, the Audit Committee and Special Committee to act for the benefit of all of Taro's shareholders and conduct a process that will maximize Taro's shareholder value in the context of Sun's proposal.

            In light of the foregoing, we fully expect and demand that Taro remove immediately Items 4 through 8 from the agenda of the upcoming annual shareholder meeting with respect to the grant of overbroad and open-ended indemnification, insurance and exculpation protections to Taro's directors and management and to publish an updated proxy statement without those voting items. We also demand that the Special Committee reject Sun's current acquisition proposal as grossly inadequate and opportunistic

            We would be remiss if we did not close this letter by pointing out that we had high hopes for Taro when Sun replaced the Levitt family as the controlling shareholder of the company, in particular, in light of the world-renown business acumen of Sun's chairman and controlling shareholder (whom is now also Taro's chairman) and Sun's public statements signaling its intent to champion the cause of maximizing shareholder value for ALL Taro shareholders while pursuing transparency and corporate governance best practices. Unfortunately, our trust in Sun and Taro's management to wisely steward our investment in Taro has been apparently misplaced. While we strongly respect Mr. Shanghvi's achievements in the international business community, we must say, Taro's minority shareholders expected more from one of Forbes' 2010 persons of the year.


/s/ Brian Sheehy

Brian Sheehy
Managing Partner
IsZo Capital



SOURCE IsZo Capital Management LP
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