AI
Tuesday, July 22, 2008 2:30:12 PM
Here's an example of a company that couldn't sell themselves, CRTX reverse merging with Cornerstone. Cornerstone a company with a management that ran their prior company to zero. Amazing how many prospects targeted by their bankers passed, triple digits.
THE MERGER
This section and the section entitled “The Merger Agreement” beginning on page 115 of this proxy statement/prospectus describe the material aspects of the merger, including the merger agreement. While Critical Therapeutics believes that this description covers the material terms of the merger and the merger agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus, including the merger agreement, which is attached as Annex A to this proxy statement/prospectus, and the other documents to which Critical Therapeutics has referred to or incorporated by reference herein. For a more detailed description of where you can find those other documents, please see the section entitled “Where You Can Find More Information” beginning on page 297 of this proxy statement/prospectus.
Background of the Merger
Critical Therapeutics has regularly evaluated different strategies for improving its competitive position and enhancing stockholder value. As part of these evaluations, Critical Therapeutics has, from time to time, considered various potential strategic alternatives to pursuing its business plan, including acquisitions, divestitures, collaborations, business combinations and other strategic transactions.
In May 2006, Critical Therapeutics’ board of directors and management began exploring methods by which to improve Critical Therapeutics’ strategic position in the industry and enhance stockholder value. In September 2006, Critical Therapeutics engaged Lazard to assist in this process. During the remainder of 2006 and early 2007, Critical Therapeutics’ management, with the assistance of Lazard, assessed Critical Therapeutics’ long-term prospects, market position and possible strategic alternatives, including a merger or similar strategic transaction. During the period between September 2006 and March 2007, Critical Therapeutics, directly or through Lazard, contacted a total of 82 companies to assess whether those companies would be interested in discussing a possible merger or similar strategic transaction with Critical Therapeutics. As a result of the foregoing contacts, preliminary discussions were held with 12 companies concerning a possible merger or similar strategic transaction.
By March 2007, none of the companies that were contacted as part of this strategic process were interested in pursuing a merger or similar strategic transaction at that time. Accordingly, Critical Therapeutics decided to remain independent and to enter into a co-promotion agreement with DEY for ZYFLO and ZYFLO CR.
Following the decision to enter into the co-promotion agreement with DEY, Critical Therapeutics secured FDA approval for ZYFLO CR in May 2007 and commercially launched the product in September 2007 with 42 sales representatives. During this time, sales of ZYFLO remained relatively flat until the launch of ZYFLO CR despite the commencement of co-promotional detailing by DEY in May 2007 with an additional 200 sales representatives. From March 2007 through September 2007, Critical Therapeutics continued to consider other potential strategic transactions.
At a regularly scheduled board meeting on September 10, 2007, Critical Therapeutics’ board of directors and management reviewed the status of Critical Therapeutics’ commercial and research and development activities, including the risks and benefits of its upcoming launch of ZYFLO CR, as well as its financial position, long-term prospects, financing options and ongoing strategic and business development opportunities. Members of Critical Therapeutics’ management reviewed the status of ongoing discussions with potential strategic partners as well as other business development opportunities.
At a regularly scheduled board meeting on October 4, 2007, Critical Therapeutics’ board of directors and management reviewed Critical Therapeutics’ strategy, discussed potential options for increasing stockholder value and reviewed the status of ongoing discussions with potential strategic partners. Critical Therapeutics’ board noted that most of Critical Therapeutics’ competitors were significantly larger companies, with more resources, more product offerings and larger sales forces. Critical Therapeutics’ board was concerned that, notwithstanding the recent commercial launch of ZYFLO CR, the company would need to create a larger set of resources, including products and pipeline, to create a sustainable business model for long-term success as an independent, standalone company. Critical Therapeutics’ board concluded that, given, among other things,
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the overall difficulty for life sciences companies to obtain financing, there were significant risks to Critical Therapeutics’ long-term success as an independent, standalone company and that stockholders’ interests would be best served if Critical Therapeutics began to explore opportunities for a range of potential strategic transactions. On October 5, 2007, Critical Therapeutics’ board of directors further discussed the possible benefit of exploring various strategic alternatives with the assistance of a financial advisor. Based upon Lazard’s existing knowledge of Critical Therapeutics, as well as Lazard’s reputation, background and experience in the industry and in mergers and acquisitions generally, Critical Therapeutics’ board once again formally engaged Lazard, effective October 12, 2007, to advise it in considering potential strategic alternatives.
In October 2007, Critical Therapeutics began making and receiving general inquiries to gauge interest in potential business combinations with companies seeking to gain access to a commercial-stage respiratory therapeutics business in the United States. Critical Therapeutics’ management and board of directors, with the assistance of Lazard, identified public and private companies that might fit Critical Therapeutics’ strategic plans, focusing on specialty pharmaceutical companies potentially interested in acquiring Critical Therapeutics’ commercial assets, as well as research and development companies with clinical-stage assets in selected therapeutic areas potentially interested in merging with Critical Therapeutics.
On November 8, 2007, Critical Therapeutics publicly announced that it was evaluating a range of strategic alternatives that could result in potential changes to its current business strategy and future operations, including the sale or divestiture of certain assets, the merger or sale of the company or other strategic transactions.
During the period between October 2007 and April 2008, Critical Therapeutics conducted a targeted process in which a total of 36 companies were contacted to assess whether those companies would be interested in discussing a possible merger, acquisition or other strategic transaction with Critical Therapeutics. In connection with these discussions, Critical Therapeutics entered into confidentiality agreements with a total of 19 companies, including Cornerstone, for the purpose of exchanging non-public information to facilitate discussions. As a result of this process, preliminary discussions were held with nine companies concerning a possible merger transaction with or acquisition of Critical Therapeutics. Critical Therapeutics also prepared an electronic data room and granted access to that information to several companies, and was granted access to similar information by several companies. Critical Therapeutics conducted substantive scientific, commercial and financial due diligence on several of these companies during this period. Throughout this period, Critical Therapeutics’ management apprised the board of directors of these discussions both informally and through reports at board meetings. Between October 1, 2007 and May 1, 2008, Critical Therapeutics’ board met 29 times and discussed the ongoing strategic alternatives review process and discussions and negotiations with companies as part of this strategic review process.
Beginning in September 2007, Critical Therapeutics engaged in substantive discussions with a privately held biotechnology company, or Company X. Beginning in October 2007, Critical Therapeutics engaged in substantive discussions with a privately held biotechnology company, or Company Y. Beginning in December 2007, Critical Therapeutics engaged in substantive discussions with a publicly traded biotechnology company, or Company Z. Beginning in February 2008, Critical Therapeutics engaged in substantive discussions with Cornerstone.
On November 20, 2007, Critical Therapeutics’ board of directors held a meeting, also attended by members of Critical Therapeutics’ management and representatives of Wilmer Cutler Pickering Hale and Dorr LLP, or WilmerHale, Critical Therapeutics’ outside legal counsel, Lazard and outside diligence consultants, at which the board was briefed on the ongoing process to identify possible strategic transactions. In addition, the board received an overview of the development pipeline, commercial potential, business and operations of Company X and Company Y together with preliminary terms for a potential transaction with each company. After discussion, Critical Therapeutics’ board authorized management to continue discussions and engage in mutual due diligence with both companies, while continuing efforts to identify additional potential strategic partners.
At meetings on December 11 and 12, 2007, Critical Therapeutics’ board of directors received an update on the status of Critical Therapeutics’ strategic process from management and Lazard. Management and Critical
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Therapeutics’ outside diligence consultants reviewed with the board scientific, commercial and financial information on Company X and Company Y.
In late December 2007, after a number of meetings and discussions between Critical Therapeutics and Company X regarding the acquisition process and participating in a significant mutual due diligence review process, Company X indicated that it had other business priorities and had decided not to move forward with a merger with Critical Therapeutics.
In January 2008, after discussions between Critical Therapeutics and Company Y regarding the acquisition process, participating in a significant mutual due diligence review process and conducting negotiations regarding a definitive agreement, Company Y indicated that it had other business priorities and had decided not to move forward with a merger with Critical Therapeutics.
During the fourth quarter of 2007 and the first quarter of 2008, sales of ZYFLO CR were lower than anticipated. In addition, in March 2008, Critical Therapeutics began to experience problems in the supply chain for ZYFLO CR. During this time, Critical Therapeutics’ cash position also continued to decrease. In addition, conditions in the national economy and the financial markets in particular continued to present challenges for life sciences companies seeking financing. These factors reinforced the view of Critical Therapeutics’ board of directors that concluding the strategic alternatives process as soon as practical was in the best interests of Critical Therapeutics’ stockholders.
On February 14, 2008, Critical Therapeutics’ board of directors held a meeting, also attended by members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard, at which the board received an update on the strategic process, including information regarding the commercial, clinical and business operations of Company Z.
On February 15, 2008, Craig Collard, President, Chief Executive Officer and a director of Cornerstone, contacted by telephone Frank E. Thomas, then President, Chief Executive Officer and a director of Critical Therapeutics, to discuss the possibility of a strategic transaction between Cornerstone and Critical Therapeutics.
On February 20, 2008, Critical Therapeutics and Cornerstone executed a confidentiality agreement for the purpose of exchanging non-public information to facilitate discussions between the two companies. On or after February 20, 2008, Critical Therapeutics sent a detailed presentation regarding Critical Therapeutics via e-mail to representatives of Cornerstone.
On February 28, 2008, Thomas P. Kelly, Chief Financial Officer and Senior Vice President of Finance and Corporate Development of Critical Therapeutics, and Roger Heerman, Vice President of Sales and Marketing of Critical Therapeutics, held a telephone conference with Mr. Collard and Brian Dickson, M.D., Chief Medical Officer of Cornerstone. During this telephone conference, the parties made presentations to each other regarding their respective companies and their businesses.
On March 3, 2008, Cornerstone sent a detailed presentation regarding Cornerstone via e-mail to representatives of Critical Therapeutics and Lazard. Also on March 3, 2008, Mr. Collard e-mailed Mr. Thomas to inform him that Cornerstone was interested in continuing discussions regarding a transaction with Critical Therapeutics.
On March 4, 2008, Critical Therapeutics publicly announced that Mr. Thomas had informed Critical Therapeutics’ board of directors that he had resigned as a director effective March 2, 2008 and was resigning as President and Chief Executive Officer effective March 31, 2008, and that Trevor Phillips, Ph.D., Critical Therapeutics’ Senior Vice President of Operations and Chief Operating Officer, had been appointed as a director effective March 4, 2008 and would become President and Chief Executive Officer of Critical Therapeutics effective April 1, 2008.
In early March 2008, after many meetings and discussions between Critical Therapeutics and Company Z regarding the acquisition process, participating in a significant mutual due diligence review process and conducting negotiations regarding a definitive agreement, Company Z indicated that it had other business priorities and had decided not to move forward with a merger with Critical Therapeutics.
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On March 7, 2008, Mr. Collard, Dr. Dickson and Alastair McEwan, Chairman of the board of directors of Cornerstone, traveled to Critical Therapeutics’ offices in Lexington, Massachusetts and met with Dr. Phillips, Mr. Thomas, Mr. Kelly, Mr. Heerman and Roberta Tucker, Senior Vice President of Regulatory Affairs of Critical Therapeutics. During this meeting, the managements of both Cornerstone and Critical Therapeutics made presentations regarding their respective companies and their businesses. Representatives of Jefferies & Company, Inc., or Jefferies, Cornerstone’s financial advisor, were also present at this meeting.
Following the meeting on March 7, 2008, Critical Therapeutics and Cornerstone continued mutual due diligence on the business, assets and liabilities of each company, including telephone conferences and review of information contained in each company’s electronic dataroom. In addition, representatives of both companies’ management teams and their respective legal and financial advisors conducted numerous discussions regarding the potential terms of a transaction.
On March 12, 2008, Dr. Phillips, Mr. Kelly, Mr. Heerman and Mr. Thomas held a telephone conference call with Mr. Collard, Mr. McEwan and a representative of Jefferies regarding the proposed transaction with Cornerstone and the acquisition process in general.
On March 13, 2008, representatives of the parties’ management and financial advisors held a further telephone conference to discuss the proposed transaction with Cornerstone, potential deal terms and the acquisition process in general.
On March 17, 2008, Cornerstone sent a letter via e-mail to Critical Therapeutics reflecting a non-binding expression of interest regarding a potential merger with Critical Therapeutics in which Critical Therapeutics would issue common stock to Cornerstone stockholders for all of Cornerstone’s equity capital. In this letter, Cornerstone preliminarily proposed a transaction in which Critical Therapeutics’ stockholders would hold 34% of the combined company, based on Critical Therapeutics having a cash balance at closing of at least $20 million.
Critical Therapeutics’ board of directors met on March 20, 2008 in Cambridge, Massachusetts and by teleconference, together with members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard. At this meeting, representatives of Cornerstone made a presentation to Critical Therapeutics’ board regarding a possible strategic transaction between Cornerstone and Critical Therapeutics and related matters. Following this presentation, Cornerstone’s representatives departed the meeting. Critical Therapeutics’ board then continued to discuss a potential strategic transaction with Cornerstone. As part of this discussion, Lazard provided an update on the status of the strategic review process and potential transaction with Cornerstone, Dr. Phillips made a presentation to the board regarding the potential transaction and members of management discussed the due diligence performed on Cornerstone and the strategy, business and prospects for a combined company. Following this discussion, Critical Therapeutics’ board met in executive session without Critical Therapeutics’ management, other than Dr. Phillips, and unanimously agreed to continue to pursue discussions with Cornerstone and directed management to report back to the board on their progress.
Following the meeting on March 20, 2008, representatives of Critical Therapeutics and Cornerstone continued their mutual due diligence.
On March 21, 2008, Critical Therapeutics sent a letter via e-mail to Cornerstone with a response to Cornerstone’s expression of interest regarding potential terms of a transaction. In this letter, Critical Therapeutics preliminarily proposed a transaction in which Critical Therapeutics’ stockholders would hold 35% of the combined company. Critical Therapeutics also delivered to Cornerstone a detailed due diligence request list regarding legal, finance and other business matters relating to Cornerstone.
On March 25, 2008, Jefferies, on behalf of Cornerstone, sent a letter via e-mail in response to Critical Therapeutics’ letter of March 21, 2008. In that letter, Cornerstone preliminarily proposed a transaction in which Critical Therapeutics’ stockholders would hold 31% of the combined company, based on a projected cash balance at closing for Critical Therapeutics of $12 million.
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On March 25, 2008, Critical Therapeutics’ board of directors held a meeting by telephone conference at which, among other matters, Dr. Phillips provided the board with an update regarding the potential transaction with Cornerstone as well as the status of Critical Therapeutics’ discussions with and due diligence regarding other potential strategic transaction candidates.
Also on March 25, 2008, Critical Therapeutics, Cornerstone and their respective financial advisors held a telephone conference to discuss financial models for each company and pro forma models on a combined basis.
On March 28, 2008, members of Critical Therapeutics’ management attended due diligence meetings at Cornerstone’s offices in Cary, North Carolina with Chenyqua Baldwin, Vice President, Finance of Cornerstone. On March 29, 2008, members of Critical Therapeutics’ management attended due diligence meetings in Cary, North Carolina.
Also on March 28, 2008, Cornerstone sent a letter to Critical Therapeutics clarifying particular items regarding potential deal terms, including proposing an exclusivity period and proposing that the proportion of the combined company that Critical Therapeutics’ stockholders would hold would be variable based on Critical Therapeutics’ cash balance at closing.
On March 31, 2008, Critical Therapeutics received a legal due diligence request list from Cornerstone regarding legal, finance and other business matters relating to Critical Therapeutics.
Also on March 31, 2008, Critical Therapeutics’ board of directors held a meeting by telephone conference. Also present at this telephonic meeting were members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard. At this meeting, among other things, Dr. Phillips provided an update with respect to, and led a discussion with input from Lazard regarding, Critical Therapeutics’ ongoing process of reviewing strategic alternatives, including the status of discussions with Cornerstone and with other potential strategic transaction candidates. After extensive discussions, the board determined that the company should pursue further negotiations with Cornerstone regarding a possible business combination on a non-exclusive basis.
On April 8 and 9, 2008, representatives of Cornerstone and Critical Therapeutics and representatives of Jefferies and Lazard discussed further the financial models for each company and pro forma models on a combined basis.
On April 10, 2008, Critical Therapeutics’ board of directors held a meeting in Cambridge, Massachusetts and by telephone conference. Also present at this meeting were members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard, as well as Mr. Collard, Mr. McEwan and Dr. Dickson of Cornerstone and representatives of Jefferies. During the meeting, Cornerstone’s representatives made presentations to Critical Therapeutics’ board regarding a possible strategic transaction between Critical Therapeutics and Cornerstone. Following these presentations, Cornerstone’s representatives departed the meeting. Critical Therapeutics’ board then continued to discuss a potential strategic transaction with Cornerstone. Following this discussion, Dr. Phillips updated Critical Therapeutics’ board regarding the status of discussions with other potential strategic transaction candidates. Critical Therapeutics’ board determined that the stage of discussions with Cornerstone justified additional mutual due diligence and the negotiation of definitive documentation regarding a merger between the two companies.
On April 14, 2008, Critical Therapeutics’ board of directors met by telephone conference. Mr. Kelly and Scott B. Townsend, Senior Vice President of Legal Affairs, General Counsel and Secretary of Critical Therapeutics, participated in the meeting. Dr. Phillips and Mr. Kelly provided the board with an update on the status of discussions with Cornerstone regarding a potential transaction, the status of a draft definitive merger agreement with Cornerstone and the status of financial and accounting due diligence on Cornerstone. Dr. Phillips then provided Critical Therapeutics’ board with an update regarding the status of discussions with other potential candidates for a strategic transaction.
On April 15, 2008, Critical Therapeutics provided Cornerstone with a first draft of a definitive merger agreement. Between April 15, 2008 and April 30, 2008, representatives of Critical Therapeutics and
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Cornerstone negotiated the terms of the proposed merger agreement. Negotiations focused on, among other matters, the conditions to closing, post-signing operating covenants, termination rights, the amount of termination fees, required levels of cash, debt and working capital, representations and warranties, and the timing of the re-audit of Cornerstone’s financial statements.
On April 18, 2008, Dr. Phillips and Mr. Collard met by telephone conference to discuss various aspects of the proposed transaction, including operational and business strategy issues.
On April 24, 2008, Critical Therapeutics’ board of directors held a meeting by telephone conference. Also present at this meeting were members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard. At this meeting, among other things, Dr. Phillips provided an update on and led a discussion regarding the potential transaction with Cornerstone, including the status of financial, tax and accounting due diligence, and the status of negotiations regarding a draft definitive agreement with Cornerstone. After discussion, the board determined to proceed with the final negotiations of a definitive agreement with Cornerstone.
Following Critical Therapeutics’ board meeting on April 24, 2008, representatives of Critical Therapeutics, WilmerHale, Lazard, Cornerstone, Jefferies and Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., or Smith Anderson, Cornerstone’s outside legal counsel, continued negotiation of the definitive agreement. Preliminary agreement was reached on a number of matters, including agreement that the exchange ratio in the merger would provide that Critical Therapeutics’ stockholders would hold 30% of the combined company but without any condition that Critical Therapeutics have a minimum amount of cash or working capital as a closing condition and without any potential adjustment to the exchange ratio based on Critical Therapeutics’ amount of cash or working capital at closing. Later on April 24, 2008, WilmerHale provided a revised draft of the merger agreement to Cornerstone and its advisors reflecting these discussions and the preliminary agreement of Critical Therapeutics and Cornerstone.
On April 26, 2008, Critical Therapeutics’ board of directors held a meeting by telephone conference to receive an update on due diligence matters with respect to Cornerstone and the strategic fit of Critical Therapeutics and Cornerstone.
Between April 25, 2008 and April 30, 2008, counsel for Critical Therapeutics and Cornerstone had various communications regarding the merger agreement and related acquisition agreements and exchanged revised drafts of these agreements.
On April 28, 2008, members of Critical Therapeutics’ management and WilmerHale met by telephone conference with representatives of Cornerstone, including Mr. Collard, and Smith Anderson to discuss the process for final approval and execution of a definitive merger agreement, related disclosure obligations under applicable securities laws and regulations and a proposed communications plan and timeline.
On April 30, 2008, Critical Therapeutics’ board of directors met to further consider the proposed merger of Critical Therapeutics with Cornerstone and related matters. Also participating in the meeting were members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard. During that meeting:
• Dr. Phillips provided a summary of Critical Therapeutics’ process to date regarding consideration of a proposed transaction with Cornerstone, including an overview of the strategic alternatives process undertaken by the board generally, discussions with Cornerstone’s management, negotiations with respect to a proposed merger agreement and due diligence conducted by Critical Therapeutics;
• Dr. Phillips discussed with the board the strategic business rationale for a combination with Cornerstone, including with respect to the marketed products of, and product candidates under development by, both Critical Therapeutics and Cornerstone and the ability of the combined company to utilize Cornerstone’s existing commercial organization;
• Dr. Phillips presented his views on the competitive environment facing Critical Therapeutics;
• the board discussed Critical Therapeutics’ prospects as an independent, standalone company;
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• Mr. Kelly reviewed with the board various financial modeling scenarios, including models for Critical Therapeutics as a standalone company, Cornerstone as a standalone company and a combination of Critical Therapeutics and Cornerstone, in each case utilizing different assumptions regarding future business plans and financing needs;
• Mr. Heerman and Ms. Tucker discussed with the board their due diligence review with respect to Cornerstone’s historical and projected sales, its sales and marketing organization and its regulatory affairs;
• Lazard discussed with the board financial aspects of the proposed merger;
• the WilmerHale representatives outlined the fiduciary duties and responsibilities of the board under applicable law and summarized the principal terms of the proposed merger agreement and related acquisition agreements; and
• the board discussed at length the proposed business combination with Cornerstone, the appropriateness of the exchange ratio in the proposed merger and the nature of the deal protections, closing conditions, covenants and termination rights set forth in the proposed merger agreement, the competitive environment facing Critical Therapeutics and Critical Therapeutics’ prospects as an independent, standalone company.
Critical Therapeutics’ board of directors then reconvened on May 1, 2008 with members of Critical Therapeutics’ management and representatives of Critical Therapeutics’ legal and financial advisors. During that meeting:
• Critical Therapeutics’ board of directors again engaged in a discussion regarding the matters discussed at the April 30, 2008 meeting relating to the proposed business combination between Critical Therapeutics and Cornerstone;
• Lazard reviewed with Critical Therapeutics’ board its financial analysis of the exchange ratio provided for in the merger and rendered to Critical Therapeutics’ board an oral opinion, which opinion was confirmed by delivery of a written opinion, dated May 1, 2008, to the effect that, as of that date and based upon and subject to the assumptions, factors and qualifications set forth in its opinion, the exchange ratio was fair, from a financial point of view, to Critical Therapeutics; and
• Critical Therapeutics’ board further discussed and deliberated at length the proposed business combination with Cornerstone, the appropriateness of the exchange ratio in the proposed merger and the nature of the deal protections, closing conditions, covenants and termination rights set forth in the proposed merger agreement, the competitive environment facing Critical Therapeutics and Critical Therapeutics’ prospects as an independent, standalone company.
Following this discussion and deliberation, Critical Therapeutics’ board of directors unanimously determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable, fair to and in the best interests of the stockholders of Critical Therapeutics, unanimously approved the merger agreement and unanimously recommended that the Critical Therapeutics’ stockholders approve the issuance of Critical Therapeutics’ common stock pursuant to the merger agreement, the reverse stock split of Critical Therapeutics’ common stock and the name change of Critical Therapeutics to “Cornerstone Therapeutics Inc.”
Critical Therapeutics and Cornerstone executed the merger agreement on May 1, 2008 after the close of trading on The NASDAQ Global Market and made a joint public announcement of the proposed transaction later that day.
THE MERGER
This section and the section entitled “The Merger Agreement” beginning on page 115 of this proxy statement/prospectus describe the material aspects of the merger, including the merger agreement. While Critical Therapeutics believes that this description covers the material terms of the merger and the merger agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus, including the merger agreement, which is attached as Annex A to this proxy statement/prospectus, and the other documents to which Critical Therapeutics has referred to or incorporated by reference herein. For a more detailed description of where you can find those other documents, please see the section entitled “Where You Can Find More Information” beginning on page 297 of this proxy statement/prospectus.
Background of the Merger
Critical Therapeutics has regularly evaluated different strategies for improving its competitive position and enhancing stockholder value. As part of these evaluations, Critical Therapeutics has, from time to time, considered various potential strategic alternatives to pursuing its business plan, including acquisitions, divestitures, collaborations, business combinations and other strategic transactions.
In May 2006, Critical Therapeutics’ board of directors and management began exploring methods by which to improve Critical Therapeutics’ strategic position in the industry and enhance stockholder value. In September 2006, Critical Therapeutics engaged Lazard to assist in this process. During the remainder of 2006 and early 2007, Critical Therapeutics’ management, with the assistance of Lazard, assessed Critical Therapeutics’ long-term prospects, market position and possible strategic alternatives, including a merger or similar strategic transaction. During the period between September 2006 and March 2007, Critical Therapeutics, directly or through Lazard, contacted a total of 82 companies to assess whether those companies would be interested in discussing a possible merger or similar strategic transaction with Critical Therapeutics. As a result of the foregoing contacts, preliminary discussions were held with 12 companies concerning a possible merger or similar strategic transaction.
By March 2007, none of the companies that were contacted as part of this strategic process were interested in pursuing a merger or similar strategic transaction at that time. Accordingly, Critical Therapeutics decided to remain independent and to enter into a co-promotion agreement with DEY for ZYFLO and ZYFLO CR.
Following the decision to enter into the co-promotion agreement with DEY, Critical Therapeutics secured FDA approval for ZYFLO CR in May 2007 and commercially launched the product in September 2007 with 42 sales representatives. During this time, sales of ZYFLO remained relatively flat until the launch of ZYFLO CR despite the commencement of co-promotional detailing by DEY in May 2007 with an additional 200 sales representatives. From March 2007 through September 2007, Critical Therapeutics continued to consider other potential strategic transactions.
At a regularly scheduled board meeting on September 10, 2007, Critical Therapeutics’ board of directors and management reviewed the status of Critical Therapeutics’ commercial and research and development activities, including the risks and benefits of its upcoming launch of ZYFLO CR, as well as its financial position, long-term prospects, financing options and ongoing strategic and business development opportunities. Members of Critical Therapeutics’ management reviewed the status of ongoing discussions with potential strategic partners as well as other business development opportunities.
At a regularly scheduled board meeting on October 4, 2007, Critical Therapeutics’ board of directors and management reviewed Critical Therapeutics’ strategy, discussed potential options for increasing stockholder value and reviewed the status of ongoing discussions with potential strategic partners. Critical Therapeutics’ board noted that most of Critical Therapeutics’ competitors were significantly larger companies, with more resources, more product offerings and larger sales forces. Critical Therapeutics’ board was concerned that, notwithstanding the recent commercial launch of ZYFLO CR, the company would need to create a larger set of resources, including products and pipeline, to create a sustainable business model for long-term success as an independent, standalone company. Critical Therapeutics’ board concluded that, given, among other things,
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the overall difficulty for life sciences companies to obtain financing, there were significant risks to Critical Therapeutics’ long-term success as an independent, standalone company and that stockholders’ interests would be best served if Critical Therapeutics began to explore opportunities for a range of potential strategic transactions. On October 5, 2007, Critical Therapeutics’ board of directors further discussed the possible benefit of exploring various strategic alternatives with the assistance of a financial advisor. Based upon Lazard’s existing knowledge of Critical Therapeutics, as well as Lazard’s reputation, background and experience in the industry and in mergers and acquisitions generally, Critical Therapeutics’ board once again formally engaged Lazard, effective October 12, 2007, to advise it in considering potential strategic alternatives.
In October 2007, Critical Therapeutics began making and receiving general inquiries to gauge interest in potential business combinations with companies seeking to gain access to a commercial-stage respiratory therapeutics business in the United States. Critical Therapeutics’ management and board of directors, with the assistance of Lazard, identified public and private companies that might fit Critical Therapeutics’ strategic plans, focusing on specialty pharmaceutical companies potentially interested in acquiring Critical Therapeutics’ commercial assets, as well as research and development companies with clinical-stage assets in selected therapeutic areas potentially interested in merging with Critical Therapeutics.
On November 8, 2007, Critical Therapeutics publicly announced that it was evaluating a range of strategic alternatives that could result in potential changes to its current business strategy and future operations, including the sale or divestiture of certain assets, the merger or sale of the company or other strategic transactions.
During the period between October 2007 and April 2008, Critical Therapeutics conducted a targeted process in which a total of 36 companies were contacted to assess whether those companies would be interested in discussing a possible merger, acquisition or other strategic transaction with Critical Therapeutics. In connection with these discussions, Critical Therapeutics entered into confidentiality agreements with a total of 19 companies, including Cornerstone, for the purpose of exchanging non-public information to facilitate discussions. As a result of this process, preliminary discussions were held with nine companies concerning a possible merger transaction with or acquisition of Critical Therapeutics. Critical Therapeutics also prepared an electronic data room and granted access to that information to several companies, and was granted access to similar information by several companies. Critical Therapeutics conducted substantive scientific, commercial and financial due diligence on several of these companies during this period. Throughout this period, Critical Therapeutics’ management apprised the board of directors of these discussions both informally and through reports at board meetings. Between October 1, 2007 and May 1, 2008, Critical Therapeutics’ board met 29 times and discussed the ongoing strategic alternatives review process and discussions and negotiations with companies as part of this strategic review process.
Beginning in September 2007, Critical Therapeutics engaged in substantive discussions with a privately held biotechnology company, or Company X. Beginning in October 2007, Critical Therapeutics engaged in substantive discussions with a privately held biotechnology company, or Company Y. Beginning in December 2007, Critical Therapeutics engaged in substantive discussions with a publicly traded biotechnology company, or Company Z. Beginning in February 2008, Critical Therapeutics engaged in substantive discussions with Cornerstone.
On November 20, 2007, Critical Therapeutics’ board of directors held a meeting, also attended by members of Critical Therapeutics’ management and representatives of Wilmer Cutler Pickering Hale and Dorr LLP, or WilmerHale, Critical Therapeutics’ outside legal counsel, Lazard and outside diligence consultants, at which the board was briefed on the ongoing process to identify possible strategic transactions. In addition, the board received an overview of the development pipeline, commercial potential, business and operations of Company X and Company Y together with preliminary terms for a potential transaction with each company. After discussion, Critical Therapeutics’ board authorized management to continue discussions and engage in mutual due diligence with both companies, while continuing efforts to identify additional potential strategic partners.
At meetings on December 11 and 12, 2007, Critical Therapeutics’ board of directors received an update on the status of Critical Therapeutics’ strategic process from management and Lazard. Management and Critical
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Therapeutics’ outside diligence consultants reviewed with the board scientific, commercial and financial information on Company X and Company Y.
In late December 2007, after a number of meetings and discussions between Critical Therapeutics and Company X regarding the acquisition process and participating in a significant mutual due diligence review process, Company X indicated that it had other business priorities and had decided not to move forward with a merger with Critical Therapeutics.
In January 2008, after discussions between Critical Therapeutics and Company Y regarding the acquisition process, participating in a significant mutual due diligence review process and conducting negotiations regarding a definitive agreement, Company Y indicated that it had other business priorities and had decided not to move forward with a merger with Critical Therapeutics.
During the fourth quarter of 2007 and the first quarter of 2008, sales of ZYFLO CR were lower than anticipated. In addition, in March 2008, Critical Therapeutics began to experience problems in the supply chain for ZYFLO CR. During this time, Critical Therapeutics’ cash position also continued to decrease. In addition, conditions in the national economy and the financial markets in particular continued to present challenges for life sciences companies seeking financing. These factors reinforced the view of Critical Therapeutics’ board of directors that concluding the strategic alternatives process as soon as practical was in the best interests of Critical Therapeutics’ stockholders.
On February 14, 2008, Critical Therapeutics’ board of directors held a meeting, also attended by members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard, at which the board received an update on the strategic process, including information regarding the commercial, clinical and business operations of Company Z.
On February 15, 2008, Craig Collard, President, Chief Executive Officer and a director of Cornerstone, contacted by telephone Frank E. Thomas, then President, Chief Executive Officer and a director of Critical Therapeutics, to discuss the possibility of a strategic transaction between Cornerstone and Critical Therapeutics.
On February 20, 2008, Critical Therapeutics and Cornerstone executed a confidentiality agreement for the purpose of exchanging non-public information to facilitate discussions between the two companies. On or after February 20, 2008, Critical Therapeutics sent a detailed presentation regarding Critical Therapeutics via e-mail to representatives of Cornerstone.
On February 28, 2008, Thomas P. Kelly, Chief Financial Officer and Senior Vice President of Finance and Corporate Development of Critical Therapeutics, and Roger Heerman, Vice President of Sales and Marketing of Critical Therapeutics, held a telephone conference with Mr. Collard and Brian Dickson, M.D., Chief Medical Officer of Cornerstone. During this telephone conference, the parties made presentations to each other regarding their respective companies and their businesses.
On March 3, 2008, Cornerstone sent a detailed presentation regarding Cornerstone via e-mail to representatives of Critical Therapeutics and Lazard. Also on March 3, 2008, Mr. Collard e-mailed Mr. Thomas to inform him that Cornerstone was interested in continuing discussions regarding a transaction with Critical Therapeutics.
On March 4, 2008, Critical Therapeutics publicly announced that Mr. Thomas had informed Critical Therapeutics’ board of directors that he had resigned as a director effective March 2, 2008 and was resigning as President and Chief Executive Officer effective March 31, 2008, and that Trevor Phillips, Ph.D., Critical Therapeutics’ Senior Vice President of Operations and Chief Operating Officer, had been appointed as a director effective March 4, 2008 and would become President and Chief Executive Officer of Critical Therapeutics effective April 1, 2008.
In early March 2008, after many meetings and discussions between Critical Therapeutics and Company Z regarding the acquisition process, participating in a significant mutual due diligence review process and conducting negotiations regarding a definitive agreement, Company Z indicated that it had other business priorities and had decided not to move forward with a merger with Critical Therapeutics.
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On March 7, 2008, Mr. Collard, Dr. Dickson and Alastair McEwan, Chairman of the board of directors of Cornerstone, traveled to Critical Therapeutics’ offices in Lexington, Massachusetts and met with Dr. Phillips, Mr. Thomas, Mr. Kelly, Mr. Heerman and Roberta Tucker, Senior Vice President of Regulatory Affairs of Critical Therapeutics. During this meeting, the managements of both Cornerstone and Critical Therapeutics made presentations regarding their respective companies and their businesses. Representatives of Jefferies & Company, Inc., or Jefferies, Cornerstone’s financial advisor, were also present at this meeting.
Following the meeting on March 7, 2008, Critical Therapeutics and Cornerstone continued mutual due diligence on the business, assets and liabilities of each company, including telephone conferences and review of information contained in each company’s electronic dataroom. In addition, representatives of both companies’ management teams and their respective legal and financial advisors conducted numerous discussions regarding the potential terms of a transaction.
On March 12, 2008, Dr. Phillips, Mr. Kelly, Mr. Heerman and Mr. Thomas held a telephone conference call with Mr. Collard, Mr. McEwan and a representative of Jefferies regarding the proposed transaction with Cornerstone and the acquisition process in general.
On March 13, 2008, representatives of the parties’ management and financial advisors held a further telephone conference to discuss the proposed transaction with Cornerstone, potential deal terms and the acquisition process in general.
On March 17, 2008, Cornerstone sent a letter via e-mail to Critical Therapeutics reflecting a non-binding expression of interest regarding a potential merger with Critical Therapeutics in which Critical Therapeutics would issue common stock to Cornerstone stockholders for all of Cornerstone’s equity capital. In this letter, Cornerstone preliminarily proposed a transaction in which Critical Therapeutics’ stockholders would hold 34% of the combined company, based on Critical Therapeutics having a cash balance at closing of at least $20 million.
Critical Therapeutics’ board of directors met on March 20, 2008 in Cambridge, Massachusetts and by teleconference, together with members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard. At this meeting, representatives of Cornerstone made a presentation to Critical Therapeutics’ board regarding a possible strategic transaction between Cornerstone and Critical Therapeutics and related matters. Following this presentation, Cornerstone’s representatives departed the meeting. Critical Therapeutics’ board then continued to discuss a potential strategic transaction with Cornerstone. As part of this discussion, Lazard provided an update on the status of the strategic review process and potential transaction with Cornerstone, Dr. Phillips made a presentation to the board regarding the potential transaction and members of management discussed the due diligence performed on Cornerstone and the strategy, business and prospects for a combined company. Following this discussion, Critical Therapeutics’ board met in executive session without Critical Therapeutics’ management, other than Dr. Phillips, and unanimously agreed to continue to pursue discussions with Cornerstone and directed management to report back to the board on their progress.
Following the meeting on March 20, 2008, representatives of Critical Therapeutics and Cornerstone continued their mutual due diligence.
On March 21, 2008, Critical Therapeutics sent a letter via e-mail to Cornerstone with a response to Cornerstone’s expression of interest regarding potential terms of a transaction. In this letter, Critical Therapeutics preliminarily proposed a transaction in which Critical Therapeutics’ stockholders would hold 35% of the combined company. Critical Therapeutics also delivered to Cornerstone a detailed due diligence request list regarding legal, finance and other business matters relating to Cornerstone.
On March 25, 2008, Jefferies, on behalf of Cornerstone, sent a letter via e-mail in response to Critical Therapeutics’ letter of March 21, 2008. In that letter, Cornerstone preliminarily proposed a transaction in which Critical Therapeutics’ stockholders would hold 31% of the combined company, based on a projected cash balance at closing for Critical Therapeutics of $12 million.
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On March 25, 2008, Critical Therapeutics’ board of directors held a meeting by telephone conference at which, among other matters, Dr. Phillips provided the board with an update regarding the potential transaction with Cornerstone as well as the status of Critical Therapeutics’ discussions with and due diligence regarding other potential strategic transaction candidates.
Also on March 25, 2008, Critical Therapeutics, Cornerstone and their respective financial advisors held a telephone conference to discuss financial models for each company and pro forma models on a combined basis.
On March 28, 2008, members of Critical Therapeutics’ management attended due diligence meetings at Cornerstone’s offices in Cary, North Carolina with Chenyqua Baldwin, Vice President, Finance of Cornerstone. On March 29, 2008, members of Critical Therapeutics’ management attended due diligence meetings in Cary, North Carolina.
Also on March 28, 2008, Cornerstone sent a letter to Critical Therapeutics clarifying particular items regarding potential deal terms, including proposing an exclusivity period and proposing that the proportion of the combined company that Critical Therapeutics’ stockholders would hold would be variable based on Critical Therapeutics’ cash balance at closing.
On March 31, 2008, Critical Therapeutics received a legal due diligence request list from Cornerstone regarding legal, finance and other business matters relating to Critical Therapeutics.
Also on March 31, 2008, Critical Therapeutics’ board of directors held a meeting by telephone conference. Also present at this telephonic meeting were members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard. At this meeting, among other things, Dr. Phillips provided an update with respect to, and led a discussion with input from Lazard regarding, Critical Therapeutics’ ongoing process of reviewing strategic alternatives, including the status of discussions with Cornerstone and with other potential strategic transaction candidates. After extensive discussions, the board determined that the company should pursue further negotiations with Cornerstone regarding a possible business combination on a non-exclusive basis.
On April 8 and 9, 2008, representatives of Cornerstone and Critical Therapeutics and representatives of Jefferies and Lazard discussed further the financial models for each company and pro forma models on a combined basis.
On April 10, 2008, Critical Therapeutics’ board of directors held a meeting in Cambridge, Massachusetts and by telephone conference. Also present at this meeting were members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard, as well as Mr. Collard, Mr. McEwan and Dr. Dickson of Cornerstone and representatives of Jefferies. During the meeting, Cornerstone’s representatives made presentations to Critical Therapeutics’ board regarding a possible strategic transaction between Critical Therapeutics and Cornerstone. Following these presentations, Cornerstone’s representatives departed the meeting. Critical Therapeutics’ board then continued to discuss a potential strategic transaction with Cornerstone. Following this discussion, Dr. Phillips updated Critical Therapeutics’ board regarding the status of discussions with other potential strategic transaction candidates. Critical Therapeutics’ board determined that the stage of discussions with Cornerstone justified additional mutual due diligence and the negotiation of definitive documentation regarding a merger between the two companies.
On April 14, 2008, Critical Therapeutics’ board of directors met by telephone conference. Mr. Kelly and Scott B. Townsend, Senior Vice President of Legal Affairs, General Counsel and Secretary of Critical Therapeutics, participated in the meeting. Dr. Phillips and Mr. Kelly provided the board with an update on the status of discussions with Cornerstone regarding a potential transaction, the status of a draft definitive merger agreement with Cornerstone and the status of financial and accounting due diligence on Cornerstone. Dr. Phillips then provided Critical Therapeutics’ board with an update regarding the status of discussions with other potential candidates for a strategic transaction.
On April 15, 2008, Critical Therapeutics provided Cornerstone with a first draft of a definitive merger agreement. Between April 15, 2008 and April 30, 2008, representatives of Critical Therapeutics and
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Cornerstone negotiated the terms of the proposed merger agreement. Negotiations focused on, among other matters, the conditions to closing, post-signing operating covenants, termination rights, the amount of termination fees, required levels of cash, debt and working capital, representations and warranties, and the timing of the re-audit of Cornerstone’s financial statements.
On April 18, 2008, Dr. Phillips and Mr. Collard met by telephone conference to discuss various aspects of the proposed transaction, including operational and business strategy issues.
On April 24, 2008, Critical Therapeutics’ board of directors held a meeting by telephone conference. Also present at this meeting were members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard. At this meeting, among other things, Dr. Phillips provided an update on and led a discussion regarding the potential transaction with Cornerstone, including the status of financial, tax and accounting due diligence, and the status of negotiations regarding a draft definitive agreement with Cornerstone. After discussion, the board determined to proceed with the final negotiations of a definitive agreement with Cornerstone.
Following Critical Therapeutics’ board meeting on April 24, 2008, representatives of Critical Therapeutics, WilmerHale, Lazard, Cornerstone, Jefferies and Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., or Smith Anderson, Cornerstone’s outside legal counsel, continued negotiation of the definitive agreement. Preliminary agreement was reached on a number of matters, including agreement that the exchange ratio in the merger would provide that Critical Therapeutics’ stockholders would hold 30% of the combined company but without any condition that Critical Therapeutics have a minimum amount of cash or working capital as a closing condition and without any potential adjustment to the exchange ratio based on Critical Therapeutics’ amount of cash or working capital at closing. Later on April 24, 2008, WilmerHale provided a revised draft of the merger agreement to Cornerstone and its advisors reflecting these discussions and the preliminary agreement of Critical Therapeutics and Cornerstone.
On April 26, 2008, Critical Therapeutics’ board of directors held a meeting by telephone conference to receive an update on due diligence matters with respect to Cornerstone and the strategic fit of Critical Therapeutics and Cornerstone.
Between April 25, 2008 and April 30, 2008, counsel for Critical Therapeutics and Cornerstone had various communications regarding the merger agreement and related acquisition agreements and exchanged revised drafts of these agreements.
On April 28, 2008, members of Critical Therapeutics’ management and WilmerHale met by telephone conference with representatives of Cornerstone, including Mr. Collard, and Smith Anderson to discuss the process for final approval and execution of a definitive merger agreement, related disclosure obligations under applicable securities laws and regulations and a proposed communications plan and timeline.
On April 30, 2008, Critical Therapeutics’ board of directors met to further consider the proposed merger of Critical Therapeutics with Cornerstone and related matters. Also participating in the meeting were members of Critical Therapeutics’ management and representatives of WilmerHale and Lazard. During that meeting:
• Dr. Phillips provided a summary of Critical Therapeutics’ process to date regarding consideration of a proposed transaction with Cornerstone, including an overview of the strategic alternatives process undertaken by the board generally, discussions with Cornerstone’s management, negotiations with respect to a proposed merger agreement and due diligence conducted by Critical Therapeutics;
• Dr. Phillips discussed with the board the strategic business rationale for a combination with Cornerstone, including with respect to the marketed products of, and product candidates under development by, both Critical Therapeutics and Cornerstone and the ability of the combined company to utilize Cornerstone’s existing commercial organization;
• Dr. Phillips presented his views on the competitive environment facing Critical Therapeutics;
• the board discussed Critical Therapeutics’ prospects as an independent, standalone company;
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• Mr. Kelly reviewed with the board various financial modeling scenarios, including models for Critical Therapeutics as a standalone company, Cornerstone as a standalone company and a combination of Critical Therapeutics and Cornerstone, in each case utilizing different assumptions regarding future business plans and financing needs;
• Mr. Heerman and Ms. Tucker discussed with the board their due diligence review with respect to Cornerstone’s historical and projected sales, its sales and marketing organization and its regulatory affairs;
• Lazard discussed with the board financial aspects of the proposed merger;
• the WilmerHale representatives outlined the fiduciary duties and responsibilities of the board under applicable law and summarized the principal terms of the proposed merger agreement and related acquisition agreements; and
• the board discussed at length the proposed business combination with Cornerstone, the appropriateness of the exchange ratio in the proposed merger and the nature of the deal protections, closing conditions, covenants and termination rights set forth in the proposed merger agreement, the competitive environment facing Critical Therapeutics and Critical Therapeutics’ prospects as an independent, standalone company.
Critical Therapeutics’ board of directors then reconvened on May 1, 2008 with members of Critical Therapeutics’ management and representatives of Critical Therapeutics’ legal and financial advisors. During that meeting:
• Critical Therapeutics’ board of directors again engaged in a discussion regarding the matters discussed at the April 30, 2008 meeting relating to the proposed business combination between Critical Therapeutics and Cornerstone;
• Lazard reviewed with Critical Therapeutics’ board its financial analysis of the exchange ratio provided for in the merger and rendered to Critical Therapeutics’ board an oral opinion, which opinion was confirmed by delivery of a written opinion, dated May 1, 2008, to the effect that, as of that date and based upon and subject to the assumptions, factors and qualifications set forth in its opinion, the exchange ratio was fair, from a financial point of view, to Critical Therapeutics; and
• Critical Therapeutics’ board further discussed and deliberated at length the proposed business combination with Cornerstone, the appropriateness of the exchange ratio in the proposed merger and the nature of the deal protections, closing conditions, covenants and termination rights set forth in the proposed merger agreement, the competitive environment facing Critical Therapeutics and Critical Therapeutics’ prospects as an independent, standalone company.
Following this discussion and deliberation, Critical Therapeutics’ board of directors unanimously determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable, fair to and in the best interests of the stockholders of Critical Therapeutics, unanimously approved the merger agreement and unanimously recommended that the Critical Therapeutics’ stockholders approve the issuance of Critical Therapeutics’ common stock pursuant to the merger agreement, the reverse stock split of Critical Therapeutics’ common stock and the name change of Critical Therapeutics to “Cornerstone Therapeutics Inc.”
Critical Therapeutics and Cornerstone executed the merger agreement on May 1, 2008 after the close of trading on The NASDAQ Global Market and made a joint public announcement of the proposed transaction later that day.
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