UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy
Statement Pursuant to Section 14(a)
of the Securities
Exchange Act of 1934
Filed by the Registrant
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Filed by a Party other than the Registrant
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to §240.14a-12
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RAE SYSTEMS INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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Fee paid previously with preliminary materials.
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previous filing by registration statement number, or the Form or Schedule and the date of its
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RAE SYSTEMS INC.
3775 North First Street
San Jose, California 95134
(408) 952-8200
Dear Stockholder:
We invite you to attend a special meeting of stockholders of RAE
Systems Inc., a Delaware corporation (RAE Systems),
to be held at the offices of Fenwick & West LLP, 801
California Street, Mountain View, California 94041, at
10:00 a.m., local time, on April 7, 2011 (the
Special Meeting). Holders of record of RAE Systems
common stock at the close of business on March 9, 2011 will
be entitled to vote at the Special Meeting or any adjournment or
postponement of the Special Meeting.
At the Special Meeting, we will ask you to adopt the Agreement
and Plan of Merger, dated as of January 18, 2011, by and
among RAE Systems, Ray Holding Corporation, a Delaware
corporation (Purchaser) and Ray Merger Sub
Corporation, a Delaware corporation and a wholly owned
subsidiary of Purchaser (Merger Sub), as such
agreement may be amended from time to time (the Merger
Agreement). As a result of the merger contemplated by the
Merger Agreement (the merger), RAE Systems will
become a wholly owned subsidiary of Purchaser. This is a
going-private transaction. Purchaser and Merger Sub
are each affiliates of Vector Capital IV, L.P., and its
affiliated funds (collectively, Vector Capital).
We are also asking you to expressly grant the authority to vote
your shares to adjourn the Special Meeting, if necessary, to
permit further solicitation of proxies to vote in favor of the
adoption of the Merger Agreement if there are not sufficient
votes at the time of the Special Meeting to adopt the Merger
Agreement.
If the merger is completed, each share of RAE Systems
common stock (each a Share and collectively, the
Shares) outstanding immediately prior to the
effective time of the merger will be converted into the right to
receive $1.75 in cash, without interest and subject to any
applicable withholding taxes, other than 13,392,857 shares
(the Rollover Shares) registered under the name of
Chen Revocable Trust DTD
5/8/2001
and
Hsi Family Trust, which are beneficially owned by Robert I. Chen
and Peter C. Hsi, respectively, (Chen Revocable Trust DTD
5/8/2001,
Hsi Family Trust, Robert I. Chen, Peter C. Hsi and Lien Q. Chen
(Robert I. Chens wife) are collectively hereinafter
referred to as the Rollover Holders). In connection
with the merger, the Rollover Holders have agreed to contribute,
immediately prior to the effective time of the merger, the
13,392,857 Rollover Shares, which will be valued at $1.75 per
share, and in exchange for the Rollover Shares, the Rollover
Holders will receive equity (consisting of a combination of
preferred stock and common stock) in Purchaser. RAE Systems
stockholders other than the Rollover Holders and the Purchaser
Group will have no ongoing ownership interest in the continuing
business of RAE Systems. We cannot complete the merger unless
all of the conditions to closing are satisfied, including the
adoption of the Merger Agreement by holders of a majority of the
outstanding shares of RAE Systems common stock.
A special committee of our board of directors composed entirely
of independent directors (the Special Committee)
negotiated and reviewed the terms and conditions of the proposed
merger. The Special Committee and our board of directors have
determined that the merger and the Merger Agreement are
procedurally and substantively fair to, and in the best
interests of, RAE Systems and its stockholders (other than the
Rollover Holders), declared the Merger Agreement and the merger
to be advisable and recommended that RAE Systems
stockholders vote to adopt the Merger Agreement.
THE
SPECIAL COMMITTEE AND
THE BOARD OF DIRECTORS RECOMMEND THAT YOU VOTE
FOR
THE ADOPTION OF THE MERGER AGREEMENT.
YOUR VOTE IS IMPORTANT.
In the materials accompanying this letter, you will find a
Notice of Special Meeting of Stockholders, a proxy statement
relating to the actions to be taken by our stockholders at the
Special Meeting and a proxy card. The proxy statement includes
other important information about the Merger Agreement and the
merger. We encourage you to read the entire proxy statement
(including its annexes) carefully.
All of our stockholders are cordially invited to attend the
special meeting in person. Whether or not you plan to attend the
Special Meeting, however, please complete, sign, date and return
your proxy card in the enclosed envelope or vote over the
Internet or by telephone as instructed in these materials. If
you have Internet access, we encourage you to record your vote
via the Internet using the Internet proxy instructions printed
on your proxy card. It is important that your shares be
represented and voted at the Special Meeting. If you attend the
Special Meeting, you may vote in person as you wish, even though
you have previously returned your proxy card or appointed a
proxy over the Internet or by telephone. If you have any
questions or need assistance voting your shares, please call
MacKenzie Partners, Inc., which is assisting us in the
solicitation of proxies, toll-free at
(800) 322-2885
or call collect at
(212) 929-5500.
On behalf of our board of directors, I thank you for your
support and urge you to vote FOR the adoption of the
Merger Agreement.
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Sincerely yours,
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Susan Wang
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Chairperson of the Special Committee
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER,
PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE PROPOSED
MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE
The proxy statement is dated March 9, 2011, and is first
being mailed to stockholders of RAE Systems on or about
March 10, 2011.
IMPORTANT
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF
SHARES YOU OWN. PLEASE SIGN, DATE AND PROMPTLY MAIL YOUR PROXY
CARD OR SUBMIT YOUR PROXY BY TELEPHONE OR THROUGH THE INTERNET
AT YOUR EARLIEST CONVENIENCE.
RAE SYSTEMS INC.
3775 North First Street
San Jose, California 95134
(408) 952-8200
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
TO BE HELD ON April 7, 2011
Dear Stockholder:
You are cordially invited to attend the Special Meeting of
Stockholders of RAE Systems Inc., a Delaware corporation
(RAE Systems), that will be held at the offices of
Fenwick & West LLP, 801 California Street, Mountain
View, California 94041, at 10:00 a.m., local time, on
April 7, 2011 (the Special Meeting), for the
following purposes:
1. To consider and vote upon a proposal to adopt the
Agreement and Plan of Merger (the Merger Agreement),
dated as of January 18, 2011, by and among RAE Systems, Ray
Holding Corporation, a Delaware corporation
(Purchaser) and Ray Merger Sub Corporation, a
Delaware corporation and a wholly owned subsidiary of Purchaser
(Merger Sub), as may be amended from time to
time; and
2. To vote to adjourn the Special Meeting, if necessary,
for the purpose of soliciting additional proxies to vote in
favor of adoption of the Merger Agreement if there are
insufficient votes at the time of the meeting to adopt the
Merger Agreement.
A special committee of our board of directors composed entirely
of independent directors (the Special Committee)
negotiated and reviewed the terms and conditions of the merger
contemplated by the Merger Agreement (the merger).
The Special Committee and our board of directors each determined
that the merger and the Merger Agreement are substantively and
procedurally fair to, and in the best interests of, RAE
Systems stockholders (other than Robert I. Chen, Peter C.
Hsi and certain other affiliated stockholders), and each
recommended that RAE Systems stockholders vote to adopt
the Merger Agreement. This item of business to be submitted to a
vote of the stockholders at the Special Meeting is more fully
described in the attached proxy statement, which we urge you to
read carefully. The Special Committee and the board of directors
also recommend that you expressly grant the authority to vote
your shares to adjourn the Special Meeting, if necessary, to
permit further solicitation of proxies if there are not
sufficient votes at the time of the Special Meeting to adopt the
Merger Agreement. No other business may be transacted at the
Special Meeting.
Stockholders of record at the close of business on March 9,
2011, the record date, are entitled to notice of and to vote at
the Special Meeting and any adjournment or postponement of the
meeting. All stockholders are cordially invited to attend the
Special Meeting in person. Adoption of the Merger Agreement will
require the affirmative vote of the holders of a majority of the
shares of RAE Systems common stock outstanding as of the record
date.
Under Delaware law, RAE Systems stockholders who do not
vote in favor of the Merger Agreement will have the right to
demand appraisal of their shares of common stock and obtain
payment in cash for the fair value of their shares of common
stock, but only if they submit a written demand for an appraisal
before the vote is taken on the Merger Agreement and comply with
the applicable provisions of Delaware law. A copy of the
Delaware statutory provisions relating to appraisal rights is
attached as Annex C to the attached proxy statement, and a
summary of these provisions can be found under Special
Factors Appraisal Rights in the attached proxy
statement.
You should not send any certificates representing shares of RAE
Systems common stock with your proxy card. Upon closing of the
merger, you will be sent instructions regarding the procedure to
exchange your stock certificates for the cash merger
consideration.
THE
SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS RECOMMEND THAT YOU
VOTE FOR
THE ADOPTION OF THE MERGER AGREEMENT AND, IF NECESSARY, TO
ADJOURN THE SPECIAL MEETING FOR THE PURPOSES OF OBTAINING
ADDITIONAL PROXIES TO VOTE IN FAVOR OF ADOPTING THE MERGER
AGREEMENT.
YOUR VOTE IS IMPORTANT.
Your vote is very important, regardless of the number of shares
you own. Even if you plan to attend the Special Meeting in
person, we request that you complete, sign, date and return the
enclosed proxy card, or vote over the Internet or by telephone
as instructed in these materials, to ensure that your shares
will be represented at the Special Meeting if you are unable to
attend. If you have Internet access, we encourage you to record
your vote via the Internet using the Internet proxy instructions
printed on your proxy card. If you do attend the Special Meeting
and wish to vote in person, you may withdraw your proxy and vote
in person. If your shares are held in the name of your broker,
bank or other nominee, you must obtain a legal proxy, executed
in your favor, from the holder of record to be able to vote in
person at the Special Meeting.
No person has been authorized to give any information or to make
any representations other than those set forth in the proxy
statement in connection with the solicitation of proxies made
hereby, and, if given or made, such information must not be
relied upon as having been authorized by RAE Systems or any
other person.
By Order of the Board of Directors
David Achterkirchen
Corporate Secretary
San Jose, California
TABLE OF
CONTENTS
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SUMMARY
TERM SHEET
This summary highlights selected information from this proxy
statement and may not contain all of the information that is
important to you. To fully understand the merger contemplated by
the Agreement and Plan and Merger (the Merger
Agreement), dated as of January 18, 2011, among RAE
Systems Inc. (RAE Systems or the
Company), Ray Holding Corporation
(Purchaser) and Ray Merger Sub Corporation, a wholly
owned subsidiary of Purchaser (Merger Sub), pursuant
to which Merger Sub will merge with and into RAE Systems with
RAE Systems becoming the wholly owned subsidiary of Purchaser
(the merger), and for a more complete description of
the legal terms of the Merger Agreement, you should read
carefully this entire proxy statement, including the documents
and information incorporated by reference and the annexes
hereto. See Other Matters Where You Can Find
More Information on page 89. We have included page
references in parentheses to direct you to a more complete
description of the topics presented in this summary. The Merger
Agreement is attached as Annex A to this proxy statement.
We encourage you to read the Merger Agreement as it is the legal
document that governs the merger.
RAE
Systems Inc. (page 12)
RAE Systems develops and manufactures chemical and radiation
detection monitors and wireless networks for application in five
key markets: oil and gas, hazardous material management,
industrial safety, civil defense and environmental remediation.
Ray
Holding Corporation and Ray Merger Sub Corporation
(Page 12)
Ray Holding Corporation and Ray Merger Sub Corporation each are
affiliates of Vector Capital III, L.P., Vector Entrepreneur
Fund III, L.P. and Vector Capital IV, L.P. (collectively,
Vector Capital). Vector Capital is a leading global
private equity investor in the technology sector.
The
Merger (page 66)
Pursuant to the Merger Agreement, Merger Sub will merge with and
into RAE Systems. After the merger, Purchaser will own all of
our outstanding stock. Stockholders (other than holders of the
Rollover Shares as described below) not exercising appraisal
rights will receive cash in the merger in exchange for their
shares of RAE Systems common stock.
Termination
of Battery Merger Agreement (Page 76)
On September 20, 2010, RAE Systems entered into an
Agreement and Plan of Merger (the Battery Merger
Agreement and the merger provided for thereunder, the
Battery Merger) by and among RAE Systems, Rudy
Acquisition Corp., a Delaware corporation and Rudy Merger Sub
Corp., a Delaware corporation, each an affiliate of Battery
Ventures VIII, L.P. and Battery Ventures VIII Side Fund, L.P.
(collectively Battery Ventures), which provided a
price per share to our stockholders of $1.60. On
January 18, 2011, in order to enter into the Merger
Agreement, RAE Systems terminated the Battery Merger Agreement
and paid a termination fee of $3.39 million to Battery
Ventures.
Going-Private
Transaction (page 49)
This is a going-private transaction. If the merger
is completed, RAE Systems will cease to be a publicly-traded
company. You will no longer have any interest in RAE
Systems future earnings or growth. Following consummation
of the merger, the registration of our common stock and our
reporting obligations with respect to our common stock under the
Securities Exchange Act of 1934, as amended (the Exchange
Act), will be terminated upon application to the
Securities and Exchange Commission (the SEC). In
addition, upon completion of the merger, shares of our common
stock will no longer be listed on any stock exchange or
quotation system.
1
Merger
Consideration (page 66)
If the merger is completed, each share of RAE Systems
common stock (each a Share and collectively, the
Shares) outstanding immediately prior to the
effective time of the merger (including 4,681,324 Shares
beneficially held by the Rollover Holders, as defined below,
that do not constitute Rollover Shares, as defined below) will
be converted into the right to receive $1.75 in cash (the
Merger Consideration), without interest and subject
to any applicable withholding taxes, other than
13,392,857 shares (the Rollover Shares)
registered under the name of Chen Revocable Trust DTD
5/8/2001
and
Hsi Family Trust, which are beneficially owned by Robert I. Chen
and Peter C. Hsi (Chen Revocable Trust DTD
5/8/2001,
Hsi Family Trust, Robert I. Chen, Peter C. Hsi and Lien Q. Chen
(Robert I. Chens wife) are collectively hereinafter
referred to as the Rollover Holders). The Rollover
Holders contribution, and Vector Capitals
investment, in the Purchaser will be made at the same valuation.
As of the date of this proxy statement, the Rollover Holders,
collectively, own 18,255,441 shares of our common stock
(excluding any options held by the Rollover Holders). These
shares are worth approximately $31.9 million at $1.75 per
share. The shares owned by the Rollover Holders represent
approximately 31% of the total number of shares of our common
stock outstanding as of February 28, 2011. In addition, as
of the date of this Proxy Statement, Vector Capital owns
2,900,000 shares of common stock, representing approximately
4.9% of our outstanding common stock as of February 28,
2011.
In connection with the merger, the Rollover Holders have agreed
to contribute, immediately prior to the effective time of the
merger, 13,392,857 Rollover Shares, which will be valued at
$1.75 per share, and in exchange for the Rollover Shares, the
Rollover Holders will receive equity in Purchaser valued at
approximately $23.4 million, in the aggregate, in the same
class of stock, and at the same valuation, as Vector
Capitals cash investment. The remaining
4,681,324 shares of our common stock owned by the Rollover
Holders will be cashed out in the merger at $1.75 per share (or
a total of approximately $8.5 million). Accordingly,
immediately following the effective time of the merger, the
Rollover Holders will receive combined equity and cash in the
total value of approximately $31.9 million, the same value
as their shares of our common stock prior to the merger (valued
at $1.75 per share).
Purchaser intends to raise approximately $30 million in
debt (although it has not entered into any agreements with
respect to debt financing at this time and Purchaser would fund
the entire merger consideration with equity financing and RAE
Systems available cash if it does not enter into any such
agreement prior to the merger). The merger is not conditioned on
Purchasers ability to raise any debt financing, and as
noted above, the full amount of the merger consideration will be
funded with equity financing by Vector Capital and PSIL (as
defined below), if debt financing is not available. Assuming the
full amount is borrowed in connection with the merger and is
used to purchase common stock, then the post-closing equity
value of Purchaser after the merger will be approximately
$83.49 million (determined based on the pre-merger equity
value of our common stock and options and transaction expenses
reduced by the amount of the debt incurred by Purchaser in
connection with the merger (net of our expected costs at
closing)) and the enterprise value will be approximately
$97.06 million. Based on the above assumptions, to fund a
portion of the merger consideration, Vector Capital and Profit
Spring Investments Limited (PSIL), an affiliate of
CITIC Capital MB Investment Limited (CITIC Capital),
have agreed to invest approximately $52.1 million and
approximately $8.0 million, respectively, in cash in
Purchaser in the form of an equity contribution (consisting of a
combination of preferred stock and common stock). The Rollover
Holders contribution and Vector Capitals investment
in Purchaser will be made at the same valuation. As a result,
immediately after the merger, (i) the Rollover Holders
would hold equity in Purchaser valued at approximately
$23.4 million (or approximately 28.1% of the total equity
value of approximately $83.49 million), (ii) Vector
Capital would hold equity in Purchaser valued at
$52.1 million (or approximately 62.4% of the total equity
value of $83.49 million), and (iii) PSIL would hold
equity in Purchaser valued at approximately $8.0 million
(or approximately 9.6% of the total equity value of
$83.49 million). The remainder of the capitalization of
Purchaser would consist of $30 million in debt, which will
not exist prior to the closing of the merger, and which would be
arranged by Vector Capital. To the extent debt financing is not
available, or additional equity financing is otherwise required
at closing, Vector Capital and PSIL have committed to increase
their respective equity investment amounts (without cap), but in
a manner such that PSILs percentage ownership of the
initial equity of Purchaser will remain constant at 9.58%.
2
It is anticipated that, after the closing of the merger,
Purchaser will authorize and reserve an equity pool representing
approximately 10% of the then-outstanding common stock of
Purchaser. Of this common stock equity pool, Mr. Chen and
Dr. Hsi will have the right to acquire restricted common
stock pursuant to a customary restricted stock purchase
agreement representing 1% and 1.5%, respectively, of the
outstanding common stock of Purchaser on customary terms and
conditions, including vesting. The common stock equity pool will
otherwise dilute the ownership of the Rollover Holders, Vector
Capital and PSIL on a pro rata basis.
Mr. Chen is the Chief Executive Officer, Chairman, and a
founder, of the Company, and Dr. Hsi is the Chief
Technology Officer, and a founder, of the Company.
After the merger is completed, unless you dissent and seek
appraisal of the fair value of your Shares, you will have the
right to receive the Merger Consideration, but you will no
longer have any rights as a RAE Systems stockholder. The
aggregate merger consideration to be received by RAE
Systems stockholders (other than the Rollover Holders) is
expected to be approximately $80.7 million. Pursuant to a
Guarantee Agreement between Vector Capital and the Company,
Vector Capital has guaranteed the obligations of Purchaser and
Merger Sub to pay the aggregate cash merger consideration, up to
$82.85 million.
Treatment
of Stock Options (page 67)
At the effective time of the merger, each then-outstanding
option to purchase common stock of the Company (each a
Company Option) will become fully vested and will be
cancelled in exchange for a cash payment per share equal to the
excess, if any, of the Merger Consideration over the exercise
price of such Company Option.
Market
Price (page 81)
Our common stock is listed on the NYSE Alternext US under the
ticker symbol RAE. The $1.75 per share merger
consideration represents a premium of approximately (i) 68%
to the $1.04 per share closing price of our common stock on
September 17, 2010, the last full trading day prior to the
public announcement of the proposed Battery Merger, (ii) 9%
to the $1.60 per share merger consideration proposed in the
Battery Merger, (iii) 5% to the $1.66 per share closing
price of our common stock on January 14, 2011, the last
full trading day prior to the public announcement of the Merger
and (iv) −1.7% to the $1.78 per share closing price of our
common stock on March 8, 2011, the last full trading day
prior to the date of this proxy statement.
Special
Committee (page 13)
Formed by our board of directors, the Special Committee of our
board of directors (the Special Committee) consists
entirely of independent directors who are neither officers or
employees nor affiliated with significant stockholders of RAE
Systems and who will not have an economic interest in the
surviving entity following the merger. The Special Committee was
charged with representing the interests of our stockholders
(other than the Rollover Holders) and was actively involved in
deliberations and negotiations regarding the terms and
conditions of a change of control transaction on behalf of the
unaffiliated stockholders. In this capacity, the Special
Committee retained and received advice from UBS Securities LLC
(UBS), as financial advisor, and Fenwick &
West LLP (Fenwick), as legal advisor. The authority
of the Special Committee was not limited by our board of
directors. See Special Factors Background of
the Merger beginning on page 12 and Special
Factors Reasons for the Merger of RAE Systems and
Recommendation of the Board of Directors beginning on
page 28.
Reasons
for the Merger of RAE Systems and Recommendation of the Board of
Directors (page 28)
The Special Committee and our board of directors determined that
the merger and the Merger Agreement are substantively and
procedurally fair to, and in the best interests of, RAE
Systems stockholders (other than the Rollover Holders).
Accordingly, the Special Committee and our board of directors
determined that the merger and the Merger Agreement are
substantively and procedurally fair to, and in the best
interests of, RAE Systems unaffiliated stockholders. The
Special Committee and the board of directors have declared the
Merger Agreement and the merger to be advisable and recommend
that RAE Systems stockholders vote FOR
adoption of the Merger Agreement.
3
Opinion
of the Financial Advisor to RAE Systems Special Committee
(page 34)
In connection with the Battery Merger, the Special Committee
received a written opinion from UBS, the Special
Committees financial advisor, as to the fairness, from a
financial point of view and as of the date of its opinion, of
the per share consideration to be received by holders of RAE
Systems common stock (other than the Rollover Holders) in the
Battery Merger. The full text of UBS written opinion,
dated September 19, 2010, is attached to this proxy
statement as Annex B. RAE Systems stockholders are
encouraged to read this opinion carefully in its entirety for a
description of the assumptions made, procedures followed,
matters considered and limitation on the review undertaken.
UBS opinion was provided to the Special Committee in
connection with, and for the purposes of, its evaluation of the
per share consideration to be paid in the Battery Merger from a
financial point of view, does not address any other aspect of
the Battery Merger, does not address any aspect of the merger
and does not constitute a recommendation to any stockholder of
RAE Systems as to how such stockholder should vote or act with
respect to the merger. The Special Committee did not request
that UBS deliver a fairness opinion to the Special Committee
related to the $1.75 per share consideration to be paid in the
merger.
Purposes
and Reasons for the Merger of the Purchaser Group
(page 39)
The primary purposes in structuring the transaction as a merger
transaction (compared to other transaction structures) are that
a merger transaction (i) will enable Purchaser to acquire
all of the outstanding shares of RAE Systems (other than the
Rollover Shares) at the same time, (ii) represents an
opportunity for RAE Systems stockholders (other than the
Rollover Holders) to receive fair value for their shares of
common stock in the form of the merger consideration or, at the
election of such stockholder, by pursuing appraisal rights and
(iii) allows the Rollover Holders to maintain a portion of
their investment in RAE Systems. Further, structuring the
transaction as a merger transaction provides a prompt and
orderly transfer of ownership of RAE Systems in a single step,
without the necessity of financing separate purchases of RAE
Systems common stock in a tender offer and implementing a
second-step merger to acquire any shares of common stock not
tendered into any such tender offer, and without incurring any
additional transaction costs associated with such activities.
The primary purposes of the rollover transaction are to
(i) reduce the amount of upfront liquidity required by the
Purchaser Group in order to fund the merger consideration,
(ii) encourage management continuity by allowing management
to retain an indirect equity interest in RAE Systems through the
exchange of the Rollover Shares for common stock and preferred
stock of Purchaser, and to continue bearing the rewards and
risks of such ownership after the shares of RAE Systems common
stock cease to be publicly traded and (iii) otherwise
better align the incentives of the Rollover Holders with those
of Vector Capital following the completion of the transaction.
The primary purpose in structuring the rollover as a partial
rollover (as compared to a 100% rollover) is to effect the
Purchaser Groups desired post-closing equity ownership and
capital structure, including specifically,
Vector Capitals desire to obtain a substantial
ownership position in RAE Systems after shares of RAE Systems
common stock cease to be publicly traded and
Mr. Chens desire to receive cash for a portion of his
shares.
In structuring the transaction as a rollover, the Purchaser
Group considered the potential tax effects to the Rollover
Holders. The Purchaser Group structured the rollover to minimize
the tax burden with respect to the illiquid stock received by
the Rollover Holders in the transaction.
The Special Committee considered possible acquisition
transactions that did not involve a going-private transaction,
but did not evaluate other alternative methods of going private,
such as a liquidation, stock repurchases or a leveraged
recapitalization as discussed on page 31.
The purposes of the Rollover Agreements are to set forth the
terms by which the Rollover Holders are required to exchange
their shares of RAE Systems into shares of the Purchaser and to
restrict their ability to transfer their shares prior to the
effective time of the transaction (other than to the Purchaser).
Position
of the Purchaser Group as to the Fairness of the Merger
(page 39)
Based on their beliefs regarding the reasonableness of the
conclusions and analyses of the Special Committee and our board
of directors (although Purchaser, Merger Sub and Vector Capital
(collectively, the Purchaser Group), did not rely on
these conclusions and analyses) and in view of, among other
things, the strategic process
4
undertaken by the Special Committee, which did not result in an
alternative transaction that would reasonably be likely to be
consummated and to yield merger consideration of more than $1.75
per share to RAE Systems stockholders (other than the
Rollover Holders with respect to the Rollover Shares), the
Purchaser Group believes that the terms and conditions of the
merger are substantively and procedurally fair to RAE
Systems unaffiliated stockholders. The rules of the SEC
require the Purchaser Group to express its belief as to the
fairness of the merger to RAE Systems unaffiliated
stockholders. None of the Purchaser Group makes any
recommendation as to whether any RAE Systems stockholder should
adopt the Merger Agreement. As the acquiring parties in the
merger, the Purchaser Group is not objective in its views with
regard to the fairness of the merger to RAE Systems
unaffiliated stockholders. The Purchaser Group did not engage
the services of a financial advisor in connection with the
proposed merger.
Position
of the Rollover Holders as to the Fairness of the Merger
(page 43)
Based on their beliefs regarding the reasonableness of the
conclusions and analyses of the Special Committee and our board
of directors (although the Rollover Holders did not rely on
these conclusions and analyses) and in view of, among other
things, the strategic process undertaken by the Special
Committee, which did not result in an alternative transaction
that would reasonably be likely to be consummated and to yield
merger consideration of more than $1.75 per share to RAE
Systems stockholders (other than to the Rollover Holders
with respect to the Rollover Shares), the Rollover Holders
believe that the terms and conditions of the merger are
substantively and procedurally fair to RAE Systems
unaffiliated stockholders. The Rollover Holders are selling,
collectively, 4,681,324 of their own shares in exchange for the
merger consideration of $1.75 per share, for a total of
approximately $8.5 million. The rules of the SEC require the
Rollover Holders to express their belief as to the fairness of
the merger to the unaffiliated stockholders of RAE Systems. None
of the Rollover Holders makes any recommendation as to whether
any RAE Systems stockholder should adopt the Merger Agreement.
The Rollover Holders did not engage the services of a financial
advisor in connection with the proposed merger.
Voting
Agreements (page 49)
Concurrently with the execution of the Merger Agreement, each of
Robert I. Chen and Peter C. Hsi (collectively, the Voting
Parties), entered into voting agreements pursuant to which
each such party has agreed to, among other things, vote all
shares held by them, including shares held in trusts of which
they were a trustee (collectively 18,551,272 shares, which
includes 295,831 options to purchase common stock exercisable
within 60 days of the record date, or approximately 31% of
the outstanding shares of RAE Systems common stock as of
February 28, 2011) in favor of the adoption of the
Merger Agreement and against any competing proposals and grant
Purchaser and Vector Capital a proxy to vote such shares in
favor of the merger in the event the Voting Parties fail to do
so. The voting agreements terminate upon the earlier to occur of
an amendment to the Merger Agreement decreasing the per share
consideration, the consummation of the merger or termination of
the Merger Agreement in accordance with its terms (including
termination by RAE Systems in connection with a Superior Offer
as described under The Merger Agreement
Termination of the Merger Agreement).
Guarantee
of Payment of Merger Consideration (page 47)
Pursuant to a Guarantee Agreement between Vector Capital and RAE
Systems, Vector Capital has guaranteed the obligations of
Purchaser and Merger Sub to pay the aggregate cash merger
consideration, up to $82.85 million. This guarantee will
terminate upon the earlier of the effective time of the merger
or the termination of the Merger Agreement.
Financing
(page 47)
The merger is not conditioned on Purchasers ability to
obtain debt financing. Purchaser expects to fund the Merger
Consideration with a combination of equity financing to be
provided by Vector Capital and PSIL, potential debt financing
and RAE Systems available cash balances, however, if debt
financing is not available, Purchaser will fund the Merger
Consideration with equity financing from Vector Capital and
PSILs available capital.
5
Interests
of Our Directors and Executive Officers in the Merger
(page 51)
In considering the recommendation of the Special Committee and
our board of directors in favor of adoption of the Merger
Agreement, you should be aware that there are provisions of the
Merger Agreement and the merger that will result in certain
benefits to our directors and executive officers, including
$1.75 per share merger consideration for the Shares held by our
directors and officers outstanding immediately prior to the
effective time of the merger, the continuation of certain
indemnification and insurance arrangements, cash compensation,
and acceleration of stock options.
The following table reflects the total cash consideration
expected to be received by each of our directors and executive
officers in connection with the merger.
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Cash Merger
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Realizable
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Realizable
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Consideration
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Value of
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Value
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to be
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Vested Options
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of All
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Compensation
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Name of Director
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Received for
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as a Result
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Options at
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of Members
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and/or Executive
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RAE Systems
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of the
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the Closing
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of Special
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Total Cash
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Officer
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Position
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Common Stock
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Merger(1)
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of Merger(1)
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Committee
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Consideration
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Robert I. Chen(2)
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President, Chief Executive Officer and Chairman of the Board
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$
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8,509,522
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$
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58,800
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$
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134,400
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$
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8,643,922
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Randall K. Gausman(3)
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Vice President and Chief Financial Officer
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$
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8,750
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$
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86,625
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$
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168,000
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$
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176,750
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Peter C. Hsi(2)
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Chief Technology Officer and Director
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$
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28,875
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$
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56,000
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$
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56,000
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Ming-Ching Tang
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Executive Vice President Operations
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$
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45,719
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$
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94,500
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$
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94,500
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Christopher Hameister
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Vice President Asia-Pacific, Europe and Middle East Business
Operations
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$
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28,875
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$
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56,000
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$
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56,000
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Fei-Zhou Shen
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Vice President Corporate Development and Fushun Business
Operations
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$
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41,504
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$
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132,413
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$
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159,538
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$
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201,042
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Ryan Watson
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Vice President
Americas Sales
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$
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7,905
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$
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40,907
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$
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73,500
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$
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81,405
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Dr. Keh-Shew Lu
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Director
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$
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472,500
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$
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33,688
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$
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77,000
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$
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8,500
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$
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558,000
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Susan Wang
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Director
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$
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50,531
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$
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115,500
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$
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20,000
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$
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135,500
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Dr. Lyle D. Feisel
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Director
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$
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125,909
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$
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93,500
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$
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93,500
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$
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219,409
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Sigrun Hjelmqvist
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Director
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$
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35,000
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$
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24,063
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$
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35,000
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$
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70,000
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James W. Power
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Director
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$
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70,000
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$
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20,006
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$
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106,700
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$
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9,000
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$
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185,700
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TOTAL
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$
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9,271,090
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$
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644,002
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$
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1,169,638
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$
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37,500
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$
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10,478,228
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(1)
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This table excludes stock options with exercise prices greater
than $1.75 per share as of February 28, 2011. All
outstanding stock options will accelerate and vest in full as a
result of the merger.
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(2)
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If the merger is completed, the 13,392,857 Rollover Shares
registered under the name of Chen Revocable Trust DTD
5/8/2001 and Hsi Family Trust, which are beneficially owned by
Robert I. Chen and Peter C. Hsi, respectively, will be valued at
$1.75 per share and exchanged for a combination of preferred
stock and common stock in Purchaser valued at approximately
$23.4 million in the aggregate (Value of Rollover
Shares). Total Cash Consideration does not include the
Value of Rollover Shares.
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(3)
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In order to provide Randall K. Gausman, Vice President and Chief
Financial Officer of the Company, with an incentive to continue
his employment with the Company and to maximize the value of the
Company upon a change of control of the Company for the benefit
of stockholders of the Company (other than the Rollover
Holders), the Company and Mr. Gausman entered into a Change
of Control Severance Agreement, dated September 19, 2010,
pursuant to which Mr. Gausman will receive a lump sum
severance payment equal to 12 months of
Mr. Gausmans base salary and reimbursement of COBRA
premiums for up to 12 months, upon his termination of
employment without cause, or for good
reason, following the merger. In addition, upon the
consummation of the merger, Mr. Gausman will receive a
bonus equal to $62,500 (three months of base salary).
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6
Appraisal
Rights (page 54)
If you do not wish to accept the $1.75 per share merger
consideration in the merger, you have the right under Delaware
law to have your shares appraised (the Appraisal
Shares) by the Delaware Chancery Court. This right
of appraisal is subject to a number of restrictions and
technical requirements. Generally, in order to exercise
appraisal rights, among other things, (1) you must NOT vote
in favor of adoption of the Merger Agreement, (2) you must
make a written demand for appraisal in compliance with Delaware
law BEFORE the vote on the Merger Agreement and (3) you
must hold shares of RAE Systems common stock on the date of
making the demand for appraisal and continuously hold such
shares through the effective time of the merger. The fair value
of your shares of RAE Systems common stock as determined in
accordance with Delaware law may be more or less than, or the
same as, the Merger Consideration to be paid to non-dissenting
stockholders in the merger. Merely voting against adoption of
the Merger Agreement will not preserve your right of appraisal
under Delaware law. Annex C to this proxy statement
contains a copy of the Delaware statute relating to
stockholders right of appraisal. Failure to follow all of
the steps required by this statute will result in the loss of
your appraisal rights.
Material
United States Federal Income Tax Consequences of the Merger
(page 57)
The merger will be taxable for U.S. federal income tax
purposes. Generally, this means that RAE Systems
stockholders will recognize a taxable gain or loss equal to the
difference between the cash you receive in the merger and your
adjusted tax basis in your shares.
Tax matters can be
complicated and the tax consequences of the merger to you will
depend on the facts of your own situation. You should consult
your own tax advisor to understand fully the tax consequences of
the merger to you.
Regulatory
Matters (page 60)
The merger and the conversion of shares of RAE Systems common
stock into the right to receive the Merger Consideration are not
subject to the provisions of the
Hart-Scott-Rodino
Antitrust Improvement Act of 1976.
The
Special Meeting of RAE Systems Stockholders
(page 63)
Time, Date and Place.
The Special Meeting will
be held to consider and vote upon the proposal to adopt the
Merger Agreement and, if necessary, to vote to adjourn the
Special Meeting for the purpose of soliciting additional proxies
to vote in favor of adoption of the Merger Agreement, at the
offices of Fenwick & West, at 801 California Street,
Mountain View, California 94041, at 10:00 a.m., local time,
on April 7, 2011.
Record Date, Voting Power and Quorum.
You are
entitled to vote at the Special Meeting if you owned shares of
RAE Systems common stock at the close of business on
March 9, 2011, the record date for the Special Meeting. You
will have one vote at the Special Meeting for each share of RAE
Systems common stock you owned at the close of business on the
record date. There are approximately 59,512,064 shares of
RAE Systems common stock entitled to be voted at the Special
Meeting. A quorum will be present at the Special Meeting if a
majority of the outstanding shares of RAE Systems common stock
entitled to vote on the record date are represented in person or
by proxy. In the event that a quorum is not present at the
Special Meeting, it is expected that the Special Meeting will be
postponed to solicit additional proxies. In addition, if there
are not sufficient votes at the time of the Special Meeting to
adopt the Merger Agreement, it is expected that the meeting will
be adjourned or postponed to solicit additional proxies if the
holders of a majority of the shares of our common stock present,
in person or by proxy, and entitled to vote at the Special
Meeting approve an adjournment.
Procedure for Voting.
To vote, you can either
(1) complete, sign, date and return the enclosed proxy
card, (2) vote over the Internet or by telephone or
(3) attend the Special Meeting and vote in person. If your
shares are held in street name by your broker, bank
or other nominee, you should instruct your broker to vote your
shares by following the instructions provided by your broker.
Your broker will not vote your shares without instruction from
you. Failure to instruct your broker to vote your shares will
have the same effect as a vote AGAINST adoption of
the Merger Agreement.
Required Vote.
The adoption of the Merger
Agreement requires the affirmative vote of the holders of a
majority of the outstanding shares of RAE Systems common stock
at the close of business on the record date. The proposal to
adjourn the Special Meeting, if necessary, for the purpose of
soliciting additional proxies to vote in favor
7
of adoption of the Merger Agreement, requires the approval of
the holders of a majority of the shares of RAE Systems common
stock present, in person or by proxy, at the Special Meeting
(excluding abstentions).
The
Merger Agreement (page 66)
Limitation on Considering Other Takeover
Proposals.
We have agreed, prior to the merger
becoming effective or being terminated in accordance with its
terms, to limitations on, among other things, our ability to
solicit proposals for, or participate in discussions with
respect to, other acquisition transactions as described in this
document. See the section entitled The Merger
Agreement Covenants No Solicitation of
Transactions by RAE Systems beginning on page 70 for
a discussion of these limitations.
Conditions to the Merger.
The obligations of
both Purchaser and RAE Systems to complete the merger are
subject to the adoption of the Merger Agreement by the requisite
vote of RAE Systems stockholders.
Purchasers and Merger Subs obligations to complete
the merger are also subject to the following conditions:
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our representations and warranties set forth in the Merger
Agreement must be true and correct as of the closing of the
merger, except for (1) those representations and warranties
which address matters as of a particular date or (2) any
failure to be so true and correct which has not had and would
not have, individually or in the aggregate, a material
adverse effect on us (except that certain representations
and warranties must be true and correct in all respects, or in
all respects that are material to us);
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we must have performed in all material respects each of our
covenants and obligations under the Merger Agreement;
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we must not have suffered a material adverse effect;
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no order or injunction preventing the consummation of the merger
(or any transaction contemplated by the Merger Agreement) shall
have been issued by any court or other government body and
remain in effect, and there shall not be any legal requirement
enacted or deemed applicable to the merger (or any transaction
contemplated thereby) that makes consummation of the merger (or
any transaction contemplated thereby) by Purchaser and Merger
Sub illegal;
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there shall not be pending, and there shall not have been
threatened in writing, legal proceedings in which a governmental
body is or has threatened to become a party:
(a) challenging the consummation of the merger,
(b) relating to the merger and seeking from Purchaser or
RAE Systems damages or other relief that may be material,
(c) seeking to prohibit in any material respect
Purchasers ability to exercise ownership rights with
respect to the stock of the surviving corporation, (d) that
could materially and adversely affect the right of Purchaser or
surviving corporation to own the assets or operate the business
of the surviving corporation, or (e) seeking to compel any
party to the merger to hold separate any material assets as a
result of the merger; and
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|
|
|
there must not be any other pending legal proceedings in which
there is a reasonable possibility of an outcome that would have
a material adverse effect on us or Purchaser.
|
See the section entitled The Merger Agreement
Conditions to the Merger beginning on page 73.
Termination of the Merger Agreement.
Purchaser
and RAE Systems can terminate the Merger Agreement if, among
other things, the merger is not completed by July 31, 2011.
In addition, we can terminate the Merger Agreement if we receive
a superior acquisition proposal and meet a number of conditions
as described in the Merger Agreement and in other circumstances
described in this document. See the section entitled The
Merger Agreement Termination of the Merger
Agreement beginning on page 74.
Termination Fee.
The Merger Agreement requires
us to reimburse up to $900,000 of Purchasers out of pocket
expenses if the Merger Agreement is terminated under certain
circumstances and requires us to pay Purchaser a termination fee
in the amount of $3,710,000 (less the amount of any such expense
reimbursement paid or payable by us) if the Merger Agreement is
terminated under circumstances involving an alternative
acquisition proposal. See the section entitled The Merger
Agreement Termination of the Merger Agreement
beginning on page 74.
8
QUESTIONS
AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING
Q: Will I own any shares of RAE Systems common stock or
Purchaser common stock after the merger?
A: No. You will be paid cash for your shares of RAE
Systems common stock. Our stockholders (other than the Rollover
Holders) will not have the option to receive Purchaser common
stock in exchange for their shares instead of cash.
Q: Does our board of directors recommend adoption of the
Merger Agreement?
A: Yes. Our board of directors recommends that our
stockholders adopt the Merger Agreement. The Special Committee
also recommends that our stockholders adopt the Merger Agreement.
Q: What vote of the stockholders is required to adopt
the Merger Agreement?
A: To adopt the Merger Agreement, stockholders of record as
of March 9, 2011 holding a majority of the outstanding
shares of RAE Systems common stock must vote FOR the
adoption of the Merger Agreement. The proposal to adopt the
Merger Agreement does not require the approval of a majority of
our disinterested stockholders (i.e. our stockholders other than
the Voting Parties). There are approximately
59,512,064 shares of RAE Systems common stock entitled to
be voted at the Special Meeting. Pursuant to the voting
agreements executed by each of the Voting Parties, the Voting
Parties have agreed to vote an aggregate of
18,551,272 shares, which includes 295,831 options to
purchase common stock exercisable within 60 days of the
record date, or approximately 31% of our outstanding common
stock as of the record date, in favor of the Merger Agreement
and against any competing proposals. Vector Capital beneficially
owns 2,900,000 shares, or approximately 4.9% of our
outstanding common stock. Vector Capital intends to vote all
such shares in favor of the Merger Agreement.
Q: How do RAE Systems directors and executive officers
intend to vote?
A: As of March 9, 2011, the record date, the directors
and executive officers of RAE Systems held and are entitled to
vote, in the aggregate, shares of our common stock representing
approximately 34% of our outstanding shares. We believe our
directors and executive officers intend to vote all of their
shares of our common stock FOR the approval and adoption of the
Merger Agreement. In addition, the Voting Parties have entered
into voting agreements pursuant to which the Voting Parties have
agreed to vote an aggregate of approximately 31% of our
outstanding common stock as of the record date, in favor of the
adoption of the Merger Agreement and against any competing
proposals.
Q: What is the date, time and location of the Special
Meeting?
A: The Special Meeting will be held at the offices of
Fenwick & West, at 801 California Street, Mountain
View, California 94041, at 10:00 a.m., local time, on
April 7, 2011.
Q: What do I need to do now?
A: We urge you to read this proxy statement carefully,
including its annexes, and consider how the merger affects you.
Then mail your completed, dated and signed proxy card in the
enclosed return envelope or vote over the Internet or by
telephone as soon as possible so that your shares can be voted
at the Special Meeting. See the section entitled The
Special Meeting Voting of Proxies beginning on
page 64.
Q: What happens if I do not return a proxy card?
A: The failure to return your proxy card (or to vote over
the Internet or by telephone or to vote in person) will have the
same effect as voting AGAINST adoption of the Merger
Agreement.
Q: How are votes counted?
A: For the proposal relating to the adoption of the Merger
Agreement, you may vote
FOR
,
AGAINST
or
ABSTAIN.
Abstentions will not count as votes cast on the proposal
relating to adoption of the Merger Agreement, but will count for
the purpose of determining whether a quorum is present. As a
result, if you
ABSTAIN,
it has the same
effect as if you vote
AGAINST
the adoption of
the Merger Agreement. For a proposal to adjourn or postpone the
meeting, if necessary or appropriate, to solicit additional
proxies, you may vote
FOR
,
AGAINST
or
ABSTAIN.
Abstentions will not count as votes cast on a proposal to
adjourn or
9
postpone the special meeting, if necessary or appropriate, to
solicit additional proxies, but will count for the purpose of
determining whether a quorum is present. If you
ABSTAIN,
it will have no effect on a proposal
to adjourn or postpone the special meeting. If you sign and
return your proxy and do not indicate how you want to vote, your
proxy will be voted
FOR
the proposal to adopt
the Merger Agreement, and
FOR
a proposal to
approve the adjournment or postponement of the special meeting,
if necessary or appropriate, to solicit additional proxies.
Please do NOT send in your share certificates with your proxy.
Q: May I vote in person?
A: Yes. You may vote in person at the meeting, rather than
signing and returning your proxy card, if you own shares in your
own name. However, we encourage you to return your signed proxy
card to ensure that your shares are voted. You may also vote in
person at the Special Meeting if your shares are held in
street name through a broker or bank provided that
you bring a legal proxy from your broker or bank and present it
at the Special Meeting. You may also be asked to present photo
identification for admittance.
Q: May I vote over the Internet or by telephone?
A: Yes. If you own shares in your own name, you may vote
over the Internet or by telephone by following the instructions
included in these materials. You may vote over the Internet
until 11:59 P.M. Eastern Time on the day before the
Special Meeting by going to the website for Internet voting on
the proxy card and following the instructions on the screen. You
may vote by telephone by calling the toll-free number on your
proxy card, 24 hours a day and until 11:59 PM Eastern
Time on the day before the Special Meeting and following the
prerecorded instructions. Have your proxy card available when
you access this web page or call.
If you are the beneficial owner of shares held in
street name (i.e., your brokerage firm, bank,
broker-dealer or other similar organization is the holder of
record of your shares), you should follow their instructions for
voting through the internet or by telephone.
Q: May I change my vote after I have mailed my signed
proxy card?
A: Yes. You may change your vote at any time before the
shares reflected on your proxy card are voted at the Special
Meeting. You can do this in one of four ways. First, you can
send a written, dated notice to our corporate secretary stating
that you would like to revoke your proxy. Second, you can
complete, sign, date and submit a new proxy card. Third, you can
submit a subsequent proxy over the Internet or by telephone.
Fourth, you can attend the meeting and vote in person. Your
attendance alone will not revoke your proxy. If you have
instructed a broker to vote your shares, you must follow the
directions received from your broker to change your instructions.
Q: If my shares are held in street name by
my broker or bank, will they vote my shares for me?
A: Your broker or bank will
not
vote your shares
without instructions from you. You should instruct your broker
or bank to vote your shares, following the procedure provided by
them, or by following their instructions for voting through the
Internet or by phone. Without instructions, your shares will not
be voted, which will have the same effect as voting against
adoption of the Merger Agreement. In the alternative, you may
vote in person at the meeting if you obtain a valid legal proxy
from your broker, bank or other nominee and present it at the
meeting.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, you will receive
written instructions for exchanging your shares of RAE Systems
common stock for the merger consideration of $1.75 in cash,
without interest, for each share of RAE Systems common stock.
Q: Where will I find the results of the stockholder
vote?
A: After the stockholder votes are counted, we will
promptly file a final amendment to the
Schedule 13E-3
which will describe the results of the stockholder vote. In
addition, we also intend to file a Current Report on
Form 8-K
in which we will announce the results of the stockholder vote.
See Where You Can Find More Information beginning on
page 89.
Q: What happens if the stockholders do not approve the
merger?
A: Our board of directors currently intends to direct
management to continue to operate RAE Systems as a
publicly-traded company.
10
Q: When do you expect the merger to be completed?
A: We are working toward completing the merger as quickly
as possible, but we cannot predict the exact timing. We
currently expect the merger to be completed by the end of the
second quarter of 2011. In addition to obtaining stockholder
approval, all other closing conditions must be satisfied or
waived. However, we cannot assure you that all conditions to the
merger will be satisfied or, if satisfied, the date by which
they will be satisfied.
Q: When will I receive the merger consideration for my
shares of RAE Systems common stock?
A: After the merger is completed, you will receive written
instructions, including a letter of transmittal, that explain
how to exchange your shares for the $1.75 per share merger
consideration. When you properly complete and return the
required documentation described in the written instructions,
you will promptly receive from the paying agent a payment of the
merger consideration for your shares.
Q: Where can I find more information about the
companies?
A: RAE Systems files reports and other information with the
SEC. Purchaser, Merger Sub and Vector Capital are also required
to file information with the SEC in connection with their
potential ownership interest in RAE Systems. You may read and
copy this information at the SECs public reference
facilities. Please call the SEC at
1-800-SEC-0330
for information about these facilities. This information is also
available at the SECs website maintained at www.sec.gov.
You can also request copies of the documents we file with the
SEC from us. See Where You Can Find More Information
beginning on page 89.
Q: Will any other business be conducted at the Special
Meeting?
A: Our board of directors knows of no business, other than
as set forth in the attached Notice of Special Meeting, that
will be presented at the special meeting. If any other proposal
properly comes before the stockholders for a vote at the special
meeting, the persons named in the proxy card that accompanies
this proxy statement will, to the extent permitted by law and to
the extent we were not notified of the proposal in a reasonable
amount of time before our solicitation, vote your shares in
accordance with their judgment on such matter.
Q: Who is soliciting my vote?
A: This proxy solicitation is being made and paid for by
RAE Systems. In addition, we have retained MacKenzie Partners,
Inc. to assist in the solicitation. We will pay MacKenzie
Partners, Inc. approximately $15,000 plus out-of-pocket expenses
for its assistance. Our directors, officers and employees may
also solicit proxies by personal interview, mail,
e-mail,
telephone, facsimile or by other means of communication. These
persons will not be paid additional remuneration for their
efforts. We will also request brokers and other fiduciaries to
forward proxy solicitation material to the beneficial owners of
shares of RAE Systems common stock that the brokers and
fiduciaries hold of record. We will reimburse them for their
reasonable out-of-pocket expenses.
Q: Who can help answer my further questions?
A: If you have additional questions about the merger or
require assistance in submitting proxies or voting shares of our
common stock, or if you would like to receive additional copies
of the proxy statement or the enclosed proxy card, please
contact our proxy solicitation agent and information agent in
connection with the merger, toll-free at
(800) 322-2885
or call collect at
(212) 929-5500,
by email at proxy@mackenziepartners.com, or by mail to the
following address:
MacKenzie
Partners, Inc.
105 Madison Avenue
New York, New York 10016
If your brokerage firm, bank, trust or other nominee holds
your shares in street name, you should also call
your brokerage firm, bank, trust or other nominee for additional
information.
11
SPECIAL
FACTORS
The discussion of the merger and the Merger Agreement contained
in this statement summarizes the material terms of the merger.
Although we believe that the description covers the material
terms of the merger and the Merger Agreement, this summary may
not contain all of the information that is important to you. We
urge you to read this proxy statement, the Merger Agreement, a
copy of which is attached to this proxy statement as
Annex A, and the other documents referred to herein
(including the annexes) carefully for a more complete
understanding of the merger.
Parties
to the Merger Agreement
RAE
Systems Inc.
RAE Systems Inc., a Delaware corporation, is a leading developer
and manufacturer of rapidly-deployable, multi-sensor chemical
and radiation detection monitors and wireless networks for
application in five key markets: oil and gas, hazardous material
management, industrial safety, civil defense and environmental
remediation. We provide personal, portable and wireless sensor
networks that enable our customers in more than 95 countries to
identify safety and security threats in real-time. The Company
was founded in 1991 and originally developed technologies for
the detection of hazardous materials in environmental
remediation and chemical spill
clean-ups.
We have a broad patent portfolio consisting of 14 issued
U.S. patents, one patent issued in Japan, one issued and
five pending EU patents, and five issued and 14 pending
technology patents in China. These patents in gas and radiation
detection technology are the basis for many of our products. Our
principal executive offices are located at 3775 North First
Street, San Jose, California 95134, and our telephone
number is
(408) 952-8200.
Ray
Holding Corporation
Ray Holding Corporation is a wholly owned by Vector Capital III,
L.P. and Vector Capital IV, L.P. (collectively,
Vector). Vector is a leading global private equity
investor in the technology sector. Ray Holding Corporation was
incorporated under the laws of the State of Delaware on
January 12, 2011. Ray Holding Corporation has not engaged
in any business activity other than in connection with its
formation and the proposed merger. Vector Capital III, L.P. was
organized in April 23, 2004, and Vector Capital IV, L.P.
was organized in May 23, 2007, each under the laws of the
state of Delaware.
Ray
Merger Sub Corporation
Ray Merger Sub Corporation is a wholly owned subsidiary of Ray
Holding Corporation. It was incorporated under the laws of the
State of Delaware on January 12, 2011. Ray Merger Sub
Corporation has not engaged in any business activity other than
in connection with its formation and the proposed merger.
Background
of the Merger
Preliminary
Discussions with Battery Ventures.
In November and December 2009, representatives of Battery
Ventures contacted Robert I. Chen and Randall K. Gausman,
our chief financial officer and expressed their preliminary
interest in exploring an acquisition of RAE Systems. During
these discussions, Battery Ventures provided Mr. Chen and
Mr. Gausman with information on Battery Ventures
investment strategies, and Battery Ventures requested that RAE
Systems provide it with certain financial information.
In addition, in November 2009, we received several unsolicited
inquiries from private equity firms expressing interest in a
going-private or acquisition transaction.
On January 27, 2010, Battery Ventures and RAE Systems
entered into a non-disclosure agreement. Mr. Chen,
Mr. Gausman and Peter C. Hsi (our chief technology officer)
met with representatives of Battery Ventures on January 27,
2010 and provided Battery Ventures with a presentation regarding
our business (including our products, technology and
strategies), and discussed our historical financial results and
our projected 2010 financial results.
12
Formation
and Activities of a Strategic Planning Committee
On February 3, 2010, our board of directors held a meeting
that was also attended by representatives of Fenwick &
West LLP (Fenwick & West), our outside
counsel. At this meeting, the directors discussed our current
business positioning and financial prospects, and the
preliminary discussions that had occurred with Battery Ventures.
The board of directors then formed a strategic planning
committee, consisting of Mr. Chen, James Power and Susan
Wang, to review and analyze our business and outlook, industry
positioning and potential strategic planning and alternatives.
The strategic planning committees objectives included
working with management to develop a business plan and forecast
before any further discussions would be conducted with any
parties with respect to a strategic transaction, and
interviewing investment banks to assist with this review and
analysis. Management was instructed to stop further discussions
with Battery Ventures or other prospective acquirers regarding
the terms of any proposed transaction until a business plan and
forecast was developed.
The strategic planning committee met on February 3,
February 5 and February 10, 2010 with representatives of
Fenwick & West. At these meetings, the committee
discussed its objectives and the approach to be taken in
developing a strategic plan and interviewing investment banking
firms, and representatives of Fenwick & West reviewed
the duties of the members of this committee. On February 18 and
19, 2010 the strategic planning committee interviewed three
investment banking firms, and discussed their perspectives on
RAE Systems and its industry and its strategic alternatives.
In addition, in February 2010, our management prepared a three
year business plan and forecast under the direction of the
strategic planning committee. The strategic planning committee
then met again on March 3, March 4 and March 8, 2010
to review and discuss this business plan and forecast. This
forecast included 2010 revenue, gross margin, operating expense
and operating income projections that were the same as those in
the projections that had been presented to Battery Ventures on
January 27, 2010, and projections for 2010 other expenses
and net income that were not materially different from those
provided to Battery Ventures.
Battery
Ventures Proposal and Formation of a Special
Committee
Subsequent to the January 27, 2010 meeting described above,
representatives of Battery Ventures requested an opportunity to
present a proposal for a transaction to the board of directors
of the Company. On March 11 and 12, 2010, the board of directors
met, with representatives of Fenwick & West in
attendance. Fenwick & West had not represented us
prior to February 2010. At these meetings, representatives of
Fenwick & West reviewed the directors fiduciary
duties, and the directors discussed the activities of the
strategic planning committee and the business plan and forecast
that had been developed. Representatives of Battery Ventures
then joined the meeting on March 12 and presented a proposal to
acquire RAE Systems at a price of $1.45 per share, and which
contemplated Mr. Chen and Dr. Hsi exchanging a
substantial portion of their RAE Systems shares for equity in
the new entity, which represented a 70% premium to our $0.85 per
share closing price on March 12, 2010. The proposal stated that
it was not subject to any financing contingency. As part of this
proposal, the representatives of Battery Ventures requested that
we enter into an exclusivity agreement with Battery Ventures
under which we would agree not to solicit proposals from other
parties for a period of 20 business days (subject to extension).
In addition, the representatives of Battery Ventures provided us
with a proposed form of merger agreement, which provided for a
go shop period following execution of the agreement,
in which we could conduct a post-signing market
check. The representatives of Battery Ventures then left
the meeting and the directors discussed this proposal and the
activities of the strategic planning committee. Following that
discussion, our board of directors created a special committee
of independent board members consisting of Keh-Shew Lu,
Mr. Power and Ms. Wang to establish and direct a
process to solicit, review and negotiate possible transactions
involving a change of control of RAE Systems, to determine the
fairness of a transaction and to reject or approve a
transaction. The board of directors also authorized the Special
Committee to retain legal and financial advisors. The Special
Committee subsequently retained UBS as its financial advisor.
On March 26, 2010, a representative of UBS spoke with
representatives of Battery Ventures and advised them that the
Special Committee had been formed, and had engaged UBS, and that
the Special Committee and UBS were reviewing Battery
Ventures proposal.
During this process, Battery Ventures did not have any
discussions with the Rollover Holders with respect to the terms
of the rollover of their shares until August 17, 2010, when
the Special Committee consented to such
13
discussions. As part of its strategic process, the Special
Committee restricted Battery Ventures (and other bidders), and
the Rollover Holders, from having any such discussions.
Also in February and March 2010, we received unsolicited letters
from two other parties expressing interest in acquiring us, and
an unsolicited call from a private equity firm expressing
interest in acquiring us.
Implementation
of a Strategic Process
The Special Committee met on April 2, 2010, together with
representatives of Fenwick & West, Mr. Chen and
Mr. Gausman. Fenwick & West discussed the
members fiduciary duties, and the members discussed the
potential risks and benefits involved in execution of our
business plan as an independent company. Representatives of DLA
Piper (DLA), our special Foreign Corrupt Practices
Act (FCPA) counsel, provided an update on the FCPA
investigation being conducted by the SEC and the Department of
Justice and DLAs expectations with respect to a
settlement, and the committee members discussed the potential
effect of this both on the execution of our business plan as an
independent company and on our contemplated strategic process.
Mr. Chen and Mr. Gausman then left the meeting, and
these discussions continued.
During the first half of April 2010, our management, under the
direction of the Special Committee, developed five-year
financial forecasts based on two alternative scenarios, one
based on an assumption of a 2012 recovery in general economic
conditions and credit markets (the 2012 recovery
case) and one based on an assumption of a 2011 recovery
(the 2011 recovery case). Both forecasts set forth
anticipated 2010 results that were consistent with the three
year business plan and forecast described above. They both
assumed that we would not acquire any new business or divest any
existing businesses, that we would settle our FCPA investigation
on terms that would require a payment that was consistent with
our existing publicly disclosed accrual of $3.5 million,
and that we would reduce our general and administrative expenses
(including as a result of such settlement). These forecasts
included 2010 revenue, gross margin, operating expense and
operating income projections that were the same as those in the
forecast that had been provided to Battery Ventures in January
2010 and to our board of directors in March 2010, and
projections for 2010 other expenses and net income that were not
materially different from those provided to Battery Ventures
(and were the same as those provided to our board of directors
and the strategic planning committee in March 2010).
On April 13 and 14, 2010, the Special Committee met, together
with representatives of Fenwick & West and UBS. At
this meeting, the Special Committee reviewed the financial
forecasts described above and the Battery Ventures proposal,
public market perspectives on us and preliminary financial
analyses based on these forecasts, and risks to our ability to
achieve our strategies and financial goals as an independent
company and the possible benefits that we might achieve by
pursuing our strategic plan as an independent company. The
preliminary financial analyses were not prepared in connection
with any fairness opinion and were based on information
available at the time and are similar to the final analyses
described under Opinion of the Financial
Advisor to RAE Systems Special Committee. The
preliminary analyses included a comparison of selected financial
and stock market data of RAE Systems with corresponding data of
selected publicly traded companies principally operating in the
detection, safety and industrial instrumentation and sensors
industry, which for the publicly traded companies indicated a
range of enterprise values (calculated as diluted equity value
as of April 9, 2010, plus book value of total debt, plus
book value of minority interests, less cash and cash
equivalents) as multiples of estimated 2010 earnings before
interest, taxes depreciation and amortization, or EBITDA, of 5.0
to 19.4 (compared to 15.6x for RAE Systems), a range of
multiples of enterprise values to estimated 2011 EBITDA of 4.2
to 10.2 (compared to 8.0x and 10.9x for RAE Systems) and a range
of price to earnings ratios for 2010 of 14.5x to 26.1x
(estimated earnings for RAE Systems were negative) and for 2011
of 10.8x to 23.4x (compared to 13.0x and 19.5x for RAE Systems).
The preliminary analyses also included a comparison of selected
financial and stock market data of RAE Systems with
corresponding data of selected transactions involving target
companies principally operating in the detection, safety and
industrial instrumentation and sensors industry, which indicated
a range of enterprise values to the latest twelve months EBITDA
of 8.3x to 16.5x. The preliminary analyses also included an
illustrative discounted cash flow analyses based on the 2011
recovery case and 2012 recovery case financial forecasts
described above, which indicated a range of implied present
values of approximately $1.10 to $1.80 per outstanding share of
RAE Systems common stock using the 2011 recovery case and
approximately $0.75 to $1.20 per outstanding share of RAE
Systems common stock using the 2012 recovery case.
14
Following discussion of these financial analyses,
representatives of Fenwick & West advised the
committee members on their fiduciary duties. The Special
Committee then discussed Battery Ventures request for an
exclusivity agreement. The committee determined that we should
pursue the Battery Ventures proposal while also exploring other
alternatives by conducting a market check.
Accordingly, the committee determined that we would advise
Battery Ventures that we were not in a position to provide them
with the requested exclusivity, but would be prepared to work
with them to provide them with due diligence, and to negotiate a
merger agreement. The committee also directed UBS to assist us
in preparing a list of parties that might be interested in an
acquisition of RAE Systems. Following this meeting, the board of
directors met and was apprised of these decisions. Ms. Wang
and representatives of UBS each then had separate discussions
with a representative of Battery Ventures and communicated this
decision, and Ms. Wang noted to Battery Ventures our
anticipation that its due diligence process would help them to
increase their proposed valuation.
On April 21, 2010, the Special Committee met, together with
representatives of Fenwick & West and UBS, and
discussed a list of parties to be contacted by UBS to solicit
indications of interest in acquiring us, and the information
that would be provided to such parties in connection with these
solicitations. Representatives of UBS, in consultation with
members of the Special Committee and management, continued to
assist us in developing this list and information, and, during
the last week of April and the first week of May,
representatives of UBS contacted 36 prospective acquirors
(including each of the firms that contacted us in November 2010
and early 2011), and circulated information about us, and our
process, to 34 prospective acquirors, including 17 financial
sponsors and 17 industry participants (including companies that
competed with our business).
On April 24, 2010, representatives of Fenwick &
West provided representatives of Battery Ventures with a revised
form of merger agreement, and advised Battery Ventures that in
order to provide it with detailed due diligence information, we
would require that it enter into an amendment to its January 27
non-disclosure agreement to provide for a standstill
under which it would agree that it would not acquire any of our
securities or engage in other takeover activities for a period
of 18 months without our prior consent. On April 26,
2010, we entered into this amendment with Battery Ventures, and
on April 27, 2010, we provided representatives of Battery
Ventures and its outside counsel Cooley LLP (Cooley)
with access to an on-line electronic data room.
On April 30, 2010, representatives of UBS discussed with
the members of the Special Committee the status of the process
of contacting prospective acquirers.
In May 2010, we negotiated and entered into non-disclosure
agreements with 16 of the prospective acquirors UBS had
contacted on our behalf pursuant to which we and the other party
each agreed to customary restrictions on the disclosure and use
of confidential information and the other party agreed to
customary standstill provisions restricting their
ability to purchase our securities or engage in other takeover
activities without our consent. During May and June 2010, our
management and representatives of UBS provided information, and
had discussions, regarding RAE Systems and its business with
such parties, and 15 of these parties attended in-person
presentations by our management. Mr. Chen, Dr. Hsi and
Mr. Gausman participated in these meetings to discuss and
provide information regarding our business; in each case a
representative of UBS was also present. During the course of
these meetings, each of these prospective purchasers received
copies of the five-year financial forecasts described above
(both the 2012 recovery case and the 2011 recovery case). During
this time, on May 6 and May 7, Mr. Chen and his
advisor met with representatives of Battery Ventures at Battery
Ventures offices, where he was introduced to senior
representatives of Battery Ventures who had not previously met
Mr. Chen. At this meeting, Mr. Chen and
representatives of Battery Ventures discussed RAE Systems, the
instrumentation industry and potential growth strategies.
In addition, during the period from April 27, 2010 through
June 17, 2010, Battery Ventures and its advisors conducted
detailed due diligence on RAE Systems, and Fenwick &
West and Cooley discussed the terms of a draft merger agreement.
Throughout the period from May 2010 through September 17,
2010, the Special Committee held a number of meetings, including
the meetings described below, to discuss the process by which
RAE Systems would explore and evaluate opportunities for RAE
Systems to be acquired by another company, and to evaluate such
opportunities relative to the option of RAE Systems continuing
as an independent publicly traded company. In addition, on
May 11, July 1 and August 9, 2010, our board of
directors met and received an update on our strategic process.
15
On May 12, 2010, Battery Ventures requested that we agree
to reimburse its out-of-pocket due diligence expenses, and
provided a proposed form of expense reimbursement agreement. In
addition, representatives of Battery Ventures requested
permission to contact certain of our customers for purposes of
its due diligence review. Following discussion with
representatives of UBS and Ms. Wang, representatives of
Fenwick & West advised Battery Ventures and
representatives of Cooley that we would be prepared to enter
into such an expense reimbursement agreement only if Battery
Ventures reaffirmed its proposed valuation for a transaction
following due diligence meetings in China that had been planned
for the following week, and agreed to make the following changes
to the proposed form of merger agreement: the amount of the
termination fee and expense reimbursement that we would be
obligated to pay under certain circumstances would be capped in
the aggregate at a percentage of the transaction value customary
for such transactions; on termination of the merger agreement,
we would not be obligated to reimburse Battery Ventures
out of pocket expenses if the merger agreement were terminated
as a result of events that were out of our (and our
stockholders) control; the condition to Battery
Ventures obligations to consummate the merger that
required our representations to be true as of the closing of the
merger would be subject to a qualification that any inaccuracies
must have a material adverse effect; a condition to
Battery Ventures obligations to consummate the merger
related to retention of our employees would be eliminated; and
Battery Ventures would guarantee the entire amount of the
purchasing entitys obligations under the merger agreement.
After discussions between representatives of Fenwick &
West and representatives of Cooley, Battery Ventures agreed
generally to make these changes, to limit the expenses for which
it was requesting such reimbursement to a maximum of $500,000,
to permit us to notify Battery Ventures at any time that we had
determined to cease reimbursing such expenses (in which case we
would only be required to reimburse expenses incurred through
the time of such notice), and to only require reimbursement of
such expenses if we decided not to proceed with a transaction,
or agreed to a transaction with a third party by August 31,
2010 at more than $1.45 per share. The Special Committee met on
May 20, 2010 and discussed the expense reimbursement
request, and the benefits to us of Battery Ventures
continuing with its due diligence and negotiations while we
conducted our strategic process. Based on these benefits, the
Special Committee authorized us to enter into this expense
reimbursement agreement. On May 22, 2010, following their
due diligence meetings in China, representatives of Battery
Ventures reaffirmed their offer price of $1.45 per share. We and
Battery Ventures then executed the expense reimbursement
agreement on May 23, 2010.
The Special Committee met again on May 26, 2010, and
discussed the status of our strategic process, as well as the
status of our discussions with the SEC and the Department of
Justice regarding the FCPA investigation, including expectations
regarding timing for a settlement and our expectation that a
settlement would not impose any liability that was inconsistent
with our publicly announced accrual.
On June 2, 2010, the Special Committee authorized UBS to
inform the prospective buyers who had engaged in (or had plans
to engage in) these meetings that each participant in our
strategic process should provide a written, preliminary and
non-binding indication of interest to UBS by June 15, 2010,
and that following evaluation of the indications of interest,
the Special Committee would select participants to proceed in
the process. During the first week of June, representatives of
UBS notified each of the prospective buyers of this process.
By June 15, 2010, UBS had contacted a total of 36 potential
bidders, 16 of these had entered into non-disclosure and
standstill agreements with us, 15 of these (including 6
strategic buyers and 9 private equity sponsors) had attended
management presentations, and 11 of these submitted non-binding
indications of interest, as follows:
Bidder A, a strategic buyer, proposed a purchase price in a
range of $1.97 to $2.44 per share, in cash;
Bidder B, a strategic buyer, proposed a purchase price of
$1.50 per share, in cash;
Bidder C, a private equity sponsor, proposed a purchase
price in a range of $1.25 to $1.50 per share, in cash;
Bidder D, a strategic buyer, proposed a purchase price of
$1.25 per share, in cash;
Bidder E, a private equity sponsor, proposed a purchase
price in a range of $1.00 to $1.15 per share, in cash;
Bidder F, a private equity sponsor, proposed a purchase
price of $1.10 per share, in cash;
Bidder G, a private equity sponsor, proposed a purchase
price of $1.00 per share, in cash;
Bidder H, a private equity sponsor, proposed a purchase
price in a range of $0.90 to $1.00 per share, in cash;
16
Bidder I, a private equity sponsor, proposed a purchase
price of up to $0.89 per share, in cash; and
Bidder J, a private equity sponsor, proposed a purchase
price of $0.80 per share, in cash.
In addition, on June 16, 2010, Battery Ventures reaffirmed
its proposal of a purchase price of $1.45 per share, in cash and
requested that it be permitted to contact customers as part of
its due diligence.
Each of these proposals was subject to certain stated
assumptions, and to further due diligence.
The Special Committee met on June 16, 2010 with
representatives of Fenwick & West and UBS and reviewed
these proposals, including the financial terms, the assumptions
stated and the risks inherent in each. The Special Committee
determined not to proceed with further discussions with Bidders
E through J because it believed that they were unlikely to reach
valuations that would be competitive with those reflected in the
proposals of Bidders A, B, C and Battery Ventures, and because
it desired to invite into the second round a manageable number
of bidders and therefore limited the second round process to
four or five participants, and because the proposals from these
bidders were substantially lower than the proposals from Bidders
A, B, C and Battery Ventures. The Special Committee did not
believe it likely that these bidders would increase their bids
to a level that would be competitive with Bidders A, B, C and
Battery Ventures based on the substantial difference in values
between these bids and that of Bidders A, B, C (at the upper end
of Bidder Cs range) and Battery Ventures, on the fact
that these bidders were aware of the competitive nature of the
process, and on the fact that these bidders would have an
opportunity, when informed by UBS of the Special
Committees determination, to inform UBS that they would be
willing to increase their valuations. The Special Committee
directed the representatives of UBS to inform Bidders A, B, C
and Battery Ventures that they would be invited to continue to a
second phase of the strategic process, in which
Bidders A, B and C would be provided access to an on-line
electronic data room and to the Companys facilities and
personnel, to the same extent as had previously been made
available to Battery Ventures. Because the Special Committee
believed that a transaction with Bidder D could have the
potential for substantial synergy, the Special Committee
believed that Bidder D should be able to pay a higher price
for the Company than it had initially proposed, and accordingly
the Special Committee also directed the representatives of UBS
to communicate with Bidder D to determine whether
Bidder D would be willing to increase the value set forth
in its proposal. In addition, the Special Committee determined
that it would not be appropriate for us to reimburse Battery
Ventures for any further due diligence expenses under the
expense reimbursement agreement, or to permit Battery Ventures
to contact customers at that time in view of the value of its
bid in relation to the others.
Representatives of UBS communicated to Bidders A, B, C and
Battery Ventures that they would be invited to continue to the
second phase of our strategic process, and to Bidders E through
J that their valuations were not sufficient to qualify them to
continue to this second phase. None of Bidders E through J
indicated in response to this communication that they might be
willing to increase their valuation, or subsequently informed us
or UBS that they were willing to consider a transaction at a
higher valuation than they had proposed. In addition, a
representative of Fenwick & West notified Battery
Ventures that while we intended to continue discussions with
Battery Ventures and provide it with due diligence, we could not
agree to reimburse its out of pocket due diligence expenses
incurred after June 17, 2010.
Neither Mr. Chen nor Dr. Hsi engaged in any
negotiations on behalf of RAE Systems with any potential bidders
at this or any other time; rather, all negotiations were engaged
in at the direction of the Special Committee by UBS, legal
counsel or members of the Special Committee.
On June 22, 2010, Bidder D indicated that it was not
willing to increase its non-binding indication of interest and
on July 1, 2010, Bidder B indicated that it would no
longer participate in the process. On July 6, 2010,
representatives of UBS informed Bidders A and C and Battery
Ventures of the process for detailed due diligence, and
requested definitive proposals by August 13, 2010. On
July 15, 2010, we sent the bidders a proposed form of
merger agreement prepared by Fenwick & West. Bidders A
and C commenced detailed due diligence, and Battery Ventures
suspended its due diligence activities and its negotiation of a
merger agreement.
Our non-disclosure agreement with Battery Ventures, as
previously amended, contained a most favored nation
provision under which we agreed that if we entered into a
standstill agreement with any other party containing terms more
favorable to that party than our agreement, we would advise
Battery Ventures and, if requested by Battery Ventures, would
amend its standstill terms to provide it with the benefit of
such more favorable
17
terms. Pursuant to that provision, on July 29, 2010 we
entered into another amendment to our non-disclosure agreement
with Battery Ventures to modify the standstill provisions in
order to make such provisions consistent with terms we had
negotiated in our agreements with certain bidders.
During the course of their due diligence, Bidders A and C were
provided access to materials, personnel and facilities that were
the same in all material respects as had been provided to
Battery Ventures, and to other materials and personnel requested
by Bidders A and C which were, in turn, also made available to
Battery Ventures. Following a visit to our China operations, on
July 19, 2010, representatives of Bidder A advised UBS
that Bidder A did not want to acquire our joint venture in
Fushun (RAE Fushun) or our joint venture in Beijing
(RAE KLH), with the exception of certain operations
of our Beijing joint venture that they desired to be
restructured. Representatives of Fenwick & West and
UBS reviewed this information and discussed it with our
management, and the Special Committee met on July 21 and
August 2, 2010 to discuss this information. At the August 2
meeting, the Special Committee also discussed our preliminary
second quarter results of operations and the status of our
settlement discussions with the SEC and the Department of
Justice pertaining to the FCPA investigation, including
expectations regarding timing for a settlement and our
expectation, based on our most recent discussions with the
Department of Justice, that a settlement would be consistent
with our publicly-announced accrual.
On August 5, 2010, the Special Committee met, together with
Mr. Chen and representatives of Fenwick & West,
and again discussed the communications from Bidder A,
including the timeline that would be required to achieve
Bidder As objectives, possible approaches that might
be taken to seek to achieve these objectives, and the challenges
to achieving these objectives, as well as the status of
Bidder Cs due diligence investigation. In addition,
in early August Battery Ventures had resumed its due diligence
activities, and the Special Committee discussed a request by
Battery Ventures that we extend the August 31 deadline set forth
in its expense reimbursement agreement, as described above. The
Special Committee discussed the desirability of maintaining
Battery Ventures participation in our strategic process,
and approved the extension of the deadline to September 30.
On August 9, 2010, our board of directors held a meeting,
at which representatives of Fenwick & West and
Mr. Gausman were present, during which the board was given
an update on the status of the strategic process, including the
terms expected to be requested by the bidders, recent
discussions with the bidders, the anticipated timing of an
announcement of a settlement of the FCPA investigation with the
SEC and the Department of Justice, the possibility that other
bidders might become involved following execution of a
definitive merger agreement, and the process by which they might
do so, as well as our outlook and plans if we remained an
independent company. Mr. Chen and Dr. Hsi attended
this meeting, other than a portion at which these topics were
further discussed without their participation.
On August 11, 2010, representatives of Cooley provided
representatives of Fenwick & West with a revised draft
of a merger agreement, which included the following proposed
terms: a termination fee of 4.5% of the total transaction value;
a requirement for reimbursement of Battery Ventures
expenses on termination of the merger agreement upon a number of
different circumstances, including the failure of our
stockholders to adopt the merger agreement; and a condition to
Battery Ventures obligations to consummate the merger that
certain operational representations must be true in all respects
as of closing (rather than being subject to a qualification that
any inaccuracy must not have a material adverse effect). On
August 13, 2010, representatives of Battery Ventures
provided a revised proposal reaffirming its $1.45 per share bid,
on the same terms as the indications of interest previously
provided by Battery Ventures, and providing for a 10-business
day period of exclusivity (subject to automatic extension for an
additional five business days).
On August 13, 2010, representatives of Bidder C
advised representatives of UBS that it did not intend to submit
a definitive proposal, and Bidder A declined to provide a
definitive proposal and instead provided a revised non-binding
indication of interest proposing a transaction at a price per
share ranging from $1.57 to $1.73 per share. This indication of
interest contained a number of conditions, including the
following:
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we would be required to enter into a settlement agreement with
the SEC and the Department of Justice regarding our FCPA
investigation prior to entering into a definitive agreement with
Bidder A;
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Bidder A would need to meet with the SEC and the Department
of Justice and obtain confirmation as to its ability to shield
itself from liabilities for any past FCPA violations by RAE
Systems;
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it must be demonstrated to Bidder A that the transaction
would not have any adverse impact on any current matters before
the Department of Justice or the SEC involving Bidder A or
any of its affiliates;
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the proposed transaction would exclude any ownership interest or
liabilities of RAE Fushun, and we would be required to complete
a dissolution and liquidation process prior to closing, in a
manner satisfactory to Bidder A, if we were unable to sell
it to a third party; and
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we would be required to acquire the minority interest in our RAE
KLH joint venture in Beijing from our joint venture partner,
obtain title documents for its Beijing facility, reorganize
certain of its business operations and commence a liquidation of
this joint venture.
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On August 15, 2010, representatives of Fenwick &
West and UBS discussed these proposals with representatives of
Battery Ventures and Bidder A, respectively, and on August
15 through 18, representatives of Fenwick & West, UBS
and our China counsel discussed and assessed the ability of RAE
Systems to satisfy the conditions required by Bidder A with
respect to the RAE Fushun and RAE KLH joint ventures and
facility and the timeline, process and uncertainties that would
be involved.
On August 16, 2010, our Special Committee met, together
with representatives of Fenwick & West and UBS, to
discuss the proposals made by Battery Ventures and
Bidder A. The Special Committee discussed the proposal by
Bidder A in detail, and noted the significant conditions to
closing a transaction that had been included by Bidder A.
In particular, the Special Committee discussed the uncertainty
of our ability to sell RAE Fushun, the substantial timeframe
that would be required to complete a liquidation of RAE Fushun,
the requirements that we negotiate and complete transactions
with third parties who were not within our control, and the
anticipated difficulties in satisfying the FCPA-related
conditions, which were dependent on the satisfaction of
Bidder A and required actions by the Department of Justice
and the SEC. In addition, the Special Committee discussed the
extensive process that had been conducted, and the possibility
that any other bidder might enter into a transaction with RAE
Systems at a greater value. Following these discussions, the
Special Committee directed UBS to negotiate with Battery
Ventures to seek an increase in the per share price set forth in
Battery Ventures proposal to $1.60 per share. The
Special Committee selected this target per share price based on
the fact that it was within the range proposed by Bidder A
in its conditional indication of interest, and the Special
Committees belief that it would be desirable to obtain a
price that was within the range presented by the other bidder.
In addition, in view of the highly conditional nature of
Bidder As proposal, the Special Committee determined
that Bidder A did not represent a credible alternative to
Battery Ventures, and that in the absence of a credible
alternative, a more aggressive strategy could be
counterproductive. Finally, the Special Committee considered the
fact that $1.60 per share would represent a material increase in
the price proposed by Battery Ventures, the substantial premium
represented by this price compared to the public trading price
of our common stock (which closed at $0.76 on August
16) and the Special Committees belief that $1.60 per
share would represent a fair price for our unaffiliated
stockholders and advised Bidder A that unless it was
willing to remove or meaningfully modify these conditions, we
would not be able to proceed with a transaction with
Bidder A. Representatives of UBS subsequently so advised a
representative of Bidder A.
On August 17, 2010, representatives of UBS advised
representatives of Battery Ventures that we could provide
Battery Ventures with exclusivity if Battery Ventures increased
its per share price to $1.60 per share, and agreed to the
following changes to the draft merger agreement: limiting the
termination fee to 3.5% of the total transaction value;
eliminating the requirement for reimbursement of Battery
Ventures expenses on failure of our stockholders to adopt
the merger agreement in the absence of another transaction; and
restoring the material adverse effect qualifier for
the two operational representations where it had been removed.
On August 17, 2010, Battery Ventures requested permission
to communicate with Mr. Chen and Dr. Hsi to discuss
the key elements of the terms for the exchange of the Rollover
Shares for shares in the new entity, as the Special Committee
had previously restricted Battery Ventures (and other bidders)
from having any such discussions. We provided Battery Ventures
with our approval to have such discussions, and on
August 19, 2010, representatives of Battery Ventures
advised representatives of Fenwick & West and UBS that
it would increase its per share price to $1.60 and would make
the required changes to the form of merger agreement other than
the elimination of expense reimbursement upon a failure of our
stockholders to adopt the merger agreement. Representatives of
Fenwick & West and Cooley then discussed the
circumstances under which such a fee might be payable, the
amount of a cap on such reimbursable expenses, and the credit of
any such expense reimbursement against the 3.5% termination fee.
19
On August 17, 2010, representatives of Battery Ventures
entered into discussions with Mr. Chen and Dr. Hsi and
proposed terms of the exchange of the Rollover Shares for equity
of Purchaser. Battery Ventures indicated to Mr. Chen and
Dr. Hsi its expectation that, consistent with prior
investments of this nature, (1) Battery Ventures would own
a majority (and, in this case, at least 70%) of the voting power
of Purchaser (immediately after the transaction, without giving
effect to the 8% management option pool), (2) that it would
have the right to designate a majority of the board of directors
of Purchaser, and (3) that the post-transaction equity
structure of the Purchaser would consist of a combination of
debt, non-voting, non-convertible preferred stock and common
stock. On August 18, 2010, representatives of UBS
communicated the following key elements proposed by the Rollover
Holders of the terms of the exchange of the Rollover Shares to
Battery Ventures: that the Rollover Shares would be exchanged
for equity in the Purchaser at the same valuation as the price
paid to our unaffiliated stockholders ($1.60 per share); that
Battery Ventures investment in the Purchaser must be at
least $50 million in cash; that the Rollover Holders would
be willing to roll over a number of their collective shares of
RAE Systems common stock to allow Battery Ventures to
obtain a 70% interest in the Purchaser, provided that the
remainder of the RAE Systems common stock collectively
held by them would be cashed-out in the merger at $1.60 per
share; that the Purchaser would agree to reimburse the Rollover
Holders legal fees related to the negotiation of the terms
of the exchange; that the Rollover Holders would have automatic
antidilution protection; that the Rollover Holders would insist
upon a minimum 10% return on their investment; and that
Mr. Chen, Dr. Hsi and Ms. Chen would enter into
employment agreements that extended for the duration of their
investment.
On August 18, 2010, the Special Committee met, together
with Mr. Chen and representatives of Fenwick &
West and UBS. At this meeting, Mr. Chen advised the Special
Committee that representatives of Battery Ventures had
approached him regarding the exchange of the Rollover Shares for
equity of Purchaser, and regarding Battery Ventures
sources of funds for a transaction. The Special Committee then
met again later that day, together with representatives of
Fenwick & West and UBS and without Mr. Chen, and
the representatives of UBS provided an update on information
they had received from Battery Ventures regarding Battery
Ventures negotiations with Mr. Chen. On
August 19, 2010, Mr. Chen advised Ms. Wang that
the Rollover Holders and Battery Ventures had come to an
understanding on the important business terms regarding the
exchange of the Rollover Shares for equity of Purchaser. These
important terms were, specifically, that the Rollover Holders
would own 31% of the voting power of Purchaser (immediately
after the transaction, without giving effect to the 8%
management option pool); that the Rollover Shares would be
valued at $1.60 per share in the exchange; that the Rollover
Holders and Battery Ventures would each hold the same class of
shares in the Purchaser; that the post-closing board composition
would reflect the relative ownership of Battery Ventures and the
Rollover Holders, with Battery Ventures having the right to
designate three of the five Board members. However, certain
additional minority protections and the terms of the employment
agreements would need to be further negotiated between Battery
Ventures and the Rollover Holders.
The Special Committee met again on August 19, 2010,
together with representatives of Fenwick & West and
UBS. Representatives of UBS provided an update on their
discussions with Battery Ventures, and representatives of
Fenwick & West discussed Battery Ventures
requirement in the draft merger agreement that we reimburse it
for its out of pocket expenses in the event that Battery
Ventures terminated the merger agreement because our
stockholders did not vote to adopt the merger agreement. The
Special Committee then discussed Battery Ventures request
for a 10-business day period of exclusivity (subject to
automatic extension for an additional five business days).
Following this discussion, the Special Committee authorized us
to enter into the exclusivity agreement with Battery Ventures,
provided that Battery Ventures confirmed that it would increase
its per share price to $1.60, and eliminate the provision for
automatic extension of its exclusivity period beyond the initial
10
business-day
period.
On August 20, 2010, a representative of Bidder A
advised UBS that Bidder A was not prepared to proceed with
a transaction unless it were subject to the conditions that were
set forth in its August 13 proposal. Battery Ventures confirmed
its agreement to increase its per share price to $1.60, and made
the requested change to the exclusivity period, and accordingly,
on August 20, 2010, we entered into a 10-business day
exclusivity agreement with Battery Ventures.
From August 20, 2010 through September 17, 2010,
representatives of Cooley and Fenwick & West
negotiated the final terms of the merger agreement, and
representatives of Battery Ventures and its legal and accounting
advisors completed their due diligence review. Battery
Ventures exclusivity period ended on September 3,
2010, and on September 3, our Special Committee met and
authorized us to extend this period to September 10 in view of
20
the progress that Battery Ventures and we were making on
resolving open issues in the draft merger agreement and on
Battery Ventures due diligence. This exclusivity period
was again extended to September 14, 2010.
On August 23, 2010, Battery Ventures was informed that the
Rollover Holders had engaged Wilson Sonsini Goodrich &
Rosati P.C. (Wilson Sonsini) to represent them with
respect to the exchange of the Rollover Shares and on this date,
Wilson Sonsini and Cooley entered into discussions and
negotiations regarding the terms and conditions pursuant to
which the Rollover Holders would exchange the Rollover Shares
for equity of the Purchaser. In addition to the key elements
identified by UBS on August 18, Wilson Sonsini informed
Battery Ventures that, in light of their minority ownership
position in the Purchaser after the transaction, the Rollover
Holders would seek additional customary minority protections
(such as registration rights and information rights), and in
addition, the Rollover Holders requested a put right (at a price
equal to their investment, $21.4 million, plus dividends)
with respect to their shares in the event of the termination of
their employment. Certain of the minority protections requested
by the Rollover Holders and their counsel (such as information
rights, preemptive rights, and registration rights), were
acceptable to Battery Ventures. However, certain of the proposed
minority protections were not acceptable to Battery Ventures,
including automatic antidilution protection, a minimum 10%
return on their investment, employment agreements for
Mr. Chen, Dr. Hsi and Ms. Chen that would extend
for the duration of the Rollover Holders investment and
the requested put right with respect to their equity in the
Purchaser.
Over the next few weeks, Battery Ventures and the Rollover
Holders continued their negotiations and discussions through
Cooley and Wilson Sonsini. Battery Ventures continued to express
its unwillingness to agree to a put right on the Rollover
Holders equity, employment agreements that extended for
the duration of the Rollover Holders investment and
automatic antidilution protection. However, as part of these
discussions and in order to reach agreement with the Rollover
Holders, Battery Ventures indicated that it would be willing to
agree to employment agreements containing terms consistent with
executives of certain of its other portfolio companies, and, in
this case, with an
18-month
severance period for Mr. Chen and a
12-month
severance periods for Dr. Hsi and Ms. Chen.
In lieu of the requested put right and guaranteed 10% return,
Battery Ventures proposed an exception to the transfer
restrictions in the stockholders agreement allowing the Rollover
Holders to sell their equity in Purchaser under certain
circumstances upon the termination of their employment.
Mr. Chen and Dr. Hsi agreed to subject their shares to
a drag-along provision, whereby the Rollover Holders
would agree to vote in favor of, and support, a future sale
approved by Battery Ventures. In exchange for that concession
and the elimination of the put right, Battery Ventures agreed
that, in the event of any sale approved by Battery Ventures in
which the proceeds payable to the Rollover Holders, after
discharge of any debt, was less than the amount of their initial
investment, Battery Ventures would be willing to agree to
reallocate a portion of the sale proceeds to provide that the
Rollover Holders receive at least $21.4 million in such
sale which represents the current value of the
Rollover Shares at $1.60 per share.
Further, as part of these discussions and in order to reach
agreement on the terms of the shares to be rolled over, in
addition to the employment agreements, certain sale rights and
guaranteed minimum return described above, Battery Ventures,
Mr. Chen and Dr. Hsi agreed to the following final
terms with respect to the Rollover Shares and post-closing
governance of the Purchaser: (a) that the Rollover Holders
would own 31% of the post-transaction equity of RAE Systems
(without giving effect to the dilution from the 8% management
equity pool); (b) pursuant to a stockholders agreement, the
Rollover Holders would have the right to initially designate two
out of five directors of Purchaser (and that Battery Ventures
would have the right to designate the remaining three
directors); and (c) the Rollover Holders would be entitled
to certain customary information, preemptive rights and
registration rights with respect to their shares of common stock.
On September 19, 2010, the Special Committee and our board
of directors each held a meeting, at which representatives of
Fenwick & West and UBS, Mr. Gausman and the other
two independent members of our board of directors were present
(but which Mr. Chen and Dr. Hsi did not attend),
during which the Special Committee received an update on the
status of the proposed transaction. During the meeting, a
representative of Fenwick & West presented a summary
of the terms of the Merger Agreement and related agreements, and
discussed the fiduciary duties of the members of the Special
Committee and the board. Also at this meeting, UBS reviewed with
the Special Committee UBS financial analyses of the per
share consideration and delivered to the Special
21
Committee an oral opinion, which opinion was confirmed by
delivery of a written opinion, dated September 19, 2010, to
the effect that, as of that date and based on and subject to
various assumptions, matters considered and limitations
described in its opinion, the $1.60 per share consideration to
be received in the Battery Merger by holders of RAE Systems
common stock (other than the Rollover Holders) was fair, from a
financial point of view, to such holders. The full text of the
written opinion of UBS, which sets forth the assumptions made,
procedures followed, matters considered and limitations on the
review undertaken by UBS in connection with such opinion, is
attached to this proxy statement as Annex B. The Special
Committee, having deliberated regarding the terms of the
proposed acquisition, the UBS presentation and opinion and the
other factors discussed below, determined that the Battery
Merger and the Battery Merger Agreement are substantively and
procedurally fair to, and in the best interests of, RAE
Systems stockholders (other than the Rollover Holders) and
approved the Merger Agreement and the transactions contemplated
thereby, and recommended that our board of directors approve the
Merger Agreement and the transactions contemplated thereby,
including the Battery Merger and the voting agreements and that
our board of directors recommend that RAE Systems
stockholders vote to adopt the Battery Merger Agreement.
Following the Special Committees recommendation to our
board of directors, our board of directors, by unanimous vote of
those directors in attendance, determined that the Battery
Merger and the Battery Merger Agreement are substantively and
procedurally fair to, and in the best interests of, RAE Systems
and its stockholders (other than the Rollover Holders), declared
the Battery Merger Agreement and the Battery Merger to be
advisable and recommended that RAE Systems stockholders
vote to adopt the Battery Merger Agreement.
The Battery Merger Agreement and related documents were
finalized and executed on September 19, 2010. Before the
opening of the market on September 20, 2010, we announced
the execution of the Battery Merger Agreement.
On September 21, 2010, our board of directors received a
letter setting forth an unsolicited non-binding proposal from
Vector Capital, in which Vector Capital proposed, subject to
completion of due diligence and negotiation of definitive
agreements, to acquire the outstanding shares of our common
stock for $1.80 per share in cash (other than those held by
Mr. Chen and Dr. Hsi, which this letter proposed be
exchanged for equity in the acquiring company). Vector Capital
did not have access to our non-public information prior to
delivering this letter. On September 22, 2010, the Special
Committee met, together with representatives of
Fenwick & West and UBS, to discuss the proposal.
Representatives of Fenwick & West described the
fiduciary duties of the members of the Special Committee with
regards to this proposal. Following discussion, and after
consultation with representatives of Fenwick & West
and UBS, the Special Committee determined that this proposal met
the criteria set forth in the Battery Merger Agreement to permit
us to provide information to, and negotiate with, Vector
Capital. In addition, the Special Committee determined that it
would be appropriate for us to continue to move forward on the
actions required in connection with the Battery Merger. Based on
the Special Committees determination and as permitted by
the Battery Merger Agreement, on September 24, 2010 we
entered into a confidentiality agreement with a standstill
provision with Vector Capital, and representatives of Vector and
Shearman & Sterling LLP (Shearman &
Sterling), its legal counsel, commenced a due diligence
process. On October 5, 2010, representatives of Vector
Capital met with Mr. Chen, Mr. Gausman and
Dr. Hsi and a representative of UBS and received a
presentation similar in scope to that provided to prospective
acquirers in late May and early June 2010. Mr. Chen,
Dr. Hsi and representatives of Vector Capital met again on
October 12, 2010 and discussed our business and strategy.
Between October 12, 2010 and January 17, 2011,
representatives of Vector Capital visited our China facilities
and continued to meet with Mr. Gausman, Mr. Chen,
Dr. Hsi and other members of our management to discuss our
business, strategy and prospects, and Shearman &
Sterling continued its legal due diligence review.
In December 2010, our management presented to our board of
directors updated projected proforma financial information for
2010 and 2011, and we provided Battery Ventures and Vector
Capital with these updated projections. A summary of these
updated projections is set forth in this Proxy Statement under
the caption Important Information Concerning RAE
Systems Certain Projections.
On January 4, 2011, representatives of Shearman &
Sterling provided representatives of Wilson Sonsini with
proposed forms of rollover agreements, voting agreements and
employment agreements, stockholders agreements and related
documents and between January 4 and January 12, 2011,
representatives of Shearman & Sterling and Wilson
Sonsini negotiated the terms of these agreements.
22
On January 12, 2011, we entered into an agreement to divest
our interest in our Fushun joint venture to a third party.
On January 12, 2011, we received a letter from Vector
Capital setting forth an offer to acquire the outstanding shares
of our common stock for $1.75 per share in cash (other than
those held by Mr. Chen and Dr. Hsi, which would be
exchanged for equity in the acquiring company). This letter was
accompanied by proposed forms of a merger agreement, voting
agreements to be signed by Mr. Chen and Dr. Hsi, a
guarantee, and rollover agreements to be signed by the Rollover
Holders, providing for the rollover of shares by the Rollover
Holders. These documents were executed by Vector Capital, and
the letter stated that Vectors Capital offer would be
irrevocable until 9:00 am (Pacific Time) on January 18,
2011, at which time the offer would expire. We provided a copy
of these documents to Battery Ventures as required by the
Battery Merger Agreement, and notified Battery Ventures of our
intention to convene a Special Committee meeting, no sooner than
January 15, 2011, to consider whether this offer
represented a Superior Offer within the meaning of
the Battery Merger Agreement.
On January 13, 2011, Battery Ventures requested that,
pursuant to the Battery Merger Agreement, we engage in good
faith negotiations with Battery Ventures, and that we provide it
with certain additional information regarding the Vector Capital
offer. We provided this additional information on January 13 and
14, 2011.
On January 14, 2011, Susan Wang, the Chair of the Special
Committee, met with representatives of Battery Ventures,
together with representatives of Cooley and Fenwick &
West, to discuss Vector Capital, the Special Committees
process for considering the Vector Capital offer, and prospects
for improved terms by Battery Ventures. Later that day,
Mr. Chen and Dr. Hsi met with representatives of
Battery Ventures, together with representatives of Cooley,
Fenwick & West and Wilson Sonsini, and discussed the
Vector Capital offer, the parties respective views of the
Vector Capital offer compared to the Battery Merger, and Battery
Ventures plans and strategies for us following the merger.
During this discussion, Mr. Chen informed the
representatives of Battery Ventures that he had been impressed
by the Vector Capital team, and its strategies for our business.
Mr. Chen also noted that he had been advised by Vector that they
intended to involve a CITIC Capital affiliate as an investor and
that he believed its investment might be advantageous to the
company because of its financial resources and relationships in
China. The value Mr. Chen ascribed to CITIC Capitals
participation in the transaction with Vector was based upon his
belief as to the importance of adding to the Companys
existing presence in the Chinese market for our further growth,
and his perception of CITIC Capital as a China-based institution
with a deep understanding of the Chinese market and (through
other entities with which CITIC Capital is indirectly related) a
broad network of business contacts and relationships, and his
hope that as an equity investor, CITIC Capital might provide us
with the benefits of that understanding of our market, and its
relationships, and that those other entities could potentially
also serve as a source of financing for our operations in China.
For example, Mr. Chen noted his understanding that some of
those entities provide working capital, property and equipment
lease financing in China.
On January 15, 2011, the Special Committee met, together
with representatives of Fenwick & West, Morris Nichols
Arsht & Tunnell LLP (special Delaware counsel to the
Special Committee, referred to hereafter as Morris
Nichols) and UBS to discuss the Vector Capital offer.
Mr. Chen and Dr. Hsi also attended a portion of the
meeting. The Special Committee discussed the terms of the Vector
Capital offer, as well as the requirement under the terms of the
Battery Merger Agreement that we pay a $3.39 million
break-up
fee
to Battery Ventures in the event that we terminated the Battery
Merger Agreement. The Special Committee discussed our cash
resources and working capital, and considered our ability to pay
the
break-up
fee and the effect such payment would have on our financial
condition if a merger with Vector Capital was not consummated.
The Special Committee then discussed the Battery Merger
Agreement and related rollover agreement and voting agreement,
and in particular whether those agreements would remain in
effect if Battery Ventures were to agree to amend the Battery
Merger Agreement to increase the per share merger consideration.
Mr. Chen advised the Special Committee that he and Dr Hsi,
after having consulted with their counsel, did not believe that
those agreements would continue to bind them in that event. Mr.
Chen and Dr. Hsi then left the meeting, and the Special
Committee discussed these matters, and the Vector Capital offer,
in their absence. In addition, representatives of
Fenwick & West advised the Special Committee of its
fiduciary duties relevant to the consideration of the Vector
Capital offer. Mr. Chen and Dr. Hsi then rejoined the
meeting, and the Special Committee requested that they consider
in good faith any proposal Battery Ventures might make. In
addition, the Special Committee requested that Mr. Chen
postpone a planned trip to China to facilitate the consideration
of any such proposal, and Mr. Chen agreed to do so.
Following this meeting, a representative of Fenwick &
West advised a representative of Cooley that the Special
Committee encouraged Battery Ventures to submit a viable
alternative
23
proposal, and advised Cooley that Battery Ventures should not
assume that Mr. Chen and Dr. Hsi would necessarily be
willing, in their capacity as stockholders, to support an
improved offer by Battery Ventures.
On January 16, 2011, we received a letter from Battery
Ventures setting forth a proposal to amend the Battery Merger
Agreement to increase the merger consideration to $1.85 per
share and increase the termination fee to 3.5% of the overall
new transaction value, accompanied by a form of such an
amendment. The letter stated Batterys position that the
existing rollover agreements and voting agreements would remain
in effect and enforceable against the Rollover Holders following
such an amendment notwithstanding the increase in the merger
consideration. As an alternative, the letter stated that if the
Rollover Holders desired to be released from their rollover
obligations, Battery Ventures would be willing to increase the
merger consideration to $1.85 per share with no rollover at all,
but only if Battery Ventures could work with Vector Capital as
50/50 equity partners on the transaction.
On January 17 and 18, 2011, representatives of
Fenwick & West LLP discussed with representatives of
Cooley and of Wilson Sonsini, counsel to the Rollover Holders,
the legal issue of whether the rollover agreements, and the
voting agreements executed by the Rollover Holders,
Mr. Chen and Dr. Hsi, would remain in effect following
such an amendment if the Rollover Holders, and Mr. Chen and
Dr. Hsi, did not consent to that amendment. Representatives
of Wilson Sonsini advised representatives of Fenwick &
West that, in the view of the Rollover Holders, the existing
rollover agreements and voting agreements with Battery Ventures
would not continue to be valid and enforceable obligations of
the Rollover Holders following such an amendment, because of the
material changes to the overall transaction to the Rollover
Holders (among other considerations), including the change in
the purchase price and in the post-closing capitalization and
capital structure of the purchaser, which the Rollover Holders
viewed as significant as they would require either an increase
in the total amount of equity financing (which would dilute the
ownership of the Rollover Holders following the merger), or an
increase in the amount of debt financing (which presents risk
associated with additional leverage). The Rollover Holders
advised the representatives of Fenwick & West that in
their view, for such agreements to be enforceable against them
after such a material change in the transaction, the agreements
would need to explicitly state such was the intent of the
Rollover Holders. The rollover agreement and the voting
agreement were not explicit in this respect. In fact, counsel
for the Rollover Holders advised the representatives of
Fenwick & West that they believe that the language of
the agreements explicitly describe the opposite. The rollover
transaction with Battery Ventures was explicitly conditioned
upon the closing of the Merger, which was the
transaction described in the Merger Agreement dated
September 19, 2010. The Rollover Holders believe that if
the rollover agreement and the voting agreement were meant to
apply to any amended merger agreement between Battery Ventures
and the Company without the consent of the Rollover Holders, the
parties would have defined the term Merger Agreement
as the merger agreement dated September 19, 2010,
as
amended
, and the rollover agreement would not have contained
a specific price and a specific post-closing capital structure
that was dependent upon such specific price. Counsel for the
Rollover Holders advised the representatives of
Fenwick & West that in their view, if the merger
agreement were amended to increase the price per share without
an amendment to the rollover agreement, the exchange of shares
provided for in the rollover agreement would be impossible to
complete, since it was premised upon a post-closing
capitalization and capital structure that could only come into
effect at a purchase price of $1.60 per share. In the view of
the Rollover Holders, the reference to the Merger
Agreement in the rollover agreement and the voting
agreement could only mean the original merger agreement dated
September 19, 2010, with the purchase price of $1.60 per
share, because the merger agreement in its original state is the
only merger agreement that would allow the performance of the
rollover agreement without material modification. Counsel to the
Rollover Holders advised representatives of Fenwick &
West that the Rollover Holders were aware of this distinction,
and that it had always been their understanding that they would
have the right to consent to any material change in the
transaction, whether effected through an amended Merger
Agreement or otherwise. Accordingly, counsel to the Rollover
Holders informed the representatives of Fenwick & West
that it was the Rollover Holders position that a change to
the per share consideration would require an amendment to the
rollover agreement, which would require the consent of the
Rollover Holders. In considering this issue, Mr. Chen was
of the view that the increased amount of debt financing implied
by Battery Ventures revised offer would place a
significant additional burden on the Company, thereby negatively
affecting Mr. Chens assessment of the financial
viability of the transaction contemplated by Battery Ventures
and the Rollover Holders and putting his continued equity stake
in the venture at additional risk. Similarly, Mr. Chen
considered the potential dilution of his ownership in the
Company post-closing were Battery Ventures to increase the total
amount of equity financing in order to support its $1.85 per
share offer, and determined that it would be
24
adverse to his financial interests. Because these changes could
be viewed as material, and as adverse, to stockholders who
entered into an agreement such as this (and because
Mr. Chen actually did view these changes as material and
adverse), the Rollover Holders counsel advised the
representatives of Fenwick & West that the Rollover
Holders expected to have a right to consent to (or withhold
consent from) an exchange of shares on these changed terms
unless the agreement expressly provided the contrary.
Representatives of Cooley advised representatives of
Fenwick & West that Battery Ventures took a contrary
position, and that in their view, the reference in the Battery
Merger Agreement to the Merger Agreement would apply
to the Merger Agreement as amended, but they were not able to
state that they believed the issue to be free from doubt. In
view of these differing positions, the ambiguity of the rollover
agreement and the resulting significant legal uncertainty
regarding the enforceability of the existing rollover agreements
and voting agreements following such an amendment,
representatives of Fenwick & West advised
representatives of Cooley that the Special Committee would
require additional certainty as to this matter, such as a
structure in which the merger agreement would provide our
stockholders (other than the Rollover Holders) with $1.85 per
share regardless of whether the existing rollover agreements
continued to be enforceable obligations of the Rollover Holders
and regardless of whether Battery Ventures, or the Rollover
Holders, prevailed in any dispute with the Rollover Holders on
this issue. In addition, with respect to Battery Ventures
proposal for a joint transaction with Vector Capital, the
representatives of Fenwick & West advised the
representatives of Cooley that the Special Committee would
likely not consent to discussions between competing bidders, but
suggested to representatives of Cooley that Battery Ventures
submit a letter to the Special Committee that could be forwarded
to Vector Capital outlining the proposed terms for such a joint
transaction. Battery Ventures did not submit any such letter.
On January 17, 2011 the Special Committee and our board of
directors met, together with representatives of
Fenwick & West, UBS and Morris Nichols, and discussed
the Vector Capital offer and the proposal that we had received
from Battery Ventures. A representative of Wilson Sonsini was
present for portions of the meeting at the invitation of the
Special Committee and the board, to assist in presenting
Mr. Chens and Dr. Hsis perspectives on the
Vector Capital and Battery Ventures proposals. During the
meeting, a representative of Fenwick & West presented
a summary of the terms of the Merger Agreement and related
agreements, and discussed the fiduciary duties of the members of
the Special Committee and the board. Mr. Chen and his
counsel from Wilson Sonsini advised the Special Committee and
board of his position that the existing rollover agreements and
voting agreements with Battery Ventures would cease to be
binding on the Rollover Holders if the Battery Merger Agreement
were amended to increase the per share consideration to $1.85
per share. The representative of Wilson Sonsini, and
Mr. Chen, reiterated to the Special Committee the analysis
described above in support of this position. Mr. Chen
advised the Special Committee that he believed that Vector
Capital was better positioned to develop execute a strategic
plan for the company following the merger and, he believed, that
the participation of a CITIC Capital affiliate as a stockholder
could potentially provide valuable financial resources and
relationships in China. Mr. Chen also indicated to the
Special Committee that it was his belief that he and
Dr. Hsi should have the freedom to choose the party with
whom they would be partners (or co-owners) in the newly private
Company, and for whom they would work as executives of the
Company, following the consummation of the merger. Mr. Chen
advised the Special Committee and the board that, in view of
these factors, and in his capacity as a stockholder, he would
not agree to vote in favor of the proposed amended transaction
with Battery Ventures, or to exchange his shares of our common
stock for equity in the purchaser in the proposed amended
transaction with Battery Ventures. In addition, he stated his
intention to vote his shares of our common stock against the
proposed amended transaction with Battery Ventures.
Mr. Chen, Dr. Hsi and the representative of Wilson
Sonsini then left the meeting. With respect to Battery
Ventures proposal for a joint transaction with Vector
Capital, the Special Committee determined that direct
discussions between the two competing bidders would not be
appropriate, because discussions presented the potential for
collusion that would be contrary to the interests of our public
stockholders, and because it was important that the Special
Committee be able to manage this competitive process to protect
the interests of the companys public stockholders. The
Special Committee discussed Mr. Chen and Dr. Hsis stated
refusal to make commitments in support of a transaction with
Battery Ventures, and noted that when it had approved the
Battery Merger Agreement, the Special Committee was mindful that
any party seeking to make a superior proposal that required the
participation of Mr. Chen and Dr. Hsi through a rollover of
their shares would need to obtain the agreement of Mr. Chen and
Dr. Hsi to do so (as Vector Capital in fact had done), which
could present a challenge for any bidder seeking to make such a
proposal. The Special Committee noted that there was no
contractual or other legal basis by which the Special Committee
could require that Mr.
25
Chen and Dr. Hsi expressly agree in advance to be obligated to
roll over their shares in the event that Battery, or any third
party, made such a proposal. In view of Mr. Chens
stated position regarding his unwillingness to make any new
commitments in support of a transaction with Battery Ventures,
and in view of the uncertainties regarding the continued
enforceability of the existing rollover agreements and voting
agreements if the Battery Merger Agreement were amended to
increase the per share consideration payable to holders of our
common stock other than the Rollover Holders, the Special
Committee and our board noted that there was substantial risk
that an amended transaction with Battery Ventures at $1.85 per
share could not be consummated unless Battery Ventures were
willing to proceed without the support of Mr. Chen and
Dr. Hsi, and to be obligated to pay cash for all of our
outstanding common stock in the event the existing rollover
agreements were not enforceable as part of a transaction
involving an amendment to the Battery Merger Agreement to
increase the price that Battery would pay. Accordingly, the
Special Committee directed Fenwick & West and UBS to
communicate to Battery Ventures the need to revise its proposal
so that the consideration payable to our stockholders would not
be at risk in the event that the existing rollover agreement
were determined not to be enforceable, or the rollover of shares
not consummated. Representatives of Fenwick & West
communicated this position to representatives of Cooley
following this meeting.
On the morning of January 18, 2011, our Special Committee
and board met again beginning at 6:00 am (Pacific Time),
together with representatives of UBS, Fenwick & West
and Morris Nichols, to consider the Vector and Battery Ventures
proposals. We had not received any revised proposal from Battery
Ventures, and the Special Committee and our board of directors
determined it would be appropriate to seek Battery
Ventures definitive response to the issues raised by
Fenwick & West in its discussions with representatives
of Cooley, and in particular the question of whether Battery
Ventures, or our stockholders, would bear the risk that it be
determined that the existing rollover agreements ceased to be
the valid and binding obligations of the Rollover Holders
following the proposed amendment. Accordingly, following the
conclusion of the joint Special Committee and board meeting at
approximately 7:30 am (Pacific Time), representatives of UBS and
Fenwick & West spoke with representatives of Battery
Ventures and Cooley and during this discussion, representatives
of Battery Ventures advised the representatives of
Fenwick & West and UBS that Battery Ventures would not
bear that risk, and in fact would now require that the Rollover
Holders reaffirm their obligations under the existing rollover
agreement in connection with any amendment of the Battery Merger
Agreement. Representatives of Battery Ventures also reiterated
their request to be allowed to discuss with Vector Capital a
potential joint bid. In addition, a representative of Vector
Capital spoke with Ms. Wang, our Special Committee chair,
and advised her that the Vector Capital offer would expire by
its terms, and Vector would discontinue any and all discussions
and efforts toward a transaction, if the Vector Capital offer
were not accepted on or before its expiration at 9:00 am
(Pacific Time) on that day. A representative of our Special
Committee then had a discussion with a representative of Vector
Capital in which the representative of our Special Committee
requested a
one-hour
extension of the 9:00 am (Pacific Time) expiration of the Vector
Capital offer, and asked whether Vector Capital would be
prepared to increase the per share consideration in its offer,
and whether Vector Capital would have any interest in a
transaction in which Battery might participate as an investor.
The representative of Vector Capital informed the representative
of our Special Committee that Vector Capital would not be
interested in Batterys participation with Vector Capital
in a transaction, and would not be in a position to increase the
per share consideration in its offer, but agreed to the
one-hour
extension to 10:00 a.m. (Pacific Time). Our Special
Committee and board of directors again met beginning at
9:00 a.m. (Pacific Time), and Ms. Wang and
representatives of Fenwick & West and UBS informed the
committee and board of their discussions. Following discussion,
the Special Committee and the disinterested members of our board
of directors determined that because Battery Ventures
proposal was conditioned on a requirement that the Rollover
Holders reaffirm their obligations under the existing rollover
agreements and voting agreements in connection with any
amendment of the Battery Merger Agreement, which reaffirmation
Mr. Chen had informed the Special Committee the Rollover
Holders would not be willing to provide, the Battery Ventures
proposal did not represent an option that was available to us.
In addition, the Special Committee and the disinterested members
of the board of directors noted that even in the absence of such
a condition, Battery Ventures proposal involved
significant uncertainties regarding the status of the rollover
agreements and voting agreements, and regarding the risk to our
stockholders of such unenforceability, and in view of these
uncertainties and risks, and Mr. Chen and
Dr. Hsis stated intention to vote against the Battery
proposal as stockholders, the Special Committee could not have
confidence that the transaction set forth in the January 16
proposal by Battery Ventures could be consummated. The Special
Committee determined that the Vector Capital offer and the
Merger Agreement represented a Superior Offer (as defined in the
Battery Merger Agreement) and authorized us to terminate the
Battery Merger Agreement and pay Battery Ventures the required
$3.39 million
break-up
fee
(which we then paid). The Special Committee then determined that
the Merger and Merger Agreement are substantively and
procedurally fair to,
26
and in the best interests of, RAE Systems stockholders
(other than the Rollover Holders), and to RAE Systems
unaffiliated stockholders generally, and approved the Merger
Agreement and the transactions contemplated thereby, and
recommended that our board of directors approve the Merger
Agreement and the transactions contemplated thereby and that our
board of directors recommend that RAE Systems stockholders
vote to adopt the Merger Agreement. Following the Special
Committees recommendation to our board of directors, our
board of directors, by unanimous vote of those directors in
attendance, determined that the Merger and the Merger Agreement
are substantively and procedurally fair to, and in the best
interests of, RAE Systems and its stockholders (other than the
Rollover Holders), and to RAE Systems unaffiliated
stockholders generally, and approved the Merger Agreement and
the transactions contemplated thereby declared and recommended
that RAE Systems stockholders vote to adopt the Merger
Agreement.
The Merger Agreement and related documents were finalized and
executed on January 18, 2011, we paid a termination fee of
$3.39 million to Battery Ventures in accordance with the
terms of the Battery Merger Agreement, and we announced the
execution of the Merger Agreement.
On February 2, 2011, our Special Committee received a
letter from Rudy Acquisition Corp., the purchaser under the
Battery Merger Agreement, setting forth an unsolicited
non-binding proposal offer to acquire all of the outstanding
shares of our common stock for $1.85 per share in cash. The
letter indicated that the purchase price would be guaranteed by
Battery Ventures and another private equity firm, that these
firms would provide the equity financing for the transaction,
and that the proposed transaction would not be subject to a
financing contingency. In addition, the letter stated that the
proposal was not contingent on a rollover agreement with
Mr. Chen and Dr. Hsi. Finally, the letter indicated
that Battery Ventures would need to update its due diligence
review of our business and the other private equity firm would
need to conduct its own due diligence. On February 2, 2011,
the Special Committee met, together with representatives of
Fenwick & West and UBS to discuss the proposal.
Representatives of Fenwick & West described the
fiduciary duties of the members of the Special Committee with
regards to this proposal. Following discussion, and after
consultation with representatives of Fenwick & West
and UBS, the Special Committee determined that this proposal met
the criteria set forth in the Merger Agreement to permit us to
provide information to, and negotiate with, Battery Ventures and
the other private equity firm in response to this proposal. In
addition, the Special Committee determined that it would be
appropriate for us to continue to move forward on the actions
required in connection with the merger, in view of the certainty
of the terms of the merger and our obligations under the Merger
Agreement. Following the Special Committee meeting,
Ms. Wang, the chair of our Special Committee, advised
Mr. Chen of the Special Committees determination, and
he informed Ms. Wang that, in his capacity as a
stockholder, he would not be willing to enter into a voting
agreement to vote in favor of the proposed transaction. On
February 6, 2011, Battery Ventures and the other private
equity firm executed confidentiality agreements with us, and
they commenced a due diligence process. On February 25,
2011, representatives of Battery Ventures and the other private
equity firm had a discussion with Ms. Wang and a
representative of Fenwick & West regarding the
remaining items that they wished to review in their due
diligence process, and in which the representative of Battery
Ventures reaffirmed their proposal of February 2, 2011.
However, Battery Ventures and this private equity firm have not
yet made any firm, definitive proposal or submitted a proposed
form of definitive agreement.
On March 1, 2011, representatives of Cooley informed a
representative of Fenwick & West that Battery Ventures
intended to submit a definitive proposal on March 4, 2011
that would be consistent with the preliminary proposal that
Battery Ventures had provided on February 2, 2011. On
March 3, 2011, a representative of Battery Ventures stated
to Ms. Wang and a representative of Fenwick &
West that he and another representative of Battery Ventures each
had received a call from Mr. Chen on March 2, 2011,
and that Mr. Chen stated to each of them that he would not
agree to vote as a stockholder in favor of a transaction with
Battery Ventures or to roll over his shares in such a
transaction, and would not continue as an officer or employee of
the Company in the event of an acquisition of the Company by
Battery Ventures, and that without his continued involvement,
the Company would face challenges in China, including challenges
in retaining employees and in obtaining certain required
government license renewals and approvals. In addition, the
representative of Battery Ventures stated that Mr. Chen had
also told him that he would act to impair the ability of the
Company to retain these employees and to obtain such license
renewals and approvals, and would otherwise act to harm the
business, in the event that a transaction with Battery Ventures
were consummated. The Special Committee met, together with
representatives of Fenwick & West, on March 4,
2011 to discuss this matter, and Mr. Chen and his counsel
attended a portion of this meeting at the
27
invitation of the Special Committee. Mr. Chen stated to
the Special Committee that although he did advise Battery
Ventures of his intent to vote against a transaction with
Battery Ventures, to not roll over his shares in such a
transaction and to retire as an officer and employee of the
Company in the event of such a transaction, and of the
challenges the Company would face in China without his continued
involvement, including challenges in obtaining these license
renewals and approvals in China, he did not advise Battery
Ventures that he would act to impair the ability of the Company
to obtain these license renewals and approvals, or to otherwise
harm the Company, in the event of a transaction with Battery
Ventures. In addition, Mr. Chen told the Special Committee
that he would never act to harm the Company that he founded. At
the request of the Special Committee, following this meeting a
representative of Fenwick & West spoke with a
representative of Wilson Sonsini and requested that
Mr. Chen state, in a letter to Battery Ventures, that he
would not act with the intention of harming the Company in the
event of a transaction with Battery Ventures. The representative
of Wilson Sonsini subsequently advised the representative of
Fenwick & West that Mr. Chen would not provide
such written assurances as he believed such written assurances
were inappropriate. A representative of Fenwick & West
was subsequently informed that a representative of Vector
Capital and Mr. Chen had discussed Mr. Chens
making calls to representatives of Battery Ventures to inform
them of Mr. Chens unwillingness to vote as a
stockholder in favor of a transaction with Battery Ventures, to
roll over his shares in such a transaction or to continue as an
officer or employee of the Company, and of the challenges the
Company would face in China without his continued involvement,
including challenges in retaining employees and obtaining the
above-referenced license renewals and approvals, prior to the
occurrence of such calls.
On March 4, 2011, representative of Battery Ventures
informed Ms. Wang and a representative of
Fenwick & West that Battery Ventures was evaluating
the impact of Mr. Chens statements on its planned
proposal and that in any case it would require further due
diligence with respect to the China operations and the permits
and approvals described by Mr. Chen. On March 7, 2011
Battery Ventures commenced this further due diligence.
There is no assurance that Battery Ventures
February 2, 2011 proposal will ultimately lead to a
superior proposal or that we will reach final agreement on terms
regarding an acquisition of RAE Systems by Battery Ventures and
the other private equity firm. In the event of any such
agreement, Battery Ventures is not under any obligation to
return the termination fee paid to it on January 18, 2011.
Neither our Special Committee nor our board of directors has
approved, adopted or recommended an acquisition proposal from
Battery Ventures and the other private equity firm or declared
it superior to the Merger Agreement and the merger. Moreover,
our Special Committee and board of directors have not withdrawn,
qualified, or modified in any respect their recommendation that
our stockholders adopt the Merger Agreement.
Reasons
for the Merger of RAE Systems and Recommendation of the Board of
Directors
In considering the Battery Merger and the merger, the Special
Committee consulted with UBS regarding the financial aspects of
the merger and also consulted with representatives of
Fenwick & West regarding the fiduciary duties of the
members of the Special Committee and our board of directors and
the terms of the Merger Agreement and related agreements. Based
on these consultations and the factors discussed below, the
Special Committee and our board of directors determined that the
merger and the Merger Agreement are substantively and
procedurally fair to, and in the best interests of, RAE
Systems stockholders (other than the Rollover Holders).
Accordingly, the Special Committee and our board of directors
determined that the merger and the Merger Agreement are
substantively and procedurally fair to, and in the best
interests of, RAE Systems unaffiliated stockholders. The
Special Committee and the board of directors have recommended
that RAE Systems stockholders vote to adopt the Merger
Agreement. In concluding that the merger and the Merger
Agreement are procedurally and substantively fair to, and in the
best interests of, RAE Systems stockholders, it concluded
that the merger and the Merger Agreement are procedurally and
substantively fair to, and in the best interests of, RAE
Systems unaffiliated stockholders.
In the course of reaching that determination and recommendation,
the Special Committee and our board of directors considered a
number of potentially positive factors in its deliberations,
including the following:
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the belief that, having engaged in a lengthy process during
which 36 potential buyers were approached, including both
strategic purchasers (including competitors) and private equity
firms, we obtained the highest price per share that was
reasonably available from any potential acquirer in a
transaction that had reasonable certainty of being consummated
with respect to the Battery Merger and Battery Merger Agreement,
and the
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$1.75 merger consideration represents an increase of per share
merger consideration of approximately 9.38% from the $1.60 per
share merger consideration proposed in the Battery Merger
Agreement;
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the fact that Battery Ventures proposal for an increase in
the merger consideration payable under the Battery Merger
Agreement was conditioned on a requirement that the Rollover
Holders reaffirm their obligations under the existing rollover
agreement, which reaffirmation Mr. Chen had informed the
Special Committee the Rollover Holders would not be willing to
provide, as a result of which the Battery Ventures proposal did
not represent a option that was available to us. The Special
Committee did not attempt to negotiate the elimination of this
condition when it was communicated on January 18, 2011 in
view of the fact that this position was communicated moments
before the time that the Vector proposal would expire, that
Battery had indicated that this was their firm and final
position, that Vector had advised the Special Committee that it
would not extend its deadline, and that if Battery were to
change its position, there would be no impediment to their
making a new proposal, following execution of the merger
agreement with Vector, that was not subject to this condition.
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the view of the Special Committee and the disinterested members
of our board of directors that even in the absence of such a
condition that the Rollover Holders reaffirm this obligation,
Battery Ventures proposal involved significant
uncertainties regarding the status of the rollover agreement,
and regarding the risk to our stockholders of such
unenforceability, and in view of these uncertainties and risks,
and Mr. Chen and Dr. Hsis stated intention to
vote against the Battery proposal as stockholders, the Special
Committee could not have confidence that the transaction set
forth in the January 16, 2011 proposal by Battery Ventures
could be consummated because of the resulting increased risk
that the transaction might not obtain stockholder approval
(since a very high percentage of our other stockholders would
need to vote in favor of the merger, and since it might be
expected that some portion of our stockholders would not vote or
return proxies to vote their shares);
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the fact that the merger consideration is all cash, which
provides certainty of value to our stockholders;
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the likelihood that the merger would be consummated, the absence
of any financing condition to Vector Capitals
obligation to complete the merger, the guarantee by Vector
Capital and the Special Committees belief, based on
information provided by Vector Capital (including financial
information provided by Vector Capital to UBS setting forth its
available committed capital) which confirmed that Vector Capital
has sufficient financial resources to complete the merger
without the need to obtain any debt financing;
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the business, market and execution risks associated with
remaining independent and successfully implementing a
stand-alone strategy given the highly competitive nature of our
industry and our relatively small size and resources as compared
to our competitors;
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the costs and expenses of remaining a public company, and their
effect on our profitability in view of the size of our business;
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Our projected financial results, as described under
Important Information Concerning RAE Systems
Certain Projections, the risks to our ability to achieve
these projected results and the valuations of RAE Systems that
would be implied by such projections, as set forth in the
financial analyses presented by UBS;
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the $1.75 per share merger consideration represents a premium of
approximately (i) 68% to the $1.04 per share closing price
of our common stock on September 17, 2010, the last full
trading day prior to the public announcement of the proposed
Battery Merger, (ii) 9.38% to the $1.60 per share merger
consideration proposed in the Battery Merger, (iii) 5% to
the $1.66 per share closing price of our common stock on
January 14, 2011, the last full trading day prior to the
public announcement of the Merger and (iv) −1.7% to the
$1.78 per share closing price of our common stock on March 8,
2011, the last full trading day prior to the date of this proxy
statement.
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the fact that the Special Committee of our board of directors,
in the exercise of its fiduciary duties in accordance with
Delaware law and the Merger Agreement, can authorize our
management to provide information to, and can engage in
negotiations with a third party following receipt of an
unsolicited proposal or offer that our board of directors (or
the Special Committee thereof) believes in good faith is
reasonably likely to lead to a superior offer in the manner
provided in the Merger Agreement, subject to specified
conditions;
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the fact that our board of directors or Special Committee, in
the exercise of its fiduciary duties in accordance with Delaware
law and the Merger Agreement, can terminate the Merger Agreement
following receipt of a bona fide written superior offer in the
manner provided in the Merger Agreement, subject to specified
conditions, including the payment of a $3,710,000 termination
fee;
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the fact that the merger would be subject to the approval of our
stockholders and the availability of appraisal rights to our
stockholders; and
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the financial presentation of UBS and its opinion dated
September 19, 2010, to the Special Committee as to the
fairness, from a financial point of view and as of that date, of
the $1.60 per share consideration to be received by the holders
of RAE Systems common stock (other than the Rollover Holders) in
the Battery Merger, as more fully described below under
Opinion of the Financial Advisor to RAE
Systems Special Committee beginning on page 34
and in the written opinion of UBS attached as Annex B to this
proxy statement; and the fact that the $1.75 per share merger
consideration represents a premium of approximately 9.38% to the
$1.60 per share merger consideration proposed in the Battery
Merger. In view of this premium, the Special Committee did not
obtain an updated opinion from UBS with respect to the fairness
of the consideration. In January 2011, the Special Committee was
deciding between two alternative transactions, one at $1.60 per
share and one at $1.75 per share, and was not deciding between
the alternatives of remaining an independent company and
entering into an agreement to be acquired, as it was in
September 2010. Therefore, the Special Committee did not believe
that an updated opinion was necessary in order to conclude that
the $1.75 per share transaction was superior to the $1.60 per
share transaction.
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Since the Rollover Holders are all affiliates of the Company,
the Special Committee believes that the determinations by the
Special Committee with respect to the fairness of the terms of
the merger to all holders of RAE Systems common stock other than
the Rollover Holders, and the opinion of UBS, address the
fairness to all unaffiliated stockholders.
In particular, the Special Committee and our board of directors
believed that the process by which we entered into the Merger
Agreement was fair, and in reaching that determination, the
Special Committee and our board of directors took into account,
in addition to the positive factors noted above, the following:
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the consideration and negotiation of the transaction (and the
entire strategic process) was conducted entirely under the
oversight of the members of the Special Committee, and no
limitations were placed on the authority of the Special
Committee;
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the Special Committee was free to reject the proposed merger and
explore, as it did, transactions with other bidders;
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the Special Committee had exclusive authority to review,
evaluate and negotiate the terms of the transaction and the
Special Committee was thus able to adequately represent our
stockholders (other than the Rollover Holders), particularly as
none of the members of the Special Committee has any financial
interest in the merger that is different from our stockholders
generally (other than the Rollover Holders), although the Merger
Agreement does include customary provisions for indemnification
and the continuation of liability insurance for our officers and
directors;
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the Special Committee was advised by legal counsel and an
internationally recognized financial advisor selected by them
(neither of which firms had any prior material relationship with
RAE Systems or with the Rollover Holders); and
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that although the merger was not conditioned on the approval of
a majority of our disinterested stockholders, the Voting Parties
holding 31% of the outstanding shares of RAE Systems common
stock as of January 20, 2011, had agreed to vote those
shares in favor of the adoption of the merger agreement, and
that Vector Capital, holding 4.9% of RAE Systems common stock as
of February 28, 2011, intends to vote those shares in favor
of the merger, the adoption of the merger agreement would still
require the approval of a significant number of our
disinterested stockholders, who represent approximately 65.1% of
our outstanding shares of common stock as of February 28,
2011. Accordingly, the adoption of the merger agreement will
require the approval of holders of approximately 15.1% of our
outstanding common stock, in addition to the Rollover Holders
and Vector Capital, which has advised us that it intends to vote
the 4.9% of RAE Systems outstanding common stock owned by
it in favor of the merger.
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In addition, the members of our board of directors who were not
members of the Special Committee (other than Messrs. Chen
and Hsi) considered the extensive discussions, review and
analysis that had been conducted by the Special Committee, and
our board of directors expressly adopted the Special
Committees analysis and conclusions.
The Special Committee and our board of directors (other than
Messrs. Chen and Hsi) also considered a number of
additional potentially countervailing factors in its
deliberations concerning the merger, including the following:
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that we will no longer exist as an independent company and our
stockholders (other than the Rollover Holders) will no longer
participate in our growth or from any future increase in the
value of RAE Systems;
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that, under the terms of the Merger Agreement, we cannot solicit
other acquisition proposals and we must pay or cause to be paid
to Vector Capital a termination fee of $3,710,000 in cash or
reimburse Vector Capital for its expenses in connection with the
Merger Agreement, up to a maximum of $900,000 (which amount will
reduce the amount of the termination fee paid to Vector
Capital), if the Merger Agreement is terminated under certain
circumstances specified in the Merger Agreement, including if we
exercise our right to terminate the Merger Agreement, which
payments may deter others from proposing an alternative
transaction that may be more advantageous to our stockholders;
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that the merger was not conditioned on the approval of a
majority of our disinterested stockholders, the Voting Parties
holding approximately 31% of the outstanding shares of RAE
Systems common stock as of February 28, 2011, had agreed to
vote those shares in favor of the adoption of the merger
agreement and that Vector Capital, holding 4.9% of RAE Systems
common stock as of February 28, 2011, intends to vote those
shares in favor of the merger;
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the fact that any gains from an all-cash transaction would be
taxable to our stockholders for U.S. federal income tax
purposes;
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that, under the terms of the Merger Agreement, we agreed that we
will carry on our business in the ordinary course of business
consistent with past practice and, subject to specified
exceptions, that we will not take a number of actions related to
the conduct of our business without the prior consent of
Purchaser (which cannot be unreasonably withheld or delayed in
certain circumstances specified in the Merger Agreement);
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that if the merger does not close, our officers and other
employees will have expended extensive efforts attempting to
complete the transaction and will have experienced significant
distractions from their work during the pendency of the
transaction and we will have incurred substantial transaction
costs in connection with the transaction and such costs will
harm our operating results; and
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that when we signed the Battery Merger Agreement, we were in
final discussions with the SEC and the Department of Justice
regarding a settlement of their FCPA investigation, which we
expected would not impose any liability that was inconsistent
with our publicly-announced accrual, and that the announcement
of such a settlement might have a positive effect on our stock
price, and might be viewed favorably by prospective acquirors
(this investigation was settled on December 10, 2010 for
approximately $2.9 million, which was approximately $550,000
less than our publicly-announced accrual of $3.5 million and on
terms otherwise were consistent with our expectations).
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The Special Committee and our board of directors (other than
Messrs. Chen and Hsi) also considered the interests of our
directors and executive officers in the merger which existed as
of the time of the Special Committees and board of
directors determination, including the terms of the
Rollover Holders agreements with respect to their shares
of our common stock and their future employment following the
merger, which are described below under Special
Factors Interests of Our Directors and Executive
Officers in the Merger.
In considering the desirability of our being acquired at this
point in time rather than a future date, the Special Committee
gave significant weight to current trends in our industry and
uncertainty regarding our ability to successfully address these
trends. Our industry is undergoing a transition marked by the
introduction of wireless sensors and intelligent applications
that analyze and communicate the data from these sensors, and we
believe that we must develop new technologies and products
providing these, and other advanced functions, in order to be
competitive. Continued development of new products in a timely
manner will require significant investments in engineering
resources, manufacturing, and marketing programs to promote the
products, which we expect would require third party financing or
the ability to generate more cash from our operations. The
Special Committee
31
believes that third party debt financing would be difficult to
obtain at this time in view of continuing difficult conditions
in credit markets, which have made it more difficult for smaller
companies with a history of operating losses, such as us, to
obtain debt financing. In addition, the Special Committee
believes that equity financing would be difficult to obtain on
terms that are not dilutive to our stockholders, due to our very
small market capitalization and our history of operating losses,
and the fact that as a result of these factors, we are no longer
covered by any publishing securities analysts, which reduces the
interest of new equity investors. The Special Committee believes
that this financing challenge reduces our value as an
independent company, and conversely increases our value to
potential acquirers, such as larger industry participants or
private equity firms, that were not subject to these constraints
on their access to capital (as they would be in a better
position to make these investments than is RAE Systems, and
would have a lower cost of capital with respect to these
investments).
In addition, in order to remain competitive and succeed as an
independent public company, we would be required, in the near
term, to develop and execute new cost reduction measures, such
as consolidation of administrative functions and manufacturing
operations. The Special Committee believes that it is
particularly important that we implement these measures at this
time due to the need to generate cash from operations to finance
our product development initiatives.
The Special Committee considered the significant business and
operating risks to executing these product development and cost
reduction strategies, which created uncertainty as to our
ability to execute these strategies and achieve our projected
operating results at this time, including the following:
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the need to recruit additional qualified engineering personnel,
and the challenges to doing so that are presented by our history
of operating losses;
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the significant engineering and marketing resources that would
be needed for the development and introduction of new products,
which would require that we make significant investments before
we can determine the commercial viability of the new products;
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the concern that our status as a public company could make it
more difficult to take these measures, as they could negatively
affect our earnings per share in the short term (depressing our
stock price and making it even more difficult to obtain equity
financing); and
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the concern that we may face greater difficulty reducing our
manufacturing costs than our larger competitors, as our smaller
revenue base and focus on specialized, lower volume products
limit our ability to scale up our production volume and obtain
increased volume efficiencies.
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Finally, the Special Committee considered the fact that we
compete against many larger better capitalized companies, such
as, Mine Safety Appliances Company, Honeywell International
Inc., Industrial Scientific Corporation and Draeger Safety Inc.,
which have longer operating histories, greater manufacturing
scale, larger customer bases, greater financial and marketing
resources, and better brand recognition, and we believe that
recent consolidation in our industry (such as the acquisitions
of BW Technologies by Honeywell and General Monitors by Mine
Safety Appliances ) will further increase the competitive
pressures on our business.
As a result of these current trends, and these challenges, the
Special Committee determined that there was significant
uncertainty regarding our ability to execute our business plan,
and to achieve the projected operating results described under
Important Information Regarding RAE Systems
Certain Projections. However, the Special Committee also
believed that an acquirer of RAE Systems could potentially
create value by using its resources to reduce these risks and to
address and capitalize on trends in our industry, and that this
value could be reflected in a per share price in an acquisition
that was greater than our value as an independent company.
Accordingly, the Special Committee determined that it would be
advantageous to our unaffiliated stockholders to pursue a sale
of the company at this time.
The Special Committee determined that it would not be
appropriate to delay entering into an agreement to be acquired
until we had settled our pending FCPA investigation, since it
believed (based on discussions between us and the SEC and
Department of Justice) that it was unlikely that the amount of
the final settlement would be materially different than our
publicly-announced accrual, and because we had no assurances as
to when such a final
32
settlement would be executed. On December 10, 2010, we entered
into a final settlement of this investigation, for approximately
$2.9 million, and on terms otherwise consistent with our prior
expectations.
In considering the Battery Merger, the Special Committee
considered possible acquisition transactions that did not
involve a going-private transaction, as discussed under
Background of the Merger Implementation of a
Strategic Process beginning on page 12 of this proxy
statement. In particular, during the course of the strategic
process conducted by the Special Committee, the Special
Committee sought proposals from both strategic buyers and
private equity sponsors, and did not focus on, or limit bids to,
proposals for a going private transaction, but instead solicited
proposals for acquisition transactions generally without
limitation as to structure. The Special Committee did not
evaluate other alternative methods of going private, such as a
liquidation, stock repurchases, or a leveraged recapitalization,
in view of the fact that they would not result in synergies, or
provide increased access to capital or other resources, and
thereby create value that could be provided to our stockholders
beyond the elimination of the costs of being a public company,
and the fact that since we did not have working capital or cash
in excess of the requirements of our business, any alternative
transaction would require debt financing, which the Special
Committee did not believe would be available to us in view of
current conditions in credit markets (which have made it
difficult for small companies, with a history of operating
losses, to obtain debt financing).
The Special Committee and our board of directors (other than
Messrs. Chen and Hsi) did not consider whether or not the
merger consideration constituted fair value in relation to RAE
Systems liquidation value or book value, and did not
attempt to calculate a specific going concern value. The Special
Committee and our board of directors did not attempt to assess
the liquidation value of RAE Systems assets, and such
factor was not considered to be relevant in considering the
substantive fairness of the merger, because they consider RAE
Systems to be a viable going concern where value is derived from
cash flows generated from its continuing operations. In
addition, the Special Committee and our board of directors
believed that the value of our assets that might be realized in
a liquidation would be significantly less than its value as a
going concern. Further, because our assets include a
significant amount of intangible assets, intellectual property,
leased properties and other assets that are not readily
transferable or are subject to restrictions on their transfer in
a liquidation scenario, the Special Committee and our board of
directors believes that we are not susceptible to a meaningful
liquidation valuation. In addition, the Special Committee and
our board of directors did not consider the net book value of
our common stock in considering the substantive fairness of the
Merger. The Special Committee and our board of directors believe
that net book value is an accounting concept that does not
reflect our value of the Company as a going concern.
Accordingly, the Special Committee and our board of directors do
not believe that net book value was relevant to its analysis.
RAE Systems net book value per share was approximately
$0.68 as of June 30, 2010 and September 30, 2010. The
merger consideration represents a premium of 157% to net book
value per share as of June 30, 2010 and September 30,
2010. Finally, the Special Committee did not establish a
specific going concern value for RAE Systems in considering the
fairness of the merger consideration, as any single value would
be inherently subjective. However, the Special Committee did
consider the range of values set forth in the discounted cash
flow analysis prepared by UBS as part of its fairness analysis.
With respect to those matters considered by the Special
Committee included in UBSs fairness analysis, the Special
Committee relied on and participated in the presentation by UBS
described under Opinion of the Financial Advisor to
RAE Systems Special Committee. Although the members
of the Special Committee are not experts in the areas addressed
by UBS, the Special Committee adopted the analysis presented by
UBS.
The preceding discussion is not meant to be an exhaustive
description of the information and factors considered by the
Special Committee and our board of directors but is believed to
address the material information and factors considered. In view
of the wide variety of factors considered in connection with its
evaluation of the merger and the complexity of these matters,
the Special Committee and our board of directors did not find it
practicable to, and did not, quantify or otherwise attempt to
assign relative weights to the various factors considered in
reaching its determination. In considering the factors described
above, individual members of the Special Committee and our board
of directors may have given different weight to different
factors.
After its consideration of the preceding factors and
deliberations, the Special Committee and our board of directors
determined that the merger and the Merger Agreement are
substantively and procedurally fair to, and in the best
interests of, RAE Systems stockholders (other than the
Rollover Holders) and approved the Merger Agreement and the
transactions contemplated thereby, including the merger, and the
voting agreements and recommended that RAE Systems
stockholders vote to adopt the Merger Agreement.
33
Opinion
of the Financial Advisor to RAE Systems Special
Committee
On September 19, 2010, at a meeting of the Special
Committee of the board of directors of RAE Systems held to
evaluate the Battery Merger, UBS delivered to the Special
Committee an oral opinion, which opinion was confirmed by
delivery of a written opinion, dated September 19, 2010, to
the effect that, as of that date and based on and subject to
various assumptions, matters considered and limitations
described in its opinion, the $1.60 per share consideration to
be received in the Battery Merger by holders of RAE Systems
common stock (other than the Rollover Holders) in the Battery
Merger was fair, from a financial point of view, to such
holders. The Special Committee did not request that UBS deliver
a fairness opinion to the Special Committee related to the $1.75
per share consideration to be paid in the merger.
The full text of UBS opinion describes the assumptions
made, procedures followed, matters considered and limitations on
the review undertaken by UBS. This opinion is attached as
Annex B and is incorporated into this proxy statement by
reference.
Holders of RAE Systems common stock are encouraged
to read UBS opinion carefully in its entirety. UBS
opinion was provided for the benefit of the Special Committee of
the board of directors of RAE Systems in connection with, and
for the purpose of, its evaluation of the $1.60 per share
consideration in the Battery Merger from a financial point of
view, does not address any other aspect of the Battery Merger
and does not address any aspect of the merger. The opinion does
not address the relative merits of the Battery Merger as
compared to other business strategies or transactions that might
be available with respect to RAE Systems or RAE Systems
underlying business decision to effect the Battery Merger. The
opinion does not constitute a recommendation to any stockholder
of RAE Systems as to how to vote or act with respect to the
merger. The following summary of UBS opinion is qualified
in its entirety by reference to the full text of UBS
opinion.
In arriving at its opinion, UBS, among other things:
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reviewed certain publicly available business and financial
information relating to RAE Systems;
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reviewed certain internal financial information and other data
relating to the business and financial prospects of RAE Systems
that were not publicly available, including financial forecasts
and estimates prepared by the management of RAE Systems that the
Special Committee directed UBS to utilize for purposes of its
analysis, consisting of the revised 2010 projections together
with the 2012 recovery case projections for 2011 through 2014;
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conducted discussions with members of the senior management of
RAE Systems concerning the business and financial prospects of
RAE Systems;
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reviewed publicly available financial and stock market data with
respect to certain other companies UBS believed to be generally
relevant;
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compared the financial terms of the Battery Merger with the
publicly available financial terms of certain other transactions
UBS believed to be generally relevant;
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reviewed current and historical market prices of RAE Systems
common stock;
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reviewed a draft of the Battery Merger Agreement dated
September 19, 2010; and
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conducted such other financial studies, analyses and
investigations, and considered such other information, as UBS
deemed necessary or appropriate.
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In connection with its review, with the consent of the Special
Committee, UBS assumed and relied upon, without independent
verification, the accuracy and completeness in all material
respects of the information provided to or reviewed by UBS for
the purpose of its opinion. In addition, with the consent of the
Special Committee, UBS did not make any independent evaluation
or appraisal of any of the assets or liabilities (contingent or
otherwise) of RAE Systems, and was not furnished with any such
evaluation or appraisal. With respect to the financial forecasts
and estimates referred to above, UBS assumed, at the direction
of the Special Committee, that such forecasts and estimates had
been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of
RAE Systems as to the future financial performance of RAE
34
Systems. UBS opinion was necessarily based on economic,
monetary, market and other conditions as in effect on, and the
information available to UBS as of, the date of its opinion.
At the request of the Special Committee, UBS contacted third
parties to solicit indications of interest in a possible
transaction with RAE Systems and held discussions with certain
of these parties prior to the date of UBS opinion. In
addition, at the direction of the Special Committee, UBS was not
asked to, and it did not, offer any opinion as to the terms,
other than the $1.60 per share consideration in the Battery
Merger to the extent expressly specified in UBS opinion,
of the Battery Merger Agreement or any related documents or the
form of the Battery Merger. In addition, UBS expressed no
opinion as to the fairness of the amount or nature of any
compensation to be received by any officers, directors or
employees of any parties to the Battery Merger, or any class of
such persons, relative to the $1.60 per share consideration in
the Battery Merger. In rendering its opinion, UBS assumed, with
the consent of the Special Committee, that (i) the final
executed form of the Battery Merger Agreement would not differ
in any material respect from the draft that UBS reviewed,
(ii) the parties to the Battery Merger Agreement would
comply with all material terms of the Battery Merger Agreement,
and (iii) the Battery Merger would be consummated in
accordance with the terms of the Battery Merger Agreement
without any adverse waiver or amendment of any material term or
condition of the Battery Merger Agreement. UBS also assumed that
all governmental, regulatory or other consents and approvals
necessary for the consummation of the Battery Merger would be
obtained without any material adverse effect on RAE Systems. The
issuance of UBS opinion was approved by an authorized
committee of UBS.
In connection with rendering its opinion to the Special
Committee, UBS performed a variety of financial and comparative
analyses which are summarized below. The following summary is
not a complete description of all analyses performed and factors
considered by UBS in connection with its opinion. The
preparation of a financial opinion is a complex process
involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. With
respect to the selected public companies analysis and the
selected transaction analysis summarized below, no company or
transaction used as a comparison was identical to either RAE
Systems or the Battery Merger. These analyses necessarily
involve complex considerations and judgments concerning
financial and operating characteristics and other factors that
could affect the public trading or acquisition values of the
companies concerned.
UBS believes that its analyses and the summary below must be
considered as a whole and that selecting portions of its
analyses and factors or focusing on information presented in
tabular format, without considering all analyses and factors or
the narrative description of the analyses, could create a
misleading or incomplete view of the processes underlying
UBS analyses and opinion. UBS did not draw, in isolation,
conclusions from or with regard to any one factor or method of
analysis for purposes of its opinion, but rather arrived at its
ultimate opinion based on the results of all analyses undertaken
by it and assessed as a whole.
The estimates of the future performance of RAE Systems provided
by RAE Systems in or underlying UBS analyses are not
necessarily indicative of future results or values, which may be
significantly more or less favorable than those estimates. In
performing its analyses, UBS considered industry performance,
general business and economic conditions and other matters, many
of which were beyond the control of RAE Systems. Estimates of
the financial value of companies do not purport to be appraisals
or necessarily reflect the prices at which businesses or
securities actually may be sold or acquired.
The per share consideration was determined through negotiation
between the Special Committee and Battery Ventures, and the
decision by RAE Systems to enter into the Battery Merger was
solely that of the Special Committee and the board of directors
(other than Messrs. Chen and Hsi). UBS opinion and
financial analyses were only one of many factors considered by
the Special Committee in its evaluation of the Battery Merger
and should not be viewed as determinative of the views of the
Special Committee or RAE Systems management with respect
to the Battery Merger or the per share consideration.
The following is a brief summary of the material financial
analyses performed by UBS and reviewed with the Special
Committee of the board of directors of RAE Systems on
September 19, 2010 in connection with its opinion relating
to the Battery Merger.
The financial analyses summarized
below include information presented in tabular format. In order
for UBS financial analyses to be fully understood, the
tables must be read together with the text of each summary. The
tables alone do not constitute a complete description of the
financial analyses. Considering the data below without
considering the full narrative description of the financial
35
analyses, including the methodologies and assumptions
underlying the analyses, could create a misleading or incomplete
view of UBS financial analyses.
Selected
Public Companies Analysis
UBS compared selected financial and stock market data of RAE
Systems with corresponding data of the seven publicly traded
companies principally operating in the detection, safety and
industrial instrumentation and sensors industry:
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Enterprise
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Enterprise
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Stock
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Value to
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Value to
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Price to
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Equity
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Enterprise
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Estimated
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Estimated
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Estimated
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|
Value
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Value
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2010
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2011
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2011
|
Company
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(millions)
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(millions)
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EBITDA
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EBITDA
|
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EPS
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Spectris plc
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$
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1,851
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$
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2,021
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9.9x
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9.0x
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12.7x
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Halma p.l.c
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1,851
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1,837
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10.3x
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9.7x
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15.3x
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Drägerwerk AG & Co. KGaA
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1,259
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1,724
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5.7x
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5.2x
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10.4x
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II-VI Incorporated
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1,129
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1,024
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11.8x
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9.5x
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19.2x
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Mine Safety Appliances Company
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937
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1,020
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9.7x
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7.9x
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16.1x
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FARO Technologies, Inc.
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298
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191
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7.9x
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5.5x
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15.5x
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Measurement Specialties, Inc.
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252
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301
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7.7x
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5.8x
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10.4x
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|
For the selected public companies, UBS considered, among other
things: (1) diluted equity values (computed using closing
stock prices as of September 17, 2010), (2) enterprise
values (calculated as diluted equity value, plus book value of
total debt, plus book value of minority interests, less cash and
cash equivalents), (3) enterprise values as multiples of
estimated calendar years 2010 and 2011 earnings before interest,
taxes, depreciation and amortization, referred to as EBITDA, and
(4) price-to-earnings ratios for estimated calendar year
2011. Financial data for the selected companies were based on
public filings, estimates of the Institutional Brokers
Estimate System and other publicly available information,
including certain projections set forth under Important
Information Concerning RAE Systems Certain
Projections. Financial data for RAE Systems were based on
information provided by the management of RAE Systems. This
analysis indicated the following implied high, median, mean and
low multiples for the selected public companies, as compared to
corresponding multiples implied for RAE Systems based on the
$1.04 closing price of RAE Systems common stock as of
September 17, 2010 and on the $1.60 per share consideration
in the Battery Merger:
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Enterprise Value as a Multiple of:
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Estimated 2010
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Estimated 2011
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EBITDA
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EBITDA
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Multiples for Selected Companies
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High
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11.8
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x
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9.7
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x
|
Mean
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9.0
|
x
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7.5
|
x
|
Median
|
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9.7
|
x
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7.9
|
x
|
Low
|
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5.7
|
x
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|
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5.2
|
x
|
Multiples for RAE Systems
|
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|
Closing Price on September 17, 2010 of $1.04
|
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14.3
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x
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12.1
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x
|
Per Share Consideration of $1.60 in the Battery Merger
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23.6
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x
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20.1
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x
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|
Closing Stock Price as a Multiple of
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Estimated 2011 EPS
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Multiples for Selected Companies
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High
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19.2
|
x
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Mean
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14.2
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x
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Median
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15.3
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x
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Low
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10.4
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x
|
Multiples for RAE Systems
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Closing Price on September 17, 2010 of $1.04
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20.8
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x
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Per Share Consideration of $1.60 in the Battery Merger
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32.0
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x
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36
Selected
Transactions Analysis
UBS reviewed transaction values in the 18 transactions since
October 2003 involving target companies principally operating in
the detection, safety and industrial instrumentation and sensors
industry:
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Enterprise
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Enterprise
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Value
|
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Value to
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Date Announced
|
|
Target
|
|
Acquiror
|
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(millions)
|
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|
LTM EBITDA
|
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|
September 2010
|
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General Monitors, Inc.
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Mine Safety Appliances Company
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$
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260
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10.4x
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August 2010
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ICx Technologies, Inc.
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Flir Systems, Inc.
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231
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nm
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May 2010
|
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Sperian Protection
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Honeywell International Inc.
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1,385
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13.8x
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|
January 2010
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Ahura Scientific, Inc.
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Thermo Fisher Scientific Inc.
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145
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na
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October 2008
|
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LDS Test & Measurement
Ltd
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Spectris plc
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86
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na
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|
July 2008
|
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Xantrex Programmable
Power
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Ametek, Inc.
|
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120
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na
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October 2007
|
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Extech Instruments
Corporation
|
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Flir Systems Inc.
|
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40
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na
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August 2007
|
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Cameca SAS
|
|
Ametek, Inc.
|
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112
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na
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February 2007
|
|
Mikron Infrared Inc.
|
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LumaSense Technologies Inc.
|
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62
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10.1x
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|
January 2006
|
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SwissQual Holding AG
|
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Spirent Communications plc
|
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72
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16.5x
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December 2005
|
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First Technology plc
|
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Honeywell International Inc.
|
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743
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13.4x
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August 2006
|
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Solartron Group
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Ametek, Inc.
|
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75
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na
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|
May 2005
|
|
UbiNetics Holdings Limited
- SPG Test and Measurement
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Aeroflex Inc.
|
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|
84
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9.6x
|
|
April 2005
|
|
Zellweger Analytics
|
|
Honeywell International Inc.
|
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na
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|
na
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|
June 2004
|
|
Inet Technologies, Inc.
|
|
Tektronix, Inc.
|
|
|
325
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|
|
15.1x
|
|
June 2004
|
|
synOdys Group SA
|
|
American Capital Strategies Ltd.
|
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|
72
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|
na
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|
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|
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|
May 2004
|
|
Imaging and Sensing
Technology Corporation
|
|
American Capital Strategies Ltd.
|
|
|
45
|
|
|
|
na
|
|
October 2003
|
|
ICN Worldwide Dosimetry
Services Inc.
|
|
American Capital Strategies Ltd.
|
|
|
49
|
|
|
|
na
|
|
37
UBS reviewed, among other things, transaction values in the
selected transactions, calculated as the purchase price paid for
the target companys equity, plus debt at book value,
preferred stock at liquidation value and minority interests at
book value, less cash and cash equivalents, as multiples of, to
the extent publicly available, latest 12 months EBITDA.
Financial data that were not publicly available were designated
na. Multiples that were not meaningful because they
were above 25x or zero or below were designated nm.
UBS then compared these multiples derived for the selected
transactions with the corresponding multiple implied for RAE
Systems based on the $1.60 per share consideration in the
Battery Merger. Multiples for the selected transactions were
based on publicly available information at the time of
announcement of the relevant transaction. This analysis
indicated the following implied high, mean, median and low
multiples for the selected transactions, as compared to the
corresponding multiple implied for RAE Systems:
|
|
|
|
|
|
|
Enterprise Value as a Multiple
|
|
|
of Latest Twelve Months EBITDA
|
|
Multiples for Selected Transactions
|
|
|
|
|
High
|
|
|
16.5
|
x
|
Mean
|
|
|
12.7
|
x
|
Median
|
|
|
13.4
|
x
|
Low
|
|
|
9.6
|
x
|
Multiples for RAE Systems
|
|
|
|
|
Per Share Consideration of $1.60 in the Battery Merger
|
|
|
24.4
|
x
|
Discounted
Cash Flow Analysis
UBS performed a discounted cash flow analysis of RAE Systems
using financial forecasts and estimates relating to RAE Systems
prepared by RAE Systems management. UBS calculated a range
of implied present values (as of September 30,
2010) of the standalone unlevered, after-tax free cash
flows that RAE Systems was forecasted to generate from
October 1, 2010 until December 31, 2014 and of
terminal values for RAE Systems based on RAE Systems
calendar year 2014 estimated EBITDA. Implied terminal values
were derived by applying to RAE Systems calendar year 2014
estimated EBITDA a range of latest 12 months estimated
EBITDA terminal value multiples of 8.0x to 9.0x. Present values
of cash flows and terminal values were calculated using discount
rates ranging from 20.0% to 25.0%. The discounted cash flow
analysis resulted in a range of implied present values of
approximately $1.05 to $1.30 per outstanding share of RAE
Systems common stock, as compared to the $1.60 per share
consideration in the Battery Merger.
Miscellaneous
Under the terms of UBS engagement, RAE Systems agreed to
pay UBS for its financial advisory services in connection with
the merger an aggregate fee of $3.1 million,
$1.0 million of which was paid in connection with UBS
opinion and $2.1 million of which is contingent upon
consummation of the merger. In addition, on September 18,
2010, RAE Systems approved the payment of an additional $500,000
that the terms of UBS engagement had provided was payable
at the discretion of RAE Systems (which discretionary fee RAE
Systems has agreed in the Merger Agreement not to pay during the
period beginning on the date of the Merger Agreement and ending
at the effective time of the merger). In addition, RAE Systems
has agreed to reimburse UBS for its reasonable expenses,
including fees, disbursements and other charges of counsel, and
to indemnify UBS and related parties against liabilities,
including liabilities under federal securities laws, relating
to, or arising out of, its engagement. In the ordinary course of
business, UBS and its affiliates may hold or trade, for their
own accounts and the accounts of their customers, securities of
RAE Systems and portfolio companies of Battery Ventures and its
affiliates and, accordingly, may at any time hold a long or
short position in such securities. RAE Systems selected UBS as
its financial advisor in connection with the merger because UBS
is an internationally recognized investment banking firm with
substantial experience in similar transactions and because of
UBS familiarity with RAE Systems and its business. UBS is
regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions,
leveraged buyouts, negotiated underwritings, competitive bids,
secondary distributions of listed and unlisted securities and
private placements.
38
Purposes
and Reasons for the Merger of the Purchaser Group
Vector Capital, Purchaser and Merger Sub, collectively, the
Purchaser Group, are making the statements included in this
section solely for the purpose of complying with the
requirements of
Rule 13e-3
and related rules under the Exchange Act. If the merger is
completed, RAE Systems will become a subsidiary of Purchaser.
For Purchaser and the Merger Sub, the purpose of the merger is
to effectuate the transactions contemplated by the Merger
Agreement. For Vector Capital and the Purchaser, the purpose of
the merger is also to bear the rewards and risks of such
ownership after the shares of RAE Systems common stock
cease to be publicly traded. The Purchaser Group did not
consider any alternatives for achieving these purposes.
The Purchaser Group believes that RAE Systems is well situated
in its current segment of the market, but faces substantial
execution risk in the near term if it were to remain independent
as detailed elsewhere in this Proxy Statement as described under
the caption Special Factors Reasons for the
Merger of RAE Systems and Recommendation of the Board of
Directors. The Purchaser Group believes that this
execution risk could be mitigated, and RAE Systems
long-term market growth potential could be better realized, as a
private company, particularly if it had the resources and
support to pursue growth initiatives both organically and
through strategic acquisitions.
The Purchaser Group believes that as a private company, RAE
Systems could operate more efficiently and effectively.
Operating as a public company entails substantial expense, which
has been significantly increased by requirements arising from
the Sarbanes-Oxley Act of 2002. The Purchaser Group believes
that other improvements to RAE Systems long-term and
strategic direction could be achieved, free of the market
pressures imposed on a publicly traded company with quarterly
reporting obligations. In addition, the Purchaser Group
considered what it believed were competitive advantages of RAE
Systems no longer being a public company, including less
transparency to competitors and greater access to capital
resources to capitalize on market opportunities, if any. The
Purchaser Group has undertaken to pursue the transaction at this
time for the reasons above.
The primary purposes of the Purchaser Group in structuring the
transaction as a merger transaction (compared to other
transaction structures) are that a merger transaction
(i) will enable Purchaser to acquire all of the outstanding
shares of RAE Systems (other than the Rollover Shares) at the
same time, (ii) represents an opportunity for RAE
Systems stockholders (other than the Rollover Holders) to
receive fair value for their shares of common stock in the form
of the merger consideration or, at the election of such
stockholder, by pursuing appraisal rights and (iii) allows
the Rollover Holders to maintain a portion of their investment
in RAE Systems. Further, the Purchaser Group believes that
structuring the transaction as a merger transaction provides a
prompt and orderly transfer of ownership of RAE Systems in a
single step, without the necessity of financing separate
purchases of RAE Systems common stock in a tender offer and
implementing a second-step merger to acquire any shares of
common stock not tendered into any such tender offer, and
without incurring any additional transaction costs associated
with such activities.
The primary purposes of the rollover transaction are to
(i) reduce the amount of upfront liquidity required by the
Purchaser Group in order to fund the merger consideration,
(ii) encourage management continuity by allowing management
to retain an indirect equity interest in RAE Systems through the
exchange of the Rollover Shares for common stock and preferred
stock of Purchaser, and to continue bearing the rewards and
risks of such ownership after shares of RAE Systems common stock
cease to be publicly traded and (iii) otherwise better
align the incentives of the Rollover Holders with those of
Vector Capital following the completion of the transaction. The
primary purpose of the Purchaser Group in structuring the
rollover as partial rollover (as compared to a 100% rollover) is
to effect the Purchaser Groups desired post-closing equity
ownership and capital structure, including specifically, Vector
Capitals desire to obtain a substantial ownership position
in RAE Systems after shares of RAE Systems common stock cease to
be publicly traded. In structuring the transaction as a
rollover, the Purchaser Group considered the potential tax
effects to the Rollover Holders. The Purchaser Group structured
the rollover to minimize the tax burden with respect to the
illiquid stock received by the Rollover Holders in the
transaction.
Position
of the Purchaser Group as to the Fairness of the
Merger
The rules of the SEC governing going private
transactions require the Purchaser Group to express its belief
as to the fairness of the merger to unaffiliated stockholders of
RAE Systems. The Purchaser Group did not undertake a formal
evaluation of the fairness of the proposed merger and is making
the statements included in this section solely for purposes of
complying with the requirements of
Rule 13e-3
and related rules under the Exchange Act.
39
The views of the Purchaser Group should not be construed as a
recommendation as to whether any RAE Systems stockholder should
adopt the Merger Agreement.
As the acquiring parties in the merger, the Purchaser Group is
not objective in its views with regard to the fairness of the
merger to RAE Systems unaffiliated stockholders. The
Purchaser Group did not engage the services of a financial
advisor in connection with the proposed merger.
The stockholders of RAE Systems (other than the Rollover
Holders) were, as described elsewhere in this proxy statement,
represented by the Special Committee which negotiated with
certain representatives of the Purchaser Group, with the
assistance of outside legal counsel and independent financial
advisors. The Purchaser Group was not a member of, and did not
participate in the deliberations of, the Special Committee. The
merger is not structured such that approval of at least a
majority of RAE Systems unaffiliated stockholders is
required.
The fact that the merger was not conditioned on the approval of
a majority of RAE Systems unaffiliated stockholders did
not significantly affect the Purchaser Groups
determination as to the procedural fairness of the terms and
conditions of the merger, because of the factors described
below, which, in the opinion of the Purchaser Group, provided
substantial procedural safeguards to RAE Systems
unaffiliated stockholders. Specifically, although the merger was
not conditioned on the approval of a majority of our
unaffiliated stockholders, the adoption of the merger agreement
still requires the approval of a significant number of RAE
Systems unaffiliated stockholders, representing
approximately 20% of RAE Systems outstanding shares of
common stock as of February 28, 2011 (approximately 15.1%
excluding Vector Capital, which has advised us that it intends
to vote the 4.9% of RAE Systems outstanding common stock
owned by it in favor of the merger). In addition, the following
procedural safeguards were considered, and given substantial
weight, in the Purchaser Groups determination that the
terms and conditions of the merger were procedurally fair to RAE
Systems unaffiliated stockholders (without the need for a
separate condition requiring the approval of the merger
agreement by a majority of RAE Systems unaffiliated
stockholders): the fact that the Special Committee was advised
by outside legal counsel and an independent financial advisor in
relation to the merger; the fact that the Special Committee and
its advisors took an active role in the negotiations with
Battery Ventures and Vector Capital in the sales process, had
exclusive authority to review, evaluate and negotiate the terms
of the transaction and prevented Battery Ventures from
negotiating separate terms with the Rollover Holders until
Battery Ventures bid had been accepted by the Special
Committee; the fact that the Rollover Holders did not, and were
prevented by the Special Committee from, participating in the
negotiations with Battery Ventures and then Vector Capital
regarding the terms of the merger agreement; the fact that the
Special Committee conducted a pre-signing market check over a
period of five months prior to the signing of the Battery Merger
Agreement, the fact that more than four months elapsed between
the execution of the Battery Merger Agreement and the Merger
Agreement, and more than three months elapsed between the
submission of Vector Capitals first bid and the execution
of the Merger Agreement; the terms of the Merger Agreement
detailed below, including the fact that the Special Committee
can engage in negotiations with a third party under certain
circumstances; and the fact the Merger Agreement can be
terminated following receipt of a bona fide written superior
offer subject to the payment of a fee as described below.
The Purchaser Group believes that the terms and conditions of
the merger are substantively and procedurally fair to RAE
Systems unaffiliated stockholders. In making this
determination, the Purchaser Group considered among others, the
following factors:
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|
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|
|
the Special Committee, which is comprised of three independent
directors who are not affiliated with Purchaser or Merger Sub,
unanimously concluded that the merger is fair to and in the best
interests of the unaffiliated stockholders of RAE Systems,
approved the Merger Agreement and the merger and recommended to
the board of directors that the board of directors approve the
merger agreement and that the Merger Agreement be submitted to
the stockholders of RAE Systems for adoption;
|
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|
|
the Special Committee was advised by outside legal counsel and
an independent financial advisor in relation to the merger
(neither of which firms had any prior material relationship with
RAE Systems or with the Rollover Holders);
|
|
|
|
the fact that the Special Committee acted on behalf of the
unaffiliated stockholders of RAE Systems and effectively led and
managed the negotiations and discussions with Battery Ventures
and Vector Capital, as
|
40
|
|
|
|
|
evidenced by, among other things, the Special Committees
refusal to conduct only a post-signing market check by means of
a go-shop, its decision to conduct a pre-signing
market check with over 36 potential bidders, the scope of the
Special Committees market check, and the duration of the
Special Committees market check (extending over a period
of five months), the fact that more than four months elapsed
between the execution of the Battery Merger Agreement and the
Merger Agreement, and more than three months elapsed between the
submission of Vector Capitals first bid and the execution
of the Merger Agreement;
|
|
|
|
|
|
the board of directors unanimously (with two abstentions, by Mr.
Chen and Dr. Hsi) approved the Merger Agreement and recommended
that the Merger Agreement be submitted to the stockholders of
RAE Systems for adoption and this approval included a majority
of RAE Systems directors who are not employees of RAE
Systems;
|
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|
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the fact that, although the Purchaser Group is not entitled to
rely on it, the Special Committee received an opinion from the
Special Committees independent financial advisor, UBS, to
the effect that, as of the date of the opinion and subject to
various assumptions, qualifications, limitations and other
matters set forth therein, the $1.60 per share merger
consideration to be received by the stockholders (other than the
Rollover Holders) in the proposed merger pursuant to the Battery
Merger Agreement was fair to such stockholders from a financial
point of view; and the fact that the $1.75 per share merger
consideration represents a premium of approximately 9% to the
$1.60 per share merger consideration proposed in the Battery
Merger;
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the fact that the merger would be subject to the approval of RAE
Systems stockholders and the availability of appraisal
rights to RAE Systems stockholders;
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the fact that, although the Voting Parties have entered into
voting agreements, the Merger Agreement and the merger could be
approved without the affirmative votes of the Voting Parties and
further, that the voting agreements terminate if the Merger
Agreement is terminated in accordance with its terms (including
termination by RAE Systems in connection with a Superior Offer);
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the Special Committee had the authority to reject any
transaction proposed by the Purchaser Group;
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the fact that the $1.75 per share merger consideration
represents a premium of approximately (i) 68% to the $1.04
per share closing price of RAE Systems common stock on
September 17, 2010, the last full trading day prior to the
public announcement of the proposed Battery Merger,
(ii) 9.38% to the $1.60 per share merger consideration
proposed in the Battery Merger, (iii) 5% to the $1.66 per
share closing price of RAE Systems common stock on
January 14, 2011, the last full trading day prior to the
public announcement of the Merger and (iv) −1.7% to the
$1.78 per share closing price of RAE Systems common stock
on March 8, 2011, the last full trading day prior to the
date of this proxy statement.
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the terms of the Merger Agreement do not contain a financing
contingency, which the Purchaser Group believes is favorable to
RAE Systems stockholders given the current market conditions;
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the fact that the Special Committee, in the exercise of its
fiduciary duties in accordance with the Merger Agreement, can
authorize RAE Systems management to provide information to
and can engage in negotiations with a third party following
receipt of a proposal or offer that RAE Systems board of
directors (or the Special Committee thereof) believes in good
faith is reasonably likely to lead to a superior offer in the
manner provided in the Merger Agreement, subject to specified
conditions;
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the fact that RAE Systems board of directors or the
Special Committee, in the exercise of its fiduciary duties in
accordance with the Merger Agreement, can terminate the Merger
Agreement following receipt of a bona fide written superior
offer in the manner provided in the Merger Agreement, subject to
specified conditions, including the payment of a $3,710,000
termination fee; and
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the other factors referred to above as having been taken into
account by the Special Committee and the board of directors,
which the Purchaser Group adopts as its own, as described above
under Special Factors Reasons for the Merger
of RAE Systems and Recommendation of the Board of
Directors starting at page 28).
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In addition, the Purchaser Group believes that sufficient
procedural safeguards were and are present to ensure the
fairness of the merger to the RAE Systems unaffiliated
stockholders. These procedural safeguards include the following:
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the engagement by RAE Systems and its financial advisors in a
lengthy process during which 36 potential buyers were approached
and, the fact that more than four months elapsed between the
execution of the Battery Merger Agreement and the Merger
Agreement, and more than three months elapsed between the
submission of Vector Capitals first bid and the execution
of the Merger Agreement;
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the Special Committee and outside legal counsel negotiated all
financial and other terms and conditions of the Merger Agreement
on an arms-length basis with certain members of the
Purchaser Group and its counsel, with the Special Committee
benefiting from the advice of its independent financial advisor.
The Purchaser Group did not participate in the deliberations of
the Special Committee or the board of directors;
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the Special Committee unanimously concluded that the merger is
fair to and in the best interests of the unaffiliated
stockholders of RAE Systems, approved the Merger Agreement and
the merger and recommended to the board of directors that the
board of directors approve the Merger Agreement and that the
Merger Agreement be submitted to the stockholders of RAE Systems
for adoption;
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the Special Committee had the authority to reject the
transaction proposed by the Purchaser Group;
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the fact that the Special Committee, in the exercise of its
fiduciary duties in accordance with the Merger Agreement, can
authorize RAE Systems management to provide information to
and can engage in negotiations with a third party following
receipt of a proposal or offer that RAE Systems board of
directors (or the Special Committee thereof) believes in good
faith is reasonably likely to lead to a superior offer in the
manner provided in the Merger Agreement, subject to specified
conditions;
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the fact that RAE Systems board of directors or the
Special Committee, in the exercise of its fiduciary duties in
accordance with the Merger Agreement, can terminate the Merger
Agreement following receipt of a bona fide written superior
offer in the manner provided in the Merger Agreement, subject to
specified conditions, including the payment of a $3,710,000
termination fee; and
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stockholders who do not vote in favor of the Merger Agreement
and who comply with certain procedural requirements will be
entitled, upon completion of the merger, to exercise statutory
appraisal rights under Delaware law, which allows stockholders
to have the fair value of their shares determined by the
Delaware Court of Chancery and paid to them in cash.
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The Purchaser Group also considered the interests of RAE
Systems directors and executive officers in the merger
which existed as of January 18, 2011, which are described
below under Special Factors Interests of Our
Directors and Executive Officers in the Merger, and the
other risks and potentially negative factors identified under
Purposes and Reasons for the Merger of the
Purchaser Group.
The Purchaser Group has considered all of the foregoing factors
as a whole to support its belief that the proposed merger is
substantively and procedurally fair to RAE Systems
unaffiliated stockholders. In view of the number and wide
variety of factors considered in connection with making a
determination as to the fairness of the proposed merger to the
unaffiliated stockholders of RAE Systems, and the complexity of
these matters, the Purchaser Group did not find it practicable
to, nor did it attempt to, quantify, rank or otherwise assign
relative weights to the specific factors it considered.
Moreover, the Purchaser Group has not undertaken to make any
specific determination to assign any particular weight to any
single factor, but have conducted an overall analysis of the
factors described above. The Purchaser Group did not engage a
financial advisor for purposes of undertaking a formal
evaluation of the fairness of the merger to RAE Systems
unaffiliated stockholders.
The Purchaser Group did not consider any other material factors
in evaluating the substantive and procedural fairness of the
merger to unaffiliated stockholders of RAE Systems. The
Purchaser Group did not consider whether the merger
consideration constitutes fair value in relation to RAE
Systems liquidation value and did not give consideration
to RAE Systems book value, because they believed that
those measures of asset value do not reflect, or have any
meaningful impact on, the market value of RAE Systems common
stock. In addition, the liquidation value of RAE Systems
assets was not considered to be a material factor from the
perspective of the Purchaser
42
Group because it believes that substantial value results from
continuing RAE Systems as a going concern and any liquidation
would destroy that value. Therefore, no appraisal of the
liquidation value was attempted. Nonetheless, the Purchaser
Group notes that RAE Systems net book value per share was
approximately $0.68 as of June 30, 2010 and
September 30, 2010. The merger consideration represents a
premium of 157% to net book value per share as of June 30,
2010 and September 30, 2010.
The Purchaser Group believes that the factors discussed above
provide a reasonable basis for their belief that the merger is
fair to RAE Systems unaffiliated stockholders. This belief
should not, however, be construed as a recommendation to any
stockholder to vote to approve the Merger Agreement. The
Purchaser Group does not make any recommendation as to how our
stockholders should vote their shares relating to the merger or
any related transaction. The foregoing discussion of the
information and factors considered by the Purchaser Group is not
intended to be exhaustive but includes all material factors.
Purposes
and Reasons of the Rollover Holders for the Merger and Position
of the Rollover Holders as to the Fairness of the
Merger
The Rollover Holders believe that RAE Systems is well situated
in its current segment of the market, but faces substantial
execution risk in the near term if it were to remain independent
as detailed elsewhere in this Proxy Statement as described under
the caption Special Factors Reasons for the
Merger of RAE Systems and Recommendation of the Board of
Directors. The Rollover Holders believe that this
execution risk could be mitigated, and RAE Systems
long-term market growth potential could be better realized, as a
private company, particularly if it had the resources and
support to pursue growth initiatives both organically and
through strategic acquisitions.
The Rollover Holders believe that as a private company, RAE
Systems could operate more efficiently and effectively.
Operating as a public company entails substantial expense, which
has been significantly increased by requirements arising from
the Sarbanes-Oxley Act of 2002. The Rollover Holders believe
that other improvements to RAE Systems long-term and
strategic direction could be achieved, free of the market
pressures imposed on a publicly traded company with quarterly
reporting obligations. In addition, the Rollover Holders
considered what it believed were competitive advantages of RAE
Systems no longer being a public company, including less
transparency to competitors and greater access to capital
resources to capitalize on market opportunities, if any. The
Rollover Holders have undertaken to pursue the transaction at
this time for the reasons above.
The purposes of the merger for the Rollover Holders are to:
(i) to enable our stockholders to realize a premium on
their shares of RAE Systems common stock (including
4,681,324 shares beneficially owned by the Rollover Holders
which are not Rollover Shares) based on the closing price of
shares of our common stock on September 17, 2010, and
(ii) retain an indirect equity interest in RAE Systems
through the exchange of the Rollover Shares for common stock and
preferred stock of Purchaser, and to continue bearing the
rewards and risks of such ownership after shares of RAE Systems
common stock cease to be publicly traded. If the merger is
completed, in addition to exchanging the Rollover Shares for
equity interests in Purchaser, the Rollover Holders will also
receive $1.75 per share for the remaining 4,681,324 shares
of RAE Systems common stock they beneficially own. In addition,
the Rollover Holders considered the potential tax effects of
structuring the transaction as a rollover. The Purchaser Group
and the Rollover Holders structured the transaction as a
rollover to attempt to minimize the tax burden with respect to
the illiquid stock received by the Rollover Holders in the
transaction.
The rules of the SEC governing going private
transactions require the Rollover Holders to express their
belief as to the fairness of the merger to unaffiliated
stockholders of RAE Systems. The Rollover Holders did not
undertake a formal evaluation of the fairness of the proposed
merger to RAE Systems unaffiliated stockholders and are
making the statements included in this section solely for
purposes of complying with the requirements of
Rule 13e-3
and related rules under the Exchange Act. The views of the
Rollover Holders should not be construed as a recommendation as
to whether any RAE Systems stockholder should adopt the Merger
Agreement.
The stockholders of RAE Systems (other than the Rollover
Holders) were, as described elsewhere in this proxy statement,
represented by the Special Committee which negotiated with
certain representatives of the Purchaser Group, with the
assistance of outside legal counsel and independent financial
advisors. The Rollover Holders were not members of, and did not
participate in the deliberations of, the Special Committee. The
merger is not structured to require the approval of at least a
majority of RAE Systems unaffiliated stockholders.
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The fact that the merger was not conditioned on the approval of
a majority of RAE Systems unaffiliated stockholders did
not significantly affect the Rollover Holders
determination as to the procedural fairness of the terms and
conditions of the merger, because of the factors described
below, which, in the opinion of the Rollover Holders, provided
substantial procedural safeguards to RAE Systems
unaffiliated stockholders. Specifically, although the merger was
not conditioned on the approval of a majority of our
unaffiliated stockholders, the adoption of the merger agreement
still requires the approval of a significant number of RAE
Systems unaffiliated stockholders, representing
approximately 20% of RAE Systems outstanding shares of
common stock as of February 28, 2011 (approximately 15.1%
excluding Vector Capital, which has advised us that it intends
to vote the 4.9% of RAE Systems outstanding common stock
owned by it in favor of the merger). In addition, the following
procedural safeguards were considered, and given substantial
weight, in the Rollover Holders determination that the
terms and conditions of the merger were procedurally fair to RAE
Systems unaffiliated stockholders (without the need for a
separate condition requiring the approval of the merger
agreement by a majority of RAE Systems unaffiliated
stockholders): the fact that the Special Committee was advised
by outside legal counsel and an independent financial advisor in
relation to the merger; the fact that the Special Committee and
its advisors took an active role in the negotiations with
Battery Ventures and Vector Capital in the sales process, had
exclusive authority to review, evaluate and negotiate the terms
of the transaction and prevented Battery Ventures from
negotiating separate terms with the Rollover Holders until
Battery Ventures bid had been accepted by the Special
Committee; the fact that the Rollover Holders did not, and were
prevented by the Special Committee from, participating in the
negotiations with Battery Ventures and then Vector Capital
regarding the terms of the merger agreement; the fact that the
Special Committee conducted a pre-signing market check over a
period of five months prior to the signing of the Battery Merger
Agreement, the fact that more than four months elapsed between
the execution of the Battery Merger Agreement and the Merger
Agreement, and more than three months elapsed between the
submission of Vector Capitals first bid and the execution
of the Merger Agreement; the terms of the Merger Agreement
detailed below, including the fact that the Special Committee
can engage in negotiations with a third party under certain
circumstances; and the fact the Merger Agreement can be
terminated following receipt of a bona fide written superior
offer subject to the payment of a fee as described below.
The Rollover Holders believe that the terms and conditions of
the merger are substantively and procedurally fair to RAE
Systems unaffiliated stockholders. In making this
determination, the Rollover Holders considered among others, the
following factors:
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the Special Committee, which is comprised of three independent
directors who are not affiliated with Purchaser or Merger Sub,
unanimously concluded that the merger is fair to and in the best
interests of the unaffiliated stockholders of RAE Systems,
approved the Merger Agreement and the merger and recommended to
the board of directors that the board of directors approve the
merger agreement and that the Merger Agreement be submitted to
the stockholders of RAE Systems for adoption;
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the Special Committee was advised by outside legal counsel and
an independent financial advisor in relation to the merger
(neither of which firms had any prior material relationship with
RAE Systems or with the Rollover Holders);
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the fact that the Special Committee acted on behalf of the
unaffiliated stockholders of RAE Systems and effectively led and
managed the negotiations and discussions with Battery Ventures
and Vector Capital, as evidenced by, among other things, the
Special Committees refusal to conduct only a post-signing
market check by means of a go-shop, its decision to
conduct a pre-signing market check with over 36 potential
bidders, the scope of the Special Committees market check,
and the duration of the Special Committees market check
(extending over a period of five months), the fact that more
than four months elapsed between the execution of the Battery
Merger Agreement and the Merger Agreement, and more than three
months elapsed between the submission of Vector Capitals
first bid and the execution of the Merger Agreement;
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the board of directors unanimously (with two abstentions, by Mr.
Chen and Dr. Hsi) approved the Merger Agreement and recommended
that the Merger Agreement be submitted to the stockholders of
RAE Systems for adoption and this approval included a majority
of RAE Systems directors who are not employees of RAE
Systems;
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the fact that, although the Purchaser Group is not entitled to
rely on it, the Special Committee received an opinion from the
Special Committees independent financial advisor, UBS, to
the effect that, as of the date of the opinion and subject to
various assumptions, qualifications, limitations and other
matters set forth therein, the $1.60 per
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share merger consideration to be received by the stockholders
(other than the Rollover Holders) in the proposed merger
pursuant to the Battery Merger Agreement was fair to such
stockholders from a financial point of view; and the fact that
the $1.75 per share merger consideration represents a premium of
approximately 9.38% to the $1.60 per share merger consideration
proposed in the Battery Merger;
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the fact that the merger would be subject to the approval of RAE
Systems stockholders and the availability of appraisal
rights to RAE Systems stockholders;
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the fact that, although the Voting Parties have entered into
voting agreements, the Merger Agreement and the merger could be
approved without the affirmative votes of the Voting Parties and
Vector Capital and further, that the voting agreements terminate
if the Merger Agreement is amended to decrease the per share
consideration, or Merger Agreement is terminated in accordance
with its terms (including termination by RAE Systems in
connection with a Superior Offer);
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the Special Committee had the authority to reject any
transaction proposed by the Purchaser Group;
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the fact that Battery Ventures proposal for an increase in
the merger consideration payable under the Battery Merger
Agreement was conditioned on a requirement that the Rollover
Holders reaffirm their obligations under the existing rollover
agreement, which reaffirmation Mr. Chen had informed the
Special Committee the Rollover Holders would not be willing to
provide, based on Mr. Chens assessment that Vector
Capital was better positioned to develop and execute a strategic
plan for RAE Systems following the merger and his belief that
the investment by an affiliate of CITIC Capital might provide
RAE Systems (through entities with which CITIC Capital is
indirectly related) with financial resources and relationships
in China, as a result of which the Battery Ventures proposal did
not represent an option that was available to RAE Systems, and
the view of the Special Committee and the disinterested members
of RAE Systems board of directors that even in the absence
of such a condition, Battery Ventures proposal involved
significant uncertainties regarding the status of the rollover
agreement, and regarding the risk to RAE Systems
stockholders of such unenforceability, and in view of these
uncertainties and risks, and Mr. Chens stated
intention to vote against the Battery proposal as stockholders,
the Special Committee could not have confidence that the
transaction set forth in the January 16, 2011 proposal by
Battery Ventures could be consummated;
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the fact that the $1.75 per share merger consideration
represents a premium of approximately (i) 68% to the $1.04
per share closing price of RAE Systems common stock on
September 17, 2010, the last full trading day prior to the
public announcement of the proposed Battery Merger,
(ii) 9.38% to the $1.60 per share merger consideration
proposed in the Battery Merger, (iii) 5% to the $1.66 per
share closing price of RAE Systems common stock on
January 14, 2011, the last full trading day prior to the
public announcement of the Merger and (iv) −1.7% to the
$1.78 per share closing price of RAE Systems common stock
on March 8, 2011, the last full trading day prior to the
date of this proxy statement.
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the terms of the Merger Agreement do not contain a financing
contingency, which the Purchaser Group believes is favorable to
RAE Systems stockholders given the current market conditions;
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the fact that the Special Committee, in the exercise of its
fiduciary duties in accordance with the Merger Agreement, can
authorize RAE Systems management to provide information to
and can engage in negotiations with a third party following
receipt of a proposal or offer that RAE Systems board of
directors (or the Special Committee thereof) believes in good
faith is reasonably likely to lead to a superior offer in the
manner provided in the Merger Agreement, subject to specified
conditions;
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the fact that RAE Systems board of directors or the
Special Committee, in the exercise of its fiduciary duties in
accordance with the Merger Agreement, can terminate the Merger
Agreement following receipt of a bona fide written superior
offer in the manner provided in the Merger Agreement, subject to
specified conditions, including the payment of a $3,710,000
termination fee; and
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the other factors referred to above as having been taken into
account by the Special Committee and the board of directors,
which the Purchaser Group adopts as its own, as described above
under Special Factors Reasons for the Merger
of RAE Systems and Recommendation of the Board of
Directors starting at page 28).
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In addition, the Rollover Holders believe that sufficient
procedural safeguards were and are present to ensure the
fairness of the merger to the RAE Systems unaffiliated
stockholders. These procedural safeguards include the following:
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the engagement by RAE Systems and its financial advisors in a
lengthy process during which 36 potential buyers were approached;
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the Special Committee and outside legal counsel negotiated all
financial and other terms and conditions of the Merger Agreement
on an arms-length basis with certain members of the
Purchaser Group and its counsel, with the Special Committee
benefiting from the advice of its independent financial advisor.
The Rollover Holders did not participate in the deliberations of
the Special Committee or the board of directors;
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the Special Committee unanimously concluded that the merger is
fair to and in the best interests of the unaffiliated
stockholders of RAE Systems, approved the Merger Agreement and
the merger and recommended to the board of directors that the
board of directors approve the Merger Agreement and that the
Merger Agreement be submitted to the stockholders of RAE Systems
for adoption;
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the Special Committee had the authority to reject the
transaction proposed by the Purchaser Group;
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the fact that the Special Committee, in the exercise of its
fiduciary duties in accordance with the Merger Agreement, can
authorize RAE Systems management to provide information
to, and can engage in negotiations with a third party following
receipt of a proposal or offer that RAE Systems board of
directors (or the Special Committee thereof) believes in good
faith is reasonably likely to lead to a superior offer in the
manner provided in the Merger Agreement, subject to specified
conditions;
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the fact that RAE Systems board of directors or the
Special Committee, in the exercise of its fiduciary duties in
accordance with the Merger Agreement, can terminate the Merger
Agreement following receipt of a bona fide written superior
offer in the manner provided in the Merger Agreement, subject to
specified conditions, including the payment of a $3,710,000
termination fee; and
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stockholders who do not vote in favor of the Merger Agreement
and who comply with certain procedural requirements will be
entitled, upon completion of the merger, to exercise statutory
appraisal rights under Delaware law, which allows stockholders
to have the fair value of their shares determined by the
Delaware Court of Chancery and paid to them in cash.
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The Rollover Holders also considered the interests of our
directors and executive officers in the merger which existed as
of January 18, 2011 which are described below under
Special Factors Interests of Our Directors and
Executive Officers in the Merger, and the other risks and
potentially negative factors identified under
Purposes and Reasons for the Merger of the
Purchaser Group.
The Rollover Holders have considered all of the foregoing
factors as a whole to support their belief that the proposed
merger is substantively and procedurally fair to RAE
Systems unaffiliated stockholders. In view of the number
and wide variety of factors considered in connection with making
a determination as to the fairness of the proposed merger to the
unaffiliated stockholders of RAE Systems, and the complexity of
these matters, the Rollover Holders did not find it practicable
to, nor did they attempt to, quantify, rank or otherwise assign
relative weights to the specific factors they considered.
Moreover, the Rollover Holders have not undertaken to make any
specific determination to assign any particular weight to any
single factor, but have conducted an overall analysis of the
factors described above. The Rollover Holders did not engage a
financial advisor for purposes of undertaking a formal
evaluation of the fairness of the merger to RAE Systems
unaffiliated stockholders.
The Rollover Holders did not consider any other material factors
in evaluating the substantive and procedural fairness of the
merger to unaffiliated stockholders of RAE Systems. The Rollover
Holders did not consider whether the merger consideration
constitutes fair value in relation to RAE Systems
liquidation value and did not give consideration to RAE
Systems book value, because they believed that those
measures of asset value do not reflect, or have any meaningful
impact on, the market value of RAE Systems common stock.
In addition, the liquidation value of RAE Systems assets
was not considered to be a material factor from the perspective
of the Rollover Holders because they believe that substantial
value results from continuing RAE Systems as a going concern and
any liquidation would destroy that value. Therefore, no
appraisal of the liquidation value was attempted. Nonetheless,
the Rollover Holders note that RAE Systems net book value
per share was approximately $0.68
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as of June 30, 2010 and September 30, 2010. The merger
consideration represents a premium of 157% to net book value per
share as of June 30, 2010 and September 30, 2010.
The Rollover Holders believe that the factors discussed above
provide a reasonable basis for their belief that the merger is
fair to RAE Systems unaffiliated stockholders. This belief
should not, however, be construed as a recommendation to any
stockholder to vote to approve the Merger Agreement. The
Rollover Holders do not make any recommendation as to how our
stockholders should vote their shares relating to the merger or
any related transaction. The foregoing discussion of the
information and factors considered by the Rollover Holders is
not intended to be exhaustive but includes all material factors.
Purposes
and Plans for RAE Systems After the Merger
The purpose of the merger is to enable our stockholders (other
than the Rollover Holders) to immediately realize the value of
their investment in us through their receipt of the per share
merger consideration of $1.75 in cash. It is expected that, upon
consummation of the merger, the operations of our company will
be conducted substantially as they currently are being conducted
except that we will not be subject to the obligations and
constraints, and the related direct and indirect costs and
personnel requirements, associated with being a public company.
At the effective time of the merger, the directors of Merger Sub
immediately prior to the effective time of the merger will be
directors of the surviving corporation. It is further
contemplated that the officers of RAE Systems immediately prior
to the effective time of the merger will be the initial officers
of the surviving corporation.
Purchaser does not have any current plans or proposals that
relate to, or would result in, an extraordinary corporate
transaction following completion of the merger involving our
corporate structure, business or management, such as a merger,
reorganization, liquidation, relocation of any operations or
sale or transfer of a material amount of assets. Purchaser
expects, however, that following the merger, RAE Systems
management will evaluate and review our business and operations
and may develop new plans and proposals that they consider
appropriate to maximize the value of RAE Systems after the
merger. Purchaser expressly reserves the right to make any
changes it deems appropriate in light of its evaluation and
review or in light of future developments.
Guarantee
of Payment of Merger Consideration
Pursuant to a Guarantee Agreement between Vector Capital and RAE
Systems, Vector Capital has guaranteed the obligations of
Purchaser and Merger Sub to pay the aggregate cash merger
consideration, up to $82.85 million. This guarantee will
terminate upon the earlier of the effective time of the merger
or the termination of the Merger Agreement.
Financing
The merger is not conditioned on Purchasers ability to
obtain financing. Purchaser expects to fund the Merger
Consideration with a combination of equity financing to be
provided by Vector Capital and PSIL, potential debt financing
and RAE Systems available cash balances; however, if debt
financing is not available, Purchaser will fund the Merger
Consideration with equity financing from Vector Capital and
PSILs available capital.
In connection with the merger, Purchaser expects that the total
amount of funds necessary to consummate the merger and the
related transactions is approximately $119.57 million,
which includes $106.29 million to be paid out to our
stockholders and holders of our options, with the remainder to
be applied to pay related fees and expenses in connection with
the merger, any financing arrangements and related transactions
and the assumption or repayment of indebtedness. This amount is
expected to come from a combination of equity contributions by
Vector Capital and PSIL, borrowings by Merger Sub or us, the
cancellation of the Rollover Shares and our cash, cash
equivalents and marketable securities on hand. As of
February 28, 2011, we had approximately $14.1 million
in cash, cash equivalents and marketable securities, and no
restricted cash.
Equity
Financing
As discussed above, Vector Capital has agreed to guarantee the
obligations of Purchaser and Merger Sub to pay the aggregate
cash merger consideration, up to $82.85 million. Such
guarantee is subject to the conditions precedent
47
to Purchasers and Merger Subs obligations under the
Merger Agreement. Vector Capital and PSIL have each provided
equity commitment letters to Purchaser related to the equity
financing, which equity commitment letters obligate Vector
Capital and PSIL to provide equity financing sufficient to pay
the entire Merger Consideration if debt financing is not
available.
Estimated
Fees and Expenses
Except as set forth below, RAE Systems will not pay any fees or
commissions to any broker, dealer or other person in connection
with the merger. If the Merger Agreement is terminated under
certain circumstances described under The Merger
Agreement Termination of the Merger Agreement,
RAE Systems has agreed to pay Purchaser a termination fee in the
amount of $3,710,000 (less any expenses reimbursement paid or
payable under the Merger Agreement).
The following is an estimate of fees and expenses to be incurred
by RAE Systems in connection with the merger:
|
|
|
|
|
Termination fee paid to Battery Ventures
|
|
$
|
3,390,000
|
|
Legal (excludes litigation fees)
|
|
|
1,300,000
|
|
Financial Advisors
|
|
|
3,250,000*
|
|
Printing
|
|
|
10,000
|
|
SEC Filing Fees
|
|
|
9,613
|
|
Accounting
|
|
|
99,000
|
|
Proxy Solicitation
|
|
|
15,000
|
|
Special Committee Fees
|
|
|
37,500
|
|
Miscellaneous
|
|
|
13,000
|
|
Processing and Mailing
|
|
|
30,000
|
|
|
|
|
|
|
Total
|
|
$
|
8,154,113
|
|
|
|
|
|
|
On September 18, 2010, RAE Systems approved the payment for
an additional $500,000 that the terms of UBS engagement
had provided was payable at the discretion of RAE Systems (which
discretionary fee RAE Systems has agreed in the Merger Agreement
not to pay during the period beginning on the date of the Merger
Agreement and ending at the effective time of the merger). The
amount set forth in this table does not include this
discretionary fee.
The estimated fees and expenses listed above do not include
expenses incurred by Purchaser or Merger Sub that will be borne
by the surviving corporation. None of the costs and expenses
described above or to be borne by the surviving corporation will
reduce the $1.75 per share merger consideration payable to our
stockholders (other than the Rollover Holders with respect to
the Rollover Shares).
RAE Systems has not retained UBS to provide any services, in the
past or the future, other than those services described in this
proxy statement with respect to the merger.
Rollover
Agreements
Each of the Chen Revocable Trust DTD 5/8/2001 and the Hsi Family
Trust has entered into a Rollover Agreement with Purchaser dated
January 18, 2011 in which such Rollover Holder has agreed
to contribute to Purchaser, immediately prior to the effective
time of the merger, the Rollover Shares held by such Rollover
Holder in exchange for common stock and preferred stock of
Purchaser, as more fully described elsewhere in this proxy
statement. Prior to the effective time of the merger, each
Rollover Holder has agreed not to transfer any of the Rollover
Shares, other than to Purchaser, and has granted Purchaser a
lien upon and security interest in the Rollover Shares. The
Rollover Agreements also contain customary representations and
warranties of both Purchaser and the Rollover Holders party
thereto.
48
Voting
Agreements
Each of the Voting Parties has executed and delivered a Voting
Agreement dated January 18, 2011 in which such Voting Party
has agreed to vote shares beneficially owned by them
(approximately 31% of the Companys outstanding common
stock as of February 28, 2011) in favor of the adoption of
the Merger Agreement, the merger and other actions contemplated
by the Merger Agreement and against any competing proposals and
to grant Purchaser and Vector Capital a proxy to vote such
shares in favor of the merger in the event such Voting Party
fails to do so. The voting agreements terminate upon the earlier
to occur of (i) consummation of the merger, (ii) the
amendment of the Merger Agreement to provide for a decrease in
the Merger Consideration or (iii) the termination of the
Merger Agreement in accordance with its terms (including
termination by RAE Systems in connection with a Superior Offer
as described under The Merger Agreement
Termination of the Merger Agreement).
Certain
Effects of the Merger
If the merger is consummated, Merger Sub will be merged with and
into RAE Systems, with RAE Systems continuing as the surviving
corporation and a wholly owned subsidiary of Purchaser.
Upon the consummation of the merger, each share of RAE Systems
common stock issued and outstanding immediately prior to the
effective time of the merger (other than the Rollover Shares and
any Appraisal Shares) will be converted into the right to
receive $1.75 in cash, without interest. Upon the consummation
of the merger, each stock option to acquire RAE Systems common
stock outstanding at the effective time of the merger, whether
or not then vested or exercisable, will be accelerated and
canceled. In consideration of such cancellation, RAE Systems
will pay to the holder of each such canceled stock option, as
soon as practicable after the effective time, a cash payment
equal to the excess, if any, of $1.75 over the per share
exercise price of such stock option.
Pursuant to the terms of the Merger Agreement, RAE Systems
2007 Equity Incentive Plan, 2002 Stock Option Plan and 1993
Stock Plan shall terminate immediately prior to the effective
time of the merger.
As of the date of this proxy statement, the Rollover Holders,
collectively, own approximately 18,255,441 shares of our
common stock (excluding any options held by the Rollover
Holders). These shares are worth approximately
$31.9 million at $1.75 per share. The shares owned by the
Rollover Holders represent approximately 31% of the total number
of shares of our common stock outstanding as of
February 28, 2011.
In connection with the merger, the Rollover Holders have agreed
to contribute to Purchaser, immediately prior to the effective
time of the merger, 13,392,857 Rollover Shares, which will be
valued at $1.75 per share, and in exchange for the Rollover
Shares, the Rollover Holders will receive equity in Purchaser
valued at approximately $23.4 million, in the aggregate, in
the same class of stock, and at the same valuation, as Vector
Capitals cash investment. The remaining
4,681,324 shares of our common stock owned by the Rollover
Holders will be cashed out in the merger at $1.75 per share (or
a total of approximately $8.5 million). Accordingly,
immediately following the effective time of the merger, the
Rollover Holders will receive combined equity and cash in the
total value of approximately $31.9 million, the same value
as their shares of our common stock prior to the merger (valued
at $1.75 per share).
Purchaser intends to raise approximately $30 million in
debt (although it has not entered into any agreement with
respect to debt financing at this time and Purchaser would fund
the merger consideration solely with equity financing and RAE
Systems available cash if it does not enter into any such
agreement prior to the merger). Assuming the full amount is
borrowed in connection with the merger and is used to purchase
common stock, then the post-closing equity value of Purchaser
after the merger will be approximately $83.49 million
(determined based on the pre-merger equity value of our common
stock and options and transaction expenses reduced by the amount
of the debt incurred by Purchaser in connection with the merger
(net of our expected costs at closing)) and the enterprise value
will be approximately $97.06 million. Based on the above
assumptions, to fund a portion of the merger consideration,
Vector and PSIL have agreed to invest approximately
$52.1 million and approximately $8.0 million,
respectively, in cash in Purchaser in the form of an equity
contribution (consisting of a combination of preferred stock and
common stock). The Rollover Holders contribution and
Vectors investment in Purchaser will be made at the same
valuation. As a result, immediately after the merger,
(i) the Rollover Holders would hold equity in Purchaser
valued at approximately $23.4 million (or approximately
28.1% of the total equity value of
49
approximately $83.49 million), (ii) Vector would hold
equity in Purchaser valued at $52.1 million (or
approximately 62.4% of the total equity value of
$83.49 million), and (iii) PSIL would hold equity in
Purchaser valued at approximately $8.0 million (or
approximately 9.6% of the total equity value of
$83.49 million). The remainder of the capitalization of
Purchaser would consist of $30 million in debt, which will
not exist prior to the closing of the merger, and which would be
arranged by Vector. To the extent debt financing is not
available, or additional equity financing is otherwise required
at closing, Vector Capital and PSIL have committed to increase
their respective equity investment amounts (without cap), but in
a manner such that PSILs percentage ownership of the
initial equity of Purchaser will remain constant at 9.58%
It is anticipated that, after the closing of the merger,
Purchaser will authorize and reserve an equity pool representing
approximately 10% of the then-outstanding common stock of
Purchaser. Of this common stock equity pool, Mr. Chen and
Dr. Hsi will have the right to acquire restricted common
stock pursuant to a customary restricted stock purchase
agreement representing 1% and 1.5%, respectively, of the
outstanding common stock of Purchaser on customary terms and
conditions, including vesting. The common stock equity pool will
otherwise dilute the ownership of the Rollover Holders and
Vector on a pro rata basis.
A primary benefit of the merger to RAE Systems
stockholders will be the right of such stockholders to receive a
cash payment of $1.75, without interest, for each share of RAE
Systems common stock held by such stockholders as described
above. Additionally, such stockholders will avoid the risk of
any possible decrease in the future earnings, growth or value of
RAE Systems following the merger. The primary detriments of the
merger to such stockholders include the lack of an interest of
such stockholders in the potential future earnings or growth of
RAE Systems. Additionally, the receipt of cash in exchange for
shares of RAE Systems common stock pursuant to the merger will
be a taxable transaction for U.S. federal income tax
purposes.
The primary benefits of the merger to Purchaser, Vector Capital
and the Rollover Holders include their right to all of the
potential future earnings and growth of RAE Systems, which, if
RAE Systems successfully executes its business strategies, could
exceed the value of their original investment in RAE Systems.
Additionally, immediately following the merger, RAE Systems will
be a private company directly owned by Purchaser and the
Rollover Holders and as such will be relieved of the burdens
imposed on companies with publicly traded equity, including the
pressure to meet analyst forecasts and the requirements and
restrictions on trading that RAE Systems directors,
officers and beneficial owners of more than 10% of the shares of
RAE Systems common stock currently face as a result of the
provisions of Section 16 of the Exchange Act.
The primary detriments of the merger to Purchaser, Vector
Capital and the Rollover Holders include the fact that all of
the risk of any possible decrease in the earnings, growth or
value of RAE Systems following the merger will be borne by
Purchaser and the Rollover Holders. Additionally, the shares of
Purchaser will be illiquid, with no public trading market for
such securities.
RAE Systems common stock is currently registered under the
Exchange Act and is quoted on NYSE Alternext US under the symbol
RAE. If the merger is completed, RAE Systems common
stock will be delisted from NYSE Alternext US and will be
deregistered under the Exchange Act.
Interests
of Our Directors and Executive Officers in the Merger
In considering the recommendation of the Special Committee and
RAE Systems board of directors with respect to the merger,
you should be aware that some of RAE Systems directors and
executive officers have interests in the merger that are
different from, or in addition to, the interests of our
stockholders generally. These interests may present them with
actual or potential conflicts of interest, and these interests,
to the extent material, are described below. The Special
Committee and RAE Systems board of directors were aware of
these interests and considered them, among other matters, in
approving the Merger Agreement and the merger.
Treatment
of Stock Options
As of the record date, there were approximately
3,387,370 shares of our common stock subject to stock
options granted under our equity incentive plans to our current
executive officers and directors. The vesting of each unvested
stock option to acquire RAE Systems common stock outstanding at
the effective time of the merger will be
50
accelerated, so that each stock option to acquire RAE Systems
common stock will be fully vested and exercisable. Each such
stock option will then be cancelled in the merger, and in
consideration of such cancellation, RAE Systems will pay to the
holder of each such canceled stock option, as soon as
practicable after the effective time, a cash payment equal to
the excess (if any) of $1.75 over the per share exercise price
of such stock option.
The following table reflects the total cash consideration
expected to be received by each of our directors and executive
officers in connection with the merger, including the
consideration that each of them will receive pursuant to the
Merger Agreement in connection with the cancellation of their
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Merger
|
|
|
Realizable
|
|
|
Realizable
|
|
|
|
|
|
|
|
|
|
|
|
Consideration
|
|
|
Value of
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
to be
|
|
|
Vested Options
|
|
|
of All
|
|
|
Compensation
|
|
|
|
|
Name of Director
|
|
|
|
Received for
|
|
|
as a Result
|
|
|
Options at
|
|
|
of Members
|
|
|
|
|
and/or Executive
|
|
|
|
RAE Systems
|
|
|
of the
|
|
|
the Closing
|
|
|
of Special
|
|
|
Total Cash
|
|
Officer
|
|
Position
|
|
Common Stock
|
|
|
Merger(1)
|
|
|
of Merger(1)
|
|
|
Committee
|
|
|
Consideration
|
|
|
Robert I. Chen(2)
|
|
President, Chief Executive Officer and Chairman of the Board
|
|
$
|
8,509,522
|
|
|
$
|
58,800
|
|
|
$
|
134,400
|
|
|
|
|
|
|
$
|
8,643,922
|
|
Randall K. Gausman(3)
|
|
Vice President and Chief Financial Officer
|
|
$
|
8,750
|
|
|
$
|
86,625
|
|
|
$
|
168,000
|
|
|
|
|
|
|
$
|
176,750
|
|
Peter C. Hsi(2)
|
|
Chief Technology Officer and Director
|
|
|
|
|
|
$
|
28,875
|
|
|
$
|
56,000
|
|
|
|
|
|
|
$
|
56,000
|
|
Ming-Ching Tang
|
|
Executive Vice President Operations
|
|
|
|
|
|
$
|
45,719
|
|
|
$
|
94,500
|
|
|
|
|
|
|
$
|
94,500
|
|
Christopher Hameister
|
|
Vice President Asia-Pacific, Europe and Middle East Business
Operations
|
|
|
|
|
|
$
|
28,875
|
|
|
$
|
56,000
|
|
|
|
|
|
|
$
|
56,000
|
|
Fei-Zhou Shen
|
|
Vice President Corporate Development and Fushun Business
Operations
|
|
$
|
41,504
|
|
|
$
|
132,413
|
|
|
$
|
159,538
|
|
|
|
|
|
|
$
|
201,042
|
|
Ryan Watson
|
|
Vice President
Americas Sales
|
|
$
|
7,905
|
|
|
$
|
40,907
|
|
|
$
|
73,500
|
|
|
|
|
|
|
$
|
81,405
|
|
Dr. Keh-Shew Lu
|
|
Director
|
|
$
|
472,500
|
|
|
$
|
33,688
|
|
|
$
|
77,000
|
|
|
$
|
8,500
|
|
|
$
|
558,000
|
|
Susan Wang
|
|
Director
|
|
|
|
|
|
$
|
50,531
|
|
|
$
|
115,500
|
|
|
$
|
20,000
|
|
|
$
|
135,500
|
|
Dr. Lyle D. Feisel
|
|
Director
|
|
$
|
125,909
|
|
|
$
|
93,500
|
|
|
$
|
93,500
|
|
|
|
|
|
|
$
|
219,409
|
|
Sigrun Hjelmqvist
|
|
Director
|
|
$
|
35,000
|
|
|
$
|
24,063
|
|
|
$
|
35,000
|
|
|
|
|
|
|
$
|
70,000
|
|
James W. Power
|
|
Director
|
|
$
|
70,000
|
|
|
$
|
20,006
|
|
|
$
|
106,700
|
|
|
$
|
9,000
|
|
|
$
|
185,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
$
|
9,271,090
|
|
|
$
|
644,002
|
|
|
$
|
1,169,638
|
|
|
$
|
37,500
|
|
|
$
|
10,478,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This table excludes stock options with exercise prices greater
than $1.75 per share as of February 28, 2011. All
outstanding stock options will accelerate and vest in full as a
result of the merger.
|
|
|
|
(2)
|
|
If the merger is completed, the 13,392,857 Rollover Shares
registered under the name of Chen Revocable Trust DTD
5/8/2001 and Hsi Family Trust, which are beneficially owned by
Robert I. Chen and Peter C. Hsi, respectively, will be valued at
$1.75 per share and exchanged for a combination of preferred
stock and common stock in Purchaser valued at approximately
$23.4 million in the aggregate (Value of Rollover
Shares). Total Cash Consideration does not include the
Value of Rollover Shares.
|
|
(3)
|
|
See the description of the severance agreement and bonus
described below in Special Factors Interests
of Our Directors and Executive Offices in the Merger
Severance Agreement.
|
Severance
Agreement
In connection with the merger, and in order to provide
Mr. Gausman with an incentive to continue his employment
with us, we entered into a Change of Control Severance
Agreement, dated September 19, 2010, with Mr. Gausman
pursuant to which Mr. Gausman will receive a lump sum
severance payment equal to 12 months of his base salary and
reimbursement of COBRA premiums for up to 12 months, upon
his termination of employment without cause, or for
good reason, following the merger. In addition, upon
the consummation of the merger, Mr. Gausman will receive a
bonus equal to $62,500 (three months of base salary).
51
Positions
with the Surviving Corporation
It is anticipated that two representatives of Vector Capital
will be the initial officers of the surviving corporation.
Indemnification
of Directors and Officers; Insurance
The Merger Agreement provides that the surviving corporation
will continue our indemnification obligations with respect to
our directors and officers and that Purchaser will provide, or
cause the surviving corporation to provide, for a period of not
less than six years after the consummation of the merger, our
officers and directors with an insurance and indemnification
policy, in an amount not in excess of $300,000, that provides
coverage for events occurring at or prior to the consummation of
the merger that is no less favorable than the existing policy of
RAE Systems.
Compensation
of Members of the Special Committee
The members of the Special Committee received an aggregate of
$37,500 in connection with the performance of their duties as
members of the Special Committee equal to $500 per meeting for
each member other than Ms. Wang, who served as the
chairperson of the Special Committee, and $1,000 per meeting for
the chairperson). James W. Power received an aggregate of $8,000
in connection with his services as a member of the Special
Committee. Dr. Keh-Shew Lu received an aggregate of $7,500
in connection with his services as a member of the Special
Committee, and Susan Wang received an aggregate of $18,000 in
connection with her services as a member, and chairperson, of
the Special Committee.
Transactions
with the Rollover Holders
In connection with the merger, the Rollover Holders will
contribute, immediately prior to the effect time of the merger,
13,392,857 Rollover Shares to Purchaser. The Rollover Shares
will be valued at $1.75 per share, and in exchange for the
Rollover Shares, the Rollover Holders will receive equity in
Purchaser valued at approximately $23.4 million, in the
aggregate, in the same classes of stock, and at the same
valuation, as Vector Capitals cash investment. The
remaining 4,681,324 shares of our common stock owned by the
Rollover Holders will be cashed out in the merger at $1.75 per
share (or a total of approximately $8.5 million).
Accordingly, immediately following the effective time of the
merger, the Rollover Holders will receive combined equity and
cash in the total value of approximately $31.9 million, the
same value as their shares of our common stock prior to the
merger (valued at $1.75 per share).
Cash
Consideration Received by Rollover Holders in Connection with
the Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Merger
|
|
|
|
|
|
|
|
|
|
Consideration
|
|
|
Realizable
|
|
|
|
|
|
|
to be
|
|
|
Value of All
|
|
|
|
|
|
|
Received for
|
|
|
Options at
|
|
|
|
|
|
|
RAE Systems
|
|
|
the Closing of
|
|
|
Total Cash
|
|
Name of Rollover Holders
|
|
Common Stock
|
|
|
Merger
|
|
|
Consideration
|
|
|
Chen Revocable Trust DTD 5/8/2001
|
|
$
|
8,509,522
|
|
|
|
|
|
|
$
|
8,509,522
|
|
Robert I. Chen
|
|
|
|
|
|
$
|
134,400
|
|
|
$
|
134,400
|
|
Hsi Family Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter C. Hsi
|
|
|
|
|
|
$
|
56,000
|
|
|
$
|
56,000
|
|
Lien Q. Chen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,509,522
|
|
|
$
|
190,400
|
|
|
$
|
8,699,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vector intends to raise approximately $30 million in debt.
Assuming the full amount is borrowed in connection with the
merger and is used to purchase common stock, then the
post-closing equity value of Purchaser after the merger will be
approximately $83.49 million (determined based on the
pre-merger equity value of our common stock and options and
transaction expenses reduced by the amount of the debt incurred
by Purchaser in connection with the merger (net of our expected
costs at closing)) and the enterprise value will be
approximately $97.06 million. Based on the above
assumptions, to fund a portion of the merger consideration,
Vector and PSIL have agreed to invest approximately
$52.1 million and approximately $8.0 million,
respectively, in cash in Purchaser in the form of
52
an equity contribution (consisting of a combination of preferred
stock and common stock). The Rollover Holders contribution
and Vectors investment in Purchaser will be made at the
same valuation. As a result, immediately after the merger,
(i) the Rollover Holders would hold equity in Purchaser
valued at approximately $23.4 million (or approximately
28.1% of the total equity value of approximately
$83.49 million), (ii) Vector would hold equity in
Purchaser valued at $52.1 million (or approximately 62.4%
of the total equity value of $83.49 million), and
(iii) PSIL would hold equity in Purchaser valued at
approximately $8.0 million (or approximately 9.6% of the
total equity value of $83.49 million). The remainder of the
capitalization of Purchaser would consist of $30 million in
debt, which will not exist prior to the closing of the merger,
and which would be arranged by Vector.
It is anticipated that, after the closing of the merger,
Purchaser will authorize and reserve an equity pool representing
approximately 10% of the then-outstanding common stock of
Purchaser. Of this common stock equity pool, Mr. Chen and
Dr. Hsi will have the right to acquire restricted common
stock pursuant to a customary restricted stock purchase
agreement representing 1% and 1.5%, respectively, of the
outstanding common stock of Purchaser on customary terms and
conditions, including vesting. The common stock equity pool will
otherwise dilute the ownership of the Rollover Holders and
Vector on a pro rata basis.
The Rollover Holders have also entered into a stockholders
agreement with Purchaser and Vector Capital, which will govern
the rights and obligations of Vector Capital and the Rollover
Holders as holders of equity in Purchaser following completion
of the merger. Pursuant to the stockholders agreement,
immediately following the merger, the board of directors of
Purchaser will initially consist of five members, three of which
initially will be designated by Vector Capital and two of which
initially will be designated by the Rollover Holders. The
stockholders agreement also sets forth certain requirements
regarding the voting of the equity of Purchaser and certain
restrictions on transfers of the equity of Purchaser and
provides the Rollover Holders with certain information rights,
preemptive rights, a guaranteed return on their rollover
investment in certain circumstances and the right to effect a
sale of the equity of Purchaser in the event
Mr. Chens or Dr. Hsis (as applicable)
employment with RAE Systems is terminated without cause after
the merger. Pursuant to a registration rights agreement, the
Rollover Holders will also be entitled to registration rights
with respect to the registration under the Securities Act of
1933, as amended, of the equity of Purchaser they will own
following the merger. Purchaser has agreed, contingent upon the
closing of the merger, to reimburse the Rollover Holders for a
portion of the expenses incurred by them in connection with the
negotiation of the final terms with respect to the Rollover
Shares and post-closing governance of the Purchaser and the
employment agreements.
Mr. Chen, Dr. Hsi and Ms. Lien Q. Chen
(Mr. Chens spouse) (collectively, the
executives) have also entered into employment
agreements with Purchaser, which will be effective as of the
effective time of the merger and will govern their respective
employment arrangements with RAE Systems after the effective
time of the merger. Each employment agreement provides that the
executives employment relationship with RAE Systems will
be at-will and terminable by either the executive or
RAE Systems with or without cause. Each employment
agreement provides for an initial base salary for the
executives, in the following amounts (i) $350,000 for
Mr. Chen, (ii) $200,000 for Dr. Hsi, and
(iii) $125,000 for Ms. Chen, which amounts are
consistent with each executives current base salary. In
addition, each executive will be eligible to receive an annual
bonus, determined in the discretion of RAE Systems board
of directors. The employment agreements provide that the
executives are entitled (to the extent eligible) to participate
on the same basis as similarly situated employees in RAE
Systems benefit plans in effect from time to time during
his or her employment. In addition, Mr. Chen and
Dr. Hsi are each entitled to an annual automobile allowance
in the amount of $16,000 and reimbursement (to the extent not
otherwise covered by insurance) for an annual physical
examination.
The employment agreements with Mr. Chen and Dr. Hsi
further provide that such executives will be issued a restricted
stock award for a number of shares of Purchasers common
stock equal to (i) in the case of Mr. Chen, 1% of
Purchasers then outstanding shares of common stock and
(ii) in the case of Dr. Hsi, 1.5% of Purchasers
then outstanding shares of common stock (determined, in each
case, after giving effect to the merger and after giving effect
to the equity pool reserve described elsewhere in this proxy
statement), in each case subject to customary vesting schedules.
If any executives employment is terminated by RAE Systems
without cause or by the executive for good
reason, then (i) RAE Systems shall pay to such
executive: (1) his or her then current monthly base salary
plus (2) an amount equal to one-twelfth of his or her 100%
on target annual bonus each month for a period of twelve
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(12) months (or, in the case of Mr. Chen, eighteen
(18) months), less applicable withholdings and deductions,
(ii) in the case of Mr. Chen, his restricted stock
award will accelerate vesting as to an additional eighteen
(18) months of vesting and in the case of Dr. Hsi, his
restricted stock award will accelerate vesting as to an
additional twelve (12) months of vesting, and (iii) in
the case of Mr. Chen, a lump sum payment of $45,000 and in
the cases of Dr. Hsi and Ms. Chen, a lump sum payment
of $30,000. Provision of the severance payments and benefits is
contingent upon the executive executing (and not revoking) a
valid general release of claims in favor of RAE Systems and its
affiliates within 21 days of termination.
To the extent required to avoid a violation of Section 409A
of the Code, any severance payments made to an executive at the
time he or she qualifies as a specified employee
(within the meaning of Section 409A) will be delayed for
six months or until the date of the executives death (if
earlier).
The employment agreements contain restrictive covenants,
including a perpetual confidentiality covenant pursuant to which
the executives have agreed not to disclose RAE Systems
confidential information. In addition, the executives have
agreed not to compete with RAE Systems and not to solicit its
employees, consultants or customers for a period of two
(2) years from the effective date of the employment
agreement.
As of the date of this Proxy Statement, none of the other
executive officers of RAE Systems has entered into any
arrangement, agreement or understanding with Vector Capital,
Purchaser or their affiliates regarding employment with, or the
right to purchase or participate in the equity of, Purchaser or
the surviving corporation. As more fully described above, it is
anticipated that, after the closing of the merger, Purchaser
will authorize and reserve an equity pool representing
approximately 10% of the then-outstanding common stock of
Purchaser. Of such common stock equity pool, Mr. Chen will
have the right to acquire restricted common stock pursuant to a
customary restricted stock purchase agreement representing 1% of
the outstanding common stock of Purchaser on customary terms and
conditions, including vesting. Dr. Hsi will have the right
to acquire restricted common stock pursuant to a customary
restricted stock purchase agreement representing 1.5% of the
outstanding Common stock of Purchaser on customary terms and
conditions, including vesting. The common stock equity pool will
otherwise dilute the ownership of the Rollover Holders and
Vector Capital on a pro rata basis. The terms of the equity plan
will be later determined by Purchaser in consultation with our
management but Purchaser anticipates that the plan would provide
financial equity incentives to management in amounts customary
for transactions of this kind.
Appraisal
Rights
If the merger is completed, holders of RAE Systems common stock
are entitled to appraisal rights under Section 262 of the
Delaware General Corporation Law (Section 262),
provided that they comply with the conditions established by
Section 262.
The discussion below is a summary of all the material terms of
your appraisal rights under Delaware law, but we urge you to
read the entire text of the relevant provisions of Delaware law,
which are attached to this proxy statement as Annex C.
Stockholders intending to exercise appraisal rights should
carefully review Annex C. Failure to follow precisely any
of the statutory procedures set forth in Annex C may result
in a termination or waiver of these rights.
A record holder of shares of RAE Systems common stock who makes
the demand described below with respect to such shares, who
continuously is the record holder of such shares through the
effective time of the merger, who otherwise complies with the
statutory requirements of Section 262 and who neither votes
in favor of adoption of the Merger Agreement nor consents
thereto in writing will be entitled to an appraisal by the
Delaware Court of Chancery (the Delaware Court) of
the fair value of his or her shares of RAE Systems common stock.
All references in this summary of appraisal rights to a
stockholder or holders of shares of RAE
Systems common stock are to the record holder or holders
of shares of RAE Systems common stock as of March 9, 2011.
Except as set forth herein, stockholders of RAE Systems will not
be entitled to appraisal rights in connection with the merger.
Under Section 262, where a merger is to be submitted for
approval at a meeting of stockholders, such as the Special
Meeting, not less than 20 days prior to the meeting a
constituent corporation must notify each of the holders of its
stock for whom appraisal rights are available that such
appraisal rights are available and include in each such
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notice a copy of Section 262. This proxy statement shall
constitute such notice to the record holders of RAE Systems
common stock.
Stockholders who desire to exercise their appraisal rights must
satisfy all of the conditions of Section 262. Those
conditions include the following:
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Stockholders electing to exercise appraisal rights must not vote
for the adoption of the Merger Agreement. Also,
because a submitted proxy not marked against or
abstain will be voted for the proposal
to adopt the Merger Agreement, the submission of a proxy not
marked against or abstain will result in
the waiver of appraisal rights.
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A written demand for appraisal of shares must be filed with us
before the taking of the vote on the Merger Agreement at the
Special Meeting on April 7, 2011. The written demand for
appraisal should specify the stockholders name and mailing
address, and that the stockholder is thereby demanding appraisal
of his or her RAE Systems common stock. The written demand for
appraisal of shares is in addition to and separate from a vote
against adoption of the Merger Agreement or an abstention from
such vote.
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A demand for appraisal should be executed by or for the
stockholder of record, fully and correctly, as such
stockholders name appears on the share certificate. If the
shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, this demand must be executed by
or for the fiduciary. If the shares are owned by or for more
than one person, as in a joint tenancy or tenancy in common,
such demand should be executed by or for all joint owners. An
authorized agent, including an agent for two or more joint
owners, may execute the demand for appraisal for a stockholder
of record. However, the agent must identify the record owner and
expressly disclose the fact that, in exercising the demand, he
is acting as agent for the record owner. A person having a
beneficial interest in RAE Systems common stock held of record
in the name of another person, such as a broker or nominee, must
act promptly to cause the record holder to follow the steps
summarized below in a timely manner to perfect whatever
appraisal rights the beneficial owners may have.
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A stockholder who elects to exercise appraisal rights should
mail or deliver his, her or its written demand to RAE Systems at
3775 North First Street, San Jose, California 95134,
Attention: Corporate Secretary.
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Within ten days after the effective time of the merger, RAE
Systems must provide notice of the effective time of the merger
to all of our stockholders who have complied with
Section 262 and have not voted for the merger.
Within 120 days after the effective time of the merger,
either RAE Systems or any stockholder who has complied with the
required conditions of Section 262 may file a petition in
the Delaware Court, with a copy served on RAE Systems in the
case of a petition filed by a stockholder, demanding a
determination of the fair value of the shares of all dissenting
stockholders. There is no present intent on the part of RAE
Systems to file an appraisal petition and stockholders seeking
to exercise appraisal rights should not assume that RAE Systems
will file such a petition or that RAE Systems will initiate any
negotiations with respect to the fair value of such shares.
Accordingly, holders of RAE Systems common stock who desire to
have their shares appraised should initiate any petitions
necessary for the perfection of their appraisal rights within
the time periods and in the manner prescribed in
Section 262.
Within 120 days after the effective time of the merger, any
stockholder who has satisfied the requirements of
Section 262 will be entitled, upon written request, to
receive from RAE Systems a statement setting forth the aggregate
number of shares of RAE Systems common stock not voting in favor
of adoption of the Merger Agreement and with respect to which
demands for appraisal were received by RAE Systems and the
number of holders of such shares. Such statement must be mailed
within 10 days after the stockholders request has
been received by RAE Systems or within 10 days after the
expiration of the period for the delivery of demands as
described above, whichever is later.
If a petition for an appraisal is timely filed, at the hearing
on such petition, the Delaware Court will determine which
stockholders are entitled to appraisal rights. The Delaware
Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any
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stockholder fails to comply with such direction, the Delaware
Court may dismiss the proceedings as to such stockholder. Where
proceedings are not dismissed, the Delaware Court will appraise
the shares of RAE Systems common stock owned by such
stockholders, determining the fair value of such shares
exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a
fair rate of interest, if any, to be paid upon the amount
determined to be the fair value.
Although we believe that the merger consideration is fair, no
representation is made as to the outcome of the appraisal of
fair value as determined by the Delaware Court and stockholders
should recognize that such an appraisal could result in a
determination of a value higher or lower than, or the same as,
the consideration they would receive pursuant to the Merger
Agreement. Moreover, we do not anticipate offering more than the
merger consideration to any stockholder exercising appraisal
rights and reserve the right to assert, in any appraisal
proceeding, that, for purposes of Section 262, the
fair value of a share of RAE Systems common stock is
less than the merger consideration. In determining fair
value, the Delaware Court is required to take into account
all relevant factors. The Delaware Supreme Court has stated that
proof of value by any techniques or methods which are
generally considered acceptable in the financial community and
otherwise admissible in court should be considered and
that fair price obviously requires consideration of all
relevant factors involving the value of a company. The
Delaware Supreme Court has stated that in making this
determination of fair value the court must consider market
value, asset value, dividends, earnings prospects, the nature of
the enterprise and any other facts which could be ascertained as
of the date of the merger which throw any light on future
prospects of the merged corporation. Section 262 provides
that fair value is to be exclusive of any element of value
arising from the accomplishment or expectation of the merger.
The Delaware Supreme Court has stated that such exclusion is a
narrow exclusion that does not encompass known elements of
value, but which rather applies only to the speculative elements
of value arising from such accomplishment or expectation. The
Delaware Supreme Court has construed Section 262 to mean
that elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the
date of the merger and not the product of speculation, may be
considered.
The cost of the appraisal proceeding may be determined by the
Delaware Court and taxed against the parties as the Delaware
Court deems equitable in the circumstances. However, costs do
not include attorneys and expert witness fees. Each
dissenting stockholder is responsible for his or her
attorneys and expert witness expenses, although, upon
application of a dissenting stockholder, the Delaware Court may
order that all or a portion of the expenses incurred by any
dissenting stockholder in connection with the appraisal
proceeding, including without limitation, reasonable
attorneys fees and the fees and expenses of experts, be
charged pro rata against the value of all shares of stock
entitled to appraisal.
Any stockholder who has duly demanded appraisal in compliance
with Section 262 will not, after the effective time of the
merger, be entitled to vote for any purpose any shares subject
to such demand or to receive payment of dividends or other
distributions on such shares, except for dividends or
distributions payable to stockholders of record at a date prior
to the effective time of the merger.
At any time within 60 days after the effective time of the
merger, any stockholder will have the right to withdraw his
demand for appraisal and to accept the terms offered in the
Merger Agreement. After this period, a stockholder may withdraw
his, her or its demand for appraisal and receive payment for
his, her or its shares as provided in the Merger Agreement only
with our consent. If no petition for appraisal is filed with the
court within 120 days after the effective time of the
merger, stockholders rights to appraisal (if available)
will cease. Inasmuch as we have no obligation to file such a
petition, any stockholder who desires a petition to be filed is
advised to file it on a timely basis. Any stockholder may
withdraw such stockholders demand for appraisal by
delivering to RAE Systems a written withdrawal of his or her
demand for appraisal and acceptance of the merger consideration,
except that (i) any such attempt to withdraw made more than
60 days after the effective time of the merger will require
written approval of RAE Systems and (ii) no appraisal
proceeding in the Delaware Court shall be dismissed as to any
stockholder without the approval of the Delaware Court, and such
approval may be conditioned upon such terms as the Delaware
Court deems just.
Failure by any RAE Systems stockholder to comply fully with the
procedures described above and set forth in Annex C to this
proxy statement may result in termination of such
stockholders appraisal rights. In view of the
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complexity of exercising your appraisal rights under Delaware
law, if you are considering exercising these rights you should
consult with your legal counsel.
Material
United States Federal Income Tax Consequences of the
Merger
The following summary is a general discussion of the material
United States federal income tax consequences to our
stockholders whose common stock is converted into cash in the
merger. This summary is based on the current provisions of the
Internal Revenue Code of 1986, as amended, (the
Code), applicable Treasury Regulations, judicial
authority and administrative rulings, all of which are subject
to change, possibly with retroactive effect or different
interpretations. Any such change could alter the tax
consequences to our stockholders as described herein. As a
result, we cannot assure you that the tax consequences described
herein will not be challenged by Internal Revenue Service (the
IRS) or will be sustained by a court if challenged
by the IRS. No ruling from the IRS has been or will be sought
with respect to any aspect of the transactions described herein.
This summary contains the material tax consequences and is for
the general information of our stockholders (other than the
Rollover Holders).
This summary does not contain an analysis of all potential tax
effects of the merger. For example, it does not consider the
effect of any applicable state, local, foreign, estate or gift
tax laws, or of any non-income tax laws. In addition, this
discussion does not address the tax consequences of transactions
effectuated prior to or after the merger (whether or not such
transactions occur in connection with the merger), including,
without limitation, any exercise of a RAE Systems option, the
acquisition or disposition of RAE Systems shares other than
pursuant to the merger, or the exchange of Rollover Shares for
Purchaser Equity. In addition, it does not address all aspects
of federal income taxation that may affect particular RAE
Systems stockholders in light of their particular
circumstances, including:
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stockholders that are insurance companies;
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stockholders that are tax-exempt organizations;
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stockholders that are financial institutions, regulated
investment companies, or brokers or dealers in securities;
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stockholders who hold their common stock as part of a hedge,
straddle or conversion transaction;
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stockholders that hold common stock which constitutes qualified
small business stock for purposes of Section 1202 of the
Code or section 1244 stock for purposes of
Section 1244 of the Code;
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stockholders who are liable for the federal alternative minimum
tax;
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stockholders who are partnerships or other entity classified as
a partnership for United States federal income tax purposes;
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stockholders who acquired their common stock pursuant to the
exercise of a stock option or otherwise as compensation;
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stockholders whose functional currency for United States federal
income tax purposes is not the U.S. dollar; and
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stockholders who are not citizens or residents of the United
States or that are foreign corporations, foreign partnerships or
foreign estates or trusts with respect to the United States.
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This summary applies only to U.S. holders of our stock who
own such stock as capital assets within the meaning of
Section 1221 of the Code (generally, property held for
investment). A U.S. holder is any beneficial owner of
shares who is treated for U.S. federal income tax purposes
as:
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an individual citizen or resident of the United States;
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a corporation or other entity treated as a corporation for
U.S. federal income tax purposes that is, in each case,
created or organized in or under the laws of the United States,
any state thereof or the District of Columbia;
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an estate, the income of which is subject to U.S. federal
income tax regardless of its source; or
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a trust that (1) is subject to the primary supervision of a
U.S. court and the control of one or more U.S. persons
or (2) has validly elected to be treated as a
U.S. person for U.S. federal income tax purposes.
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If a partnership, or other entity treated as a partnership for
U.S. federal income tax purposes, holds shares, the tax
treatment of its partners generally will depend on a
partners status and the activities of the partnership.
Partnerships and their partners should consult their tax
advisors regarding the U.S. federal income tax consequences
to them of the merger.
ACCORDINGLY, RAE SYSTEMS STOCKHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO
THEM OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES, AND AS TO ANY TAX REPORTING
REQUIREMENTS OF THE MERGER AND RELATED TRANSACTIONS IN LIGHT OF
THEIR OWN RESPECTIVE TAX SITUATIONS.
Treatment
of Holders of Common Stock
The conversion of RAE Systems common stock into the right to
receive cash in the merger will be a taxable transaction.
Generally, this means that a RAE Systems stockholder (other than
a Rollover Holder) will recognize a capital gain or loss equal
to the difference between (1) the amount of cash the
stockholder receives in the merger and (2) the
stockholders adjusted tax basis in the common stock
surrendered therefor. For this purpose, RAE Systems
stockholders who acquired different blocks of RAE Systems shares
at different times for different prices must calculate gain or
loss separately for each identifiable block of RAE Systems
shares surrendered in the exchange. This gain or loss will be
long-term if the holder has held RAE Systems common stock for
more than one year as of the date of the merger. The maximum
U.S. federal income tax rate on net long-term capital gain
recognized by individuals is 15% under current law (scheduled to
increase to 20% in 2011). The maximum U.S. federal income
tax rate on both ordinary income and net long-term capital gain
recognized by a corporation is 35% under current law. Those
rates are subject to change and may depend on the
stockholders particular circumstances. The deduction of
capital losses is subject to limitations for both individuals
and corporations.
Appraisal
Rights
Under specified circumstances, a RAE Systems stockholder may be
entitled to appraisal rights in connection with the merger. If a
stockholder of RAE Systems common stock receives cash pursuant
to the exercise of appraisal rights, such stockholder generally
will recognize gain or loss, measured by the difference between
the cash received and such stockholders tax basis in such
RAE Systems common stock. Interest, if any, awarded in an
appraisal proceeding by a court would be included in such
stockholders income as ordinary income for federal income
tax purposes. Stockholders of RAE Systems common stock who
exercise appraisal rights are urged to consult their own tax
advisors.
Backup
Withholding
A RAE Systems stockholder may be subject to backup
withholding with respect to certain reportable
payments including taxable proceeds received in exchange
for the stockholders RAE Systems shares in the merger. The
current backup withholding rate for 2010 is 28%, but this rate
could change at any time and is subject to increase to 31% for
payments made after December 31, 2010. Backup withholding
will generally not apply, however, to a RAE Systems stockholder
who furnishes the paying agent with a correct taxpayer
identification number on IRS
Form W-9
(and who does not subsequently become subject to backup
withholding) or who is otherwise exempt from backup withholding,
such as a corporation. RAE Systems stockholders who fail
to provide their correct taxpayer identification numbers may be
subject to penalties imposed by the IRS. In addition, certain
foreign persons such as certain nonresident aliens may establish
an exemption from, or a reduced rate of, backup withholding by
delivering the proper version of IRS
Form W-8,
for example by providing a properly completed IRS
Form W-8BEN
certifying such stockholders
non-U.S. status.
Each RAE Systems stockholder and, if applicable, each other
payee, should complete and sign the IRS
Form W-9
included with the letter of transmittal (or other applicable
form such as a IRS
Form W-8)
in order to provide the information and certification necessary
to avoid the imposition of backup withholding, unless an
exemption applies and is established in a manner satisfactory to
the
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paying agent. Any amounts withheld from payments to a RAE
Systems stockholder under the backup withholding rules are
generally not an additional tax and may be refunded or allowed
as a credit against RAE Systems stockholders United States
federal income tax liability, provided that the stockholder
furnishes the required information to the IRS.
THE FOREGOING DISCUSSION OF THE FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER IS FOR OUR STOCKHOLDERS (OTHER THAN THE
ROLLOVER HOLDERS) GENERAL INFORMATION ONLY. ACCORDINGLY,
OUR STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE
MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES.
Litigation
Related to the Merger
On September 20, 2010, a putative class action suit,
entitled
Foley v. RAE Systems Inc., et al.
,
No. 110CV182985, was filed in the Superior Court of
California, County of Santa Clara, against the Company,
members of its Board of Directors, the Companys Chief
Financial Officer, and entities affiliated with Battery
Ventures. The suit alleges in summary that, in connection with a
proposed acquisition of the Company by an affiliate of Battery
Ventures, the individual defendants breached their fiduciary
duties by conducting an unfair sale process and agreeing to an
unfair price, would purportedly receive improper personal
benefits in connection with the proposed acquisition, and were
aided and abetted by the other defendants. Plaintiff seeks,
among other things, a declaration that the suit can be
maintained as a class action, an injunction against the proposed
merger, rescission of the Merger Agreement, a directive that the
defendants exercise their fiduciary duties to implement a
process to secure the best possible consideration for
stockholders, imposition of a constructive trust on allegedly
improper benefits, and fees and costs. Four other lawsuits
making similar allegations have also been filed in the Superior
Court of the State of California, County of Santa Clara
against the Company, its Board of Directors and Battery Ventures
or its affiliates:
Angles v. RAE Systems Inc., et
al.
, No. 110CV183606;
Greenbaum v. Chen, et
al.
, No. 110CV183814;
AC Photonics, Inc. v. RAE
Systems Inc., et al.
, No. 110CV183942; and
Mann v. RAE Systems Inc., et al.
,
No. 110CV183960. On October 28, 2010 the California
court consolidated all five California actions under the caption
In re RAE Systems, Inc. Shareholder Litigation
, Lead Case
No. 110CV182985. On December 15, 2010, plaintiffs Mann
and Angles filed an amended complaint continuing to set forth
the claims set forth above and including additional disclosure
claims based on allegations that the Companys proxy
filings contain materially false statements and fail to disclose
material facts regarding, among other things, the Special
Committee, the holders of the Rollover Shares, the process and
events leading up to the proposed acquisition, the FCPA
investigation, communications with Battery Ventures and other
potential bidders, and the work performed by UBS and data
underlying its analyses. On December 17, 2010, the
California court issued an order staying all proceedings in
California state court in favor of litigation pending in
Delaware.
In addition, four putative class action suits with similar
allegations have been filed in Delaware Chancery Court:
Nelson v. RAE Systems Inc., et al.
, C.A.
No. 5848-VCS;
Venton v. RAE Systems Inc., et al.
, C.A.
No. 5854-VCS;
Quintanilla v. RAE Systems Inc., et al.
, C.A.
No. 5872;
Villeneuve v. RAE Systems Inc., et
al.
, C.A. No. 5877. The Delaware actions have been
consolidated under the caption
In re RAE Systems, Inc.
Shareholder Litigation
, Consolidated C.A.
No. 5848-VCS,
and plaintiffs filed a Verified Consolidated Amended
Class Action Complaint on or about October 28, 2010.
In this pleading, plaintiffs continue to assert the claims set
forth above, and in addition they allege that the Companys
Preliminary Proxy Statement, filed with the SEC on
October 21, 2010, contains materially false statements or
fails to disclose material facts regarding, among other things,
the Special Committee, the holders of the Rollover Shares, the
process and events leading up to the proposed acquisition, the
FCPA investigation, communications with Battery Ventures and
other potential bidders, and the work performed by UBS and data
underlying its analyses. Plaintiffs request various forms of
injunctive relief, as well as money damages allegedly suffered
or to be suffered by the putative class. On December 17,
2010, two of the plaintiffs from the stayed California action
(Mann and Angles) also filed a complaint in Delaware Chancery
Court making essentially the same allegations as in their
amended California complaint described above. Plaintiffs Mann
and Angles subsequently voluntarily dismissed their Delaware
complaint. On February 24, 2011, the remaining Delaware
plaintiffs filed a motion requesting leave to file a
Supplemental and Amended Verified Class Action Complaint.
The proposed Supplemental Amended Verified Class Action
Complaint asserts claims against the
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Company, members of its Board of Directors, and entities
affiliated with Vector Capital, and alleges in summary that, in
connection with the proposed acquisition of the Company by an
affiliate of Vector Capital, the individual defendants breached
their fiduciary duties by conducting an unfair sale process and
agreeing to an unfair price, are purportedly receiving improper
personal benefits, and were aided and abetted by the other
defendants. The proposed pleading also alleges that the
Companys Preliminary Proxy Statement, filed with the SEC
on February 22, 2011, contains materially false statements
or fails to disclose material facts regarding, among other
things, the Special Committee, the holders of the Rollover
Shares, the process and events leading up to the proposed
acquisition, the work performed by UBS and data underlying its
analyses, and communications with Battery Ventures, Vector
Capital, and other potential bidders. Plaintiffs request various
forms of injunctive relief, as well as money damages allegedly
suffered or to be suffered by the putative class.
Two other actions have been also filed in the United States
District Court for the Northern District of California against
the Company, members of its Board of Directors, the
Companys Chief Financial Officer,
and/or
Battery Ventures, Rudy Merger Sub Corp. and Rudy Acquisition
Corp. Those actions are entitled
LaPlante v. RAE Systems
Inc., et al.
, No. CV
10-4944,
and
Mabry v. Chen, et al.
, No. CV
10-5328.
They make allegations similar to the other lawsuits, and add
claims for alleged violation of the federal securities laws in
connection with the preparation of the proxy statement filed by
the Company in connection with the proposed acquisition. On
January 10, 2011, the federal court issued an order
pursuant to a stipulation of the parties staying proceedings in
the
LaPlante
action in favor of litigation pending in
Delaware. A similar order was entered by the federal court in
the
Mabry
action on January 21, 2011, pursuant to
stipulation of the parties.
The Company believes that the claims in the suits described
above are without merit and intends to vigorously defend against
them. However, there can be no assurances as to the outcome of
the litigation.
Provisions
for Unaffiliated Security Holders
No provision has been made to grant RAE Systems
stockholders access to the corporate files of RAE Systems, any
other party to the Merger Agreement or to obtain counsel or
appraisal services at the expense of RAE Systems or any other
such party.
Regulatory
Matters
The merger and the conversion of shares of RAE Systems common
stock into the right to receive the merger consideration is not
subject to the provisions of the
Hart-Scott-Rodino
Antitrust Improvement Act of 1976.
FCPA
Settlement
On December 10, 2010, we settled the SECs and
Department of Justices Foreign Corrupt Practices Act
(FCPA) investigation. In our settlement with the
SEC, we agreed to pay $1,257,012 to the SEC in disgorgement of
profits and pre-judgment interest, and in our settlement with
the Department of Justice, we agreed to pay a $1.7 million
penalty. In addition, we accepted responsibility for violating
the internal controls and books and records provisions of the
FCPA, agreed to cooperate with investigations by law enforcement
authorities, and agreed to adhere to certain compliance and
reporting obligations.
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CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement, and the documents to which we refer you in
this proxy statement, include forward-looking
statements that reflect our current views as to our
financial condition, results of operations, plans, objectives,
future performance, business, and the expected completion and
timing of the merger and other information relating to the
merger. These statements can be identified by the fact that they
do not relate strictly to historical or current facts. You can
identify these statements by words such as expect,
anticipate, intend, plan,
believe, seek, estimate,
may, strategy, will and
continue or similar words. You should be aware that
forward-looking statements involve known and unknown risks and
uncertainties. These forward-looking statements speak only as of
the date on which the statements were made and we undertake no
obligation to update or revise any forward-looking statements
made in this proxy statement or elsewhere as a result of new
information, future events or otherwise, except as required by
law. In addition to other factors and matters contained in or
incorporated by reference in this document, we believe the
following factors could cause actual results to differ
materially from those discussed in the forward-looking
statements:
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the occurrence of any event, change or other circumstance that
could give rise to the termination of the Merger Agreement;
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the outcome of any legal proceedings that have been or may be
instituted against RAE Systems and others relating to the Merger
Agreement;
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the inability to complete the merger due to the failure to
obtain stockholder approval or the failure to satisfy other
conditions to consummate the merger;
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the failure of the merger to close for any other reason;
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the risk that the proposed merger disrupts current plans and
operations and the potential difficulties in employee retention
as a result of the proposed merger;
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the effect of the announcement of the merger on our customer
relationships, operating results and business generally;
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the amount of the costs, fees, expenses and charges related to
the merger; and
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other risks detailed in our Annual Report on
Form 10-K
for the year ended December 31, 2009 filed with the SEC on
March 12, 2010 and our Quarterly Reports on
Form 10-Q
for the quarter ended March 31, 2010 filed with the SEC on
May 7, 2010, for the quarter ended June 30, 2010 filed
with the SEC on August 6, 2010 and for the quarter ended
September 30, 2010 filed with the SEC on November 5,
2010 and incorporated herein by reference. See Other
Matters Where You Can Find More Information
beginning on page 89.
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The foregoing list and the risks reflected in our documents
incorporated by reference in this proxy statement should not be
construed to be exhaustive. We believe the forward-looking
statements in this proxy statement are reasonable; however,
there is no assurance that the actions, events or results of the
forward-looking statements will occur or, if any of them do,
what impact they will have on our results of operations or
financial condition or on the merger. In light of the
significant uncertainties inherent in the forward-looking
statements contained herein, readers should not place undue
reliance on forward-looking statements, which reflect
managements views only as of the date hereof. We cannot
guarantee any future results, levels of activity, performance or
achievements.
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RISK
FACTORS
In addition to the risk factors detailed in our Annual Report
on
Form 10-K
for the year ended December 31, 2009 filed with the SEC on
March 12, 2010 and our Quarterly Reports on
Form 10-Q
for the quarter ended March 31, 2010 filed with the SEC on
May 7, 2010, for the quarter ended June 30, 2010 filed
with the SEC on August 6, 2010 and for the quarter ended
September 30, 2010 filed with the SEC on November 5,
2010, below please find two risk factors which relate to the
proposed merger. You should consider the following factors in
conjunction with the other information included or incorporated
by reference in this proxy statement.
If the
proposed merger is not completed, our business could be harmed
and our stock price could decline.
The consummation of the merger is conditioned upon, among other
things, the adoption of the Merger Agreement by our
stockholders, regulatory approvals and other customary closing
conditions. Therefore, the merger may not be completed or may
not be completed in a timely manner. If the Merger Agreement is
terminated, the market price of our common stock will likely
decline. In addition, our stock price may decline as a result of
the fact that we have incurred and will continue to incur
significant expenses related to the merger prior to its closing
that will not be recovered if the merger is not completed. If
the Merger Agreement is terminated under certain circumstances,
we may be obligated to pay Purchaser a termination fee of
$3,710,000 (less the amount of any expense reimbursement paid or
payable by us). As a consequence of the failure of the merger to
be completed, as well as of some or all of these potential
effects of the termination of the Merger Agreement, our business
could be harmed in that concerns about our viability are likely
to increase, making it more difficult to retain employees and
existing customers and to generate new business.
The fact
that there is a merger pending could harm our business, revenue
and results of operations.
While the merger is pending, it creates uncertainty about our
future. As a result of this uncertainty, customers may decide to
delay, defer, or cancel purchases of our products pending
completion of the merger or termination of the Merger Agreement.
If these decisions represent a significant portion of our
anticipated revenue, our results of operations and quarterly
revenues could be substantially below the expectations of
investors.
In addition, while the merger is pending, we are subject to a
number of risks that may harm our business, revenue and results
of operations, including:
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the diversion of management and employee attention and the
unavoidable disruption to our relationships with customers and
vendors may detract from our ability to grow revenues and
minimize costs;
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we have and will continue to incur significant expenses related
to the merger prior to its closing; and
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we may be unable to respond effectively to competitive
pressures, industry developments and future opportunities.
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THE
PARTIES TO THE MERGER
RAE
Systems Inc.
RAE Systems is a Delaware corporation with its headquarters in
San Jose, California. RAE Systems was incorporated in 1991
and its principal executive offices are located at 3775 North
First Street, San Jose, California 95134. RAE Systems
website is located at
http://www.raesystems.com
and its telephone number is
(408) 952-8200.
Additional information regarding RAE Systems is contained in our
filings with the SEC. See Other Matters Where
You Can Find More Information on page 89.
Ray
Holding Corporation
Ray Holding Corporation, which we refer to as
Purchaser, is a newly formed Delaware corporation
that was formed solely for the purpose of entering into the
Merger Agreement and consummating the transactions contemplated
by the Merger Agreement. Purchaser has not engaged in any
business except for activities incident to its formation and in
connection with the transactions contemplated by the Merger
Agreement. The principal office address of Ray Holding
Corporation is
c/o Vector
Capital Corporation, One Market Street, Steuart Tower,
23
rd
Floor, San Francisco, CA 94105. Its telephone number is
(415) 293-5000.
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Ray
Merger Sub Corporation
Ray Merger Sub Corporation, which we refer to as Merger
Sub, is a newly formed Delaware corporation and a wholly
owned subsidiary of Purchaser. Merger Sub was formed solely for
the purpose of entering into the Merger Agreement and
consummating the transactions contemplated by the Merger
Agreement. Merger Sub has not engaged in any business except for
activities incident to its incorporation and in connection with
the transactions contemplated by the Merger Agreement. Upon the
consummation of the proposed merger, Merger Sub will cease to
exist and RAE Systems will continue as the surviving corporation
and a wholly owned subsidiary of Purchaser. The principal office
address of Ray Merger Sub Corporation is
c/o Vector
Capital Corporation, One Market Street, Steuart Tower,
23
rd
Floor, San Francisco, CA 94105. Its telephone number is
(415) 293-5000.
THE
SPECIAL MEETING
We are furnishing this proxy statement to you as part of the
solicitation of proxies by our board of directors for use at the
Special Meeting.
Date,
Time and Place
The Special Meeting will be held at the offices of
Fenwick & West LLP, 801 California Street, Mountain
View, California 94041, at 10:00 a.m., local time, on
April 7, 2011.
Purpose
of the Special Meeting
You will be asked at the Special Meeting to adopt the Merger
Agreement. The Special Committee has determined that the merger
and the Merger Agreement are substantively and procedurally fair
to, and in the best interests of, RAE Systems stockholders
(other than Rollover Holders) and recommended that our board of
directors approve the Merger Agreement and the transactions
contemplated thereby, including the merger, and that our board
of directors recommend that RAE Systems stockholders vote
to adopt the Merger Agreement. Our board of directors then
determined that the merger and the Merger Agreement are
procedurally and substantively fair to, and in the best
interests of, RAE Systems and its stockholders, declared the
Merger Agreement and the merger to be advisable and recommended
that RAE Systems stockholders vote to adopt the Merger
Agreement. If necessary, you will also be asked to vote on a
proposal to adjourn the Special Meeting for the purpose of
soliciting proxies to vote in favor of adoption of the Merger
Agreement.
Record
Date; Stock Entitled to Vote; Quorum
Only holders of record of RAE Systems common stock at the close
of business on March 9, 2011, the record date, are entitled
to notice of and to vote at the Special Meeting. On the record
date, approximately 59,512,064 shares of RAE Systems common
stock were issued and outstanding and held by approximately 270
holders of record. A quorum will be present at the Special
Meeting if a majority of the outstanding shares of RAE Systems
common stock entitled to vote on the record date are represented
in person or by proxy. In the event that a quorum is not present
at the Special Meeting, or there are not sufficient votes at the
time of the Special Meeting to adopt the Merger Agreement, it is
expected that the meeting will be adjourned or postponed to
solicit additional proxies if the holders of a majority of the
shares of our common stock present, in person or by proxy, and
entitled to vote at the Special Meeting approve an adjournment.
Holders of record of RAE Systems common stock on the record date
are entitled to one vote per share at the Special Meeting on
each proposal presented.
Vote
Required
The adoption of the Merger Agreement requires the affirmative
vote of the holders of a majority of the outstanding shares of
RAE Systems common stock on the record date. If you abstain from
voting or do not vote, either in person or by proxy, it will
have the same effect as a vote AGAINST the adoption
of the Merger Agreement. The approval of the adjournment of the
Special Meeting requires the affirmative vote of the holders of
a majority of the shares of RAE Systems common stock present, in
person or by proxy, at the Special Meeting (excluding
abstentions).
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Voting of
Proxies
All shares represented by properly executed proxies received in
time for the Special Meeting will be voted at the Special
Meeting in the manner specified by the holders. Properly
executed proxies that do not contain voting instructions will be
voted for the adoption of the Merger Agreement and
for approval of the proposal to adjourn the Special
Meeting, if necessary.
To vote, please complete, sign, date and return the enclosed
proxy card or, to vote over the Internet or by telephone, follow
the instructions provided below. If you attend the Special
Meeting and wish to vote in person, you may withdraw your proxy
and vote in person. If your shares are held in the name of your
broker, bank or other nominee, you must obtain a legal proxy,
executed in your favor, from the holder of record to be able to
vote at the Special Meeting.
Shares of RAE Systems common stock represented at the Special
Meeting but not voted, including shares of RAE Systems common
stock for which proxies have been received but for which
stockholders have abstained, will be treated as present at the
Special Meeting for purposes of determining the presence or
absence of a quorum for the transaction of all business.
Only shares affirmatively voted for the adoption of the Merger
Agreement, including properly executed proxies that do not
contain specific voting instructions, will be counted for that
proposal. If you abstain from voting, it will have the same
effect as a vote AGAINST the adoption of the Merger
Agreement, but no effect on the proposal to adjourn the Special
Meeting. If you do not execute a proxy card, it will have the
same effect as a vote against the adoption of the Merger
Agreement and will have no effect on the proposal to grant
authority to adjourn the Special Meeting. Brokers who hold
shares in street name for customers have the authority to vote
on routine proposals when they have not received
instructions from beneficial owners. However, brokers are
precluded from exercising their voting discretion with respect
to approval of non-routine matters, such as the adoption of the
Merger Agreement and, as a result, absent specific instructions
from the beneficial owner of such shares, brokers are not
empowered to vote those shares, referred to generally as
broker non-votes. Broker non-votes will be treated
as shares that are present at the Special Meeting for purposes
of determining whether a quorum exists and will have the same
effect as votes AGAINST the adoption of the Merger
Agreement and on the proposal to grant the persons named as
proxies the authority to adjourn the Special Meeting.
No business may be transacted at the Special Meeting other than
the proposal to adopt the Merger Agreement and, if necessary,
the proposal to adjourn the Special Meeting.
Voting
over the Internet or by Telephone
You may also cause your shares to be voted over the Internet or
by telephone. The law of Delaware, under which we are
incorporated, specifically permits electronically transmitted
proxies, provided that each such proxy contains or is submitted
with information from which the inspector of election can
determine that such proxy was authorized by the stockholder.
The Internet and telephone voting procedures described below are
designed to authenticate stockholders identities, to allow
stockholders to vote their shares over the Internet or by
telephone and to confirm that stockholders instructions
have been recorded properly. Stockholders granting a proxy to
vote over the Internet should understand that there may be costs
associated with electronic access, such as usage charges from
Internet access providers and telephone companies, that must be
borne by the stockholder.
For
Shares Registered in Your Name
Internet.
You may vote over the Internet until
11:59 P.M. Eastern Time on the day before the Special
Meeting by going to the website for Internet voting on the proxy
card and following the instructions on the screen. Votes cast
through the internet are authenticated by use of a personal
identification number. Specific instructions to be followed are
set forth on the enclosed proxy card, and you should have your
proxy card available when you access this web page. If you vote
through the internet, you do not need to return your proxy card.
Telephone.
You may vote by telephone by
calling the toll-free number on your proxy card, 24 hours a
day and until 11:59 PM Eastern Time on the day before the
Special Meeting and following the prerecorded instructions.
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Votes cast by telephone are authenticated by use of a personal
identification number. Specific instructions to be followed are
set forth on the enclosed proxy card, and you should have your
proxy card available when you call. If you vote by telephone,
you do not need to return your proxy card.
For
Shares Registered in the Name of a Broker or Bank
If you are the beneficial owner of shares held in
street name (i.e., your brokerage firm, bank,
broker-dealer or other similar organization is the holder of
record of your shares), you have the right to direct your
broker, bank or other nominee on how to vote your shares by
using the voting instruction form provided to you by them, or by
following their instructions for voting through the internet or
by telephone. In the alternative, you may vote in person at the
meeting if you obtain a valid legal proxy from your broker, bank
or other nominee and present it at the meeting. Brokers and
banks do not have discretionary authority to vote on either
proposal.
General
Information for All Shares Voted over the Internet or by
Telephone
Votes submitted over the Internet or by telephone must be
received by 11:59 p.m., Eastern Time, on April 6,
2011. Submitting your proxy over the Internet or by telephone
will not affect your right to vote in person should you decide
to attend the Special Meeting.
Revocability
of Proxies
The grant of a proxy on the enclosed proxy card or over the
Internet or by telephone does not preclude a stockholder from
voting in person at the Special Meeting. You may revoke your
proxy at any time before the shares reflected on your proxy card
are voted at the Special Meeting by:
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filing with our corporate secretary a properly executed and
dated revocation of proxy;
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submitting a properly completed, executed and dated proxy card
to our corporate secretary bearing a later date;
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submitting a subsequent vote over the Internet or by
telephone; or
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appearing at the Special Meeting and voting in person.
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Your attendance at the Special Meeting will not in and of itself
constitute the revocation of a proxy. If you have instructed
your broker to vote your shares, you must follow the directions
received from your broker to change these instructions.
Solicitation
of Proxies and Expense
The enclosed proxy is solicited on behalf of the board of
directors and the Special Committee of RAE Systems. The cost of
preparing, assembling, and mailing this proxy statement, the
Notice of Special Meeting and the enclosed proxy will be borne
by RAE Systems. RAE Systems is requesting that banks, brokers
and other custodians, nominees and fiduciaries forward copies of
the proxy materials to their principals and request authority
for the execution of proxies. RAE Systems may reimburse these
persons for their expenses in so doing. In addition, RAE Systems
has retained MacKenzie Partners, Inc. to assist in the
solicitation. RAE Systems will pay MacKenzie Partners, Inc.
approximately $15,000 plus out-of-pocket expenses for its
assistance. The directors, officers and employees of RAE Systems
and its subsidiaries may also solicit proxies by telephone,
facsimile, electronic mail, telegram or in person. Such
directors, officers, and employees will not be additionally
compensated for this solicitation, but may be reimbursed for
out-of-pocket expenses incurred.
RAE Systems has not authorized any person to provide any
information or make any representation not contained in this
proxy statement. You should not rely on any such information or
representation as having been authorized.
You should not send your stock certificates with your proxy. A
letter of transmittal with instructions for the surrender of RAE
Systems common stock certificates will be mailed to our
stockholders as soon as practicable after completion of the
merger.
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Delivery
of this Proxy Statement to Multiple Stockholders with the Same
Address
The SEC has adopted rules that permit companies and
intermediaries (for example, brokers) to satisfy the delivery
requirements for proxy statements with respect to two or more
stockholders sharing the same address if we believe the
stockholders are members of the same family by delivering a
single proxy statement addressed to those stockholders. Each
stockholder will continue to receive a separate proxy card or
voting instruction card. This process, which is commonly
referred to as householding, potentially means extra
convenience for stockholders and cost savings for companies by
reducing the volume of duplicate information.
A number of brokers with account holders who are our
stockholders will be householding our proxy
materials. A single proxy statement will be delivered to
multiple stockholders sharing an address unless contrary
instructions have been received from the affected stockholders.
Once you have received notice from your broker or us that they
will be householding communications to your address,
householding will continue until you are notified
otherwise or until you revoke your consent. If your household
received a single proxy statement, but you would prefer to
receive your own copy, or if you have additional questions about
the merger or require assistance in submitting proxies or voting
shares of our common stock, or if you would like to receive
additional copies of the proxy statement or the enclosed proxy
card, please notify your broker and direct your written request
to MacKenzie Partners, Inc., our proxy solicitation agent,
toll-free at
(800) 322-2885
or call collect at
(212) 929-5500,
by email at proxy@mackenziepartners.com, or by mail at 105
Madison Avenue, New York, New York 10016. Be sure to include
your name, the name of your brokerage firm and your account
number.
THE
MERGER AGREEMENT
The following description summarizes the material provisions of
the Merger Agreement, but we urge you to read the entire text of
the Merger Agreement, a copy of which is included as
Annex A to this proxy statement. We encourage you to read
it carefully and in its entirety. The Merger Agreement has been
included to provide you with information regarding its terms. It
is not intended to provide any other factual information about
RAE Systems. Such information can be found elsewhere in this
proxy statement and in the other public filings RAE Systems
makes with the SEC, which are available without charge at
www.sec.gov.
Merger
Consideration
Upon completion of the merger, each outstanding share of RAE
Systems common stock, other than 13,392,857 shares
beneficially held by the Rollover Holders, which will be
exchanged for capital stock of Purchaser (as more fully
described below), and any Appraisal Shares, will be converted
into the right to receive $1.75 in cash, without interest. The
price of $1.75 per share was determined through negotiations
between the Special Committee and Vector Capital. Upon
completion of the merger, no shares of RAE Systems common stock
will remain outstanding and all shares will automatically be
canceled and will cease to exist.
Pursuant to a Guarantee Agreement between Vector Capital and the
Company, Vector Capital has guaranteed the obligations of
Purchaser and Merger Sub to pay the cash merger consideration,
up to $82.85 million, as described in more detail above
under Special Factors Guarantee
Agreement. Additionally, there is no financing condition
to the merger.
Conversion
of Shares; Procedures for Exchange of Certificates
Effective automatically upon completion of the merger, you will
have the right to receive $1.75 per share in cash, without
interest. Prior to the effective time of the merger, Purchaser
will enter into an agreement with a bank or trust company to act
as paying agent under the Merger Agreement. On or before the
effective time of the merger, Purchaser will deposit with the
paying agent cash sufficient to enable the paying agent to pay
the aggregate cash merger consideration to RAE Systems
stockholders, other than the Rollover Holders.
Promptly after the effective time of the merger, the paying
agent will mail to each record holder of shares a letter of
transmittal and instructions for use in surrendering
certificates in exchange for the merger consideration.
No
stockholder should surrender any certificates until the
stockholder receives the letter of transmittal and other
materials for such surrender.
Upon surrender of a stock
certificate for cancellation to the paying agent,
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together with a letter of transmittal, duly completed and
executed in accordance with the instructions, and such other
documents as the paying agent may require, the holder of such
certificate will be entitled to receive the merger consideration
into which the number of shares of common stock previously
represented by such stock certificate shall have been converted
pursuant to the Merger Agreement, without any interest thereon.
The certificates so surrendered will be canceled.
In the event of a transfer of ownership of shares of common
stock which is not registered in our transfer records, payment
may be made with respect to such shares to the transferee if the
stock certificate representing such shares is presented to the
paying agent, accompanied by all documents reasonably required
by the paying agent to evidence such transfer and to evidence
that any applicable stock transfer taxes relating to such
transfer have been paid.
If your stock certificate has been lost, stolen or destroyed,
the paying agent will deliver to you the applicable merger
consideration for the shares represented by that certificate if:
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you make an affidavit claiming such certificate has been lost,
stolen or destroyed; and
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if required by Purchaser, you post a bond in such reasonable
amount as Purchaser may direct as indemnity against any claim
that may be made with respect to that certificate against
Purchaser.
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You should not send your certificates now and should send
them only pursuant to instructions set forth in the letters of
transmittal to be mailed to stockholders promptly after the
effective time of the merger. In all cases, the merger
consideration will be provided only in accordance with the
procedures set forth in this proxy statement and such letters of
transmittal.
One year after the effective time, the paying agent will deliver
to Purchaser any funds made available to the paying agent which
have not been disbursed. Any holders of certificates who have
not complied with the above-described procedures to receive
payment of the merger consideration during such one year period
may thereafter look only to Purchaser for payment of the merger
consideration to which they are entitled.
The cash paid to you upon conversion of your shares of RAE
Systems common stock will be issued in full satisfaction of all
rights relating to the shares of RAE Systems common stock.
Effect on
RAE Systems Stock Options
At the effective time of the merger, the vesting of each
unvested stock option to acquire RAE Systems common stock
outstanding will be accelerated, so that each outstanding stock
option to acquire RAE Systems common stock will be fully vested
and exercisable. Each such stock option will then be cancelled
in the merger, and in consideration of such cancellation, RAE
Systems will pay to the holder of each such canceled stock
option, as soon as practicable after the effective time, a cash
payment equal to the excess (if any) of $1.75 over the per share
exercise price of such stock option.
Effect on
13,392,857 Shares Beneficially Held by Rollover
Holders
In connection with the merger, the Rollover Holders have agreed
to contribute, immediately prior to the effective time of the
merger, 13,392,857 Rollover Shares, which will be valued at
$1.75 per share, and in exchange for the Rollover Shares, the
Rollover Holders will receive equity in Purchaser valued at
approximately $23.4 million, in the aggregate, in the same
class of stock, and at the same valuation, as Vector
Capitals cash investment. The remaining
4,681,324 shares of our common stock owned by the Rollover
Holders will be cashed out in the merger at $1.75 per share (or
a total of approximately $8.5 million).
Effect on
RAE Systems 2007 Equity Incentive Plan, 2002 Stock Option Plan
and 1993 Stock Plan
RAE Systems 2007 Equity Incentive Plan, 2002 Stock Option
Plan and 1993 Stock Plan shall terminate immediately prior to
the effective time of the merger. We do not expect to grant any
new options to employees, directors and officers prior to the
effective time of the merger.
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Effective
Time of the Merger
The merger will become effective upon the filing of a
certificate of merger with the Delaware Secretary of State or at
such later time as is agreed upon by Purchaser and RAE Systems
and specified in the certificate of merger. The filing of the
certificate of merger will occur on the closing date. Subject to
the terms and conditions of the Merger Agreement and in
accordance with Delaware law, at the effective time of the
merger, Merger Sub, a wholly owned subsidiary of Purchaser and a
party to the Merger Agreement, will merge with and into RAE
Systems. RAE Systems will survive the merger as a wholly owned
Delaware subsidiary of Purchaser.
Representations
and Warranties
The Merger Agreement contains representations and warranties of
each party to the agreement. The representations and warranties
in the Merger Agreement are complicated and not easily
summarized. Although the material representations and warranties
are summarized below, you are urged to read carefully and in
their entirety the sections of the Merger Agreement entitled
Representations and Warranties of the Company and
Representations and Warranties of Parent and Merger
Sub in Annex A to this proxy statement. However, the
assertions embodied in these representations and warranties are
qualified by information in a confidential disclosure schedule
that RAE Systems provided to Purchaser in connection with the
signing of the Merger Agreement. Accordingly, you should not
rely on the representations and warranties as characterizations
of the actual state of facts, since they are modified in
important part by the underlying disclosure schedule. Moreover,
information concerning the subject matter of the representations
and warranties may have changed since the date of the agreement,
which subsequent information may or may not be fully reflected
in RAE Systems public disclosures.
The Merger Agreement contains customary representations and
warranties of RAE Systems as to, among other things:
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our organization, good standing and corporate power;
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our capitalization;
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our SEC documents and undisclosed liabilities;
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certain changes or events since September 30, 2010;
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ownership of our assets and real property;
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intellectual property;
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our material contracts;
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compliance with legal requirements;
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compliance with laws and permits;
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the information supplied in this proxy statement;
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tax matters;
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employee benefits and labor matters;
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environmental matters;
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insurance;
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transactions with affiliates;
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legal proceedings and orders;
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authorization, execution, delivery, performance and
enforceability of, and required consents, approvals, orders and
authorizations of our stockholders, third parties and
governmental authorities relating to, the Merger Agreement;
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the vote required to approve the merger;
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our Shanghai construction project;
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opinion of financial advisor; and
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brokers and other advisors.
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In addition, the Merger Agreement contains representations and
warranties by Purchaser and Merger Sub as to, among other things:
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organization, good standing and corporate power;
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authorization, execution, delivery, performance and
enforceability of, and required consents, approvals, orders and
authorizations of third parties and governmental authorities
relating to, the Merger Agreement;
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the information supplied in this proxy statement;
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availability of funds;
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the solvency of the surviving corporation after the
merger; and
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no ownership of RAE Systems stock.
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The representations and warranties of RAE Systems, Purchaser and
Merger Sub will expire upon completion of the merger.
Covenants
Conduct
of Business
We have agreed in the Merger Agreement that we will conduct our
business and operations in the ordinary course, consistent with
past practices, and in compliance in all material respects with
all applicable laws, use reasonable efforts to preserve our
current business organization, retain the services of our
current officers and other employees, comply with the
requirements of all our material contracts and maintain
relations and goodwill of those having business relationships
with us, promptly notify Purchaser of certain legal proceedings,
use commercially reasonable efforts to transfer cash held by us
outside the United States to the United States and preserve our
cash balances consistent with past practice, subject to
expenditures related to the merger.
In addition, we have agreed that, subject to specified
exceptions, during the period commencing on the date of the
Merger Agreement and ending at the effective time of the Merger,
neither we nor any of our subsidiaries may, without
Purchasers prior written consent (which, as to certain of
the matters listed below, may not be unreasonably withheld or
delayed):
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declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of our capital stock, or
repurchase, redeem or otherwise reacquire any shares of capital
stock or other securities;
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sell, issue, grant or authorize the sale, issuance or grant of:
any capital stock or other security; any option, call, warrant
or right to acquire any capital stock or other security; or any
instrument convertible into or exchangeable for any capital
stock or other security, except that we may issue shares of
common stock upon the valid exercise of options outstanding as
of January 18, 2011;
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amend or waive any of our rights under any provision of: any of
our stock option plans; any option or any agreement evidencing
or relating to any outstanding stock option;
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amend our certificate of incorporation or bylaws or become a
party to any merger, consolidation, share exchange, business
combination, amalgamation, recapitalization, reclassification of
shares, stock split, reverse stock split, division or
subdivision of shares, consolidation of shares or similar
transaction;
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form any subsidiary or acquire any interest in any other entity;
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make any capital expenditure, except in the ordinary course of
business and consistent with past practices not exceeding
$100,000 individually or $250,000 in the aggregate, except for
certain specified expenses;
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other than in the ordinary course of business consistent with
past practices, enter into any material contract, or amend or
terminate, or waive or exercise any material right or remedy
under any material contract;
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surrender any owned or leased real property;
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acquire, lease or license any right or asset, except in the
ordinary course of business and consistent with past practices,
or expressly waive, or relinquish any material right;
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other than in the ordinary course of business consistent with
past practices, write off as uncollectible, or establish any
extraordinary reserve with respect to, any receivable or
indebtedness;
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make any pledge of our assets except immaterial assets made in
the ordinary course of business consistent with past practices;
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lend money to any person (excluding advancement of reasonable
expenses to employees in the ordinary course of business
consistent with past practice), or incur or guarantee any
indebtedness;
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establish, adopt, or amend any benefit plan; pay any bonus or
make any profit-sharing or similar payment, except customary
bonus and commission payments consistent with past practices or
in connection with the hiring of new employees in the ordinary
course of business; or increase the amount of the wages, salary,
commissions, fringe benefits or other compensation payable to
officers, directors and employees;
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hire any employee at the level of manager or above or with an
annual base salary in excess of $155,000, promote any employee
except in order to fill a position vacated after
January 18, 2011, or terminate any employee with an annual
base salary in excess of $155,000, except in the ordinary course
of business or for cause;
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change any of our accounting practices;
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make any tax election;
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commence or settle any legal proceeding;
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enter into any material transaction or take any other material
action outside the ordinary course of business;
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pay UBS more than the fixed fee provided in its engagement
letter, or any discretionary fee; or
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agree or commit to take any of the forgoing actions.
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The covenants in the Merger Agreement relating to the conduct of
our business are complicated and not easily summarized. You are
urged to read carefully and in its entirety the section of the
Merger Agreement entitled Operation of the Companys
Business in Annex A to this proxy statement.
No
Solicitation of Transactions by RAE Systems
Subject to specified exceptions, we have agreed to not directly
or indirectly:
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solicit, initiate, encourage, induce or facilitate the
communication, making, submission or announcement of any
Acquisition Proposal or Acquisition Inquiry (both as defined
below);
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furnish information to any third party in connection with or in
response to an Acquisition Proposal or Acquisition Inquiry;
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engage in discussions or negotiations with any third party with
respect to any Acquisition Proposal or Acquisition Inquiry;
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approve, endorse or recommend any Acquisition Proposal; or
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execute or enter into any letter of intent with respect to any
Acquisition Proposal or any other Acquisition Agreement.
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We have also agreed that (1) our board of directors will
not withdraw or modify, in a manner adverse to Purchaser, our
board of directors recommendation that our stockholders
approve and adopt the Merger Agreement and (2) our board of
directors and Special Committee will not adopt or propose any
resolution to withdraw or
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modify, in a manner adverse to Purchaser, the board of
directors recommendation that our stockholders approve and
adopt the Merger Agreement.
Notwithstanding these limitations:
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We may furnish nonpublic information to, or enter into
discussions with, any third party in response to a Superior
Offer (as defined below) or an Acquisition Proposal or
Acquisition Inquiry that the board of directors or the Special
Committee believes in good faith is reasonably likely to result
in a Superior Offer that is submitted to us and not withdrawn
if: (1) the board of directors or the Special Committee
concludes in good faith, after having taken into account the
advice of its outside legal counsel, that such action is
required in order for the board of directors to comply with its
fiduciary obligations to our stockholders under applicable law;
(2) at least one business day prior to furnishing any such
nonpublic information to, or entering into discussions with,
such third party, we give Purchaser written notice of the
identity of such third party and of our intention to furnish
nonpublic information to, or enter into discussions with, such
third party; (3) we received from such third party an
executed confidentiality agreement containing provisions
(including nondisclosure provisions, use restrictions,
non-solicitation provisions, no hire provisions and
standstill provisions) at least as favorable to us
as those contained in the Mutual Nondisclosure Agreement between
RAE Systems and Vector Capital, dated September 24, 2010,
as amended from time to time (the Confidentiality
Agreement); and (4) prior to furnishing any such
nonpublic information to such third party, we furnish such
nonpublic information to Purchaser (to the extent such nonpublic
information has not been previously furnished by us to
Purchaser).
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Our board of directors or any committee of our board of
directors may withdraw or modify its recommendation that our
stockholders adopt the Merger Agreement, if (i) (1) we have
provided Purchaser with at least two business days prior notice
of any meeting of our board of directors or the Special
Committee to consider a Superior Offer; (2) during such
two-day
period, if requested by Purchaser, we will engage in good faith
negotiations with Purchaser to make such adjustments in the
terms and conditions of the Merger Agreement in such a manner
that obviates the need for our board of directors or the Special
Committee withdraw or modify its recommendation that our
stockholders adopt the Merger Agreement; (3) our board of
directors or the Special Committee determines in good faith
(after consulting with its independent financial advisor of
nationally recognized reputation and taking into account any
changes to the terms of the Merger Agreement proposed by
Purchaser) that the offer of the third party constitutes a
Superior Offer; (4) our board of directors or the Special
Committee determines in good faith, after consulting with its
outside legal counsel, that, the withdrawal or modification of
its recommendations is required in order for the board of
directors to comply with its fiduciary obligations to our
stockholders; and (5) our board of directors recommendation
is not withdrawn or modified in a manner adverse to Purchaser at
any time prior to the time at which Purchaser receives written
notice from us confirming that our board of directors has
determined that an offer is a Superior Offer; or (ii)
(1) in response to a material development or change in
material circumstances occurring or arising after the date of
the Merger Agreement, the existence of which was not known by
our board of directors at or prior to date of the Merger
Agreement (and not relating to any acquisition proposal) (such
material development or change in circumstances, an
Intervening Event), if our board of directors or the
Special Committee determines in good faith, after consultation
with its financial advisor and outside legal counsel, that, in
light of such Intervening Event, that the withdrawal or
modification of its recommendation that our stockholders adopt
the Merger Agreement is required in order for the board of
directors to comply with its fiduciary obligations to our
stockholders; (2) if we have provided Purchaser with at
least three days prior notice (unless the Intervening Event
arises fewer than three days prior to the Stockholders
Meeting in which case such notice shall be given as promptly as
practicable) advising Parent that the board of directors or
Special Committee intends to take such action and specifying the
reasons therefor in reasonable detail; and (3) during such
three day period, if requested by Parent, we will engages in
good faith negotiations with Parent to make such adjustments in
the terms and conditions of the Merger Agreement in such a
manner that obviates the need for our board of directors or the
Special Committee to withdraw or modify its recommendation that
our stockholders adopt the Merger Agreement as a result of the
Intervening Event.
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We may terminate the Merger Agreement in order to enter into an
acquisition agreement with respect to a Superior Offer, however,
in the event of such a termination, RAE Systems would be
required to pay a $3,710,000 termination fee (reduced by any
expense reimbursement paid or payable under the Merger
Agreement) to Purchaser as described below under Fees and
Expenses.
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Under the Merger Agreement,
Acquisition Inquiry means an inquiry, indication of
interest or request for information (other than an inquiry,
indication of interest or request for information made or
submitted by Purchaser) that could reasonably be expected to
lead to an Acquisition Proposal; and
Acquisition Proposal means any offer or proposal
(other than an offer or proposal made or submitted by Purchaser)
contemplating or otherwise relating to any transaction or series
of transactions involving:
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any merger, consolidation, amalgamation, share exchange,
business combination, issuance of securities, acquisition of
securities, reorganization recapitalization, tender offer,
exchange offer or other similar transaction: (1) in which
RAE Systems or any of our subsidiaries is a constituent
corporation; (2) in which a third party or
group of such third party directly or indirectly
acquires beneficial or record ownership of securities
representing more than 15% of the outstanding securities of any
class of voting securities of RAE Systems or any of our
subsidiaries; or (3) in which RAE Systems or any of our
subsidiaries issues securities representing more than 15% of the
outstanding securities of any class of voting securities of such
issuing entity;
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any sale, lease, exchange, transfer, license, acquisition or
disposition of any business or businesses or assets that
constitute or account for: (1) 15% or more of our
consolidated net revenues, consolidated net income or
consolidated book value of the assets; or (2) 15% or more
of the fair market value of our assets; or
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any liquidation or dissolution of RAE Systems of any of our
subsidiaries.
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Under the Merger Agreement, Superior Offer means a
bona fide written offer by a third party, not solicited by us in
violation of the Merger Agreement, to purchase, in exchange for
consideration consisting exclusively of cash
and/or
publicly traded equity securities, all of the outstanding shares
of our common stock, that: (1) was not obtained or made as
a direct or indirect result of a breach of the Merger Agreement,
the Confidentiality Agreement or any standstill or
similar agreement under which RAE Systems or any of our
subsidiaries has any rights or obligations; and (2) is on
terms and conditions that our board of directors or the Special
Committee determines, in its reasonable, good faith judgment,
after consultation with an independent financial advisor of
nationally recognized reputation, to be: (a) more
favorable, from a financial point of view, to our stockholders
than the terms of the merger; and (b) likely to be
consummated. However, an offer shall not be deemed to be a
Superior Offer if any financing required to
consummate the transaction contemplated by such offer is not
committed and is not reasonably capable of being obtained by
such third party (as determined in good faith by our board of
directors or the Special Committee), or if the consummation of
such transaction is contingent on any such financing being
obtained.
Other
Covenants
The Merger Agreement contains a number of other covenants,
including covenants relating to:
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preparation of this proxy statement and holding of the Special
Meeting;
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recommendation by our board of directors that our stockholders
adopt the Merger Agreement;
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use of reasonable best efforts to consummate the merger,
including obtaining regulatory clearance;
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employee benefits;
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indemnification and insurance;
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access to information;
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fees and expenses;
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notification by us to Purchaser of breaches of representations
and warranties, breaches of covenants and certain other matters;
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stockholder litigation; and
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export control
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Conditions
to the Merger
Our obligation and Purchasers obligation to complete the
merger are subject to the adoption of the Merger Agreement by
the requisite vote of our stockholders.
Purchasers and Merger Subs obligations to complete
the merger are also subject to the following conditions:
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our representations and warranties set forth in the Merger
Agreement regarding certain aspects of our capitalization, the
corporate power and authority to enter into the Merger Agreement
and the binding nature of the Merger Agreement, the
inapplicability of certain anti-takeover statutes, the required
stockholder vote, and the fairness opinion are true and correct
in all respects, and our representations and warranties set
forth in the Merger Agreement regarding the authorization of,
issuance of our outstanding shares are true and correct in all
respects that are material to us, in each case as of the date of
the Merger Agreement and as of the closing of the merger;
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our representations and warranties set forth in the Merger
Agreement that are qualified as to material adverse
effect on us are true and correct on and as of the closing
of the merger with the same force and effect as if made on and
as of such date, except for those representations and warranties
that are qualified as to material adverse effect on
us that address matters only as of a particular date, which
representations and warranties shall have been true and correct
as of such particular date;
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all of our other representations and warranties set forth in the
Merger Agreement are true and correct on and as of the closing
of the merger with the same force and effect as if made on and
as of such date, except for any failure to be so true and
correct which has not had and would not have, individually or in
the aggregate, a material adverse effect on us, and
for those representations and warranties that address matters
only as of a particular date, which representations and
warranties shall have been true and correct as of such
particular date, except for any failure to be so true and
correct as of such particular date which has not had and would
not have, individually or in the aggregate, a material
adverse effect on us;
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we must have performed in all material respects each of our
covenants and obligations under the Merger Agreement at or prior
to the closing of the merger;
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we must not have suffered a material adverse effect;
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no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the
merger (or any transaction contemplated thereby) shall have been
issued by any court of competent jurisdiction or other
government body and remain in effect, and there shall not be any
foreign, U.S. federal or state legal requirement enacted or
deemed applicable to the merger (or any transaction contemplated
thereby) that makes consummation of the merger (or any
transaction contemplated thereby) by Purchaser and Merger Sub
illegal;
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there shall not be pending, and there shall not have been
threatened in writing, any legal proceeding in which a
governmental body is or has threatened to become a party:
(1) challenging or seeking to restrain or prohibit the
consummation of the merger (or any transaction contemplated
thereby); (2) related to the merger or any of the
transactions contemplated thereby, seeking to obtain any damages
or other relief that may be material to Purchaser or us;
(3) seeking to prohibit or limit in any material respect
Purchasers ability to vote, transfer, receive dividends
with respect to or otherwise exercise ownership rights with
respect to the stock of the surviving corporation; (4) that
could materially and adversely affect the right or ability of
Purchaser or us to own the assets or operate the business of RAE
Systems; or (5) seeking to compel us, Purchaser or any
subsidiary of Purchaser to dispose of or hold separate any
material assets as a result of the merger (or any transaction
contemplated thereby); and
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there must not be any other pending legal proceedings in which
there is a reasonable possibility of an outcome that would have
a material adverse effect on us or Purchaser.
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Our obligations to complete the merger are also subject to the
following conditions:
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the representations and warranties of Purchaser and Merger Sub
in the Merger Agreement must be true and correct on and as of
the date of the closing of the merger with the same force and
effect as if made on and as of such date, except (1) for
any failure to be so true and correct that would not,
individually or in the aggregate, prevent or materially delay
the consummation of the contemplated transaction or the ability
of Purchaser and Merger Sub to fully perform their respective
covenants and obligations under the Merger Agreement,
(2) for changes contemplated by the Merger Agreement, and
(3) for those representations and warranties that address
matters only as of a particular date, which representations
shall have been true and correct as of such particular date,
except for any failure to be so true and correct as of such
particular date that would not, individually or in the
aggregate, prevent the merger or prevent or materially delay the
consummation of the transactions contemplated under the Merger
Agreement or the ability of Purchaser and Merger Sub to fully
perform their respective covenants and obligations under the
Merger Agreement;
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all of the covenants and obligations in the Merger Agreement
that Purchaser and Merger Sub are required to comply with or to
perform at or prior to the closing of the merger shall have been
complied with and performed in all material respects; and
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no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the
merger by us shall have been issued by any U.S. court of
competent jurisdiction and remain in effect, and there shall not
be any U.S. federal or state legal requirement enacted or
deemed applicable to the merger that makes consummation of the
merger by us illegal.
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The Merger Agreement provides that a material adverse
effect on us means any effect, change, event or
circumstance that, considered together with all other effects,
changes, events or circumstances, is or would reasonably be
expected to be or to become materially adverse to, or has or
would reasonably be expected to have or result in a material
adverse effect on: (1) our business, condition (financial
or otherwise), capitalization, assets (including intellectual
property), liabilities (accrued, contingent or otherwise),
operations, or financial performance; (2) our ability to
consummate the merger or any of the other transactions
contemplated by the Merger Agreement or to perform any of our
obligations under the Merger Agreement; or
(3) Purchasers ability to vote, transfer, receive
dividends with respect to or otherwise exercise ownership rights
with respect to any of the stock of the surviving corporation.
The Merger Agreement also provides that a material adverse
effect on us shall not include the effect of (1) any
changes in general economic or political conditions (to the
extent such changes do not disproportionately affect us relative
to other companies in our industry), (2) any changes in
applicable legal requirements, regulations or GAAP (to the
extent such changes do not disproportionately affect us relative
to other companies in our industry), (3) the announcement
of the Merger Agreement (or transactions contemplated thereby),
(4) any failure to meet analyst projections or any change
in analyst recommendations, (5) any failure by us to meet
any internal projections, estimates or budgets for any period on
or after the date of the Merger Agreement, (6) any change
in the market price or trading volume of our common stock
(provided that the underlying causes or causes of any failure or
change referred to in clauses (4), (5) or (6) may be
taken into account in determining whether a material adverse
effect on us shall have occurred) or (7) any legal
proceedings made or brought by any of the current or former
stockholders of RAE Systems (on their own behalf or on behalf of
RAE Systems) or any other person against RAE Systems or our
directors or officers which arise out of the Battery Merger
Agreement or the Merger Agreement, or the transactions
contemplated thereby or hereby.
Termination
of the Merger Agreement
The Merger Agreement may be terminated at any time prior to the
closing of the merger:
by mutual written consent of us and Purchaser;
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by either us or Purchaser if:
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the merger is not completed by July 31, 2011; provided that
a party may not so terminate the Merger Agreement if the failure
of the merger to be completed was attributed to the failure of
such party to perform any of its obligations under the Merger
Agreement;
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a court of competent jurisdiction or other governmental body
shall have issued a final and nonappealable order, decree or
ruling, or shall have taken any other action, having the effect
of permanently restraining, enjoining or otherwise prohibiting
the merger;
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the required vote of our stockholders is not obtained to adopt
the Merger Agreement at a meeting of our stockholders duly
convened therefore or at any adjournment thereof, subject to
certain limitations;
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by Purchaser:
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if the board of directors (or the Special Committee, if
applicable) fails to unanimously (with two abstentions)
recommend that our stockholders vote to adopt and approve the
Merger Agreement or withdraw or modify such recommendation in a
manner adverse to Purchaser;
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if we fail to include in the proxy statement the board
recommendation or a statement to the effect that the board of
directors (or the Special Committee, if applicable) has
unanimously (with two abstentions) determined and believes that
the merger is advisable and fair to and in the best interests of
our stockholders;
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if our board of directors (or the Special Committee, if
applicable) fails to reaffirm publicly the its recommendation,
or fails to reaffirm its determination that the merger is
advisable and fair to and in the best interests of our
stockholders, within five business days after Purchaser requests
in writing that such recommendation or determination be
reaffirmed publicly;
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if our board of directors or the Special Committee shall have
approved, endorsed or recommended any Acquisition Proposal;
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if we shall have executed any letter of intent, memorandum of
understanding or similar document or any contract relating to
any Acquisition Proposal (with certain limitations);
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if a tender or exchange offer relating to securities of the
Company shall have been commenced and we have not sent to our
stockholders, within ten business days after the commencement of
such tender or exchange offer, a statement disclosing that we
(or our board of directors or the Special Committee) recommends
rejection of such tender or exchange offer;
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if any of our representations and warranties contained in the
Merger Agreement are inaccurate as of the date of the Merger
Agreement, or become inaccurate as of a date subsequent to the
date of the Merger Agreement (as if made on and as of such
subsequent date), or any of our covenants or obligations
contained in the Merger Agreement are breached; provided,
however, that Purchaser may not terminate the Merger Agreement
on account of such inaccuracy or breach prior to the end of the
15-day
period commencing on the date on which we receive notice of such
inaccuracy or breach, or after such
15-day
period if such inaccuracy or breach shall have been fully cured
during such
15-day
period in a manner that does not result in a continuing breach
of any covenant or obligation us;
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by us:
|
|
|
|
|
if any of Purchasers representations and warranties
contained in the Merger Agreement are inaccurate as of the date
of the Merger Agreement, or shall have become inaccurate as of a
date subsequent to the date of the Merger Agreement (as if made
on and as of such subsequent date), or any of Purchasers
covenants or obligations contained in the Merger Agreement are
breached; provided, however, that we may not terminate the
Merger Agreement on account of such inaccuracy or breach prior
to the end of the
15-day
period commencing on the date on which Purchaser receives notice
of such inaccuracy or breach; or after such
15-day
period if such inaccuracy or breach shall have been fully cured
during such
15-day
period in a manner that does not result in a continuing breach
of any covenant or obligation of Purchaser; or
|
75
|
|
|
|
|
in order to enter into an acquisition agreement with respect to
a Superior Offer but only if the Board has first complied with
the procedures as set forth in the Merger Agreement with respect
to a Superior Offer. However, in the event of such termination,
we would be required to pay a $3,390,000 termination fee
(reduced by any expense reimbursement also paid or payable under
the Merger Agreement) as described below under Fees and
Expenses.
|
Fees and
Expenses
Pursuant to the Merger Agreement, whether or not the merger is
consummated, all fees and expenses incurred in connection with
the Merger Agreement shall be paid by the party incurring such
fees or expenses. However, we must reimburse Purchaser for
certain expenses incurred by it in connection with or related to
the Merger Agreement and related transactions, up to a maximum
of $900,000, in the event the Merger Agreement is terminated
under the certain provisions allowing for termination which
include the termination of the Merger Agreement if our
stockholders do not adopt the Merger Agreement. In addition, we
must pay to Purchaser an amount equal to $3,710,000, less any
reimbursed expenses as described in the preceding sentence, if
the Merger Agreement is terminated in the following
circumstances:
|
|
|
|
|
We terminate the Merger Agreement pursuant to the provision
allowing for termination by us after receipt of a Superior Offer
(as defined above);
|
|
|
|
Purchaser terminates the Merger Agreement pursuant to the
provision allowing for termination following:
|
|
|
|
|
|
Our board of directors or the Special Committees
withdrawal of their recommendation to our stockholders to adopt
the Merger Agreement or a modification of such recommendation in
a manner adverse to Purchaser;
|
|
|
|
Our board of directors or the Special Committees
failure to reaffirm their determination that the merger is
advisable and fair to and in the best interest of our
stockholders within five business days after Purchasers
requests in writing that such reaffirmation be publicly made;
|
|
|
|
Our breach, in any material respect, of our covenants not to
solicit any Acquisition Proposal;
|
|
|
|
our board of directors or the Special Committees
approval, endorsement or recommendation of any Acquisition
Proposal;
|
|
|
|
our execution of any letter of intent, memorandum of
understanding or similar document or any contract relating to
any Acquisition Proposal; or
|
|
|
|
the commencement of a tender or exchange offer relating to our
securities and we have not sent to our stockholders, within ten
business days after the commencement of such tender or exchange
offer, a statement disclosing that we or our board of directors
or the Special Committee recommends rejection of such tender or
exchange offer;
|
|
|
|
|
|
we or Purchaser terminate the Merger Agreement pursuant to the
provision allowing for termination for failure to obtain our
stockholders approval or the merger fails to be
consummated by March 31, 2011 and the following conditions
are satisfied: (1) an Acquisition Proposal had been
publicly announced, commenced, submitted or made and not
publicly withdrawn; and (2) we either consummate an
Acquisition Transaction or enter into an acquisition agreement
with any third party within 12 months following such
termination.
|
Termination
of Battery Merger Agreement
On September 20, 2010, RAE Systems entered into the Battery
Merger Agreement, which provided a price per share to our
stockholders of $1.60. On January 18, 2011, in order to
enter into the Merger Agreement, RAE Systems terminated the
Battery Merger Agreement and paid a termination fee of
$3.39 million to Battery.
76
IMPORTANT
INFORMATION CONCERNING RAE SYSTEMS
Selected
Historical Financial Data
Set forth below is certain selected historical consolidated
financial data relating to RAE Systems and our consolidated
subsidiaries, which should be read in conjunction with, and is
qualified in its entirety by reference to, our historical
financial statements, the notes to those statements,
Part II, Item 7, Managements Discussion
and Analysis of Financial Condition and Results of
Operations, in our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, and
Part I, Item 2, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
in our Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2010. The selected
financial data set forth below as of December 31, 2009 and
2008 and for the fiscal years ended December 31, 2009, 2008
and 2007 have been derived from the audited consolidated
financial statements contained in our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, which
information is incorporated by reference in this proxy
statement. The selected financial data set forth below as of
December 31, 2007, 2006 and 2005 and for the fiscal years
ended December 31, 2006 and 2005 have been derived from our
audited consolidated financial statements which information is
not incorporated by reference in this proxy statement. The
selected financial data set forth below as of and for the nine
months ended September 30, 2010 and 2009 have been derived
from our unaudited financial statements contained in our
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2010, which information
is incorporated by reference in this proxy statement. The
unaudited financial statements have been prepared on the same
basis as our audited financial statements and include all
adjustments consisting of normal recurring adjustments that we
consider necessary for a fair presentation of the financial
information set forth in those statements. Results for interim
periods are not necessarily indicative of the results for a full
year. More comprehensive financial information is included in
our Annual Report on
Form 10-K
for the year ended December 31, 2009 and Quarterly Report
on
Form 10-Q
for the quarter ended September 30, 2010, both of which are
incorporated herein by reference, and other documents filed by
us with the SEC, and the following summary is qualified in its
entirety by reference to such reports and other documents and
all of the financial information and notes contained in those
documents. See Where You Can Find More Information,
beginning on page 89.
No separate financial information is provided for Purchaser
because Purchaser is a newly-formed entity formed in connection
with the merger and has no independent operations. No pro forma
data giving effect to the merger has been provided. We do not
believe that such information is material to stockholders in
evaluating the proposed merger and Merger Agreement because
(i) the proposed merger consideration is all-cash, and
(ii) if the merger is completed, our common stock will
cease to be publicly-traded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
60,293
|
|
|
$
|
67,721
|
|
|
$
|
90,836
|
|
|
$
|
95,383
|
|
|
$
|
83,172
|
|
|
$
|
58,929
|
|
|
$
|
67,043
|
|
Gross profit
|
|
$
|
35,603
|
|
|
$
|
35,523
|
|
|
$
|
46,408
|
|
|
$
|
48,215
|
|
|
$
|
40,979
|
|
|
$
|
29,471
|
|
|
$
|
38,556
|
|
Operating income (loss) from continuing operations
|
|
$
|
(1,588
|
)
|
|
$
|
(2,871
|
)
|
|
$
|
(4,171
|
)
|
|
$
|
(6,089
|
)
|
|
$
|
(7,323
|
)
|
|
$
|
(7,031
|
)
|
|
$
|
1,237
|
|
Income (loss) from continuing operations
|
|
$
|
(821
|
)
|
|
$
|
(1,418
|
)
|
|
$
|
(10,536
|
)
|
|
$
|
(7,383
|
)
|
|
$
|
(6,714
|
)
|
|
$
|
(6,727
|
)
|
|
$
|
132
|
|
Basic income (loss) per share from continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
|
|
Diluted income (loss) per share from continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
|
|
Basic outstanding shares
|
|
|
67,688
|
|
|
|
58,425
|
|
|
|
58,852
|
|
|
|
59,204
|
|
|
|
59,367
|
|
|
|
59,359
|
|
|
|
59,415
|
|
Diluted outstanding shares
|
|
|
67,688
|
|
|
|
58,425
|
|
|
|
58,852
|
|
|
|
59,204
|
|
|
|
59,367
|
|
|
|
59,359
|
|
|
|
59,636
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
41,366
|
|
|
$
|
36,641
|
|
|
$
|
40,850
|
|
|
$
|
37,146
|
|
|
$
|
31,676
|
|
|
$
|
31,676
|
|
|
$
|
31,895
|
|
Total assets
|
|
$
|
76,264
|
|
|
$
|
89,753
|
|
|
$
|
85,343
|
|
|
$
|
81,175
|
|
|
$
|
78,874
|
|
|
$
|
78,874
|
|
|
$
|
79,981
|
|
Long-term liabilities
|
|
$
|
2,962
|
|
|
$
|
5,441
|
|
|
$
|
10,442
|
|
|
$
|
8,358
|
|
|
$
|
7,822
|
|
|
$
|
35,319
|
|
|
$
|
35,452
|
|
Total Shareholders equity
|
|
$
|
54,573
|
|
|
$
|
56,179
|
|
|
$
|
46,356
|
|
|
$
|
43,216
|
|
|
$
|
39,029
|
|
|
$
|
43,555
|
|
|
$
|
44,529
|
|
Certain
Projections
RAE Systems does not as a matter of course make public
projections as to future sales, earnings, or other results.
However, our management has prepared the prospective financial
information set forth below to provide stockholders with
information that was presented to UBS, Battery Ventures, Vector
Capital and other prospective acquirers. The accompanying
prospective financial information was prepared in accordance
with generally accepted accounting principles. However, it was
not prepared with a view toward public disclosure or with a view
toward complying with the guidelines established by the American
Institute of Certified Public Accountants with respect to
prospective financial information, but, in the view of our
management, was prepared on a reasonable basis, reflected the
best currently available estimates and judgments at the time
this information was prepared, and presented, to the best of
managements knowledge and belief, the expected course of
action and the expected future financial performance of RAE
Systems as of the time this information was prepared. However,
this information is not fact and should not be relied upon as
being necessarily indicative of future results, and readers of
this proxy statement are cautioned not to place undue reliance
on the prospective financial information. Neither RAE
Systems independent auditors, nor any other independent
accountants, have compiled, examined, or performed any
procedures with respect to the prospective financial information
contained herein, nor have they expressed any opinion or any
other form of assurance on such information or its
achievability, and assume no responsibility for, and disclaim
any association with, the prospective financial information.
Furthermore, this projected financial information:
|
|
|
|
|
necessarily makes numerous assumptions, many of which are beyond
our control and may not prove to have been, or may no longer be,
accurate;
|
|
|
|
does not necessarily reflect revised prospects for our business,
changes in general business or economic conditions or any other
transaction or event that has occurred or that may occur;
|
|
|
|
is not necessarily indicative of current values or future
performance, which may be significantly more favorable or less
favorable than as set forth below; and
|
|
|
|
should not be regarded as a representation that the estimates
will be achieved.
|
In May and June 2010, we provided Battery Ventures and other
prospective bidders with projected financial results through
2014 that were based upon the following material assumptions:
|
|
|
|
|
we remain a public company;
|
|
|
|
we achieve organic business growth, as opposed to business
expansions involving mergers and acquisitions or alternative
business models;
|
|
|
|
we significantly reduce our general and administrative expenses
by, among other things, completion of the FCPA investigation and
consolidation of administrative functions for our Beijing and
Shanghai operations;
|
|
|
|
we sell our Beijing facility in 2011 for proceeds of
$5.7 million;
|
|
|
|
we consolidate the manufacturing operations of RAE KLH and our
joint venture in Shanghai beginning in 2010;
|
|
|
|
our pending FCPA investigation is settled for an amount equal to
the $3.5 million that we accrued in 2009;
|
78
|
|
|
|
|
credit markets in the U.S. and China remain tight through
2011 (which can adversely affect demand for our products from
certain customers); and
|
|
|
|
macroeconomic conditions experience slow and uncertain growth
through 2011, and worldwide economic growth resumes in 2012.
|
The projected financial information in the table below
represents the 2012 recovery case forecast described above under
Background of the Merger.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Projected Year Ending December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
|
(in millions, unless noted)
|
|
|
Revenue
|
|
$
|
83.2
|
|
|
|
85.7
|
|
|
|
92.1
|
|
|
|
100.8
|
|
|
|
110.3
|
|
|
|
120.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
41.0
|
|
|
|
43.7
|
|
|
|
46.1
|
|
|
|
50.4
|
|
|
|
55.0
|
|
|
|
60.1
|
|
Sales and marketing expense
|
|
|
(18.8
|
)
|
|
|
(20.8
|
)
|
|
|
(22.1
|
)
|
|
|
(23.5
|
)
|
|
|
(24.3
|
)
|
|
|
(25.6
|
)
|
Research and development expense
|
|
|
(6.4
|
)
|
|
|
(7.7
|
)
|
|
|
(7.8
|
)
|
|
|
(8.0
|
)
|
|
|
(8.1
|
)
|
|
|
(8.5
|
)
|
General and administrative expense
|
|
|
(23.1
|
)
|
|
|
(15.2
|
)
|
|
|
(15.0
|
)
|
|
|
(14.9
|
)
|
|
|
(14.9
|
)
|
|
|
(15.3
|
)
|
Total operating expenses
|
|
$
|
(48.3
|
)
|
|
|
(43.8
|
)
|
|
|
(44.9
|
)
|
|
|
(46.3
|
)
|
|
|
(47.4
|
)
|
|
|
(49.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(7.3
|
)
|
|
|
(0.1
|
)
|
|
|
1.2
|
|
|
|
4.1
|
|
|
|
7.6
|
|
|
|
10.7
|
|
Net income(loss)
|
|
$
|
(5.8
|
)
|
|
|
(0.5
|
)
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
5.3
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures(1)
|
|
|
(4.1
|
)
|
|
|
(6.0
|
)
|
|
|
(1.4
|
)
|
|
|
(1.4
|
)
|
|
|
(1.6
|
)
|
|
|
(1.9
|
)
|
Cash and cash equivalents (end of period)
|
|
$
|
20.7
|
|
|
|
15.8
|
|
|
|
21.3
|
|
|
|
24.5
|
|
|
|
26.8
|
|
|
|
34.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes capital for new building in Shanghai of
$5.1 million, $0.1 million, and $0.1 million in
2010, 2011, and 2012, respectively.
|
We also prepared, and in May and June 2010 provided Battery
Ventures and other prospective bidders with, projected financial
information based on a more optimistic assumption that a general
economic recovery will occur in 2011. Under this 2011 recovery
case forecast, we projected that our revenue would increase from
approximately $85.7 million in 2010 to approximately
$151.8 million in 2014, that our gross profit would
increase from approximately $43.7 million in 2010 to
approximately $79.7 million in 2014, that our operating
income would grow from a net loss of approximately
$0.1 million in 2010 to net income of approximately
$18.4 million in 2014, and that we would achieve a net loss
of $523,000 in 2010 and that our net income would thereafter
increase to approximately $12.6 million in 2014. In
addition, the 2011 recovery case projected that our year-end
cash would grow from $15.8 million in 2010 to
$42.7 million in 2014. The assumptions for this more
optimist financial projection are generally the same as
described above for the 2012 recovery case forecast except for
the assumption that a general economic recovery will occur in
2011 and that credit markets will remain tight through 2010. We
believed that the 2012 recovery case forecast was more likely to
be achieved than the 2011 recovery case forecast, and we
provided Battery Ventures and prospective bidders with the 2011
recovery case forecast for illustrative purposes.
In August 2010, we provided Battery Ventures and the remaining
prospective bidders with updated projected financial information
that we developed through an analysis and update to our budget
that we regularly conduct after the second quarter of each
fiscal year. These revised 2010 projections reflected the
following differences from the 2010 forecast reflected in the
2012 recovery case forecast: (1) revenue of
$85.2 million; (2) gross profit of $46.9 million;
(3) total operating expenses of $46.2 million
(primarily reflecting an increase in anticipated 2010 total
general and administrative expenses, primarily relating to
expenses incurred in connection with the merger and our
strategic process, and with our FCPA investigation);
(4) operating income of $0.7 million; and (5) net
income of $0.5 million.
On November 3, 2010, we announced our financial results for
the three and nine months ended September 30, 2010, and
disclosed that as of that date, we expected our revenues for
2010 to be between $88 million and $90 million.
79
In December 2010, our management presented to the board of
directors updated projected proforma financial information for
2010 and 2011 (December Projections), which we
provided to Battery Ventures and Vector Capital. The December
Projections differ from previously provided projections,
primarily because they exclude the results of our RAE Fushun
joint venture that is expected to be sold in the first quarter
of 2011. The December Projections, as compared to the August
2010 projected financials for 2010 and the 2012 recovery case
projections provided in May and June 2010 for 2011, exclude
projected revenue from the Fushun joint venture of
$4.1 million in 2010 and $8.7 million in 2011 and an
operating loss from the Fushun joint venture of
$3.6 million in 2010 and $0.5 million in 2011. While
the updated 2010 Projections do not include Fushun revenue, they
reflect an improvement in net income due to the exclusion of the
Fushun operating losses. In addition, the December Projections
include three quarters of actual 2010 results and an update for
the remainder of the year that reflected an improved business
outlook for the full year 2010.
The December Projections for the year ended December 31,
2010, which exclude Fushun, differ from the August 2010
projected financials for the year ended December 31, 2010,
which included Fushun, as follows: (1) revenue increased to
$85.8 million from $85.2 million, (2) gross
profit increased to $50.9 million from $46.9 million,
(3) total operating expenses decreased to
$45.0 million from $46.2 million, (4) operating
income increased to $5.9 million from $0.7 million,
and (5) net income increased to $4.7 million from
$0.5 million. In addition, the December Projections for
2011 differ from the 2011 projections included in the 2012
recovery case projections provided in May and June 2010 as
follows: (1) revenue decreased to $89.1 million from
$92.1 million, (2) gross profit increased to
$51.1 million from $46.1 million, (3) total
operating expenses decreased to $44.7 million from
$44.9 million, (4) operating income increased to
$6.4 million from $1.2 million and (5) net income
increased to $4.8 million from $2.7 million.
This projected financial information provided in the proxy
statement is not a guarantee of performance. This projected
financial information, and the underlying assumptions and
estimates are inherently uncertain, and are subject to a wide
variety of business, economic, and competitive risks and
uncertainties that we can not control or predict could cause
actual results to differ materially from those contained in the
prospective financial information, including, among others,
risks and uncertainties, including risks described in the
documents incorporated by reference in this proxy statement as
set forth under Other Matters Where You Can
Find More Information. Accordingly, our future financial
results may materially differ from the projected financial
information. We cannot assure you that the estimates in the
projected financial information will be realized. Furthermore,
we do not intend to update or revise the projected financial
information to reflect changes in general economic or industry
conditions or in our business, or otherwise.
The projected financial information contains forward-looking
statements. For information on factors that may cause RAE
Systems future financial results to vary materially, see
Caution Regarding Forward-Looking Statements on
page 61.
80
Ratio of
Earnings to Fixed Charges
The following presents our ratio of earnings to fixed charges
for the fiscal years ended December 31, 2005, 2006, 2007,
2008 and 2009, and for the nine months ended September 30,
2009 and 2010, which should be read in conjunction with our
consolidated financial statements, including the notes thereto,
included in our Annual Report on
Form 10-K
for the fiscal years ended December 31, 2009 and Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2010, see Where
You Can Find More Information on page 89.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 Months
|
|
|
9 Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
9/30/2009
|
|
|
9/30/2010
|
|
|
FIXED CHARGES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
180
|
|
|
$
|
249
|
|
|
$
|
705
|
|
|
$
|
397
|
|
|
$
|
402
|
|
|
$
|
314
|
|
|
$
|
149
|
|
Capitalized interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155
|
|
Deemed interest on operating leases
|
|
|
183
|
|
|
|
148
|
|
|
|
290
|
|
|
|
688
|
|
|
|
637
|
|
|
|
478
|
|
|
|
410
|
|
Total fixed Charges
|
|
$
|
363
|
|
|
$
|
397
|
|
|
$
|
995
|
|
|
$
|
1,085
|
|
|
$
|
1,039
|
|
|
$
|
792
|
|
|
$
|
714
|
|
EARNINGS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(1,102
|
)
|
|
$
|
(2,106
|
)
|
|
$
|
(4,656
|
)
|
|
$
|
(6,888
|
)
|
|
$
|
(7,489
|
)
|
|
$
|
(7,175
|
)
|
|
$
|
1,044
|
|
Fixed charges
|
|
|
363
|
|
|
|
397
|
|
|
|
995
|
|
|
|
1,085
|
|
|
|
1,039
|
|
|
|
792
|
|
|
|
714
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(155
|
)
|
Net loss (income) attributable to the noncontrolling interest
|
|
|
62
|
|
|
|
49
|
|
|
|
(6
|
)
|
|
|
220
|
|
|
|
955
|
|
|
|
773
|
|
|
|
622
|
|
Total earnings
|
|
$
|
(677
|
)
|
|
$
|
(1,660
|
)
|
|
$
|
(3,667
|
)
|
|
$
|
(5,583
|
)
|
|
$
|
(5,495
|
)
|
|
$
|
(5,610
|
)
|
|
$
|
2,225
|
|
Ratio of Earnings to Fixed Charges
|
|
|
(1.9
|
)
|
|
|
(4.2
|
)
|
|
|
(3.7
|
)
|
|
|
(5.1
|
)
|
|
|
(5.3
|
)
|
|
|
(7.1
|
)
|
|
|
3.1
|
|
Deficiency
|
|
$
|
1,040
|
|
|
$
|
2,057
|
|
|
$
|
4,662
|
|
|
$
|
6,668
|
|
|
$
|
6,534
|
|
|
$
|
6,402
|
|
|
$
|
|
|
Book
Value Per Share
Our net book value per share as of September 30, 2010 was
$0.68.
Market
Price and Dividend Data
Our common stock traded on the American Stock Exchange
(AMEX) under the trading symbol RAE
beginning on August 29, 2003. Effective October 1,
2008, the AMEX was acquired by NYSE Euronext, the holding
company created by the combination of NYSE Group, Inc. and
Euronext N.V. in April 2007. Since October 1, 2008, our
common stock has traded on the NYSE Alternext US
(NYSE-Alt). The following table sets forth, for the
periods indicated, the high and low sales prices for our common
stock as derived from publicly reported AMEX and NYSE-Alt daily
trading data. The quotations do not reflect adjustments for
retail
mark-ups,
mark-downs, or commissions and may not necessarily represent
actual transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
3.93
|
|
|
$
|
3.26
|
|
|
$
|
3.75
|
|
|
$
|
2.52
|
|
|
$
|
2.81
|
|
|
$
|
1.07
|
|
|
$
|
1.00
|
|
|
$
|
.028
|
|
|
$
|
1.17
|
|
|
$
|
0.77
|
|
Second Quarter
|
|
$
|
4.54
|
|
|
$
|
3.27
|
|
|
$
|
2.95
|
|
|
$
|
2.23
|
|
|
$
|
1.92
|
|
|
$
|
1.30
|
|
|
$
|
1.70
|
|
|
$
|
0.42
|
|
|
$
|
0.89
|
|
|
$
|
0.67
|
|
Third Quarter
|
|
$
|
4.14
|
|
|
$
|
2.40
|
|
|
$
|
3.35
|
|
|
$
|
1.90
|
|
|
$
|
2.18
|
|
|
$
|
1.03
|
|
|
$
|
2.23
|
|
|
$
|
1.00
|
|
|
$
|
1.59
|
|
|
$
|
0.65
|
|
Fourth Quarter
|
|
$
|
4.05
|
|
|
$
|
2.81
|
|
|
$
|
3.68
|
|
|
$
|
2.40
|
|
|
$
|
1.72
|
|
|
$
|
0.38
|
|
|
$
|
1.48
|
|
|
$
|
0.65
|
|
|
|
1.61
|
|
|
|
1.58
|
|
81
The high and low sales prices per share for RAE Systems common
stock as reported by the NYSE Alternext US on March 8,
2011, the latest practicable trading day before the filing of
this proxy statement were $1.78 and $1.77, respectively.
As of March 9, 2011, there were approximately 270
stockholders of record who held shares of our common stock.
We have never declared or paid dividends on our common stock. We
do not have any plans to pay dividends in the foreseeable future
so that we may reinvest our earnings in the development of our
business. The payment of dividends in the future will be at the
discretion of the board of directors.
Following the merger, our common stock will not be traded on any
public market.
Directors
and Executive Officers of RAE Systems
The following information sets forth, as of February 28,
2011, the names, ages, titles of our directors and executive
officers, their present principal occupation and their business
experience during the past five years. During the last five
years, neither we nor our current executive officers or
directors have been (i) convicted in a criminal proceeding
(excluding traffic violations and similar misdemeanors) or
(ii) a party to any judicial or administrative proceeding
(except for matters that were dismissed without sanction or
settlement) that resulted in a judgment, decree or final order
enjoining such person from future violations of, or prohibiting
activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws.
The business number for all of the directors is
(408) 952-8200.
As of February 28, 2011, the directors and executive
officers of RAE Systems held and were entitled to vote, in the
aggregate, shares of our common stock representing approximately
34.1% of the outstanding shares. We believe our directors and
executive officers intend to vote all of their shares of our
common stock FOR the approval and adoption of the Merger
Agreement and FOR the adjournment proposal, and the Voting
Parties have entered into voting agreements in which each Voting
Party agreed to, among other things, vote in favor of the
adoption of the Merger Agreement and against any competing
proposals. All of our directors and officers are
U.S. citizens except Sigrun Hjelmqvist (Sweden) and
Christopher Hameister (Australia).
|
|
|
|
|
|
|
Name of Director
|
|
|
|
|
and/or Executive
|
|
|
|
|
Officer
|
|
Position
|
|
Age
|
|
Robert I. Chen
|
|
President, Chief Executive Officer and
Chairman of the Board
|
|
|
63
|
|
Randall K. Gausman
|
|
Vice President and Chief Financial Officer
|
|
|
61
|
|
Peter C. Hsi
|
|
Chief Technology Officer and director
|
|
|
61
|
|
Ming-Ching Tang
|
|
Executive Vice President Operations
|
|
|
60
|
|
Christopher Hameister
|
|
Vice President Asia-Pacific, Europe and
Middle East Business Operations
|
|
|
56
|
|
Fei-Zhou Shen
|
|
Vice President Corporate Development and
Fushun Business Operations
|
|
|
48
|
|
Ryan Watson
|
|
Vice President Americas Sales
|
|
|
38
|
|
Dr. Keh-Shew Lu
|
|
Director
|
|
|
64
|
|
Susan Wang
|
|
Director
|
|
|
60
|
|
Dr. Lyle D. Feisel
|
|
Director
|
|
|
75
|
|
Sigrun Hjelmqvist
|
|
Director
|
|
|
54
|
|
James W. Power
|
|
Director
|
|
|
81
|
|
Robert I. Chen
co-founded RAE Systems in 1991 and has
served as President, Chief Executive Officer and a director
since our inception. From 1981 to 1990, Mr. Chen served as
President and Chief Executive Officer of Applied Optoelectronic
Technology Corporation, a manufacturer of computer-aided test
systems, a company he founded and subsequently sold to
Hewlett-Packard. Mr. Chen currently serves on the board of
directors of Shanghai Ericsson Simtek Electronics Company,
Limited, a telecommunications and electronics company.
Mr. Chen received a BS in electrical engineering from
Taiwan National Cheng Kung University, an MS in electrical
engineering from
82
South Dakota School of Mines and Technology, an advanced
engineering degree from Syracuse University and graduated from
the Harvard Owner/President program.
Randall K. Gausman
joined RAE Systems in October 2006 as
Chief Financial Officer. From May 2006 until joining the
Company, Mr. Gausman worked as an independent financial
consultant. From April 2002 to May 2006, Mr. Gausman served
as Chief Financial Officer of Tut Systems, Inc., which delivered
industry leading content processing and distribution products
for deploying next-generation video and IP services over
broadband networks. Previously he served as co-founder and Chief
Financial Officer of Zantaz, Inc. and a senior finance executive
at American President Companies. Mr. Gausman holds both a
BS and MBA from the University of Southern California, as well
as a certificate in corporate finance from the University of
Michigan School of Business Administration.
Dr. Peter C. Hsi
co-founded RAE Systems in 1991 and
has served as Chief Technology Officer and a director since our
inception. Prior to co-founding RAE Systems, Dr. Hsi was
the chief architect for semiconductor test systems at Applied
Optoelectronic Technology Corporation. He was also the general
manager for Shanghai Simax Technology Co. Ltd. Dr. Hsi has
filed 21 patent applications, of which 16 have been granted and
5 are pending. Dr. Hsi received a BS in electrical
engineering from the National Chiao-Tung University, and a MS
and PhD in electrical engineering from Syracuse University.
Dr. Ming-Ching Tang
joined RAE Systems in June 2007
as Vice President Manufacturing and was promoted to Executive
Vice President Operations in August 2009. Prior to joining the
Company, Dr. Tang was Senior Vice President of TDK China
from 2004 to 2007, and was President of Trace Storage
Technology, a thin film magnetic recording media company in
Taiwan from 2001 to 2004. Prior to 2001, Dr. Tang held
senior executive positions in hard drive technology development
with Western Digital, Seagate Technology and IBM. Dr. Tang
received a BS in mechanical engineering from National Taiwan
University, an MS in mechanical engineering from Massachusetts
Institute of Technology and a PhD in mechanical engineering from
University of California, Berkeley.
Christopher Hameister
has served as Vice President of
Asia-Pacific, Europe, and Middle East Business Operations since
January 2007. Previously, Mr. Hameister served as Vice
President of Worldwide Sales with RAE Systems from July 2006 to
January 2007. In the last 25 years,
Mr. Hameisters experiences have all been with
instrumentation companies, including seven years, prior to
rejoining the Company in July 2005, as Director of Marketing and
Sales with RAE Systems and six years with Thermo Instruments as
Business Operation Manager. Mr. Hameister holds a BS from
the University of Adelaide, South Australia and a certificate in
marketing from University of New South Wales.
Fei-Zhou Shen
joined RAE Systems in May 2001 and has
served in various key roles including Vice President of
Worldwide Manufacturing. Mr. Shen is currently Vice
President Corporate Development and Fushun Business Operations.
Mr. Shen has over 20 years of business experience
serving in key business and strategic management roles.
Mr. Shen has a BS in mechanical engineering from Shanghai
Jiao-Tong University and a MS in mechanical engineering from the
University of Idaho.
Ryan Watson
joined RAE Systems in May 1999 as the
Midwestern Regional Sales Manager. He has also served as Sales
Director for the Eastern US and Canada and Central US Regional
Sales Manager. He was promoted to Vice President of Americas
Sales in March 2008. Mr. Watson has over 14 years of
field experience selling into multiple market segments including
industrial, first responder, government/military, oil-gas and
petrochemical as well as environmental applications.
Mr. Watson has a BS in human environmental sciences from
the University of Missouri.
Dr. Keh-Shew Lu
has served as a member of our board
of directors since 2009. Dr. Lu has also served as
President and Chief Executive Officer of Diodes Incorporated
since June 2005 after serving on its Board of Directors since
2001. Dr. Lu is also a Board member of Lite-On Technology
Corporation, a publicly held company in Taiwan, as well as
LedEngin, Inc., Lorentz Solution, Inc. and Nuvoton Technology
Corporation, three privately held companies. Dr. Lu is the
founding Chairman of the Asia American Citizens Council,
the Vice Chairman of the governing Board of the Plano Chinese
Alliance Church, a Board member of the Texas Tech foundation,
and a Board member of the Advisory Board to the Southern
Methodist Universitys Asian Studies Program. From 2001 to
2005, Dr. Lu was a partner of the WK Technology Venture
Fund. From 1998 to 2001, Dr. Lu served as Senior Vice
83
President of Texas Instruments and General Manager of Worldwide
Mixed-Signal and Logic Products. His responsibilities included
all aspects of the analog, mixed-signal and logic products for
Texas Instruments worldwide business, including design, process
and product development, manufacturing and marketing. From 1996
to 1998, Dr. Lu was the manager of TIs worldwide
memory business. In addition, he served as the President of
Texas Instruments Asia from 1994 to 1997 where he supervised all
of Texas Instruments activities in Asia, excluding Japan.
Dr. Lu holds a Bachelors degree in engineering from
the National Cheng Kung University in Taiwan, and a MS and a PhD
in electrical engineering from Texas Tech University.
Susan Wang
has served as a member of our board of
directors since March 2009. Ms. Wang retired from Solectron
Corporation in 2002 from her position as Executive Vice
President, Corporate Development and Chief Financial Officer.
From 2003 to 2008, she also served as Chairperson of the Audit
Committee and a member of the Executive Committee of Calpine
Corporation. From 2002 to 2009 she also served as Chairperson of
the Audit Committee and a member of the Compensation Committee
of Avanex Corp. She is currently a director and Chairperson of
the Audit Committee of Altera Corporation, and a director and
Chairperson of the Audit Committee and a member of the
Nominating and Governance Committee of Nektar Therapeutics. She
also serves as a member of the Audit Committee of Suntech Power.
Ms. Wang is a CPA and holds a BA in Accounting from the
University of Texas and an MBA in Finance from the University of
Connecticut
Dr. Lyle D. Feisel
has served as a member of our
board of directors since March 2001 and is currently Interim
Executive Director of the American Society for Engineering
Education. In 2001, he retired as the Dean of the Thomas J.
Watson School of Engineering and Applied Science and Professor
of Electrical Engineering at the State University of New York
(SUNY) at Binghamton, where he was responsible,
inter
alia
, for personnel, curriculum, and finance.
Dr. Feisel joined the faculty of SUNY Binghamton in 1983.
Dr. Feisel is a Life Fellow of the Institute of Electrical
and Electronics Engineers and of the American Society for
Engineering Education, and is a fellow of the National Society
of Professional Engineers. He is active in the affairs of those
organizations and in the development and accreditation of
engineering education worldwide. Dr. Feisel received his
BS, MS, and PhD degrees in Electrical Engineering from Iowa
State University.
Sigrun Hjelmqvist
has served as a member of our board of
directors since March 2004 and is currently chairperson of the
board of directors for C2SAT AB as well as chairperson of two of
Almi Invests regional VC funds in Sweden. From 2000 to
2005, Ms. Hjelmqvist was investment manager and one of the
founding partners of BrainHeart Capital, a venture capital
company focusing on wireless communication. From 1998 to 2000,
Ms. Hjelmqvist was President of Ericsson Components AB, and
from 1994 to 1997, General Manager of the Microelectronics
Business Unit at Ericsson Components AB. Ms. Hjelmqvist
currently serves on the board of directors of Silex Microsystems
AB, Atea ASA, Addnode AB, Fingerprint Cards AB, OneMedia AB,
Setra Group AB and Bluetest AB. During the past five years,
Ms. Hjelmqvist also served on the boards of E&T
Förlag, AU Systems AB, Sandvik AB, Svenska Handelsbanken
AB, E.ON Sverige AB, Seamless Distribution AB, AudioDev AB, IBS
AB, Micronic Laser Systems AB, Sight Executive AB, and Symsoft
AB. Ms. Hjelmqvist received an MS in Engineering Physics
and a Licentiate of Engineering in Applied Physics from the
Royal Institute of Technology in Stockholm, Sweden.
James W. Power
has served as a member of our board of
directors since May 2006, and is currently the principal partner
in J.W. Power & Associates, a security systems
development and marketing consultant group, which he founded in
1992. From 2004 to 2009, Mr. Power served as chairman of
the board of directors of MDI, Inc., a security controls systems
company. Since December 2005, Mr. Power has also been a
member of the board of directors of Henry Bros. Electronics,
Inc., a security systems sales and integration company. From
1994 to 2003, Mr. Power served as the chairman of the board
of directors for InfoGraphic Systems Corp., a security systems
development, manufacturer and sales company.
Directors
and Executive Officers of the Purchaser Group
The following persons are the members of the purchaser group
(collectively, the Purchaser Group):
(i) Purchaser, (ii) Merger Sub, (iii) Vector
Capital III, L.P., a Delaware limited partnership (VC III
LP), (iv) Vector Entrepreneur Fund III, L.P., a
Delaware limited partnership (VEF III LP),
(v) Vector Capital IV, L.P., a Delaware limited partnership
(VC IV LP), (vi) Vector Capital Partners III,
L.L.C., a Delaware limited liability
84
company (VCP III LLC), (vii) Vector Capital
Partners IV, L.L.C., a Delaware limited liability company
(VCP IV LLC) and Alex Slusky. VCP III LLC is the
sole General Partner of each of VC III LP and VEF III LP. VCP IV
LLC is the sole General Partner of VC IV LP. VC III LP and VC IV
LP own 100% of Purchaser, and Purchaser is the sole shareholder
of Merger Sub. The business address for each entity is
c/o Vector
Capital, One Market Street, Steuart Tower, 23rd Floor,
San Francisco, CA 94105, and the business telephone number
of each entity
(415) 293-5000.
During the past five years, none of the members of the Purchaser
Group or their executive officers, directors, or managing
members listed below have been (i) convicted in a criminal
proceeding (excluding traffic violations and similar
misdemeanors) or (ii) a party to any judicial or
administrative proceeding (except for matters that were
dismissed without sanction or settlement) that resulted in a
judgment, decree, or final order enjoining such person from
future violations of, or prohibiting activities subject to,
federal or state securities laws, or a finding of any violation
of federal or state securities laws.
The name and principal occupation of each director and executive
officer of Ray and Merger Sub, and the managing member of VCP
III LLC and VCP IV LLC, are as follows:
Alex Slusky,
age 43, is a director of each of
Purchaser and Merger Sub, and Managing Member of VCP III LLC and
VCP IV LLC. Mr. Slusky is the founder and Managing Partner
of Vector Capital. Prior to Vector, Mr. Slusky led the
technology equity practice at Ziff Brothers Investments. Prior
to Ziff Brothers, Mr. Slusky held positions at New
Enterprise Associates, McKinsey & Company, and
Microsoft Corporation.
David Fishman,
age 40, is a director of each of
Purchaser and Merger Sub. Mr. Fishman is a Partner of
Vector Capital. Prior to Vector, Mr. Fishman was a Managing
Director at Goldman, Sachs & Co. where he focused on
Mergers & Acquisitions. Previously, Mr. Fishman
worked at JP Morgan.
Andrew Fishman,
age 30, is a director of each of
Purchaser and Merger Sub. Mr. Fishman is a Vice President
of Vector Capital. Prior to Vector, Mr. Fishman held
positions at Silver Lake Partners, Goldman, Sachs &
Co, Vlingo, Sun Microsystems, and the MIT Artificial
Intelligence Lab.
David Baylor,
age 51, is President of each of
Purchaser and Merger Sub. Mr. Baylor is the Chief Operating
Officer of Vector Capital. Prior to Vector, Mr. Baylor was
the COO and CFO of Thomas Weisel Partners Group, Inc. Prior to
Thomas Weisel Partners, Mr. Baylor held positions at
Montgomery Securities, and Howard, Rice, Nemerovski, Canady,
Falk and Rabkin, and Deloitte & Touche.
Roy Kelvin,
age 48, is Secretary of each of
Purchaser and Merger Sub. Mr. Kelvin is the Chief Financial
Officer of Vector Capital. Previously, Mr. Kelvin was the
CFO of Zephyr Management, LP. Prior to Zephyr, Mr. Kelvin
held positions at Wasserstein Perella Group, Ryka Inc., and
Arthur Andersen & Co.
Each of the individuals listed above is a U.S. citizen, his
business address is
c/o Vector
Capital, One Market Street, Steuart Tower, 23rd Floor,
San Francisco, CA 94105, and his business number is
(415) 293-5000.
Directors
and Executive Officers of Voting Parties
The Voting Parties consist of Robert I. Chen, the President,
Chief Executive Officer and Chairman of RAE Systems, and Peter
C. Hsi, the Chief Technology Officer and a director of RAE
Systems, and the shares that are subject to the Voting
Agreements include shares held by them personally, as well as
shares held by the Chen Revocable Trust DTD
5/8/2001,
the Chen Family Foundation and the Hsi Family Trust.
Robert I. and Lien Q. Chen serve as the trustees of the Chen
Revocable Trust DTD
5/8/2001
(the Chen Trust). The Chen Trust is organized under
the laws of the State of California for the purpose of holding
assets of Robert and Lien. Chen in trust. The business address
of the Chen Revocable Trust DTD
5/8/2001
is
c/o Robert
I. Chen, RAE Systems Inc., 3775 North First Street,
San Jose, California 95134. The telephone number for the
Chen Trust is
(408) 952-8200.
Lien Q. Chen is Mr. Chens spouse and the IT director
of RAE Systems, which position she has held for over five years.
Ms. Chens business address is RAE Systems Inc., 3775
North First Street, San Jose, California 95134, and the
telephone number for Ms. Chen is
(408) 952-8200.
Robert I. and Lien Q. Chen serve as directors of the Chen Family
Foundation. The Chen Family Foundation is a corporation
organized under the laws of the State of California to hold
certain assets of Robert and Lien Chen for
85
estate planning purposes. The business address of Chen Family
Foundation is
c/o Robert
I. Chen, RAE Systems Inc., 3775 North First Street,
San Jose, California 95134. The telephone number for the
Chen Family Foundation is
(408) 952-8200.
Peter and Sandy Hsi serve as the trustees of the Hsi Family
Trust. The Hsi Family Trust is organized under the laws of the
State of California for the purpose of holding assets of Peter
C. Hsi and Sandy Hsi in trust. The business address of the Hsi
Family Trust is
c/o Peter
C. Hsi, RAE Systems Inc., 3775 North First Street,
San Jose, California 95134. The telephone number for the
Hsi Family Trust is
(408) 952-8200.
Sandy Hsi is Dr. Hsis spouse. Ms. Hsis
principal business occupation is director of Seed2Sprout
Learning Center located at 7485 Village Parkway, Dublin,
California, which position she has held for over five years.
Ms. Hsis business number is
(925) 828-2468.
Each of Mr. Chen, Dr. Hsi, Ms. Chen and
Ms. Hsi is a U.S. citizen and during the last five
years none of them, and none of the Chen Trust, the Hsi Family
Trust or the Chen Foundation, has been (i) convicted in a
criminal proceeding (excluding traffic violations and similar
misdemeanors) or (ii) a party to any judicial or
administrative proceeding (except for matters that were
dismissed without sanction or settlement) that resulted in a
judgment, decree, or final order enjoining such person from
future violations of, or prohibiting activities subject to,
federal or state securities laws, or a finding of any violation
of federal or state securities laws.
Security
Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 28, 2011,
certain information with respect to the beneficial ownership of
our common stock by (i) each stockholder known by us to be
the beneficial owner of more than 5% of our common stock
(ii) each of our directors, (iii) each executive
officer listed in Important Information concerning RAE
Systems Directors and Officers of RAE Systems
above, and (iv) all of our directors and executive officers
as a group.
Except where otherwise indicated, the address for each of the
persons listed the following table is
c/o RAE
Systems Inc., 3775 North First Street, San Jose, CA 95134.
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|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Beneficial Owner
|
|
Beneficially Owned(1)
|
|
Percent
|
|
5% Holders:
|
|
|
|
|
|
|
|
|
Kopp Investment Advisors, LLC(2)
|
|
|
7,094,277
|
|
|
|
11.9
|
%
|
Vector Capital(3)
|
|
|
21,451,772
|
|
|
|
36.0
|
%
|
Executive Officers
|
|
|
|
|
|
|
|
|
Robert I. Chen(4)
|
|
|
15,809,942
|
|
|
|
25.5
|
%
|
Randall K. Gausman(5)
|
|
|
486,250
|
|
|
|
*
|
|
Peter C. Hsi(6)
|
|
|
2,751,748
|
|
|
|
4.4
|
%
|
Ming-Ching Tang(7)
|
|
|
224,999
|
|
|
|
*
|
|
Christopher Hameister(8)
|
|
|
260,416
|
|
|
|
*
|
|
Fei-Zhou Shen(9)
|
|
|
372,851
|
|
|
|
*
|
|
Ryan Watson(10)
|
|
|
122,016
|
|
|
|
*
|
|
Directors
|
|
|
|
|
|
|
|
|
Dr. Keh-Shew Lu(11)
|
|
|
371,916
|
|
|
|
*
|
|
Susan Wang(12)
|
|
|
71,875
|
|
|
|
*
|
|
Dr. Lyle D. Feisel(13)
|
|
|
319,448
|
|
|
|
*
|
|
Sigrun Hjelmqvist(14)
|
|
|
192,916
|
|
|
|
*
|
|
James W. Power(15)
|
|
|
175,208
|
|
|
|
*
|
|
Directors and executive officers as a group (12 persons)(16)
|
|
|
21,105,585
|
|
|
|
34.1
|
%
|
|
|
|
(1)
|
|
Calculated on the basis of 59,512,064 shares of common
stock outstanding as of February 28, 2011, provided that
any additional shares of common stock that a stockholder has the
right to acquire within 60 days after
|
86
|
|
|
|
|
February 28, 2011, are deemed to be outstanding for the
purpose of calculating that stockholders percentage
beneficial ownership. All shares of our common stock subject to
currently exercisable options or options exercisable within
60 days after February 28, 2011, are deemed to be
outstanding and to be beneficially owned by the person holding
such options for the purpose of computing the number of shares
beneficially owned and the percentage of ownership of such
person, but are not deemed to be outstanding and to be
beneficially owned for the purpose of computing the percentage
of ownership of any other person. Except as indicated in the
footnotes to the table and subject to applicable community
property laws, based on information provided by the persons
named in the table, such persons have sole voting and investment
power with respect to all shares of our common stock as
beneficially owned by them.
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|
|
(2)
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|
Based solely upon a Schedule 13D filed with the SEC by Kopp
Investment Advisors, LLC on February 18, 2011. Consists of
shares owned by clients and held in discretionary accounts
managed by Kopp Investment Advisors, LLC (KIA). Kopp
Holding Company, LLC (KHCLLC) is the parent entity
of KIA and indirect beneficial owner of the shares beneficially
owned by KIA and LeRoy C. Kopp, by virtue of his position as the
control person of KHCLLC, may be deemed indirect beneficial
owner of the shares. The business address of each of the KIA,
KHCLLC and LeRoy C. Kopp is 8400 Normandale Lake Boulevard,
Suite 1450, Bloomington, Minnesota 55437.
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(3)
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Based solely on a Schedule 13D filed with the SEC by Ray
Holding Corporation, Ray Merger Sub Corporation, Vector Capital
III, L.P., Vector Entrepreneur Fund III, L.P., Vector
Capital IV, L.P., Vector Capital Partners III, L.P., Vector
Capital Partners IV, L.P., Vector Capital, L.L.C., and Alex
Slusky on January 28, 2011. Consists of 1,432,600 shares of
common stock held by Vector Capital III, L.P., 34,800 shares of
common stock held by Vector Entrepreneur Fund III, L.P. and
1,432,600 shares of common stock held by Vector Capital IV,
L.P., and shares of common stock beneficially owned by the
Voting Parties, and reported as beneficially owned by Ray
Holding Corporation and Ray Merger Sub Corporation, affiliates
of Vector Capital, because of the rights of Ray Holding
Corporation and Ray Merger Sub Corporation under the Voting
Agreements. The principal address of each of Ray Holding
Corporation, Ray Merger Sub Corporation and Vector Capital is
One Market Street, Steuart Tower, 23rd Floor, San Francisco, CA
94105.
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(4)
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|
Represents 15,382,849 shares of common stock held by Chen
Revocable Trust DTD 5/8/2001, Robert I. Chen and Lien Q. Chen,
as trustees; 181,260 shares of common stock held by the
Chen Family Foundation; and 245,833 shares subject to
options that may be exercised within 60 days after
February 28, 2011.
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|
|
|
(5)
|
|
Represents 5,000 shares owned by Mr. Gausman and
481,250 shares subject to options that may be exercised
within 60 days after February 28, 2011.
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|
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|
(6)
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|
Represents 2,691,332 shares owned by the Hsi Family Trust,
Peter C. Hsi and Sandy Hsi, as trustees and 60,416 shares
subject to options that may be exercised within 60 days
after February 28, 2011.
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(7)
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|
Represents 224,999 shares subject to options that may be
exercised within 60 days after February 28, 2011.
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|
(8)
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|
Represents 260,416 shares subject to options that may be
exercised within 60 days after February 28, 2011.
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|
(9)
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|
Represents 23,717 shares owned by Mr. Shen and
349,134 shares subject to options that may be exercised
within 60 days after February 28, 2011.
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(10)
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|
Represents 4,517 shares owned by Mr. Watson and
117,499 shares subject to options that may be exercised
within 60 days after February 28, 2011.
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|
|
|
(11)
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|
Represents 270,000 shares owned by Dr. Lu and
47,916 shares subject to options that may be exercised
within 60 days after February 28, 2011.
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|
(12)
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|
Represents 71,875 shares subject to options that may be
exercised within 60 days after February 28, 2011.
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|
(13)
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|
Represents 71,948 shares owned by Dr. Feisel and
247,500 shares subject to options that may be exercised
within 60 days after February 28, 2011.
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|
(14)
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|
Represents 20,000 shares owned by Ms. Hjelmqvist and
172,916 shares subject to options that may be exercised
within 60 days after February 28, 2011.
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(15)
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|
Represents 40,000 shares owned by Mr. Power and
135,208 shares subject to options that may be exercised
within 60 days after February 28, 2011.
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(16)
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Includes 2,414,962 shares subject to options that may be
exercised within 60 days after February 28, 2011.
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87
In addition, as described above under Special
Factors Interests of Our Directors and Executive
Officers in the Merger, immediately prior to the effective
time of the merger, stock options held by our executive officers
and directors, like all other stock options held by our other
employees, will immediately vest and become exercisable. All
stock options will be automatically converted into an amount in
cash equal to, for each share of common stock of RAE Systems
underlying such option, the excess (if any) of $1.75 over the
exercise price per share of such option.
Prior
Public Offerings
During the last three years, none of RAE Systems, the Rollover
Holders or the Purchaser Group have not made any underwritten
public offering of securities for cash that was registered under
the Securities Act of 1933 or exempt from registration under
Regulation A.
Transactions
in Shares
Securities
Transactions Within 2 Years
None of RAE Systems, the Rollover Holders or the Purchaser Group
has purchased any shares of RAE Systems common stock within the
last two years except for 2,900,000 shares of our common
stock acquired in open market transactions on September 21 and
22, 2010 by affiliates of Vector Capital.
Securities
Transactions Within 60 Days
Other than the execution of the Voting Agreement by the Voting
Parties and Purchaser, none of our company, the Purchaser Group,
the Rollover Holders, any executive officer or director of ours,
the Purchaser Group or the Rollover Holders, any pension,
profit-sharing or similar plan of ours or any associate or
majority owned subsidiary of our company has effected any
transactions with respect to our common stock during the past
60 days.
OTHER
MATTERS
No business may be transacted at the Special Meeting other than
the matters set forth in this proxy statement.
Adjournments
The Special Meeting may be adjourned without notice, other than
by the announcement made at the Special Meeting, by approval of
the holders of a majority of the shares of our common stock
present, in person or by proxy, and entitled to vote at the
Special Meeting. We are soliciting proxies to grant the
authority to vote in favor of adjournment of the Special
Meeting. In particular, authority is expected to be exercised if
the purpose of the adjournment is to provide additional time to
solicit votes in favor of adoption of the Merger Agreement. The
Special Committee and our board of directors recommend that you
vote in favor of the proposal to grant the authority to vote
your shares to adjourn the meeting.
Stockholder
Proposals
We will hold an Annual Meeting of Stockholders in 2011, or the
2011 Annual Meeting, only if the merger is not completed.
Proposals of stockholders that are intended to be presented at
the 2011 Annual Meeting were due at our executive offices in
San Jose, California no later than December 31, 2010
to be included in the proxy statement and proxy card related to
such meeting. No stockholder proposals were received.
Pursuant to our bylaws, stockholders who wish to bring matters
to be transacted or propose nominees for director at our 2011
annual meeting of stockholders, if any, must provide certain
information to us before December 31, 2010. Stockholders
are also advised to review our bylaws, which contain additional
requirements with respect to advance notice of stockholder
proposals and director nominations.
88
Where You
Can Find More Information
We file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any
reports, statements or other information that we file with the
SEC at the SEC public reference room at the following location:
Public Reference Room, 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Please call the SEC
at
1-800-SEC-0330
for further information on the public reference room. These SEC
filings are also available to the public from commercial
document retrieval services and at the website maintained by the
SEC at www.sec.gov.
Purchaser has supplied all information contained in this proxy
statement relating to Purchaser and Merger Sub and we have
supplied all information relating to RAE Systems.
In some cases, the SEC allows RAE Systems to incorporate
by reference information that it files with the SEC in
other documents into this proxy statement. This means that RAE
Systems can disclose important information to you, where
permitted, by referring you to another document filed separately
with the SEC. The information incorporated by reference is
considered to be part of this proxy statement. RAE Systems
incorporates by reference into this proxy statement the
following documents or information that it filed with the SEC
under the Exchange Act:
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Annual Report on
Form 10-K,
for the year ended December 31, 2009.
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Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010.
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Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2010.
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Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2010.
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Current Report on
Form 8-K
filed with the SEC on June 14, 2010.
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Current Report on
Form 8-K
filed with the SEC on August 12, 2010.
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Current Report on
Form 8-K
filed with the SEC on September 20, 2010.
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Current Report on
Form 8-K
filed with the SEC on November 3, 2010.
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Current Report on
Form 8-K
filed with the SEC on January 6, 2011.
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Current Report on
Form 8-K
filed with the SEC on January 19, 2011.
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RAE Systems undertakes to provide without charge to each person
to whom a copy of this proxy statement has been delivered, upon
request, by first class mail or other equally prompt means,
within one business day of receipt of such request, a copy of
any or all of the documents incorporated by reference into this
proxy statement, other than the exhibits to these documents,
unless the exhibits are specifically incorporated by reference
into the information that this proxy statement incorporates. You
may obtain copies of documents incorporated by reference by
requesting them in writing from MacKenzie Partners, Inc., our
proxy solicitation agency toll-free at
(800) 322-2885
or call collect at
(212) 929-5500,
by email at proxy@mackenziepartners.com, by mail at 105 Madison
Avenue, New York, New York 10016, or from the SEC as described
above.
89
Because the merger is a going-private transaction,
RAE Systems, Ray Holding Corporation, Ray Merger Sub
Corporation, Vector Capital, and the Rollover Holders have filed
with the SEC a
Rule 13e-3
Transaction Statement or
Schedule 13E-3
under the Exchange Act with respect to the merger. This proxy
statement does not contain all of the information set forth in
the
Schedule 13E-3
and the exhibits thereto. Copies of the
Schedule 13E-3
and the exhibits thereto (including the financial analysis
materials prepared by UBS in connection with its presentation to
the Special Committee) are available for inspection and copying
at RAE Systems principal executive offices during regular
business hours by any of our stockholders, or a representative
who has been so designated in writing, and may be inspected and
copied, or obtained by mail, by making a request in writing from
MacKenzie Partners, Inc., our proxy solicitation agency
toll-free at
(800) 322-2885
or call collect at
(212) 929-5500,
by email at proxy@mackenziepartners.com, by mail at 105 Madison
Avenue, New York, New York 10016, or from the SEC as described
above.
* * *
You should rely only on the information contained in this proxy
statement. We have not authorized anyone to provide you with
information that is different from what is contained in this
proxy statement. This proxy statement is dated March 9,
2011. You should not assume that the information contained in
this proxy statement is accurate as of any date other than that
date. Neither the mailing of this proxy statement to
stockholders nor the issuance of cash in the merger creates any
implication to the contrary.
90
ANNEX A
AGREEMENT
AND PLAN OF MERGER
This Agreement and
Plan of Merger
is made and entered into as of
January 18, 2011 by and among:
Ray Holding
Corporation
, a Delaware corporation
(
Parent
);
Ray Merger Sub
Corporation
, a Delaware corporation and a wholly
owned subsidiary of Parent (
Merger
Sub
); and
RAE Systems
Inc.
, a Delaware corporation (the
Company
). Certain capitalized terms
used in this Agreement are defined in
Exhibit A
.
Recitals
A.
Parent, Merger Sub and the Company intend to
effect a merger of Merger Sub into the Company (the
Merger
) in accordance with this
Agreement and the DGCL. Upon consummation of the Merger, Merger
Sub will cease to exist, and the Company will become a wholly
owned subsidiary of Parent.
B.
The boards of directors of Parent and Merger Sub
have approved this Agreement and the Merger.
C.
The board of directors of the Company (the
Board of Directors
), after considering
the recommendation of a committee (the
Special
Committee
) formed for the purpose of, among other
matters, evaluating and making a recommendation to the Board of
Directors with respect to this Agreement and the Merger,
(i) concluded that the Merger and the transactions
contemplated by this Agreement constitute a Superior Offer (as
such term is defined in the Agreement and Plan of Merger dated
September 19, 2010 by and among Rudy Acquisition Corp, Rudy
Merger Sub and the Company (the
Prior Merger
Agreement
)), (ii) determined that it is in
the best interests of the Company and its stockholders, and
declared it advisable, to terminate the Prior Merger Agreement,
and (iii) has determined that the Merger is in the best
interest of the Company and its stockholders and declared it
advisable to enter into this Agreement and the Merger, upon the
terms and conditions provided herein.
D.
Concurrently with the execution of this
Agreement, and as a condition and inducement to Parents
and Merger Subs willingness to enter into this Agreement,
Parent and certain beneficial owners (the
Rollover
Holders
) of Company Common Stock are entering into
Rollover Agreements (the
Rollover
Agreements
), pursuant to which the Rollover
Holders are agreeing, among other things, to contribute the
Rollover Shares to Parent immediately prior to the Effective
Time of the Merger.
E.
Concurrently with the execution of this
Agreement, and as a condition and inducement to Parents
and Merger Subs willingness to enter into this Agreement,
certain stockholders of the Company are entering into voting
agreements in favor of Parent (the
Voting
Agreements
).
F.
Concurrently with the execution of this
Agreement, and as a condition and inducement to the
Companys willingness to enter into this Agreement,
Vector Capital IV,
L.P.
and
Vector Capital III,
L.P.
(collectively, the
Sponsors
) have executed and delivered
a guarantee of the payment obligations of Parent and Merger Sub
hereunder (the
Guarantee
).
A-1
G.
Pursuant to the Merger, among other things, all
of the issued and outstanding shares of capital stock of the
Company (other than the Rollover Shares) and all outstanding
options, warrants and other rights to receive shares of the
Companys capital stock shall be converted into the right
to receive cash.
Agreement
The parties to this Agreement, intending to be legally bound,
agree as follows:
Section
1.
Description
of Transaction.
1.1
Merger of Merger Sub into the
Company.
Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time
(as defined in Section 1.3), Merger Sub shall be merged
with and into the Company, and the separate existence of Merger
Sub shall cease. The Company will continue as the surviving
corporation in the Merger (the
Surviving
Corporation
).
1.2
Effects of the Merger.
The
Merger shall have the effects set forth in this Agreement and in
the applicable provisions of the DGCL.
1.3
Closing; Effective Time.
The
consummation of the Merger and the other transactions
contemplated hereby (the
Closing
)
shall take place at the offices of Fenwick & West LLP,
555 California Street, 12th Floor, San Francisco, CA 94104
at 10:00 a.m. on a date to be designated by Parent, which
shall be no later than the fifth (5th) business day after the
satisfaction or waiver of the last to be satisfied or waived of
the conditions set forth in Section 6 and Section 7
(other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or
waiver of each of such conditions). The date on which the
Closing actually takes place is referred to as the
Closing Date
. A certificate of merger
satisfying the applicable requirements of the DGCL shall be duly
executed by the Company in connection with the Closing and,
concurrently with or as soon as practicable following the
Closing, shall be filed with the Secretary of State of the State
of Delaware. The Merger shall become effective at the time of
the filing of such certificate of merger with the Secretary of
State of the State of Delaware or at such later time as may be
specified in such certificate of merger with the consent of
Parent (the time as of which the Merger becomes effective being
referred to as the
Effective Time
).
1.4
Certificate of Incorporation and Bylaws;
Directors and Officers.
Unless otherwise
determined by Parent prior to the Effective Time:
(a)
the Certificate of Incorporation of the
Surviving Corporation shall be amended and restated at the
Effective Time to conform to
Exhibit B
;
(b)
the Bylaws of the Surviving Corporation shall be
amended and restated as of the Effective Time to conform to the
Bylaws of Merger Sub as in effect immediately prior to the
Effective Time; and
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(c)
the directors and officers of the Surviving
Corporation immediately after the Effective Time shall be the
respective individuals who are directors and officers of Merger
Sub immediately prior to the Effective Time.
1.5
Effect on Capital Stock; Conversion of
Shares
.
(a)
Conversion of Shares.
At the
Effective Time, by virtue of the Merger and without any further
action on the part of Parent, Merger Sub, the Company or any
stockholder of the Company:
(i)
any shares of Company Common Stock held by the
Company or any wholly owned Subsidiary of the Company (or held
in the Companys treasury) immediately prior to the
Effective Time shall be canceled and retired and shall cease to
exist, and no consideration shall be delivered in exchange
therefor;
(ii)
any shares of Company Common Stock held by
Parent, Merger Sub or any other wholly owned Subsidiary of
Parent immediately prior to the Effective Time shall be canceled
and retired and shall cease to exist, and no consideration shall
be delivered in exchange therefor;
(iii)
except as provided in clauses (i)
and (ii) above and subject to Section 1.5(b),
each share of Company Common Stock outstanding immediately prior
to the Effective Time shall be converted into the right to
receive $1.75 in cash, without interest (the
Merger
Consideration
); and
(iv)
each share of the common stock, $0.01 par
value per share, of Merger Sub outstanding immediately prior to
the Effective Time shall be converted into one share of common
stock of the Surviving Corporation.
(b)
Certain Adjustments.
If,
during the period commencing on the date of this Agreement and
ending at the Effective Time, the outstanding shares of Company
Common Stock are changed into a different number or class of
shares by reason of any stock split, division or subdivision of
shares, stock dividend, reverse stock split, consolidation of
shares, reclassification, recapitalization or other similar
transaction, then the Merger Consideration shall be
proportionately adjusted to reflect such change.
1.6
Company Options
.
(a)
At the Effective Time, each then-outstanding
Company Option, whether vested or unvested, shall be cancelled
as follows:
(i)
in the case of a Vested Company
Option having a per share exercise price less than the Merger
Consideration, such Vested Company Option shall be cancelled in
exchange for the right to receive from the Surviving Corporation
for each share of Company Common Stock subject to such Vested
Company Option immediately prior to the Effective Time an amount
(subject to any applicable withholding tax) in cash equal to the
product of
(1)
the number of shares of Company
Common Stock subject to such Vested Company Option immediately
prior to the Effective Time and
(2)
the amount by
which the Merger Consideration exceeds the per share exercise
price of such Vested Company Option, or
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(ii)
in the case of an Unvested Company Option or a
Company Option having a per share exercise price equal to or
greater than the Merger Consideration, such Company Option shall
be cancelled without the payment of cash or issuance of other
securities in respect thereof. The cancellation of a Company
Option as provided in the immediately preceding sentence shall
be deemed a release of any and all rights the holder thereof had
or may have had in respect of such Company Option. The aggregate
amount paid or payable in respect of the cancellation of the
Company Options as set forth in this Section 1.6 is
referred to herein as the
Option
Consideration
.
(b)
Prior to the Effective Time, the Company shall
take such actions as may be necessary to give effect to the
transactions contemplated by this Section 1.6, including,
but not limited to, satisfaction of the requirements of
Rule 16b-3(e)
under the Exchange Act.
(c)
The Option Plans shall terminate as of the
Effective Time and the provisions in any other plan, program or
arrangement providing for the issuance or grant of any other
interest in respect of the capital stock of the Company or any
Subsidiary thereof shall be canceled as of the Effective Time.
(d)
Prior to the Effective Time, the Company shall
deliver to the holders of Company Options notices, in form and
substance reasonably acceptable to Parent, setting forth such
holders rights pursuant to this Agreement.
1.7
Closing of the Companys Transfer
Books.
At the Effective Time:
(a)
all
shares of Company Common Stock outstanding immediately prior to
the Effective Time shall automatically be canceled and retired
and shall cease to exist, and all holders of certificates
representing shares of Company Common Stock that were
outstanding immediately prior to the Effective Time shall cease
to have any rights as stockholders of the Company; and
(b)
the stock transfer books of the Company shall be
closed with respect to all shares of Company Common Stock
outstanding immediately prior to the Effective Time. No further
transfer of any such shares of Company Common Stock shall be
made on such stock transfer books after the Effective Time. If,
after the Effective Time, a valid certificate previously
representing any shares of Company Common Stock (other than the
Rollover Shares) outstanding immediately prior to the Effective
Time (a
Company Stock Certificate
) is
presented to the Paying Agent (as defined in
Section 1.8(a)) or to the Surviving Corporation or Parent,
such Company Stock Certificate shall be canceled and shall be
exchanged as provided in Section 1.8.
1.8
Surrender of Certificates
.
(a)
Not less than five (5) business days prior
to the Closing Date, Parent shall designate and enter into an
agreement with a bank or trust company to serve as Paying Agent
in the Merger (the
Paying Agent
). On
or before the Effective Time, Parent shall deliver to the Paying
Agent, for the benefit of the stockholders of the Company and
otherwise for payment in accordance with this Section 1,
sufficient cash necessary for the payment of the Merger
Consideration as provided in Section 1.5(a)(iii). Funds
made available to the Paying Agent shall be invested by the
Paying Agent as directed by Parent (it being understood that any
and all interest or income earned on funds made available to the
Paying Agent pursuant to this Agreement shall be turned over to
Parent).
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(b)
As promptly as practicable (and no later than
five (5) business days) after the Effective Time, Parent
shall cause the Paying Agent to mail to each holder of record of
a Company Stock Certificate
(i)
a letter of
transmittal in a form reasonably acceptable to the Company which
shall specify that delivery shall be effected, and risk of loss
and title to the Company Stock Certificates shall pass, only
upon actual delivery of the Company Stock Certificates to the
Paying Agent and shall be in such form and have such other
provisions as Parent shall reasonably specify, and
(ii)
instructions for use in effecting the surrender
of the Company Stock Certificates in exchange for the Merger
Consideration, without any interest thereon. Upon surrender of
Company Stock Certificates for cancellation to the Paying Agent,
together with a duly executed letter of transmittal and such
other documents as the Paying Agent shall reasonably require,
the holder of such Company Stock Certificates shall be entitled
to receive in exchange therefor a check in the amount of the
Merger Consideration for each share of Company Common Stock
formerly represented thereby to be mailed within ten
(10) business days of receipt of such Company Stock
Certificate and letter of transmittal, in accordance with
Section 1.5(a)(iii), and the Company Stock Certificates so
surrendered shall be canceled. At the sole discretion of Parent,
Parent may make similar arrangements with the Paying Agent for
the payment of the Option Consideration to the holders of the
Company Options;
provided, however
, that the payment of
the applicable Option Consideration shall, in all events, be
conditioned upon the holder of the applicable Company Option
delivering to Parent or the Paying Agent, as applicable, a
written termination agreement releasing the Company, Parent and
their respective Affiliates from any and all claims the holder
thereof may have in respect of such Company Option.
(c)
Promptly following the date that is twelve
(12) months after the Effective Time, the Paying Agent
shall deliver to Parent all cash and any documents in its
possession relating to the transactions described in this
Agreement, and the Paying Agents duties shall terminate.
Thereafter, each holder of a Company Stock Certificate shall
thereafter look only to Parent for payment of the Merger
Consideration and may surrender such Company Stock Certificate
to the Surviving Corporation or Parent and (subject to
applicable abandoned property, escheat and similar laws) receive
in exchange therefor the Merger Consideration, without any
interest thereon. Notwithstanding the foregoing, none of the
Paying Agent, Parent, Merger Sub, the Company or the Surviving
Corporation shall be liable to a holder of shares of Company
Common Stock for any amounts delivered to a public official
pursuant to applicable abandoned property, escheat or similar
Legal Requirements.
(d)
If any Company Stock Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such Company Stock Certificate
to be lost, stolen or destroyed, the Paying Agent (or if more
than twelve (12) months after the Effective Time, the
Surviving Corporation), shall issue in exchange for such lost,
stolen or destroyed Company Stock Certificate, the Merger
Consideration deliverable in respect thereof determined in
accordance with this Section 1. When authorizing such
issuance in exchange therefor, the board of directors of the
Surviving Corporation may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed Company Stock Certificate to deliver
to the Paying Agent (or if more than twelve (12) months
after the Effective Time, the Surviving Corporation) a bond in
such amount as the Surviving Corporation may reasonably request
as indemnity against any claim that may be made against
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the Surviving Corporation with respect to the Company Stock
Certificate alleged to have been lost, stolen or destroyed.
(e)
Except as required by law, no dividends or other
distributions with respect to capital stock of the Surviving
Corporation with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Company Stock
Certificate.
(f)
All cash paid in respect of the surrender for
exchange of shares of Company Common Stock in accordance with
the terms hereof shall be deemed to be in full satisfaction of
all rights pertaining to such shares of Company Common Stock.
If, after the Effective Time, Company Stock Certificates are
presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this
Section 1.8.
(g)
The Surviving Corporation (and/or any of its
Affiliates) shall be entitled to deduct and withhold from the
amounts otherwise payable pursuant to this Agreement to any
holder of shares of Company Common Stock or any holders of
Company Options such amounts as the Surviving Corporation
(and/or any of its Affiliates) is required to deduct and
withhold with respect to the making of such payment under the
Code, or any applicable Legal Requirement, including any
provision of state, local or foreign Tax law. To the extent that
amounts are so withheld by the Surviving Corporation or its
Affiliates, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of
the shares of Company Common Stock, or the holder of Company
Options, with respect to which such deduction and withholding
was made.
1.9
Further Action.
If, at any
time after the Effective Time, any further action is determined
by Parent or the Surviving Corporation to be necessary or
desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation with full right, title and possession
of and to all rights and property of Merger Sub and the Company,
then the officers and directors of the Surviving Corporation and
Parent shall be fully authorized (in the name of Merger Sub, in
the name of the Company and otherwise) to take such action.
Section
2.
Representations
and Warranties of the Company.
Except as disclosed in the Company Disclosure Schedule (as to
which a disclosure in one section of the Company Disclosure
Schedule shall be deemed disclosed in each other section where
it is reasonably apparent on its face that the matter disclosed
is responsive to the representations and warranties in such
section), the Company represents and warrants to Parent and
Merger Sub as follows:
2.1
Subsidiaries; Due Organization; Etc
.
(a)
The Company has no Subsidiaries, except for the
Entities identified in
Part 2.1(a)(i) of the Company
Disclosure Schedule
; and neither the Company nor any of the
other Entities identified in
Part 2.1(a)(i) of the
Company Disclosure Schedule
owns any capital stock of, or
any equity interest of any nature in, any other Entity, other
than the Entities identified in
Part 2.1(a)(ii) of the
Company Disclosure Schedule
. Except as set forth in
Part 2.1(a)(iii) of the Company Disclosure Schedule
,
none of the Acquired Corporations has agreed
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or is obligated to make, or is bound by any Contract under which
it may become obligated to make, any future investment in or
capital contribution to any other Entity. None of the Acquired
Corporations has, at any time, been a general partner of, or has
otherwise been liable for any of the debts or other obligations
of, any general partnership, limited partnership or other Entity.
(b)
Each of the Acquired Corporations is a
corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation
and has all necessary power and authority:
(i)
to
conduct its business in the manner in which its business is
currently being conducted;
(ii)
to own and use its
assets in the manner in which its assets are currently owned and
used; and
(iii)
to perform its obligations under all
Contracts by which it is bound.
(c)
Each of the Acquired Corporations is qualified
to do business as a foreign corporation, and is in good
standing, under the laws of all jurisdictions where the nature
of its business requires such qualification, except where the
failure to be so qualified would not constitute a Company
Material Adverse Effect.
2.2
Certificate of Incorporation; Bylaws;
Charters and Codes of Conduct.
The Company has
delivered to Parent accurate and complete copies of the
certificate of incorporation, bylaws and other charter and
organizational documents of the respective Acquired
Corporations, including all amendments thereto.
Part 2.2
of the Company Disclosure Schedule
lists, and the Company
has delivered to Parent, accurate and complete copies of:
(a)
the charters of all committees of the Board of
Directors; and
(b)
any code of conduct or similar
policy adopted by any of the Acquired Corporations or by the
board of directors, or any committee of the board of directors,
of any of the Acquired Corporations.
2.3
Capitalization, Etc
.
(a)
The authorized capital stock of the Company
consists of 200,000,000 shares of Company Common Stock, of
which 59,512,064 shares have been issued and are
outstanding as of the business day preceding the date of this
Agreement. Except as set forth in
Part 2.3(a) of the
Company Disclosure Schedule
, the Company does not hold any
shares of its capital stock in its treasury.
(b)
All of the outstanding shares of Company Common
Stock have been duly authorized and validly issued, and are
fully paid and nonassessable. There are no shares of Company
Common Stock held by any of the other Acquired Corporations.
Except as set forth in
Part 2.3(b)(i) of the Company
Disclosure Schedule
:
(1)
none of the outstanding
shares of Company Common Stock is entitled or subject to any
preemptive right, right of participation, right of maintenance
or any similar right;
(2)
none of the outstanding
shares of Company Common Stock is subject to any right of first
refusal in favor of the Company; and
(3)
there is no
Company Contract relating to the voting or registration of, or
restricting any Person from purchasing, selling, pledging or
otherwise disposing of (or granting any option or similar right
with respect to), any shares of Company Common Stock. None of
the Acquired Corporations is under any obligation, or is bound
by any Contract pursuant to which it may become obligated, to
repurchase, redeem or otherwise acquire any outstanding shares
of Company Common Stock or other securities.
Part 2.3(b)(ii) of the Company Disclosure Schedule
accurately and
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completely describes all repurchase rights held by the Company
with respect to shares of Company Common Stock (including shares
issued pursuant to the exercise of stock options), and specifies
which of those repurchase rights are currently exercisable.
(c)
As of the date of this Agreement:
(i)
3,189,167 shares of Company Common Stock
are subject to issuance pursuant to stock options granted and
outstanding under the Companys 2007 Equity Incentive Plan
(the
2007 Plan
);
(ii)
1,986,188 shares of Company Common Stock
are subject to issuance pursuant to stock options granted and
outstanding under the Companys 2002 Stock Option Plan (the
2002 Plan
);
(iii)
90,666 shares of Company Common Stock are
subject to issuance pursuant to stock options granted and
outstanding under the Companys 1993 Stock Plan (the
1993 Plan
and, together with the 2002
Plan and the 2007 Plan, collectively, the
Option
Plan
s);
(iv)
100,000 shares of
Company Common Stock are reserved for future issuance pursuant
to stock options granted and outstanding outside of the Option
Plans; and
(v)
1,919,124 shares of Company
Common Stock are reserved for future issuance pursuant to stock
options not yet granted under the 2007 Plan.
(d) Part 2.3(d) of the Company Disclosure Schedule
sets forth the following information with respect to each
Company Option outstanding as of the date of this Agreement:
(1)
the name of the optionee;
(2)
the
number of shares of Company Common Stock subject to such Company
Option;
(3)
the exercise price of such Company
Option;
(4)
the date on which such Company Option
was granted;
(5)
the applicable vesting schedule,
and the extent to which such Company Option is vested and
exercisable as of the date of this Agreement;
(6)
the date on which such Company Option expires;
and
(7)
whether such Company Option is an
incentive stock option (as defined in the Code) or a
non-qualified stock option. The Company has delivered to Parent
accurate and complete copies of all stock option plans pursuant
to which any Company Options are outstanding, and the forms of
all stock option agreements evidencing such options. The Company
has the right and authority pursuant to the terms of the Option
Plans and the applicable stock option agreements and other
related documents to take all of the actions and conduct set
forth in Section 1.6 of this Agreement with respect to the
Company Options without obtaining the consent or authorization
of any holder of such Company Options.
(e)
Except as set forth in
Part 2.3(e) of
the Company Disclosure Schedule
, there is no:
(i)
outstanding subscription, option, call, warrant
or right (whether or not currently exercisable) to acquire any
shares of the capital stock or other securities of any of the
Acquired Corporations;
(ii)
outstanding security,
instrument or obligation that is or may become convertible into
or exchangeable for any shares of the capital stock or other
securities of any of the Acquired Corporations;
(iii)
stockholder rights plan (or similar plan
commonly referred to as a poison pill) or Contract
under which any of the Acquired Corporations is or may become
obligated to sell or otherwise issue any shares of its capital
stock or any other securities; or
(iv)
condition or
circumstance that would provide a basis for the assertion of a
claim by any Person to the effect that such Person is entitled
to acquire or receive any shares of capital stock or other
securities of any of the Acquired Corporations.
(f)
All outstanding shares of Company Common Stock,
options, warrants and other securities of the Acquired
Corporations have been issued and granted in compliance in all
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material respects with
(i)
all applicable securities
laws and other applicable Legal Requirements, and
(ii)
all requirements set forth in applicable
Contracts.
(g)
All of the outstanding shares of capital stock
of each of the Companys Subsidiaries have been duly
authorized and validly issued, are fully paid and nonassessable
and free of preemptive rights, with no personal liability
attaching to the ownership thereof, and are owned beneficially
and (other than directors qualifying shares) of record by
the Company, free and clear of any Encumbrances (other than
Encumbrances described in
Part 2.3(d) of the Company
Disclosure Schedule
.
2.4
SEC Filings; Financial Statements
.
(a)
The Company has delivered or made available to
Parent accurate and complete copies of all registration
statements, proxy statements, Certifications (as defined below)
and other statements, reports, schedules, forms and other
documents filed by the Company with the SEC since
January 1, 2007 (the
Company SEC
Documents
) as well as all comment letters received
by the Company from the SEC since January 1, 2007 and all
responses to such comment letters provided to the SEC by or on
behalf of the Company. All statements, reports, schedules, forms
and other documents required to have been filed by the Company
or its officers with the SEC have been so filed on a timely
basis. None of the Companys Subsidiaries is required to
file any documents with the SEC. As of the time it was filed
with the SEC (or, if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing):
(i)
each of the Company SEC Documents (as so amended
or superseded) complied in all material respects with the
applicable requirements of the Securities Act or the Exchange
Act (as the case may be); and
(ii)
none of the
Company SEC Documents (as so amended or superseded) contained
any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The
certifications and statements required by:
(1)
the
SECs Order dated June 27, 2002 pursuant to
Section 21(a)(1) of the Exchange Act (File
No. 4-460);
(2)
Rule 13a-14
under the Exchange Act; and
(3)
18 U.S.C.
§ 1350 (Section 906 of the Sarbanes-Oxley Act)
relating to the Company SEC Documents (collectively, the
Certifications
) are accurate and
complete, and comply as to form and content with all applicable
Legal Requirements. As used in this Section 2.4, the term
file
and variations thereof shall be
broadly construed to include any manner in which a document or
information is furnished, supplied or otherwise made available
to the SEC pursuant to the Securities Act or the Exchange Act.
(b)
The Acquired Corporations maintain disclosure
controls and procedures that satisfy the requirements of
Rule 13a-15
under the Exchange Act. Such disclosure controls and procedures
are designed, and to the knowledge of the Company, effective to
ensure that all material information concerning the Acquired
Corporations is made known on a timely basis to the individuals
responsible for the preparation of the Companys filings
with the SEC and other public disclosure documents.
Part 2.4(b) of the Company Disclosure Schedule
lists, and the Company has delivered to Parent, accurate and
complete copies of, all written descriptions of, and all
policies, manuals and other documents promulgating, such
disclosure controls and procedures. The Company is in compliance
with the applicable listing and other rules and
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regulations of the NYSE Amex and has not since January 1,
2007 received any notice from the NYSE Amex asserting any
non-compliance with such rules and regulations.
(c)
The financial statements (including any related
notes) contained or incorporated by reference in the Company SEC
Documents:
(i)
complied as to form in all material
respects with the published rules and regulations of the SEC
applicable thereto;
(ii)
were prepared in accordance
with GAAP applied on a consistent basis throughout the periods
covered (except as may be indicated in the notes to such
financial statements or, in the case of unaudited financial
statements, as permitted by
Form 10-Q
of the SEC, and except that the unaudited financial statements
may not contain footnotes and are subject to normal and
recurring year-end adjustments that will not, individually or in
the aggregate, be material in amount), and
(iii)
fairly present in all material respects the
consolidated financial position of the Company and its
consolidated subsidiaries as of the respective dates thereof and
the consolidated results of operations and cash flows of the
Company and its consolidated subsidiaries for the periods
covered thereby. No financial statements of any Person other
than the Acquired Corporations are required by GAAP to be
included in the consolidated financial statements of the
Company. The financial statements required to be delivered to
Parent pursuant to Section 2.4(a):
(1)
have
been prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered (except that such financial
statements may not contain footnotes and may be subject to
normal and recurring year-end adjustments that will not,
individually or in the aggregate, be material in amount); and
(2)
fairly present in all material respects the
consolidated financial position of the Company and its
consolidated subsidiaries as of the respective dates thereof and
the consolidated results of operations of the Company and its
consolidated subsidiaries for the periods covered thereby.
(d)
The Companys auditor has at all times
since the date of enactment of the Sarbanes-Oxley Act been:
(i)
a registered public accounting firm (as defined
in Section 2(a)(12) of the Sarbanes-Oxley Act);
(ii)
independent with respect to the
Company within the meaning of
Regulation S-X
under the Exchange Act; and
(iii)
to the knowledge
of the Company, in compliance with subsections (g) through
(l) of Section 10A of the Exchange Act and the rules
and regulations promulgated by the SEC and the Public Company
Accounting Oversight Board thereunder.
(e)
The Proxy Statement and the
Rule 13e-3
Transaction Statement on
Schedule 13E-3
relating to the adoption of this Agreement by the stockholders
of the Company (as amended or supplemented from time to time,
the
Schedule 13E-3
)
shall not,
(i)
on the date the Proxy Statement
(including any amendment or supplement) is first mailed to
stockholders of the Company,
(ii)
at the time of the
Company Stockholders Meeting, or
(iii)
in the
case of the
Schedule 13E-3
(including any amendment or supplement or document to be
incorporated by reference), on the date it is filed with the
SEC, contain any statement which, at such time and in light of
the circumstances under which made, is false or misleading with
respect to any material fact, or omit to state any material fact
required to be stated therein or necessary in order to make the
statements made therein not false or
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misleading in light of the circumstances under which made; or,
with respect to the Proxy Statement, omit to state any material
fact required to be stated therein or necessary to correct any
statement in any earlier communication with respect to the
solicitation of proxies for the Company Stockholders
Meeting which has become false or misleading. The Proxy
Statement and the
Schedule 13E-3
will comply in all material respects with the requirements of
the Exchange Act. Notwithstanding the foregoing, the Company
makes no representation or warranty with respect to information
furnished in writing by or on behalf of the Parent or Merger Sub
for inclusion in the Proxy Statement or the
Schedule 13E-3.
If at any time prior to the Company Stockholders Meeting
any fact or event relating to the Company or any of its
Affiliates which should be set forth in an amendment or
supplement to the Proxy Statement or the
Schedule 13E-3
should be discovered by the Company, the Company shall, promptly
after becoming aware thereof, inform the Parent of such fact or
event.
(f)
The Acquired Corporations maintain a system of
internal accounting controls sufficient to provide reasonable
assurance that:
(i)
transactions are executed in
accordance with managements general or specific
authorizations;
(ii)
transactions are recorded as
necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability;
(iii)
access to assets is permitted only in
accordance with managements general or specific
authorization; and
(iv)
the recorded accountability
for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences.
(g) Part 2.4(g) of the Company Disclosure Schedule
lists, and the Company has delivered to Parent accurate and
complete copies of the documentation creating or governing, all
securitization transactions and off-balance sheet
arrangements (as defined in Item 303(c) of
Regulation S-K
under the Exchange Act) effected by any of the Acquired
Corporations since January 1, 2007.
2.5
Absence of Changes.
From the
date of the Unaudited Interim Balance Sheet through the date of
this Agreement, except as set forth in
Part 2.5 of the
Company Disclosure Schedule
:
(a)
there has not been any Company Material Adverse
Effect;
(b)
there has not been any material loss, damage or
destruction to, or any material interruption in the use of, any
of the assets of any of the Acquired Corporations (whether or
not covered by insurance);
(c)
none of the Acquired Corporations has:
(i)
declared, accrued, set aside or paid any
dividend or made any other distribution in respect of any shares
of capital stock; or
(ii)
repurchased, redeemed or
otherwise reacquired any shares of capital stock or other
securities;
(d)
none of the Acquired Corporations has sold,
issued or granted, or authorized the issuance of:
(i)
any capital stock or other security (except for
Company Common Stock issued upon the valid exercise of
outstanding Company Options);
(ii)
any option,
warrant or right to acquire any capital stock or any other
security (except for Company Options identified in
Part 2.3(c) of the Company Disclosure Schedule
); or
(iii)
any instrument convertible into or
exchangeable for any capital stock or other security;
(e)
the Company has not amended or waived any of its
rights under, or permitted the acceleration of vesting under any
provision of:
(i)
any of the Companys stock
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option plans;
(ii)
any Company Option or any
Contract evidencing or relating to any Company Option;
(iii)
any restricted stock purchase agreement; or
(iv)
any other Contract evidencing or relating to
any equity award (whether payable in cash or stock);
(f)
there has been no amendment to the certificate
of incorporation, bylaws or other charter or organizational
documents of any of the Acquired Corporations, and none of the
Acquired Corporations has effected or been a party to any
merger, consolidation, share exchange, business combination,
recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction;
(g)
none of the Acquired Corporations has formed any
Subsidiary or acquired any equity interest or other interest in
any other Entity;
(h)
none of the Acquired Corporations has made any
capital expenditure that, when added to all other capital
expenditures made on behalf of the Acquired Corporations since
September 30, 2010, exceeds $250,000 in the aggregate;
(i)
none of the Acquired Corporations has made any
expenditures or series of related expenditures in excess of
$250,000, other than payment of accounts payable in the ordinary
course of business;
(j)
none of the Acquired Corporations has:
(i)
acquired, leased or licensed any material right
or other material asset from any other Person;
(ii)
sold or otherwise disposed of, or leased or
licensed, any material right or other material asset to any
other Person; or
(iii)
waived or relinquished any
right, except for rights or other assets acquired, leased,
licensed or disposed of in the ordinary course of business and
consistent with past practices;
(k)
none of the Acquired Corporations has written
off as uncollectible, or established any reserve with respect
to, any account receivable or other indebtedness, other than in
the ordinary course of business;
(l)
none of the Acquired Corporations has made any
pledge of any of its assets or otherwise permitted any of its
assets to become subject to any Encumbrance, except for pledges
of or Encumbrances with respect to immaterial assets made in the
ordinary course of business and consistent with past practices;
(m)
none of the Acquired Corporations has:
(i)
lent money to any Person (excluding advancements
of expenses to employees in the ordinary course of business); or
(ii)
incurred or guaranteed any indebtedness for
borrowed money;
(n)
none of the Acquired Corporations has:
(i)
adopted, established or entered into any Company
Benefit Plan or Company Benefit Agreement;
(ii)
caused or permitted any Company Benefit Plan to
be amended in any material respect; or
(iii)
paid
any bonus or made any profit-sharing or similar payment to, or
materially increased the amount of the wages, salary,
commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or other
employees at the director level or above (other than periodic
increases
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in the base salaries of employees in connection with the
Companys customary employee review process, not in excess
of 5% for any employee);
(o)
none of the Acquired Corporations has changed
any of its methods of accounting or accounting practices in any
material respect;
(p)
none of the Acquired Corporations has made any
material Tax election;
(q)
none of the Acquired Corporations has commenced
or settled any Legal Proceeding;
(r)
none of the Acquired Corporations has entered
into any material transaction or taken any other material action
that has had, or could reasonably be expected to have or result
in, a Company Material Adverse Effect; and
(s)
none of the Acquired Corporations has agreed or
committed to take any of the actions referred to in clauses
(c) through (r) above.
2.6
Title to Assets.
Except with
regard to Company IP (as to which all representations are
contained in Section 2.10 below), the Acquired Corporations
own, and have good and valid title to, all assets purported to
be owned by them, including:
(a)
all assets
reflected on the Unaudited Interim Balance Sheet (except for
assets sold or otherwise disposed of in the ordinary course of
business since the date of the Unaudited Interim Balance Sheet);
and
(b)
all other assets reflected in the books and
records of the Acquired Corporations as being owned by the
Acquired Corporations. Except with regard to Company IP (as to
which all representations are contained in Section 2.10
below), all of said assets are owned by the Acquired
Corporations free and clear of any Encumbrances, except for:
(i)
any lien for current taxes not yet due and
payable (or those being contested in good faith by appropriate
proceedings, which proceedings are described with particularity
in
Part 2.17 of the Company Disclosure Schedule
);
(ii)
minor liens that have arisen in the ordinary
course of business and that do not (in any case or in the
aggregate) materially detract from the value of the assets
subject thereto or materially impair the operations of any of
the Acquired Corporations; and
(iii)
liens described
in
Part 2.6 of the Company Disclosure Schedule
.
Except with regard to Company IP (as to which all
representations are contained in Section 2.10 below), the
Acquired Corporations are the lessees of, and hold valid
leasehold interests in, all assets purported to have been leased
by them, including:
(1)
all assets reflected as
leased on the Unaudited Interim Balance Sheet; and
(2)
all other assets reflected in the books and
records of the Acquired Corporations as being leased by the
Acquired Corporations, and enjoy undisturbed possession of such
leased assets.
2.7
Receivables; Customers; Inventories
.
(a)
All existing accounts receivable of the Acquired
Corporations (including those accounts receivable reflected on
the Unaudited Interim Balance Sheet that have not yet been
collected and those accounts receivable that have arisen since
the date of the Unaudited Interim Balance Sheet and have not yet
been collected): represent valid obligations of customers of the
Acquired Corporations arising from bona fide transactions
entered into in the ordinary course of business.
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(b) Part 2.7(b) of the Company Disclosure Schedule
contains an accurate and complete list of each loan or
advance made by any of the Acquired Corporations to any Company
Associate, other than routine travel advances made to employees
in the ordinary course of business.
(c) Part 2.7(c) of the Company Disclosure Schedule
accurately identifies, and provides an accurate and complete
breakdown of the revenues received from, each of the 20 largest
customers (by revenue contribution) of the Acquired Corporations
in each of the fiscal years ended December 31, 2008 and
December 31, 2009. Except as set forth in
Part 2.7(c)
, to the knowledge of the Company, none
of the Acquired Corporations has received any notice indicating
that any customer identified in
Part 2.7(c) of the
Company Disclosure Schedule
intends to cease dealing with
any of the Acquired Corporations or intends to otherwise
materially reduce the volume of business transacted by such
Person with any of the Acquired Corporations below historical
levels.
2.8
Equipment.
All material items
of equipment and other tangible assets owned by or leased to the
Acquired Corporations are adequate for the uses to which they
are being put, are in good and safe condition and repair
(ordinary wear and tear excepted) and are adequate for the
conduct of the businesses of the Acquired Corporations in the
manner in which such businesses are currently being conducted.
2.9
Real Property
.
(a) Part 2.9 of the Company Disclosure Schedule
lists each parcel of real property leased by an Acquired
Corporation (the
Leased Real
Property
).
Part 2.9 of the Company
Disclosure Schedule
lists each parcel of real property owned
or purported to be owned in the Companys
Form 10-K
filed with the SEC on March 12, 2010 by an Acquired
Corporation (the
Owned Real Property
).
(b)
In the case of Owned Real Property, the Acquired
Corporation has good and marketable title over such Owned Real
Property free and clear of any Encumbrances, except as set forth
on
Part 2.9 of the Company Disclosure Schedule
.
(c)
In the case of the Leased Real Property, the
Acquired Corporation has valid and outstanding leasehold
interests in all such Leased Real Property and the improvements
thereon. The Acquired Corporations use and occupation of
any and all Leased Real Property and Owned Real Property, and
the construction or improvements thereon comply in all respects
with the applicable Legal Requirements, including zoning
regulations and building codes.
2.10
Intellectual Property; Privacy
.
(a)
Products and Services.
Part 2.10(a) of the Company Disclosure Schedule
accurately identifies and describes each material Company
Product currently being designed, developed, manufactured,
marketed, distributed, provided, licensed, or sold by any of the
Acquired Corporations.
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(b)
Registered IP.
Part 2.10(b) of
the Company Disclosure Schedule
accurately identifies:
(i)
each item of Registered IP in which any of the
Acquired Corporations has or purports to have an ownership
interest of any nature (whether exclusively, jointly with
another Person, or otherwise);
(ii)
the jurisdiction
in which such item of Registered IP has been registered or filed
and the applicable registration or serial number; and
(iii)
any other Person that has an ownership
interest in such item of Registered IP and the nature of such
ownership interest. The Company has provided to Parent complete
and accurate copies of all applications, correspondence with any
Governmental Body, and other material documents related to each
such item of Registered IP.
(c)
Inbound Licenses.
Part 2.10(c) of
the Company Disclosure Schedule
accurately identifies:
(i)
each Contract pursuant to which any Intellectual
Property Right or Intellectual Property is or has been licensed,
sold, assigned, or otherwise conveyed or provided to the Company
(other than
(1)
agreements between any of the
Acquired Corporations and their respective employees in the
Acquired Corporations standard forms thereof and
(2)
non-exclusive licenses to third-party software
that is not incorporated into any Company Product and that is
not otherwise material to the business of any of the Acquired
Corporations); and
(ii)
whether the licenses or
rights granted to the Acquired Corporations in each such
Contract are exclusive or non-exclusive.
(d)
Outbound Licenses.
Part 2.10(d)
of the Company Disclosure Schedule
accurately identifies
each Contract pursuant to which any Person has been granted any
license under, or otherwise has received or acquired any right
(whether or not currently exercisable) or interest in, any
Company IP. None of the Acquired Corporations are bound by, and
no Company IP is subject to, any Contract containing any
covenant or other provision that in any way limits or restricts
the ability of any of the Acquired Corporations to use, exploit,
assert, or enforce any Company IP anywhere in the world.
(e)
Royalty Obligations.
Part 2.10(e)
of the Company Disclosure Schedule
contains a complete and
accurate list and summary of all royalties, fees, commissions,
and other amounts payable by any of the Acquired Corporations to
any other Person (other than sales commissions paid to employees
according to the Acquired Corporations standard
commissions plan) upon or for the manufacture, sale, or
distribution of any Company Product or the use of any Company IP.
(f)
Ownership Free and Clear.
The Acquired
Corporations exclusively own all right, title, and interest to
and in the Company IP (other than Intellectual Property Rights
exclusively licensed to the Acquired Corporations, as identified
in
Part 2.10(c) of the Company Disclosure Schedule
)
free and clear of any Encumbrances (other than licenses and
rights granted pursuant to the Contracts identified in
Part 2.10(d) of the Company Disclosure Schedule
).
Without limiting the generality of the foregoing:
(i)
Perfection of Rights.
All
documents and instruments necessary to establish, perfect, and
maintain the rights of the Acquired Corporations in the material
Company IP that is Registered IP have been validly executed,
delivered, and filed in a timely manner with the appropriate
Governmental Body.
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(ii)
Employees and
Contractors.
Each Person who is or was an
employee or contractor of any of the Acquired Corporations and
who is or was involved in the creation or development of any
Company Product or Company IP has signed a valid, enforceable
agreement containing an assignment of Intellectual Property
Rights pertaining to such Company Product or Company IP to such
Acquired Corporation and confidentiality provisions protecting
the Company IP. No current or former shareholder, officer,
director, or employee of the Company has any claim, right
(whether or not currently exercisable), or interest to or in any
Company IP. No employee of any of the Acquired Corporations is
(1)
bound by or otherwise subject to any Contract
restricting him from performing his duties for any of the
Acquired Corporations or
(2)
in breach of any
Contract with any former employer or other Person concerning
Intellectual Property Rights or confidentiality due to his
activities as an employee of any of the Acquired Corporations.
(iii)
Government Rights.
No
funding, facilities, or personnel of any Governmental Body or
any public or private university, college, or other educational
or research institution were used, directly or indirectly, to
develop or create, in whole or in part, any Company IP, other
than the Intellectual Property jointly owned by the Company and
Shanghai University set forth in
Part 2.10(f)(iii) of
the Company Disclosure Schedule
.
(iv)
Protection of Proprietary
Information.
Each of the Acquired Corporations
has taken all reasonable steps to maintain the confidentiality
of and otherwise protect and enforce their rights in all
proprietary information pertaining to the Acquired Corporations
or any Company Product. Without limiting the generality of the
foregoing, other than the license agreement set forth in
Part 2.10(f)(iv) of the Company Disclosure Schedule,
no portion of the source code for any software ever owned or
developed by any of the Acquired Corporations has been disclosed
or licensed to any escrow agent or other Person.
(v)
Past IP Dispositions.
Since
January 1, 2007 none of the Acquired Corporations has
assigned or otherwise transferred ownership of, or agreed to
assign or otherwise transfer ownership of, any Intellectual
Property Right to any other Person.
(vi)
Standards Bodies.
None of the
Acquired Corporations is or has ever been a member or promoter
of, or a contributor to, any industry standards body or similar
organization that could require or obligate any of the Acquired
Corporations to grant or offer to any other Person any license
or right to any Company IP.
(vii)
Sufficiency.
Each of the
Acquired Corporations owns or otherwise has, and immediately
after the Closing, the Surviving Corporation will have, all
Intellectual Property Rights needed to conduct its business as
currently conducted and, with respect to the Company Products,
as currently planned to be conducted (subject, to the
Companys knowledge, to the rights of holders of patents).
(g)
Valid and Enforceable.
All
Company IP is valid, subsisting, and enforceable; the foregoing
representation is made to the Acquired Corporations
knowledge as to patents. Without limiting the generality of the
foregoing:
A-16
(i)
Misuse and Inequitable
Conduct.
None of the Acquired Corporations has
engaged in patent or copyright misuse or any fraud or
inequitable conduct in connection with any Company IP that is
Registered IP.
(ii)
Trademarks.
To the knowledge
of the Company, no trademark or trade name owned, used, or
applied for by any of the Acquired Corporations conflicts or
interferes with any trademark or trade name owned, used, or
applied for by any other Person. No event or circumstance
(including a failure to exercise adequate quality controls and
an assignment in gross without the accompanying goodwill) has
occurred or exists that has resulted in, or could reasonably be
expected to result in, the abandonment of any trademark (whether
registered or unregistered) owned, used, or applied for by any
of the Acquired Corporations.
(iii)
Legal Requirements and
Deadlines.
As to each item of Company IP that is
Registered IP:
(1)
each such item of Company IP is
and at all times has been in compliance with all legal
requirements and is properly subsisting and
(2)
all
filings, payments, and other actions required to be made or
taken to maintain such item of Company IP in full force and
effect have been made by the applicable deadline. No application
for a patent or a copyright, mask work, or trademark
registration or any other type of Registered IP filed by or on
behalf of any of the Acquired Corporations at any time since
January 1, 2007 has been abandoned, allowed to lapse, or
rejected.
Part 2.10(g)(iii) of the Company Disclosure
Schedule
accurately identifies and describes as of the date
of this Agreement each action, filing, and payment that must be
taken or made on or before the date that is 120 days after
the date of this Agreement in order to maintain such item of
Company IP in full force and effect.
(iv)
Interference Proceedings and Similar
Claims.
No interference, opposition, reissue,
reexamination, or other Proceeding is or since January 1,
2007 has been pending or, to the knowledge of the Company,
threatened, in which the scope, validity, or enforceability of
any Company IP is being, has been, or could reasonably be
expected to be contested or challenged. To the knowledge of the
Company, there is no basis for a claim that any Company IP is
invalid or unenforceable.
(h)
Third-Party Infringement of Company
IP.
To the knowledge of the Company, since
January 1, 2007 no Person has infringed, misappropriated,
or otherwise violated, and no Person is currently infringing,
misappropriating, or otherwise violating, any Company IP.
Part 2.10(h) of the Company Disclosure Schedule
accurately identifies (and the Company has provided to
Parent a complete and accurate copy of) each letter or other
written or electronic communication or correspondence that has
been sent or otherwise delivered since January 1, 2007 by
or to any of the Acquired Corporations or any representative of
the Company regarding any actual, alleged, or suspected
infringement or misappropriation of any Company IP, and provides
a brief description of the current status of the matter referred
to in such letter, communication, or correspondence.
(i)
Effects of This
Transaction.
Neither the execution, delivery, or
performance of this Agreement (or any of the ancillary
agreements) nor the consummation of any of the transactions
contemplated by this Agreement (or any of the ancillary
agreements) will, with or without notice or lapse of time,
result in, or give any other Person the right or option to
A-17
cause or declare,
(i)
a loss of, or Encumbrance on,
any Company IP;
(ii)
a breach of or default under
any Company IP Contract;
(iii)
the release,
disclosure, or delivery of any Company IP by or to any escrow
agent or other Person; or
(iv)
the grant,
assignment, or transfer to any other Person of any license or
other right or interest under, to, or in any of the Company IP.
(j)
No Infringement of Third Party IP
Rights.
None of the Acquired Corporations has
ever infringed (directly, contributorily, by inducement, or
otherwise), misappropriated, or otherwise violated or made
unlawful use of any Intellectual Property Right of any other
Person (other than rights under patents), and to the knowledge
of the Company, none of the Acquired Corporations has ever
infringed (directly, contributorily, by inducement, or
otherwise), misappropriated, or otherwise violated or made
unlawful use of any patents of any other Person. None of the
Acquired Corporations has received any written notice from any
third party alleging such infringement. None of the Acquired
Corporations has engaged in unfair competition. No Company
Product, and no method or process used in the manufacturing of
any Company Product, infringes, violates, or makes unlawful use
of any Intellectual Property Right of, or contains any
Intellectual Property misappropriated from, any other Person
(provided that with respect to Intellectual Property Rights
consisting of patent rights of third parties, this
representation is made only to the knowledge of the Company). To
the knowledge of the Company, there is no legitimate basis for a
claim that any of the Acquired Corporations or any Company
Product has infringed or misappropriated any Intellectual
Property Right of another Person or engaged in unfair
competition or that any Company Product, or any method or
process used in the manufacturing of any Company Product,
infringes, violates, or makes unlawful use of any Intellectual
Property Right of, or contains any Intellectual Property
misappropriated from, any other Person. Without limiting the
generality of the foregoing:
(i)
Infringement Claims.
As of the
date of this Agreement, no infringement, misappropriation, or
similar claim or Proceeding is pending or, to the knowledge of
the Company, threatened against any of the Acquired Corporations
or against any other Person who is or may be entitled to be
indemnified, defended, held harmless, or reimbursed by any of
the Acquired Corporations with respect to such claim or
Proceeding. As of the date of this Agreement, none of the
Acquired Corporations has ever received any notice or other
communication (in writing or otherwise) relating to any actual,
alleged, or suspected infringement, misappropriation, or
violation by any of the Acquired Corporations, any of their
employees or agents, or any Company Product of any Intellectual
Property Rights of another Person, including any letter or other
communication suggesting or offering that the Company obtain a
license to any Intellectual Property Right of another Person.
(ii)
Other Infringement
Liability.
None of the Acquired Corporations is
bound by any Contract to indemnify, defend, hold harmless, or
reimburse any other Person with respect to, or otherwise assumed
or agreed to discharge or otherwise take responsibility for, any
existing or potential intellectual property infringement,
misappropriation, or similar claim (other than indemnification
provisions in the Acquired Corporations standard forms of
Company IP Contracts and its customers standard terms and
conditions of purchase, to which it may be subject, accurate and
complete copies of which have been delivered to Parent).
A-18
(iii)
Infringement Claims Affecting In-Licensed
IP.
To the knowledge of the Company, as of the
date of this Agreement, no claim or Proceeding involving any
Intellectual Property or Intellectual Property Right licensed to
any of the Acquired Corporations is pending or has been
threatened, except for any such claim or Proceeding that, if
adversely determined, would not adversely affect
(1)
the use or exploitation of such Intellectual
Property or Intellectual Property Right by any of the Acquired
Corporations, or
(2)
the design, development,
manufacturing, marketing, distribution, provision, licensing or
sale of any Company Product.
(k)
Part 2.10(k) of the Company Disclosure
Schedule
accurately identifies and describes
(i)
each item of Open Source Code that is contained
in or distributed with, or from which any part of any Company
Product is derived,
(ii)
the applicable license
terms for each such item of Open Source Code, and
(iii)
the Company Product or Company Products to
which each such item of Open Source Code relates.
(l)
No Company Product contains, is derived from, is
distributed with, or is being or was developed using Open Source
Code that is licensed under any terms that
(i)
impose or could impose a requirement or
condition that any Company Product or part thereof
(1)
be disclosed or distributed in source code form,
(2)
be licensed for the purpose of making
modifications or derivative works, or
(3)
be
redistributable at no charge, or
(ii)
otherwise
impose or could impose any other material limitation,
restriction, or condition on the right or ability of any of the
Acquired Corporations to use or distribute any Company Product.
(m)
Part 2.10(m) of the Company Disclosure
Schedule
contains each Company Privacy Policy in effect at
any time since January 1, 2007 and identifies, with respect
to each Company Privacy Policy,
(i)
the period of
time during which such privacy policy was or has been in effect,
(ii)
whether the terms of a later Company Privacy
Policy apply to the data or information collected under such
privacy policy, and
(iii)
if applicable, the
mechanism (such as opt-in, opt-out, or notice only) used to
apply a later Company Privacy Policy to data or information
previously collected under such privacy policy. Each of the
Acquired Corporations has complied at all times and in all
material respects with all of the Company Privacy Policies.
2.11
Contracts
.
(a)
Part 2.11(a) of the Company Disclosure
Schedule
identifies each Company Contract that, as of the
date of this Agreement, constitutes a Material
Contract. For purposes of this Agreement, each of the
following shall be deemed to constitute a
Material
Contract
:
(i)
any Contract: relating to the employment of, or
the performance of services by, any employee or consultant;
(1)
pursuant to which any of the Acquired
Corporations is or may become obligated to make any severance,
termination or similar payment in excess of $25,000 to any
current or former employee or director (except as required by
any applicable Legal Requirements in the case of employees
outside the United States and except for offer letters providing
for at will employment with no right to severance
other than in accordance with the Companys standard
severance policies as identified in reasonable detail in
Part 2.18(i) of the Company Disclosure Schedule
,
copies of which have
A-19
been made available to Parent); or
(2)
pursuant to
which any of the Acquired Corporations is or may become
obligated to make any bonus or similar payment (other than
payments constituting base salary) in excess of $100,000 to any
current or former employee or director (except for severance
payments required by any applicable Legal Requirements outside
of the United States);
(ii)
any Contract under which the Company leases any
of the Leased Real Property;
(iii)
any Company IP Contract;
(iv)
any Contract relating to the acquisition, sale,
spin-off, outsourcing or disposition of any business operation
or unit or any product line of any Acquired Corporation (other
than Contracts for transactions consummated prior to
January 1, 2007 under which no Acquired Corporation has any
obligations);
(v)
any Contract in which another Person is
appointed as an exclusive distributor, reseller or sales
representative with respect to, or otherwise is authorized to
exclusively market, promote, distribute, resell, sublicense,
support or solicit orders for, any Company Product;
(vi)
any Contract with any of the top ten
(10) distributors or resellers of Company Products (based
on revenue recognized from sales through, and to, the
Companys distributors and resellers) for each of fiscal
year 2009 and the first six (6) months of fiscal year 2010;
(vii)
any Contract that provides for indemnification
of any Company Associate (an
Indemnification
Contract
);
(viii)
any Contract imposing any restriction on the
right or ability of any Acquired Corporation:
(1)
to
compete with any other Person;
(2)
to acquire any
product or other asset or any services from any other Person;
(3)
to solicit, hire or retain any Person as an
employee, consultant or independent contractor;
(4)
to develop, sell, supply, distribute, offer,
support or service any product or any technology or other asset
to or for any other Person;
(5)
to perform services
for any other Person; or
(6)
to transact business or
deal in any other manner with any other Person;
(ix)
any Contract (other than Contracts evidencing
Company Options):
(1)
relating to the acquisition,
issuance, voting, registration, sale or transfer of any
securities;
(2)
providing any Person with any
preemptive right, right of participation, right of maintenance
or similar right with respect to any securities; or
(3)
providing any of the Acquired Corporations with
any right of first refusal with respect to, or right to
repurchase or redeem, any securities;
(x)
any Contract incorporating or relating to any
guaranty, any warranty, any sharing of liabilities or any
indemnity or similar obligation, except for
(1)
Contracts substantially similar in all material
respects to the standard forms of end-user licenses
A-20
previously delivered by the Company to Parent and
(2)
product or service warranties in the ordinary
course of business consistent with past practice;
(xi)
any Contract relating to any currency hedging;
(xii)
any Contract:
(1)
to which any
Governmental Body is a party or under which any Governmental
Body has any rights or obligations; or
(2)
directly
or indirectly benefiting any Governmental Body (including any
subcontract or other Contract between any Acquired Corporation
and any contractor or subcontractor to any Governmental Body);
(xiii)
any Contract requiring that any of the
Acquired Corporations give any notice or provide any information
to any Person prior to considering or accepting any Acquisition
Proposal or similar proposal, or prior to entering into any
discussions, agreement, arrangement or understanding relating to
any Acquisition Transaction or similar transaction;
(xiv)
any Contract that provides for the payment or
delivery of cash or other consideration in an amount or having a
value in excess of $250,000 in fiscal year 2010 (other than
Contracts for the sale of Company Products, or procurement of
inventory, in the ordinary course of business); and
(xv)
any Contract that could reasonably be expected
to have or result in a material effect on:
(1)
the
business, condition (financial or otherwise), capitalization,
assets (including Intellectual Property), liabilities (accrued,
contingent or otherwise), operations, financial performance or
prospects of any of the Acquired Corporations; or
(2)
the ability of the Company to perform any of its
obligations under this Agreement or to consummate any of the
Contemplated Transactions; and
(xvi)
any other Contract, if a breach of such
Contract could reasonably be expected to have or result in a
Company Material Adverse Effect.
The Company has delivered to Parent an accurate and complete
copy of each Company Contract that constitutes a Material
Contract (other than Company IP Contracts that do not need to be
specifically identified in
Part 2.10 of the Company
Disclosure Schedule
).
(b)
Each Company Contract that constitutes a
Material Contract is valid and in full force and effect, and is
enforceable in accordance with its terms, subject to
(i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other
equitable remedies.
(c)
Except as set forth in the applicable
subsections of
Part 2.11(c) of the Company Disclosure
Schedule
:
(i)
none of the Acquired Corporations
has in any material respect violated or breached, or committed
any material default under, any Material Contract; and, to the
knowledge of the Company, no other Person has in any material
respect violated or breached, or committed any material default
under, any Material Contract;
(ii)
no Material
Contract will expire according to its terms on or before
December 31, 2011; to the knowledge of
A-21
the Company, no event has occurred, and no circumstance or
condition exists, that (with or without notice or lapse of time)
could reasonably be expected to:
(1)
result in a
violation or breach of any of the provisions of any Material
Contract;
(2)
give any Person the right to declare a
default under any Material Contract;
(3)
give any
Person the right to receive or require a rebate, chargeback,
penalty in excess of $25,000;
(4)
give any Person
the right to materially change the delivery schedule under any
Company Contract;
(5)
give any Person the right to
accelerate the maturity or performance of any Material Contract;
or
(6)
give any Person the right to cancel,
terminate or modify any Material Contract; and
(iii)
since January 1, 2007, none of the
Acquired Corporations has received any notice or other
communication regarding any actual or possible violation or
breach of, or default under, any Material Contract which remains
unresolved.
2.12
Sale of Products; Performance of
Services
.
(a)
Except as set forth in
Part 2.12(a) of
the Company Disclosure Schedule
, each product, system,
program, item of Intellectual Property or other asset designed,
developed, manufactured, assembled, sold, installed, repaired,
licensed or otherwise made available by any of the Acquired
Corporations to any Person conformed and complied in all
material respects with the terms and requirements of any
applicable warranty or other Contract (subject to warranty
claims in the ordinary course of business) and with all
applicable Legal Requirements.
(b)
All installation services, programming services,
integration services, repair services, maintenance services,
support services, training services, upgrade services and other
services that have been performed by the Acquired Corporations
were performed in conformity with the terms and requirements of
all applicable warranties and other Contracts (subject to
warranty claims in the ordinary course of business) and with all
applicable Legal Requirements.
(c)
Except as set forth in
Part 2.12(c) of
the Company Disclosure Schedule
, since January 1, 2007,
no customer or other Person has asserted or, to the knowledge of
the Company, threatened to assert any material claim against any
of the Acquired Corporations under or based upon any warranty
provided by or on behalf of any of the Acquired Corporations
outside of the ordinary course of business or in excess of
warranty reserves set forth in the financial statements
contained or incorporated by reference in the Company SEC
Documents (or consistent therewith for periods after
September 30, 2010).
2.13
Liabilities.
None of the
Acquired Corporations has, and none of the Acquired Corporations
is or may become responsible for performing or discharging, any
accrued, contingent or other liabilities of any nature, either
matured or unmatured, except for:
(a)
liabilities
included or adequately reserved against in the Unaudited Interim
Balance Sheet;
(b)
current liabilities that have
been incurred by the Acquired Corporations since the date of the
Unaudited Interim Balance Sheet in the ordinary course of
business and consistent with past practices;
(c)
liabilities for performance of obligations of
the Acquired Corporation under Company Contracts, to the extent
such liabilities are readily ascertainable (in nature, scope and
amount) from the copies of such Company Contracts; and
(d)
liabilities described in
Part 2.13
or
Part 2.29 of the Company Disclosure Schedule
.
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2.14
Compliance with Legal Requirements
.
(a)
Each of the Acquired Corporations is, and has at
all times since January 1, 2007, been, in compliance in all
material respects with all applicable Legal Requirements. To the
knowledge of the Company, each Person who is or was a director
or officer of any Acquired Corporation is, and has at all times
since January 1, 2007 been, in connection with his or her
position as a director or officer of the Company, in compliance
in all material respects with all applicable Legal Requirements.
Since January 1, 2007, none of the Acquired Corporations
has received any written notice from any Governmental Body or
other Person regarding any actual or possible material violation
of, or failure to comply with, any material Legal Requirement.
(b)
Without limiting the generality of
Section 2.14(a), each of the Acquired Corporations is in
compliance with its obligations under any licenses issued or
granted to such Acquired Company by the Federal Communications
Commission (the
FCC
) and all
applicable Legal Requirements of the FCC. There is not pending
or, to the knowledge of the Company, threatened before the FCC,
any Legal Proceeding against any Acquired Company that would
reasonably be expected to either
(i)
materially
impact the ability of the Company to conduct its business as
currently conducted or as currently proposed to be conducted or
(ii)
result in any monetary Liability in excess of
$100,000.
2.15
Certain Business Practices
.
(a)
Except as set forth on
Part 2.15 of the
Company Disclosure Schedule
, none of the Acquired
Corporations, and (to the knowledge of the Company) no director,
officer, other employee or agent of any of the Acquired
Corporations, has:
(i)
used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses
relating to political activity;
(ii)
made any
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or
(iii)
made any
other unlawful payment.
(b)
The Company has disclosed all matters described
in
Part 2.15 of the Company Disclosure Schedule
to
the Department of Justice and the SEC. The Company is compliance
with the Consent and Final Judgment entered by the SEC on
December 1, 2010 (the
Final
Judgment
). None of the Acquired Corporations has
in any material respect violated or breached, or committed any
material default under, the Final Judgment.
2.16
Governmental Authorizations
.
(a)
The Acquired Corporations hold all Governmental
Authorizations necessary to enable the Acquired Corporations to
conduct their respective businesses in the manner in which such
businesses are currently being conducted. All such Governmental
Authorizations are valid and in full force and effect. Each
Acquired Corporation is, and at all times since January 1,
2007 has been, in compliance in all material respects with the
terms and requirements of such Governmental Authorizations.
Since January 1, 2007, none of the Acquired Corporations
has received any notice or other communication from any
Governmental Body regarding:
(i)
any actual or
possible violation of or failure to comply with any term or
requirement of any material Governmental Authorization; or
(ii)
any actual or possible revocation, withdrawal,
suspension, cancellation, termination or modification of any
material
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Governmental Authorization. No Governmental Body has at any time
challenged in writing the right of any of the Acquired
Corporations to design, manufacture, offer or sell any product
or service.
(b)
Part 2.16(b) of the Company Disclosure
Schedule
accurately and completely describes the terms of
each grant, incentive or subsidy provided or made available to
or for the benefit of any of the Acquired Corporations by any
U.S. or foreign Governmental Body or otherwise. Each of the
Acquired Corporations is in compliance in all material respects
with all of the terms and requirements of each grant, incentive
and subsidy identified or required to be identified in
Part 2.16(b) of the Company Disclosure Schedule
.
Neither the execution, delivery or performance of this
Agreement, nor the consummation of the Merger or any of the
other Contemplated Transactions, will (with or without notice or
lapse of time) give any Person the right to revoke, withdraw,
suspend, cancel, terminate or modify any grant, incentive or
subsidy identified or required to be identified in
Part 2.16(b) of the Company Disclosure Schedule
.
2.17
Tax Matters
.
(a)
Each of the Acquired Corporations has filed all
material Tax Returns that it was required to file under
applicable Legal Requirements. All such Tax Returns were correct
and complete in all material respects and have been prepared in
substantial compliance with all applicable Legal Requirements.
All material Taxes due and owing by each of the Acquired
Corporations (whether or not shown on any Tax Return) have been
paid. None of the Acquired Corporations is currently the
beneficiary of any extension of time within which to file any
Tax Return. No written claim has ever been made by an authority
in a jurisdiction where the Acquired Corporations do not file
Tax Returns that any of them is or may be subject to taxation by
that jurisdiction. There are no liens for Taxes (other than
Taxes not yet due and payable) upon any of the assets of any of
the Acquired Corporations.
(b)
Each of the Acquired Corporations has withheld
and paid all Taxes required to have been withheld and paid in
connection with any amounts paid or owing to any employee,
independent contractor, creditor, stockholder, or other third
party.
(c)
No Legal Proceedings are pending or being
conducted with respect to any of the Acquired Corporations. None
of the Acquired Corporations has received from any Governmental
Body any
(i)
written notice indicating an intent to
open an audit or other review, or written request for
information related to Tax matters, or
(ii)
notice
of deficiency or proposed adjustment of or any amount of Tax
proposed, asserted, or assessed by any Governmental Body against
any of the Acquired Corporations.
(d) Part 2.17(d) of the Company Disclosure Schedule
lists all income Tax Returns filed with respect to each of
the Acquired Corporations for taxable periods ended on or after
December 31, 2007, and all sales and use tax and VAT
returns for taxable periods ended on or after December 31,
2008, and lists those Tax Returns that have been audited, and
those that currently are the subject to audit. The Company has
delivered to Parent correct and complete copies of all federal
income Tax Returns, examination reports, and statements of
deficiencies
A-24
assessed against or agreed to by any of the Acquired
Corporations filed or received since January 1, 2008.
(e)
None of the Acquired Corporations has waived any
statute of limitations in respect of Taxes or agreed to any
extension of time with respect to a Tax assessment or deficiency.
(f)
None of the Acquired Corporations is a party to
any Contract that has resulted or would reasonably be expected
to result, separately or in the aggregate, in the payment of
(i)
any excess parachute payment within
the meaning of section 280G of the Code (or any
corresponding provisions of state, local or foreign Tax law) and
(ii)
any amount that will not be fully deductible as
a result of section 162(m) of the Code (or any
corresponding provisions of state, local or foreign Tax law).
The Company has not been a United States real property holding
corporation within the meaning of section 897(c)(2) of the
Code during the applicable period specified in
section 897(c)(1)(A)(ii) of the Code. Each of the Acquired
Corporations has disclosed on its federal income Tax Returns all
positions taken therein that would, in the event of an adverse
determination, give rise to a substantial understatement of
federal income Tax within the meaning of section 6662 of
the Code. None of the Acquired Corporations is a party to or
bound by any Tax allocation or Tax sharing agreement. Each of
the Acquired Corporations has
(1)
not been a member
of an Affiliated Group filing a consolidated federal income Tax
Return (other than a group the common parent of which was the
Company) or
(2)
no Liability for the Taxes of any
Person (other than such Acquired Corporation) under
regulation 1.1502-6
of the Code (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or
otherwise.
(g)
The unpaid Taxes of the Acquired Corporations
did not, as of the date of the Unaudited Interim Balance Sheet,
exceed the reserve for Tax Liability (rather than any reserve
for deferred Taxes established to reflect timing differences
between book and Tax income) set forth on the Unaudited Interim
Balance Sheet, and do not exceed that reserve as adjusted for
the passage of time through the Closing Date in accordance with
the past custom and practice of the Acquired Corporations in
filing their Tax Returns. Since the date of the Unaudited
Interim Balance Sheet, none of the Acquired Corporations has
incurred any liability for Taxes arising from extraordinary
gains or losses, determined in accordance with GAAP, outside the
ordinary course of business.
(h)
None of the Acquired Corporations will be
required to include any item of income in, or exclude any item
of deduction from, taxable income for any taxable period (or
portion there) ending after the Closing Date as a result of any:
(i)
change in method of accounting for taxable
period entered into on or prior to the Closing Date;
(ii)
closing agreement as described in
section 7121 of the Code (or any corresponding or similar
provision of state, local or foreign income Tax law) executed on
or prior to the Closing Date;
(iii)
intercompany
transactions or any excess loss account described in Treasury
Regulations under section 1502 of the Code (or any
corresponding or similar provisions of state, local or foreign
income Tax law) entered into or arising on or prior to the
Closing Date;
(iv)
installment sale or open
transaction disposition made on or prior to the Closing Date; or
(v)
prepaid amount received on or prior to the
Closing Date.
A-25
(i)
None of the Acquired Corporations has
distributed stock of another Person, or has had its stock
distributed by another Person, in a transaction that was
purported or intended to be governed in whole or in part by
section 355 or section 361 of the Code.
(j)
No activity giving rise to a permanent
establishment, or Taxes, or Tax reporting obligations for the
Acquired Corporations in a jurisdiction outside the United
States has been conducted by any of the Acquired Corporations or
any other person acting on behalf of the Acquired Corporations.
(k)
Each Company Benefit Plan is either exempt from
the application of Section 409A of the Code, or has been
maintained in form and in operation in compliance with
Section 409A of the Code and the applicable regulations and
guidance thereunder.
2.18
Employee and Labor Matters; Benefit
Plans
.
(a)
Part 2.18(a) of the Company Disclosure
Schedule
accurately sets forth, as of the date of the Prior
Agreement, with respect to each employee of each of the Acquired
Corporations (other than the PRC JVs) at the Manager level or
above (including any employee of any of such Acquired
Corporations who is on a leave of absence or on layoff status):
(i)
the name of such employee, the Acquired
Corporation by which such employee is employed and the date as
of which such employee was originally hired by such Acquired
Corporation and the latest employment contract with such
employee;
(ii)
such employees title, employment location
and current status (i.e., full-time, part-time; or other);
(iii)
such employees base salary and bonus
during the twelve (12) months ended June 30, 2010;
(iv)
any outstanding amounts due as compensation or
otherwise to such employees, including accrued and unused
vacation entitlements; and
(v)
any Governmental Authorization that is held by
such employee and that relates to or is useful in connection
with the businesses of the Acquired Corporations.
The Company has made available to Parent a correct and complete
list that accurately sets forth, as of the date hereof, the
names, employer and principal work locations of all other
employees (including employees of the PRC JVs) of the Acquired
Corporations below the level of Manager.
(b)
Part 2.18(b) of the Company Disclosure
Schedule
accurately identifies as of the date of the Prior
Agreement each former employee of any of the Acquired
Corporations who is receiving or is scheduled to receive (or
whose spouse or other dependent is receiving or is scheduled to
receive) any benefits (whether from any of the Acquired
Corporations or otherwise) relating to such former
employees employment with any of the Acquired Corporations
(other than COBRA continuation coverage at such former
employees expense) and
Part 2.18(b) of the
A-26
Company Disclosure Schedule
accurately describes such
benefits as of the date of the Prior Agreement.
(c)
The employment of each of the Acquired
Corporations employees is terminable by the applicable
Acquired Corporation at will (except as otherwise required by
applicable Legal Requirements or as set forth on
Part 2.18(c) of the Company Disclosure Schedule
).
The Company has made available to Parent accurate and complete
copies of all employee manuals and handbooks, disclosure
materials and policy statements relating to the employment of
the Company Associates.
(d)
To the knowledge of the Company:
(i)
as of the date of this Agreement, no employee of
any of the Acquired Corporations intends to terminate his
employment with the Company; and
(ii)
no employee of any of the Acquired Corporations
is a party to or is bound by any confidentiality agreement,
noncompetition agreement or other Contract (with any Person)
that may have an adverse effect on: (A) the performance by
such employee of any of his duties or responsibilities as an
employee of such Acquired Corporation; or (B) the business
or operations of the Acquired Corporations.
(e)
The Company has made available to Parent a
correct and complete list that accurately sets forth, with
respect to each Person who is or was, at any time since
January 1, 2009, an independent contractor of any of the
Acquired Corporations and who has received or may be entitled to
receive in excess of $50,000 from any of the Acquired
Corporations:
(i)
the name of such independent contractor, the
Acquired Corporation with which such independent contractor is
or was under contract and the date as of which such independent
contractor was originally hired by such Acquired Corporation;
(ii)
a description of such independent
contractors services;
(iii)
the fees or compensation payable to such
independent contractor in 2010; and
(iv)
any Governmental Authorization that is held by
such independent contractor and that relates to or is useful in
connection with the businesses of the Acquired Corporations.
(f)
Except as set forth in
Part 2.18(f) of
the Company Disclosure Schedule
, none of the Acquired
Corporations is a party to, bound by, or has a duty to bargain
for, any collective bargaining agreement or other Contract with
a labor organization representing any of its employees, and
there are no labor organizations representing, purporting to
represent or, to the knowledge of the Company, seeking to
represent any employees of any of the Acquired Corporations.
A-27
(g)
As of the date of this Agreement, there has
never been, nor has there been any threat of, any strike,
slowdown, work stoppage, lockout, job action, union organizing
activity, question concerning representation or any similar
activity or dispute, affecting any of the Acquired Corporations
or any of their employees.
(h)
None of the Acquired Corporations is or has ever
been engaged, in any unfair labor practice within the meaning of
the National Labor Relations Act, or unlawful labor practices
under the relevant Legal Requirements of its respective
jurisdiction. As of the date of this Agreement, there is no
Legal Proceeding, claim, labor dispute or grievance pending or,
to the knowledge of the Company, threatened or reasonably
anticipated relating to any employment contract, privacy right,
labor dispute, wages and hours, employee welfare and benefits,
leave of absence, plant closing notification, workers
compensation policy, long-term disability policy, harassment,
retaliation, immigration, employment statute or regulation,
safety or discrimination matter involving any Company Associate,
including charges of unfair labor practices or discrimination
complaints.
(i)
Part 2.18(i) of the Company Disclosure
Schedule
contains an accurate and complete list as of the
date hereof of each Company Benefit Plan and each Company
Benefit Agreement. None of the Acquired Corporations has any
plan or commitment to create any additional Company Benefit
Plan, or to modify or change any existing Company Benefit Plan
(other than to comply with applicable Legal Requirements as
previously disclosed to Parent in writing) in a manner that
would materially affect any Company Associate.
(j)
With respect to each Company Benefit Plan, the
Company has made available to Parent:
(i)
an
accurate and complete copy of all documents setting forth the
terms of such Company Benefit Plan, including all amendments
thereto and all related trust documents;
(ii)
a
complete and accurate copy of the annual report
(Form Series 5500 and all schedules and financial
statements attached thereto), if any, required under ERISA or
the Code, with respect to such Company Benefit Plan for the most
recent plan year;
(iii)
if such Company Benefit Plan
is subject to the minimum funding standards of Section 302
of ERISA, the most recent annual and periodic accounting of such
Company Benefit Plans assets;
(iv)
the most
recent summary plan description together with the summaries of
material modifications thereto, if any, required under ERISA
with respect to such Company Benefit Plan;
(v)
if
such Company Benefit Plan is funded through a trust or any third
party funding vehicle, an accurate and complete copy of the
trust or other funding agreement (including all amendments
thereto) and accurate and complete copies of the most recent
financial statements thereof;
(vi)
accurate and
complete copies of all Contracts relating to such Company
Benefit Plan, including service provider agreements, insurance
contracts, minimum premium contracts, stop-loss agreements,
investment management agreements, subscription and participation
agreements and recordkeeping agreements;
(vii)
all
written materials provided to any Company Associate relating to
such Company Benefit Plan and any proposed Company Benefit
Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration
of payments or vesting schedules or other events that would
result in any liability to any of the Acquired Corporations or
any Company Affiliate;
(viii)
all material
correspondence, if any, to or from any Governmental Body
relating to such Company Benefit Plan;
(ix)
all
forms and related notices required under COBRA with respect to
such Company Benefit Plan;
(x)
all insurance
policies, if
A-28
any, in the possession of any of the Acquired Corporations or
any Company Affiliate pertaining to fiduciary liability
insurance covering the fiduciaries for such Company Benefit
Plan;
(xi)
if such Company Benefit Plan is intended
to be qualified under Section 401(a) of the Code, all
discrimination tests, if any, required under the Code for such
Company Benefit Plan for the three most recent plan years;
(xii)
if such Company Benefit Plan is intended to be
qualified under Section 401(a) of the Code, the most recent
IRS determination letter (or opinion letter, if applicable)
received with respect to such Company Benefit Plan; and
(xiii)
if such Company Benefit Plan is a Foreign
Plan, all Governmental Authorizations received from any foreign
Governmental Body with respect to such Company Benefit Plan.
(k)
Each of the Company Benefit Plans has been
operated and administered in all material respects in accordance
with its terms and with applicable Legal Requirements, including
ERISA, the Code, applicable U.S. and
non-U.S. securities
laws and regulations and applicable foreign Legal Requirements.
Each of the Acquired Corporations and Company Affiliates has
performed all obligations required to be performed by them under
each Company Benefit Plan and none of the Acquired Corporations
is in default or violation of the material terms of any Company
Benefit Plan. To the knowledge of the Company, there has been no
default or violation by any other party with respect to any term
of any Company Benefit Plan. Any Company Benefit Plan intended
to be qualified under Section 401(a) of the Code has
obtained a favorable determination letter (or opinion letter, if
applicable) as to its qualified status under the Code, and to
the knowledge of the Company, there has not been any event,
condition or circumstance that could reasonably be expected to
result in disqualification under the Code (or, in the case of a
Foreign Plan, the equivalent of disqualification under any
applicable foreign Legal Requirement). No prohibited
transaction, within the meaning of Section 4975 of
the Code or Sections 406 and 407 of ERISA (other than a
transaction exempt under Section 408 of ERISA), has
occurred with respect to any Company Benefit Plan. There are no
claims or Legal Proceedings pending, or, to the knowledge of the
Company, threatened or reasonably anticipated (other than
routine claims for benefits), against any Company Benefit Plan
or against the assets of any Company Benefit Plan. To the
knowledge of the Company, no breach of fiduciary duty has
occurred with respect to which any Acquired Corporation or any
of its fiduciaries could reasonably be expected to incur a
material liability. Each Company Benefit Plan (other than any
Company Benefit Plan to be terminated prior to the Closing in
accordance with this Agreement) can be amended, terminated or
otherwise discontinued after the Effective Time in accordance
with its terms, without liability to Parent, the Acquired
Corporations or any Company Affiliate (other than ordinary
administration expenses). No Company Benefit Plan is under audit
or investigation, or is subject to any other Legal Proceeding
commenced by the IRS, the DOL or any other Governmental Body,
nor is any such audit, investigation or other Legal Proceeding
pending or, to the knowledge of the Company, threatened. None of
the Acquired Corporations nor any Company Affiliate has ever
incurred any material penalty or material tax with respect to
any Company Benefit Plan under Section 502(i) of ERISA or
Sections 4975 through 4980 of the Code. No mortgage, lien,
pledge, charge, security interest or other Encumbrance of any
kind has been imposed under the Code, ERISA or any foreign Legal
Requirement with respect to any Company Benefit Plan or any of
the assets of any Company Benefit Plan. All contributions,
premiums and expenses to or in respect of each Company Benefit
Plan have been paid in full or, to the extent not yet due, have
been adequately accrued on the Unaudited Interim Balance Sheet.
A-29
(l)
None of the Acquired Corporations nor any
Company Affiliate has ever maintained, established, sponsored,
participated in, or contributed to any:
(i)
Company
Benefit Plan subject to Section 302 or Title IV of
ERISA or Section 412 of the Code;
(ii)
multiemployer plan within the
meaning of Section 3(37) of ERISA;
(iii)
multiple employer plan (within the
meaning of Section 413(c) of the Code); or
(iv)
Company Benefit Plan in which stock of any of
the Acquired Corporations or any Company Affiliate is or was
held as a plan asset within the meaning of DOL
Regulations
Section 2510.3-101.
The fair market value of the assets of each funded Foreign Plan,
the liability of each insurer for any Foreign Plan funded
through insurance, or the book reserve established for any
Foreign Plan, together with any accrued contributions, is
sufficient to procure or provide in full for the accrued benefit
obligations, with respect to all current and former participants
in such Foreign Plan according to the actuarial assumptions and
valuations most recently used to determine employer
contributions to and obligations under such Foreign Plan.
Neither the execution of this Agreement, nor the consummation of
any of the Contemplated Transactions, will cause any of the
assets or insurance obligations to be less than the benefit
obligations under such Company Benefit Plan or Foreign Plan.
(m)
No Company Benefit Plan provides (except at no
cost to the Acquired Corporations or any Company Affiliate), or
reflects or represents any liability of any of the Acquired
Corporations or any Company Affiliate to provide, retiree life
insurance, retiree health benefits or other retiree employee
welfare benefits to any Person for any reason, except as may be
required by COBRA or other applicable Legal Requirements. Other
than commitments made that involve no future costs to any of the
Acquired Corporations or any Company Affiliate, no Acquired
Corporations nor any Company Affiliate has ever represented,
promised or contracted (whether in oral or written form) to any
Company Associate (either individually or as a part of a group
of Company Associates) or any other Person that such Company
Associate or other person would be provided with retiree life
insurance, retiree health benefit or other retiree employee
welfare benefits, except to the extent required by applicable
Legal Requirements.
(n)
Except as set forth in
Part 2.18(n) of
the Company Disclosure Schedule
, neither the execution of
this Agreement nor the consummation of any of the Contemplated
Transactions (either alone or in combination with another event,
whether contingent or otherwise) will
(i)
result in
any payment (including bonus, severance or otherwise) or
obligation to any Company Associate (whether or not under any
Company Benefit Plan);
(ii)
materially increase the
benefits payable or provided to, or result in a forgiveness of
any indebtedness of, any Company Associate;
(iii)
accelerate the vesting, funding or time of
payment of any compensation, equity award or other similar
benefit;
(iv)
result in any parachute
payment under Section 280G of the Code (whether or
not such payment is considered to be reasonable compensation for
services rendered); or
(v)
cause any compensation to
fail to be deductible under Section 162(m) of the Code or
any other provision of the Code or any similar foreign Legal
Requirement. Without limiting the generality of the foregoing
(and except as set forth in
Part 2.18(n) of the Company
Disclosure Schedule
), the consummation of the Contemplated
Transactions will not result in the acceleration of vesting of
any Unvested Company Options.
(o)
Except as set forth in
Part 2.18(o) of
the Company Disclosure Schedule
, each of the Acquired
Corporations and Company Affiliates:
(i)
is, and at
all times has been, in
A-30
compliance in all material respects with all applicable Legal
Requirements respecting employment, employment practices, terms
and conditions of employment and wages and hours, in each case,
with respect to Company Associates, including the health care
continuation requirements of COBRA, the requirements of FMLA,
the requirements of HIPAA and any similar provisions of state
law;
(ii)
has withheld and reported all material
amounts required by any Legal Requirement or Contract to be
withheld and reported with respect to wages, salaries and other
payments to any Company Associate;
(iii)
has no
material liability for any arrears of wages or any Taxes or any
penalty for failure to comply with the Legal Requirements
applicable to any of the foregoing; and
(iv)
has no
material liability for any payment to any trust or other fund
governed by or maintained by or on behalf of any Governmental
Body with respect to unemployment compensation benefits, social
security or other benefits or obligations for any Company
Associate (other than routine payments to be made in the normal
course of business and consistent with past practice). Since
January 1, 2004, none of the Acquired Corporations has
effectuated a plant closing, partial plant
closing, mass layoff, relocation
or termination (each as defined in the Worker
Adjustment and Retraining Notification Act (the
WARN
Act
) or any similar Legal Requirement) affecting
any site of employment or one or more facilities or operating
units within any site of employment or facility of any of the
Acquired Corporations.
(p)
To the knowledge of the Company, no stockholder
nor any Company Associate is obligated under any Contract or
subject to any judgment, decree, or order of any court or other
Governmental Body that would interfere with such Persons
efforts to promote the interests of the Acquired Corporations or
that would interfere with the businesses of the Acquired
Corporations or any Company Affiliate. Neither the execution nor
the delivery of this Agreement, nor the carrying on of the
business of the Acquired Corporations or any Company Affiliate
as presently conducted nor any activity of such stockholder or
Company Associate in connection with the carrying on of the
business of the Acquired Corporations or any Company Affiliate
as presently conducted will, to the knowledge of the Company,
conflict with, result in a breach of the terms, conditions or
provisions of, or constitute a default under, any Contract under
which any of such stockholders or Company Associates is now
bound.
(q)
In connection with employment by the Acquired
Corporations in Peoples Republic of China
(
PRC
):
(i)
no Acquired Corporation is a party to any
collective bargaining agreement or other labor union contract
applicable to persons employed by the Acquired Corporations, and
currently there are no organizational campaigns, petitions or
other unionization activities seeking recognition of a
collective bargaining unit which could materially affect the
Acquired Corporations;
(ii)
there are no strikes, slowdowns, lock-outs,
controversies material to the relevant Acquired Corporation, or
work stoppages pending or threatened between the Acquired
Corporations and any of the employees, and no Acquired
Corporation has experienced any such strike, slowdown,
lock-outs, controversy, or work stoppage within the past three
(3) years;
(iii)
the Acquired Corporations are and have been in
compliance in all material respects with all applicable Legal
Requirements, (including without limitation,
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PRC Labor Contract Law) relating to the employment of labor,
(including without limitation those related to wages, hours and
collective bargaining), and is not liable for any arrears of
wages, taxes, allowances, benefits, severance pay, penalties or
other sums for failure to comply with any of the foregoing;
(iv)
the Acquired Corporations have paid in full to
all current and former directors, officers and employees or
adequately accrued for in accordance with Legal Requirements all
wages, salaries, commissions, bonuses, benefits allowances,
severance pay and other compensation due to or on behalf of
their respective current and former directors, officers and
employees;
(v)
there are no Legal Proceedings that have been
asserted or are now pending or threatened with respect to the
Acquired Corporations for unfair labor practices, payment of
withholding taxes, payment of wages, salary or severance,
employee benefit contribution, safety and health standards or
discrimination in employment practices; and
(vi)
the Acquired Corporations have made all
required contributions, concerning national pension, national
medical insurance, workers compensation insurance,
unemployment insurance, housing fund and other mandatory social
security matters.
2.19
Environmental Matters
.
(a)
Each of the Acquired Corporations:
(i)
is and has been in compliance in all material
respects with, and has not been and is not in material violation
of or subject to any material liability under, any applicable
Environmental Requirements (as defined in Section 2.19(f));
and
(ii)
possesses all permits and other
Environmental Authorizations (as defined in
Section 2.19(f)), and is in compliance with the terms and
conditions thereof.
(b)
As of the date of this Agreement, none of the
Acquired Corporations has received any written notice, whether
from a Governmental Body, citizens group, Company Associate or
otherwise, that alleges that any of the Acquired Corporations is
not or might not be in compliance with any Environmental
Requirement or Environmental Authorization, and, to the
knowledge of the Company, there are no circumstances that may
prevent or interfere with the compliance by any of the Acquired
Corporations with any Environmental Requirement or Environmental
Authorization in the future.
(c)
To the knowledge of the Company:
(i)
all property that is or was owned in fee by,
leased to, controlled by or used by any of the Acquired
Corporations, and all surface water, groundwater and soil
associated with or adjacent to such property, is free of any
Materials of Environmental Concern (as defined in
Section 2.19(f)) or material environmental contamination of
any nature;
(ii)
none of the property that is or was
owned in fee by, leased to, controlled by or used by any of the
Acquired Corporations contains any underground storage tanks,
asbestos, equipment using PCBs or underground injection wells;
and
(iii)
none of the property that is or was owned
in fee by, leased to, controlled by or used by any of the
Acquired Corporations contains any septic tanks in which process
wastewater or any Materials of Environmental Concern have been
Released (as defined in Section 2.19(f)).
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(d)
No Acquired Corporation has ever Released any
Materials of Environmental Concern except in compliance in all
material respects with all applicable Environmental Requirements.
(e)
No Acquired Corporation has ever sent or
transported, or arranged to send or transport, any Materials of
Environmental Concern to a site that, pursuant to any applicable
Environmental Requirement:
(i)
has been placed on
the National Priorities List of hazardous waste
sites or any similar state list;
(ii)
is otherwise
designated or identified as a potential site for remediation,
cleanup, closure or other environmental remedial activity; or
(iii)
is subject to a Legal Requirement to take
removal or remedial action as detailed
in any applicable Environmental Requirement or to make payment
for the cost of cleaning up any site.
(f)
For purposes of this Section 2.19:
(i)
Environmental Requirement
means any federal, state, local or foreign Legal Requirement,
order, writ, injunction, directive, authorization, judgment,
decree, grant, franchise, Contract or other governmental
restriction and requirement, whether judicial or administrative,
relating to pollution or protection of human health and safety,
natural resources or the environment (including ambient air,
surface water, ground water, land surface or subsurface strata),
including any Legal Requirement relating to emissions,
discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern;
(ii)
Environmental Authorization
means any Governmental Authorization required under applicable
Environmental Requirements;
(iii)
Materials of
Environmental Concern
include chemicals,
pollutants, contaminants, wastes, toxic substances, petroleum
and petroleum products and any other substance that is now or
hereafter regulated by any Environmental Requirement or that is
otherwise a danger to health, reproduction or the environment;
and
(iv)
Release
means any
spilling, leaking, emitting, discharging, depositing, escaping,
leaching, dumping or other releasing into the environment,
whether intentional or unintentional.
2.20
Insurance
.
(a)
The Company has delivered to Parent accurate and
complete copies of all material insurance policies and all
material self insurance programs and arrangements relating to
the business, assets, liabilities and operations of the Acquired
Corporations, including, without limitation, the liability and
property insurance policies with respect to the real property
required to be disclosed pursuant to
Part 2.9 of the
Company Disclosure Schedule
. Each of such insurance policies
is in full force and effect and is sufficient in amount (subject
to reasonable deductions) to allow it to replace any of the
assets of the Acquired Corporations that might be damaged or
destroyed. Except as set forth in
Part 2.20(a) of the
Company Disclosure Schedule
, since January 1, 2007,
none of the Acquired Corporations has received any notice or
other communication regarding any actual or possible:
(i)
cancellation or invalidation of any insurance
policy or
(ii)
refusal or denial of any coverage,
reservation of rights or rejection of any material claim under
any insurance policy. Except as set forth in
Part 2.20(a) of the Company Disclosure Schedule
,
there is no pending workers compensation or other claim
under or based upon any insurance policy of any of the Acquired
Corporations.
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(b)
The Company has delivered to Parent accurate and
complete copies of the existing policies (primary and excess) of
directors and officers liability insurance
maintained by the Company as of the date of this Agreement (the
Existing D&O Policies
). The
Company has delivered to Parent accurate and complete copies of
all directors and officers liability insurance
policies issued to the Company incepting on or after
January 1, 2007.
Part 2.20(b) of the Company
Disclosure Schedule
accurately sets forth the most recent
annual premiums paid by the Company with respect to the Existing
D&O Policies.
2.21
Transactions with
Affiliates.
Except as set forth in the Company
SEC Documents filed prior to the date of this Agreement, since
the date of the Companys last proxy statement filed with
the SEC, no event has occurred that would be required to be
reported by the Company pursuant to Item 404 of
Regulation S-K
promulgated by the SEC.
2.22
Legal Proceedings; Orders
.
(a)
Except as set forth in
Part 2.22(a) of
the Company Disclosure Schedule
, there is no pending Legal
Proceeding, and (to the knowledge of the Company) no Person has
threatened to commence any Legal Proceeding:
(i)
that involves any of the Acquired Corporations,
any Company Associate (in his or her capacity as such) or any of
the assets owned or used by any of the Acquired Corporations; or
(ii)
that challenges, or that may have the effect of
preventing, delaying, making illegal or otherwise interfering
with, the Merger or any of the other Contemplated Transactions.
The Legal Proceedings identified in
Part 2.22(a) of the
Company Disclosure Schedule
have not had and could not
reasonably be expected to have or result in a Company Material
Adverse Effect.
(b)
There is no order, writ, injunction, judgment or
decree to which any of the Acquired Corporations, or any of the
assets owned or used by any of the Acquired Corporations, is
subject. To the knowledge of the Company, no officer or other
key employee of any of the Acquired Corporations is subject to
any order, writ, injunction, judgment or decree that prohibits
such officer or other employee from engaging in or continuing
any conduct, activity or practice relating to the business of
any of the Acquired Corporations.
2.23
Authority; Binding Nature of
Agreement.
The Company has all necessary
corporate power and authority to enter into and to perform its
obligations under this Agreement. The Board of Directors (at a
meeting duly called and held) has:
(a)
unanimously
determined that the Merger is advisable and fair to and in the
best interests of the Company and its stockholders;
(b)
unanimously authorized and approved the
execution, delivery and performance of this Agreement by the
Company and unanimously approved the Merger;
(c)
unanimously recommended the adoption and
approval of this Agreement by the holders of Company Common
Stock and directed that this Agreement and the Merger be
submitted for consideration by the Companys stockholders
at the Company Stockholders Meeting (as defined in
Section 4.5(a)); and
(d)
to the extent
necessary, unanimously adopted a resolution having the effect of
causing the Company not to be subject to any state takeover law
or similar Legal Requirement that might otherwise apply to the
Merger or any of the other Contemplated Transactions;
provided
that any action by the Board of Directors shall
be considered unanimous for all purposes under this Agreement if
approved by the vote of all disinterested members of the Board
of Directors (with any interested members abstaining). This
Agreement constitutes the legal, valid and binding
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obligation of the Company, enforceable against the Company in
accordance with its terms, subject to:
(i)
laws of
general application relating to bankruptcy, insolvency and the
relief of debtors; and
(ii)
rules of law governing
specific performance, injunctive relief and other equitable
remedies.
2.24
Inapplicability of Anti-takeover
Statutes.
The Board of Directors has taken and
will take all actions necessary to ensure that the restrictions
applicable to business combinations contained in
Section 203 of the DGCL are, and will be, inapplicable to
the execution, delivery and performance of this Agreement and
the Voting Agreements and to the consummation of the Merger and
the other Contemplated Transactions. No other state takeover
statute or similar Legal Requirement applies or purports to
apply to the Merger, this Agreement, the Voting Agreements or
any of the other Contemplated Transactions.
2.25
No Discussions.
None of the
Acquired Corporations, and no Representative of any of the
Acquired Corporations, is engaged, directly or indirectly, in
any discussions or negotiations with any other Person relating
to any Acquisition Proposal. Since January 1, 2009, none of
the Acquired Corporations has terminated or waived any rights
under any confidentiality, standstill,
nonsolicitation or similar agreement with any third party to
which any of the Acquired Corporations is or was a party or
under which any of the Acquired Corporations has or had any
rights.
2.26
Vote Required.
The
affirmative vote of the holders of a majority of the shares of
Company Common Stock outstanding on the record date for the
Company Stockholders Meeting and entitled to vote (the
Required Stockholder Vote
) is the only
vote of the holders of any class or series of the Companys
capital stock necessary to adopt or approve this Agreement and
approve the Merger or the other Contemplated Transactions.
2.27
Non-Contravention;
Consents.
Except as set forth in
Part 2.27 of the Company Disclosure Schedule
,
neither (x) the execution, delivery or performance of this
Agreement, nor (y) the consummation of the Merger or any of
the other Contemplated Transactions, will directly or indirectly
(with or without notice or lapse of time):
(a)
contravene, conflict with or result in a
violation of
(i)
any of the provisions of the
certificate of incorporation, bylaws or other charter or
organizational documents of any of the Acquired Corporations, or
(ii)
any resolution adopted by the stockholders, the
Board of Directors or any committee of the board of directors of
any of the Acquired Corporations;
(b)
contravene, conflict with or result in a
violation of, or give any Governmental Body or other Person the
right to challenge the Merger or any of the other Contemplated
Transactions or to exercise any remedy or obtain any relief
under, any Legal Requirement or any order, writ, injunction,
judgment or decree to which any of the Acquired Corporations, or
any of the assets owned or used by any of the Acquired
Corporations, is subject;
(c)
contravene, conflict with or result in a
violation of any of the terms or requirements of, or give any
Governmental Body the right to revoke, withdraw, suspend,
cancel, terminate or modify, any Governmental Authorization that
is held by any of the Acquired
A-35
Corporations or that otherwise relates to the business of any of
the Acquired Corporations or to any of the assets owned or used
by any of the Acquired Corporations;
(d)
contravene, conflict with or result in a
violation or breach of, or result in a default under, any
provision of any Material Contract, or give any Person the right
to:
(i)
declare a default or exercise any remedy
under any Material Contract;
(ii)
a rebate,
chargeback, penalty, or change in the delivery schedule under
any Material Contract;
(iii)
accelerate the maturity
or performance of any Material Contract; or
(iv)
cancel, terminate or modify any term of any
Material Contract;
(e)
result in the imposition or creation of any
Encumbrance upon or with respect to any asset owned or used by
any of the Acquired Corporations (except for minor liens that
will not, in any case or in the aggregate, materially detract
from the value of the assets subject thereto or materially
impair the operations of any of the Acquired
Corporations); or
(f)
result in the transfer of any material asset of
any of the Acquired Corporations to any Person.
Except as may be required by the Exchange Act, the DGCL, and any
foreign antitrust Legal Requirement, none of the Acquired
Corporations was, is or will be required to make any filing with
or give any notice to, or to obtain any Consent from, any Person
in connection with (x) the execution, delivery or
performance of this Agreement, or (y) the consummation of
the Merger or any of the other Contemplated Transactions.
2.28
Fairness Opinion.
The Special
Committee of the Board of Directors has received the written
opinion of UBS Securities LLC, financial advisor to the Company
(the
Financial Advisor
), dated the
date of the Prior Merger Agreement, to the effect that the
Merger Consideration (as defined in the Prior Merger Agreement)
was fair, from a financial point of view, to the Company
Stockholders (other than the Rollover Holders).
2.29
Financial Advisor.
Except for
the Financial Advisor, no broker, finder or investment banker is
entitled to any brokerage fee, finders fee, opinion fee,
success fee, transaction fee or other fee or commission in
connection with the Merger or any of the other Contemplated
Transactions based upon arrangements made by or on behalf of any
of the Acquired Corporations. The Company has furnished to
Parent accurate and complete copies of all agreements under
which any such fees, commissions or other amounts have been paid
or may become payable and all indemnification and other
agreements related to the engagement of the Financial Advisor.
Part 2.29 of the Disclosure schedule contains
a good
faith estimate of the fees and expenses of any investment
banker, broker, advisor or similar party, and any accountant,
legal counsel or other Person retained by the Company in
connection with this Agreement or the transactions contemplated
hereby that are
(a)
accrued but unpaid through the
date of this Agreement;
(b)
payable conditioned upon
the consummation of the Merger and
(c)
reasonably
expected to be incurred from the date of this Agreement through
the Effective Time, and such estimates are based upon
information provided to the Company by the respective Person.
2.30
Shanghai Construction
Project.
Prior to the date hereof, the Company
has furnished to Parent a forecast of cash payments to be made
by, or on behalf of, the Acquired
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Corporations after the date hereof under the Shanghai
Construction Contract. Such forecast was prepared in good faith
based upon reasonable assumptions and consistent with the terms
of the Shanghai Construction Contract. The Company has not made
(and will not make) any payments under the Shanghai Construction
Contract, other than
(a)
such payments as are
required to be made by the express terms of the Shanghai
Construction Contract (as in effect on the date hereof); or
(b)
payments not in excess of $100,000 in the
aggregate.
Section 3. Representations
and Warranties of Parent and Merger Sub.
Except as disclosed in the Parent Disclosure Schedule (as to
which a disclosure in one section of the Parent Disclosure
Schedule shall be deemed disclosed in each other section where
it is reasonably apparent on its face that the matter disclosed
is responsive to the representations and warranties in such
section), Parent and Merger Sub represent and warrant to the
Company as follows:
3.1
Due Organization.
Each of
Parent and Merger Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware.
3.2
Authority; Binding Nature of
Agreement.
Parent and Merger Sub have the
absolute and unrestricted right, power and authority to perform
their obligations under this Agreement; and the execution,
delivery and performance by Parent and Merger Sub of this
Agreement have been duly authorized by any necessary action on
the part of Parent and Merger Sub and their respective boards of
directors. This Agreement constitutes the legal, valid and
binding obligation of Parent and Merger Sub, enforceable against
them in accordance with its terms, subject to:
(a)
laws of general application relating to
bankruptcy, insolvency and the relief of debtors; and
(b)
rules of law governing specific performance,
injunctive relief and other equitable remedies.
3.3
Non-Contravention;
Consents.
Neither the execution and delivery of
this Agreement by Parent and Merger Sub nor the consummation by
Parent and Merger Sub of the Merger will:
(a)
conflict with or result in any breach of the certificate of
incorporation or bylaws of Parent or Merger Sub;
(b)
result in a default by Parent or Merger Sub
under any Contract to which Parent or Merger Sub is a party,
except for any default that has not had and will not have a
Parent Material Adverse Effect, or
(c)
result in a
violation by Parent or Merger Sub of any Legal Requirement or
any order, writ, injunction, judgment or decree to which Parent
or Merger Sub is subject, except for any violation that will not
have a Parent Material Adverse Effect. Except as may be required
by any foreign antitrust Legal Requirement, neither Parent nor
Merger Sub was, is and will be required to make any filing with
or give any notice to, or to obtain any Consent from, any
Governmental Body in connection with:
(i)
the
execution, delivery or performance of this Agreement; or
(ii)
the consummation of the Merger or any of the
other Contemplated Transactions.
3.4
Schedule 13E-3;
Proxy Statement; Other Information.
None of the
information furnished by Parent or its Subsidiaries in writing
to be included in the Proxy Statement or the
Schedule 13E-3
shall
(a)
on the date the Proxy Statement (including
any amendment or supplement) is first mailed to stockholders of
the Company,
(b)
at the time of the Company
Stockholders Meeting, or
(c)
in the case of
the
Schedule 13E-3
(including any
A-37
amendment or supplement or document to be incorporated by
reference), on the date it is filed with the SEC, contain any
statement which, at such time and in light of the circumstances
under which made, is false or misleading with respect to any
material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements made
therein not false or misleading in light of the circumstances
under which made. Notwithstanding the foregoing, neither Parent
nor Merger Sub makes any representation or warranty with respect
to any information supplied by the Company for inclusion or
incorporation by reference in the
Schedule 13E-3
or the Proxy Statement.
3.5
Availability of Funds;
Guarantee.
Parent will have available to it upon
the consummation of the Merger sufficient funds to consummate
the transactions contemplated hereby, including payment in full
of the aggregate Merger Consideration. The Sponsors have
delivered the Guarantee to the Company in the form attached
hereto as
Exhibit C
. The Guarantee is in full
force and effect and no event has occurred which, with or
without notice, lapse of time or both, would constitute a
default or breach on the part of either Parent or Sponsors under
any term or condition of any Guarantee.
3.6
Solvency.
Assuming,
(a)
satisfaction of the conditions to the
Parents obligations to consummate the Merger as set forth
herein and
(b)
the accuracy of the representations
and warranties of the Company set forth in Section 2
hereof,
(i)
immediately after giving effect to the
transactions contemplated by this Agreement and the closing of
any financing to be obtained by the Parent or any of its
Affiliates in order to effect the transactions contemplated by
this Agreement, the Surviving Corporation shall, as of such
date, be able to pay its debts as they become due and shall own
property having a fair saleable value greater than the amounts
required to pay its debts (including a reasonable estimate of
the amount of all contingent liabilities) as they become
absolute and mature; and
(ii)
immediately after
giving effect to the transactions contemplated by this Agreement
and the closing of any financing to be obtained by the Parent or
any of its Affiliates in order to effect the transactions
contemplated by this Agreement, the Surviving Corporation shall
not have, as of such date, unreasonably small capital to carry
on its business. Neither the Parent nor Merger Sub is entering
into the transactions contemplated by this Agreement with the
intent to hinder, delay or defraud either present or future
creditors of the Parent or the Surviving Corporation.
3.7
Management and Stockholder
Arrangements.
As of the date hereof, except as
disclosed in
Schedule 3.7
hereto, none of Parent,
Merger Sub or any of their Affiliates have
(a)
entered into any Contract with any of the
executive officers of the Company directly related to the Merger
and/or
any
of the other transactions contemplated by this Agreement or
(b)
entered into any Contract with any holder of the
Companys capital stock concerning any investments to be
made in, or contributions to be made to, Parent, Merger Sub or
the Surviving Corporation in connection with the Merger
and/or
any
other transactions contemplated by this Agreement.
3.8
No Additional
Representations.
Parent and Merger Sub
acknowledge and agree that the Company has not made any
representation or warranty, express or implied, as to any matter
or as to the accuracy or completeness of any information
provided, except as expressly set forth in this Agreement.
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3.9
Ownership of Company Common
Stock.
Neither Parent nor any of its
Subsidiaries, nor to Parents knowledge, any of their
respective Affiliates, beneficially owns, directly or
indirectly, any shares of Company Common Stock or other
securities convertible or exchangeable into, or exercisable for,
Company Common Stock (except as may be set forth or contemplated
by the Rollover Agreements with respect to the Rollover Shares).
Other than the Voting Agreements, there are no voting trusts or
other agreements, arrangements or understandings to which Parent
or any of its Subsidiaries is a party with respect to the voting
of the Company Common Stock or other equity interest of the
Company or any of its Subsidiaries. Other than this Agreement
and the Contemplated Transactions (and except as may be set
forth or contemplated by the Rollover Agreements with respect to
the Rollover Shares), there are no agreements, arrangements or
understandings to which Parent or any of its Subsidiaries is a
party with respect to the acquisition, divestiture, retention,
purchase, sale or tendering of the capital stock or other equity
interest of the Company or any of its Subsidiaries. Neither
Parent nor Merger Sub, nor to Parents knowledge, any of
their respective Affiliates, has been an interested
stockholder of the Company within the last three years
prior to the date of this Agreement as those terms are used in
Section 203 of the DGCL.
Section
4.
Certain
Covenants of the Company.
4.1
Access and
Investigation.
Subject to the Confidentiality
Agreement, during the period commencing on the date of this
Agreement and ending at the Effective Time (the
Pre-Closing Period
), the Company
shall, and shall cause the respective Representatives of the
Acquired Corporations to:
(a)
provide Parent and
Parents Representatives with reasonable access to the
Acquired Corporations Representatives, personnel and
assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to the
Acquired Corporations;
(b)
provide Parent and
Parents Representatives with such copies of the existing
books, records, Tax Returns, work papers and other documents and
information relating to the Acquired Corporations, and with such
additional financial, operating and other data and information
regarding the Acquired Corporations, as Parent may reasonably
request; and
(c)
permit Parents officers and
other employees to meet, upon reasonable notice and during
normal business hours, with the chief financial officer and
other officers and Managers of the Company responsible for the
Companys financial statements and the internal controls of
the Acquired Corporations to discuss such matters as Parent may
deem necessary or appropriate. Without limiting the generality
of any of the foregoing, during the Pre-Closing Period, the
Company shall promptly provide Parent with copies of:
(i)
the unaudited monthly consolidated balance
sheets of the Acquired Corporations as of the end of each
calendar month and the related unaudited monthly consolidated
statements of operations, statements of stockholders
equity and statements of cash flows for such calendar month,
which shall be delivered by the Company to Parent within twenty
days after the end of such calendar month;
(ii)
all material operating and financial reports
prepared by the Acquired Corporations for the Companys
senior management, including sales forecasts, marketing plans,
development plans, discount reports, write-off reports, hiring
reports and capital expenditure reports prepared for the
Companys senior management;
A-39
(iii)
any written materials or communications sent
by or on behalf of the Company to its stockholders;
(iv)
any material notice, document or other
communication sent by or on behalf of any of the Acquired
Corporations to any party to any Material Contract or sent to
any of the Acquired Corporations by any party to any Material
Contract (other than any communication that relates solely to
routine commercial transactions between an Acquired Corporation
and the other party to any such Material Contract and that is of
the type sent in the ordinary course of business and consistent
with past practices);
(v)
any notice, report or other document filed with
or otherwise furnished, submitted or sent to any Governmental
Body on behalf of any of the Acquired Corporations in connection
with the Merger or any of the other Contemplated Transactions;
(vi)
any non-privileged notice, document or other
communication sent by or on behalf of, or sent to, any of the
Acquired Corporations relating to any pending or threatened
Legal Proceeding involving or affecting any of the Acquired
Corporations; and
(vii)
any material notice, report or other document
received by any of the Acquired Corporations from any
Governmental Body.
(d)
In order to assist with obtaining third party
financing for the Contemplated Transactions, at the request of
Parent, the Company shall, and the Company shall cause its
Subsidiaries to, use their reasonable best efforts to provide
such assistance and cooperation as Parent and Merger Sub may
reasonably request, including
(i)
making senior
management of the Company and its Subsidiaries reasonably
available for customary meetings,
(ii)
cooperating
with prospective lenders, and their respective advisors in
performing their due diligence,
(iii)
providing
existing financial statements and financial and other
information reasonably required by lenders,
(iv)
entering into customary agreements with lenders
(to become effective no earlier than the Effective Time), and
(v)
helping procure and obtain other reasonably
requested certificates or documents, including pledge and
security documents, customary perfection certificates, legal
opinions, intellectual property filings and ownership
information and real estate title documentation; provided that
such requested cooperation does not unreasonably interfere with
the ongoing operations of the Acquired Corporations.
4.2
Operation of the Companys Business
.
(a)
During the Pre-Closing Period:
(i)
the Company shall ensure that each of the
Acquired Corporations conducts its business and operations:
(1)
in the ordinary course and in accordance with
past practices; and
(2)
in compliance in all
material respects with all applicable Legal Requirements;
(ii)
the Company shall use reasonable efforts to
ensure that each of the Acquired Corporations preserves intact
its current business organization, keeps available the services
of its current officers and other employees, complies with the
requirements of all Company Contracts that constitute Material
Contracts, and maintains its relations and goodwill with all
suppliers, customers, landlords, creditors, licensors,
licensees, employees and other Persons having business
relationships with the respective Acquired Corporations;
(iii)
the
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Company shall keep in full force all insurance policies referred
to in Section 2.20 (other than any such policies that are
immediately replaced with substantially similar policies);
(iv)
the Company shall promptly notify Parent of:
(1)
any notice or other communication from any
Person alleging that the Consent of such Person is or may be
required in connection with any of the Contemplated
Transactions; and
(2)
any Legal Proceeding against
or involving any of the Acquired Corporations that is commenced,
or, to the knowledge of the Company, threatened against, any of
the Acquired Corporations;
(v)
the Company shall (to
the extent reasonably requested by Parent) cause its officers
and the officers of its Subsidiaries to report regularly to
Parent concerning the status of the Companys business;
(vi)
the Company shall (to the extent reasonably
requested by Parent) use its commercially reasonable efforts to
(and otherwise cooperate with Parent to) transfer any cash, cash
equivalents and short-term investments
(
Cash
) held by the Company outside of
the United States to (and hold such Cash in) the United States
and to minimize any Tax Liabilities resulting therefrom (it
being understood, however, that the Company shall not be
required to incur any material Tax Liabilities as a result of
such transfers unless either (1) such Tax Liabilities
relate exclusively to post-Closing periods or (2) Parent
agrees to reimburse the Company for any such Tax Liabilities if
the Closing does not occur);
(vii)
subject to clause
(vi), the Company shall preserve and maintain its Cash balances
in a manner consistent with past practice (subject to
expenditures related to the Contemplated Transactions); and
(viii)
the Company shall comply in all material
respects with the terms and conditions of the Final Judgment.
(b)
During the Pre-Closing Period, the Company shall
not (without the prior written consent of Parent), and shall not
(without the prior written consent of Parent, which consent
shall not be unreasonably withheld or delayed in the case of
clauses (vi), (vii), (xiii), or (xiv)) permit any of the other
Acquired Corporations to:
(i)
declare, accrue, set aside or pay any dividend
or make any other distribution in respect of any shares of
capital stock (other than dividends or other distributions from
a Subsidiary to the Company or another Subsidiary), or
repurchase, redeem or otherwise reacquire any shares of capital
stock or other securities (other than repurchases of shares of
capital stock in accordance with the Option Plans in connection
with the termination of employees or other service providers);
(ii)
sell, issue, grant or authorize the sale,
issuance or grant of:
(1)
any capital stock or other
security;
(2)
any option, call, warrant or right to
acquire any capital stock or other security; or
(3)
any instrument convertible into or exchangeable
for any capital stock or other security, except that the Company
may issue shares of Company Common Stock upon the valid exercise
of Company Options outstanding as of the date of this Agreement;
(iii)
amend or waive any of its rights under, or
permit the acceleration of the vesting under, any provision of:
(1)
any of the Companys stock option plans;
(2)
any Company Option or any agreement evidencing
or relating to any outstanding stock option or warrant;
(3)
any restricted stock purchase agreement; or
(4)
any other Contract evidencing or relating to any
equity award (whether payable in cash or stock), other than
pursuant to rights to acceleration disclosed in Part 2.3(d)
and Part 2.5(e) of the Company Disclosure Schedule;
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(iv)
amend or permit the adoption of any amendment
to its certificate of incorporation or bylaws or other charter
or organizational documents, or effect or become a party to any
merger, consolidation, share exchange, business combination,
amalgamation, recapitalization, reclassification of shares,
stock split, reverse stock split, division or subdivision of
shares, consolidation of shares or similar transaction;
(v)
form any Subsidiary or acquire any equity
interest or other interest in any other Entity;
(vi)
make any capital expenditure (except a capital
expenditure that:
(1)
is in the ordinary course of
business and consistent with past practices;
(2)
does not exceed $100,000 individually; and
(3)
when added to all other capital expenditures
made by or on behalf of the Acquired Corporations since the date
of this Agreement, does not exceed $250,000 in the aggregate);
(vii)
other than in the ordinary course of business
consistent with past practices, enter into or become bound by,
or permit any of the assets owned or used by it to become bound
by, any Material Contract, or amend or terminate, or waive or
exercise any material right or remedy under, any Material
Contract;
(viii)
surrender or cause to be surrendered any
Owned Real Property or Leased Real Property;
(ix)
acquire, lease or license any right or other
asset from any other Person or sell or otherwise dispose of, or
lease or license, any right or other asset to any other Person
(except in each case for assets (that are not material
individually or in the aggregate) acquired, leased, licensed or
disposed of by the Company in the ordinary course of business
and consistent with past practices), or expressly waive, or
relinquish any material right;
(x)
other than in the ordinary course of business
consistent with past practices, write off as uncollectible, or
establish any extraordinary reserve with respect to, any
receivable or other indebtedness;
(xi)
make any pledge of any of its assets or permit
any of its assets to become subject to any Encumbrances, except
for pledges of or Encumbrances with respect to immaterial assets
made in the ordinary course of business consistent with past
practices;
(xii)
lend money to any Person (excluding
advancement of reasonable expenses to employees in the ordinary
course of business consistent with past practice), or incur or
guarantee any indebtedness;
(xiii) (1)
establish, adopt, enter into or
amend any Company Benefit Plan or Company Benefit Agreement
(except that Company Benefit Plans or Company Benefit Agreements
may be amended to the extent required by applicable Legal
Requirements);
(2)
pay any bonus or make any
profit-sharing or similar payment to (except that the Company
may make customary bonus and commission payments consistent with
past practices,
(A)
in
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accordance with bonus and commission plans and programs in
effect on the date of this Agreement, in the ordinary course of
business or
(B)
in connection with the hiring of new
employees in the ordinary course of business; or
(3)
increase the amount of the wages, salary,
commissions, fringe benefits or other compensation (including
equity-based compensation, whether payable in stock, cash or
other property) or remuneration payable to, any of its directors
or any of its officers or other employees;
(xiv)
hire any employee at the level of Manager or
above or with an annual base salary in excess of $155,000,
promote any employee except in order to fill a position vacated
after the date of this Agreement or, except in the ordinary
course of business or for cause, terminate the
employment of any employee with an annual base salary in excess
of $155,000;
(xv)
change any of its methods of accounting or
accounting practices in any respect;
(xvi)
make any Tax election;
(xvii)
subject to Section 5.6, commence or
settle any Legal Proceeding;
(xviii)
enter into any material transaction or take
any other material action outside the ordinary course of
business;
(xix)
(1) pay to the Financial Advisor
(A) any amounts described as non-discretionary in the
engagement letter between the Company and the Financial Advisor
dated March 19, 2010 (the
Engagement
Letter
) in excess of those set forth on
Part 2.29 of the Disclosure Schedule
or (B) pay
any amounts described as discretionary in the Engagement Letter
or (2) amend or modify in any manner the Engagement
Letter; or
(xx)
agree or commit to take any of the actions
described in clauses (i) through (xviii)
of this Section 4.2(a).
(c)
During the Pre-Closing Period, the Company shall
promptly notify Parent in writing of:
(i)
the
discovery by the Company of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of
this Agreement and that caused or constitutes a material
inaccuracy in any representation or warranty made by the Company
in this Agreement;
(ii)
any event, condition, fact
or circumstance that occurs, arises or exists after the date of
this Agreement and that would cause or constitute a material
inaccuracy in any representation or warranty made by the Company
in this Agreement if:
(1)
such representation or
warranty had been made as of the time of the occurrence,
existence or discovery of such event, condition, fact or
circumstance; or
(2)
such event, condition, fact or
circumstance had occurred, arisen or existed on or prior to the
date of this Agreement;
(iii)
any material breach of
any covenant or obligation of the Company; and
(iv)
any event, condition, fact or circumstance that could reasonably
be expected to make the timely satisfaction of any of the
conditions set forth in Section 6 or Section 7
impossible or, in the good faith judgment of the Company,
materially less likely or that has had or could reasonably be
expected to have or result in a Company
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Material Adverse Effect. Without limiting the generality of the
foregoing, the Company shall promptly advise Parent in writing
of any Legal Proceeding or material claim threatened, commenced
or asserted against or with respect to, or otherwise affecting,
any of the Acquired Corporations or (to the knowledge of the
Company) any director or officer or key employee of any of the
Acquired Corporations (in their capacities as such). No
notification given to Parent pursuant to this
Section 4.2(c) shall limit or otherwise affect any of the
representations, warranties, covenants or obligations of the
Company contained in this Agreement.
(d)
The Company shall (to the extent directed by
Parent in writing) timely exercise in full any right or option
it may have to repurchase shares of its capital stock which is
or becomes exercisable during the Pre-Closing Period. The
Company shall use reasonable efforts to notify Parent in writing
at least ten days in advance of any such repurchase right or
option becoming exercisable.
(e)
During the Pre-Closing Period, the Company shall
provide Parent and its Representatives with copies of all
federal and state income Tax Returns promptly upon receipt from
the preparer (and at least one (1) business day prior to
the due date for filing), and shall consider in good faith any
changes to such Tax Returns reasonably requested by Parent
(provided that the Company shall not be required to delay the
filing of any Tax Returns as a result thereof).
(f)
During the Pre-Closing Period, the Company shall
use its reasonable best efforts to complete all approvals,
filings and registrations to reflect that an Acquired
Corporation owns at least 92.49% shares in RAE-KLH (Beijing)
Co., LTD.
4.3
No Solicitation
.
(a)
During the Pre-Closing Period, the Company shall
not directly or indirectly do, and shall ensure that no
Representative of any of the Acquired Corporations directly or
indirectly does, any of the following:
(i)
solicit,
initiate, encourage, induce or facilitate the communication,
making, submission or announcement of any Acquisition Proposal
or Acquisition Inquiry;
(ii)
furnish any information
regarding any of the Acquired Corporations to any Person in
connection with or in response to an Acquisition Proposal or
Acquisition Inquiry;
(iii)
engage in discussions or
negotiations with any Person with respect to any Acquisition
Proposal or Acquisition Inquiry;
(iv)
approve,
endorse or recommend any Acquisition Proposal; or
(v)
execute or enter into any letter of intent with
respect to an Acquisition Proposal or any other Acquisition
Agreement;
provided, however,
that, notwithstanding
anything contained in this Section 4.3(a) (but subject to
the other provisions of this Agreement), from the date hereof
until the adoption and approval of this Agreement by the
Required Stockholder Vote, the Company may furnish nonpublic
information regarding the Acquired Corporations to, or enter
into discussions with, any Person in response to a Superior
Offer (or an Acquisition Proposal or Acquisition Inquiry that
the Board of Directors or the Special Committee believes in good
faith is reasonably likely to result in a Superior Offer) that
is submitted to the Company by such Person (and not withdrawn)
if:
(1)
neither the Company nor any Representative
of any of the Acquired Corporations shall have breached (or
taken any action inconsistent with) any of the provisions set
forth in this Section 4.3;
(2)
the Board of
Directors (or the Special Committee thereof) concludes in good
faith, after having taken into account the advice of its outside
legal
A-44
counsel, that such action is required in order for the Board of
Directors to comply with its fiduciary obligations to the
Companys stockholders under applicable Legal Requirements;
(3)
at least one business days prior to furnishing
any such nonpublic information to, or entering into discussions
with, such Person, the Company gives Parent written notice of
the identity of such Person and of the Companys intention
to furnish nonpublic information to, or enter into discussions
with, such Person;
(4)
the Company receives from
such Person an executed confidentiality agreement containing
provisions (including nondisclosure provisions, use
restrictions, non-solicitation provisions, no hire provisions
and standstill provisions) at least as favorable to
the Company as those contained in the Confidentiality Agreement
(an
Acceptable Confidentiality
Agreement
); and
(5)
prior to
furnishing any such nonpublic information to such Person, the
Company furnishes such nonpublic information to Parent (to the
extent such nonpublic information has not been previously
furnished by the Company to Parent). Without limiting the
generality of the foregoing, the Company acknowledges and agrees
that, in the event any Representative of any of the Acquired
Corporations (whether or not such Representative is purporting
to act on behalf of any of the Acquired Corporations) takes any
action that, if taken by the Company, would constitute a breach
of this Section 4.3 by the Company, the taking of such
action by such Representative shall be deemed to constitute a
breach of this Section 4.3 by the Company for purposes of
this Agreement.
(b)
If any Acquired Corporation or any
Representative of any Acquired Corporation receives an
Acquisition Proposal or Acquisition Inquiry at any time during
the Pre-Closing Period, then the Company shall promptly (and in
no event later than twenty-four (24) hours after receipt of
such Acquisition Proposal or Acquisition Inquiry) advise Parent
orally and in writing of such Acquisition Proposal or
Acquisition Inquiry (including the identity of the Person making
or submitting such Acquisition Proposal or Acquisition Inquiry,
and the terms thereof). The Company shall keep Parent fully
informed with respect to the status and terms of any such
Acquisition Proposal or Acquisition Inquiry and any modification
or proposed modification thereto.
(c)
The Company shall immediately cease and cause to
be terminated any existing discussions with any Person that
relate to any Acquisition Proposal or Acquisition Inquiry.
(d)
The Company shall not release or permit the
release of any Person from, or waive or permit the waiver of any
provision of or right under, any confidentiality,
non-solicitation, no hire, standstill or similar
agreement to which any of the Acquired Corporations is a party
or under which any of the Acquired Corporations has any rights,
and shall enforce or cause to be enforced each such agreement to
the extent requested by Parent. The Company shall promptly
request each Person that has executed a confidentiality or
similar agreement in connection with its consideration of a
possible Acquisition Transaction or equity investment to return
to the Acquired Corporations all confidential information
heretofore furnished to such Person by or on behalf of any of
the Acquired Corporations.
4.4
Proxy Statement;
Schedule 13E-3.
As
promptly as practicable after the execution of this Agreement,
the Company shall prepare the Proxy Statement and file it with
the SEC and the Company and Parent shall jointly prepare and
file the
Schedule 13E-3
with the SEC
A-45
and the Company and the Parent shall cooperate with each other
in connection with the preparation of the foregoing. The Company
shall use commercially reasonable efforts to respond as promptly
as practicable to any comments of the SEC or its staff
concerning the Proxy Statement or the
Schedule 13E-3
and shall cause the Proxy Statement to be mailed to its
stockholders at the earliest practicable time after the
resolution of any such comments. The Company shall notify the
Parent promptly upon the receipt of any comments from the SEC or
its staff or any other government officials and of any request
by the SEC or its staff or any other government officials for
amendments or supplements to the Proxy Statement or the
Schedule 13E-3
and shall supply the Parent with copies of all correspondence
between the Company or any of its representatives, on the one
hand, and the SEC, or its staff or any other government
officials, on the other hand, with respect to the Proxy
Statement or the
Schedule 13E-3.
Notwithstanding anything to the contrary stated above, prior to
filing or mailing the Proxy Statement or the
Schedule 13E-3
(including any amendment or supplement to the Proxy Statement or
Schedule 13E-3)
or responding to any comments of the SEC with respect thereto,
(a)
the Company shall cooperate and provide the
Parent with a reasonable opportunity to review and comment on
the Proxy Statement and responses relating thereto and shall
consider in good faith and include in such documents and
responses comments reasonably proposed by the Parent and
(b)
the Company and the Parent shall cooperate and
provide each other with a reasonable opportunity to review and
comment on the
Schedule 13E-3
and responses relating thereto and shall consider in good faith
comments reasonably proposed by the other party. The Company
shall use commercially reasonable efforts to cause all documents
that it is responsible for filing with the SEC or other
regulatory authorities under this Section 4.4 to comply
with all applicable Legal Requirements. Whenever any event
occurs which is required to be set forth in an amendment or
supplement to the Proxy Statement or the
Schedule 13E-3,
the Parent or the Company, as the case may be, shall promptly
inform the other of such occurrence and cooperate in filing with
the SEC or its staff or any other government officials,
and/or
mailing to stockholders of the Company, such amendment or
supplement.
4.5
Company Stockholders Meeting
.
(a)
The Company shall take all action necessary
under all applicable Legal Requirements to call, give notice of
and hold a meeting of the holders of Company Common Stock to
vote on the adoption and approval of this Agreement (the
Company Stockholders Meeting
).
The Company Stockholders Meeting shall be held (on a date
selected by the Company in consultation with Parent) as promptly
as reasonably practicable after the date hereof. The Company
shall ensure that all proxies solicited in connection with the
Company Stockholders Meeting are solicited in compliance
with all applicable Legal Requirements.
(b)
Subject to Section 4.5(c):
(i)
the Proxy Statement shall include a statement to
the effect that the Board of Directors unanimously (with two
abstentions) recommends, based on the recommendation of the
Special Committee, that the Companys stockholders vote to
adopt and approve this Agreement at the Company
Stockholders Meeting (such recommendation of the Board of
Directors that the Companys stockholders vote to adopt and
approve this Agreement being referred to as the
Company Board Recommendation
); and
(ii)
the Company Board Recommendation shall not be
withdrawn or modified in a manner adverse to Parent, and no
resolution by the Board of Directors of the Company or any
committee thereof to withdraw or
A-46
modify the Company Board Recommendation in a manner adverse to
Parent shall be adopted or proposed;
provided, however
,
that nothing herein shall prevent the Company from postponing or
adjourning the Company Stockholders Meeting if
(1)
there are holders of insufficient shares of the
Company Common Stock present or represented by a proxy at the
Company Stockholders Meeting to constitute a quorum at the
Company Stockholders Meeting,
(2)
the Company
is required to postpone or adjourn the Company
Stockholders Meeting by applicable Legal Requirement or a
request from the SEC or its staff, or
(3)
the Board
of Directors or the Special Committee shall have determined in
good faith (after consultation with outside legal counsel) that
it is necessary or appropriate to postpone or adjourn the
Company Stockholders Meeting, including in order to give
Company Stockholders sufficient time to evaluate any information
or disclosure that the Company has sent to Company Stockholders
or otherwise made available to Company Stockholders by issuing a
press release, filing materials with the SEC or otherwise
(including in connection with any withdrawal or modification of
the Company Board Recommendation). The Proxy Statement shall
include the opinion of the Financial Advisor referred to in
Section 2.29.
(c)
Notwithstanding anything to the contrary
contained in Section 4.5(b), at any time prior to the
adoption and approval of this Agreement by the Required
Stockholder Vote, the Company Board Recommendation may be
withdrawn or modified in a manner adverse to Parent if:
(i) (1)
an unsolicited, bona fide written offer
to purchase all of the outstanding shares of Company Common
Stock is made to the Company and is not withdrawn;
(2)
such unsolicited, bona fide, written offer was
not obtained or made as a direct or indirect result of a breach
of this Agreement, the Confidentiality Agreement or any
standstill or similar agreement under which any
Acquired Corporation has any rights or obligations;
(3)
the Companys Board of Directors or the
Special Committee has determined in good faith (after consulting
with its independent financial advisor of nationally recognized
reputation) that such offer constitutes a Superior Offer;
(4)
the Company has provided Parent with notice of
such offer and the determination of the Companys Board of
Directors or the Special Committee, and for a period of two
business days after the date of such notice, if requested by
Parent, the Company shall have engaged in good faith
negotiations with Parent to make such adjustments in the terms
and conditions of this Agreement in such a manner that obviates
the need to withdraw or modify the Company Board Recommendation
as a result of such offer;
(5)
the Companys
Board of Directors or the Special Committee determines in good
faith (after consulting with its independent financial advisor
of nationally recognized reputation and taking into account any
changes to the terms of this Agreement proposed by Parent) that
such offer continues to constitute a Superior Offer;
(6)
the Companys Board of Directors or the
Special Committee determines in good faith, after consulting
with its outside legal counsel, that, the withdrawal or
modification of the Company Board Recommendation is required in
order for the Board of Directors to comply with its fiduciary
obligations to the Company Stockholders under applicable Legal
Requirements; and
(7)
the Company Board
Recommendation is not withdrawn or modified in a manner adverse
to Parent at any time prior to the time at which Parent receives
written notice from the Company confirming that the
Companys Board of Directors has determined that such offer
is a Superior Offer; or
A-47
(ii)
in response to a material development or change
in material circumstances occurring or arising after the date
hereof, the existence of which was not known by the Board of
Directors at or prior to the date hereof (and not relating to
any Acquisition Proposal) (such material development or change
in circumstances, an
Intervening
Event
), if the Board of Directors or the Special
Committee determines in good faith, after consultation with its
financial advisor and outside legal counsel, that, in light of
such Intervening Event, that the withdrawal or modification of
the Company Board Recommendation is required in order for the
Board of Directors to comply with its fiduciary obligations to
the Company Stockholders under applicable Legal Requirements;
provided, that
, the Company Board of Directors shall not
be entitled to exercise its right to withdraw or modify the
Company Board Recommendation pursuant to this sentence unless
the Company has
(1)
provided to Parent at least
three days prior notice (unless the Intervening Event
arises fewer than three days prior to the Company
Stockholders Meeting in which case such notice shall be
given as promptly as practicable) advising Parent that the Board
of Directors or Special Committee intends to take such action
and specifying the reasons therefor in reasonable detail and
(2)
during such three day period, if requested by
Parent, the Company engages in good faith negotiations with
Parent to make such adjustments in the terms and conditions of
this Agreement in such a manner that obviates the need to
withdraw or modify the Company Board Recommendation as a result
of the Intervening Event.
(d)
The Companys obligation to call, give
notice of and hold the Company Stockholders Meeting in
accordance with Section 4.5(a) shall not be limited or
otherwise affected by the commencement, disclosure, announcement
or submission of any Superior Offer or other Acquisition
Proposal, or by any withdrawal or modification of the Company
Board Recommendation.
(e)
Nothing in this Agreement shall prohibit or
restrict the Company, the Special Committee or the Board of
Directors from
(i)
complying with its disclosure
obligations under applicable Legal Requirements with regard to
any Acquisition Proposal, including taking and disclosing to its
stockholders a position contemplated by
Rule 14d-9
or
rule 14e-2(a)
under the Exchange Act (or any similar communication to
stockholders); or
(ii)
making any
stop-look-and-listen or similar communication of the
type contemplated by
Rule 14d-9(f)
under the Exchange Act (and any communication of the type
described in this subsection (e) shall not be a
Triggering Event for purposes of this Agreement).
Section
5.
Certain
Covenants of the Parties.
5.1
Regulatory Approvals.
Each
party shall use reasonable best efforts to file or otherwise
submit, as soon as practicable after the date of this Agreement,
all notices, reports and other documents required to be filed by
such party with or otherwise submitted by such party to any
Governmental Body with respect to the Merger and the other
Contemplated Transactions, and to submit promptly any additional
information requested by any such Governmental Body. Without
limiting the generality of the foregoing, the Company and Parent
shall, promptly after the date of this Agreement, prepare and
file any notification or other document required to be filed in
connection with the Merger under any applicable foreign Legal
Requirement relating to antitrust or competition matters. The
Company and Parent shall respond as promptly as
A-48
practicable to:
(i)
any inquiries or requests
received from the Federal Trade Commission or the Department of
Justice for additional information or documentation; and
(ii)
any inquiries or requests received from any
state attorney general, foreign antitrust or competition
authority or other Governmental Body in connection with
antitrust or competition matters. At the request of Parent, the
Company shall agree to divest, sell, dispose of, hold separate
or otherwise take or commit to take any other action with
respect to any of the businesses, product lines or assets of the
Acquired Corporations, provided that any such action is
conditioned upon the consummation of the Merger.
5.2
Employee Benefits
.
(a)
All employees of the Acquired Corporations who
continue employment with Parent, the Surviving Corporation or
any Subsidiary of the Surviving Corporation after the Effective
Time (
Continuing Employees
) shall
become employees of the Surviving Corporation. Nothing in this
Section 5.2(a) or elsewhere in this Agreement shall be
construed to create a right in any Company Associate to
employment with Parent, the Surviving Corporation or any
Subsidiary of the Surviving Corporation, and the employment of
each Continuing Employee shall be at will
employment. Except for Indemnified Persons (as defined in
Section 5.3(a)) to the extent of their respective rights
pursuant to Section 5.3, no Company Associate or Continuing
Employee shall be deemed to be a third party beneficiary of this
Agreement.
(b)
If requested by Parent prior to the Closing, the
Company shall take (or cause to be taken) all actions necessary
or appropriate to terminate, effective no later than the day
prior to the date on which the Merger becomes effective, any
Company Benefit Plan that contains a cash or deferred
arrangement intended to qualify under Section 401(k) of the
Code (a
Company 401(k) Plan
). If the
Company is required to terminate any Company 401(k) Plan, then
the Company shall provide to Parent prior to the Closing Date
written evidence of the adoption by the Companys board of
directors of resolutions authorizing the termination of such
Company 401(k) Plan (the form and substance of which resolutions
shall be subject to the prior review and approval of Parent,
which approval shall not be unreasonably withheld). If
requested, the Company also shall take such other actions in
furtherance of terminating such Company 401(k) Plan as Parent
may reasonably request.
5.3
Indemnification of Officers and Directors
.
(a)
All rights to indemnification by any of the
Acquired Corporations existing in favor of each individual who
is an officer or director of any Acquired Corporation as of the
date of this Agreement (each such individual, an
Indemnified Person
) for his acts and
omissions as a director or officer of the Company or any
Acquired Corporation occurring prior to the Effective Time, as
provided in the certificate of incorporation or bylaws (or other
similar organizational documents) (as in effect as of the date
of this Agreement) and as provided in the Indemnification
Contract between the Acquired Corporation and such Indemnified
Person (as in effect as of the date of this Agreement) in the
form disclosed to Parent prior to the date of this Agreement,
shall survive the Merger and shall continue in full force and
effect (to the fullest extent such rights to indemnification are
available under and are consistent with Delaware law) for a
period of six years from the date on which the Merger becomes
effective, and Parent shall cause (and enable) the Surviving
Corporation to perform its obligations thereunder. In addition,
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for a period of six years following the Effective Time, Parent
and the Surviving Corporation shall cause the Surviving
Corporation and its Subsidiaries to cause the certificate of
incorporation (and other organizational documents) of the
Surviving Corporation and its Subsidiaries to contain provisions
with respect to indemnification, exculpation of liability and
advancement of expenses that are at least as favorable as those
provisions of the current certificate of incorporation (or other
organizational documents) of the Acquired Corporations.
(b)
From the Effective Time until the sixth
anniversary of the date on which the Merger becomes effective,
the Surviving Corporation shall maintain in effect, for the
benefit of the Indemnified Persons with respect to their acts
and omissions as directors and officers of the Company occurring
prior to the Effective Time, the Existing D&O Policies, to
the extent that directors and officers liability
insurance coverage is available on commercially reasonable
terms;
provided, however,
that:
(i)
the
Surviving Corporation may substitute for the Existing D&O
Policies a policy or policies of comparable coverage; and
(ii)
the Surviving Corporation shall not be required
to pay annual premiums for the Existing D&O Policies (or
for any substitute policies) that exceed, in the aggregate, an
amount equal to $300,000 (the
Maximum
Premium
). In the event any future annual premiums
for the Existing D&O Policies (or any substitute policies)
exceed the Maximum Premium in the aggregate, the Surviving
Corporation shall be entitled to reduce the amount of coverage
of the Existing D&O Policies (or any substitute policies)
to the amount of coverage that can be obtained for a premium
equal to the Maximum Premium. Prior to the Effective Time, the
Company may purchase a six-year tail pre-paid policy
(the
Tail Policy
) on the Existing
D&O Policies which Tail Policy shall be
(1)
on
terms and conditions with respect to coverage and amounts no
less favorable, in the aggregate, than the Existing D&O
Policies,
(2)
be for an amount not to exceed the
Maximum Premium and
(3)
name Parent as a successor
in interest of such Tail Policy. In the event the Company
purchases such Tail Policy prior to the Effective Time, Parent
and the Surviving Corporation shall maintain such Tail Policy in
full force and effect and continue to honor their obligations
thereunder in lieu of all other obligations of Parent and the
Surviving Corporation under the first sentence of this
Section 5.3(b).
5.4
Additional Agreements
.
(a)
Subject to the terms and conditions set forth in
this Agreement (including Section 5.4(b) below), Parent and
the Company shall use reasonable efforts to cause to be taken
all actions necessary to consummate the Merger and make
effective the other Contemplated Transactions. Without limiting
the generality of the foregoing, but subject to
Section 5.4(b), each party to this Agreement:
(i)
shall make all filings and other submissions (if
any) and give all notices (if any) required to be made and given
by such party in connection with the Merger and the other
Contemplated Transactions;
(ii)
shall use reasonable
efforts to obtain each Consent (if any) required to be obtained
(pursuant to any applicable Legal Requirement or Contract, or
otherwise) by such party in connection with the Merger or any of
the other Contemplated Transactions; and
(iii)
shall use reasonable efforts to lift any injunction prohibiting,
or any other legal bar to, the Merger or any of the other
Contemplated Transactions. The Company shall provide Parent with
a copy of each proposed filing with or other submission to any
Governmental Body relating to any of the Contemplated
Transactions, and shall give Parent a reasonable time prior to
making such filing or other submission in which to review and
comment
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on such proposed filing or other submission. The Company shall
promptly deliver to Parent a copy of each such filing or other
submission made, each notice given and each Consent obtained by
the Company during the Pre-Closing Period.
(b)
Notwithstanding anything to the contrary
contained in this Agreement, Parent shall not have any
obligation under this Agreement:
(i)
to dispose of
or transfer or cause any of its Subsidiaries to dispose of or
transfer any assets, or to commit to cause any of the Acquired
Corporations to dispose of or transfer any assets;
(ii)
to discontinue or cause any of its Subsidiaries
to discontinue offering any product or service, or to commit to
cause any of the Acquired Corporations to discontinue offering
any product or service;
(iii)
to license or
otherwise make available, or cause any of its Subsidiaries to
license or otherwise make available to any Person any
technology, software or other Intellectual Property or
Intellectual Property Right, or to commit to cause any of the
Acquired Corporations to license or otherwise make available to
any Person any technology, software or other Intellectual
Property or Intellectual Property Right;
(iv)
to
hold separate or cause any of its Subsidiaries to hold separate
any assets or operations (either before or after the Closing
Date), or to commit to cause any of the Acquired Corporations to
hold separate any assets or operations; or
(v)
to
make or cause any of its Subsidiaries to make any commitment (to
any Governmental Body or otherwise) regarding its future
operations or the future operations of any of the Acquired
Corporations.
(c)
With respect to the Contract identified on
Schedule 5.4
, the Company will enter into an
amendment thereto, or will otherwise take such actions as are
necessary, so that
(i)
the last payment thereunder
in respect of the services performed thereunder shall not be due
at any time earlier than February 28, 2011; and
(ii)
if the Contract is terminated prior to any
services being performed, then any amounts paid by the Company
in advance under such Contract shall be refunded in full.
5.5
Disclosure.
Parent and the
Company will reasonably consult with each other before issuing
any press release or otherwise making any public statements
about this Agreement or any of the transactions contemplated by
this Agreement. Neither Parent nor the Company will issue any
such press release or make any such public statement without the
prior written consent of the other party, except to the extent
that the disclosing party determines in good faith it is
required to do so by applicable Legal Requirements or the rules
or regulations of the NYSE Amex, in which case that party
consult with the other party and will consider the other
partys comments in good faith, and unless the Board of
Directors (or Special Committee) believes in good faith that
such comments are inappropriate, will implement them, before
issuing any such release or making any such public statement.
5.6
Stockholder Litigation.
To the
extent permitted by applicable Legal Requirements, in the event
that any stockholder litigation relating to the Contemplated
Transactions is brought or threatened against the Company or any
members of the Companys Board prior to the Effective Time,
the Company shall promptly notify Parent and keep Parent
reasonably informed with respect to the status thereof. The
Company shall give Parent the opportunity to participate in the
defense or settlement of any stockholder litigation against the
Company or any members of the Company Board relating to the
transaction contemplated by this Agreement, at Parents
cost. The Company agrees to use commercially reasonable efforts
to
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enter into such joint defense agreement with Parent, if
requested by Parent. The Company shall not agree to any
settlement of any stockholder litigation for an amount in excess
of $250,000 in the aggregate without Parents prior written
consent (such consent not to be unreasonably withheld or
delayed).
5.7
Export Control.
Prior to the
Closing, the Company shall use commercially reasonable efforts
to take the actions set forth on
Part 5.7 of the Company
Disclosure Schedule
. With respect to the foregoing, the
Company shall (x) promptly notify Parent of any material
communication between the Company or its Affiliates and any
Governmental Authority; (y) consult with Parent in advance
of any substantive meeting or discussion with any Governmental
Authority and, to the extent permitted by such Governmental
Authority, give Parent or Parents Affiliates or
Representatives, the opportunity to attend and participate
thereat; and (z) subject to applicable Legal Requirements,
furnish Parent or Parents Representatives with copies of
written correspondence and communications between the Company
and/or
its
Affiliates
and/or
its
Representatives on the one hand, and any Governmental Authority
or members of their respective staffs on the other hand,
including providing Parent or Parents Representative with
the opportunity to review such material communications in
advance of their submission.
Section
6.
Conditions
Precedent to Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to effect the Merger
and otherwise consummate the transactions to be consummated at
the Closing are subject to the satisfaction, at or prior to the
Closing, of each of the following conditions:
6.1
Accuracy of Representations
.
(a)
The representations and warranties of the
Company set forth in Section 2.3(a), Section 2.3(c),
Section 2.3(d), Section 2.3(e), Section 2.23,
Section 2.24, Section 2.26 and Section 2.28 of
this Agreement shall be true and correct in all respects, and
the representations and warranties of the Company set forth in
Section 2.3(g) shall be true and correct in all respects
that are material to the Company, in each case as of the date of
this Agreement and as of the Closing Date;
(b)
the representations and warranties of the
Company set forth in this Agreement that are qualified as to
Company Material Adverse Effect shall be true and
correct on and as of the Closing Date with the same force and
effect as if made on and as of such date, except for those
representations and warranties that are qualified as to
Company Material Adverse Effect that address matters
only as of a particular date, which representations and
warranties shall have been true and correct as of such
particular date; and
(c)
all other representations and warranties of the
Company set forth in this Agreement shall be true and correct on
and as of the Closing Date with the same force and effect as if
made on and as of such date, except
(i)
for any
failure to be so true and correct which has not had and would
not have, individually or in the aggregate, a Company Material
Adverse Effect, and
(ii)
for those representations
and warranties that address matters only as of a
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particular date, which representations and warranties shall have
been true and correct as of such particular date, except for any
failure to be so true and correct as of such particular date
which has not had and would not have, individually or in the
aggregate, a Company Material Adverse Effect.
6.2
Performance of Covenants.
Each
of the covenants or obligations in this Agreement that the
Company is required to comply with or to perform at or prior to
the Closing shall have been complied with and performed by the
Company in all material respects.
6.3
Stockholder Approval.
This
Agreement shall have been duly adopted and approved by the
Required Stockholder Vote.
6.4
No Company Material Adverse
Effect.
Since the date of this Agreement, there
shall not have occurred any Company Material Adverse Effect.
6.5
No Restraints.
No temporary
restraining order, preliminary or permanent injunction or other
order preventing the consummation of the Merger or any of the
other Contemplated Transactions shall have been issued by any
court of competent jurisdiction or other Governmental Body and
remain in effect, and there shall not be any foreign,
U.S. federal or state Legal Requirement enacted or deemed
applicable to the Merger or any of the other Contemplated
Transactions that makes consummation of the Merger or any of the
other Contemplated Transactions by Parent and Merger Sub illegal.
6.6
No Governmental Proceedings Relating to
Contemplated Transactions or Right to Operate
Business.
There shall not be pending, and there
shall not have been threatened in writing, any Legal Proceeding
in which a Governmental Body is or has threatened to become a
party:
(a)
challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other
Contemplated Transactions;
(b)
relating to the
Merger or any of the other Contemplated Transactions and seeking
to obtain from Parent or any of the Acquired Corporations, any
damages or other relief that may be material to Parent or the
Acquired Corporations;
(c)
seeking to prohibit or
limit in any material respect Parents ability to vote,
transfer, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the
Surviving Corporation;
(d)
that could materially and
adversely affect the right or ability of Parent or any of the
Acquired Corporations to own the assets or operate the business
of any of the Acquired Corporations; or
(e)
seeking
to compel any of the Acquired Corporations, Parent or any
Subsidiary of Parent to dispose of or hold separate any material
assets as a result of the Merger or any of the other
Contemplated Transactions.
6.7
No Other Proceedings.
There
shall not be pending any Legal Proceeding in which there is a
reasonable possibility of an outcome that would have a Parent
Material Adverse Effect or a Company Material Adverse Effect.
Section
7.
Conditions
Precedent to Obligation of the Company.
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The obligation of the Company to effect the Merger and
consummate the transactions to be consummated at the Closing is
subject to the satisfaction, at or prior to the Closing, of the
following conditions:
7.1
Accuracy of
Representations.
The representations and
warranties of Parent and Merger Sub set forth in this Agreement
shall be true and correct on and as of the Closing Date with the
same force and effect as if made on and as of such date, except
(a)
for any failure to be so true and correct that
would not, individually or in the aggregate, prevent or
materially delay the consummation of the Contemplated
Transaction or the ability of Parent and Merger Sub to fully
perform their respective covenants and obligations under this
Agreement,
(b)
for changes contemplated by this
Agreement, and
(c)
for those representations and
warranties that address matters only as of a particular date,
which representations shall have been true and correct as of
such particular date, except for any failure to be so true and
correct as of such particular date that would not, individually
or in the aggregate, prevent the Merger or prevent or materially
delay the consummation of the Contemplated Transactions or the
ability of Parent and Merger Sub to fully perform their
respective covenants and obligations under this Agreement.
7.2
Performance of Covenants.
All
of the covenants and obligations in this Agreement that Parent
and Merger Sub are required to comply with or to perform at or
prior to the Closing shall have been complied with and performed
in all material respects.
7.3
Stockholder Approval.
This
Agreement shall have been duly adopted and approved by the
Required Stockholder Vote.
7.4
No Restraints.
No temporary
restraining order, preliminary or permanent injunction or other
order preventing the consummation of the Merger by the Company
shall have been issued by any U.S. court of competent
jurisdiction and remain in effect, and there shall not be any
U.S. federal or state Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger
by the Company illegal.
Section
8.
Termination.
8.1
Termination.
This Agreement
may be terminated prior to the Effective Time (whether before or
after the adoption and approval of this Agreement by the
Required Stockholder Vote):
(a)
by mutual written consent of Parent and the
Company;
(b)
by either Parent or the Company if the Merger
shall not have been consummated by July 31, 2011 (the
Outside Termination Date
);
provided, however
, that a party shall not be permitted to
terminate this Agreement pursuant to this Section 8.1(b) if
the failure to consummate the Merger by the Outside Termination
Date is attributable to a failure on the part of such party to
perform any covenant or obligation in this Agreement that is
required to be performed by such party at or prior to the
Effective Time;
(c)
by either Parent or the Company if a court of
competent jurisdiction or other Governmental Body shall have
issued a final and nonappealable order, decree or ruling, or
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shall have taken any other action, having the effect of
permanently restraining, enjoining or otherwise prohibiting the
Merger;
(d)
by either Parent or the Company if: (i) the
Company Stockholders Meeting (including any adjournments
and postponements thereof) shall have been held and completed
and the Companys stockholders shall have taken a final
vote on a proposal to adopt and approve this Agreement; and
(ii)
this Agreement shall not have been adopted and
approved at the Company Stockholders Meeting (and shall
not have been adopted and approved at any adjournment or
postponement thereof) by the Required Stockholder Vote;
provided, however,
that a
(1)
party shall not
be permitted to terminate this Agreement pursuant to this
Section 8.1(d) if the failure to have this Agreement
adopted and approved by the Required Stockholder Vote is
attributable to a failure on the part of such party to perform
any covenant or obligation in this Agreement that is required to
be performed by such party at or prior to the Effective Time;
and
(2)
the Company shall not be permitted to
terminate this Agreement pursuant to this Section 8.1(d)
unless the Company shall have made, or shall concurrently make,
any payment required to be made to Parent pursuant to
Section 8.4(a) and shall have paid to Parent any fee
required to be paid to Parent pursuant to Section 8.4(c);
(e)
by Parent (at any time prior to the adoption of
this Agreement by the Required Stockholder Vote) if a Triggering
Event shall have occurred;
(f)
by Parent if:
(i)
any of the
Companys representations and warranties contained in this
Agreement shall be inaccurate as of the date of this Agreement,
or shall have become inaccurate as of a date subsequent to the
date of this Agreement (as if made on and as of such subsequent
date), such that the condition set forth in Section 6.1
would not be satisfied; or
(ii)
any of the
Companys covenants or obligations contained in this
Agreement shall have been breached such that the condition set
forth in Section 6.2 would not be satisfied;
provided,
however
, that Parent may not terminate this Agreement under
this Section 8.1(f) on account of such inaccuracy or
breach:
(1)
prior to the end of the
15-day
period commencing on the date on which the Company receives
notice of such inaccuracy or breach; or
(2)
after
such
15-day
period if such inaccuracy or breach shall have been fully cured
during such
15-day
period in a manner that does not result in a continuing breach
of any covenant or obligation of the Company;
(g)
by the Company if:
(i)
any of
Parents representations and warranties contained in this
Agreement shall be inaccurate as of the date of this Agreement,
or shall have become inaccurate as of a date subsequent to the
date of this Agreement (as if made on and as of such subsequent
date), such that the condition set forth in Section 7.1
would not be satisfied; or
(ii)
any of Parents
covenants or obligations contained in this Agreement shall have
been breached such that the condition set forth in
Section 7.2 would not be satisfied;
provided,
however
, that the Company may not terminate this Agreement
under this Section 8.1(g) on account of such inaccuracy or
breach:
(1)
prior to the end of the
15-day
period commencing on the date on which Parent receives notice of
such inaccuracy or breach; or
(2)
after such
15-day
period if such inaccuracy or breach shall have been fully cured
during such
15-day
period in a manner that does not result in a continuing breach
of any covenant or obligation of Parent; or
(h)
by the Company in order to enter into an
Acquisition Agreement with respect to a Superior Offer;
provided, however
, that this Agreement may not be so
terminated
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unless
(i)
the Company Board of Directors shall have
first complied with the procedures set forth in
Section 4.5(c) with respect to the related Acquisition
Proposal and shall have determined that it constitutes a
Superior Offer and
(ii)
contemporaneously the
Company makes the payment required by Section 8.4(c) in
full to Parent.
8.2
Effect of Termination.
In the
event of the termination of this Agreement as provided in
Section 8.1, this Agreement shall be of no further force or
effect;
provided, however,
that
(i)
this
Section 8.2, Section 8.4 and Section 9 (and the
Confidentiality Agreement) shall survive the termination of this
Agreement and shall remain in full force and effect, and
(ii)
the termination of this Agreement shall not
relieve any party from any liability for any willful breach of
any representation or warranty, or any breach of any covenant or
other obligation contained in this Agreement.
8.3
Frustration of
Conditions.
Neither Parent or Merger Sub, on the
one hand, nor the Company, on the other, may rely on the failure
of any condition set forth in Section 6 (in the case of
Parent or Merger Sub) or Section 7 (in the case of the
Company) to be satisfied if such failure was caused by such
partys failure to comply with or perform any of its
covenants or obligations set forth in this Agreement.
8.4
Expenses; Termination Fees
.
(a)
Expenses.
Except as set forth
in this Section 8.4, all fees and expenses incurred in
connection with this Agreement and the Contemplated Transactions
shall be paid by the party incurring such expenses, whether or
not the Merger is consummated;
provided, however,
that
upon any termination of this Agreement pursuant to
Section 8.1(d), 8.1(e), or 8.1(h) (other than a termination
that would not have occurred: (1) but for the failure of
Parent or Merger Sub to fulfill its or their obligations
hereunder or (2) but for, with respect to a termination
pursuant to Section 8.1(d) only, the failure of the
Rollover Holders (and Parent, by proxy under the Voting
Agreements) to vote the Rollover Shares at the Company
Stockholders Meeting in favor of the adoption and approval
of this Agreement), then (without limiting any obligation of the
Company to pay any fee payable pursuant to Section 8.4(c)),
the Company shall make a nonrefundable cash payment to Parent,
at the time specified in Section 8.4(b), in an amount equal
to the lesser of
(1)
the amount of all Parent
Expenses and
(2)
$900,000, in each case subject to
Section 8.4(d). The term
Parent
Expenses
means the aggregate amount of all fees
and expenses of Parent and its Affiliates that have been paid or
that may become payable in connection with the preparation and
negotiation of this Agreement and otherwise in connection with
the Merger and the other Contemplated Transactions, including,
without limitation, fees and expenses of accountants, attorneys
and financial advisors, and all filing fees (including the
Antitrust Filing Fees).
(b)
Timing of Payment.
In the case
of termination of this Agreement by the Company, any
nonrefundable payment required to be made pursuant to the
proviso to Section 8.4(a) shall be made by the Company
prior to the time of such termination; and in the case of
termination of this Agreement by Parent, any nonrefundable
payment required to be made pursuant to the proviso to
Section 8.4(a) shall be made by the Company within two
business days after such termination.
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(c)
Company Termination Fee
.
(i)
If:
(1)
this Agreement is terminated
by Parent or the Company pursuant to Section 8.1(b) or
Section 8.1(d), and in any such event, at or prior to the
time of the termination of this Agreement an Acquisition
Proposal shall have been publicly announced, commenced,
submitted or made (and not publicly withdrawn) and the Company
either consummates an Acquisition Transaction (or enters into an
Acquisition Agreement) with any Person (other than Parent)
within twelve (12) months following such termination;
(2)
this Agreement is terminated by Parent pursuant
to Section 8.1(e) or
(3)
this Agreement is
terminated by the Company pursuant to Section 8.1(h), then
the Company shall pay to Parent, in cash, a nonrefundable fee in
the amount equal to (A) $3,710,000 less (B) any Parent
Expenses previously paid to Parent pursuant to
Section 8.4(a).
(ii)
In the case of termination of this Agreement by
Parent or the Company pursuant to Section 8.1(b) or
Section 8.1(d) the fee referred to in the preceding clause
(i) shall be paid by the Company prior to the event
giving rise to such fee; in the case of termination of this
Agreement by the Company pursuant to Section 8.1(h), the
fee referred to in the preceding clause (i) shall be
paid by the Company prior to the time of such termination; and
in the case of termination of this Agreement by Parent pursuant
to Section 8.1(e), the fee referred to in the preceding
clause (i) shall be paid by the Company within two
business days after such termination.
(d)
Costs of Collection and
Interest.
If any party fails to pay when due any
amount payable under this Section 8.4, then
(i)
the party failing to make payment shall
reimburse the other party for all costs and expenses (including
fees and disbursements of counsel) incurred in connection with
the collection of such overdue amount and the enforcement by
such other party of its rights under this Section 8.4, and
(ii)
the party failing to make payment shall pay to
the other party interest on such overdue amount (for the period
commencing as of the date such overdue amount was originally
required to be paid and ending on the date such overdue amount
is actually paid in full) at an annual rate three percentage
points above the prime rate (as announced by Bank of
America or any successor thereto) in effect on the date such
overdue amount was originally required to be paid.
Section
9.
Miscellaneous
Provisions.
9.1
Amendment.
This Agreement may
be amended with the approval of the respective boards of
directors of the Company and Parent at any time (whether before
or after the adoption and approval of this Agreement by the
Companys stockholders);
provided, however,
that
after any such adoption and approval of this Agreement by the
Companys stockholders, no amendment shall be made which by
applicable Legal Requirement requires further approval of the
stockholders of the Company without the further approval of such
stockholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties
hereto.
9.2
Waiver
.
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(a)
No failure on the part of any party to exercise
any power, right, privilege or remedy under this Agreement, and
no delay on the part of any party in exercising any power,
right, privilege or remedy under this Agreement, shall operate
as a waiver of such power, right, privilege or remedy; and no
single or partial exercise of any such power, right, privilege
or remedy shall preclude any other or further exercise thereof
or of any other power, right, privilege or remedy.
(b)
No party shall be deemed to have waived any
claim arising out of this Agreement, or any power, right,
privilege or remedy under this Agreement, unless the waiver of
such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on
behalf of such party; and any such waiver shall not be
applicable or have any effect except in the specific instance in
which it is given.
9.3
No Survival of Representations and
Warranties.
None of the representations and
warranties contained in this Agreement or in any certificate
delivered pursuant to this Agreement shall survive the Merger.
9.4
Entire Agreement; Counterparts; Exchanges by
Facsimile.
This Agreement and the other
agreements referred to in this Agreement constitute the entire
agreement and supersede all prior agreements and understandings,
both written and oral, among or between any of the parties with
respect to the subject matter hereof and thereof;
provided,
however
, that the Confidentiality Agreement shall not be
superseded and shall remain in full force and effect in
accordance with its terms. This Agreement may be executed in
several counterparts, each of which shall be deemed an original
and all of which shall constitute one and the same instrument.
The exchange of a fully executed Agreement (in counterparts or
otherwise) by facsimile shall be sufficient to bind the parties
to the terms and conditions of this Agreement.
9.5
Applicable Law;
Jurisdiction.
This Agreement shall be governed
by, and construed in accordance with, the laws of the State of
Delaware, regardless of the laws that might otherwise govern
under applicable principles of conflicts of laws. In any action
or suit between any of the parties arising out of or relating to
this Agreement or any of the transactions contemplated by this
Agreement:
(a)
each of the parties irrevocably and
unconditionally consents and submits to the exclusive
jurisdiction and venue of the state and federal courts located
in the State of Delaware; and
(b)
each of the
parties irrevocably waives the right to trial by jury.
9.6
Remedies.
Except as otherwise
provided herein, but subject to Section 9.7, any and all
remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred
hereby, or by law or equity upon such party, and the exercise by
a party of any one remedy will not preclude the exercise of any
other remedy.
9.7
Specific Performance
.
(a)
The parties to this Agreement agree that
irreparable damage would occur if any provision of this
Agreement is not performed in accordance with the terms hereof
and that the parties will be entitled to specific performance of
the terms hereof in addition to any other remedy at law or
equity. Each party to this Agreement, to the extent permitted by
Applicable Law, hereby waives any defenses it may have to the
remedy of specific performance provided
A-58
for herein, waives any requirement for the posting of any bond
or other security as a prerequisite for specific performance,
and agrees not to raise any objections to the remedy of specific
performance in any proceeding brought by any other party to this
Agreement. The Company hereby agrees that specific performance
shall be its (and any third party beneficiarys) sole and
exclusive remedy with respect to breaches by Parent, Merger Sub
or any other Person or otherwise in connection with this
Agreement or the Contemplated Transactions, except as provided
in Section 9.7(b) below and as expressly provided in the
Guarantee (if and to the extent applicable), and subject to
Section 9.7(b) below, that none of the Company nor any
holder of Company Common Stock may accept any other form of
relief that may be available for breach under this Agreement,
the Guarantee, any commitment letter (or similar document) or
otherwise in connection with this Agreement or the transactions
contemplated hereby (including monetary damages).
(b)
Only if a court of competent jurisdiction has
declined to specifically enforce the obligations of Parent or
Merger Sub to consummate the Merger pursuant to a claim for
specific performance brought against Parent or Merger Sub in
connection with this Agreement, the Company may enforce any
award of damages granted by such court for such alleged breach
against Parent, Merger Sub or such other Person and accept
damages for such alleged breach only if, within two
(2) weeks following such courts determination, Parent
and Merger Sub do not consummate the Merger in accordance with
this Agreement. Notwithstanding anything else contained in this
Agreement, in no event shall the collective damages payable by
Parent, Merger Sub or any of their affiliates, for breaches
under this Agreement or the Guarantee exceed the Cap (as defined
in the Guarantee) in the aggregate for all such breaches. For
the avoidance of doubt, the Company and any third party
beneficiary may contemporaneously seek both specific performance
and any other form of alternative relief that may be available
for breach under this Agreement or otherwise in connection with
this Agreement or the Contemplated Transactions (including
monetary damages), but no such alternative relief may be
accepted unless and until the court has declined to award
specific performance. The Company agrees to cause any pending
Legal Proceeding seeking any such other relief to be dismissed
with prejudice at such time as Parent and Merger Sub consummate
the Merger in accordance with this Agreement. The Company, by
its acceptance of the benefits of this Agreement and the
Guarantee, covenants, agrees and acknowledges that no Person
other than the Sponsors shall have any obligation hereunder or
thereunder and that no recourse or right of recovery hereunder
or thereunder or under any document or instrument delivered in
connection herewith or therewith, or for any claim based on, in
respect of, or by reason of, such obligations or their creation,
against, and no liability shall be attached to, any former,
current or future director, officer, agent, Affiliate, employee,
general or limited partner, member, manager, stockholder, other
equity holder, controlling person or assignee of a Sponsor or
any Affiliate thereof or any former, current or future director,
officer, agent, Affiliate, employee, general or limited partner,
member, manager, stockholder, other equity holder, controlling
person or assignee of any of the foregoing (excluding Parent and
Merger Sub), through Parent, Merger Sub or otherwise, whether by
or through attempted piercing of the corporate veil, by or
through a claim by or on behalf of Parent or Merger Sub against
any of the foregoing, whether by the enforcement of any
assessment or by any legal or equitable proceeding, by virtue of
any Legal Requirement, or otherwise.
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9.8
Disclosure Schedules.
Each of
the Company Disclosure Schedule and the Parent Disclosure
Schedule shall be arranged in separate parts corresponding to
the numbered and lettered sections contained in Section 2
or Section 3, and the information disclosed in any numbered
or lettered part shall be deemed to relate to and to qualify
only the particular representation or warranty set forth in the
corresponding numbered or lettered section in Section 2 or
Section 3, and shall not be deemed to relate to or to
qualify any other representation or warranty unless the
applicability of the information to any other representation or
warranty is readily apparent from the text of such disclosure.
For purposes of this Agreement, each statement or other item of
information set forth in the Company Disclosure Schedule or in
any update to the Company Disclosure Schedule shall be deemed to
be a representation and warranty made by the Company in
Section 2 and each statement or other item of information
set forth in the Parent Disclosure Schedule or in any update to
the Parent Disclosure Schedule shall be deemed to be a
representation and warranty made by Parent in Section 3.
9.9
Attorneys Fees.
In any
action at law or suit in equity to enforce this Agreement or the
rights of any of the parties under this Agreement, the
prevailing party in such action or suit shall be entitled to
receive a reasonable sum for its attorneys fees and all
other reasonable costs and expenses incurred in such action or
suit.
9.10
Assignability;
Beneficiaries.
This Agreement shall be binding
upon, and shall be enforceable by and inure solely to the
benefit of, the parties hereto and their respective successors
and assigns;
provided, however
, that neither this
Agreement nor any of the Companys rights or obligations
hereunder may be assigned or delegated by the Company without
the prior written consent of Parent, and any attempted
assignment or delegation of this Agreement or any of such rights
or obligations by the Company without Parents prior
written consent shall be void and of no effect. Nothing in this
Agreement, express or implied, is intended to or shall confer
upon any Person (other than:
(a)
the parties hereto;
(b)
prior to the Effective Time, but subject to
Section 9.7(b), for the right of holders of shares of the
Company Common Stock (other than the Rollover Holders) to pursue
claims for damages and other relief, including equitable relief,
for any breach of this Agreement by Parent or Merger Sub;
(c)
from and after the Effective Time, the former
holders of Company Common Stock (other than the Rollover
Holders) solely with respect to their right to receive the
Merger Consideration in accordance with (and subject to
Section 1) and
(d)
the Indemnified Persons
to the extent of their respective rights pursuant to
Section 5.3) any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement. Notwithstanding
the foregoing, or anything to the contrary contained herein, the
rights granted pursuant to clause (b) of this
Section 9.10 will only be enforceable on behalf of holders
of Company Common Stock by the Company in its sole and absolute
discretion, it being understood and agreed that any and all
interests in such claims will attach to such shares of the
Company Common Stock and subsequently transfer therewith and,
consequently, any damages, settlements, or other amounts
recovered or received by the Company with respect to such claims
(net of expenses incurred by the Company in connection
therewith) may, in the Companys sole and absolute
discretion, be
(i)
distributed, in whole or in part,
by the Company to the holders of shares of Company Common Stock
of record as of any date determined by the Company or
(ii)
retained by the Company for the use and benefit
of the Company on behalf of its stockholders in any manner the
Company deems fit.
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9.11
Notices.
Any notice or other
communication required or permitted to be delivered to any party
under this Agreement shall be in writing and shall be deemed
properly delivered, given and received when delivered by hand,
by registered mail, by courier or express delivery service or by
facsimile to the address or facsimile telephone number set forth
beneath the name of such party below (or to such other address
or facsimile telephone number as such party shall have specified
in a written notice given to the other parties hereto):
if to Parent or Merger Sub:
Ray Holding Corporation
Ray Merger Sub Corporation
c/o Vector
Capital Corporation
One Market Street
Steuart Tower, 23rd Floor
San Francisco, CA 94105
Attention: Chief Operating Officer
Facsimile:
(415) 293-5100
with a copy (which shall not constitute notice) to:
Shearman & Sterling LLP
525 Market Street, Suite 1500
San Francisco, CA 94105
Attention: Steve L. Camahort
Facsimile:
(415) 616-1199
if to the Company:
RAE Systems Inc.
3775 North First St.
San Jose, CA 95134
Attention: Chief Financial Officer
Facsimile:
408-952-8480
with a copy (which shall not constitute notice) to:
Fenwick & West LLP
801 California Street
Mountain View, CA 94041
Attention: David Michaels and Dennis DeBroeck
Facsimile:
650-988-8500
9.12
Cooperation.
The Company
agrees to cooperate fully with Parent and to execute and deliver
such further documents, certificates, agreements and instruments
and to take such
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other actions as may be reasonably requested by Parent to
evidence or reflect the Contemplated Transactions and to carry
out the intent and purposes of this Agreement.
9.13
Severability.
Any term or
provision of this Agreement that is invalid or unenforceable in
any situation in any jurisdiction shall not affect the validity
or enforceability of the remaining terms and provisions of this
Agreement or the validity or enforceability of the offending
term or provision in any other situation or in any other
jurisdiction. If a final judgment of a court of competent
jurisdiction declares that any term or provision of this
Agreement is invalid or unenforceable, the parties hereto agree
that the court making such determination shall have the power to
limit such term or provision, to delete specific words or
phrases or to replace such term or provision with a term or
provision that is valid and enforceable and that comes closest
to expressing the intention of the invalid or unenforceable term
or provision, and this Agreement shall be valid and enforceable
as so modified. In the event such court does not exercise the
power granted to it in the prior sentence, the parties hereto
agree to replace such invalid or unenforceable term or provision
with a valid and enforceable term or provision that will
achieve, to the extent possible, the economic, business and
other purposes of such invalid or unenforceable term or
provision.
9.14
Construction
.
(a)
For purposes of this Agreement, whenever the
context requires: the singular number shall include the plural,
and vice versa; the masculine gender shall include the feminine
and neuter genders; the feminine gender shall include the
masculine and neuter genders; and the neuter gender shall
include masculine and feminine genders.
(b)
The parties hereto agree that any rule of
construction to the effect that ambiguities are to be resolved
against the drafting party shall not be applied in the
construction or interpretation of this Agreement.
(c)
As used in this Agreement, the words
include and including, and variations
thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words without
limitation.
(d)
Except as otherwise indicated, all references in
this Agreement to Sections, Exhibits and
Schedules are intended to refer to Sections of this
Agreement and Exhibits and Schedules to this Agreement.
(e)
The bold-faced headings contained in this
Agreement are for convenience of reference only, shall not be
deemed to be a part of this Agreement and shall not be referred
to in connection with the construction or interpretation of this
Agreement.
(f)
The statement that any item of documentation has
been provided, delivered or made
available shall mean that such documentation was uploaded
into the virtual dataroom set up by the Company in connection
with the Contemplated Transactions by 12:00 pm PDT on or before
the day that is two business days prior to the date of this
Agreement.
(g)
References to $ and
dollars shall mean United States dollars.
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In Witness
Whereof
, the parties have caused this Agreement to be
executed as of the date first above written.
Ray Holding
Corporation
Name: David Baylor
Ray Merger Sub
Corporation
Name: David Baylor
RAE Systems
Inc.
|
|
|
|
By:
|
/s/ Randall
K. Gausman
|
Name: Randall K. Gausman
|
|
|
|
Title:
|
Chief Financial Officer
|
Merger
Agreement Signature Page
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Exhibit A
Certain
Definitions
For purposes of the Agreement (including this Exhibit A):
Acquired Corporations.
Acquired
Corporations
shall mean the Company and its
Subsidiaries and the respective predecessors of the Company and
its Subsidiaries (including any Entity that shall have merged
into the Company or any Subsidiary of the Company).
Acquisition Agreement.
Acquisition
Agreement
shall mean any definitive merger
agreement, stock purchase agreement, asset purchase agreement,
acquisition agreement, option agreement or similar definitive
agreement relating to an Acquisition Proposal or Acquisition
Transaction (other than an Acceptable Confidentiality Agreement).
Acquisition Inquiry.
Acquisition
Inquiry
shall mean an inquiry, indication of
interest or request for information (other than an inquiry,
indication of interest or request for information made or
submitted by Parent) that could reasonably be expected to lead
to an Acquisition Proposal.
Acquisition Proposal.
Acquisition
Proposal
shall mean any offer or proposal (other
than an offer or proposal made or submitted by Parent)
contemplating or otherwise relating to any Acquisition
Transaction.
Acquisition
Transaction.
Acquisition
Transaction
shall mean any transaction or series
of transactions involving:
(a)
any merger, consolidation, amalgamation, share
exchange, business combination, issuance of securities,
acquisition of securities, reorganization recapitalization,
tender offer, exchange offer or other similar transaction:
(i)
in which any of the Acquired Corporations is a
constituent corporation;
(ii)
in which a Person or
group (as defined in the Exchange Act and the rules
promulgated thereunder) of Persons directly or indirectly
acquires beneficial or record ownership of securities
representing more than 15% of the outstanding securities of any
class of voting securities of any of the Acquired Corporations;
or
(iii)
in which any Acquired Corporation issues
securities representing more than 15% of the outstanding
securities of any class of voting securities of such Acquired
Corporation;
(b)
any sale, lease, exchange, transfer, license,
acquisition or disposition of any business or businesses or
assets that constitute or account for:
(i)
15% or
more of the consolidated net revenues of the Acquired
Corporations, consolidated net income of the Acquired
Corporations or consolidated book value of the assets of the
Acquired Corporations; or
(ii)
15% or more of the
fair market value of the assets of the Acquired
Corporations; or
(c)
any liquidation or dissolution of any of the
Acquired Corporations.
Affiliate.
Affiliate
means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control
with such other Person as of the
A-65
date on which, or at any time during the period for which, the
determination of affiliation is being made. For purposes of this
definition, the term control (including, with
correlative meanings, the terms controlled by and
under common control with), as used with respect to
any Person means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting
securities, by Contract or otherwise.
Affiliated Group.
Affiliated
Group
shall mean any affiliated group within the
meaning of Code Section 1504(a) or any similar group
defined under a similar provision of any applicable Legal
Requirement.
Agreement.
Agreement
shall mean the Agreement and Plan of Merger to which this
Exhibit A is attached, as it may be amended from time to
time.
Antitrust Filing Fee.
Antitrust
Filing Fee
shall mean, collectively, all fees and
expenses, other than attorneys fees, incurred in
connection with the filing by the parties hereto of the
premerger notification and report forms relating to the Merger
under the HSR Act and the filing of any notice or other document
under any applicable foreign Legal Requirement relating to
antitrust or competition matters.
Audited Balance Sheet.
Audited
Balance Sheet
shall mean the audited consolidated
balance sheet of the Company and its consolidated subsidiaries
as of December 31, 2009, included in the Companys
Report on
Form 10-K
for the fiscal year ended December 31, 2009, as filed with
the SEC prior to the date of this Agreement.
COBRA.
COBRA
shall
mean the Consolidated Omnibus Budget Reconciliation Act of 1985,
as amended.
Code.
Code
shall
mean the Internal Revenue Code of 1986, as amended.
Company Affiliate.
Company
Affiliat
e shall mean any Person under common
control with any of the Acquired Corporations within the meaning
of Sections 414(b), (c), (m) and (o) of the Code,
and the regulations issued thereunder.
Company Associate.
Company
Associate
shall mean any current or former
employee, independent contractor, officer or director of any of
the Acquired Corporations or any Company Affiliate.
Company Benefit Agreement.
Company
Benefit Agreement
shall mean each management,
employment, severance, change in control, consulting,
relocation, repatriation or expatriation agreement or other
Contract between any of the Acquired Corporations or any Company
Affiliate and any Company Associate, other than any such
Contract with a Company Associate that is terminable at
will without any obligation on the part of the applicable
Acquired Corporation or Company Affiliate to make any payments
or provide any benefits in connection with such termination
(other than in the case of agreements with employees outside of
the United States that do not provide any payment in excess of
amounts as required by applicable Legal Requirements).
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Company Benefit Plan.
Company
Benefit Plan
shall mean each employment,
consulting, salary, bonus, vacation, deferred compensation,
incentive compensation, stock purchase, stock option or other
equity-based, severance, termination, retention,
change-in-control,
death and disability benefits, hospitalization, medical, life or
other insurance, flexible benefits, supplemental unemployment
benefits, other welfare fringe benefits, profit-sharing, pension
or retirement plan, program, Contract or commitment and each
other employee benefit plan or arrangement, whether written or
unwritten, and whether funded or unfunded, including each
Foreign Plan and each employee benefit plan, within
the meaning of Section 3(3) of ERISA (whether or not ERISA
is applicable to such plan), that is or has been sponsored,
maintained, contributed to or required to be contributed to by
any of the Acquired Corporations or any Company Affiliate for
the benefit of any Company Associate or with respect to which
any of the Acquired Corporations or any Company Affiliate has or
may have any liability or obligation.
Company Common Stock.
Company
Common Stock
shall mean the Common Stock, par
value $0.001 per share, of the Company.
Company Contract.
Company
Contract
shall mean any Contract:
(a)
to which any of the Acquired Corporations is a
party;
(b)
by which any of the Acquired Corporations
or any Company IP or any other asset of any of the Acquired
Corporations is or may become bound or under which any of the
Acquired Corporations has, or may become subject to, any
obligation; or
(c)
under which any of the Acquired
Corporations has or may acquire any right or interest.
Company Disclosure
Schedule.
Company Disclosure
Schedule
shall mean the disclosure schedule that
has been prepared by the Company in accordance with the
requirements of Section 9.8 of the Agreement and that has
been delivered by the Company to Parent on the date of the
Agreement.
Company IP.
Company
IP
shall mean
(a)
all Intellectual
Property Rights in or pertaining to the Company Products or
methods or processes used to manufacture the Company Products,
and
(b)
all other Intellectual Property Rights owned
by or exclusively licensed to any of the Acquired Corporations.
Company IP Contract.
Company IP
Contract
shall mean any Contract to which any of
the Acquired Corporations is a party or by which any of the
Acquired Corporations is bound, that contains any assignment or
license of, or covenant not to assert or enforce, any
Intellectual Property Right or that otherwise relates to any
Company IP or any Intellectual Property developed by, with, or
for any of the Acquired Corporations.
Company Material Adverse
Effect.
Company Material Adverse
Effect
shall mean any effect, change, event or
circumstance that, considered together with all other effects,
changes, events or circumstances, is or would reasonably be
expected to be or to become materially adverse to, or has or
would reasonably be expected to have or result in a material
adverse effect on:
(a)
the business, condition
(financial or otherwise), capitalization, assets (including
Intellectual Property), liabilities (accrued, contingent or
otherwise), operations, or financial performance of the Acquired
Corporations taken as a whole;
(b)
the ability of
the Company to consummate the Merger or any of the other
Contemplated Transactions or to
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perform any of its covenants or obligations under the Agreement;
or
(c)
Parents ability to vote, transfer,
receive dividends with respect to or otherwise exercise
ownership rights with respect to any of the stock of the
Surviving Corporation;
provided, however
, that
Company Material Adverse Effect
shall
not include the effect of
(i)
any changes in general
economic or political conditions (to the extent such changes do
not disproportionately affect the Company relative to other
companies in its industry);
(ii)
any changes in
applicable Legal Requirements, regulations or GAAP (to the
extent such changes do not disproportionately affect the Company
relative to other companies in its industry);
(iii)
the announcement of this Agreement or the
pendency of the Contemplated Transactions;
(iv)
any
failure to meet analyst projections or any change in analyst
recommendations;
(v)
any failure by the Company to
meet any internal projections, estimates or budgets for any
period on or after the date of this Agreement;
(vi)
any change in the market price or trading
volume of the Company Common Stock (provided that the underlying
causes or causes of any failure or change referred to in clauses
(iv), (v) or (vi) may be taken into account in
determining whether a Company Material Adverse Effect shall have
occurred); or
(vii)
any legal proceedings made or
brought by any of the current or former stockholders of the
Company (on their own behalf or on behalf of the Company) or any
other Person against the Company or its directors or officers
which arise out of the Prior Merger Agreement or this Agreement,
or the transactions contemplated thereby or hereby.
Company Option.
Company
Option
shall mean any option to purchase
shares of Company Common Stock (whether granted by the Company
pursuant to the Option Plans, assumed by the Company in
connection with any merger, acquisition or similar transaction
or otherwise issued or granted).
Company Privacy Policy.
Company
Privacy Policy
shall mean each external or
internal, past or present privacy policy of any of the Acquired
Corporations, including any policy relating to
(a)
the privacy of users of the Company Products or
of any Company Website,
(b)
the collection, storage,
disclosure, and transfer of any User Data or Personal Data, and
(c)
any employee information.
Company Product.
Company
Product
shall mean any product or service
designed, developed, manufactured, marketed, distributed,
provided, licensed, or sold at any time by any of the Acquired
Corporations.
Company Web Site.
Company Web
Site
shall mean any public or private website
owned, maintained, or operated at any time by or on behalf of
any of the Acquired Corporations.
Confidentiality
Agreement.
Confidentiality
Agreement
shall mean the Mutual Nondisclosure
Agreement between the Company and Vector Capital Corporation,
dated September 24, 2010, as amended from time to time.
Consent.
Consent
shall mean any approval, consent, ratification, permission,
waiver or authorization (including any Governmental
Authorization).
Contemplated
Transactions.
Contemplated
Transactions
shall mean the Merger and the other
transactions and actions contemplated by this Agreement and the
transactions and actions contemplated by the Voting Agreements.
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Contract.
Contract
shall mean any written, oral or other agreement, contract,
subcontract, lease, understanding, arrangement, instrument,
note, option, warranty, purchase order, license, sublicense,
insurance policy, benefit plan or legally binding commitment or
undertaking of any nature.
DGCL.
DGCL
shall
mean the General Corporation Law of the State of Delaware.
DOL.
DOL
shall mean
the United States Department of Labor.
Encumbrance.
Encumbrance
shall mean any lien, pledge, hypothecation, charge, mortgage,
security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right,
community property interest or restriction of any nature
(including any restriction on the voting of any security, any
restriction on the transfer of any security or other asset, any
restriction on the receipt of any income derived from any asset,
any restriction on the use of any asset and any restriction on
the possession, exercise or transfer of any other attribute of
ownership of any asset).
Entity.
Entity
shall
mean any corporation (including any non-profit corporation),
general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including
any company limited by shares, limited liability company or
joint stock company), firm, society or other enterprise,
association, organization or entity.
ERISA.
ERISA
shall
mean the Employee Retirement Income Security Act of 1974, as
amended.
Exchange Act.
Exchange
Act
shall mean the Securities Exchange Act of
1934, as amended.
FMLA.
FMLA
shall
mean the Family Medical Leave Act of 1993, as amended.
Foreign Plan.
Foreign
Plan
shall mean:
(a)
any plan,
program, policy, practice, Contract or other arrangement
mandated by a Governmental Body outside the United States to
which any of the Acquired Corporations is required to contribute
or under which any of the Acquired Corporations has or may have
any liability;
(b)
any Company Benefit Plan that is
subject to any of the Legal Requirements of any jurisdiction
outside the United States; and
(c)
any Company
Benefit Plan that covers or has covered any Company Associate
whose services are or have been performed primarily outside of
the United States.
GAAP.
GAAP
shall
mean generally accepted accounting principles in the United
States, consistently applied.
Governmental
Authorization.
Governmental
Authorization
shall mean any:
(a)
permit, license, certificate, franchise,
permission, variance, clearance, registration, qualification or
authorization issued, granted, given or otherwise made available
by or under the authority of any Governmental Body or pursuant
to any Legal Requirement; or
(b)
right under any
Contract with any Governmental Body.
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Governmental Body.
Governmental
Body
shall mean any:
(a)
nation,
state, commonwealth, province, territory, county, municipality,
district or other jurisdiction of any nature;
(b)
federal, state, local, municipal, foreign or
other government;
(c)
governmental or
quasi-governmental authority of any nature (including any
governmental division, department, agency, commission,
instrumentality, official, ministry, fund, foundation, center,
organization, unit, body or Entity and any court or other
tribunal); or
(d)
self-regulatory organization
(including The New York Stock Exchange).
HIPAA.
HIPAA
shall
mean the Health Insurance Portability and Accountability Act of
1996, as amended.
HSR Act.
HSR Act
shall mean the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
Intellectual
Property.
Intellectual
Property
shall mean algorithms, application
programmers interfaces (APIs), apparatus, circuit designs
and assemblies, gate arrays, IP cores, net lists, photomasks,
semiconductor devices, test vectors, databases, data and results
from simulations or tests, design rules, diagrams, formulae,
GDSII files, inventions (whether or not patentable), know-how,
logos, marks (including brand names, product names, logos and
slogans), methods, network configurations and architectures,
processes, proprietary information, protocols, schematics,
simulation methods or techniques, specifications, software,
software code (in any form, including source code and executable
or object code), software development tools, subroutines,
techniques, test vectors, user interfaces, uniform resource
locators (URLs), web sites, works of authorship and other forms
of technology (whether or not embodied in any tangible form and
including all tangible embodiments of the foregoing, such as
instruction manuals, laboratory notebooks, prototypes, samples,
studies and summaries).
Intellectual Property
Rights.
Intellectual Property
Rights
shall mean all rights of the following
types, which may exist or be created under the laws of any
jurisdiction in the world:
(a)
rights associated
with works of authorship, including exclusive exploitation
rights, copyrights, moral rights and mask works;
(b)
trademark and trade name rights and similar
rights;
(c)
trade secret rights;
(d)
patent and industrial property rights;
(e)
other proprietary rights in Intellectual
Property; and
(f)
rights in or relating to
registrations, renewals, extensions, combinations, divisions and
reissues of, and applications for, any of the rights referred to
in clauses (a) through (e) above.
IRS.
IRS
shall mean
the United States Internal Revenue Service.
Knowledge.
knowledge
shall mean
(a)
with respect to the Company, the
actual knowledge of the Companys President, Chief
Financial Officer, Chief Technology Officer and General Counsel,
and the knowledge that any such individual would reasonably be
expected to possess as a result of the diligent performance of
his or her responsibilities in such positions in the ordinary
course of the Companys business, and
(b)
with
respect to Parent, the actual knowledge of the executive
officers of Parent, and the knowledge that any such individual
would reasonably be expected to possess as a result of the
diligent performance of his or her responsibilities in such
positions in the ordinary course of Parents business.
A-70
Legal Proceeding.
Legal
Proceeding
shall mean any action, suit,
litigation, arbitration, proceeding (including any civil,
criminal, administrative, investigative or appellate
proceeding), hearing, inquiry, audit, examination or
investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental
Body or any arbitrator or arbitration panel.
Legal Requirement.
Legal
Requirement
shall mean any federal, state, local,
municipal, foreign or other law, statute, constitution,
principle of common law, resolution, ordinance, code, edict,
decree, rule, regulation, ruling or requirement issued, enacted,
adopted, promulgated, implemented or otherwise put into effect
by or under the authority of any Governmental Body.
Manager.
Manager
shall mean, with respect to the Acquired Corporations, any
employee of the Acquired Corporations who is a manager or who
holds any job with a title or functional authority that is
superior to that of a manager.
Open Source Code.
Open Source
Code
shall mean any software code that is
distributed as free software or open source
software or is otherwise distributed publicly in source
code form under terms that permit modification and
redistribution of such software. Open Source Code includes
software code that is licensed under the GNU General Public
License, GNU Lesser General Public License, Mozilla License,
Common Public License, Apache License, BSD License, Artistic
License, or Sun Community Source License.
Parent Disclosure Schedule.
Parent
Disclosure Schedule
shall mean the disclosure
schedule that has been prepared by Parent in accordance with the
requirements of Section 9.8 of the Agreement and that has
been delivered by Parent to the Company on the date of the
Agreement.
Parent Material Adverse
Effect.
Parent Material Adverse
Effect
shall mean any effect, change, event or
circumstance that, considered together with all other effects,
changes, events or circumstances, is or could reasonably be
expected to be or to become materially adverse to, or has or
could reasonably be expected to have or result in a material
adverse effect on the ability of Parent to consummate the Merger
or any of the other Contemplated Transactions or to perform any
of its covenants or obligations under the Agreement;
provided, however
, that
Parent Material
Adverse Effect
shall not include the effect of any
changes in general economic or political conditions (to the
extent such changes do not disproportionately affect Parent
relative to other companies in its industry).
Person.
Person
shall
mean any individual, Entity or Governmental Body.
Personal Data.
Personal
Data
shall mean a natural persons name,
street address, telephone number,
e-mail
address, photograph, social security number, drivers
license number, passport number, or customer or account number,
or any other piece of information that allows the identification
of a natural person.
PRC JVs.
PRC JVs
shall mean RAE Coal Mine Safety Instruments (Fushun) Co.
Ltd. and RAE KLH Technologies (Beijing) Co. Ltd.
A-71
Proxy Statement.
Proxy
Statement
shall mean the proxy statement to be
sent to the Companys stockholders in connection with the
Company Stockholders Meeting.
Registered IP.
Registered
IP
shall mean all Intellectual Property Rights
that are registered, filed, or issued under the authority of any
Governmental Body, including all patents, registered copyrights,
registered mask works, and registered trademarks and all
applications for any of the foregoing.
Representatives.
Representatives
shall mean directors, officers, other employees, agents,
attorneys, accountants, advisors and representatives.
Rollover Shares.
Rollover
Shares
shall mean a total of
13,392,857 shares of Company Common Stock owned by the
Rollover Holders as set forth on
Exhibit D
.
Sarbanes-Oxley Act.
Sarbanes-Oxley
Act
shall mean the Sarbanes-Oxley Act of 2002, as
it may be amended from time to time.
SEC.
SEC
shall mean
the United States Securities and Exchange Commission.
Securities Act.
Securities
Act
shall mean the Securities Act of 1933, as
amended.
Shanghai Construction
Contract.
Shanghai Construction
Contract
shall mean that certain construction
Contract between RAE Shanghai and Shanghai Zhuxin Construction
Development Co. Ltd. entered into on December 15, 2009 with
respect to certain property located at Huiwang, Shengxin Road,
Jiading Industrial Park North Zone.
Subsidiary.
An entity shall be deemed to be a
Subsidiary
of another Person if such
Person directly or indirectly owns or purports to own,
beneficially or of record,
(a)
an amount of voting
securities of other interests in such Entity that is sufficient
to enable such Person to elect at least a majority of the
members of such Entitys board of directors or other
governing body, or
(b)
at least 50% of the
outstanding equity, voting, beneficial or financial interests in
such Entity.
Superior Offer.
Superior
Offer
shall mean a bona fide written offer by a
third party, not solicited in violation of any provision of
Section 4.3, to purchase, in exchange for consideration
consisting exclusively of cash
and/or
publicly traded equity securities, all of the outstanding shares
of Company Common Stock, that:
(a)
was not obtained
or made as a direct or indirect result of a breach of this
Agreement, the Confidentiality Agreement or any
standstill or similar agreement under which any
Acquired Corporation has any rights or obligations; and
(b)
is on terms and conditions that the Board of
Directors or the Special Committee determines, in its
reasonable, good faith judgment, after consultation with an
independent financial advisor of nationally recognized
reputation, to be:
(i)
more favorable, from a
financial point of view, to the Companys stockholders than
the terms of the Merger; and
(ii)
likely to be
consummated;
provided, however,
that any such offer shall
not be deemed to be a Superior Offer if any
financing required to consummate the transaction contemplated by
such offer is not committed and is not reasonably capable of
being obtained by such third party (as determined in good faith
by the Board of Directors or the Special Committee), or if the
consummation of such transaction is contingent on any such
financing being obtained.
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Tax.
Tax
shall mean
any federal, state, local, foreign or other tax (including any
income tax, franchise tax, capital gains tax, gross receipts
tax, value-added tax, surtax, estimated tax, unemployment tax,
national health insurance tax, excise tax, ad valorem tax,
transfer tax, stamp tax, sales tax, use tax, property tax,
business tax, withholding tax or payroll tax), levy, assessment,
tariff, duty (including any customs duty), deficiency or fee,
and any related charge or amount (including any fine, penalty,
addition to tax or interest), imposed, assessed or collected by
or under the authority of any Governmental Body.
Tax Return.
Tax
Return
shall mean any return (including any
information return), report, statement, declaration, estimate,
schedule, notice, notification, form, election, certificate or
other document or information, and any amendment or supplement
to any of the foregoing, filed with or submitted to, or required
to be filed with or submitted to, any Governmental Body in
connection with the determination, assessment, collection or
payment of any Tax or in connection with the administration,
implementation or enforcement of or compliance with any Legal
Requirement relating to any Tax.
Triggering Event.
A
Triggering
Event
shall be deemed to have occurred if:
(a)
the Board of Directors (or the Special
Committee, if applicable) shall have failed to unanimously (with
two abstentions) recommend that the Companys stockholders
vote to adopt and approve the Agreement, or shall have withdrawn
or modified in a manner adverse to Parent the Company Board
Recommendation;
(b)
the Company shall have failed to
include in the Proxy Statement the Company Board Recommendation
or a statement to the effect that the Board of Directors (or the
Special Committee, if applicable) has unanimously (with two
abstentions) determined and believes that the Merger is
advisable and fair to and in the best interests of the
Companys stockholders;
(c)
the Board of
Directors (or the Special Committee, if applicable) fails to
reaffirm publicly the Company Board Recommendation, or fails to
reaffirm its determination that the Merger is advisable and fair
to and in the best interests of the Companys stockholders,
within five business days after Parent requests in writing that
such recommendation or determination be reaffirmed publicly;
(d)
the Board of Directors or the Special Committee
shall have approved, endorsed or recommended any Acquisition
Proposal;
(e)
the Company shall have executed any
letter of intent, memorandum of understanding or similar
document or any Contract relating to any Acquisition Proposal
(other than an Acceptable Confidentiality Agreement);
(f)
a tender or exchange offer relating to
securities of the Company shall have been commenced and the
Company shall not have sent to its securityholders, within ten
business days after the commencement of such tender or exchange
offer, a statement disclosing that the Company (or its Board of
Directors or the Special Committee) recommends rejection of such
tender or exchange offer; or
(g)
any of the Acquired
Corporations or any Representative of any of the Acquired
Corporations shall have breached, in any material respect, any
of the provisions set forth in Section 4.3.
Unaudited Interim Balance
Sheet.
Unaudited Interim Balance
Sheet
shall mean the unaudited consolidated
balance sheet of the Company and its consolidated subsidiaries
as of September 30, 2010, included in the Companys
Report on
Form 10-Q
for the fiscal quarter ended September 30, 2010, as filed
with the SEC prior to the date of this Agreement.
A-73
User Data.
User Data
shall mean any Personal Data or other data or information
collected by or on behalf of any of the Acquired Corporations
from users of the Company Products or of any Company Website.
Unvested Company Option.
Unvested Company
Option
means any Company Option, or portion
thereof, that is not vested and exercisable immediately prior to
the Effective Time and that will not become vested and
exercisable immediately upon the Effective Time.
Vested Company Option.
Vested Company
Option
means any Company Option, or portion
thereof, that is vested and exercisable immediately prior to the
Effective Time or that will become vested and exercisable
immediately upon the Effective Time.
A-74
Exhibit B
AMENDED
AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RAE SYSTEMS INC.
I.
The name of this corporation is RAE Systems Inc. (the
Corporation).
II.
The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, Wilmington, Delaware
19801, County of New Castle, and the name of the registered
agent of the Corporation in the State of Delaware at such
address is The Corporation Trust Company.
III.
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the
Delaware General Corporation Law (DGCL).
IV.
The Corporation is authorized to issue only one class of stock,
to be designated Common Stock. The total number of shares of
Common Stock presently authorized is Three Thousand (3,000),
each having a par value of $0.01.
V.
A.
The management of the business and the conduct of
the affairs of the Corporation shall be vested in its Board of
Directors. The number of directors which shall constitute the
whole Board of Directors shall be fixed by the Board of
Directors in the manner provided in the Bylaws.
B.
The Board of Directors is expressly empowered to
adopt, amend or repeal the Bylaws of the Corporation. The
stockholders shall also have power to adopt, amend or repeal the
Bylaws of the Corporation; provided, however, that, in addition
to any vote of the holders of any class or series of stock of
the Corporation required by law or by this Certificate of
Incorporation, such action by stockholders shall require the
affirmative vote of the holders of at least a majority of the
voting power of all of the then- outstanding shares of the
capital stock of the Corporation entitled to vote generally in
the election of directors, voting together as a single class.
VI.
A-75
A.
To the fullest extent permitted by the DGCL, as
the same exists or as may hereafter be amended, a director of
the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director.
B.
The Corporation shall indemnify to the fullest
extent permitted by law any person made or threatened to be made
a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that he,
his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or
served at any other enterprise as a director or officer at the
request of the Corporation or any predecessor to the Corporation.
C.
Neither any amendment nor repeal of this
Article VI, nor the adoption of any provision of the
Corporations Certificate of Incorporation inconsistent
with this Article VI, shall eliminate or reduce the effect
of this Article VI in respect of any matter occurring, or
any action or proceeding accruing or arising or that, but for
this Article VI, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
VII.
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon the stockholders herein
are granted subject to this reservation.
A-76
Exhibit C
Execution
Version
GUARANTEE
THIS GUARANTEE, dated as of January 18, 2011 (this
Guarantee
), is entered into by Vector Capital
IV, L.P. (
VCIV
) and Vector Capital III, L.P.
(
VCIII
, and each of VCIII and VCIV, a
Guarantor
and collectively VCIII and VCIV,
the
Guarantors
) in favor of RAE Systems Inc.,
a Delaware corporation (the
Company
).
Capitalized terms used herein and not otherwise defined shall
have the respective meanings assigned to such terms in the
Merger Agreement (as defined below).
RECITAL
Ray Holding Corporation, a Delaware corporation
(
Parent
), Ray Merger Sub Corporation, a
Delaware corporation and a wholly owned subsidiary of Parent
(
Merger Sub
), and the Company have entered
into that certain Agreement and Plan of Merger, dated as of the
date hereof (as amended, modified or supplemented from time to
time, the
Merger Agreement
), and it is a
requirement of the Merger Agreement that Parent deliver this
Guarantee to the Company concurrently with the execution and
delivery thereof.
NOW, THEREFORE, in consideration of the premises set forth above
and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and as an
inducement to the Company to enter into the Merger Agreement
with Parent and Merger Sub, the Guarantors hereby consent and
agree as follows:
AGREEMENT
Section
1.
Guarantee
.
(a)
Subject to the terms and conditions contained
herein (including the Cap set forth in Section 1(b) below),
VCIV, intending to be legally bound, hereby jointly and
severally, and VCIII, intending to be legally bound, hereby
severally (and not jointly), absolutely, irrevocably and
unconditionally guarantees, in accordance with such
Guarantors Pro Rata Portion (defined below), as a primary
obligor and not merely as a surety, to the Company the due,
punctual and complete discharge of all payment obligations of
Parent and Merger Sub under the Merger Agreement, including any
monetary damages payable to the Company under
Section 9.7(b) of the Merger Agreement for Parents or
Merger Subs failure to consummate the Merger under the
circumstances described in said Section 9.7(b), but (in all
events) subject to the limitations of the Merger Agreement
(collectively, the
Obligation
). All payments
hereunder shall be made in lawful money of the United States, by
wire transfer of immediately available funds to an account
designated by the Company. For purposes of this Guarantee, Pro
Rata Portion means, for each Guarantor, the percentage set forth
opposite such Guarantors name on
Schedule A
hereto.
(b)
Notwithstanding anything to the contrary
contained herein, the Guarantors maximum liability under
this Guarantee in respect of the Obligation or otherwise arising
out of or relating to the Contemplated Transactions
(irrespective of the form of the claim or action, whether in
contract, tort or otherwise) shall be limited to monetary
damages not in excess of $82,850,000 (the
Cap
);
provided
, that each
Guarantors maximum liability under this Guarantee in
respect of the Obligations or otherwise arising out of or
relating to the
A-77
Contemplated Transactions (irrespective of the form of the claim
or action, whether in contract, tort or otherwise) shall be
limited to monetary damages not in excess of such
Guarantors Pro Rata Portion of the Cap.
Section
2.
Nature
of Guarantee.
During the term hereof, this
Guarantee is an unconditional, irrevocable and continuing
guarantee of payment and the Obligation to which it applies or
may apply under the terms hereof shall be conclusively presumed
to have been created in reliance hereon. The Obligation
hereunder shall not be released or discharged, in whole or in
part, or otherwise affected by (a) the failure or delay of
the Company to assert any claim or demand or to enforce any
right or remedy against Parent, Merger Sub or any other Person
interested in the Contemplated Transactions, (b) the
addition, substitution or release of any Person interested in
the Contemplated Transactions, (c) any change in the
corporate existence, structure or ownership of Parent, Merger
Sub or any other Person interested in the Contemplated
Transactions, (d) the existence of any bankruptcy,
insolvency, reorganization or similar proceedings affecting
Parent, Merger Sub or any other Person interested in the
Contemplated Transactions, or (e) any change in the Legal
Requirements of any jurisdiction. Notwithstanding the foregoing,
(i) any failure of a condition contained in the Merger
Agreement or of the Company to comply with the Merger Agreement
(whether such breach results from fraud, misrepresentation or
otherwise) that would relieve Parent or Merger Sub of its
obligations under the Merger Agreement shall likewise relieve
Guarantors of their obligations hereunder and (ii) the
Guarantors shall be entitled to the benefit of any defenses,
limitations, caps or disclaimers of damages that may be
available to Parent or Merger Sub under the Merger Agreement.
Section
3.
Certain
Waivers and Acknowledgments.
(a)
To the fullest extent permitted by Legal
Requirement, the Guarantors hereby expressly and unconditionally
waive any and all rights or defenses arising by reason of any
Legal Requirement which would otherwise require any election of
remedies by the Company, promptness, diligence, notice of the
acceptance of this Guarantee and of the Obligation, presentment,
demand for payment, notice of non-performance, default, dishonor
and protest, notice of the Obligation incurred and all other
notices of any kind (other than notices to Parent or Merger Sub
pursuant to the Merger Agreement or this Guarantee), all
defenses which may be available by virtue of any valuation,
stay, moratorium Legal Requirement or other similar Legal
Requirement now or hereafter in effect, any right to require the
marshalling of assets of Parent or Merger Sub or any other
Person interested in the Contemplated Transactions and all
suretyship defenses generally (other than: (i) fraud or
willful misconduct by the Company or any of its subsidiaries or
Affiliates, (ii) defenses to the payment of the Obligation
under the Merger Agreement that are available to Parent or
Merger Sub or (iii) breach by the Company of this
Guarantee).
(b)
Each Guarantor acknowledges that it will receive
substantial direct and indirect benefits from the Contemplated
Transactions and that the waivers set forth in this Guarantee
are knowingly made in contemplation of such benefits.
Section
4.
No
Waiver; Exclusive Remedy.
A-78
(a)
No failure on the part of the Company to
exercise, and no delay in exercising, any right, remedy or power
hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise by the Company of any right, remedy
or power hereunder preclude any other or future exercise of any
right, remedy or power hereunder. The Company shall not have any
obligation to proceed at any time or in any manner against, or
exhaust any or all of the Companys rights against, the
Parent or any other Person liable for the Obligation prior to
proceeding against the Guarantor hereunder.
(b)
The Companys remedies against a Guarantor
shall, and are intended to be, the sole and exclusive direct or
indirect remedies available to the Company against such
Guarantor
and/or
any
Guarantor Non-Recourse Party in respect of any liabilities or
obligations arising under, or in connection with, the Merger
Agreement and the Contemplated Transactions. As used herein, the
term
Guarantor Non-Recourse Party
shall
mean any former, current or future director, officer, agent,
Affiliate, employee, general or limited partner, member,
manager, stockholder, other equity holder, controlling person or
assignee of a Guarantor or any Affiliate thereof or any former,
current or future director, officer, agent, Affiliate, employee,
general or limited partner, member, manager, stockholder, other
equity holder, controlling person or assignee of any of the
foregoing;
provided
,
however
, that Parent and
Merger Sub shall be excluded from the definition of (and shall
not, in any event be deemed to be a) Guarantor Non-Recourse
Party.
Section
5.
Representations
and Warranties.
Each Guarantor hereby represents
and warrants that:
(a)
the execution, delivery and performance of this
Guarantee have been duly authorized by all necessary action and
do not (i) contravene any provision of the Guarantors
partnership agreement or similar organizational documents or
(ii) violate, in any material respect, any Legal
Requirement or contractual restriction binding on the Guarantor
or its assets that would impair in any material respect the
Guarantors obligations under this Guarantee;
(b)
except as set forth in the Merger Agreement, all
consents, approvals, authorizations, permits of, filings with
and notifications to, any Governmental Body necessary for the
due execution, delivery and performance of this Guarantee by the
Guarantor have been obtained or made and all conditions thereof
have been duly complied with, and no other action by, and no
notice to or filing with, any Governmental Body is required in
connection with the execution, delivery or performance of this
Guarantee; and
(c)
this Guarantee constitutes a legal, valid and
binding obligation of the Guarantor enforceable against the
Guarantor in accordance with its terms, subject to (i) laws
of general application relating to bankruptcy, insolvency and
the relief of debtors, and (ii) rules of law governing
specific performance, injunctive relief and other equitable
remedies.
Section
6.
Successors
and Assigns.
A-79
(a)
Subject to the provisions of Section 6(b),
this Guarantee shall inure to the benefit of the successors or
permitted assigns of the parties who shall have, to the extent
of their interests, the rights of the assigning party hereunder.
(b)
This Guarantee is binding upon the parties
successors and assigns. No Guarantor shall assign its
obligations hereunder to any other Person without the prior
written consent of the Company. The Company shall not assign
this Guarantee (or its rights or obligations hereunder) to any
other Person without the prior written consent of the
Guarantors. Any purported assignment in violation of this
provision shall be void.
Section
7.
Notices.
All
notices and other communications under this Guarantee shall be
in writing and shall be deemed given (a) when delivered
personally by hand (with written confirmation of receipt),
(b) when sent by facsimile (with written confirmation of
transmission), or (c) one (1) business day following
the day sent by overnight courier (with written confirmation of
receipt), in each case at the following addresses and facsimile
numbers (or to such other address or facsimile number as a party
may have specified by notice given to the other parties pursuant
to this provision):
If to the Guarantors, to:
Vector Capital IV, L.P.
Vector Capital III, L.P.
One Market Street
Steuart Tower, 23rd Floor
San Francisco, CA 94105
Attention: Chief Operating Officer
Facsimile:
(415) 293-5100
with a copy (which shall not constitute notice) to:
Shearman & Sterling LLP
525 Market Street, Suite 1500
San Francisco, CA 94105
Attention: Steve L. Camahort
Facsimile:
(415) 616-1199
If to the Company, to:
RAE Systems Inc.
3775 North First St.
San Jose, CA 95134
Attention: Chief Financial Officer
Facsimile:
(408) 952-8480
with a copy (which shall not constitute notice) to:
Fenwick & West LLP
801 California Street
A-80
Mountain View, CA 94041
Attention: David Michaels and Dennis DeBroeck
Facsimile:
650-988-8500
Section
8.
Continuing
Guarantee; Termination.
(a)
Continuing Guarantee.
Except
as set forth in Section 8(b), this Guarantee may not be
revoked or terminated and shall remain in full force and effect
and shall be binding on the Guarantor, its successors and
assigns until the payment or satisfaction in full of the
Obligation.
(b)
Termination.
Notwithstanding
anything to the contrary contained herein, this Guarantee shall
terminate and be of no further force or effect with respect to
each Guarantor as of the earliest of (i) the Effective Time
and (ii) the termination of the Merger Agreement in
accordance with its terms (other than any such termination that
would not have occurred but for the failure of Parent or Merger
Sub to fulfill its or their obligations under the Merger
Agreement).
Section
9.
No
Recourse.
The Company covenants, agrees and
acknowledges that the sole asset (other than cash in a
de minimus amount) of Parent is ownership of the capital
stock of Merger Sub and that Merger Sub has no assets, and that
no additional funds are expected to be paid, lent or contributed
to Parent or Merger Sub unless and until the Closing occurs.
Notwithstanding anything that may be expressed or implied in
this Guarantee or any document or instrument delivered in
connection herewith and that, notwithstanding the fact that the
Guarantors are limited partnerships, the Company, by its
acceptance of the benefits hereof, covenants, agrees and
acknowledges that no Person other than the Guarantors shall have
any obligation hereunder and that no recourse or right of
recovery hereunder or under any document or instrument delivered
in connection herewith, or for any claim based on, in respect
of, or by reason of, such obligations or their creation,
against, and no liability shall be attached to, any Guarantor
Non- Recourse Party, through Parent, Merger Sub or otherwise,
whether by or through attempted piercing of the corporate veil,
by or through a claim by or on behalf of Parent or Merger Sub
against any Guarantor Non-Recourse Party, whether by the
enforcement of any assessment or by any legal or equitable
proceeding, by virtue of any Legal Requirement, or otherwise.
Section
10.
Enforcement.
Notwithstanding
anything to the contrary contained herein, nothing in this
Guarantee shall prevent the Company from seeking to enforce the
Merger Agreement in accordance with its terms or any related
agreement including the Confidentiality Agreement against Parent
or Merger Sub including any permitted assignee or successor to
any of them.
Section
11.
Governing
Law; Jurisdiction; Service of Process.
(a)
This Guarantee, and all claims or causes of
action (whether in contract or tort) that may be based upon,
arise out of or relate to this Guarantee or the negotiation,
execution or performance of this Guarantee (including any claim
or cause of action based upon, arising out of or related to any
representation or warranty made in or in connection with this
Guarantee or as
A-81
an inducement to enter into this Guarantee) shall be governed
by, and construed, interpreted and enforced in accordance with,
the laws of the State of New York, without regard to conflict of
laws principles.
(b)
Any legal action, suit or proceeding arising out
of or relating to this Guarantee or the transactions
contemplated hereby shall be heard and determined exclusively in
the Delaware Court of Chancery and any state appellate courts
therefrom within the State of Delaware (or if the Delaware Court
of Chancery declines to accept jurisdiction over a particular
matter, any state or federal court within the State of
Delaware). Each party hereto hereby irrevocably (i) submits
to the exclusive jurisdiction of the State of Delaware (or if
the Delaware Court of Chancery declines to accept jurisdiction
over a particular matter, any state or federal court within the
State of Delaware) in respect of any legal action, suit or
proceeding arising out of or relating to this Guarantee and
(ii) waives, and agrees not to assert, as a defense in any
such action, suit or proceeding, any claim that it is not
subject personally to the jurisdiction of such courts, that its
property is exempt or immune from attachment or execution, that
the action, suit or proceeding is brought in an inconvenient
forum, that the venue of the action, suit or proceeding is
improper or that this Guarantee or the transactions contemplated
hereby may not be enforced in or by such courts.
(c)
Each party hereto agrees that notice or the
service of process in any action, suit or proceeding arising out
of or relating to this Guarantee shall be properly served or
delivered if delivered in the manner contemplated by
Section 7.
Section
12.
Waiver
of Jury Trial.
Each of the parties hereto hereby
waives to the fullest extent permitted by applicable law any
right it may have to a trial by jury with respect to any
litigation directly or indirectly arising out of, under or in
connection with this Guarantee or any of the transactions
contemplated hereby.
Section
13.
Reformation.
If
any term or other provision of this Guarantee is determined by a
court of competent jurisdiction to be invalid, illegal or
incapable of being enforced by any rule of law or public policy,
all other terms, provisions and conditions of this Guarantee
shall nevertheless remain in full force and effect. No party
hereto shall assert, and each party shall cause its respective
Affiliates not to assert, that this Guarantee or any part hereof
is invalid, illegal or unenforceable. Upon such determination
that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate
in good faith to modify this Guarantee so as to effect the
original intent of the parties as closely as possible to the
fullest extent permitted by applicable law in an acceptable
manner to the end that the transactions contemplated hereby are
fulfilled to the extent possible.
Section
14.
Entire
Agreement; Amendments.
This Guarantee constitutes
the entire agreement, and supersedes all other prior agreements
and understandings, both written and oral, between the parties
with respect to the subject matter hereof. No amendment,
modification or waiver of any provision hereof shall be
enforceable unless approved by the Company and the Guarantor in
writing.
A-82
Section
15.
Headings.
The
descriptive headings herein are inserted for convenience of
reference only and are not intended to be part of or to affect
the meaning or interpretation of this Guarantee.
Section
16.
No
Third Party Beneficiaries.
Nothing set forth in
this Guarantee shall be construed to confer upon or give to any
Person other than the Company any rights or remedies under or by
reason of this Guarantee or to confer upon or give to any Person
any rights or remedies against any Person other than the
Guarantor under or by reason of this Guarantee.
Section
17.
Counterparts.
The
exchange of a fully executed Guarantee (in counterparts or
otherwise) by facsimile shall be sufficient to bind the parties
to the terms and conditions of this Guarantee.
[Remainder
of Page Intentionally Left Blank]
A-83
IN WITNESS WHEREOF, the undersigned have caused this Guarantee
to be duly executed and delivered as of the date first written
above.
Vector Capital IV,
L.P.
|
|
|
|
By:
|
Vector Capital Partners IV, L.P.,
|
its general partner
|
|
|
|
By:
|
Vector Capital, L.L.C.,
its general partner
|
|
|
By:
|
/s/ Alexander
R. Slusky
|
Name: Alexander R. Slusky
Vector Capital III,
L.P.
|
|
|
|
By:
|
Vector Capital Partners III, L.P.,
its general partner
|
|
|
By:
|
Vector Capital, L.L.C.,
|
its general partner
|
|
|
|
By:
|
/s/ Alexander
R. Slusky
|
Name: Alexander R. Slusky
Signature
Page to Guarantee
A-84
RAE Systems Inc.
|
|
|
|
By:
|
/s/ Randall
K. Gausman
|
Name: Randall K. Gausman
Signature
Page to Guarantee
A-85
Schedule A
List of Investors
|
|
|
|
|
Investor
|
|
Pro Rata Portion
|
|
Vector Capital IV, L.P.
|
|
|
100
|
%
|
Vector Capital III, L.P.
|
|
|
50
|
%
|
Signature
Page to Guarantee
A-86
Exhibit D
Treatment
of Rollover Stockholders
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|
|
|
|
|
|
|
|
|
|
Rollover
|
|
|
Cash-Out
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Chen Revocable Trust DTD 5/8/2001
|
|
|
15,382,849
|
|
|
|
10,701,525
|
|
|
|
4,681,324
|
|
Hsi Family Trust
|
|
|
2,691,332
|
|
|
|
2,691,332
|
|
|
|
0
|
|
|
|
|
|
|
|
|
13,392,857
|
|
|
|
4,681,324
|
|
|
|
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A-87
ANNEX B
September 19,
2010
The Special
Committee of the Board of Directors
RAE Systems Inc.
3775 North First Street
San Jose, CA 95134
Dear Members of the Committee:
We understand that RAE Systems Inc., a Delaware corporation
(RAE Systems or the Company), is
considering a transaction whereby Battery Ventures VIII, L.P.
and Battery Ventures VIII Side Fund, L.P. (together,
Battery Ventures) will effect a merger involving the
Company. Pursuant to the terms of an Agreement and Plan of
Merger, draft dated September 19, 2010 (the
Agreement), among Rudy Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Battery Ventures
(Parent), Rudy Merger Sub Corp., a Delaware
corporation and wholly owned subsidiary of Parent, and the
Company, Parent will undertake a series of transactions whereby
the Company will become a wholly owned subsidiary of Parent (the
Transaction). Pursuant to the terms of the
Agreement, all of the issued and outstanding shares of the
common stock, par value of $0.001 per share, of the Company
(Company Common Stock), will be converted into the
right to receive, for each outstanding share of Company Common
Stock, $1.60 in cash (the Consideration). We further
understand that, in connection with the Transaction, certain
beneficial owners of Company Common Stock (the Rollover
Holders) will enter into agreements concurrently with the
execution of the Agreement, pursuant to which such Rollover
Holders will contribute a portion of the shares of Company
Common Stock held by such Rollover Holders to Parent. The terms
and conditions of the Transaction are more fully set forth in
the Agreement.
You have requested our opinion as to the fairness, from a
financial point of view, to the holders of Company Common Stock
(other than the Rollover Holders) of the Consideration to be
received by such holders in the Transaction.
UBS Securities LLC (UBS) has acted as financial
advisor to the Special Committee of the Board of Directors of
the Company in connection with the Transaction and will receive
a fee for its services, a portion of which is payable in
connection with this opinion and a significant portion of which
is contingent upon consummation of the Transaction. In the
ordinary course of business, UBS and its affiliates may hold or
trade, for their own accounts and the accounts of their
customers, securities of the Company and portfolio companies of
Battery Ventures and its affiliates and, accordingly, may at any
time hold a long or short position in such securities. The
issuance of this opinion was approved by an authorized committee
of UBS.
Our opinion does not address the relative merits of the
Transaction as compared to other business strategies or
transactions that might be available with respect to the Company
or the Companys underlying business decision to effect the
Transaction. Our opinion does not constitute a recommendation to
any shareholder as to how such shareholder should vote or act
with respect to the Transaction. At your direction, we have not
been asked to, nor do we, offer any opinion as to the terms,
other than the Consideration to the extent expressly specified
herein, of the Agreement or any related documents or the form of
the Transaction. In addition, we express no opinion as to the
fairness of the amount or nature of any compensation to be
received by any officers, directors or employees of any parties
to the Transaction, or any class of such persons, relative to
the Consideration. In rendering this opinion, we have assumed,
with your consent, that (i) the final executed form of the
Agreement will not differ in any material respect from the draft
that we have reviewed, (ii) the parties to the Agreement
will comply with all material terms of the Agreement, and
(iii) the Transaction will be consummated in accordance
with the terms of the Agreement without any adverse waiver or
amendment of any material term or condition thereof. We have
also assumed that all governmental, regulatory or other consents
and approvals necessary for the consummation of the Transaction
will be obtained without any material adverse effect on the
Company or the Transaction.
In arriving at our opinion, we have, among other things:
(i) reviewed certain publicly available business and
financial information relating to the Company;
(ii) reviewed certain internal financial information and
other data relating to the business and financial prospects of
the Company that were not publicly available, including
financial
B-1
The Special
Committee of the Board of Directors
RAE Systems Inc.
September 19, 2010
Page 2
forecasts and estimates prepared by the management of the
Company that you have directed us to utilize for purposes of our
analysis; (iii) conducted discussions with members of the
senior management of the Company concerning the business and
financial prospects of the Company; (iv) reviewed publicly
available financial and stock market data with respect to
certain other companies we believe to be generally relevant;
(v) compared the financial terms of the Transaction with
the publicly available financial terms of certain other
transactions we believe to be generally relevant;
(vi) reviewed current and historical market prices of
Company Common Stock; (vii) reviewed the Agreement; and
(viii) conducted such other financial studies, analyses and
investigations, and considered such other information, as we
deemed necessary or appropriate. At your request, we have
contacted third parties to solicit indications of interest in a
possible transaction with the Company and held discussions with
certain of these parties prior to the date hereof.
In connection with our review, with your consent, we have
assumed and relied upon, without independent verification, the
accuracy and completeness in all material respects of the
information provided to or reviewed by us for the purpose of
this opinion. In addition, with your consent, we have not made
any independent evaluation or appraisal of any of the assets or
liabilities (contingent or otherwise) of the Company, nor have
we been furnished with any such evaluation or appraisal. With
respect to the financial forecasts and estimates referred to
above, we have assumed, at your direction, that they have been
reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of the
Company as to the future financial performance of the Company.
Our opinion is necessarily based on economic, monetary, market
and other conditions as in effect on, and the information
available to us as of, the date hereof.
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the Consideration to be received by
holders of Company Common Stock (other than the Rollover
Holders) in the Transaction is fair, from a financial point of
view, to such holders.
This opinion is provided for the benefit of the Special
Committee of the Board of Directors of the Company (in its
capacity as such) in connection with, and for the purpose of,
its evaluation of the Consideration in the Transaction.
Very truly yours,
UBS SECURITIES LLC
B-2
ANNEX C
§
262. Appraisal rights.
(a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to
such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to § 228 of this
title shall be entitled to an appraisal by the Court of Chancery
of the fair value of the stockholders shares of stock
under the circumstances described in subsections (b) and
(c) of this section. As used in this section, the word
stockholder means a holder of record of stock in a
corporation; the words stock and share
mean and include what is ordinarily meant by those words; and
the words depository receipt mean a receipt or other
instrument issued by a depository representing an interest in 1
or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of
any class or series of stock of a constituent corporation in a
merger or consolidation to be effected pursuant to
§ 251 (other than a merger effected pursuant to
§ 251(g) of this title), § 252,
§ 254, § 255, § 256,
§ 257, § 258, § 263 or
§ 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series
of stock, which stock, or depository receipts in respect
thereof, at the record date fixed to determine the stockholders
entitled to receive notice of the meeting of stockholders to act
upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or
(ii) held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote
of the stockholders of the surviving corporation as provided in
§ 251(f) of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to
§§ 251, 252, 254, 255, 256, 257, 258, 263 and 264
of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository
receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository receipts
at the effective date of the merger or consolidation will be
either listed on a national securities exchange or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.
and b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.,
b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under § 253 or
§ 267 of this title is not owned by the parent
immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be
available for the shares of any class or series of its stock as
a result of an amendment to its certificate of incorporation,
any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this
section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is
practicable.
C-1
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be
submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record
date for notice of such meeting (or such members who received
notice in accordance with § 255(c) of this title) with
respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) of this section that
appraisal rights are available for any or all of the shares of
the constituent corporations, and shall include in such notice a
copy of this section and, if 1 of the constituent corporations
is a nonstock corporation, a copy of § 114 of this
title. Each stockholder electing to demand the appraisal of such
stockholders shares shall deliver to the corporation,
before the taking of the vote on the merger or consolidation, a
written demand for appraisal of such stockholders shares.
Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such
stockholders shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection
and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to
§ 228, § 253, or § 267 of this
title, then either a constituent corporation before the
effective date of the merger or consolidation or the surviving
or resulting corporation within 10 days thereafter shall
notify each of the holders of any class or series of stock of
such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all shares of such
class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section and, if 1 of
the constituent corporations is a nonstock corporation, a copy
of § 114 of this title. Such notice may, and, if given
on or after the effective date of the merger or consolidation,
shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holders
shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such
holders shares. If such notice did not notify stockholders
of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of
such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such
a second notice to all such holders on or within 10 days
after such effective date; provided, however, that if such
second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be
sent to each stockholder who is entitled to appraisal rights and
who has demanded appraisal of such holders shares in
accordance with this subsection. An affidavit of the secretary
or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such
notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice,
each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or
after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is
fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the
merger or consolidation, the surviving or resulting corporation
or any stockholder who has complied with subsections (a)
and (d) of this section hereof and who is otherwise
entitled to appraisal rights, may commence an appraisal
proceeding by filing a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within
60 days after the effective date of the merger or
consolidation, any stockholder who has not commenced an
appraisal proceeding or joined that proceeding as a named party
shall have the right to withdraw such stockholders demand
for appraisal and to accept the terms offered upon the merger or
consolidation.
C-2
Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) of this
section hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholders
written request for such a statement is received by the
surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal
under subsection (d) of this section hereof, whichever is
later. Notwithstanding subsection (a) of this section, a
person who is the beneficial owner of shares of such stock held
either in a voting trust or by a nominee on behalf of such
person may, in such persons own name, file a petition or
request from the corporation the statement described in this
subsection.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after
such service file in the office of the Register in Chancery in
which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the
value of their shares have not been reached by the surviving or
resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the
time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting
corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1
or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the
City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by
publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall
determine the stockholders who have complied with this section
and who have become entitled to appraisal rights. The Court may
require the stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After the Court determines the stockholders entitled to
an appraisal, the appraisal proceeding shall be conducted in
accordance with the rules of the Court of Chancery, including
any rules specifically governing appraisal proceedings. Through
such proceeding the Court shall determine the fair value of the
shares exclusive of any element of value arising from the
accomplishment or expectation of the merger or consolidation,
together with interest, if any, to be paid upon the amount
determined to be the fair value. In determining such fair value,
the Court shall take into account all relevant factors. Unless
the Court in its discretion determines otherwise for good cause
shown, interest from the effective date of the merger through
the date of payment of the judgment shall be compounded
quarterly and shall accrue at 5% over the Federal Reserve
discount rate (including any surcharge) as established from time
to time during the period between the effective date of the
merger and the date of payment of the judgment. Upon application
by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court
may, in its discretion, proceed to trial upon the appraisal
prior to the final determination of the stockholders entitled to
an appraisal. Any stockholder whose name appears on the list
filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted such
stockholders certificates of stock to the Register in
Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder
is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or
resulting corporation to the stockholders entitled thereto.
Payment shall be so made to each such stockholder, in the case
of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock.
The Courts decree may be enforced as other decrees in the
Court of Chancery may be enforced, whether such surviving or
resulting corporation be a corporation of this State or of any
state.
C-3
(j) The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in
the circumstances. Upon application of a stockholder, the Court
may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys fees
and the fees and expenses of experts, to be charged pro rata
against the value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded appraisal rights
as provided in subsection (d) of this section shall be
entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a
written withdrawal of such stockholders demand for an
appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of
this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval
may be conditioned upon such terms as the Court deems just;
provided, however that this provision shall not affect the right
of any stockholder who has not commenced an appraisal proceeding
or joined that proceeding as a named party to withdraw such
stockholders demand for appraisal and to accept the terms
offered upon the merger or consolidation within 60 days
after the effective date of the merger or consolidation, as set
forth in subsection (e) of this section.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been
converted had they assented to the merger or consolidation shall
have the status of authorized and unissued shares of the
surviving or resulting corporation.
8 Del. C. 1953, § 262; 56 Del. Laws, c. 50; 56 Del.
Laws, c. 186, § 24; 57 Del. Laws, c. 148,
§§ 27-29;
59 Del. Laws, c. 106, § 12; 60 Del. Laws, c. 371,
§§ 3-12; 63 Del. Laws, c. 25, § 14; 63
Del. Laws, c. 152, §§ 1, 2; 64 Del. Laws, c. 112,
§§ 46-54;
66 Del. Laws, c. 136,
§§ 30-32;
66 Del. Laws, c. 352, § 9; 67 Del. Laws, c. 376,
§§ 19, 20; 68 Del. Laws, c. 337,
§§ 3, 4; 69 Del. Laws, c. 61, § 10; 69
Del. Laws, c. 262, §§ 1-9; 70 Del. Laws, c. 79,
§ 16; 70 Del. Laws, c. 186, § 1; 70 Del.
Laws, c. 299, §§ 2, 3; 70 Del. Laws, c. 349,
§ 22; 71 Del. Laws, c. 120, § 15; 71 Del.
Laws, c. 339,
§§ 49-52;
73 Del. Laws, c. 82, § 21; 76 Del. Laws, c. 145,
§§ 11-16;
77 Del. Laws, c. 14, §§ 12, 13; 77 Del. Laws, c.
253,
§§ 47-50;
77 Del. Laws, c. 290, §§ 16, 17.
C-4
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