<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 1995
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
------------------------
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
GENENTECH, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
GENENTECH, INC.
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $.02 par value
--------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
61,868,803
--------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
1/50th of 1% of the sum of (A) the product of (x) $48.1875 (average
of the high and low sales price of the Redeemable Common Stock on the
New York Stock Exchange on May 26, 1995 as reported in published
financial sources) multiplied by (y) 57,198,521 (the number of
outstanding shares of Redeemable Common Stock on May 26, 1995
(assuming the exercise of all warrants and stock options, whether or
not currently exercisable)) and (B) the product of (x) $47.1875 (the
average of the high and low sales price of the Common Stock into
which the Redeemable Common Stock was converted automatically after
June 30, 1995 on the New York Stock Exchange on August 31, 1995)
multiplied by (y) 4,670,282 (the incremental number of outstanding
shares for which a fee was not paid in connection with the initial
filing of this Schedule 14A, which number assumes the exercise of all
warrants and stock options, whether or not currently exercisable).
--------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$2,976,632,664
--------------------------------------------------------------------------------
(5) Total fee paid:
$595,327
--------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$551,251* $75,993**
--------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
*Schedule 14A filed June 2, 1995 **Form S-4, No. 33-59949, Filed
September 8, 1995
--------------------------------------------------------------------------------
(3) Filing Party:
Genentech, Inc.
--------------------------------------------------------------------------------
(4) Date Filed:
See (2) above.
--------------------------------------------------------------------------------
<PAGE> 2
LOGO
460 Point San Bruno Boulevard
South San Francisco, CA 94080
Arthur D. Levinson
President and
Chief Executive Officer September 20, 1995
Dear Fellow Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders of
Genentech, Inc., which will be held on Wednesday, October 25, 1995, at 10:00
a.m., local time, at the Crown Sterling Suites, 250 Gateway Boulevard, South San
Francisco, California.
As you may know, I was recently elected as President and Chief Executive
Officer of Genentech. This is the first opportunity I have had to communicate
with all of the stockholders of Genentech, and I am pleased to enclose a Proxy
Statement/Prospectus relating to the Special Meeting to be held with respect to
the pending transaction between Roche and Genentech. Although I was not involved
in the negotiations with Roche, I am strongly in favor of the proposed
transactions and urge you to vote FOR the Proposal to be voted upon at the
Special Meeting.
At the Special Meeting, you will be asked to consider and vote upon a
Proposal to approve a Merger Agreement that results in each outstanding share of
Genentech Common Stock (other than shares held by Roche and its affiliates)
being converted into one share of Genentech Callable Putable Common Stock (the
"Special Common Stock"). The purpose of the Merger is, through the conversion of
Common Stock to Special Common Stock, to, among other matters, (i) establish a
four-year period during which Genentech's publicly traded stock (i.e., the
Special Common Stock) is subject to redemption at the option of Roche at prices
per share beginning at $62.50 during the quarter ending December 31, 1995 and
increasing $1.25 per quarter for six quarters and then $1.50 per quarter for the
following eight quarters to $82.00 in the quarter ending June 30, 1999 (with
each of such redemption prices being increased by $0.50, to a final price of
$82.50, upon final court approval of the settlement of certain stockholder
litigation); and (ii) provide holders of Special Common Stock the right to
require the purchase of some or all of their shares for 30 business days
beginning in July 1999 (unless such right is accelerated following the
occurrence of certain events of insolvency of Genentech) at a price of $60.00
per share in the event that Roche does not exercise its right to cause Genentech
to redeem the shares on or before June 30, 1999. Currently, stockholders have no
such put rights. Roche's right to cause redemption of the Special Common Stock
is, in effect, an extension of Roche's right to cause redemption of Genentech's
formerly outstanding Redeemable Common Stock, which right expired on June 30,
1995 when the then outstanding Redeemable Common Stock was automatically
converted into Common Stock.
If the Proposal is approved, (i) Genentech and Roche will enter into an
extension of the current Governance Agreement and (ii) Genentech and Roche will
enter into a Licensing Agreement in which Roche will have the right to market
certain Genentech products on an exclusive basis outside of the United States
and have an option, on a product-by-product basis, to develop and market on an
exclusive basis outside the United States all other Genentech products which
conclude Phase II trials during the next 10 years. Roche will be obligated to
pay 50% of the vast majority of Genentech development expenses with respect to
those products Roche markets or exercises the right to develop and market and
will be obligated to pay royalties to Genentech ranging from 12.5% to 20% of
sales depending on the product and the level of sales.
The Proposal, together with the extension of the Governance Agreement and
the Licensing Agreement, protects against downward pressure on Genentech's stock
price and provides downside protection for stockholders, preserves Genentech's
existing corporate governance arrangements with Roche in order to maintain the
scientific excellence and resulting productivity of the Company, and, to the
extent Roche's option under the Licensing Agreement is exercised,
<PAGE> 3
reduces Genentech's development expenses in the United States as well as
development and commercialization expenses outside the United States in return
for reasonable royalties.
The Genentech Board of Directors believes that the redemption prices leave
substantial room for future growth of the Company to be recognized in its stock
price and that the "downside protection" afforded by the put rights is a
significant advantage to the Genentech public stockholders which mitigates any
"upside limitations" that may result from the existence of the Roche redemption
rights.
I urge you to read carefully the accompanying Notice of Special Meeting of
Stockholders and Proxy Statement/Prospectus for details of the Proposal and
additional related information.
The approval of the Proposal requires the affirmative vote of the holders
of at least a majority of the outstanding shares of Common Stock unaffiliated
with Roche. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, IT IS
IMPORTANT TO GENENTECH'S FUTURE THAT YOU COMPLETE, SIGN, DATE AND RETURN
PROMPTLY THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE PREPAID ENVELOPE. If
you attend the Special Meeting, you may vote in person if you wish, even though
you have previously returned your proxy card. Your prompt cooperation will be
greatly appreciated.
The Proposal before you has followed a tortuous path. It was fashioned
after months of discussions. It was determined to be fair by an investment bank,
and reviewed and approved by the Board of Directors (other than the directors
designated by Roche) in April. Based on the subsequent revelation in June of a
possible conflict of interest during the discussions with Roche on the part of
Genentech's then CEO and President, the Board appointed an Independent Committee
to review the Proposal again. The Committee took measures, detailed in the
"Background of the Proposed Transactions" section of the enclosed Proxy
Statement/Prospectus, to determine whether the Proposal should continue to be
recommended to Genentech's public stockholders. AFTER COMPLETION OF THAT REVIEW,
AND WITH THE OPINION OF A SECOND INVESTMENT BANK, GENENTECH'S BOARD OF DIRECTORS
(OTHER THAN THE DIRECTORS DESIGNATED BY ROCHE) HAS AGAIN DETERMINED THE PROPOSAL
AND RELATED AGREEMENTS TO BE FAIR TO AND IN THE BEST INTERESTS OF GENENTECH AND
ITS STOCKHOLDERS (OTHER THAN ROCHE), AND HAS UNANIMOUSLY APPROVED THE PROPOSAL
AND RELATED AGREEMENTS AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE
PROPOSAL.
In the best interests of Genentech, I also urge you to vote FOR approval of
the Proposal.
Sincerely,
ARTHUR D. LEVINSON,
President and Chief Executive Officer
-2-
<PAGE> 4
GENENTECH, INC.
460 POINT SAN BRUNO BOULEVARD
SOUTH SAN FRANCISCO, CA 94080
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 25, 1995
------------------------
TO THE STOCKHOLDERS OF GENENTECH, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders (the
"Special Meeting") of Genentech, Inc., a Delaware corporation ("Genentech" or
the "Company"), will be held on Wednesday, October 25, 1995, at 10:00 a.m.,
local time, at the Crown Sterling Suites, 250 Gateway Boulevard, South San
Francisco, California.
The purpose of the Special Meeting will be to consider and vote upon a
proposal (the "Proposal") to approve the Agreement and Plan of Merger, dated as
of May 23, 1995, as amended and restated (the "Merger Agreement"), among
Genentech, Roche Holdings, Inc., a Delaware corporation ("Roche"), and HLR
(U.S.) II, Inc., a Delaware corporation and a wholly-owned subsidiary of Roche
("Merger Subsidiary"), pursuant to which, among other things, (i) Merger
Subsidiary will be merged with and into Genentech (the "Merger"), with Genentech
being the surviving corporation, (ii) the Certificate of Incorporation of
Genentech will be amended to authorize the issuance by Genentech of Callable
Putable Common Stock, par value $.02 per share (the "Special Common Stock"),
(iii) each outstanding share of Common Stock, par value $.02 per share, of
Genentech (the "Common Stock") (other than shares of Common Stock held by Roche
and its affiliates) will be converted into one share of Special Common Stock,
(iv) each outstanding share of Common Stock held by Roche and its affiliates
will be cancelled, and (v) the outstanding common stock of Merger Subsidiary
will be converted into shares of Common Stock representing the same number of
shares of Common Stock held by Roche and its affiliates immediately prior to the
Merger.
Pursuant to the current Genentech Certificate of Incorporation, at the
close of business on June 30, 1995, each then outstanding share of Genentech's
Redeemable Common Stock, par value $.02 per share (the "Redeemable Common
Stock"), was converted automatically into one share of Common Stock. As noted
above, in the Merger, such Common Stock (other than Common Stock held by Roche
or its affiliates) will be converted into Special Common Stock. The purpose of
the Merger and of the resulting conversion of such Common Stock into Special
Common Stock is to, among other matters, (i) establish a four-year period during
which the publicly traded stock of Genentech is subject to redemption by
Genentech at the option of Roche, with such redemption during such four-year
period being at specified prices per share ranging from $62.50 during the
quarter ending December 31, 1995 increasing $1.25 per share for the next six
quarters and $1.50 per share for the next eight quarters to $82.00 during the
quarter ending June 30, 1999 (the "Call Rights") (with each of such redemption
prices being increased by $0.50, to a final price of $82.50, upon final court
approval of the settlement of certain stockholder litigation as described in the
enclosed Proxy Statement/Prospectus), and (ii) provide holders thereof the right
to require the purchase of all or a portion (at the election of the holder) of
their shares of such stock for 30 business days beginning in July 1999 (unless
such right is accelerated following the occurrence of certain events of
insolvency of Genentech, as described in the attached Proxy
Statement/Prospectus) at a price of $60.00 per share (the "Put Rights") in the
event that Roche does not cause the exercise of the Call Rights. The Merger will
have the effect of amending the Certificate of Incorporation of Genentech to
create the Special Common Stock. For a detailed description of such amendment
and of the terms of the Special Common Stock, see "The Charter Amendment;
Description of the Special Common Stock" in the attached Proxy
Statement/Prospectus. A vote in favor of the Proposal is therefore also a vote
in favor of amending the Genentech Certificate of Incorporation.
If Genentech's future growth and/or market conditions were to warrant a per
share valuation of Genentech prior to June 30, 1999 in excess of the redemption
prices applicable under the Call Rights, the existence of the Call Rights under
the Special Common Stock will prevent the Special Common Stock from trading
above its applicable redemption price. If the Special Common Stock were to be
redeemed through exercise of the Call Rights, holders of Special Common Stock
would participate in any increased valuation of Genentech only to the extent
permitted by the applicable redemption price. Holders of Special Common Stock
will, however, benefit from the ability to sell their shares of Special Common
Stock to the Company pursuant to the Put Rights at a price of $60.00 per share
in July 1999 if the Call Rights have not been exercised. The Special Committee
of the Genentech Board of Directors (consisting of all directors of Genentech at
the time of formation of such Committee other than the two Roche
<PAGE> 5
designees) believes that the redemption prices of the Call Rights leave
substantial room for future growth of the Company to be recognized in its stock
price and that the "downside protection" afforded by the Put Rights is a
significant advantage to the Genentech public stockholders which mitigates any
"upside limitations" that may result from the existence of the Call Rights.
GENENTECH'S BOARD OF DIRECTORS (OTHER THAN THE DIRECTORS DESIGNATED BY
ROCHE, WHO DID NOT PARTICIPATE IN THE DELIBERATIONS) HAS DETERMINED THE PROPOSED
TRANSACTIONS TO BE FAIR TO AND IN THE BEST INTERESTS OF GENENTECH AND ITS
STOCKHOLDERS (OTHER THAN ROCHE), HAS UNANIMOUSLY APPROVED AND DECLARED ADVISABLE
THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE PROPOSAL AND
RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE PROPOSAL.
Under Genentech's Certificate of Incorporation, approval of the Proposal
requires the affirmative vote of the holders of at least a majority of the
outstanding shares of Common Stock held by persons other than Roche or any of
its affiliates. ACCORDINGLY, THE PROPOSAL WILL NOT BE APPROVED UNLESS THE
HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK HELD BY PERSONS
OTHER THAN ROCHE AND ITS AFFILIATES VOTE IN FAVOR OF THE PROPOSAL. Thus, failure
to submit a proxy card (or vote in person at the Special Meeting) or the
abstention from voting by a stockholder will have the same effect as a vote
"Against" the Proposal.
Under the Merger Agreement, Roche, which currently owns approximately 65%
of the outstanding shares of Common Stock, has agreed, for purposes of the vote
required by the Delaware General Corporation Law (i.e., a majority of the stock
outstanding and entitled to vote) to vote all shares owned by it or any of its
affiliates in favor of the Proposal.
The Board of Directors of Genentech has fixed the close of business on
September 14, 1995 as the record date for determining the stockholders entitled
to receive notice of, and to vote at, the Special Meeting or any adjournment or
postponement thereof. A complete list of such stockholders will be available at
Genentech's headquarters, 460 Point San Bruno Boulevard, South San Francisco,
California 94080, for ten days before the Special Meeting. Detailed information
relating to the Proposal and related matters is contained in the accompanying
Proxy Statement/Prospectus, and the annexes thereto, which form a part of this
Notice.
All stockholders are cordially invited to attend the Special Meeting. To
ensure your representation at the Special Meeting, however, you are urged to
complete, date, sign and return the enclosed proxy as promptly as possible. A
postage-prepaid envelope is enclosed for that purpose. Any stockholder attending
the Special Meeting may vote in person even if that stockholder has returned a
proxy.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE PREPAID ENVELOPE. PLEASE DO NOT SEND ANY SHARE CERTIFICATES AT THIS
TIME. YOUR PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS VOTED BY SIGNING AND
RETURNING A LATER DATED PROXY WITH RESPECT TO THE SAME SHARES, BY FILING WITH
THE SECRETARY OF GENENTECH A WRITTEN REVOCATION BEARING A LATER DATE, OR BY
ATTENDING AND VOTING AT THE SPECIAL MEETING.
By Order of the Board of Directors
JOHN P. MCLAUGHLIN,
Secretary
South San Francisco, California
September 20, 1995
2
<PAGE> 6
GENENTECH, INC.
460 POINT SAN BRUNO BOULEVARD
SOUTH SAN FRANCISCO, CA 94080
------------------------
PROXY STATEMENT
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 25, 1995
------------------------
PROSPECTUS COVERING 61,868,803 SHARES OF
CALLABLE PUTABLE COMMON STOCK
------------------------
This Proxy Statement/Prospectus (this "Proxy Statement/Prospectus") of
Genentech, Inc., a Delaware corporation ("Genentech" or the "Company"), relates
to the solicitation of proxies by the Board of Directors for use at a Special
Meeting of Stockholders of Genentech scheduled to be held on Wednesday, October
25, 1995, at 10:00 a.m., local time, at the Crown Sterling Suites, 250 Gateway
Boulevard, South San Francisco, California, and any adjournments or
postponements thereof (the "Special Meeting"). The purpose of the Special
Meeting will be to consider and vote upon a proposal (the "Proposal") to approve
the Agreement and Plan of Merger, dated as of May 23, 1995, as amended and
restated (the "Merger Agreement"), among Genentech, Roche Holdings, Inc., a
Delaware corporation ("Roche"), and HLR (U.S.) II, Inc., a Delaware corporation
and a wholly-owned subsidiary of Roche ("Merger Subsidiary"), pursuant to which,
among other things, (i) Merger Subsidiary will be merged with and into Genentech
(the "Merger"), with Genentech being the surviving corporation, (ii) the
Certificate of Incorporation of Genentech will be amended to authorize the
issuance by Genentech of Callable Putable Common Stock, par value $.02 per share
(the "Special Common Stock"), (iii) each outstanding share of Common Stock, par
value $.02 per share, of Genentech (the "Common Stock") (other than shares of
Common Stock held by Roche and its affiliates) will be converted into one share
of Special Common Stock, (iv) each outstanding share of Common Stock held by
Roche and its affiliates will be cancelled, and (v) the outstanding common stock
of Merger Subsidiary will be converted into shares of Common Stock representing
the same number of shares of Common Stock held by Roche and its affiliates
immediately prior to the Merger.
Pursuant to the current Genentech Certificate of Incorporation, at the
close of business on June 30, 1995, each then outstanding share of Genentech's
Redeemable Common Stock, par value $.02 per share (the "Redeemable Common
Stock"), was converted automatically into one share of Common Stock. As noted
above, in the Merger, such Common Stock (other than Common Stock held by Roche
or its affiliates) will be converted into Special Common Stock. See "The Merger
Agreement." The purpose of the Merger and of the resulting conversion of such
Common Stock into Special Common Stock is to, among other matters, (i) establish
a four-year period during which the publicly traded stock of Genentech is
subject to redemption by Genentech at the option of Roche, with such redemption
during such four-year period being at specified prices per share ranging from
$62.50 during the quarter ending December 31, 1995 and increasing $1.25 per
quarter for the next six quarters and $1.50 per quarter for the next eight
quarters to $82.00 during the quarter ending June 30, 1999 (the "Call Rights")
(with each of such redemption prices being increased by $0.50, to a final price
of $82.50, upon final court approval of the settlement of the Stockholder
Litigation (as hereinafter defined) as described under "The Charter Amendment;
Description of the Special Common Stock -- Call Rights"), and (ii) provide
holders thereof the right to require the purchase of all or a portion (at the
election of the holder) of their shares of such stock for 30 business days
beginning in July 1999 (unless such right is accelerated following the
occurrence of certain Insolvency Events (as hereinafter defined)) at a price of
$60.00 per share (the "Put Rights") in the event that Roche does not cause the
exercise of the Call Rights. The Merger will have the effect of amending the
Genentech Certificate of Incorporation to create the Special Common Stock. A
vote in favor of the Proposal is therefore also a vote in favor of amending the
Genentech Certificate of Incorporation. For a detailed description of such
amendment and of the terms of the Special Common Stock, see "The Charter
Amendment; Description of the Special Common Stock."
The Company's obligation to pay the Put Price (as hereinafter defined) to
stockholders who properly exercise their Put Rights will be conditioned upon
Genentech's having received from Roche, or an affiliate of Roche, the funds
required to be contributed to the Company by Roche under the Amended Governance
Agreement (as hereinafter defined). See "The Charter Amendment; Description of
the Special Common Stock -- Put Rights;" "-- Condition to the Company's
Obligations;" "The Amended Governance Agreement -- Put Rights with Respect to
the Special Common Stock;" "-- Capital Contribution and Assumption of Put
Obligations by Roche" and "Certain Information Concerning Roche and Roche
Holding." Under the Amended Governance Agreement, Roche has agreed to either (i)
contribute to Genentech (in exchange for Common Stock) the funds required to
satisfy the Put Rights and certain other liabilities of the Company or (ii)
elect to purchase directly from
<PAGE> 7
Genentech's stockholders the shares of Special Common Stock which such
stockholders elect to have purchased pursuant to their exercise of the Put
Rights. See "The Amended Governance Agreement -- Capital Contribution and
Assumption of Put Obligations by Roche" and "Certain Information Concerning
Roche and Roche Holding." Such obligations of Roche are guaranteed (the
"Guaranty") by Roche Holding (as hereinafter defined). See "Guaranty of Roche
Holding." Amended Article Third (as hereinafter defined) provides that Genentech
will take (and will have no authority not to take) all necessary action to
enforce, and to cause the performance of, Roche's and Roche Holding's
obligations with respect to payment of the Put Price under the Amended
Governance Agreement and the Guaranty and to ensure that Roche and Roche Holding
otherwise comply with their respective obligations described under "The Amended
Governance Agreement -- Capital Contribution and Assumption of Put Obligations
by Roche" and under the Guaranty. See "Guaranty of Roche Holding." Genentech has
appointed Citibank, N.A. as its irrevocable agent (the "Agent") to enforce the
respective obligations of Roche and Roche Holding described under "The Amended
Governance Agreement -- Capital Contribution and Assumption of Put Obligations
by Roche" and under the Guaranty in the event of the occurrence of an Insolvency
Event. See "The Amended Governance Agreement -- The Agency Agreement."
Under an existing agreement between Genentech and Roche, Genentech is
currently prohibited from effecting any redemption of the Common Stock without
Roche's consent. Other than pursuant to the Put Rights, Genentech will continue
to be similarly prohibited from redeeming the Special Common Stock under the
Amended Governance Agreement, a copy of which is attached hereto as Exhibit A to
Annex A. See "The Amended Governance Agreement." Currently, holders of Common
Stock do not have a right to require Genentech to purchase their shares. The
Common Stock is traded on the New York Stock Exchange (the "NYSE") and the
Pacific Stock Exchange (the "PSE"), and it is expected that the Special Common
Stock will trade on the NYSE and the PSE. Listing of the shares of Special
Common Stock by the NYSE is a condition to Genentech's and Roche's obligations
to consummate the foregoing transactions.
This Proxy Statement also constitutes the Prospectus of Genentech with
respect to the shares of Special Common Stock to be issued pursuant to the
Merger. Genentech has filed a Registration Statement on Form S-4 (the
"Registration Statement"), of which this Proxy Statement/Prospectus is a part,
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), covering the shares
of Special Common Stock to be issued pursuant to the Merger.
The Merger Agreement also contemplates the execution by Genentech and
Roche, immediately prior to effectiveness of the Merger, of an Amended and
Restated Governance Agreement (the "Amended Governance Agreement") pursuant to
which, among other things, the principal terms of the Governance Agreement,
dated as of September 7, 1990, between Roche and Genentech (the "Existing
Governance Agreement") will be modified in certain respects and otherwise
extended and remain in effect. If the Merger is consummated, an affiliate of
Roche, F. Hoffmann-La Roche Ltd ("HLR"), will enter into a licensing agreement
(the "Licensing Agreement") with Genentech pursuant to which HLR will have the
right to market certain Genentech products on an exclusive basis outside of the
United States and have an option on a product-by-product basis to develop and
market on an exclusive basis outside of the United States all other Genentech
products developed within the 10 years following execution of the Licensing
Agreement. See "The Licensing Agreement." The transactions contemplated by the
Merger Agreement, the Amended Governance Agreement and the Licensing Agreement,
are hereinafter collectively referred to as the "Proposed Transactions."
If Genentech's future growth and/or market conditions were to warrant a per
share valuation of Genentech prior to June 30, 1999 in excess of the redemption
prices applicable under the Call Rights, the existence of the Call Rights under
the Special Common Stock will prevent the Special Common Stock from trading
above its applicable redemption price. If the Special Common Stock were to be
redeemed, holders of the Special Common Stock would participate in any increased
valuation of Genentech only to the extent permitted by the applicable redemption
price. Holders of Special Common Stock will, however, benefit from the ability
to put their shares of Special Common Stock at a price of $60.00 per share for
30 business days beginning in July 1999 (unless such right is accelerated
following the occurrence of certain Insolvency Events) if the Call Rights have
not been exercised. The Special Committee of the Genentech Board (consisting of
all directors of Genentech at the time of formation of such Committee other than
the two Roche designees) (the "Special Committee") believes that the redemption
prices of the Call Rights leave substantial room for future growth of the
Company to be recognized in its stock price and that the "downside protection"
afforded by the Put Rights is a significant advantage to the Genentech public
stockholders which mitigates any "upside limitations" that may result from the
existence of the Call Rights.
GENENTECH'S BOARD OF DIRECTORS (OTHER THAN THE DIRECTORS DESIGNATED BY
ROCHE, WHO DID NOT PARTICIPATE IN THE DELIBERATIONS) HAS DETERMINED THE PROPOSED
TRANSACTIONS TO BE FAIR TO AND IN THE BEST INTERESTS OF GENENTECH AND ITS
-ii-
<PAGE> 8
STOCKHOLDERS (OTHER THAN ROCHE), HAS UNANIMOUSLY APPROVED AND DECLARED ADVISABLE
THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE PROPOSAL AND
RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE PROPOSAL.
Under Genentech's Certificate of Incorporation, approval of the Proposal
requires the affirmative vote of the holders of at least a majority of the
outstanding shares of Common Stock held by persons other than Roche or any of
its affiliates. ACCORDINGLY, THE PROPOSAL WILL NOT BE APPROVED UNLESS THE
HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK HELD BY PERSONS
OTHER THAN ROCHE AND ITS AFFILIATES VOTE IN FAVOR OF THE PROPOSAL. Thus, the
failure to submit a proxy card (or vote in person at the Special Meeting) or the
abstention from voting by a stockholder will have the same effect as a vote
"Against" the Proposal.
Under the Merger Agreement, Roche, which currently owns approximately 65%
of the outstanding shares of Common Stock, has agreed, for purposes of the vote
required by the Delaware General Corporation Law (the "Delaware Law") (i.e., a
majority of the stock outstanding and entitled to vote), to vote all shares
owned by it or any of its affiliates in favor of the Proposal.
This Proxy Statement/Prospectus is first being mailed to Genentech's
stockholders on or about September 21, 1995.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. UNDER THE RULES AND REGULATIONS OF THE COMMISSION, THE PROPOSAL
TO APPROVE THE MERGER CONSTITUTES AN OFFER OF SPECIAL COMMON STOCK TO HOLDERS OF
COMMON STOCK. THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED HEREBY OR A SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR THE ISSUANCE OF ANY SECURITIES HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF GENENTECH SINCE THE DATE AS OF WHICH INFORMATION IS FURNISHED OR THE
DATE HEREOF.
NEITHER THE SPECIAL COMMON STOCK TO BE ISSUED PURSUANT TO THE MERGER NOR THE
PROPOSED TRANSACTIONS HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. NEITHER THE
SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THE PROPOSED
TRANSACTIONS NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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<PAGE> 9
AVAILABLE INFORMATION
As permitted by the rules and regulations of the Commission, this Proxy
Statement/Prospectus omits certain information contained in the Registration
Statement. For such information, reference is made to the Registration Statement
and the exhibits thereto. Genentech is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the Commission. The Registration Statement of which this Proxy
Statement/Prospectus forms a part, as well as reports, proxy statements and
other information filed by Genentech, can be inspected and copied at the
Commission's Public Reference Room, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549; at the public reference facilities maintained by the
Commission at its regional offices located at Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661; at 7 World Trade
Center, 13th Floor, New York, New York 10048; and at Suite 500, East Tishman
Building, 5757 Wilshire Blvd., Los Angeles, California 90036. Copies of such
materials can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Common
Stock is listed on the NYSE and the PSE, and such reports, proxy statements and
other information concerning Genentech should be available for inspection at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS THAT
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE INTO THE INFORMATION INCORPORATED HEREIN) ARE AVAILABLE WITHOUT
CHARGE, UPON ORAL OR WRITTEN REQUEST BY ANY PERSON RECEIVING THIS PROXY
STATEMENT/PROSPECTUS, FROM THE CORPORATE SECRETARY OF GENENTECH, INC., 460 POINT
SAN BRUNO BOULEVARD, SOUTH SAN FRANCISCO, CALIFORNIA 94080, (415) 225-1706. IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
OCTOBER 18, 1995.
All information contained in this Proxy Statement/Prospectus concerning
Roche, Roche Holding and HLR was provided by Roche. Genentech assumes no
responsibility for the accuracy of such information.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission pursuant to
the Exchange Act are hereby incorporated by reference in this Proxy
Statement/Prospectus:
(a) Annual Report on Form 10-K of Genentech for the year ended December 31,
1994;
(b) Annual Report to Stockholders of Genentech for the year ended December
31, 1994;
(c) Quarterly Report on Form 10-Q of Genentech for the quarter ended March
31, 1995;
(d) Quarterly Report on Form 10-Q of Genentech for the quarter ended June
30, 1995;
(e) Proxy Statement of Genentech in connection with Genentech's 1995 Annual
Meeting of Stockholders;
(f) The description of the Special Common Stock contained in Genentech's
Registration Statement filed pursuant to the Exchange Act, and any
amendment or report filed for the purpose of updating such description;
(g) Genentech's Current Reports on Form 8-K dated July 10, 1995 and July
18, 1995;
(h) Amendment No. 1 on Form 10-K/A-1 (filed on September 18, 1995) amending
the Annual Report on Form 10-K of Genentech for the year ended December
31, 1994; and
(i) Amendment No. 1 on Form 10-Q/A-1 (filed on September 18, 1995) amending
the Quarterly Report on Form 10-Q of Genentech for the quarter ended
March 31, 1995.
All documents filed by Genentech pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the Special
Meeting shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of filing thereof. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement/Prospectus to the
extent that a statement contained herein, or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus. At and immediately after
the time that the Proposal is approved and adopted, Genentech will continue to
be required to file periodic reports, proxy statements and other information
with the Commission pursuant to the Exchange Act; however, based on Genentech's
current capitalization, if Roche should elect to cause Genentech to exercise the
Call Rights, Genentech will no longer be, or, if Roche does not so elect,
depending on the number, if any, of holders of Special Common Stock who exercise
their Put Rights and upon other factors, it is possible that Genentech may no
longer be, required to file such reports. See "Summary and Special
Factors -- Possible Effects of Exercise of Put Rights on Market for Special
Common Stock."
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<PAGE> 10
TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION.................................................................. iv
INCORPORATION OF DOCUMENTS BY REFERENCE................................................ iv
SUMMARY AND SPECIAL FACTORS............................................................ 1
The 1990 Merger................................................................... 1
The Existing Governance Agreement................................................. 1
Terms of the Proposed Transactions................................................ 2
Genentech's Reasons for the Proposed Transactions................................. 4
Advantages and Disadvantages of the Proposal to Genentech Stockholders............ 6
Effects of a Failure to Approve the Proposal...................................... 7
Possible Effects of Exercise of Put Rights on Market for Special Common Stock..... 8
Composition of Genentech's Board of Directors Following the Proposed
Transactions..................................................................... 9
Certain Rights of Roche Following the Proposed Transactions....................... 9
Roche's Reasons for the Proposed Transactions..................................... 10
Interests of Certain Persons in the Proposed Transactions......................... 11
Guaranty of Roche Holding......................................................... 11
Licensing Agreement............................................................... 12
Certain Federal Income Tax Considerations......................................... 13
Stockholder Litigation............................................................ 14
Merger Subsidiary................................................................. 15
GENERAL INFORMATION.................................................................... 16
Purpose of Special Meeting........................................................ 16
Record Date; Voting Rights; Proxies............................................... 16
Solicitation of Proxies........................................................... 16
Quorum............................................................................ 16
Required Vote..................................................................... 16
No Appraisal Rights............................................................... 17
BUSINESS OF GENENTECH.................................................................. 17
MARKET PRICES OF AND DIVIDENDS ON THE REDEEMABLE COMMON STOCK AND THE COMMON STOCK..... 18
SELECTED HISTORICAL FINANCIAL DATA..................................................... 19
THE PROPOSED TRANSACTIONS.............................................................. 20
Background of the Proposed Transactions........................................... 20
Purpose and Structure of the Transactions......................................... 32
Recommendation of the Board of Directors; Fairness of the Transactions............ 33
Opinions of Financial Advisors.................................................... 36
Interests of Certain Persons in the Proposed Transactions......................... 51
Source of Funds; Expenses......................................................... 52
Stockholder Litigation............................................................ 52
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS AND ACCOUNTING TREATMENT..................... 54
Certain Federal Income Tax Consequences........................................... 54
Accounting Treatment.............................................................. 55
THE MERGER AGREEMENT................................................................... 56
General........................................................................... 56
The Merger........................................................................ 56
Effective Time.................................................................... 56
</TABLE>
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<TABLE>
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Conversion and Exchange of Common Stock and Merger Subsidiary Common Stock........ 56
Exchange of Stock Certificates.................................................... 56
Additional Covenants and Agreements............................................... 57
Conditions to Consummation of the Merger.......................................... 59
Termination of the Merger Agreement............................................... 60
Additional Provisions of the Merger Agreement..................................... 60
THE CHARTER AMENDMENT; DESCRIPTION OF THE SPECIAL COMMON STOCK......................... 60
Authorized Shares................................................................. 61
Voting Rights..................................................................... 61
Dividends; Reclassifications; Mergers............................................. 61
Liquidation....................................................................... 61
Call Rights....................................................................... 62
Put Rights........................................................................ 63
Adjustments....................................................................... 63
Condition to the Company's Obligations............................................ 64
Enforcement of Roche Obligations.................................................. 64
Payment........................................................................... 64
Default and Acceleration of Put Rights............................................ 65
Conversion........................................................................ 65
Legend............................................................................ 65
Class Vote........................................................................ 66
Put and Call Not Business Combinations............................................ 66
Certain Definitions............................................................... 66
ARTICLE ELEVENTH OF THE CERTIFICATE OF INCORPORATION................................... 67
THE AMENDED GOVERNANCE AGREEMENT....................................................... 68
Redemption of Special Common Stock................................................ 68
Put Rights with Respect to Special Common Stock................................... 68
Suspension of Obligations......................................................... 68
Indemnification................................................................... 68
Options........................................................................... 69
Further Acquisitions of Securities of Genentech by Roche.......................... 69
Capital Contribution and Assumption of Put Obligations by Roche................... 70
The Agency Agreement.............................................................. 71
Board of Directors................................................................ 72
Certain Approval Rights........................................................... 74
Affiliation Arrangements.......................................................... 74
Certain Agreements of Roche as to Voting.......................................... 74
Restrictions on Transfers of Common Stock by Roche................................ 74
Registration Rights............................................................... 76
Certain Covenants................................................................. 76
Amendments; Termination........................................................... 76
GUARANTY OF ROCHE HOLDING.............................................................. 77
General........................................................................... 77
Covenants......................................................................... 77
</TABLE>
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<TABLE>
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<S> <C>
THE LICENSING AGREEMENT................................................................ 77
Licenses, Options, Know-how and Trademarks........................................ 77
Commercialization Committees...................................................... 78
Development and Marketing......................................................... 78
Production and Supply............................................................. 79
Royalties and Other Payments...................................................... 79
Transition Provisions............................................................. 80
Term and Termination.............................................................. 80
HOLDERS OF GENENTECH'S DEBENTURES AND WARRANTS......................................... 80
CERTAIN PROJECTIONS OF FUTURE OPERATIONS AND OTHER INFORMATION......................... 81
April Information................................................................. 81
September Information............................................................. 82
Certain Significant Considerations................................................ 84
CERTAIN INFORMATION CONCERNING ROCHE AND ROCHE HOLDING................................. 85
Financial Information of the Roche Group.......................................... 86
CONDUCT OF GENENTECH'S BUSINESS AFTER COMPLETION OF THE PROPOSED TRANSACTIONS; ROCHE'S
PLANS WITH RESPECT TO GENENTECH...................................................... 111
PRINCIPAL STOCKHOLDERS OF GENENTECH.................................................... 111
SECURITY OWNERSHIP OF MANAGEMENT....................................................... 112
Amount and Nature of Beneficial Ownership......................................... 112
CERTAIN INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY......... 114
Executive Officers................................................................ 114
Directors......................................................................... 115
Transactions in Securities of Genentech During the Last 60 Days................... 117
CERTAIN INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE AND ROCHE
HOLDING.............................................................................. 118
Directors and Executive Officers of Roche......................................... 118
Directors and Executive Officers of Roche Holding................................. 119
Transactions in Securities of Genentech During the Last 60 Days................... 120
Transactions in Securities of Genentech During the Last Two Years................. 121
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................... 121
OTHER MATTERS.......................................................................... 123
AUDITORS' REPRESENTATIVES.............................................................. 123
LEGAL MATTERS.......................................................................... 124
EXPERTS................................................................................ 124
ANNEX A -- Agreement and Plan of Merger Among Roche Holdings, Inc., HLR (U.S.) II, Inc. and
Genentech, Inc., dated May 23. 1995, as amended and restated (including a Form of
Amended and Restated Governance Agreement (Exhibit A), a Form of Guaranty (Exhibit
B) and a Form of Amendment to the Certificate of Incorporation (Exhibit C)).
ANNEX B -- Opinion of Lehman Brothers.
ANNEX C -- Opinion of Morgan Stanley.
</TABLE>
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<PAGE> 13
INDEX OF DEFINED TERMS
<TABLE>
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PAGE NO.
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1990 Merger................................ 1
1990 Merger Agreement...................... 1
1990 Merger Subsidiary..................... 1
Action..................................... 14
ADSs....................................... 102
Agency Agreement........................... 71
Agent...................................... ii
alpha...................................... 121
Amended Article Third...................... 60
Amended Governance Agreement............... ii
Article Eleventh........................... 67
Article Third.............................. 60
Assumed Discount Rate...................... 48
Bankruptcy Code............................ 65
Base Terms................................. 24
Benchmark Multiples........................ 42
beta....................................... 121
Biotech Companies.......................... 47
Biotech Index.............................. 48
Business Day............................... 66
Business Combination....................... 67
Call Notification.......................... 63
Call Rights................................ cover
Canada Products............................ 77
Certificates............................... 57
Code....................................... 13
Collaborative Countries.................... 122
Commission................................. ii
Common Stock............................... cover
Company.................................... cover
Comparable P/E to Growth Rate
Multiple................................. 40
Comparable Transactions.................... 42
Comparable Universe........................ 38
Conversion Date............................ 65
Debentures................................. 80
Delaware Law............................... iii
Depositary................................. 66
Discounted Cash Flow Analysis.............. 43
DNase...................................... 77
E 32....................................... 86
EBIT....................................... 42
Effective Time............................. 11
Enforcement Amount......................... 71
EPS........................................ 37
Equity Security............................ 69
Exchange................................... 54
Exchange Act............................... iv
Exchange Agent............................. 56
Exchange Fund.............................. 57
ESP........................................ 118
Existing Governance Agreement.............. ii
FAS........................................ 87
Final Call Price........................... 48
Fluor...................................... 117
Forward P/E Multiples...................... 37
Future Share Prices........................ 48
Future Standalone Values................... 39
Future Unaffected Share Price.............. 47
Genentech.................................. cover
Genentech Board............................ 1
Genentech Countries........................ 123
Genentech Products......................... 77
Guaranty................................... ii
HLR........................................ ii
HLR/Roche.................................. 122
Hoffmann-LaRoche........................... 121
IAS........................................ 86
IASC....................................... 86
IBES....................................... 38
IDEC....................................... 77
IDEC Product............................... 77
Indenture.................................. 80
Independent Committee...................... 29
Independent Directors...................... 1
In-Licensed Product........................ 12
Insolvency Event........................... 65
Investor Directors......................... 72
IRR........................................ 40
LCPS....................................... 100
Licensing Agreement........................ ii
Liquidating Sale........................... 75
LTM........................................ 42
Merger..................................... cover
Merger Agreement........................... cover
Merger Subsidiary.......................... cover
Morgan Stanley............................. 5
Named Executive Officers................... 112
NHL........................................ 96
Noninvestor Directors...................... 72
NYSE....................................... ii
NYSE Excluded Holdings..................... 8
Option..................................... 11
Option Plans............................... 11
Optout Option.............................. 123
P/E Ratio.................................. 47
Pharma Companies........................... 47
Pharma Index............................... 48
Preferred Stock............................ 61
Proposal................................... cover
Proposed Transactions...................... ii
Proxy Statement/Prospectus................. cover
PSE........................................ ii
Put Notice................................. 66
Put Notification........................... 66
Put Obligation............................. 54
Put Period................................. 66
Put Price.................................. 63
Put Rights................................. cover
RBL........................................ 96
Receiving Stockholder...................... 54
Record Date................................ 16
Redeemable Common Stock.................... cover
Redemption Date............................ 62
Registration Statement..................... ii
Roche...................................... cover
Roche Finance.............................. 85
Roche Group................................ 15
Roche Holding.............................. 1
Roche Holding's Voting Interest............ 70
Roche Shares............................... 56
Roche Territory............................ 12
ROW Countries.............................. 123
S&P 400 Index.............................. 48
Scios Nova................................. 77
Scios Product.............................. 77
Securities Act............................. ii
Sfr........................................ 87
Small Molecule Products.................... 13
Special Committee.......................... ii
Special Common Stock....................... cover
Special Meeting............................ cover
Standalone Values.......................... 37
Stockholder Litigation..................... 29
Stockholder Meeting........................ 57
Subcommittee............................... 21
Subject Person............................. 67
TNF........................................ 121
Termination Date........................... 1
Triggering Disposition..................... 10
Transaction Agreement...................... 28
Trustee.................................... 80
Unaffected Share Price..................... 47
US GAAP.................................... 86
Voting Stock............................... 67
Warrants................................... 81
</TABLE>
-viii-
<PAGE> 14
SUMMARY AND SPECIAL FACTORS
Set forth below is a summary description of certain significant matters
stockholders should take into account prior to voting on the Proposal. Such
description is not intended to be complete and is qualified in all respects by
reference to the detailed information set forth elsewhere in this Proxy
Statement/Prospectus and the Annexes thereto. Stockholders are urged to read
this Proxy Statement/Prospectus and such Annexes in their entirety.
THE 1990 MERGER
On September 7, 1990, a wholly owned subsidiary ("1990 Merger Subsidiary")
of Roche was merged with and into Genentech (the "1990 Merger") pursuant to an
Agreement and Plan of Merger dated as of February 2, 1990 among Genentech, Roche
and 1990 Merger Subsidiary (the "1990 Merger Agreement"). Roche is a wholly
owned subsidiary of Roche Finance Ltd, a Swiss corporation, which, in turn, is a
wholly owned subsidiary of Roche Holding Ltd, a Swiss corporation ("Roche
Holding"). In the 1990 Merger, Genentech stockholders received, for each share
of Common Stock that they then owned, $18 in cash and one half share of newly
issued Redeemable Common Stock. In the 1990 Merger, Roche, in effect, acquired
one half of the Company's then outstanding Common Stock (42,699,458 shares) from
the stockholders for $1,537.2 million in cash and also acquired 24,433,951 newly
issued shares of Common Stock directly from the Company for $487.3 million. The
67,133,409 shares of Common Stock that Roche acquired in the 1990 Merger
represented approximately 57% of the outstanding voting securities of the
Company as of the Record Date (as hereinafter defined). In addition, from time
to time since the 1990 Merger, Roche purchased shares of Redeemable Common Stock
in the open market (which shares, together with all other Redeemable Common
Stock, were converted into Common Stock on July 1, 1995) and, as of the Record
Date, owned approximately 76,621,009 shares of Common Stock, which represents
approximately 65% of the Common Stock outstanding on the Record Date. See
"Certain Information Concerning Roche and Roche Holding."
THE EXISTING GOVERNANCE AGREEMENT
On September 7, 1990, pursuant to the 1990 Merger Agreement, Genentech and
Roche entered into the Existing Governance Agreement, which, among other
matters, contains terms relating to the corporate governance of the Company
after the 1990 Merger and limitations on business combinations by the Company
with, and the acquisition and disposition of securities of the Company by, Roche
and its affiliates.
Board of Directors
Pursuant to the Existing Governance Agreement, the Company's Board of
Directors (the "Genentech Board") was increased from eleven to thirteen members,
and the Genentech Board elected two nominees of Roche, Dr. Jurgen Drews and Dr.
Armin Kessler, to serve on the Genentech Board, with two nominees being the only
designees on the Genentech Board to which Roche is entitled prior to the
Termination Date (as hereinafter defined). Dr. Franz B. Humer was elected to the
Genentech Board on June 22, 1995 to fill the vacancy created by Dr. Kessler's
retirement.
The Existing Governance Agreement, as modified by the Merger Agreement,
provides that on and after the date, if any, upon which the Merger Agreement is
terminated without the Merger being consummated (the "Termination Date"), the
Genentech Board will include two nominees designated by Roche and two officers
of Genentech nominated by the nominating or proxy committee of the Genentech
Board. The remainder of the Genentech Board at such time is to be comprised of
"Independent Directors" (defined as individuals who are neither officers of
Genentech nor employees, directors, principal stockholders or partners of Roche,
its affiliates or any entity (other than the Company and its subsidiaries) that
was dependent on Roche or its affiliates for more than 10% of its revenues or
earnings in the most recent fiscal year). The Existing Governance Agreement, as
modified by the Merger Agreement, provides, in general, that after the
Termination Date, Roche will be entitled to designate, in addition to its two
nominees, as described above, a portion of the total number of Independent
Directors equal to Roche's proportional voting interest in Genentech's equity
securities and that the Company will, to the extent necessary, increase the size
of the Genentech Board and cause the Genentech Board to fill vacancies created
by any such increase to achieve the
<PAGE> 15
called-for result. See "The Amended Governance Agreement -- Board of Directors;"
"The Merger Agreement -- Additional Covenants and Agreements -- Continued
Applicability of the Existing Governance Agreement."
As indicated below, if the Proposal is approved and the Merger is
consummated, the parties will enter into the Amended Governance Agreement, under
which Roche would continue to have the right to designate two directors of
Genentech, and its right to nominate Independent Directors, on the same terms as
would be applicable under the Existing Governance Agreement, as modified by the
Merger Agreement, on and after the Termination Date, would be postponed until
the expiration of the Put Period (as hereinafter defined) and payment of the Put
Price in respect of shares of Special Common Stock with respect to which the Put
Rights have been properly exercised. Thus, following the end of the period
during which the Put Rights may be exercised, or if the Merger Agreement is
terminated by reason of not being approved by stockholders (or if the
Termination Date otherwise occurs), Roche, based on its current holdings of
Common Stock, on and after the Termination Date, will have the right to
designate more than a majority of the members of the Genentech Board, with all
but two of such Roche designees being Independent Directors. See "The Amended
Governance Agreement -- Board of Directors."
Limitations on Business Combinations with and Acquisitions of Additional
Genentech Securities by Roche
Under the Existing Governance Agreement, as modified by the Merger
Agreement, until the Termination Date, Roche will not be permitted to propose
business combinations (as described in the Company's Certificate of
Incorporation) between the Company and Roche or any affiliate of Roche unless a
majority of the Independent Directors determines that there has been a
sustained, substantial impairment of the business, prospects or financial
viability of Genentech and its subsidiaries, taken as a whole, since September
7, 1990. No such determination has been made by the Independent Directors, and
none is contemplated. Unless such a determination, as described in the preceding
sentence, is made with respect to the Company, Roche may not propose any such
business combination during the period commencing on the Termination Date, if
any, and terminating on the first anniversary of the Termination Date at a price
per share to the unaffiliated holders of the Common Stock of less than $60.00
per share.
Under Genentech's Certificate of Incorporation, any business combination
between Genentech and Roche or any affiliate of Roche (other than by exercise of
the Call Rights or the Put Rights), whether or not prior to the first
anniversary of the Termination Date, must also be approved by the affirmative
vote of a majority of the Independent Directors and the holders of a majority of
the Company's equity securities not beneficially owned by Roche or its
affiliates. The Existing Governance Agreement prohibits the Independent
Directors from taking into account any possible discount due to the fact that
Genentech is a subsidiary of Roche when considering the fairness of any such
transaction to Genentech's minority stockholders.
The Existing Governance Agreement also prohibits Roche from purchasing
equity securities of the Company if such purchase would result in Roche owning
in the aggregate in excess of 75% of the voting power of the Company's equity
securities on a fully diluted basis.
TERMS OF THE PROPOSED TRANSACTIONS
Pursuant to the Merger Agreement, among other things, (i) Merger Subsidiary
will be merged with and into Genentech, with Genentech being the surviving
corporation, (ii) the Certificate of Incorporation of Genentech will be amended
to authorize the issuance by Genentech of Special Common Stock, (iii) each
outstanding share of Common Stock (other than shares of Common Stock held by
Roche and its affiliates) will be converted into one share of Special Common
Stock, (iv) each outstanding share of Common Stock held by Roche and its
affiliates will be cancelled, and (v) the outstanding common stock of Merger
Subsidiary will be converted into shares of Common Stock representing the same
number of shares of Common Stock held by Roche and its affiliates immediately
prior to the Merger. See "The Merger Agreement."
Pursuant to the current Genentech Certificate of Incorporation, at the
close of business on June 30, 1995, each outstanding share of Redeemable Common
Stock was converted automatically into one share of Common Stock. As noted
above, in the Merger, such Common Stock (other than Common Stock held by
2
<PAGE> 16
Roche or its affiliates) will be converted into Special Common Stock. The
purpose of the Merger and of the resulting conversion of such Common Stock into
Special Common Stock is to, among other matters, (i) provide for the Call
Rights, which establish a four-year period during which the publicly traded
stock of Genentech is subject to redemption by Genentech at the option of Roche,
with such redemption during such four-year period being at specified prices per
share ranging from $62.50 during the quarter ending December 31, 1995 increasing
$1.25 per share for the next six quarters and $1.50 per share for the next eight
quarters to $82.00 during the quarter ending June 30, 1999 (with each of such
redemption prices being increased by $0.50, to a final price of $82.50, upon
final court approval of the settlement of the Stockholder Litigation), and (ii)
provide for the Put Rights, which afford the holders of Special Common Stock the
right to require the purchase of all or a portion (at the election of the
holder) of their shares of such stock at a price of $60.00 per share in the
event that Roche does not cause the exercise of the Call Rights. The Put Rights
will be exercisable during the 30-business day period following the expiration
of the Call Rights or during a 60-business day period following certain
Insolvency Events of the Company. The Merger will have the effect of amending
the Certificate of Incorporation of Genentech to create the Special Common
Stock. For a detailed description of such amendment and of the terms of the
Special Common Stock, see "The Charter Amendment; Description of the Special
Common Stock." A vote in favor of the Proposal is therefore also a vote to amend
the Genentech Certificate of Incorporation.
The Company's obligation to pay the Put Price to stockholders who properly
exercise their Put Rights will be conditioned upon Genentech's having received
from Roche, or an affiliate of Roche, the funds required to be contributed to
the Company by Roche under the Amended Governance Agreement. See "The Charter
Amendment; Description of the Special Common Stock -- Put Rights;" "-- Condition
to the Company's Obligations;" "The Amended Governance Agreement -- Put Rights
with Respect to the Special Common Stock;" "-- Capital Contribution and
Assumption of Put Obligations by Roche" and "Certain Information Concerning
Roche and Roche Holding." Under the Amended Governance Agreement, Roche has
agreed to either (i) contribute to Genentech (in exchange for Common Stock) the
funds required to satisfy the Put Rights and certain other liabilities of the
Company or (ii) elect to purchase directly from Genentech's stockholders the
shares of Special Common Stock which such stockholders elect to have purchased
pursuant to their exercise of the Put Rights. See "The Amended Governance
Agreement -- Capital Contribution and Assumption of Put Obligations by Roche"
and "Certain Information Concerning Roche and Roche Holding." Such obligations
of Roche are guaranteed by Roche Holding. See "Guaranty of Roche Holding."
Amended Article Third provides that Genentech will take (and will have no
authority not to take) all necessary action to enforce, and to cause the
performance of, Roche's and Roche Holding's obligations with respect to payment
of the Put Price under the Amended Governance Agreement and the Guaranty and to
ensure that Roche and Roche Holding otherwise comply with their respective
obligations described under "The Amended Governance Agreement -- Capital
Contribution and Assumption of Put Obligations by Roche" and under the Guaranty.
See "Guaranty of Roche Holding." Genentech has appointed the Agent to enforce
the respective obligations of Roche and Roche Holding described under "The
Amended Governance Agreement -- Capital Contribution and Assumption of Put
Obligations by Roche" and under the Guaranty in the event of the occurrence of
an Insolvency Event. See "The Amended Governance Agreement -- The Agency
Agreement."
If the Merger receives the requisite stockholder approval and if the
Proposed Transactions are effected prior to final court approval of the
settlement of the Stockholder Litigation, the redemption prices per share of
Special Common Stock applicable under the Call Rights will be as follows:
3
<PAGE> 17
<TABLE>
<CAPTION>
PERIOD PRICE
------ -----
<S> <C>
October 1, 1995 to December 31, 1995................................ $62.50
January 1, 1996 to March 31, 1996................................... $63.75
April 1, 1996 to June 30, 1996...................................... $65.00
July 1, 1996 to September 30, 1996.................................. $66.25
October 1, 1996 to December 31, 1996................................ $67.50
January 1, 1997 to March 31, 1997................................... $68.75
April 1, 1997 to June 30, 1997...................................... $70.00
July 1, 1997 to September 30, 1997.................................. $71.50
October 1, 1997 to December 31, 1997................................ $73.00
January 1, 1998 to March 31, 1998................................... $74.50
April 1, 1998 to June 30, 1998...................................... $76.00
July 1, 1998 to September 30, 1998.................................. $77.50
October 1, 1998 to December 31, 1998................................ $79.00
January 1, 1999 to March 31, 1999................................... $80.50
April 1, 1999 to June 30, 1999...................................... $82.00
</TABLE>
Upon final court approval of the proposed settlement of the Stockholder
Litigation, each of the redemption prices applicable pursuant to the Call Rights
set forth above will be increased by $0.50 per share of Special Common Stock to
a final price of $82.50, as provided by the settlement. If such final court
approval occurs after payment of the applicable redemption price pursuant to the
Call Rights, such $0.50 increase will be promptly thereafter paid by Genentech
to such person to whom payment of the applicable redemption price was previously
made.
After June 30, 1999, the Call Rights will expire.
Under the Amended Governance Agreement, Roche will be required to, if the
Call Rights are exercised, pay to the Depositary (as hereinafter defined)
sufficient funds to satisfy the Company's obligations in respect of the Call
Rights. See "The Amended Governance Agreement -- Redemption of Special Common
Stock."
The Amended Governance Agreement extends and modifies the Existing
Governance Agreement. In particular, under the modified governance arrangements,
the limit on Roche's ability to make open market purchases would be increased
such that Roche could own, following any such purchase, 79.9%, rather than 75%,
of the voting power of the Company's equity securities on a fully diluted basis.
If the Merger is consummated, HLR will enter into the Licensing Agreement with
Genentech pursuant to which HLR will have the right to market certain Genentech
products on an exclusive basis outside of the United States and will have an
option on a product-by-product basis to develop and market on an exclusive basis
outside of the United States all other Genentech products which conclude Phase
II clinical trials within the 10 years following execution of the Licensing
Agreement. For a description of the terms of the agreements relating to the
Proposed Transactions, see "The Merger Agreement;" "The Charter Amendment;
Description of the Special Common Stock;" "The Amended Governance Agreement;"
"Guaranty of Roche Holding" and "The Licensing Agreement."
GENENTECH'S REASONS FOR THE PROPOSED TRANSACTIONS
The Special Committee (which, as indicated above, consists of all directors
of Genentech at the time of formation of such Committee other than the two Roche
designees), based on the reports, presentations and discussions described under
"The Proposed Transactions -- Background of the Proposed Transactions," believes
that, regardless of whether the Company was willing to extend Roche's option to
cause the Company to redeem the Company's publicly traded shares, the Redeemable
Common Stock, prior to June 30, 1995, Roche was unlikely to exercise its then
existing option. Further, on the same basis, the Special Committee concluded
that the market price of Genentech's publicly traded shares would decline
substantially if Roche's right to cause redemption of such shares were to expire
unexercised at June 30, 1995 or if Roche were to publicly announce its intention
not to exercise its right in advance of such date. The Special Committee also
believes that a substantial decline in the value of the Company's publicly
traded stock would, in addition to the
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<PAGE> 18
immediate resulting diminution of stockholder value, have material adverse
effects on the Company's relations with its employees and on Genentech's ability
to attract and retain talented scientists, which, in turn, would likely further
adversely affect stockholder value. The Special Committee's conclusion in these
latter regards is based on its belief that (i) the failure by Roche to cause the
Company to redeem the Redeemable Common Stock would signal a lack of confidence
by Roche in the Company and (ii) the economic incentive for the Company's
scientists to remain with the Company would be substantially reduced or
eliminated if the value of the Company's publicly traded stock were to decline
as significantly as the analysis done by Lehman Brothers, the Special
Committee's financial advisors, would suggest. See "The Proposed
Transactions -- Opinions of Financial Advisors -- Lehman Brothers."
The Special Committee, based on the advice of Lehman Brothers, believes
that the existence of Roche's previous right to cause redemption of the
Redeemable Common Stock had the effect of supporting the price at which the
Redeemable Common Stock traded and that if the Merger is approved by the
shareholders of Genentech, the potential decline in the price of the Company's
publicly traded stock could be significantly mitigated by the Put Rights and the
Call Rights. The Special Committee's belief in this regard was subsequently also
supported by the advice of Morgan Stanley & Co. Incorporated ("Morgan Stanley")
rendered on July 6 and 7, 1995. See "The Proposed Transactions -- Background of
the Proposed Transactions" and "-- Opinions of Financial Advisors -- Morgan
Stanley."
If Genentech's future growth and/or market conditions were to warrant a per
share valuation of Genentech prior to June 30, 1999 in excess of the redemption
prices applicable under the Call Rights, however, the existence of the Call
Rights under the Special Common Stock will prevent such stock from trading above
its applicable redemption price. If the Special Common Stock were to be
redeemed, holders of the Special Common Stock would participate in any increased
valuation of Genentech only to the extent permitted by the applicable redemption
price. Holders of Special Common Stock will, however, benefit from the ability
to put their shares of Special Common Stock at a price of $60.00 per share for
30 business days beginning in July 1999 (unless such right is accelerated
following the occurrence of certain Insolvency Events) if the Call Rights have
not been exercised. The Special Committee believes that the redemption prices of
the Call Rights leave substantial room for future growth of the Company to be
recognized in its stock price and that the "downside protection" afforded by the
Put Rights is a significant advantage to the Genentech public stockholders which
mitigates any "upside limitations" that may result from the existence of the
Call Rights. See "The Proposed Transactions -- Background of the Proposed
Transactions" and "-- Opinions of Financial Advisors."
The Special Committee also believes that the Existing Governance Agreement
and the formerly outstanding Redeemable Common Stock facilitated, and the
Proposed Transactions will continue to facilitate, achievement of certain
objectives the Genentech Board initially formulated prior to the 1990 Merger.
These objectives include: (a) the contractual preservation of Genentech's
existing work environment, which the Genentech Board and senior management view
as critical to Genentech's ability to retain the highly talented scientific and
technical staff that is essential to Genentech's future and (b) the further
development of opportunities for synergistic relations between Genentech and a
major participant in the global pharmaceutical industry, particularly with
respect to the marketing of Genentech's products on a global basis. The Special
Committee also believes that the payment by Roche of 50% of certain of
Genentech's development expenses (including costs previously incurred) pursuant
to the Licensing Agreement with respect to those products that Roche elects to
develop and market outside the United States will allow Genentech to take a
larger number of promising research projects into development, increasing the
likelihood that Genentech will have more medically and commercially significant
marketed products over the next several years. In addition to the benefits to be
derived by Genentech from the royalties and manufacturing margin to be paid by
Roche under the Licensing Agreement, the terms of the Licensing Agreement will
also mitigate certain potential losses of the Company. For example, should Roche
elect to exercise its option under the Licensing Agreement at the conclusion of
Phase II trials with respect to a particular product and should that product
then fail during Phase III, the adverse effects on the Company of such failures
would be mitigated because Roche would generally have been required to pay one
half of the development costs with respect to such product. See " -- Advantages
and Disadvantages of the Proposal to Genentech Stockholders". See also "The
Proposed
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<PAGE> 19
Transactions -- Background of the Proposed Transactions;" "-- Purpose and
Structure of the Transactions;" "-- Recommendation of the Board of Directors;
Fairness of the Transaction;" and "-- Opinions of Financial Advisors."
The Special Committee also took into account the Independent Committee's
(as hereinafter defined) report that, although no investigation would
necessarily reveal whether the request for personal financial assistance from
Roche by G. Kirk Raab, the Company's former President and Chief Executive
Officer, had tainted his conduct in the negotiations with Roche, its inquiry had
not revealed any evidence that Mr. Raab had not attempted to negotiate the best
possible transaction for Genentech and its stockholders. See "The Proposed
Transactions -- Background of the Proposed Transactions." The Special Committee
considered the Independent Committee's report that it had no reason to question,
and that it did not in fact question, the independence and integrity of Lehman
Brothers, which participated in the negotiation of the Proposed Transactions, or
of the analysis prepared, and the opinion rendered, by Lehman Brothers at the
April 29 and 30 meetings of the Genentech Board and that the impartiality of
Lehman Brothers, and the conclusion it had reached, gave substantial comfort
that the negotiations had been vigorously conducted on behalf of the Company.
The Special Committee also took into account the Independent Committee's
report that Lehman Brothers had stated that nothing had come to its attention
that would cause it to modify its April 30, 1995 opinion with respect to the
Proposed Transactions and that Morgan Stanley was rendering its opinion on July
7, 1995 as to the fairness of the Proposed Transactions from a financial point
of view. The Special Committee and the Genentech Board concluded on July 7, 1995
that the reasons that had led the Special Committee and the Genentech Board to
recommend the Proposed Transactions in the first instance continued to be valid
and that they believed the Proposed Transactions to be the best available
alternative for Genentech and its stockholders other than Roche. See "The
Proposed Transactions -- Background of the Proposed Transactions" and
"-- Recommendation of the Board of Directors; Fairness of the Transaction."
ADVANTAGES AND DISADVANTAGES OF THE PROPOSAL TO GENENTECH STOCKHOLDERS
The Special Committee believes that the principal advantages of the
Proposed Transactions to Genentech's stockholders are that the Proposed
Transactions should significantly mitigate a decline in the market price of the
Company's publicly traded stock that would be expected to occur as a result of
Roche's having elected not to exercise its right to cause the Redeemable Common
Stock to be redeemed by June 30, 1995. Lehman Brothers has advised the Special
Committee that the escalating redemption prices for the Redeemable Common Stock
set forth in the Company's Certificate of Incorporation have likely had the
effect of helping to support the prices at which the Redeemable Common Stock
traded in the market. Lehman Brothers has advised the Special Committee that,
after June 30, 1995, when the Redeemable Common Stock automatically converted to
Common Stock and was no longer subject to redemption, in the absence of the
Proposed Transactions, a significant decline in the trading price of such stock
could be expected to occur. Based on Lehman Brothers' advice, the Special
Committee believes that such potential price decline could be significantly
mitigated by virtue of the inclusion of the Put Rights in the Special Common
Stock. If the Proposed Transactions are not consummated, the price that holders
of such stock could receive after such date upon sale of their shares would be
set by market forces without the holder being guaranteed the ability to sell
such shares at a fixed price at a future date and cannot be predicted with any
degree of certainty.
Also based upon Lehman Brothers' advice, the Special Committee believes
that the Call Rights inherent in the Special Common Stock may have a supporting
or elevating effect upon the market price of such stock, although it has been
advised that such supporting effect may not be as significant as is the case
with respect to the redemption right formerly applicable to the Redeemable
Common Stock because of the market's possible perception of the reasons for a
determination by Roche not to exercise its existing rights prior to July 1,
1995, and the corresponding lack of market conviction that Roche would exercise
an extended option. The beliefs of the Special Committee described in this
paragraph and in the immediately preceding paragraph were subsequently also
supported by the advice of Morgan Stanley rendered on July 6 and July 7. See
"The Proposed Transactions -- Background of the Proposed Transactions" and
"-- Opinions of Financial Advisors."
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<PAGE> 20
NOTWITHSTANDING THE FOREGOING, HOWEVER, LEHMAN BROTHERS AND MORGAN STANLEY
BOTH ADVISED THE SPECIAL COMMITTEE, AND THE SPECIAL COMMITTEE BELIEVES, THAT
TRADING PRICES OF SECURITIES ARE BASED UPON A VARIETY OF FACTORS, MANY OF WHICH
ARE BEYOND THE CONTROL OF THE GENENTECH BOARD AND THE COMPANY. NONE OF LEHMAN
BROTHERS, MORGAN STANLEY OR THE SPECIAL COMMITTEE CAN PREDICT THE ACTUAL PRICES
AT WHICH THE SPECIAL COMMON STOCK WILL TRADE OR THE ACTUAL PRICES AT WHICH THE
COMMON STOCK WILL TRADE IF THE PROPOSAL IS NOT ADOPTED. NOTHING IN THIS PROXY
STATEMENT/PROSPECTUS SHOULD BE UNDERSTOOD TO CONSTITUTE SUCH A PREDICTION OR
ASSURANCE OF ACTUAL FUTURE PRICES OR VALUES.
The Special Committee also concluded that, other than exercise by Roche of
the redemption right, which expired on June 30, 1995, approval and consummation
of the Proposed Transactions would be the most favorable transaction for the
employees of Genentech, almost all of whom are stockholders of the Company. The
Special Committee believes that, given the current circumstances, the best means
for Genentech to attract and retain distinguished scientists would be to enter
into the Proposed Transactions. The Special Committee believes that attracting
and retaining scientists is in the Company's and its stockholders' best
interests because the Company's scientific personnel are essential to its
economic success. The extent to which the stockholders of the Company can
participate in increased earnings, if any, of the Company is highly dependent on
the success of the Company's present and future scientific endeavors.
Another advantage of the Proposed Transactions considered by the Special
Committee is the effect of such transactions on the Company's research and
development efforts. If Roche's redemption right were to have expired
unexercised without the Genentech Board having approved the Proposed
Transactions and if the price of Genentech's stock were to decline
significantly, the Company could be forced to reduce research and development
spending in order to increase earnings over the short term. Because ongoing
research and development efforts are essential to the Company's future prospects
and such decrease in spending could have an adverse effect on the Company's
development of new products, the Special Committee concluded that the Proposed
Transactions (because they could have the effect of alleviating pressure on the
Company to decrease research and development spending) were the best available
alternative for Genentech and its stockholders. In fact, as noted above, the
terms of the Licensing Agreement which call for Roche to pay 50% of Genentech's
development expenses in certain circumstances is likely to allow the Company to
develop more products than it otherwise could have.
The Special Committee believes that the principal disadvantage of the
Proposed Transactions to Genentech's stockholders is that, as was the case under
the Existing Governance Agreement and the terms of the Redeemable Common Stock,
the Genentech stockholders' ability to realize gains in their investment will be
limited by the Call Rights. Thus, if Genentech's future growth and/or market
conditions were to warrant a per share valuation of Genentech prior to June 30,
1999 in excess of the redemption prices applicable under the Call Rights, the
existence of the Call Rights will prevent the Special Common Stock from trading
above its applicable redemption price. If the Call Rights were to be exercised,
holders of the Special Common Stock would participate in such increased
valuation only to the extent permitted by the applicable redemption price.
For information with respect to the reasons for the Proposed Transactions
and the recommendation of the Genentech Board, see "The Proposed
Transactions -- Background of the Proposed Transactions,"
" -- Recommendation of the Board of Directors; Fairness of the Transaction" and
" -- Opinions of Financial Advisors."
EFFECTS OF A FAILURE TO APPROVE THE PROPOSAL
BASED UPON THE ADVICE OF ITS FINANCIAL ADVISORS, THE GENENTECH BOARD
BELIEVES THAT IF THE PROPOSAL IS NOT APPROVED BY GENENTECH'S STOCKHOLDERS, THE
MARKET PRICE OF GENENTECH'S PUBLICLY TRADED STOCK COULD BE EXPECTED TO DECLINE
SIGNIFICANTLY. SEE "THE PROPOSED TRANSACTIONS -- RECOMMENDATION OF THE BOARD OF
DIRECTORS; FAIRNESS OF THE TRANSACTION" AND " -- OPINIONS OF FINANCIAL
ADVISORS."
If the Proposal is not approved by the Genentech stockholders at the
Special Meeting, the Common Stock will remain outstanding and will not be
subject to the Call Rights nor have the benefit of the Put Rights. Under the
Existing Governance Agreement, as modified by the Merger Agreement, until the
Termination Date, Roche will not be permitted to propose business combinations
(as described in the Company's
7
<PAGE> 21
Certificate of Incorporation) between the Company and Roche or any affiliate of
Roche unless a majority of the Independent Directors determine that there has
been a sustained, substantial impairment of the business, prospects or financial
viability of Genentech and its subsidiaries, taken as a whole, since September
7, 1990. No such determination has been made by the Independent Directors, and
none is contemplated. Unless such a determination, as described in the preceding
sentence, is made with respect to the Company, under the existing Governance
Agreement, Roche may not propose any such business combination during the period
commencing on the Termination Date and terminating on the first anniversary of
the Termination Date at a price per share to the unaffiliated holders of the
Common Stock of less than $60.00 per share.
Before and after the first anniversary of the Termination Date, Roche's
ability to effect business combinations with Genentech will continue to be
subject to the provisions of Genentech's Certificate of Incorporation, which
provides, as indicated above, that any business combination between Genentech
and Roche or any affiliate of Roche (other than by exercise of the Call Rights
or the Put Rights), whether or not prior to the first anniversary of the
Termination Date, must also be approved by the affirmative vote of a majority of
the Independent Directors and the holders of a majority of the Company's equity
securities not beneficially owned by Roche or its affiliates. The Existing
Governance Agreement prohibits the Independent Directors from taking into
account any possible discount due to the fact that Genentech is a subsidiary of
Roche when considering the fairness of any such transaction to Genentech's
minority stockholders. As indicated above, if the Proposal is not approved by
stockholders (or if, for any other reason, the Merger is not consummated), Roche
will be able to designate a majority of the Independent Directors.
The Existing Governance Agreement also prohibits Roche from purchasing
equity securities of the Company if such purchase would result in Roche owning
in the aggregate in excess of 75% of the voting power of the Company's equity
securities on a fully diluted basis. See "The Amended Governance Agreement --
Further Acquisitions of Securities of Genentech by Roche."
POSSIBLE EFFECTS OF EXERCISE OF PUT RIGHTS ON MARKET FOR SPECIAL COMMON STOCK
If Roche's right to cause redemption of the Special Common Stock pursuant
to the Call Rights expires unexercised, holders of Special Common Stock will, in
accordance with the terms thereof, be permitted to exercise the Put Rights.
Exercise by holders of their Put Rights would, to the extent of such exercises,
have the effect of reducing the number of publicly traded shares of Special
Common Stock. It is not possible to predict at the present time how many shares
of Special Common Stock might be redeemed by the Company pursuant to exercise of
the Put Rights. As of September 14, 1995, there were approximately 19,200
holders of record of Common Stock. If a sufficiently large number of holders of
Special Common Stock were to exercise their Put Rights, it is possible that the
Special Common Stock would cease to meet the listing requirements of the NYSE,
would fail to meet the listing requirements of any other national securities
exchange and, consequently, would cease to be listed on any securities exchange.
According to the NYSE's published guidelines, the NYSE would consider delisting
the shares of Special Common Stock if, among other things, the number of record
holders of at least 100 shares of Special Common Stock should fall below 1,200,
the number of publicly-held shares of Special Common Stock (exclusive of
holdings of officers, directors, their immediate families and other concentrated
holdings of 10% or more ("NYSE Excluded Holdings")) should fall below 600,000 or
the aggregate market value of publicly-held shares of Special Common Stock
(exclusive of NYSE Excluded Holdings) should fall below $5,000,000. The market
for, and the value of, Genentech's stock could be adversely affected if such
stock ceases to be listed on a national securities exchange.
In the event that the shares of Special Common Stock were no longer listed
or traded on the NYSE, it is possible that the shares of Special Common Stock
would trade on another securities exchange or in the over-the-counter market and
that price quotations would be reported by such exchange, through the National
Association of Securities Dealers Automated Quotation System or other sources.
Such trading and the availability of such quotations would, however, depend upon
the number of shareholders and/or the aggregate market value of the shares of
Special Common Stock remaining at such time, the interest in maintaining a
market in the shares of Special Common Stock on the part of securities firms,
the possible termination of registration of the shares of Special Common Stock
under the Exchange Act, as described below, and other factors.
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<PAGE> 22
If delisting occurs, there can be no assurance that a liquid trading market
for such securities would remain. In the event fewer than 300 holders of record
of Special Common Stock were to remain following the exercise of the Put Rights,
Genentech may cease filing periodic reports, proxy statements and other
information with the Commission pursuant to the Exchange Act. Genentech does not
have any current plans to cease filing such reports. A reduction in the number
of publicly traded shares could also adversely affect the trading market for and
liquidity of such shares, which could in turn have an adverse effect upon the
market value of such securities.
COMPOSITION OF GENENTECH'S BOARD OF DIRECTORS FOLLOWING THE PROPOSED
TRANSACTIONS
Pursuant to the Existing Governance Agreement, in 1990 the Genentech Board
was increased from eleven to thirteen members, and the Genentech Board elected
two nominees of Roche, Dr. Jurgen Drews and Dr. Armin Kessler, to serve on the
Genentech Board, with two nominees being the only designees on the Genentech
Board to which Roche is entitled prior to the Termination Date. Dr. Franz B.
Humer was elected to the Genentech Board on June 22, 1995 to fill the vacancy
created by Dr. Kessler's retirement.
The Existing Governance Agreement, as modified by the Merger Agreement,
provides that on and after the Termination Date, the Genentech Board will
include two nominees designated by Roche and two officers of Genentech nominated
by the nominating or proxy committee of the Genentech Board. The remainder of
the Genentech Board at such time is to be comprised of Independent Directors.
The Existing Governance Agreement, as modified by the Merger Agreement,
provides, in general, that after the Termination Date, Roche will be entitled to
designate, in addition to its two nominees, as described above, a portion of the
total number of Independent Directors equal to Roche's proportional voting
interest in Genentech's equity securities and that the Company will, to the
extent necessary, increase the size of the Genentech Board and cause the
Genentech Board to fill vacancies created by any such increase to achieve the
called-for result. See "The Amended Governance Agreement -- Board of Directors"
and "The Merger Agreement -- Additional Covenants and Agreements -- Continued
Applicability of the Existing Governance Agreement."
As indicated below, if the Proposal is approved and the Merger is
consummated, the parties will enter into the Amended Governance Agreement, under
which Roche would continue to have the right to designate two directors of
Genentech, and its right to nominate Independent Directors, on the same terms as
would be applicable under the Existing Governance Agreement, as modified by the
Merger Agreement, on and after the Termination Date, would be postponed until
the expiration of the Put Period and payment of the Put Price in respect of
shares of Special Common Stock with respect to which the Put Rights have been
properly exercised. Thus, following the end of the period during which the Put
Rights may be exercised, or if the Merger Agreement is terminated by reason of
not being approved by stockholders (or if the Termination Date otherwise
occurs), Roche will have the right to designate more than a majority of the
members of the Genentech Board, with all but two of such Roche designees being
Independent Directors. See "The Amended Governance Agreement -- Board of
Directors."
Under both the Existing Governance Agreement and the Amended Governance
Agreement, in any election of directors, Roche is obligated to vote its
Genentech stock for all nominees to the Genentech Board in proportion to the
votes cast by the other holders of Genentech stock, with certain exceptions;
provided, however, that Roche may cast all of its votes in favor of any nominee
to the Genentech Board designated by Roche as set forth above.
CERTAIN RIGHTS OF ROCHE FOLLOWING THE PROPOSED TRANSACTIONS
The Amended Governance Agreement, like the Existing Governance Agreement,
provides that Roche will have effective veto power over certain actions
involving Genentech, including material acquisitions by Genentech, sales or
other dispositions outside the ordinary course of business of all or any
substantial portion of the business or assets of Genentech, issuances of equity
securities by Genentech (subject to certain limitations and exceptions), and
repurchases of equity securities by Genentech. The Amended Governance Agreement
provides, as does the Existing Governance Agreement, in effect that, unless the
majority of the Independent Directors have made a contrary determination in good
faith, an acquisition will be deemed material, and the sale or other disposition
will be deemed to involve such substantial portion, if it would
9
<PAGE> 23
constitute or involve a portion of the business or assets of the Company
accounting for 10% or more of the consolidated total assets or contribution to
net income or revenues of the Company and its consolidated subsidiaries. Except
as provided in the Licensing Agreement, as is the case under the Existing
Governance Agreement, the Amended Governance Agreement also prohibits Genentech
from entering into any material licensing or marketing agreement with respect to
Genentech's products or technology unless Genentech first negotiates in good
faith with Roche with respect thereto for a reasonable period of not less than
three nor more than six months. If Roche chooses not to exercise its options
under the Licensing Agreement, Genentech would be free to enter into marketing
and licensing arrangements with unrelated third parties without first pursuing
such negotiations with Roche. The rights of Roche described in the first two
sentences of this paragraph, as well as Roche's right to cause Genentech to
exercise the Call Rights, would terminate upon the sale or transfer of any
shares of Common Stock by Roche in an underwritten public offering or a sale
pursuant to Rule 144 of the Securities Act prior to April 30, 2004 (such
offering or sale, a "Triggering Disposition"). See "The Amended Governance
Agreement -- Certain Approval Rights;" "-- Restrictions on Transfers of Common
Stock by Roche" and "The Licensing Agreement."
ROCHE'S REASONS FOR THE PROPOSED TRANSACTIONS
Since the completion of the 1990 Merger, Roche has monitored the
performance and financial and operating results and prospects of Genentech and
has, from time to time, considered whether exercising its right to cause
Genentech to redeem the formerly outstanding Redeemable Common Stock would be in
the best interests of Roche.
Roche believes that the extension of the Call Rights will permit Genentech
to maintain independent operations in a climate of entrepreneurial and
intellectual creativity, and that the extension of the Call Rights will permit
Roche to continue to evaluate the progress of Genentech and its own interests in
the biotechnology field in light of future developments while enabling Genentech
to preserve its independence, and entrepreneurial culture and affording other
holders of Genentech stock the opportunity to continue to participate as
investors in Genentech. Roche believes that the terms of the Special Common
Stock offer such investors protection from market and other risks of an
investment in Genentech.
As described in detail below under "The Proposed Transactions -- Background
of the Proposed Transactions," representatives of Genentech and Roche began, in
late January 1995, to discuss the possibility of extending Roche's right to
require Genentech to redeem the formerly outstanding Redeemable Common Stock
because Roche had not decided whether it would exercise its redemption option
prior to June 30, 1995. Roche believed that it would be more beneficial at this
time to Roche, Genentech and Genentech's stockholders if Genentech could
continue to maintain its operations in a climate of entrepreneurial and
intellectual creativity as a more independent company than if Genentech were to
become, by virtue of exercise of the existing option, a wholly-owned subsidiary
of Roche at this time. Roche believed that maintaining a significant number of
shares of Genentech outstanding in the hands of the public would provide more
significant independence for Genentech than would be enjoyed as a wholly-owned
subsidiary and would also provide employees of Genentech, particularly its key
scientists, whose compensation includes options for shares of Genentech stock,
important incentives to improve the current and future operations and
performance of Genentech, which, in turn, would directly benefit the Company and
its stockholders, including Roche. In the view of Roche, if the Proposal is
approved, Genentech and its stockholders will have the opportunity to
participate, subject to the Call Rights, in any increase in the value of
Genentech.
Similarly, Roche agreed to the addition of the Put Rights because the Put
Rights provide additional economic protection for the investment by non-Roche
stockholders in Genentech stock. The effect of the Put Rights will be to create
a "floor" value for the public's Genentech stock and thus afford stockholders a
minimum return on their investment in Genentech over a four-year period.
Roche considered, and after discussion Genentech agreed, that Roche's
ability to purchase Genentech's stock should be increased from the current level
of 75% to 79.9% because Roche believed that the ability of Roche to purchase
additional shares of Genentech stock would permit Roche, by means of open market
purchases, to purchase Genentech stock at attractive prices, mitigating (if
Roche chose to make such
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<PAGE> 24
purchases) the effect of any declines in the market price of the stock, to the
benefit of all Genentech stockholders.
As described under "The Proposed Transactions -- Background of the Proposed
Transactions," the terms of the Merger Agreement and Proposed Transactions were
negotiated between Roche and the Company. Roche did not independently consider
the fairness of the Proposed Transactions to the stockholders of the Company.
Based exclusively on the evaluation of the Proposed Transactions by the
Genentech Board, its Special Committee, its Independent Committee and their
financial advisors, including a review of the information and factors considered
by each of them in concluding that the Merger Agreement and Proposed
Transactions are fair to and in the best interests of the Company and its other
stockholders, Roche believes that the Proposed Transactions are indeed fair to
and in the best interests of the Company and its other stockholders.
Roche did not receive any report, opinion or appraisal from an outside
party which is materially related to the Merger Agreement or the Proposed
Transactions. In particular, Roche did not receive any report, opinion or
appraisal relating to the fairness of the Merger Agreement or the Proposed
Transactions to the Company or any of its stockholders, including Roche.
Roche acquired a 60% equity interest in Genentech in 1990 because Roche
believed that the acquisition presented Roche with an opportunity to expand its
investment in biotechnology with a leading biotechnology
enterprise -- Genentech. It continues to be the view of the board of directors
of Roche that its investment in Genentech, together with the opportunity to
acquire the remaining equity interest in Genentech at set prices prior to July
1, 1999, is a worthwhile, long-term investment. The board of directors of Roche
also believes that the Licensing Agreement provides an opportunity for Roche and
Genentech both to benefit from enhanced development and marketing of Genentech's
products outside the United States and that Genentech's innovative products can
increasingly benefit from Roche's global marketing, development and sales
resources.
INTERESTS OF CERTAIN PERSONS IN THE PROPOSED TRANSACTIONS
The Merger Agreement provides, and the Company has agreed to take all
action necessary to ensure, that, at the effective time of the Merger (the
"Effective Time"), each outstanding option to purchase shares of Common Stock
(each, an "Option"), issued pursuant to the Company's stock option plans
(collectively, the "Option Plans") (whether or not vested or exercisable) will,
without any action by the holder thereof, constitute an option to acquire, on
the same terms and conditions as were applicable under such Option immediately
prior to the Effective Time, that number of shares of Special Common Stock equal
to the number of shares of Common Stock subject to such Option immediately prior
to the Effective Time, at the price or prices per share in effect pursuant to
the terms of such Option immediately prior to the Effective Time. Holders of
Options include officers and directors of the Company who were involved in the
negotiation, and approval by the Genentech Board and the Special Committee, of
the Proposed Transactions. To the extent that the Proposed Transactions would
have a positive effect upon the trading price of the shares underlying such
Options or would, as a result of the Put Rights, place a "floor" on the value of
such underlying shares, holders of such Options, as is the case with the
underlying shares held by stockholders of the Company, would receive those same
benefits.
GUARANTY OF ROCHE HOLDING
Roche Holding, which has undertaken to guarantee Roche's payment
obligations under the Amended Governance Agreement relating to Roche's
obligations to provide funds in connection with the Put Rights, had (together
with its subsidiaries) approximately 14.3 billion Swiss Francs ($10.9 billion
converted at a rate of Sfr 1.31 per U.S.$1.00 as of December 31, 1994) in cash
and marketable securities as of December 31, 1994. See "Guaranty of Roche
Holding." For further information concerning Roche and Roche Holding see
"Certain Information Concerning Roche and Roche Holding."
11
<PAGE> 25
LICENSING AGREEMENT
Licenses, Options, Know-how and Trademarks
Pursuant to the Licensing Agreement, at the Effective Time, Genentech will
agree to grant to HLR an exclusive patent, know-how and trademark license to
use, sell and, under certain conditions, make various products of Genentech in
Canada and Pulmozyme(R) outside the United States (the "Roche Territory").
Genentech has also agreed to grant to HLR an option for an exclusive patent,
know-how and trademark license in the Roche Territory, on a product-by-product
basis, to use, sell and, under certain conditions, make other Genentech products
for which Genentech had rights as of April 12, 1995 or for which Genentech
subsequently acquires rights. For certain products in-licensed from (x) Scios
Nova Inc. and (y) IDEC Pharmaceuticals Corporation, Genentech will also grant to
HLR an option for an exclusive patent and know-how license outside the United
States and Canada on a product-by-product basis to use, sell and, under certain
conditions, make such products. For other human pharmaceutical products for
which Genentech acquires rights in the Roche Territory by means of a patent
and/or know-how license from a third party ("In-Licensed Product"), subject to
the terms and conditions of the relevant license agreements relating to such
products and HLR's acceptance of those terms and conditions, Genentech will
grant to HLR an option for an exclusive patent and know-how license in the Roche
Territory on a product-by-product basis to use, sell and, under certain
circumstances, make such In-Licensed Products. See "The Licensing
Agreement -- Licenses, Options, Know-how and Trademarks."
Prior to the completion of the first Phase II trial for a particular
product, Genentech retains authority to discontinue sole development of a
product and, subject to the Amended Governance Agreement, to license such
product to a third party. See "The Amended Governance Agreement -- Affiliation
Arrangements." Upon the completion of Phase II for a product, HLR must either
exercise or waive its option to be granted an exclusive license in the Roche
Territory for such product. See "Licensing Agreement -- Licenses, Options,
Know-how and Trademarks." If HLR waives its option, Genentech is free to develop
and sell the product itself or with another party. If Genentech and HLR mutually
agree, the options granted in the Licensing Agreement can be exercised prior to
the completion of Phase II.
The options granted in the Licensing Agreement expire ten years after the
Effective Date. Any option exercised by HLR during the ten-year term remains in
effect for the full term of the license (generally from the date the product is
first licensed to HLR until the later, in each country, of the expiration of
Genentech patents or 25 years from first commercial introduction) and any
unexercised option at the end of the ten-year period terminates. See "The
Licensing Agreement -- Royalties and Other Payments" and "-- Term and
Termination."
Under the Licensing Agreement with respect to the current Genentech and HLR
collaborations on IIbIIIa antagonists and ras farnesyltransferase inhibitors,
Genentech has the sole right in the United States, and HLR has the sole right in
the Roche Territory, to use and sell such products. All research efforts on
these products will continue to be shared in an equal manner, and no royalties
on sales shall be due from either party to the other. See "Certain Relationships
and Related Transactions."
Development and Marketing
Under the Licensing Agreement, Genentech will have sole responsibility and
full autonomy for the development and marketing of its products in the United
States, and also in the Roche Territory with respect to products for which HLR
does not exercise its option for a license. HLR will have sole responsibility
for the development and marketing of products in the Roche Territory for which
it has been granted an exclusive license or exercised its option for a license.
Under the Licensing Agreement, HLR will, in general, reimburse Genentech
for 50%, except in connection with certain products for which HLR is granted a
license with respect to Canada, for which reimbursement is 10%, of Genentech's
development costs incurred in connection with a product for which HLR has been
granted a license or for which HLR has exercised its option for a license, and
for IIbIIIa antagonists and ras farnesyltransferase inhibitors.
12
<PAGE> 26
Production and Supply
Pursuant to the Licensing Agreement, Genentech will manufacture and supply
to HLR clinical requirements of Genentech products at cost and commercial
requirements at cost plus a margin of 20% on such cost. HLR will manufacture and
supply to Genentech clinical requirements of synthetic molecules other than
peptides or proteins ("Small Molecule Products") at cost and commercial
requirements at cost plus a margin of 20% on such cost. In-Licensed Products
will be manufactured and supplied to HLR in a manner consistent with the license
agreement for that product. HLR will pay 50% of Genentech's costs associated
with developing a manufacturing process for products licensed by HLR. Genentech
will pay that proportion of HLR's costs associated with developing a
manufacturing process for a Small Molecule Product licensed by HLR that
Genentech's expected revenues for sales of that product in the United States
bears to expected worldwide sales of that product.
Royalties and Other Payments
Genentech will receive various royalties on product sales from HLR,
ranging, in general, from 12.5% to 20% on such sales. See "The Licensing
Agreement -- Royalties and Other Payments."
Transition Provisions
The operations of Genentech Canada, Inc., Genentech Europe Limited and
Genentech Ltd. (Japan) will be transferred to HLR as soon as possible following
consummation of the Merger but no later than January 1, 1996. HLR will assume
any real property leases of those organizations as well as any other liabilities
that have arisen in the normal course of business, with the exception of a line
of credit to Genentech Canada, Inc. used to purchase Activase(R) rights and
severance costs relating to not more than six employees of Genentech Europe
Limited. See "The Licensing Agreement -- Transition Provisions."
Term and Termination
The Licensing Agreement expires with respect to any individual product when
royalties are no longer payable by HLR to Genentech on sales of such product.
Other termination provisions include the following: (1) HLR has the right to
terminate a license for a product upon six-months notice if it has completed at
least one Phase III clinical trial and the results of that trial are unable to
support the registration of that product, or the results of other trials
establish that further development would not provide data sufficient to support
registration, and, in such case, all rights to the product revert to Genentech;
(2) if HLR fails to use its best efforts to commercialize a product in a country
and fails to take adequate remedial measures, Genentech may (i) terminate the
agreement with respect to that product in that country if a registration has not
been initiated or (ii) convert the exclusive license for that product in that
country to a nonexclusive one if registration has been initiated; (3) Genentech
may terminate its development or commercialization at any time for any product
which has been licensed to HLR, and such product shall then be subject to the
provisions of the Amended Governance Agreement, provided that if such
termination is for reasons other than safety concerns, Genentech will have an
obligation for up to two years to provide HLR's clinical and commercial
requirements; (4) either party may terminate the Licensing Agreement for the
breach of a material obligation of the other; and (5) Genentech may terminate
HLR's option for a license for products if Roche's equity ownership in Genentech
is less than 50% at any time. See "Licensing Agreement -- Term and Termination."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
For United States Federal income tax purposes, each share of Common Stock
held by a stockholder prior to the Effective Time will be considered to have
been exchanged with the Company for a share of Special Common Stock. Although
the issue is not free from doubt, a stockholder whose shares of Common Stock are
exchanged for Special Common Stock by virtue of the Merger should not recognize
gain or loss with respect to each share so exchanged.
If the Special Common Stock were treated as preferred stock for purposes of
Section 305 of the Internal Revenue Code of 1986, as amended (the "Code"), a
holder of Special Common Stock would be required,
13
<PAGE> 27
during the period starting at the Effective Time and ending at the conclusion of
the Put Period, to include currently in gross income, to the extent of the
Company's applicable earnings and profits, for each share of Special Common
Stock, a portion (determined by analogy to the original issue discount rules for
debt instruments) of the excess of the Put Price over the fair market value of
such share at issuance. While there is no authority directly on point and the
issue is not free from doubt, counsel to the Company believes that the Special
Common Stock should not be recharacterized as preferred stock for this purpose,
and the Company intends to treat it accordingly. See "Certain Federal Income Tax
Considerations and Accounting Treatment."
STOCKHOLDER LITIGATION
The Company, its directors (other than Dr. Levinson), Roche, former
director Dr. Armin Kessler and former director and Chief Executive Officer G.
Kirk Raab are named as defendants in several shareholder class action and
derivative complaints, pending in the Court of Chancery of the State of Delaware
in and for New Castle County consolidated under the caption In re Genentech,
Inc. Shareholders Litigation, Cons. C.A. No. 14265 (the "Action"). Plaintiffs in
the Action, who purport to represent the public shareholders of Genentech and,
in the derivative actions, the Company, as a nominal plaintiff, allege, among
other things, that: the terms of the Proposed Transactions are unfair, and were
imposed by Roche for Roche's own benefit; the prices at which Roche would be
able to cause redemption of the Special Common Stock are unfairly low, and that
the trading price of such shares would be higher if the trading prices were not
"capped" by the existence of the Call Rights option; that the directors of
Genentech breached their fiduciary duties by negotiating and agreeing to the
Proposed Transactions; and that the election of directors at Genentech's regular
Annual Meeting on April 13, 1995 was void because the disclosures in connection
with such meeting did not disclose that the Genentech Board was negotiating the
terms of the Proposed Transactions with Roche. As relief, the complaints in the
Action seek, among other things, a preliminary and permanent injunction against
consummation of the Proposed Transactions, including against any exercise by
Roche of its right to cause redemption and against any exercise by the holders
of Special Common Stock of the Put Rights; an order voiding the Proposed
Transactions in the event it is approved by the vote of the stockholders; and
damages in an unspecified amount.
On July 7, 1995, counsel for defendants and counsel for plaintiffs in the
Action entered into an agreement in principle contemplating the settlement of
the Action. Subject to final court approval, the settlement provides that the
prices to be paid by Roche if the Call Rights are exercised will be $0.50 per
share higher in each period than would otherwise be applicable pursuant to the
terms of the Proposed Transactions, resulting in a final price of $82.50. See
"The Charter Amendment; Description of the Special Common Stock -- Call Rights"
for a description of the circumstances under which court approval, if any, would
become final. In addition, the proposed settlement provides that the terms of
the Licensing Agreement shall be amended to provide that the Company (rather
than HLR) shall be responsible for the cost, if incurred, of termination of up
to six Genentech Europe Limited employees. The agreement in principle further
provides for the review by plaintiffs' counsel of draft proxy materials and for
the amendments to the Certificate of Incorporation of the Company to be adopted
pursuant to the Proposed Transactions to include a provision reflecting the
terms of the Governance Agreement relating to the exercise of the Call Rights.
The agreement in principle further recognizes that the Independent Committee was
created and that the Independent Committee engaged in the review and
consideration described under "The Proposed Transactions -- Background of the
Proposed Transactions." The agreement in principle, the terms of which are
reflected in a memorandum of understanding, is further subject to the completion
of discovery procedures by plaintiffs' counsel, and certain other conditions. In
the event that a definitive stipulation of settlement is entered into in
connection with the proposed settlement and such settlement is approved by the
court, the terms of such settlement are contemplated to include the settlement,
release and bar of all claims against the defendants and certain other claims
which have been or could have been asserted relating to the Proposed
Transactions, the actions of Roche and the other defendants relating to the
Proposed Transactions, including without limitation any claims with respect to
Mr. Raab's request for personal financial assistance from Roche Holding and any
related discussions, communication and action, this Proxy Statement/Prospectus
or any of the transactions, disclosures, facts and allegations that are or could
be (insofar as such transactions, disclosures, facts and allegations relate to
the Proposed Transactions) the subject of the Action. In addition, the agreement
in principle
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<PAGE> 28
provides that the defendants will not oppose any application that plaintiffs'
counsel may make in connection with the proposed settlement for an award from
the court of counsel fees and expenses in an amount not to exceed $3.5 million.
Any such court-awarded counsel fees and expenses will be paid by the Company. If
the settlement is presented to the court for approval, shareholders of the
Company will receive a detailed written notice describing the background of the
settlement, the terms of the settlement and the effect of judicial approval of
the settlement upon the future assertion of claims against the defendants.
There can be no assurance that the settlement submitted for court approval
will be approved by the court. In the event that the settlement is not approved,
the parties would be placed in the same positions they would have held had the
parties not agreed in principle to the proposed settlement of the Action.
Although plaintiffs' counsel have been given an opportunity to review and
comment upon draft proxy materials pursuant to the agreement in principle,
plaintiffs' counsel do not assume responsibility for the accuracy of this Proxy
Statement/Prospectus.
MERGER SUBSIDIARY
Merger Subsidiary was incorporated in the State of Delaware in May of 1995
and has never carried on any independent business activities other than those
incident to its formation and the Merger. For these reasons, no meaningful
financial data are available with respect to Merger Subsidiary. Merger
Subsidiary owns no physical properties and has no subsidiaries. There are no
pending legal proceedings to which Merger Subsidiary is a party or which relate
to the property of Merger Subsidiary.
Merger Subsidiary is an indirect wholly owned subsidiary of Roche Holding,
which, together with its subsidiaries (collectively the "Roche Group"), engages
primarily in the development and manufacture of pharmaceuticals, vitamins and
fine chemicals, diagnostics, flavors and fragrances and in the business of
analytical laboratory services. Certain financial information regarding the
Roche Group is set forth below under "Certain Information Concerning Roche and
Roche Holding."
15
<PAGE> 29
GENERAL INFORMATION
This Proxy Statement/Prospectus is furnished to stockholders of Genentech
in connection with the solicitation of proxies by and on behalf of the Genentech
Board for use at the Special Meeting to be held on Wednesday, October 25, 1995,
at 10:00 a.m., local time, at the Crown Sterling Suites, 250 Gateway Boulevard,
South San Francisco, California, and any adjournment or postponement thereof.
This Proxy Statement/Prospectus and the related form of proxy are first being
mailed to stockholders of Genentech on or about September 21, 1995.
PURPOSE OF SPECIAL MEETING
At the Special Meeting, the stockholders of Genentech will be asked to
consider and vote upon the Proposal.
RECORD DATE; VOTING RIGHTS; PROXIES
The Genentech Board has fixed the close of business on September 14, 1995
(the "Record Date") for determining holders of outstanding shares of Common
Stock of Genentech entitled to notice of and to vote at the Special Meeting.
Only holders of record of Common Stock on the records of Genentech at the close
of business on the Record Date will be entitled to notice of and to vote at the
Special Meeting or any adjournments or postponements thereof. As of the Record
Date, there were 118,712,282 shares of Common Stock issued and outstanding, each
of which entitles the holder thereof to one vote. All shares of Common Stock
represented by properly executed proxies will, unless such proxies have been
previously revoked, be voted in accordance with the instructions indicated in
such proxies. As of the Record Date, there were 19,242 holders of Common Stock.
IF NO INSTRUCTIONS ARE INDICATED, SUCH SHARES WILL BE VOTED FOR APPROVAL OF THE
PROPOSAL AND IN THE DISCRETION OF THE PROXY HOLDER AS TO OTHER MATTERS, IF ANY,
INCIDENTAL TO THE CONDUCT OF THE SPECIAL MEETING. A stockholder who has given a
proxy may revoke it at any time prior to its exercise by giving written notice
thereof to the Secretary of Genentech, by signing and returning a later dated
proxy or by voting in person at the Special Meeting; however, mere attendance at
the Special Meeting will not itself have the effect of revoking the proxy.
SOLICITATION OF PROXIES
Genentech will bear the cost of solicitation of proxies on behalf of the
Genentech Board. In addition to soliciting proxies by mail, directors, officers
and employees of Genentech, without receiving additional compensation therefor,
may solicit proxies by telephone, by telegram or in person. Arrangements will
also be made with brokerage firms and other custodians, nominees and fiduciaries
for the forwarding of solicitation materials to the beneficial owners of Common
Stock held of record by such persons. Genentech will reimburse such brokerage
firms, custodians, nominees and fiduciaries for reasonable out-of-pocket
expenses incurred by them in connection therewith. Genentech has retained D.F.
King & Co., Inc. to aid in the solicitation of proxies. It is estimated that the
fee for D.F. King & Co. will not exceed $15,000 plus out-of-pocket costs and
expenses.
QUORUM
The presence at the Special Meeting, in person or by properly executed
proxy, of holders of a majority of the outstanding shares of the Common Stock is
necessary to constitute a quorum. Because Roche owns in excess of a majority of
the outstanding shares of Common Stock and will be present at the meeting, a
quorum is assured.
REQUIRED VOTE
Under Genentech's Certificate of Incorporation, approval of the Proposal
requires the affirmative vote of the holders of at least a majority of the
outstanding shares of Common Stock held by persons other than
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<PAGE> 30
Roche or any of its affiliates. ACCORDINGLY, THE PROPOSAL WILL NOT BE APPROVED
UNLESS THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK HELD
BY PERSONS OTHER THAN ROCHE AND ITS AFFILIATES VOTE IN FAVOR OF THE PROPOSAL.
Thus, the failure to submit a proxy (or vote in person at the Special Meeting)
or the abstention from voting by a stockholder will have the same effect as a
vote "Against" the Proposal.
Under Delaware Law, approval of the Proposal will also require the
affirmative vote of holders of a majority of the shares of Common Stock
outstanding and entitled to vote. Such vote is assured because Roche has agreed
to vote all shares of Common Stock owned by it or any of its affiliates in favor
of the Proposal.
As of the Record Date, 4,748,280 shares of Common Stock (representing
approximately 3.93% of the outstanding shares of Common Stock) were beneficially
owned by directors and executive officers of Genentech (excluding options and
warrants to purchase Genentech stock in the future and shares owned by Roche).
As of the Record Date, Roche owned 76,621,009 shares of Common Stock,
representing approximately 65% of the outstanding Common Stock. THE DIRECTORS OF
GENENTECH HAVE INDICATED TO GENENTECH THAT THEY INTEND TO VOTE ANY SHARES THEY
OWN FOR APPROVAL OF THE PROPOSAL.
NO APPRAISAL RIGHTS
There are no appraisal or dissenters' rights applicable in connection with
the Proposed Transactions. Accordingly, holders of Common Stock who do not vote
in favor of the Proposed Transaction will not be entitled to exercise any
appraisal or dissenters' rights in connection with the Proposed Transactions.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF GENENTECH. ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ
AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
BUSINESS OF GENENTECH
Genentech is a leading biotechnology company focusing on the development,
manufacture and marketing of human pharmaceuticals produced by recombinant DNA
technology. Genentech was organized in 1976 as a California corporation, and
changed its state of incorporation to Delaware in 1987. The principal executive
offices of Genentech are located at 460 Point San Bruno Boulevard, South San
Francisco, California 94080 and its telephone number at that address is (415)
225-1000. In 1994, the Company had revenues of $795.4 million and earnings of
$124.4 million or $1.04 per share. Genentech currently markets five products:
Activase(R), a tissue plasminogen activator; Protropin(R) and Nutropin(R),
growth hormones; Pulmozyme(R), DNase (as hereinafter defined); and Actimmune(R),
interferon gamma-lb.
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<PAGE> 31
MARKET PRICES OF AND DIVIDENDS
ON THE REDEEMABLE COMMON STOCK AND THE COMMON STOCK
Prior to its conversion into Common Stock on July 1, 1995, the Redeemable
Common Stock was listed and traded on the NYSE and the PSE under the symbol
"GNE." Since July 3, 1995, the Common Stock has been listed and traded on the
NYSE and the PSE under the symbol "GNE." The following table provides
information as to the quarterly high and low closing prices of the Redeemable
Common Stock prior to June 30, 1995, and, thereafter, for the Common Stock, in
each case for the calendar quarters indicated.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1993:
First Quarter...................................... $39 3/4 $31 7/8
Second Quarter..................................... 44 31 1/4
Third Quarter...................................... 44 7/8 40 1/2
Fourth Quarter..................................... 50 1/2 42 5/8
1994:
First Quarter...................................... 51 3/8 41 3/4
Second Quarter..................................... 51 5/8 43 1/4
Third Quarter...................................... 52 1/2 48 1/8
Fourth Quarter..................................... 53 1/2 42 1/8
1995:
First Quarter...................................... 51 44 1/2
Second Quarter..................................... 51 7/8 46 7/8
Third Quarter (through September 19, 1995)......... 48 3/4 46 5/8
</TABLE>
No dividends have been paid on the Common Stock or Redeemable Common Stock.
On April 28, 1995, the last full trading day prior to the announcement that the
Transaction Agreement (as hereinafter defined) had been executed, the closing
price per share of Redeemable Common Stock, as reported on the NYSE Composite
Tape, was $50 3/8. On September 19, 1995, the last full trading day for which
quotations were available at the time of printing of this Proxy
Statement/Prospectus, the closing sale price per share of Common Stock, as
reported on the NYSE Composite Tape, was $47 7/8. STOCKHOLDERS ARE URGED TO
OBTAIN CURRENT QUOTATIONS FOR THE COMMON STOCK. See "Summary and Special
Factors -- Possible Effects of Exercise of Put Rights on Market for Special
Common Stock." For a description of the analysis by the financial advisors to
the Special Committee of the effects of the provisions of the Redeemable Common
Stock (and the Special Common Stock) on its trading, and potentially expected
trading, price, see "The Proposed Transactions -- Opinions of Financial
Advisors."
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<PAGE> 32
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for Genentech for each of the fiscal years ended December 31, 1992, 1993
and 1994 and for the quarters and the six-month periods ended June 30, 1994 and
1995. The selected historical consolidated financial data for Genentech for the
three years shown below have been derived from the audited consolidated
financial statements and for the quarterly periods have been derived from the
unaudited quarterly information of Genentech. The historical data are not
necessarily indicative of results to be expected in the future and should be
read in conjunction with the consolidated financial statements and notes thereto
of Genentech incorporated herein by reference.
GENENTECH SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ------------------------- ----------------------------------------
1995 1994 1995 1994 1994 1993 1992
-------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Product sales............... $161,236 $152,574 $ 323,303 $ 300,372 $ 601,064 $ 457,360 $ 390,975
Royalty income.............. 49,424 26,099 96,573 59,778 126,022 112,872 91,682
Other revenues.............. 22,393 16,249 52,144 33,642 68,304 79,517 61,608
-------- -------- ---------- ---------- ---------- ---------- ----------
Total revenues...... 233,053 194,922 472,020 393,792 795,390 649,749 544,265
Costs and expenses:
Cost of sales............... 24,312 24,565 51,062 46,696 95,829 70,514 66,824
Research and development.... 87,167 73,008 182,126 147,384 314,322 299,396 278,615
Marketing, general and
administrative............ 67,814 60,817 132,137 120,928 248,604 214,410 172,486
Special charge (merger
related).................. 8,000 -- 8,000 --
Interest expense............ 2,039 1,754 3,910 3,532 7,058 6,527 4,406
-------- -------- ---------- ---------- ---------- ---------- ----------
Total costs and
expenses
(including cost of
sales)............ 189,332 160,144 377,235 318,540 665,813 590,847 522,331
-------- -------- ---------- ---------- ---------- ---------- ----------
Income before taxes......... 43,721 34,778 94,785 75,252 129,577 58,902 21,934
Income taxes................ 6,558 1,391 14,218 3,010 5,183 -- 1,097
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income.................. $ 37,163 $ 33,387 $ 80,567 $ 72,242 $ 124,394 $ 58,902 $ 20,837
======== ======== ========= ========= ========= ========= =========
Net income per share........ $ 0.31 $ 0.28 $ 0.67 $ 0.61 $ 1.04 $ 0.50 $ 0.18
======== ======== ========= ========= ========= ========= =========
Weighted average number of
shares used in computing
per share amounts:........ 120,899 119,041 120,696 118,924 119,465 117,106 113,992
BALANCE SHEET DATA:
Current assets.............. $1,077,571 $ 831,379 $ 997,116 $ 885,337 $ 580,499
Total assets................ 1,890,829 1,575,676 1,745,124 1,468,800 1,305,131
Current liabilities......... 228,435 189,773 220,499 190,748 133,543
Total liabilities........... 426,646 352,435 396,340 351,995 297,810
Stockholders' equity........ 1,464,183 1,223,241 1,348,784 1,116,805 1,007,321
</TABLE>
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<PAGE> 33
THE PROPOSED TRANSACTIONS
BACKGROUND OF THE PROPOSED TRANSACTIONS
In late 1994, an analyst's report published by a Swiss bank raised the
subject of the expiration on June 30, 1995 of the redemption period applicable
to the Redeemable Common Stock and analyzed various alternatives, including
exercise, extension and expiration of the redemption rights then applicable to
the Redeemable Common Stock. The Company's management became aware that such
report had come to the attention of Dr. Henri B. Meier, the Chief Financial
Officer of Roche Holding.
On January 30, 1995, Dr. Meier and Frederick Frank of Lehman Brothers, a
financial advisor to the Company, discussed the subject of extending Roche's
right to cause Genentech to redeem the Redeemable Common Stock. Dr. Meier
indicated at that time that Roche had not decided whether it would exercise its
right to cause such redemption. Mr. Frank indicated to Dr. Meier that a decision
not to exercise the redemption right could have a material adverse effect on the
market price of the Redeemable Common Stock and thus on the Company's ability to
motivate and retain its highly talented technical and scientific staff, and
urged Roche to consider exercising its then existing redemption rights. Dr.
Meier indicated that, if the Company was prepared to do so, Roche would be
willing to discuss the terms upon which an extension of Roche's option might be
agreed. At a meeting requested by the Company's Senior Vice President and Chief
Financial Officer, Louis J. Lavigne, Jr., and held in Basel, Switzerland on
February 1, 1995, Dr. Meier discussed with Mr. Lavigne the alternatives set
forth in the Swiss bank report, including an extension of Roche's redemption
right. At that meeting, Dr. Meier stated that Roche would be willing to discuss
the parameters of an extension of the option and that it had not made a decision
as to whether it would exercise the then existing option prior to June 30, 1995.
During the first week of February 1995, there were additional conversations
between Mr. Frank and Dr. Meier and between G. Kirk Raab, then the Company's
President and Chief Executive Officer, and Fritz Gerber, Chairman of the Board
of Directors of Roche Holding, concerning the matters previously raised by Dr.
Meier. Mr. Raab and Dr. Meier spoke on February 3, 1995, and, as a result of
that conversation, Mr. Raab requested that Mr. Frank travel to Switzerland to
meet with Dr. Meier.
At a meeting on February 5, 1995 in Basel between Mr. Frank, on behalf of
the Company, and Dr. Meier, Dr. Meier and Mr. Frank discussed an extension of
the redemption option applicable to the Redeemable Common Stock for a period of
three and one-half years at increasing prices of $1.25 per share for the first
eight quarters, $1.50 per share for the next four quarters and $2.00 per share
for the last two quarters, with an ending price of $80 per share in December
1998. Dr. Meier proposed that the limit on Roche's ability to purchase
Genentech's stock be increased from the current level of 75% to 80% to permit
Roche, if it so chose, to mitigate the effect of any declines in the market
prices of Genentech stock.
On February 9, 1995, the Genentech Board met to consider the issues
relating to Roche's option to cause the Redeemable Common Stock to be redeemed,
the possibility of Roche's effecting or not effecting redemption, and issues
relating to the possibility of entering into arrangements with Roche to extend
such option. At that meeting, the Genentech Board resolved to form the Special
Committee consisting of all of the directors of Genentech, except the two
designees of Roche, Drs. Kessler and Drews. After Drs. Kessler and Drews excused
themselves from the meeting, the Special Committee resolved to retain Lehman
Brothers as the Special Committee's financial advisor and to retain Wachtell,
Lipton, Rosen & Katz as its legal counsel. At the February 9th meeting, the
Special Committee discussed the terms of the Existing Governance Agreement
between Genentech and Roche and reviewed the matters that had been discussed
among Messrs. Raab, Frank, Lavigne and Gerber and Dr. Meier during the preceding
weeks.
At the February 9th meeting, Lehman Brothers advised the Special Committee
that the Redeemable Common Stock had traded in the market at prices
substantially higher than those that are implied by applying a comparable
company price earnings multiple to Genentech's historical and projected earnings
and that, based on the foregoing, (1) the existence of the Roche option had a
substantial buttressing effect on the price of the Redeemable Common Stock and
that, absent such option, the Redeemable Common Stock would be expected to have
traded in the market at significantly lower prices, (2) the price of the
Redeemable Common
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Stock would be expected to decline significantly if Roche were to decide not to
exercise its existing option and (3) extension of the option would significantly
mitigate this decline. The Special Committee was also advised by Lehman Brothers
that the supporting effect of an extension of Roche's redemption option might
not be as significant as had been the case with respect to the redemption right
then applicable to the Redeemable Common Stock because of the market's possible
perception of the reasons for a determination by Roche not to exercise its
existing rights prior to June 30, 1995, and the corresponding lack of market
conviction that Roche would exercise an extended option. The analysis presented
by Lehman Brothers at the February 9th meeting was substantially similar to the
comparable analysis presented by Lehman Brothers at the meetings of the
Genentech Board and the Special Committee held on April 29 and 30, 1995. See
"--Opinions of Financial Advisors -- Lehman Brothers" below. The Special
Committee also considered Lehman Brothers' advice that a primary reason to
consider an extension of the Roche redemption right was that such an extension,
assuming acceptable terms could be arrived at, would be more favorable to the
Company and its stockholders than expiration of the right on June 30, 1995. The
Special Committee therefore concluded that the preferable approach to take in
the Company's discussions with Roche would be first to urge exercise of the
existing redemption right by Roche, but also to pursue a contingency plan of
extending the redemption right (assuming acceptable terms could be agreed) in
order to minimize the adverse impact on the Company and its stockholders which
it believed would arise as a result of expiration of the redemption right.
Also at the February 9th meeting, the Special Committee appointed a
subcommittee (the "Subcommittee") consisting of Mr. Raab and two other members
of the Genentech Board, Messrs. J. Richard Munro and Thomas Perkins, to urge
Roche to exercise its existing redemption option. As an alternative, should
Roche be unwilling to cause the Redeemable Common Stock to be redeemed, the
Subcommittee was to explore a possible extension of Roche's redemption option on
terms beneficial to Genentech and its stockholders. In adopting this strategy,
the Special Committee was aware that informing Roche of its willingness to
consider an extension of the redemption right could affect Roche's decision with
respect to its exercise of the right, but it concluded that the benefits to the
Company and its stockholders of such a strategy outweighed the possible
detriments thereof.
The Subcommittee met with Mr. Gerber on February 22, 1995. The Subcommittee
expressed to Mr. Gerber the Special Committee's desire that Roche exercise its
existing option with respect to the Redeemable Common Stock. Messrs. Raab,
Perkins and Munro presented Mr. Gerber with the financial and operational
rationales which, in Genentech's view, supported a decision by Roche to cause
Genentech to redeem the Redeemable Common Stock. In addition, the members of the
Subcommittee expressed to Mr. Gerber their view that the continuing uncertainty
with respect to Roche's decision whether or not to exercise its option would
pose operational problems for Genentech in the development of its international
infrastructure. Such problems also related to the possible effect of the
uncertainty on whether key employees of Genentech would remain with the Company.
Mr. Raab indicated to Mr. Gerber that it was his belief that the culture and
productivity of Genentech could be preserved if Roche exercised its current
redemption right so long as Roche took certain steps to maintain the
independence of Genentech, particularly with respect to research and
development. Mr. Gerber expressed concern about maintaining Genentech's
productivity and culture in the event that Roche exercised its current
redemption right.
During the course of the February 22nd meeting, the members of the
Subcommittee suggested to Mr. Gerber that if Roche was not going to exercise its
current right of redemption, the Subcommittee was prepared to consider two
possible alternatives. The first alternative was a one-year extension of the
redemption option at increasing prices with a commitment by Roche to cause
redemption of the remainder of the outstanding Redeemable Common Stock during
the period of the extension. The second alternative was a three-year extension
of the redemption right with increasing prices and a commitment by Roche to
purchase additional Genentech stock in the open market in order to bring its
ownership interest up to 79% of the Genentech stock. The Subcommittee further
suggested that if Roche did not exercise its option to redeem the outstanding
Redeemable Common Stock by the end of the three-year extension, then Roche would
lose certain approval and negotiation rights under the Existing Governance
Agreement. Under either alternative, Roche's right to nominate additional
representatives to the Genentech Board pursuant to the Existing Governance
Agreement would be suspended for the period of the extension.
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At the conclusion of the February 22nd meeting, Mr. Gerber advised the
members of the Subcommittee that he wanted to consider their points, that he had
serious concerns with the alternatives discussed, that he wanted to discuss the
matter with his associates, and that he would call Mr. Raab on March 13, 1995.
Mr. Gerber also asked to meet with Dr. Arthur D. Levinson, then a Senior Vice
President and, effective July 7, 1995, President and Chief Executive Officer, of
Genentech, to discuss with Dr. Levinson how scientists at Genentech might react
and be affected if Roche exercised, or received an extension of, its right to
cause the Company to redeem the Redeemable Common Stock.
On February 23, 1995, Mr. Raab met again with Mr. Gerber. Mr. Gerber
reiterated to Mr. Raab his concerns with respect to the alternatives discussed
the previous day.
On February 27, 1995, the Special Committee held a telephonic meeting at
which Messrs. Raab, Munro and Perkins informed the Special Committee of the
details of the meeting with Mr. Gerber held on February 22nd. The Subcommittee
reported that Roche had expressed an unwillingness to decide whether it should
exercise its right to cause the Redeemable Common Stock to be redeemed prior to
June 30, 1995. At the conclusion of the Special Committee's discussion of the
contacts with Roche, the Special Committee decided to meet again telephonically
on March 13, 1995.
On March 8 and 9, 1995, Dr. Levinson met with Mr. Gerber and Dr. Meier in
Basel. At those meetings Mr. Gerber and Dr. Meier solicited Dr. Levinson's views
on the question of exercising or extending the redemption right and on the
potential reaction of the scientists at Genentech to such redemption or
extension. Dr. Levinson indicated that he believed the preferable course of
action from the standpoint of the Company's ability to attract and retain
distinguished scientists was for Roche to cause the Redeemable Common Stock to
be redeemed and to maintain the independence of Genentech as an operating
matter. He expressed his concerns that an extension of the redemption right
would not be the best solution to the issues that had been discussed between the
Company and Roche. Mr. Gerber and Dr. Meier expressed their view that the
Company should consider an extension of the redemption period along the lines
previously proposed by Roche.
On March 13, 1995, the Special Committee held a telephonic meeting at which
Dr. Levinson reported his conversations with Mr. Gerber and Dr. Meier. In
addition, Mr. Raab reported that he had not yet received a call from Mr. Gerber
informing him of Roche's intentions with respect to the exercise of the
redemption right. Mr. Raab indicated that the members of the Subcommittee were
of the view that an extension of the redemption right on the terms proposed by
the Subcommittee on February 22nd was not under active consideration by Roche.
At the March 13th meeting, Mr. Perkins informed the Special Committee that he
would be resigning effective immediately as a director of the Company (and,
accordingly, of the Subcommittee and Special Committee).
Following the March 13th meeting of the Special Committee, Dr. Meier called
Mr. Raab in the afternoon on March 13th to indicate that there had been a
misunderstanding between Messrs. Raab and Gerber and that no decision would be
made by Roche at that time concerning exercise or non-exercise of the redemption
right. Later, in the evening on March 13th, Mr. Raab and Mr. Gerber discussed
having another meeting between Roche and Genentech concerning the exercise or
extension of the redemption right. A meeting was scheduled for Zurich,
Switzerland on April 3, 1995.
On March 16 and 17, Dr. Franz B. Humer, currently a member of the Board of
Directors and the executive committee and head of the Pharmaceuticals Division
of Roche Holding and a Director of Genentech, visited Genentech. At the end of
that visit, Mr. Raab related to Dr. Humer the history of discussions with Roche
to date and suggested that the best course for Roche was to exercise its then
current right of redemption and to maintain Genentech's operational
independence.
Prior to the April 3, 1995 meeting, Mr. Frank, of Lehman Brothers,
described to Dr. Meier in a telephone call several of the concepts expected to
be considered at the meeting including the concept of a stockholder put. Also in
advance of the April 3, 1995 meeting, a "charter" describing future
relationships between Genentech and Roche in the event that Roche exercised its
right to cause a redemption of the Redeemable Common Stock was sent by Mr. Raab
to Mr. Gerber and Dr. Humer. In general, the charter proposed that Genentech
maintain its operational independence with respect to research and development,
manufacturing
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<PAGE> 36
and sales and marketing in the United States and collaborate with Roche on the
development and commercialization of Genentech products outside the United
States. On April 3, 1995, Messrs. Raab and Frank met in Zurich with Mr. Gerber
and Drs. Humer and Meier, who indicated that they were interested in the
framework reflected in the "charter". Messrs. Raab and Frank and the Roche
representatives discussed the benefits and the risks of the redemption and
expiration scenarios, and the terms that any possible extension of the
redemption right might take.
At the April 3rd meeting, two extension proposals were discussed. The
first, considered only for a short period of time, was a three and a half year
extension of the redemption right at increasing prices ending at $80 per share
with an increase in Roche's limit on open market purchases of Genentech stock
from 75% to 79.5%. Under this approach, Roche would commit to purchase such
number of shares of Genentech as would bring its ownership level up to 75% of
the outstanding Genentech stock. Also, Roche's right to nominate additional
members of the Genentech Board would be postponed until after the expiration of
the extended redemption period. Most of the meeting was spent discussing the
second alternative, under which there would also be a three and half year
extension of the redemption right at increasing prices ending at $80 per share
and an increase in Roche's limit on purchases to 79.5%, but there would be no
requirement for Roche to purchase the difference between the percentage of
Genentech stock then owned by Roche and 75% of the outstanding Genentech stock.
In this latter scenario, Roche would offer a put option to Genentech
stockholders at $65 per share exercisable at the end of the redemption period,
Roche would be granted certain rights to develop and commercialize on an
exclusive basis Genentech's existing products outside the United States, and an
option, on a product-by-product basis, to develop and commercialize products
developed by Genentech in the future outside the United States on an exclusive
basis, in return for payment by Roche of 50% of Genentech's development expenses
with respect to new indications for those products it markets or those products
it exercises the right to develop and market and the payment by Roche of a 15%
to 20% royalty on sales of such products. As in the first alternative, Roche's
right to nominate additional Genentech Board members would be postponed until
the end of the put period.
Roche rejected the proposed put price of $65 per share as being too high.
By the end of the April 3rd meeting, the parties were focusing on three
alternatives: (1) Roche would cause redemption of the remainder of Genentech's
stock by June 30, 1995; (2) Roche would not cause redemption of the rest of
Genentech's stock by June 30, 1995 and its right to do so would expire; or (3) a
three and one half year extension of the option at increasing prices ending at
$80 per share would be effected; an increase in Roche's limit on open market
purchases of Genentech stock to 79.5% would be permitted; a put for Genentech
stockholders, at a price per share then still under discussion by the parties,
exercisable at the end of the redemption period would be granted; Roche would be
granted rights to develop and commercialize on an exclusive basis Genentech's
existing products outside the United States, and an option, on a
product-by-product basis, to develop and commercialize products developed by
Genentech in the future outside the United States on an exclusive basis, in
return for paying 50% of Genentech's development expenses with respect to new
indications for those products it markets or those products it exercises the
right to develop and market and would be obligated to pay a royalty of 15%, with
a higher royalty to be negotiated on the sales of currently marketed products
outside the United States; a Genentech obligation to supply products to Roche
would be agreed, and a postponement of Roche's right to nominate additional
Board members until the end of the put period would be added to the current
governance arrangements between the companies.
At the conclusion of the April 3rd meeting, Mr. Gerber indicated that he
wished to consider the matter and submit it to Roche's board of directors for
approval and would call Mr. Raab to advise him of Roche's decision on April 28,
1995. Mr. Raab stated to Mr. Gerber that while the "buy" and "no-buy"
alternatives were solely within Roche's control, the third alternative approach
would be subject to approval by the Special Committee and, ultimately, by the
stockholders of Genentech not affiliated with Roche.
Later on that same day, Mr. Raab met with Dr. Humer to discuss additional
details relating to the Licensing Agreement. They developed a framework under
which Roche would have an option to acquire a license for rights to Genentech's
products outside the United States in return for payment of 50% of Genentech's
development expenses and royalties on product sales ranging from 12.5% to 20%.
They discussed the concept that Roche would be required to exercise this option
by the end of Phase II trials and that, if
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<PAGE> 37
exercised, the reimbursement for expenses would include those already incurred.
Mr. Raab and Dr. Humer also discussed possible royalty rates for various types
of products and acknowledged that additional discussion was needed to deal with
the appropriate royalty rates for currently marketed products.
On April 6, 1995, Dr. Meier advised Mr. Frank, and then Mr. Lavigne, that
Roche believed that a $60 per share price for the put, which had been proposed
by Genentech, was too high. Correspondence was exchanged between Messrs. Frank
and Meier and among Messrs. Raab, Gerber and Frank during the period of April 6
to 11, 1995 concerning potential extensions of the Roche redemption right.
In a fax of April 7, 1995, Mr. Gerber suggested to Mr. Raab that four
extension alternatives, described below, were acceptable to Roche and solicited
Genentech's response as to which appeared most attractive to Genentech. The four
extension alternatives suggested in Roche's fax were: (1) a three and one half
year extension of the redemption right at increasing prices ending at $80 per
share, an increase in the limit on Roche's open market purchases of Genentech's
outstanding stock to 79.5% and a postponement of Roche's right to nominate
additional Genentech Board members (such three elements being referred to herein
as the "Base Terms"); (2) the Base Terms, plus a right on the part of the
Genentech stockholders to put their stock at $51 per share exercisable at the
end of the redemption period, and a grant of rights to Roche to develop and
commercialize Genentech's products outside the United States in exchange for
Roche's payment of 50% of Genentech's development expenses and a 15% royalty on
such sales; (3) the Base Terms, except that there would be a four year (rather
than a three and one half year) extension of the redemption right at increasing
prices up to $82 (rather than $80) per share, plus a right on the part of
Genentech's stockholders to put their stock at $55 per share (rather than $51
per share as in alternative (2) above) exercisable at the end of the redemption
period, and (as in alternative (2) above) a grant of rights to Roche to develop
and commercialize Genentech's products outside the United States in exchange for
Roche's payment of 50% of Genentech's development expenses and a 15% royalty on
such sales; or (4) the Base Terms, except that there would be a five year
extension of the redemption right at increasing prices ending at $85 per share,
plus a right on the part of Genentech's stockholders to put their stock at $60
per share exercisable at the end of the redemption period, and a grant of rights
to Roche to develop and commercialize Genentech's products outside the United
States in exchange for Roche's payment of 50% of Genentech's development
expenses and a 15% royalty on such sales. It continued to be the strong view of
Roche that a put price in excess of $55 at the end of a four-year extension
would be too high.
On April 9, 1995, Mr. Raab sent a fax to Mr. Gerber emphasizing that it was
important to have a common understanding of the terms of any proposal to extend
the redemption right before the upcoming meeting of the Special Committee and
the Genentech Board, that the rights to Genentech's products outside the United
States were worth more than the value that Roche was apparently ascribing to
them, and that Roche should have a clear understanding of the obligation of the
Genentech Board in evaluating offers from Roche to purchase the remainder of
Genentech after June 30, 1995. In his April 9th letter, Mr. Raab stated that he
believed "that the soundest decision continues to be for you to exercise your
option and the riskiest is not to exercise. The extension offers good potential
for a compromise and the inclusion of the put under appropriate conditions the
most effective way to do it."
On April 10, 1995, Mr. Raab sent another fax to Mr. Gerber defining the
term "development costs" (of which Roche would reimburse 50% in the event that
Roche exercised its option for a license under the proposed Licensing
Agreement), proposing a 20% royalty on sales of the currently marketed products
in Canada and expressing a desire for Roche to share some of the costs of
acquiring Boehringer Ingelheim's rights to tPA in Canada. Mr. Raab also proposed
a 15-20% royalty on sales of DNase in Europe depending on the approved
indications and suggested that Genentech would supply products to Roche for
which Roche exercised its option at fully burdened manufacturing costs plus a
margin to be negotiated. During this period, Roche continued to reserve its
decision on whether to exercise the existing option or negotiate an extension.
Moreover, Roche continued to emphasize its view that a put price in excess of
$55 at the end of the four-year term could not be justified.
On April 12, 1995, Mr. Gerber sent a letter to Mr. Raab proposing the
following terms: (a) a four year extension of the redemption right at increasing
prices ending at $82 per share; (b) an increase in the limit on Roche's open
market purchases of Genentech's outstanding stock to 79.5%; (c) a stockholder
put at $60 per
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share exercisable beginning at the end of the redemption period for thirty days;
(d) Roche's absorption of Genentech Canada, Inc. and payment of a 20% royalty on
sales of Hgh, tPA and DNase in Canada; (e) Roche's absorption of Genentech
Europe Limited and payment of a 20% royalty on sales of DNase for cystic
fibrosis and a 15% royalty on sales of DNase in Europe when it is approved for
chronic obstructive pulmonary disease; (f) a grant of an option to Roche for
rights to other products outside the United States which would have to be
exercised by the end of Phase II trials and for which Roche would pay 50% of
Genentech's development expenses, including reimbursement for incurred expenses,
a royalty of 12.5% on aggregate sales up to $100 million and a 15% royalty on
aggregate sales above $100 million; and (g) a Genentech obligation to supply
Roche at cost plus a margin to be negotiated.
On April 12 and 13, 1995, the Special Committee met to consider, among
other matters, the discussions that had taken place between Roche and the
Company. Mr. Raab described the events that had transpired since the March 13th
meeting and described Mr. Gerber's most recent proposal. The Special Committee
discussed the apparent likelihood that Roche would not exercise its then current
right to cause redemption of the Redeemable Common Stock prior to June 30, 1995,
at which time such right would expire, and expressed concern with respect to the
adverse effects that a decision by Roche not to exercise the redemption right
would have on the market price of the Genentech stock. The Special Committee's
conclusion with respect to Roche's apparent unwillingness to exercise its
redemption right was based in part upon the Subcommittee's and Mr. Frank's
reports of their discussions with Roche and upon Roche's stated reluctance to
cause the Company to redeem the Redeemable Common Stock prior to June 30, 1995.
Based on the advice of Lehman Brothers, the Special Committee concluded that a
public announcement on or about April 28th concerning non-exercise of the
redemption right by Roche would have the same effect on the market price of
Redeemable Common Stock as would expiration of the right on June 30, 1995. Based
on the foregoing, the Special Committee continued to consider the terms of, and
to pursue, the extension of the redemption right as a contingency plan should
Roche decide not to exercise its existing right.
The Special Committee also discussed the advantages and disadvantages of
extending the redemption right; the proposed redemption prices; the term of the
proposed extension of the redemption right; the effects of the terms of the
stockholder put, including the timing of the stockholder put and the exercise
price of the stockholder put; the value of Genentech's product rights outside
the United States; the reasonableness of the terms for the development and
commercialization of Genentech's products outside the United States; the ability
of Roche to commercialize effectively those rights and the benefits and
detriments of sharing development expenses with Roche in return for a royalty;
and the risks and benefits of an expansion by Genentech of its international
operations to develop and commercialize these products itself.
At that meeting, Mr. Frank reviewed his conversations with Dr. Meier. Mr.
Frank, on behalf of Lehman Brothers, also discussed various financial analyses,
including: the relative values of the put and the extended redemption option
under a Black-Scholes option valuation model; whether, based upon a number of
factors, including assumed levels of Genentech's earnings and the multiples of
earnings at which comparable stocks would be expected to trade, Roche would have
an incentive to redeem or shareholders would have an incentive to put their
shares; the term of the extended option; the term of the put; the price of the
extended option; the price of the put; and the value of rights to Genentech's
products outside the United States as well as the terms of that proposed grant
of rights to Roche. Lehman Brothers' discussion was substantially similar to the
comparable analysis presented by Lehman Brothers at the meetings of the
Genentech Board and the Special Committee held on April 29 and 30, 1995. See
"-- Opinions of Financial Advisors -- Lehman Brothers."
The Special Committee also discussed Mr. Frank's and Mr. Raab's stated
views that Roche was not likely to cause the Company to redeem the Redeemable
Common Stock under its current option. Lehman Brothers expressed its view that
if the option were allowed to expire unexercised on June 30, 1995 (or if a
public announcement of Roche's decision not to exercise were made prior to that
date), the decline in the market price of the Redeemable Common Stock would
likely be significant. Messrs. Raab and Frank also indicated to the Special
Committee that negotiations with Roche had been difficult and that, based on
their extensive discussions with Roche, they did not believe that the Company
could negotiate better terms with Roche than those that were currently under
consideration by both parties.
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Members of the Special Committee expressed concern as to whether Genentech
would have to decrease spending on research and development efforts to increase
earnings over the short term if Roche's redemption right expired unexercised and
the price of Genentech's stock declined significantly. Members of the Special
Committee also expressed concern that motivating employees might be difficult in
such circumstances and that such difficulties could affect the scientific
excellence and productivity of the Company to the detriment of its stockholders.
At the conclusion of the April 12-13 meeting, the Special Committee
authorized the management of Genentech and its financial and legal advisors to
explore further and refine Roche's most recent proposals.
In its correspondence with Genentech during the period following the April
12-13 meeting, Roche indicated that the Roche Board of Directors would
deliberate on the terms of the proposed transaction at a meeting of its Board of
Directors to be held on April 27th. Roche indicated that the following terms
would be discussed: (a) a four year extension of the redemption right at
increasing prices ending at $82 per share; (b) a stockholder put at $60 per
share exercisable beginning at the end of the redemption period for thirty days;
(c) a grant by Genentech to Roche of worldwide commercial product rights outside
the United States along the lines described above; and (d) an increase in the
limit on Roche's open market purchases of Genentech's outstanding stock to
79.9%. Roche's correspondence to Genentech during this period also indicated
that Roche would notify Genentech on April 28th either that (i) it would
exercise the redemption rights then applicable to the Redeemable Common Stock or
(ii) it would not exercise its right to cause the Company to redeem such stock,
in which case it would discuss with Genentech the terms of the proposal outlined
above.
On April 25, John P. McLaughlin, Senior Vice President and Secretary of
Genentech, sent a letter to Dr. Meier expressing Genentech's concern that,
because of the time required to seek stockholder approval, the transactions
might not be completed prior to June 30, 1995, the date on which the existing
Redeemable Common Stock would expire. Mr. McLaughlin suggested that, assuming
the Genentech Board decided to proceed with the proposed transaction, the
parties agree to a mechanism pursuant to which the same transactions could be
effected even after the June 30th conversion date had passed. During the course
of the next two days, Genentech, Roche and their respective legal advisors
agreed on the mechanics of an alternative structure which provided that the
Proposed Transactions could be completed after June 30, 1995 through a merger.
On April 26th, Mr. Raab contacted Dr. Meier to discuss and agree that the merger
format would be used after June 30, 1995 if the matter was approved by the
Genentech Board.
On April 27th, Dr. Humer contacted Mr. Raab to suggest several changes to
the draft Licensing Agreement. Later on April 27th, representatives of Genentech
met with representatives of Roche via video-conference to discuss issues
relating to the Licensing Agreement.
On the evening of April 28, 1995 (Pacific Time), Mr. Gerber called Mr. Raab
to inform him that Roche did not then intend to exercise its existing right to
cause Genentech to redeem the Redeemable Common Stock. Mr. Gerber informed Mr.
Raab that the Roche Board of Directors had authorized Roche to proceed with the
extension transaction as discussed over the previous two weeks. Mr. Raab
reiterated that the transaction would be subject to approval by the Special
Committee, the Genentech Board and, ultimately, by the stockholders of Genentech
not affiliated with Roche.
On April 29, 1995, the Special Committee and the Genentech Board (excluding
the Roche designees) held a joint meeting to discuss the Proposed Transactions
with its legal and financial advisors. As indicated above, the Special Committee
consists of all Genentech Board members other than the two Roche designees.
Legal counsel made presentations concerning the duties of directors and the
terms of the agreements, including the Merger Agreement, pursuant to which the
Proposed Transactions would be effected. Mr. Lavigne made a presentation
regarding the Company's operations and certain projected financial information
described under "Certain Projections of Future Operations and Other
Information." Following Mr. Lavigne's presentation, Lehman Brothers delivered
the presentation regarding the terms of the Proposed Transactions described
under " -- Opinions of Financial Advisors -- Lehman Brothers." Throughout each
of these presentations there were questions to the presenters by, and discussion
among, the members of the Special Committee. Among other matters, members of the
Special Committee asked whether, if Genentech were unwilling to extend the
redemption rights, Messrs. Frank and Raab believed that Roche would not exercise
its
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<PAGE> 40
existing right to cause the Redeemable Common Stock to be redeemed. Messrs.
Frank and Raab indicated that it continued to be their strong view, based on,
among other things, the discussion they had with senior officers of Roche, that
Roche would not exercise. In his presentation and in response to questions from
members of the Special Committee, Mr. Frank indicated that if the then current
option were permitted to lapse without exercise of the Roche call right and
without the proposed extension of the call (and the grant of the related put),
the market price of the Redeemable Common Stock would, in Lehman Brothers' view,
be expected to decline significantly below its current market value. Mr. Frank
repeated that it was Lehman Brothers' view that, based on comparable company
analyses, the Redeemable Common Stock was currently trading at a price that
significantly exceeded the price at which the shares would have been expected to
trade had the then existing redemption option not been in effect. See
" -- Recommendation of the Board of Directors; Fairness of the Transaction" and
" -- Opinions of Financial Advisors -- Lehman Brothers -- Standalone Future
Stock Price Analysis."
Members of the Genentech Board also asked for Lehman Brothers' view as to
the merits of declining to enter into the Proposed Transactions in an effort to
pressure Roche to exercise its call right on or prior to June 30, 1995. Mr.
Frank stated that, in his view, the Proposed Transactions were the best
alternative then available to the Company. He stated that, given the belief as
to Roche's unwillingness to exercise its current option, declining to enter into
the Proposed Transaction posed substantial risks for Genentech and its
stockholders. He advised that once the Redeemable Common Stock had been
converted into Common Stock on June 30, 1995 (or once a public announcement of
Roche's intention not to exercise had been made), the Company would be in a
substantially less advantageous position vis-a-vis Roche to negotiate a
transaction on terms as favorable to Genentech and its stockholders as those
contemplated by the Proposed Transactions then before the Special Committee. In
response to questions from the Special Committee, Mr. Frank indicated that it
was his view that the Company should not jeopardize the currently proposed
transaction by attempting to force Roche's hand in exercising its then current
call right.
In response to questions concerning the terms of the Proposed Transactions,
Mr. Frank stated that it was Lehman Brothers' view that the limitation on the
upper end of the range at which the Special Common Stock would trade following
consummation of the Proposed Transactions was mitigated by the assurance that
the price of such stock would not fall below the present value of the $60 Put
Price payable in July 1999. Mr. Frank also indicated that he believed the
commercial arrangements that formed an integral part of the Proposed
Transactions were favorable to the Company given the difficulty, expense and
uncertainty associated with building an infrastructure in Europe. He noted that
royalties, unlike the revenues from wholly owned but newly created or expanded
entities, result in immediate profits for the Company. He also pointed out the
significant risks associated with product development and commercialization in
Europe. Mr. Raab noted the risks associated with the development and
commercialization of drugs in Japan.
In response to questions from members of the Special Committee, Messrs.
Raab and Frank also indicated that, in their view, other than exercise by Roche
of the then current redemption right, approval and consummation of the Proposed
Transactions would be the most favorable then available alternative for the
employees of Genentech. Mr. Raab indicated that he believed that, given the
current circumstances, the best means for Genentech to attract and retain
talented scientists would be to enter into the Proposed Transactions. The joint
meeting of the Special Committee and the Genentech Board concluded in the
evening on April 29th, with the members of the Special Committee and the
Genentech Board suggesting that the meeting be reconvened on April 30th to
further consider the issues that had been raised in their deliberations to date.
On April 30, 1995, the Special Committee and the Genentech Board again met
jointly to discuss the Proposed Transactions and to ask questions of Genentech's
management, Lehman Brothers and legal counsel. Following a discussion of the
issues that had been raised the previous day, the Special Committee received the
oral opinion of Lehman Brothers (which Mr. Frank said would be followed by a
written opinion to the same effect and dated April 30th) described under
" -- Opinions of Financial Advisors -- Lehman Brothers" and resolved to
recommend that the Genentech Board approve the Proposed Transactions. The
written opinion of Lehman Brothers is set forth in Annex B hereto and is
described under " -- Opinions of Financial Advisors -- Lehman Brothers."
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<PAGE> 41
Immediately after having received the opinion of Lehman Brothers, the
Genentech Board (with Drs. Drews and Kessler, the Roche designees, not present)
approved the Proposed Transactions and authorized the Company to submit the
Charter Amendment to a vote of the Genentech stockholders.
Those members of the Genentech Board designated by Roche were not present
for the meetings held on April 29 and 30, 1995 or otherwise with respect to the
Proposed Transactions, did not participate in the deliberations of the Genentech
Board with respect to the Proposed Transactions, and consequently, did not cast
any votes with respect thereto.
On May 1, 1995, Roche and Genentech publicly announced that they had
entered into a Transaction Agreement (the "Transaction Agreement"). Under the
Transaction Agreement, the substance of the Proposed Transactions was to be
accomplished through an amendment to Genentech's Certificate of Incorporation.
The Transaction Agreement provided that if, as of the close of business on June
5, 1995, (1) a definitive copy of a proxy statement had not been mailed to the
Company's stockholders or (2) the Special Meeting had not been scheduled to
occur on or prior to June 30, 1995, the Transaction Agreement would be
terminated. However, the Company and Roche also agreed that, concurrently with
the termination of such agreement, the Company and Roche would enter into the
Merger Agreement. The purpose of the Merger Agreement was to enable the Company
and Roche to consummate the Proposed Transactions after June 30, 1995 -- the
date after which the Redeemable Common Stock would convert automatically to
Common Stock.
On May 23, 1995, Genentech and Roche agreed to terminate the Transaction
Agreement, and they simultaneously entered into the Merger Agreement. They did
so (i) because they did not believe that there was a reasonable likelihood that
the transactions contemplated by the Transaction Agreement could be consummated
prior to June 30, 1995 and (ii) to avoid any confusion among the stockholders of
the Company which might arise as a result of preliminary circulation of a proxy
statement addressing approval of the Charter Amendment contemplated by the
Transaction Agreement and a subsequent proxy statement which addressed the
Merger. Preliminary proxy material with respect to the Merger was filed with the
Commission on June 2, 1995.
The effect of the Merger Agreement is substantially the same to the Company
and its stockholders as the Charter Amendment contemplated by the Transaction
Agreement. Under the Merger Agreement, all of the Proposed Transactions would be
effected in a manner that would put the Company, Roche and the holders of
Redeemable Common Stock in the same position as they would have held if the
Proposed Transactions had been consummated pursuant to the Transaction
Agreement.
At a meeting on June 22, 1995, the Special Committee was informed that
during the period of negotiations with Roche concerning the Proposed
Transactions, Mr. Raab, at his request, discussed with Roche a potential
guarantee by Roche of a $2 million personal bank loan to Mr. Raab. Such contacts
between Mr. Raab and Roche began with Mr. Raab's unsolicited request, in
February 1995, for assistance from Roche in obtaining such a loan from a bank
and were terminated on or before April 13, with Roche declining to proceed
further. No guarantee was ever provided by Roche. Without disclosing his
requests to Roche to the Genentech Board, on April 13, 1995, Mr. Raab requested
and received a personal loan of $1.5 million from the Company.
After excusing Mr. Raab from the June 22nd meeting, the Special Committee
considered what further action to take, if any, with respect to the Proposed
Transactions and with respect to Mr. Raab's leadership of the Company. Mr. Raab
did not attend any future meetings of the Special Committee or the Genentech
Board, other than a session of the Genentech Board later on June 22nd at which
neither the Proposed Transactions nor Mr. Raab's conduct were discussed and a
session of the Special Committee on the following day for the purpose of being
advised of the formation of the Independent Committee. During the course of the
June 22nd meeting, the Special Committee also met with two senior officers of
the Company who had had some involvement in the negotiation of the Proposed
Transactions, and who indicated that they were aware of no evidence that Mr.
Raab was not vigorous in pursuing the non-Roche stockholders' interests and that
they were unaware of Mr. Raab's requests to Roche concerning his personal
finances.
At a meeting of the Special Committee on June 23, 1995, the Special
Committee appointed a committee of four independent Directors: Herbert W. Boyer,
Linda Fayne Levinson, C. Thomas Smith, Jr. and David S.
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Tappan, Jr. (the "Independent Committee"). The Independent Committee was given
the tasks of (i) reviewing the terms of the Proposed Transactions, (ii)
reviewing Mr. Raab's conduct, including recommending potential successors to Mr.
Raab if the Genentech Board were to determine to request his resignation, and
(iii) reviewing the status of the litigation pending in the Delaware Chancery
Court arising out of the Proposed Transactions (the "Stockholder Litigation").
See "-- The Stockholder Litigation." At the June 23rd meeting, the Special
Committee authorized counsel to negotiate the retention of Morgan Stanley to
assist the Independent Committee and the Special Committee.
On June 26, 1995, the Independent Committee held a telephonic meeting. At
that meeting, the Independent Committee resolved to engage Morgan Stanley. See
"-- Opinions of Financial Advisors -- Morgan Stanley." The Independent Committee
also received a report from its counsel concerning events since the meeting of
June 23rd and contacts that had been made with counsel for the plaintiffs in the
Stockholder Litigation.
At a meeting of the Independent Committee on June 29, 1995, the Committee
reviewed with representatives of Morgan Stanley, Lehman Brothers and counsel for
the Independent Committee the terms of the Proposed Transactions, including
their derivation and areas in which the Independent Committee might seek
improvement of those terms.
In an effort to insure, to the extent feasible, that the most advantageous
terms for Genentech and its stockholders had been negotiated, the Independent
Committee requested that representatives of Lehman Brothers and Morgan Stanley
assist the Independent Committee in formulating a strategy to approach Roche in
an effort to improve certain of the terms of the Proposed Transactions and the
Independent Committee made arrangements for its representatives to meet with
senior management of Roche to attempt to negotiate such an improvement.
Following such discussion, arrangements were initiated for such a meeting to
take place on July 3rd in Switzerland.
After the Independent Committee's financial advisors were excused from the
June 29th meeting, counsel reviewed with the Independent Committee its
understanding of the facts relating to Mr. Raab's contacts with Roche concerning
the Proposed Transactions. The Independent Committee then interviewed Mr. Raab
concerning, among other matters, his contacts with Roche and his conduct of the
negotiations of the Proposed Transactions. During the course of Mr. Raab's
interview, Mr. Raab indicated that he did not believe that his contacts with
Roche concerning the requested guaranty of his personal loan were related to
negotiations of the Proposed Transactions or had any impact on the vigor of
those negotiations or on his attempt to negotiate the most favorable possible
transaction for Genentech and its stockholders.
At the June 29th meeting, the Independent Committee also interviewed
several members of the Company's senior management concerning Mr. Raab and his
leadership of the Company.
Prior to July 3, 1995, financial experts retained by plaintiffs' counsel in
the Action discussed with the Company's financial advisors how the terms of the
Proposed Transactions could be improved financially.
On July 3, 1995, Peter N. Crnkovich, a Managing Director of Morgan Stanley,
and Mr. Frank met in Interlaken, Switzerland with Drs. Meier and Humer to
discuss the terms of the Proposed Transactions and to attempt to negotiate an
improvement in such terms for Genentech and its stockholders. Such attempt to
negotiate an improvement in terms was unavailing.
On July 6, 1995, the Independent Committee met again to discuss the
Proposed Transactions and Mr. Raab's status as the President and Chief Executive
Officer of the Company. The Independent Committee also received written answers
from Mr. Gerber to questions that had previously been submitted to him by the
Independent Committee. In his responses to the Independent Committee's
questions, Mr. Gerber indicated, among other matters, that at no time did Roche
consider or treat Mr. Raab's request for personal assistance to be related or
linked in any way to the negotiation of the Proposed Transactions.
At the July 6th meeting, the Independent Committee again reviewed with its
counsel and with senior management of Genentech the chronology of events with
respect to the negotiation of the Proposed Transactions and Mr. Raab's
discussions with Roche concerning the personal loan guaranty. The Independent
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<PAGE> 43
Committee interviewed Mr. Frank concerning his participation in the negotiations
with respect to the Proposed Transactions, and Mr. Frank indicated that nothing
had come to his attention which would indicate that Mr. Raab had not attempted
to achieve the best possible transaction for Genentech and its stockholders. Mr.
Frank stated that the analysis and conclusion that Lehman Brothers had presented
on April 29th and 30th with respect to the Proposed Transactions had not changed
as a result of any new information that had come to light, and that Lehman
Brothers knew of no reason to modify or withdraw its previously given formal
opinion or any of the advice that it had previously given to the Special
Committee.
Messrs. Frank and Crnkovich also reported to the Independent Committee the
results of their discussions with Roche in Interlaken on July 3rd.
At the July 6th meeting, Morgan Stanley made a presentation to the
Independent Committee of its financial analysis of the Proposed Transactions and
preliminarily indicated that it would be prepared to deliver an opinion to the
Independent Committee and the Special Committee concerning the fairness from a
financial point of view of the Proposed Transactions to the stockholders of
Genentech other than Roche. See "-- Opinions of Financial Advisors -- Morgan
Stanley."
Following Morgan Stanley's presentation, the Independent Committee received
a report concerning the ongoing settlement discussions with plaintiffs' counsel
in the Stockholder Litigation and authorized counsel to continue to pursue such
discussions. The Independent Committee also solicited from Dr. Humer Roche's
views with respect to Mr. Raab's role as the Company's President and Chief
Executive Officer and with respect to potential replacements for Mr. Raab. The
Independent Committee also again interviewed certain members of senior
management of the Company.
On July 7, 1995, the Genentech Board met, with Mr. Raab not present. The
Independent Committee reported that it had investigated four principal areas:
(i) the terms of the Proposed Transactions and the issue of whether the
Genentech Board and the Special Committee should continue to recommend approval
thereof by the stockholders; (ii) the Stockholder Litigation; (iii) Mr. Raab's
conduct of the negotiations of the Proposed Transactions with Roche and his
leadership of the Company; and (iv) potential successors to Mr. Raab should the
Board decide to request Mr. Raab's resignation.
With the Roche designees to the Genentech Board not present, the
Independent Committee reviewed the terms of the Proposed Transactions and
recommended that the Special Committee continue to recommend approval of the
Merger by the stockholders of the Company. The Independent Committee noted that,
although no investigation would necessarily reveal whether Mr. Raab's request
for personal financial assistance had tainted his conduct in the negotiations
with Roche, its inquiry had not revealed any evidence that Mr. Raab had not
attempted to achieve the best possible transaction for Genentech and its
stockholders. The Independent Committee further noted that, as a result of its
own efforts and investigation, and in light of Roche's willingness to increase
the amount of the call prices only as part of a settlement of the Stockholder
Litigation, it believed that the Proposed Transactions represented the best
terms available from Roche. The Independent Committee also noted that it had no
reason to question, and the Independent Committee did not in fact question, the
independence and integrity of Lehman Brothers, which participated in the
negotiation of the Proposed Transactions, or the analysis prepared, and the
opinion rendered, by Lehman Brothers at the April 29 and 30 meeting of the
Genentech Board and that the integrity of Lehman Brothers and the conclusion it
had reached, gave substantial comfort that the negotiations had been vigorously
conducted on behalf of the Company. The Independent Committee noted that its
interviews of senior management of the Company and of the advisors to the
Special Committee had established that none of the individuals interviewed had
had any knowledge of Mr. Raab's discussions with Roche concerning the requested
personal loan guaranty prior to having been informed thereof in connection with
the June 22nd meeting of the Genentech Board.
The Independent Committee reported that its efforts to negotiate an
improvement of the terms of the Proposed Transactions with Roche had been
unsuccessful, and members of the Independent Committee reported to the Genentech
Board the efforts of Morgan Stanley and Lehman Brothers in that regard. The
Independent Committee also noted that Mr. Frank, of Lehman Brothers, had stated
that nothing had come to the attention of Lehman Brothers that would cause it to
modify its April 30, 1995 opinion with respect to the
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<PAGE> 44
Proposed Transactions and that Morgan Stanley had been engaged to, and would,
render its own opinion as to the fairness of the Proposed Transactions from a
financial point of view to the stockholders of Genentech (other than Roche). The
Independent Committee advised the Genentech Board that, in the view of the
Independent Committee, the reasons that had led the Special Committee and the
Genentech Board to recommend the Proposed Transactions in the first instance
continued to be valid and that the Independent Committee believed the
transaction to be the best available alternative for Genentech and its
stockholders other than Roche. See "-- Recommendation of the Board of Directors;
Fairness of the Transaction."
The Independent Committee and its counsel also reported to the Genentech
Board the status of the settlement negotiations with plaintiffs' counsel in the
Stockholder Litigation. The Independent Committee indicated that Roche had
expressed, in discussions with plaintiffs' counsel, a willingness to make
changes to the terms of the Proposed Transactions as part of a settlement of the
Stockholder Litigation. The Independent Committee noted that it had been advised
that, as part of the settlement, Roche would be willing to increase the call
prices applicable to the Special Common Stock by $0.50 per share per quarter so
that the call prices would be $63.00 during the quarter ending December 31, 1995
and increase at $1.25 per quarter for six quarters and then $1.50 per quarter
for the following eight quarters to $82.50 in the quarter ending June 30, 1999.
See "The Charter Amendment; Description of the Special Common Stock -- Call
Rights." The Independent Committee also noted that Roche had conditioned the
increase in call prices upon final court approval of the settlement of the
Stockholder Litigation and upon Genentech's agreement to amend the Licensing
Agreement to provide that Genentech would bear severance expenses related to
potential future severance of a maximum of six Genentech employees in Europe.
Following the presentation of these issues by the Independent Committee,
the Special Committee authorized counsel for the Company to negotiate the
requisite documentation with Roche and with plaintiffs' counsel in the
Stockholder Litigation. The memorandum of understanding subsequently entered
into by counsel for Roche, the plaintiffs, the defendants and Mr. Raab is
described under "-- Stockholder Litigation" below.
The Independent Committee then turned to its report concerning Mr. Raab, at
which point the Roche designees on the Genentech Board were invited to join the
meeting. The Independent Committee described for the Genentech Board the
investigation it had conducted since June 22nd and indicated that, following its
consideration of Mr. Raab's conduct with respect to the loan guaranty and its
review of Mr. Raab's leadership of the Company over the last several years, the
Independent Committee had come to the conclusion that it would recommend to the
Genentech Board that it request and accept Mr. Raab's resignation as President,
Chief Executive Officer and a Director of the Company. The Genentech Board
thereafter unanimously adopted the Independent Committee's recommendations with
respect to Mr. Raab on each of the issues that had been theretofore presented to
the meeting.
With the Roche designees on the Genentech Board again having excused
themselves from the meeting, Morgan Stanley presented the analysis of the
Proposed Transactions a summary of which is included under "-- Opinions of
Financial Advisors -- Morgan Stanley" below. On July 7, 1995, after a discussion
among the members of the Genentech Board and Morgan Stanley, the Special
Committee and the Independent Committee received the oral opinion of Morgan
Stanley to the effect that, based upon and subject to the various considerations
set forth in the written opinion, the consideration to be received by Genentech
and the holders of Common Stock (other than Roche and its affiliates) pursuant
to the Proposed Transactions is fair from a financial point of view to such
holders (which was followed by a written opinion to the same effect dated July
7, 1995) described below under "-- Opinions of Financial Advisors -- Morgan
Stanley." The written opinion of Morgan Stanley is set forth in Annex C hereto
and is described under "-- Opinions of Financial Advisors -- Morgan Stanley"
below.
Following a discussion among the Directors, the Special Committee ratified
the terms of the Proposed Transactions (including as contemplated to be amended
pursuant to the settlement of the Stockholder Litigation) and resolved to
continue to recommend approval thereof by the stockholders of the Company.
In the afternoon on July 7th, Mr. Raab resigned as President, Chief
Executive Officer and as a Director of Genentech.
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Following a further report by the Independent Committee and discussions,
the Genentech Board, including the Roche designees, appointed Dr. Levinson to
the positions vacated by Mr. Raab's resignation.
On September 6, 1995, the Genentech Board (with the Roche designees not
present) met to set the Record Date and the date for the Special Meeting and to
approve certain amendments to the Proposed Transactions, including the execution
of the Agency Agreement (as hereinafter defined). The amendments to the terms of
the Proposed Transactions made by the parties since the execution of the Merger
Agreement on May 23, 1995 are in all material respects reflected in the
description of the Proposed Transactions set forth in this Proxy
Statement/Prospectus and/or in Annex A hereto and the Exhibits thereto. See "The
Charter Amendment; Description of the Special Common Stock;" "The Amended
Governance Agreement;" and "Guaranty of Roche Holding." At the meeting of the
Genentech Board on September 6th, Lehman Brothers and Morgan Stanley orally
confirmed to the Genentech Board that the amendments to be executed by the
parties did not affect the opinions previously delivered by each of them. See
" -- Opinions of Financial Advisors."
On September 8 and 18, 1995, amended preliminary proxy material with
respect to the Merger was filed with the Commission.
PURPOSE AND STRUCTURE OF THE TRANSACTIONS
On May 23, 1995, in order to effect the substance of the transactions
provided for in the Transaction Agreement, Genentech, Roche and Merger
Subsidiary entered into the Merger Agreement, which was subsequently amended.
Pursuant to the Merger Agreement, as subsequently amended, among other things,
(i) Merger Subsidiary will be merged with and into Genentech, with Genentech
being the surviving corporation, (ii) the Certificate of Incorporation of
Genentech will be amended to authorize the issuance by Genentech of Special
Common Stock, (iii) each outstanding share of Common Stock (other than shares of
Common Stock held by Roche and its affiliates) will be converted into one share
of Special Common Stock, (iv) each outstanding share of Common Stock held by
Roche and its affiliates will be cancelled, and (v) the outstanding common stock
of Merger Subsidiary will be converted into shares of Common Stock representing
the same number of shares of Common Stock held by Roche and its affiliates
immediately prior to the Merger.
Pursuant to the current Genentech Certificate of Incorporation, at the
close of business on June 30, 1995, each outstanding share of Redeemable Common
Stock was converted automatically into one share of Common Stock. As noted
above, in the Merger, such Common Stock (other than Common Stock held by Roche
and its affiliates) would be converted into Special Common Stock. The purpose of
the Merger and of the resulting conversion of Common Stock into Special Common
Stock is to, among other matters, (i) provide for the Call Rights, which extend
by four years the period during which the publicly traded stock of Genentech is
subject to redemption by Genentech at the option of Roche, with such redemption
during such four-year period being at certain specified prices per share ranging
from $62.50 during the quarter ending December 31, 1995 increasing $1.25 per
share for the next six quarters and $1.50 per share for the next eight quarters
to $82.00 during the quarter ending June 30, 1999 (with each of such redemption
prices being increased by $0.50, to a final price of $82.50, upon final court
approval of the Stockholder Litigation), and (ii) provide for the Put Rights,
which afford the holders of Special Common Stock the right to require the
purchase of all or a portion (at the election of the holder) of their shares of
such stock at a price of $60.00 per share in the event that Roche does not cause
the exercise of the Call Rights. The Put Rights will be exercisable during the
30-business day period following the expiration of the Call Rights or during a
60-business day period following certain Insolvency Events of the Company.
Under the Amended Governance Agreement, Roche will be required to, if the
Call Rights are exercised, pay to a depositary sufficient funds to satisfy the
Company's obligations in respect of the Call Rights. See "The Amended Governance
Agreement -- Redemption of Special Common Stock."
The Company's obligation to pay the Put Price to stockholders who properly
exercise their Put Rights will be conditioned upon Genentech's having received
from Roche, or an affiliate of Roche, the funds required to be contributed to
the Company by Roche under the Amended Governance Agreement. See "the Charter
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<PAGE> 46
Amendment; Description of the Special Common Stock -- Put Rights;" "-- Condition
to the Company's Obligations;" "The Amended Governance Agreement -- Put Rights
with Respect to the Special Common Stock;" "-- Capital Contribution and
Assumption of Put Obligations by Roche" and "Certain Information Concerning
Roche and Roche Holding." Under the Amended Governance Agreement, Roche has
agreed to either (i) contribute to Genentech the funds required to satisfy the
Put Rights and certain other liabilities of the Company or (ii) elect to
purchase directly from Genentech's stockholders the shares of Special Common
Stock which such stockholders elect to have purchased pursuant to their exercise
of the Put Rights. If Roche makes the contribution referred to in clause (i) of
the preceding sentence, Genentech will issue to Roche (or an affiliate of Roche)
a number of shares of Common Stock equal to the number of shares of Special
Common Stock redeemed by Genentech pursuant to exercises of the Put Rights. See
"The Amended Governance Agreement -- Capital Contribution and Assumption of Put
Obligations by Roche" and "Certain Information Concerning Roche and Roche
Holding." The obligations of Roche referred to in the second preceding sentence
are guaranteed by Roche Holding. See "Guaranty of Roche Holding." Amended
Article Third provides that Genentech will take (and will have no authority not
to take) all necessary action to enforce, and to cause the performance of,
Roche's and Roche Holding's obligations with respect to payment of the Put Price
under the Amended Governance Agreement and the Guaranty and to ensure that Roche
and Roche Holding otherwise comply with their respective obligations described
under "The Amended Governance Agreement -- Capital Contribution and Assumption
of Put Obligations by Roche" and under the Guaranty. See "Guaranty of Roche
Holding." Genentech has appointed the Agent to enforce the respective
obligations of Roche and Roche Holding described under "The Amended Governance
Agreement -- Capital Contribution and Assumption of Put Obligations by Roche"
and under the Guaranty in the event of the occurrence of an Insolvency Event.
See "The Amended Governance Agreement -- The Agency Agreement."
Each share of Special Common Stock outstanding following the close of
business on the last day of the Put Period will, unless previously called for
redemption on or prior to such date, automatically be converted into one share
of Common Stock. See "The Charter Amendment; Description of the Special Common
Stock -- Conversion."
For information regarding the specific redemption prices applicable during
each quarterly period during the four years when the Call Rights will be in
effect and for the historical redemption prices applicable under the Redeemable
Common Stock, see "The Charter Amendment; Description of the Special Common
Stock -- Call Rights."
Holders of Common Stock currently do not have any rights comparable to the
Put Rights and, consequently, do not have the right to require the Company to
purchase their shares of Common Stock.
The Amended Governance Agreement extends and modifies the Existing
Governance Agreement. In particular, under the modified governance arrangements,
the limit on Roche's ability to make open market purchases would be increased
such that Roche could own, following any such purchase 79.9%, rather than 75%,
of the voting power of the Company's equity securities on a fully diluted basis.
The Licensing Agreement provides for, among other matters, the grant by the
Company to HLR of (i) the exclusive right to market certain Genentech products
outside of the United States and (ii) an option on a product-by-product basis to
develop and market on an exclusive basis outside the United States all other
Genentech products which conclude Phase II trials within 10 years following
execution of the Licensing Agreement.
For further information with respect to the Genentech Board's and the
Special Committee's reasons for supporting the Proposed Transactions and
recommending the same to stockholders, see "Summary and Special
Factors -- Genentech's Reasons for the Proposed Transactions;" " -- Advantages
and Disadvantages of the Proposal to Genentech's Stockholders," " -- Effects of
a Failure to Approve the Proposal;" "The Proposed Transactions -- Background of
the Proposed Transactions;" " -- Recommendation of the Board of Directors;
Fairness of the Transaction;" and " -- Opinions of Financial Advisors."
RECOMMENDATION OF THE BOARD OF DIRECTORS; FAIRNESS OF THE TRANSACTION
By unanimous vote, the Genentech Board (with the two Roche designees not
present) and the Special Committee (which, as indicated above, consists of all
directors other than the two Roche designees) have
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approved the Proposed Transactions and determined that such transactions are
fair to and in the best interests of Genentech and its stockholders (other than
Roche). Each member of the Genentech Board has indicated that he or she intends
to vote all shares of Common Stock that he or she owns in favor of the Proposal.
THE GENENTECH BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE
PROPOSAL.
At the meetings on April 29 and 30, 1995, the Genentech Board and the
Special Committee reviewed and considered the presentation of Lehman Brothers as
to the fairness of the Proposed Transactions to holders of the Common Stock
(other than Roche), as well as the status of negotiations between the Company
and Roche. In reaching the determination described in the immediately preceding
paragraph, the Genentech Board and the Special Committee gave careful
consideration, without assigning relative weights, to a number of factors,
including the following:
(i) The conclusion, based on the reports, presentations and
discussions described under "The Proposed Transactions -- Background of the
Proposed Transactions," that, regardless of whether the Company was willing
to extend Roche's option to cause the Company to redeem the Company's
publicly traded shares, the Redeemable Common Stock, prior to June 30,
1995, Roche was unlikely to exercise its then existing option;
(ii) Based on the advice of Lehman Brothers, the conclusion that the
market price of Genentech's publicly traded shares would be expected to
decline significantly if Roche's right to cause Genentech's redemption of
such shares were to expire unexercised at June 30, 1995 or if Roche were to
publicly announce its intention not to exercise that right in advance of
such date;
(iii) The belief that a substantial decline in the market value of the
publicly traded Genentech stock would, in addition to immediate diminution
in stockholder value, have material adverse effects on Genentech's
relations with its employees and on Genentech's ability to attract and
retain talented scientists, which, in turn, would likely further adversely
affect stockholder value;
(iv) The belief, based on the advice of Lehman Brothers, that the
existence of Roche's right to cause redemption of the Redeemable Common
Stock had the effect of supporting the price at which the Redeemable Common
Stock trades;
(v) Lehman Brothers' advice that, if the Merger is approved by the
stockholders of Genentech, (x) the potential decline in the price of the
publicly traded Genentech stock could be significantly mitigated by the Put
Rights and (y) the Call Rights will have a supporting or elevating effect
on the market price of the Special Common Stock, although the Special
Committee has been advised that such supporting effect may not be as
significant as has been the case with the current redemption right because
of the market's possible perception of the reasons for a determination by
Roche not to exercise its then existing rights prior to July 1, 1995, and
the corresponding lack of market conviction that Roche would exercise an
extended option;
(vi) The presentation of Lehman Brothers, and Lehman Brothers'
opinion, to the effect that the Proposed Transactions are fair to the
holders of shares of Common Stock (other than Roche), from a financial
point of view, including Lehman Brothers' detailed analysis of the market
behavior of the Redeemable Common Stock, the likely impact of the
expiration of Roche's redemption option upon the trading prices of such
stock, and Lehman Brothers' views as to the potential effects upon future
trading prices of the stock of extending such option, as contemplated by
the Call Rights inherent in the Special Common Stock. The Special Committee
recognized, however, in considering such analysis that the trading price of
such stock is a product of a variety of factors, many of which are beyond
the control of the Company, and that it is not possible to predict the
actual prices at which the Special Common Stock will trade, or the actual
prices at which the Common Stock will trade if the Proposal is not adopted;
(vii) The advice of Lehman Brothers that the trading price of the
Special Common Stock would be afforded "downside" protection" and that such
price would take into account the benefits to the Genentech stockholders of
the assurance of being able to "put" their shares at the $60 price payable
in July 1999, and the fact that Roche had agreed to contribute to the
Company the funds required to satisfy the Company's obligations under the
Put Rights in exchange for the issuance by the Company of a
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number of shares of Common Stock equal to the number of shares acquired by
the Company upon exercise of the Put Rights, or to purchase Special Common
Stock directly from stockholders who exercise their Put Rights (with such
obligations of Roche being guaranteed by Roche Holding, as described herein
under "Guaranty of Roche Holding");
(viii) The fact that if Genentech's future growth and/or market
conditions were to warrant a per share valuation of Genentech prior to June
30, 1999 in excess of the redemption prices applicable under the Call
Rights, such redemption prices would place a cap on the price at which the
Special Common Stock will trade and, thus, will limit the return holders of
Special Common Stock can realize from such securities. As a result of the
Call Rights, if Genentech's future growth and/or market conditions were to
warrant a valuation of Genentech prior to June 30, 1999 in excess of the
redemption prices of the Special Common Stock under the Call Rights and if
the Special Common Stock were to be redeemed, holders of the Special Common
Stock would participate in such increased valuation only to the extent
permitted by the applicable redemption price under the Call Rights.
Although the "upside limitations" inherent in the Call Rights are
disadvantageous to stockholders, the Genentech Board and the Special
Committee believe, as discussed in item (ix) below, that the benefits of
the "downside protection" of the Put Rights mitigates any such
disadvantages;
(ix) The belief that the redemption prices of the Call Rights leave
substantial room for future growth of the Company to be recognized in its
stock price and that the "downside protection" afforded by the Put Rights
is a significant advantage to the Genentech public stockholders which
mitigates any "upside limitations" that may result from the existence of
the Call Rights;
(x) The disadvantageous negotiating position that the Company and its
stockholders would have held vis-a-vis Roche had the redemption right
expired unexercised on June 30, 1995 or had Roche made a public
announcement of its intention not to exercise the current redemption rights
in advance of June 30, 1995;
(xi) The projections of Genentech's future operations as described
herein under "Certain Projections of Future Operations and Other
Information" and the experience of the Genentech Board with respect to the
business of the Company;
(xii) The potential adverse effect upon the Company, its scientists
and other employees and its Common Stock of continuing uncertainty as to
exercise or non-exercise of the then existing redemption rights by Roche
and as to the course of action that would be taken with respect to future
relations with Roche;
(xiii) The fact that the Proposed Transactions would, in general, keep
in place current governance arrangements between Roche and the Company,
which the Genentech Board believes have formed the basis for a mutually
beneficial relationship;
(xiv) The belief that the payment by Roche of 50% of certain of
Genentech's development expenses under the Licensing Agreement will allow
Genentech to take a larger number of promising research projects into
development, increasing the likelihood that Genentech will have more
medically and commercially significant marketed products over the next
several years;
(xv) The fact that the terms of the Licensing Agreement will serve to
mitigate certain potential losses of the Company because, if Roche elects
to exercise its option under the Licensing Agreement at the conclusion of
Phase II trials with respect to a particular product, and should that
product then fail during Phase III trials, the adverse effect on the
Company of such failures would be mitigated because Roche would generally
have been required to pay one half of the development costs with respect to
such product; and
(xvi) The fact that in accordance with the Company's Certificate of
Incorporation and the Existing Governance Agreement, the Proposal could
only be approved by a majority of the holders of Common Stock unaffiliated
with Roche.
See " -- Background of the Proposed Transactions" and " -- Interests of
Certain Persons in the Proposed Transactions."
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In light of the disclosures made at the meeting of the Special Committee on
June 22, 1995 with respect to Mr. Raab's request for a loan guaranty from Roche,
the Special Committee appointed the Independent Committee to, among other
matters, review the Proposed Transactions and report to the Special Committee
with respect thereto. The Independent Committee, based on the investigation
described above under "-- Background of the Proposed Transactions," reported to
the Special Committee, and the Special Committee concluded, that the reasons
that had led the Special Committee and the Genentech Board to recommend the
Proposed Transactions in the first instance continued to be valid. The Special
Committee and the Genentech Board therefore believe the Proposed Transactions to
be the best available alternative for Genentech and its stockholders. In
reaching that conclusion, the Special Committee was assisted by Morgan Stanley,
which rendered the advice described below under "-- Opinions of Financial
Advisors -- Morgan Stanley."
OPINIONS OF FINANCIAL ADVISORS
LEHMAN BROTHERS
As indicated above, the Special Committee engaged Lehman Brothers to act as
its financial advisor in connection with the Proposed Transactions and to render
an opinion with respect to the fairness, from a financial point of view, to the
holders of the Redeemable Common Stock (other than Roche) of the consideration
to be received by such holders and Genentech in connection with the Proposed
Transactions.
In connection with the Genentech Board's and the Special Committee's
consideration of the Proposed Transactions, Lehman Brothers made a presentation
to the joint meeting of the Genentech Board and the Special Committee held on
April 29 and 30, 1995 and provided the Special Committee with its oral opinion,
subsequently confirmed in a written opinion dated April 30, 1995, to the effect
that, as of the date of such opinion, the consideration to be received by the
holders of the Redeemable Common Stock (other than Roche) and Genentech in
connection with the Proposed Transactions was fair, from a financial point of
view, to such holders.
The full text of the written opinion of Lehman Brothers, dated April 30,
1995, which sets forth assumptions made, factors considered and limitations on
the review undertaken by Lehman Brothers, is attached as Annex B to this Proxy
Statement/Prospectus and is incorporated hereby by reference. Genentech's
shareholders are urged to read such opinion carefully in its entirety.
No limitations were imposed by Genentech on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. In rendering its opinion, Lehman Brothers did not express an
opinion as to the actual prices at which shares of Special Common Stock will
trade following consummation of the Proposed Transactions.
The opinion of Lehman Brothers was requested by, and was provided for the
use and benefit of, the Special Committee. The Opinion was not intended to be,
and does not constitute, a recommendation to any holder of Genentech stock as to
how such holder should vote with respect to the Proposal.
In arriving at its opinion, Lehman Brothers reviewed and analyzed: (1) the
Transaction Agreement and all of the Exhibits attached thereto (including,
without limitation, the Merger Agreement), (2) the Certificate of Incorporation
and By-Laws of Genentech, (3) the 1990 Merger Agreement, (4) the then existing
governance arrangements between Genentech and Roche, (5) publicly available
information concerning the Company which Lehman Brothers believed to be relevant
to its inquiry, including, but not limited to, the latest annual report on Form
10-K of Genentech for the year ended December 31, 1994 and the draft of the
latest quarterly report on Form 10-Q of Genentech for the quarter ended March
31, 1995, (6) financial and operating information with respect to the business,
operations and prospects of Genentech furnished to Lehman Brothers by Genentech,
(7) a trading history of Genentech's Redeemable Common Stock from 1991 to the
time of rendering its opinion and a comparison of that trading history with
those of other companies which Lehman Brothers deemed relevant, (8) a comparison
of the historical financial results and present financial condition of Genentech
with those of other companies which Lehman Brothers deemed relevant, (9) the
financial terms of certain other recent transactions which Lehman Brothers
deemed relevant,
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<PAGE> 50
(10) reports of research analysts with respect to Genentech and the potential
effect of the expiration of Roche's option on the price of the Redeemable Common
Stock, (11) valuations of the Redeemable Common Stock using various
methodologies, (12) the financial terms of certain other commercial arrangements
between biotechnology and pharmaceutical companies which Lehman Brothers deemed
relevant, and (13) analyses of potential pro forma effects on Genentech of the
commercial arrangements contemplated by the Licensing Agreement. In addition,
Lehman Brothers held discussions with the management of Genentech concerning its
business, operations, assets, financial condition and prospects and undertook
such other studies, analyses and investigations as Lehman Brothers deemed
appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of the management of
Genentech that they were not aware of any facts that would make such information
inaccurate or misleading. With respect to the financial projections of
Genentech, upon advice of Genentech, Lehman Brothers assumed that such
projections were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of Genentech as to the
future financial performance of Genentech and that Genentech would perform
substantially in accordance with such projections. In arriving at its opinion,
Lehman Brothers did not make or obtain any evaluations or appraisals of the
assets or liabilities of Genentech. Lehman Brothers' opinion was necessarily
based upon market, economic and other conditions as they existed on, and could
be evaluated as of, the date of the opinion.
In connection with its presentation to the Genentech Board and the Special
Committee on April 29, 1995 and in advising the Genentech Board and the Special
Committee of its opinion on April 30, 1995, Lehman Brothers performed certain
financial and comparative analyses, as summarized below. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial and comparative analysis and the application of
those methods to the particular circumstances, and therefore such an opinion is
not readily susceptible to summary description. Furthermore, in arriving at its
opinion and making its presentation to the Genentech Board and the Special
Committee, Lehman Brothers did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portions of such analyses and of the factors considered, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying its opinion. In its analyses, Lehman Brothers
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of Genentech. Any estimates contained in those analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold.
The following sections are summaries of certain analyses performed by
Lehman Brothers and reviewed by Lehman Brothers with the Special Committee and
the Genentech Board.
HISTORICAL STOCK PRICE ANALYSIS
Introduction
As part of its analysis for the Genentech Board and the Special Committee,
Lehman Brothers noted the historical trading prices for the Redeemable Common
Stock and compared those prices to a range (derived as set forth below) of
estimated prices at which the stock could have been expected to trade had the
redemption option applicable to the Redeemable Common Stock not existed (the
"Standalone Values").
The Standalone Values were determined for each of the periods by applying
the average forward price to earnings multiples ("Forward P/E Multiples") for
the companies in the Comparable Universe (as hereinafter defined) to Genentech's
actual earnings per share ("EPS") and to analysts' estimates of Genentech's EPS
as of February in each of the relevant years (except 1995, for which April
estimates were used), as discussed below. The analysis yielded Standalone Values
per share of $14.04-$23.40, $6.92-$11.42, $12.40-$19.10,
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$14.76-$18.72 and $41.86-$44.15 for 1991, 1992, 1993, 1994 and 1995,
respectively, compared to actual trading price ranges for the Redeemable Common
Stock in the first quarter of the corresponding years of $21.00-$28.50,
$26.50-$31.88, $32.25-$39.50, $44.00-$50.88 and $44.50-$51.00, respectively.
Lehman Brothers noted that, as indicated above, the actual trading price
ranges of the Redeemable Common Stock significantly exceeded the estimated
Standalone Values, and concluded that the redemption rights applicable to the
Redeemable Common Stock had therefore maintained Genentech's stock price at a
level substantially higher than that which would have been expected had the
Redeemable Common Stock not been subject to redemption. Lehman Brothers also
expressed the view that the correlation of the historical price performance of
the Redeemable Common Stock to the applicable redemption price under the
Redeemable Common Stock had allowed Genentech to spend considerably more on
research and development than it might have otherwise spent had the price
performance of the Redeemable Common Stock been more closely correlated to
Genentech's earnings results. Hence, Lehman Brothers noted that because
Genentech may have been permitted to spend more on research and development, it
has had the opportunity to develop more products than might have been the case
if the price of the Redeemable Common Stock had not been supported by the
market's assessment of the possibility that Roche might exercise its redemption
option in respect of the Redeemable Common Stock.
Discussion
The Standalone Values were derived by applying historical valuation
benchmarks for a selected group of publicly traded United States biotechnology
companies that Lehman Brothers considered to be appropriate (the "Comparable
Universe") to Genentech's actual results, and to analysts' estimates of
Genentech's results, for the corresponding period. The Comparable Universe was
comprised of Amgen Inc., Chiron Corporation and Genzyme Corporation. For each of
the periods, Lehman Brothers calculated the Forward P/E Multiple for the
Comparable Universe based on historical stock prices and historical mean
earnings estimates as of February in each of the relevant years (except 1995,
for which April estimates were used) as prepared by Institutional Brokerage
Estimate Systems ("IBES"). The Forward P/E Multiple was then applied to the
historical IBES mean EPS estimate and the actual EPS of Genentech for the
corresponding years to determine the Standalone Values. For purposes of
analysis, Lehman Brothers calculated the Standalone Values using historical data
as of February for 1991, 1992, 1993 and 1994 and data as of April for 1995 and
compared such values to the high and low closing price of the Redeemable Common
Stock for the first quarter of the corresponding year.
Based on the Standalone Values and actual trading ranges noted above,
Lehman Brothers calculated the average percentage difference between the actual
trading price ranges and the Standalone Values for each period. The average
premium of the actual trading price ranges over the Standalone Values was 32.2%,
218.3%, 127.8%, 183.4% and 11.0% for 1991, 1992, 1993, 1994 and 1995,
respectively. Lehman Brothers observed that the actual price at which the
Redeemable Common Stock had traded was above the Standalone Values for each
quarterly period since the Redeemable Common Stock began trading in September
1990 and that the average premium of the actual trading prices over the
Standalone Values for the periods analyzed was 114.5%.
Lehman Brothers further noted that the historical price performance of the
Redeemable Common Stock showed stronger correlation with the redemption prices
applicable from time to time to such stock than with Genentech's actual and
projected earnings results. Lehman Brothers also expressed the view, as
indicated above, that the correlation of the historical price performance of the
Redeemable Common Stock to the applicable redemption price under the Redeemable
Common Stock had allowed Genentech to spend considerably more on research and
development than it might have otherwise spent had the price performance of the
Redeemable Common Stock been more closely correlated to Genentech's earnings
results. Hence, Lehman Brothers noted that because Genentech may have been
permitted to spend more on research and development, it has had the opportunity
to develop more products than might have been the case if the price of the
Redeemable Common Stock had not been supported by the market's perception that
Roche might exercise its redemption option in respect of the Redeemable Common
Stock. See "Market Prices of and Dividends on the Redeemable Common Stock and
the Common Stock" and "The Charter Amendment;
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Description of the Special Common Stock -- Call Rights." Genentech spent 47.4%,
55.8%, 49.2% and 41.8% of revenues, before interest income, on research and
development in 1991, 1992, 1993 and 1994, respectively. The average amount spent
on research and development by Genentech for the years 1991, 1992, 1993 and 1994
was 48.5% of revenues, before interest income, as compared to average research
and development spending by companies in the Comparable Universe of 28.6% of
revenues, before interest income, over the corresponding periods.
STANDALONE FUTURE STOCK PRICE ANALYSIS
Introduction
As part of its analysis for the Genentech Board and the Special Committee,
Lehman Brothers analyzed estimated future trading values of Genentech's stock
assuming that no redemption options were applicable to such stock (the "Future
Standalone Values"). For this purpose, Lehman Brothers assumed that Roche did
not exercise its then existing option to cause the Redeemable Common Stock to be
redeemed, and its analysis did not give effect to the Proposed Transactions.
Lehman Brothers also reviewed reports of research analysts with respect to
Genentech and with respect to the potential effect of the expiration of Roche's
option to cause redemption of the Redeemable Common Stock on the price of
Genentech's publicly traded Common Stock.
The Future Standalone Values were determined by taking the average of two
valuation benchmarks derived from the Comparable Universe as applied to
projections prepared by management of Genentech, excluding the impact of the
Licensing Agreement, for the years 1995 to 1999. See "Certain Projections of
Future Operations and Other Information." As discussed further below, the
valuation benchmarks utilized by Lehman Brothers were the average Forward P/E
Multiple and Comparable P/E to Growth Rate Multiple (as hereinafter defined) for
the Comparable Universe calculated as of April 25, 1995. This analysis resulted
in Future Standalone Values per share of $31.68, $36.52, $41.59, $54.72 and
$71.45 for the years 1995, 1996, 1997, 1998 and 1999, respectively.
The foregoing analysis by Lehman Brothers indicated a Future Standalone
Value as of June 1995 of $31.68 per share. Lehman Brothers compared this with a
range of research analysts' estimates for the Redeemable Common Stock, in the
event that Roche did not exercise its then current option to cause the
Redeemable Common Stock to be redeemed, of $35 to $60 per share, noting that
approximately 60% of the estimates were in the range of $35 to $45 per share.
Lehman Brothers further noted that research analysts' estimates reflected
earnings expectations by such analysts that were generally higher than the
projections prepared by management of Genentech. See "Certain Projections of
Future Operations and Other Information." Based on Lehman Brothers' analysis of,
and conclusions with respect to, Future Standalone Values and research analysts'
estimates, Lehman Brothers indicated to the Genentech Board and the Special
Committee a range of $30 to $40 per share, as of June 1995, as a likely trading
range for the Redeemable Common Stock in the event that Roche did not exercise
its option to cause redemption of the Redeemable Common Stock. Lehman Brothers
noted that this range was significantly lower than the then current trading
price for the Redeemable Common Stock in the absence of the Proposed
Transactions.
Lehman Brothers noted, as discussed further below, that the Future
Standalone Values were significantly lower through 1998 than the values derived
by taking into consideration the Proposed Transactions. See " -- Special Common
Stock Future Stock Price Analysis."
Discussion
In developing the Future Standalone Values, Lehman Brothers derived
estimated trading values based on Forward P/E Multiples and Comparable P/E to
Growth Rate Multiples for the Comparable Universe as applied to projections
prepared by management of Genentech, excluding the impact of the Licensing
Agreement. See "Certain Projections of Future Operations and Other Information."
The average Forward P/E Multiple for the Comparable Universe was 32.7 times 1995
estimated EPS and was based on the closing stock prices of the companies
constituting the Comparable Universe and on EPS estimates for 1995 as provided
by the First Call Corporation as of April 25, 1995. The Comparable P/E to Growth
Rate Multiple was 0.75 times the long term growth rate, as calculated by taking
the ratio of the Forward P/E Multiple to the
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estimated three-year EPS growth rate as provided by the First Call Corporation
(the "Comparable P/E to Growth Rate Multiple"). Lehman Brothers noted that the
Comparable P/E to Growth Rate Multiple equates a company's Forward P/E Multiple
to its long term growth rate and is a commonly used valuation methodology for
growth companies.
SPECIAL COMMON STOCK FUTURE STOCK PRICE ANALYSIS
Introduction
As part of its analysis for the Genentech Board and the Special Committee,
Lehman Brothers developed a model to calculate an estimated trading value for
the Special Common Stock taking into consideration the potential effects of the
Call Rights and the Put Rights on the value of such stock. The model calculated
an estimated trading value for the Special Common Stock based on the historical
relationship of the Redeemable Common Stock market values to the redemption
prices applicable from time to time to the Redeemable Common Stock and compared
those values to the potential floor value of the Special Common Stock taking
into account the Put Rights as of the end of June for each of the years from
1995 to 1999. See "Market Prices of and Dividends on the Redeemable Common Stock
and the Common Stock"; "The Charter Amendment; Description of the Special Common
Stock -- Call Rights" and "-- Put Rights."
In calculating an estimated trading price for the Special Common Stock
based on the redemption prices applicable to the Special Common Stock under the
Call Rights, Lehman Brothers applied certain formulas derived from an analysis
of the historical trading relationship of the Redeemable Common Stock to the
redemption prices applicable from time to time to the Redeemable Common Stock,
as discussed below. This analysis resulted in estimated trading values per share
for the Special Common Stock of $39.36, $45.75, $58.53 and $67.73 for 1995,
1996, 1997 and 1998, respectively.
Lehman Brothers then calculated the potential floor value of the Special
Common Stock taking into account the Put Rights by discounting the $60 per share
redemption price applicable under the Put Rights to the relevant period by
applying a discount rate of 7%, which Lehman Brothers considered appropriate
given the term of the Put Rights and the credit quality of Roche Holding, which
has guaranteed Roche's obligations in respect of the Put Rights. See "Guaranty
of Roche Holding." This calculation resulted in present values for the Put
Rights of $45.77, $48.98, $52.41, $56.07 and $60.00 for 1995, 1996, 1997, 1998
and 1999, respectively.
Lehman Brothers observed that the Special Common Stock would be expected to
trade in a range bounded by the potential floor value of the Special Common
Stock taking into account the Put Rights and a discount to the then prevailing
redemption price applicable to the Special Common Stock under the Call Rights,
with the potential floor value of the Special Common Stock taking into account
the Put Rights representing a lower bound for the estimated trading price of the
Special Common Stock. Lehman Brothers also noted that the potential floor value
of the Special Common Stock taking into account the Put Rights exceeded the
Future Standalone Values from 1995 through the third quarter of 1998 and that,
based on the historical volatility of biotechnology stocks as well as the
general risks associated with the business of biotechnology companies, the Put
Rights represented significant "downside protection" to investors. See "Summary
and Special Factors -- Genentech's Reasons for the Proposed Transactions" and
"-- Recommendation of the Board of Directors; Fairness of the Transaction."
Discussion
In calculating estimated trading prices for the Special Common Stock based
on the redemption prices applicable to the Special Common Stock under the Call
Rights, Lehman Brothers analyzed the historical relationship of the trading
prices of the Redeemable Common Stock to the redemption prices applicable from
time to time to the Redeemable Common Stock. Lehman Brothers' analysis was based
on calculations of the historical discount of the trading price of the
Redeemable Common Stock to the near-term redemption price applicable to such
stock and the historical implied internal rate of return ("IRR") of the initial
trading price of the Redeemable Common Stock to the final redemption price
applicable to such stock in June 1995 of $60 per share.
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The historical discount of the trading price of the Redeemable Common Stock
to the near-term redemption price for 1991 to 1994 was calculated by taking the
ratio of the trading price of the Redeemable Common Stock as of the end of June
to the redemption price for the quarter ending June 30 for each of the years.
The discounts were 31.3%, 29.4%, 12.0% and 10.5%, for 1991, 1992, 1993 and 1994,
respectively. Lehman Brothers applied these discounts to the redemption prices
applicable to the Special Common Stock under the Call Rights for the quarters
ended June 30, 1995, 1996, 1997 and 1998 to arrive at estimated values per share
of Special Common Stock of $41.22, $45.89, $61.60 and $68.02 for each of the
years. Lehman Brothers also noted that the supporting effect of the Call Rights
under the Special Common Stock may not be as significant as has been the case
with respect to the redemption right previously applicable to the Redeemable
Common Stock because of the market's possible perception of the reasons for a
determination by Roche not to exercise its rights prior to June 30, 1995, and
the corresponding lack of market conviction that Roche would exercise an
extended option.
The historical IRR from the actual trading price of the Redeemable Common
Stock to the final redemption price of $60 applicable to the Redeemable Common
Stock was calculated from the initial trading price of the Redeemable Common
Stock on September 10, 1990, the first trading day for the Redeemable Common
Stock to the final redemption price applicable to the Redeemable Common Stock of
$60 per share at June 30, 1995. The resulting IRR, 21.6%, was then used to
discount the final redemption price applicable to the Special Common Stock under
the Call Rights of $82 per share to the appropriate period. These calculations
resulted in estimated per share values for the Special Common Stock of $37.50,
$45.61, $55.46 and $67.43 for the quarters ended June 30, 1995, 1996, 1997 and
1998, respectively. Lehman Brothers also noted that a perception by the market
that Roche would cause Genentech to exercise the Call Rights prior to July 1999
might result in a higher market value for the Special Common Stock than those
noted above.
Lehman Brothers then calculated the average of the two sets of values,
which resulted in estimated per share trading values for the Special Common
Stock of $39.36, $45.75, $58.53 and $67.63 for the quarters ending June 30,
1995, 1996, 1997 and 1998, respectively.
INTERNAL RATE OF RETURN ANALYSIS OF THE EXTENSION
Introduction
As part of its analysis for the Genentech Board and the Special Committee,
Lehman Brothers compared the redemption prices applicable to the Special Common
Stock pursuant to the Call Rights to the redemption prices applicable to the
Redeemable Common Stock. The redemption prices were compared by calculating the
compound growth rate of the redemption prices under the Call Rights to the
compound growth rate applicable to the redemption prices under the Redeemable
Common Stock, measured, in each case, from the initial redemption price to the
final redemption price. See "The Charter Amendment; Description of the Special
Common Stock -- Call Rights."
Lehman Brothers noted that this analysis yielded a compound annual growth
rate of 8.1% for the redemption prices under the Call Rights, as compared to a
10.7% compound annual growth rate for the redemption prices under the Redeemable
Common Stock, as discussed below. Lehman Brothers further noted that although
the compound growth rate for the redemption prices under the Call Rights was
lower than for the redemption prices under the Redeemable Common Stock, this
difference reflected, among other factors, the differing growth characteristics
of recent projections prepared by management of Genentech as compared to
projections prepared at the time the 1990 Merger Agreement was entered into, as
well as reductions in overall valuation multiples for biotechnology and
pharmaceutical companies during this period. See "Certain Projections of Future
Operations and Other Information."
Lehman Brothers further noted, as discussed below, that the implied rate of
return to investors of the then current trading price per share for the
Redeemable Common Stock to the final redemption price applicable to the Special
Common Stock under the Call Rights of $82 per share was 13.1%. Lehman Brothers
noted that this rate of return was significantly lower than the historical
implied rate of return of the Redeemable Common Stock as measured by the
internal rate of return from initial trading price of the Redeemable Common
Stock of $23.875 to the final redemption price applicable under the Redeemable
Common Stock of
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$60 per share at June 30, 1995, which was 21.1%. Lehman Brothers noted that the
"downside protection" afforded by the Put Rights is a significant advantage to
Genentech's public stockholders which mitigates any "upside limitations" that
may result from the existence of the Call Rights.
Discussion
Lehman Brothers analyzed the implied rates of return of the redemption
prices applicable pursuant to the Call Rights for the period from July 1, 1995
to June 30, 1999 and compared those implied rates of return to the implied rates
of return of the redemption option applicable to the Redeemable Common Stock.
Lehman Brothers noted that the redemption prices applicable pursuant to the Call
Rights imply a compound annual growth rate in such prices of 8.1%, from $60 per
share at June 30, 1995 to $82 per share at June 30, 1999. Lehman Brothers
compared this growth rate to a compound annual growth rate of 10.7%, derived
from the increase from $38 per share at December 31, 1990 to $60 per share at
June 30, 1995 for the redemption prices applicable to the Redeemable Common
Stock.
Lehman Brothers analyzed the implied returns to the holders of Genentech's
publicly traded common stock in the event that Roche were to cause Genentech to
exercise the Call Rights on June 30, 1996, 1997, 1998 and 1999 based on a
current trading price as of April 25, 1995 of $50.125 per share. Based on the
trading price of $50.125 per share as of April 25, 1995, the annualized internal
rate of return, assuming that Roche caused Genentech to exercise the Call Rights
on June 30, 1996, 1997, 1998 and 1999, would be 29.7%, 18.2%, 14.9% and 13.1%,
respectively.
Lehman Brothers also analyzed the implied returns to the holders of
Genentech's publicly traded common stock in the event that Roche were to cause
Genentech to exercise the Call Rights on June 30, 1996, 1997, 1998 and 1999
based on Standalone Values of $30 to $40 per share, as discussed above. See
"-- Special Common Stock Future Stock Price Analysis." Lehman Brothers noted
that, at a Standalone Value of $40 per share, the implied returns would be
62.5%, 32.3%, 23.9% and 19.7%, if Roche were to cause Genentech to exercise the
Call Rights on June 30, 1996, 1997, 1998 and 1999, respectively. The implied
returns for a Standalone Value of $30 per share would be 116.7%, 52.8%, 36.3%
and 28.6%, respectively, for the same periods.
COMPARABLE TRANSACTION ANALYSIS
Introduction
As part of its presentation to the Genentech Board and the Special
Committee, Lehman Brothers analyzed the implied control valuation for Genentech
based on the final redemption price of $82 per share applicable pursuant to the
Call Rights and compared this value to the implied control valuation for
Genentech based on the final redemption price applicable to the Redeemable
Common Stock of $60 per share and the control valuations for four selected
acquisitions of pharmaceutical companies that Lehman Brothers considered
appropriate (the "Comparable Transactions").
In particular, Lehman Brothers calculated certain median Benchmark
Multiples (as hereinafter defined) for the Comparable Transactions including
total equity transaction value plus net debt as a multiple of latest twelve
months ("LTM") revenues and LTM earnings before interest and taxes ("EBIT"),
which were 2.49 times and 14.2 times, respectively (the "Benchmark Multiples").
In calculating the multiples for Genentech, Lehman Brothers based such multiples
on reported revenues and EBIT (in each case, excluding interest income) of
Genentech. For the period ended December 31, 1994 such LTM revenues were $753
million and such LTM EBIT was $85 million. Lehman Brothers compared the
Benchmark Multiples to similar implied multiples derived for Genentech based on
an acquisition value of $82 per share as of June 1999, (the final redemption
price applicable pursuant to the Call Rights), and projected financial results
prepared by management of Genentech for 1998, as well as an acquisition value of
$60 per share as of June 1995, (the final redemption price applicable pursuant
to the terms of the Redeemable Common Stock) and Genentech's actual 1994
financial results. See "Selected Historical Financial Data" and "Certain
Projections of Future Operations and Other Information." At an $82 per share
valuation as of June 1999, the analysis indicated implied multiples of LTM
revenues and LTM EBIT of 7.00 times and 25.6 times, respectively. At a $60 per
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share valuation as of June 1995, the analysis indicated implied multiples of LTM
revenues and LTM EBIT of 8.71 times and 77.1 times, respectively.
Lehman Brothers noted that the implied valuation multiples for Genentech
assuming acquisition prices of $82 per share as of June 1999 and $60 per share
as of June 1995 compared favorably to the Benchmark Multiples. Lehman Brothers
also noted that the implied valuation multiple for Genentech, based on the
present value of the Put Rights as of June 1995 of approximately $46 per share
compared favorably to the Benchmark Multiples. At a $46 per share valuation as
of June 1995, the analysis indicated implied multiples of LTM revenues and LTM
EBIT of 6.22 times and 55.1 times, respectively.
Discussion
The Comparable Transactions analyzed by Lehman Brothers were: Hoechst AG's
acquisition of Marion Merrell Dow Inc.; Glaxo plc's acquisition of Wellcome plc;
American Home Products Corporation's acquisition of American Cyanamid Company;
and Roche Holding's acquisition of Syntex Corporation. Lehman Brothers
considered these transactions appropriate comparisons based on the respective
acquired companies' strong financial results, research-driven business focus and
limited product breadth. Using publicly available information, Lehman Brothers
compared selected financial data, including total equity transaction value plus
net debt as a multiple of LTM revenues and LTM EBIT for each of the Comparable
Transactions. The average LTM revenue multiple was 2.49 times, and the average
LTM EBIT multiple was 14.2 times.
Lehman Brothers indicated that, based on an acquisition price for Genentech
of $82 per share, the implied transaction value (the acquisition price times the
number of fully diluted shares outstanding of approximately 133.7 million as of
March 31, 1995) plus net debt (based on projected net debt adjusted for option
proceeds) was $8,951.9 million for Genentech in 1999. Based on projected results
prepared by management of Genentech for 1998, Lehman Brothers calculated implied
LTM revenue and LTM EBIT multiples of 7.00 times and 25.6 times, respectively.
See "Certain Projections of Future Operations and Other Information." Based on
an acquisition price of $60 per share, the implied transaction value (the
acquisition price times the number of fully diluted shares outstanding of
approximately 133.7 million as of March 31, 1995) plus net debt (based on net
debt as of December 31, 1994 adjusted for option proceeds) was $6,556.4 million
for Genentech in 1995. Based on actual 1994 results, Lehman Brothers calculated
implied LTM revenue and LTM EBIT multiples of 8.71 times and 77.1 times,
respectively. See "Selected Historical Financial Data."
Lehman Brothers noted, however, that circumstances surrounding each of the
transactions analyzed were specific to each transaction and, because of the
inherent differences between the business, operations and prospects of the
selected acquired companies analyzed, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the analysis. Accordingly, Lehman Brothers also made qualitative judgments
concerning differences between the characteristics of these transactions and the
Proposed Transactions that would affect the acquisition value of Genentech and
such acquired companies.
DISCOUNTED CASH FLOW ANALYSIS
Introduction
As part of its analysis for the Genentech Board and the Special Committee,
Lehman Brothers calculated the present value of the future streams of after-tax
cash flows that Genentech could be expected to produce in the future (the
"Discounted Cash Flow Analysis"). The Discounted Cash Flow Analysis was based on
projections for Genentech prepared by management for the period from 1995
through 1999, which exclude the impact of the Licensing Agreement, and utilized
a range of assumptions for the appropriate discount rate and terminal multiple
to be applied to management's projections, as discussed below. See "Certain
Projections of Future Operations and Other Information." Based on these
assumptions, the analysis yielded a range of values as of June 1995 of $17.59 to
$27.59 per share of Genentech stock.
In connection with its presentation, Lehman Brothers also calculated the
present value of the incremental future streams of after-tax cash flows expected
to result from the Licensing Agreement. Lehman Brothers
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noted that the assumed impact of the Licensing Agreement was to increase
after-tax earnings and cash flow from 1995 through 1999, the net positive effect
resulting primarily from Roche's funding of certain research and development
projects. Lehman Brothers also noted that the assumed effect of the Licensing
Agreement was to decrease after-tax earnings and cash flow after 1999,
reflecting the relatively greater impact on Genentech's results of Roche's
ownership of product rights to develop and market Genentech's products outside
the United States. Lehman Brothers' analysis indicated that, at a discount rate
of approximately 30% and EBIT terminal multiples of 11.0 times to 12.0 times,
the incremental contribution to Genentech's results of the Licensing Agreement
was approximately neutral.
Lehman Brothers noted that the Discounted Cash Flow Analysis performed by
it yielded total values for Genentech that were significantly below the then
trading price of the Redeemable Common Stock. Lehman Brothers also noted,
however, the limitations of the Discounted Cash Flow Analysis, which typically
measures the "intrinsic" value of a business and is not necessarily reflective
of "achievable" values, which may be higher or lower depending on the specific
circumstances.
Discussion
For the purpose of the discounted cash flow analysis, Lehman Brothers used
projections prepared by management of Genentech, which exclude the effect of the
Licensing Agreement, before giving effect to the resulting capital structure of
Genentech. After-tax cash flows were calculated as the after-tax earnings of
Genentech, plus amortization and depreciation, less net changes in non-cash
working capital and capital expenditures. Lehman Brothers calculated terminal
values for Genentech by applying to projected 1999 EBIT of Genentech a range of
multiples from 10.0 times to 14.0 times. See "Certain Projections of Future
Operations and Other Information." These multiples were based on current trading
multiples for comparable companies that Lehman Brothers deemed appropriate and
on Lehman Brothers' experience in mergers and acquisitions. The cash-flow
streams and terminal values were then discounted to present values using a range
of discount rates, which were chosen based on several assumptions regarding
factors such as the inflation rate, interest rates, the inherent business risk
of Genentech and the cost of capital. The discount rates utilized ranged from
25% to 40%. The resulting aggregate net present values were adjusted for net
debt and option proceeds and divided by the fully diluted shares outstanding as
of December 31, 1994. The analysis indicated a range of values as of June 1995
of $17.59 to $27.59 per share of Genentech stock.
In addition, Lehman Brothers analyzed the financial impact of the Licensing
Agreement by calculating the net present value of the incremental cash flows
projected by management to result from the Licensing Agreement. In calculating
the net present value, Lehman Brothers used the same methodologies and
assumptions described above. The analysis indicated a range of aggregate values
of negative ($57.2 million) to $38.3 million as of June 1995. Lehman Brothers'
noted that, at a discount rate of approximately 30% and EBIT terminal multiples
of 11.0 times to 12.0 times, the incremental contribution to Genentech's results
of the Licensing Agreement was approximately neutral.
BLACK-SCHOLES VALUATION OF THE CALL RIGHTS AND PUT RIGHTS
Introduction
As part of its analysis for the Genentech Board and the Special Committee,
Lehman Brothers calculated a range of reference values for the Call Rights and
Put Rights based on the Black-Scholes option pricing model. The Black-Scholes
model is an analytical tool commonly used in the financial industry to value
options based on a number of factors including the volatility of a security's
return, the level of interest rates, the relationship of the underlying stock
price to the "strike price" of the option and the time remaining until the
option expires.
Lehman Brothers applied a range of assumptions to the Black-Scholes model,
as discussed below, to determine a range of reference values for the Call Rights
and the Put Rights. The analysis yielded a range of reference values for the
Call Rights of $2.56 to $17.99 per share. The analysis also yielded a range of
reference values for the Put Right of $7.14 to $12.48 per share.
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Lehman Brothers noted that the Black-Scholes option pricing model is one of
several valuation methodologies currently used in option valuation. Although the
Black-Scholes model is among the most widely accepted methods of valuing
options, it is subject to certain limitations, particularly with regard to the
valuation of options with an exercise period of greater than one year, and is
highly sensitive to the assumptions used, which are subject to varying
interpretations. Lehman Brothers therefore ascribed limited relevance to this
aspect of its overall analysis.
Discussion
Based on the final redemption price applicable pursuant to the Call Rights
of $82 per share, a four-year maturity, a risk-free rate of 7%, and using a
range of volatilities from 25% to 40% and a range of possible spot prices for
the Special Common Stock of $60, $48 and $40, Lehman Brothers estimated a range
of reference values for the Call Rights using the Black-Scholes option valuation
model. The analysis yielded a range of reference values for the Call Rights of
$2.56 to $17.99 per share. Lehman Brothers also calculated the total value of
the Call Rights by multiplying per share option values by 57.225 million, which
represents the number of shares of Redeemable Common Stock owned as of April 25,
1995 by stockholders other than Roche. This analysis yielded a range of
aggregate values for the Call Rights of $146.8 million to $1,029 million.
In addition, Lehman Brothers estimated a range of reference values
attributable to the Put Rights using the Black-Scholes option valuation model.
Assuming the strike price of $60, a risk-free rate of 7%, a four-year maturity,
a spot price of $50.38 and a range of volatilities from 15% to 40%, the analysis
yielded a range of reference values for the Put Rights of $7.14 to $12.48 per
share. Applying the calculated per share values of the Put Rights to the 57.225
million shares of Redeemable Common Stock owned as of April 25, 1995 by
stockholders other than Roche yielded a range of aggregate values for the Put
Rights of $408.5 million to $714.4 million.
ENGAGEMENT OF LEHMAN BROTHERS
Lehman Brothers is an investment banking firm engaged in, among other
things, the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements, and
valuations for corporate, estate and other purposes. The Special Committee
selected Lehman Brothers to act as its financial advisor because of its
expertise, reputation and familiarity with the health care industry in general
and because its investment banking professionals have substantial experience in
matters described above.
Genentech has agreed to pay Lehman Brothers a fee of $500,000, which became
due upon delivery of the opinion rendered at the April 30, 1995 meeting of the
Genentech Board and the Special Committee. Lehman Brothers will also receive a
fee of $2.5 million upon consummation of the Merger.
Pursuant to an engagement letter entered into in connection with the 1990
Merger (which letter remains in effect), Lehman Brothers will be entitled to an
additional fee of $3 million if, following Roche's exercise of its rights,
Genentech effects the redemption of the Special Common Stock pursuant to the
Call Rights.
In connection with the Proposed Transactions, Genentech has also agreed to
reimburse Lehman Brothers for reasonable expenses and to indemnify Lehman
Brothers for certain liabilities. Lehman Brothers has provided investment
banking services to Genentech in the past, including, among other things, acting
as an advisor to Genentech in connection with the 1990 Merger. In the ordinary
course of its business, Lehman Brothers actively trades in the Common Stock and
the debt and equity securities of Roche for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short position
in such securities.
MORGAN STANLEY
The Independent Committee engaged Morgan Stanley to render financial
advisory services and an opinion as to the fairness from a financial point of
view to the holders of the Common Stock (other than
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Roche and its affiliates) of the consideration to be received by Genentech and
by such holders in connection with the Proposed Transactions.
In connection with the Special Committee's and the Independent Committee's
consideration of the Proposed Transactions, Morgan Stanley made a presentation
to the Independent Committee on July 6, 1995 and to the joint meeting of the
Genentech Board, the Special Committee and the Independent Committee on July 7,
1995 and rendered an oral opinion to the Special Committee and the Independent
Committee, subsequently confirmed in a written opinion dated July 7, 1995, to
the effect that, as of the date of such opinion, the consideration to be
received by the holders of shares of Common Stock (other than Roche and its
affiliates) and Genentech in connection with the Proposed Transactions was fair
from a financial point of view to such holders.
THE FULL TEXT OF MORGAN STANLEY'S OPINION, DATED JULY 7, 1995, WHICH SETS
FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND MATTERS
CONSIDERED, IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. GENENTECH'S STOCKHOLDERS ARE URGED TO READ THE
MORGAN STANLEY OPINION IN ITS ENTIRETY. MORGAN STANLEY'S OPINION ADDRESSES ONLY
THE FAIRNESS OF THE CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS
OF COMMON STOCK AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF COMMON
STOCK AS TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE PROPOSED
TRANSACTIONS. THE SUMMARY OF THE OPINION OF MORGAN STANLEY SET FORTH IN THIS
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
In arriving at its opinion, Morgan Stanley: (i) analyzed certain publicly
available financial statements and other information of Genentech; (ii) analyzed
certain internal financial statements and other financial and operating data
concerning Genentech prepared by the management of Genentech; (iii) analyzed
certain financial projections prepared by the management of Genentech; (iv)
discussed the past and current operations and financial condition and the
prospects of Genentech with senior executives of Genentech, and analyzed the pro
forma impact of the commercial arrangements contemplated by the Licensing
Agreement on Genentech's earnings per share; (v) reviewed the reported prices
and trading activity for the Redeemable Common Stock and the Common Stock; (vi)
compared the financial performance of Genentech and the prices and trading
activity of the Redeemable Common Stock and the Common Stock with that of
certain other comparable publicly-traded companies and their securities; (vii)
reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions and other commercial arrangements which
Morgan Stanley deemed relevant; (viii) reviewed the Merger Agreement (together
with all of the exhibits thereto), the 1990 Merger Agreement and the existing
corporate governance arrangements between Genentech and Roche; and (ix)
performed such other analyses and reviewed such other information as Morgan
Stanley deemed appropriate.
In arriving at its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of information reviewed
by it for the purposes of its opinion. With respect to the financial
projections, Morgan Stanley assumed that such projections were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the future financial performance of Genentech. Morgan Stanley did
not make any independent valuation or appraisal of the assets or liabilities of
Genentech, nor was Morgan Stanley furnished with any such appraisals. Morgan
Stanley's opinion was necessarily based upon economic, market and other
conditions as in effect on, and the information made available to Morgan Stanley
as of, the date of its opinion. In addition, Morgan Stanley did not express any
opinion as to the actual price at which the Special Common Stock will trade
following the consummation of the Proposed Transactions.
In arriving at its opinion, Morgan Stanley was not authorized to solicit,
and did not solicit, interest from any party with respect to the acquisition of
Genentech or any of its assets, nor did Morgan Stanley negotiate with any of the
parties, other than in one meeting with Roche.
The following is a summary of certain analyses performed by Morgan Stanley
and reviewed by Morgan Stanley with the Independent Committee on July 6, 1995
and the Genentech Board, the Special Committee and the Independent Committee on
July 7, 1995.
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UNAFFECTED SHARE PRICE
As part of its analysis Morgan Stanley analyzed the price at which shares
of the Common Stock may trade in the absence of the Proposed Transactions (the
"Unaffected Share Price").
In performing this analysis, Morgan Stanley calculated certain financial
ratios for Genentech, certain companies in the biotechnology industry (such
companies being Amgen Inc., Biogen, Inc., Centocor, Inc., Chiron Corporation,
Genzyme Corporation and Immunex Corporation, collectively, the "Biotech
Companies"), and certain companies in the pharmaceutical industry (such
companies being Abbott Laboratories, American Home Products Corporation, Amgen
Inc., Bristol-Myers Squibb Company, Eli Lilly and Company, Johnson & Johnson,
Merck & Co., Inc., Pfizer Inc., Rhone-Poulenc Rorer, Schering-Plough
Corporation, The Upjohn Company and Warner-Lambert Company, collectively, the
"Pharma Companies"). These ratios included the ratio of the closing price of
shares of such companies on June 30, 1995 to the estimated EPS of such companies
for the calendar year ended December 31, 1996 (the "P/E Ratio"), and the
relationship between the P/E Ratio and five-year estimated compound annual
growth rate of EPS of such companies. The estimates of EPS and five-year
estimated compounded annual growth rate were from IBES as of June 24, 1995.
Morgan Stanley determined that the current Unaffected Share Price was
likely to be in a range from $35 to $45, implying a range of P/E Ratios from 23x
to 30x based on projections of earnings prepared by Genentech's management.
PRESENT VALUE OF FUTURE UNAFFECTED SHARE PRICES
Morgan Stanley also estimated the level at which the Common Stock might
trade in the future in the absence of the Proposed Transactions based on
Genentech's management projections and current market conditions (the "Future
Unaffected Share Prices") which were then discounted to the present. Estimated
Future Unaffected Share Prices were calculated, as of June 30, 1996, 1997, 1998
and 1999, based on P/E Ratios ranging from 14x to 30x and, assuming a mid-point
within the range considered by Morgan Stanley, implied Future Unaffected Shares
Prices of $41.00, $46.00, $52.50 and $67.50, as of June 30, 1996, 1997, 1998 and
1999, respectively. These Future Unaffected Share Prices were discounted back to
the present based on discount rates ranging from 17% to 25%. Based on, among
other things, these calculations and certain assumptions regarding P/E Ratios
and discount rates, Morgan Stanley determined that the present value of Future
Unaffected Share Prices ranged from $32 to $38 per share.
PREMIUM TO UNAFFECTED SHARE PRICE
Morgan Stanley analyzed the premia over the unaffected market prices paid
in selected precedent transactions in the biotechnology and pharmaceutical
industries and observed that such premia ranged from 14% to 101%. Morgan Stanley
also noted that the premia paid in transactions by acquirors who were also
controlling shareholders were expected to be generally lower than the premia
paid in transactions with non-controlling shareholders. For illustrative
purposes, Morgan Stanley indicated that a premium of 30% to 60% over $40 per
share, the midpoint of the range of Unaffected Share Prices, implied values of
$52 to $64 per share of Common Stock.
DISCOUNTED CASH FLOW ANALYSIS
Morgan Stanley calculated the present value of the future streams of
after-tax cash flows implied by projections prepared by Genentech's management
for the period from 1995 through 1999, excluding the impact of the Licensing
Agreement. After-tax cash flows were calculated as the after-tax earnings of
Genentech, plus amortization and depreciation, less net changes in non-cash
working capital and capital expenditures. Morgan Stanley calculated terminal
values for Genentech by applying a range of multiples from 18.0x to 30.0x to
projected earnings in 2000 of Genentech. The cash-flow streams and terminal
values were then discounted to present values using a range of discount rates
from 15% to 23%. Morgan Stanley noted that the per share discounted cash flow
for the Common Stock implied by discount rates ranging from 15% to 19% and
terminal multiples of 20.0x to 25.0x ranged from $41 to $56 per share.
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THEORETICAL VALUATION OF OPTIONS PACKAGE
Morgan Stanley analyzed the option components of the Special Common Stock
to determine the theoretical value of the options package received by Genentech
stockholders (other than Roche) pursuant to the Merger. In performing this
analysis, Morgan Stanley calculated the present value of the Put Rights on July
1, 1995, assuming the exercise of the Put Rights at a price of $60 per share on
July 1, 1999, to be $46.97 based on a discount rate of 6.31%, the rate
applicable to 4-year AA rated bonds as of June 30, 1995 (the "Assumed Discount
Rate"). Morgan Stanley then calculated the value of the Call Rights by
calculating the value of a call for a share of Common Stock struck at the Put
Price and subtracting from such value the value of a call for a share of Common
Stock struck at $82 per share (the "Final Call Price"). The calculation was
based on the Black-Scholes model and assumed a price per share of $35 to $45 and
volatility of 30% to 50%. Morgan Stanley noted that the value of the options
package ranged from $47.00 to $51.50 per share.
ANALYSIS OF SPECIAL COMMON STOCK FUTURE STOCK PRICE
As part of its analysis for the Special Committee and the Independent
Committee, Morgan Stanley estimated the level at which the Special Common Stock
might trade in the future taking into consideration the potential effects of the
Call Rights and the Put Rights on the value of such stock ("Future Share
Prices").
Historical Stock Price Analysis
Morgan Stanley compared the performance of the Redeemable Common Stock to
the S&P 400 Index (the "S&P 400 Index"), an index consisting of the Pharma
Companies (the "Pharma Index") and an index consisting of the Biotech Companies
(the "Biotech Index"), from January 1, 1990 to June 30, 1995. Morgan Stanley
noted that over this period Genentech outperformed the S&P 400 Index and the
Pharma Index and underperformed the Biotech Index. Morgan Stanley also noted
that over this period the Genentech stock price was less volatile and traded in
a narrower range than the Biotech Index.
Analysis of Historical Discount to Near-Term Call Price
As part of its analysis of the Future Share Price, Morgan Stanley
calculated the percentage discount of the actual price per share of the
Redeemable Common Stock to the near-term redemption prices applicable from time
to time to the Redeemable Common Stock from January 1, 1991 to June 30, 1995.
The discounts were 31.3%, 29.4%, 12.0%, 10.5% and 18.5% at June 30, 1991, 1992,
1993, 1994 and 1995, respectively. Morgan Stanley applied these discounts to the
redemption prices applicable to the Special Common Stock under the Call Rights
for the quarters ended from June 30, 1995 to June 30, 1999 to arrive at implied
Future Share Prices of $42.11, $45.86, $61.60, $68.05 and $66.80 at July 1, 1995
and June 30, 1996, 1997, 1998 and 1999, respectively. Morgan Stanley also
calculated the present value of the Put Rights by discounting the Put Price to
the relevant period at the Assumed Discount Rate. Morgan Stanley determined that
the present value of the Put Rights as of June 30, 1995 was $46.97.
Analysis of Historical Internal Rate of Return to Call Price
As part of its analysis of the Future Share Price, Morgan Stanley
calculated the IRR implied by the historical relationship of the trading prices
of the Redeemable Common Stock to the end-term redemption price of $60 per share
on June 30, 1995. The resulting IRRs were 21.5%, 23.6%, 16.8% and 21.8% at June
30, 1991, 1992, 1993 and 1994, respectively. The average IRR over such period
was 21.6%. Morgan Stanley applied these IRRs to the redemption prices applicable
to the Special Common Stock under the Call Rights for the quarters ended from
June 30, 1995 to June 30, 1999 to arrive at implied Future Share Prices of
$37.58, $43.49, $60.13 and $67.31 at July 1, 1995 and June 30, 1996, 1997 and
1998, respectively. Morgan Stanley also applied the average IRR to the
redemption prices applicable to the Special Common Stock under the Call Rights
for the quarters ended from June 30, 1995 to June 30, 1999 to arrive at implied
Future Share Prices of $37.45, $45.56, $55.42 and $67.41 at July 1, 1995 and
June 30, 1996, 1997 and 1998, respectively.
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Comparison of Historical Share Prices to Implied P/E Ratios
As part of its analysis of the Future Share Price, Morgan Stanley
calculated implied Future Share Prices for the Common Stock, in the absence of
the Proposed Transactions, at June 30, 1995, 1996, 1997, 1998 and 1999 based on
P/E Ratios ranging from between 26x and 28x in 1995 to between 18x and 20x in
1999, and based on Genentech's management projections of EPS as of June 30 for
such years, excluding the impact of the Licensing Agreement, to arrive at
midpoint implied Future Share Prices at such periods of $40.50, $41.00, $46.00,
$52.08 and $67.45, respectively.
Morgan Stanley repeated its analysis assuming the Licensing Agreement were
in effect to arrive at midpoint implied Future Share Prices of $56.70, $54.75,
$53.59, $53.97 and $64.22 at July 1, 1995 and June 30, 1997, 1998 and 1999,
respectively.
Morgan Stanley observed that, based on this analysis, the Common Stock
would generally be expected to trade in a range bounded by the present value of
the Put Rights and the redemption prices applicable from time to time to the
Common Stock. Morgan Stanley also noted that the present value of the Put Rights
exceeded the implied Future Share Prices from June 30, 1995 through the first
quarter of 1997 and that, based on the historical volatility of biotechnology
stocks as well as the general risks associated with the business of
biotechnology companies and general market risks, the Put Rights represented
significant "downside protection" to investors.
ANALYSIS OF INTERNAL RATE OF RETURN OF THE PUT RIGHTS AND THE CALL RIGHTS
As part of its analysis for the Special Committee and the Independent
Committee, Morgan Stanley calculated the IRRs implied by the Redeemable Common
Stock closing price of $48.625 on June 30, 1995, assuming the exercise of the
Put Rights at the Put Price on July 1, 1999 and the exercise of the Call Rights
at the Final Call Price on June 30, 1999. Morgan Stanley noted that the
redemption prices applicable pursuant to the Call Rights imply a compound annual
growth rate in such prices of 7.6%, and observed, therefore, that the IRR is
higher if the Call Rights are exercised sooner. Based on these assumptions,
Morgan Stanley noted that the Final Call Price implied an IRR of 14.0% and the
Put Price implied an IRR of 5.4%.
SENSITIVITY ANALYSIS OF PREMIUMS AND MULTIPLES IMPLIED BY PROPOSED TRANSACTION
As part of its analysis for the Special Committee and the Independent
Committee, Morgan Stanley also calculated certain premia and multiples implied
by the Put Rights and the Call Rights as discussed below.
Analysis of Premium of Present Value of Put Rights and Call Rights to June 30,
1995 Share Price
In performing this analysis, Morgan Stanley calculated the present value as
of June 30, 1995 of the Put Price and the Final Call Price, assuming exercise of
the Put Rights on July 1, 1999 and exercise of the Call Rights on June 30, 1999,
and calculated the premium represented by such values over the Unaffected Share
Price. Morgan Stanley noted that the present value of the Put Price on June 30,
1995 was $46.97 at the Assumed Discount Rate which represented a premium of 4%
to 34% over the Unaffected Share Price range of $35 to $45. Morgan Stanley noted
that the present value of the Final Call Price on July 1, 1995 was $45.76 to
$50.29 at discount rates of 17% and 13%, respectively, which represented a
discount of 3% to a premium of 44% over the Unaffected Share Price range of $35
to $45 per share.
Analysis of Call Price Premium to Unaffected Share Price
Morgan Stanley calculated the premium to the estimated implied Future Share
Prices implied by the near-term call price under the Call Rights as in effect
from time to time and ranges of estimated implied Future Share Prices of between
$39 and $42 for 1995, between $39.36 and $42.64 for 1996, between $44 and $48
for 1997, between $49.60 and $54.56 for 1998 and between $63.90 and $71.00 for
1999. Morgan Stanley noted that the median of the premium to implied Future
Share Price of the near-term call price was 59.1% for the lower set of implied
Future Share Prices and 45.8% for the higher set of implied Future Share Prices.
Call Price Implied Multiple Analysis
Morgan Stanley analyzed the P/E Ratios implied by the call prices in effect
as of July 1, 1995 and June 30, 1996, 1997, 1998 and 1999. Based on projections
of EPS prepared by Genentech's management for 1996,
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1997, 1998, 1999 and 2000, Morgan Stanley calculated implied P/E Ratios of
40.8x, 39.6x, 35.0x, 30.6x and 23.1x as of July 1, 1995 and June 30, 1996, 1997,
1998 and 1999, respectively.
LICENSING AGREEMENT
In connection with its presentation, Morgan Stanley also calculated the
present value of the incremental future streams of after-tax cash flows expected
to result from the Licensing Agreement. Morgan Stanley noted that at discount
rates ranging from 15% to 19% and terminal multiples ranging from 20.0x to
25.0x, the implied incremental discounted cash flow value per share of Common
Stock ranged from negative $(0.81) to negative $(1.50). Morgan Stanley noted
that at discount rates ranging from 15% to 19% and terminal multiples ranging
from 20.0x to 25.0x, assuming an annual improvement in international revenues of
between 10% to 20%, the incremental contribution of the Licensing Agreement to
Genentech's results ranged from negative $(0.27) to negative $(1.20).
GENERAL
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Morgan
Stanley believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion. In addition,
Morgan Stanley may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be Morgan Stanley's
view of the actual value of Genentech.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Genentech. The analyses
performed by Morgan Stanley are not necessarily indicative of actual values,
which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as a part of Morgan Stanley's
analysis of the fairness of the consideration to be received by the holders of
shares of Common Stock (other than Roche and its affiliates) and Genentech and
were provided to the Special Committee and the Independent Committee in
connection with the delivery of Morgan Stanley's July 7, 1995 opinion. The
analyses do not purport to be appraisals or to reflect the prices at which
Genentech might actually be sold. Because such estimates are inherently subject
to uncertainty, none of Genentech, Morgan Stanley or any other person assumes
responsibility for their accuracy. Consequently, the Morgan Stanley analyses
described above should not be viewed as determinative of the Special
Committee's, the Independent Committee's or Genentech management's opinion with
respect to the value of Genentech or of whether the Special Committee, the
Independent Committee or Genentech management would have been willing to agree
to different consideration.
ENGAGEMENT OF MORGAN STANLEY
The Independent Committee retained Morgan Stanley based upon its experience
and expertise. Morgan Stanley is an internationally recognized investment
banking and advisory firm. Morgan Stanley, as part of its investment banking
business, is continuously engaged in the valuation of businesses and securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In the
course of its trading activities, Morgan Stanley may, from time to time, have a
long or short position in, and buy and sell securities of, Roche and Genentech.
The consideration to be received by the stockholders of Genentech and
Genentech pursuant to the Proposed Transactions was determined through
negotiations between Genentech and Roche. Morgan Stanley participated in only
one negotiating meeting with Roche.
Genentech has agreed to pay Morgan Stanley a fee of $1.4 million which
became due upon delivery of its opinion rendered on July 7, 1995. Morgan Stanley
will also receive fees of (i) $1.4 million upon consummation of the Merger and
(ii) $2.0 million upon the acquisition by Genentech, at Roche's direction, of
the Special Common Stock pursuant to Roche's exercise of the Call Rights.
Genentech has also agreed to reimburse Morgan Stanley for expenses as incurred
and to indemnify and hold harmless Morgan Stanley and
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certain related parties to the full extent lawful from and against certain
liabilities and expenses, including certain liabilities under the federal
securities laws, in connection with its engagement.
INTERESTS OF CERTAIN PERSONS IN THE PROPOSED TRANSACTIONS
DIRECTORS AND OFFICERS. There will be no change in Genentech's directors
or officers as a result of the Proposed Transactions.
The Amended Governance Agreement will provide (as the Existing Governance
Agreement currently provides) that in any election of directors, Roche will
continue to vote its shares of Common Stock and shares of Special Common Stock
for all nominees in proportion to the votes cast by the other holders of Special
Common Stock (excluding, at Roche's option, any votes cast by any person or
group that beneficially owns at least 12% of the Equity Securities (as
hereinafter defined) not beneficially owned by Roche Holding); provided that
Roche may cast all of its votes in favor of any nominee designated by it
pursuant to the Amended Governance Agreement. See "The Amended Governance
Agreement -- Certain Agreements of Roche as to Voting."
The Existing Governance Agreement, as modified by the Merger Agreement,
provides that, on and after the Termination Date, the Genentech Board will
include two nominees designated by Roche and two officers of Genentech nominated
by the nominating or proxy committee of the Genentech Board. The remainder of
the Genentech Board at such time is to be comprised of Independent Directors.
The Existing Governance Agreement, as modified by the Merger Agreement,
provides, in general, that after the Termination Date, Roche will be entitled to
designate, in addition to its two nominees described above, a portion of the
total number of Independent Directors equal to Roche's proportional voting
interest in Genentech's Equity Securities and that the Company will, to the
extent necessary, increase the size of the Genentech Board and cause the Board
to fill vacancies created by any such increase to achieve the called-for result.
See "The Amended Governance Agreement -- Board of Directors" and "The Merger
Agreement -- Additional Covenants and Agreements -- Continued Applicability of
the Existing Governance Agreement."
If the Proposal is approved and the Merger is consummated, the parties will
enter into the Amended Governance Agreement, under which Roche would continue to
have the right to designate two directors of Genentech, and its right to
nominate Independent Directors, on the same terms as are currently applicable
under the Existing Governance Agreement, as modified by the Merger Agreement, on
and after the Termination Date, would be postponed until the expiration of the
Put Period and payment of the Put Price to the Depositary. Thus, following the
end of the period during which the Put Rights may be exercised, or if the
Proposal is not approved by stockholders (or for any other reason the Merger is
not consummated), Roche, based on its current holdings of Genentech stock, will
have the right to designate more than a majority of the members of the Genentech
Board, with all but two of such Roche designees being Independent Directors. See
"The Amended Governance Agreement -- Board of Directors."
OWNERSHIP OF COMMON STOCK BY OFFICERS AND DIRECTORS. For information as to
Common Stock and securities exercisable for or convertible into Common Stock
owned by officers and directors of Genentech, see "Security Ownership of
Management."
TREATMENT OF EMPLOYEE STOCK OPTIONS. The Merger Agreement provides that
the Company will take all action necessary to ensure that, at the Effective
Time, each outstanding Option issued pursuant to the Option Plans (whether or
not vested or exercisable) will, without any action by the holder thereof,
constitute an option to acquire, on the same terms and conditions as were
applicable under such Option immediately prior to the Effective Time, that
number of shares of Special Common Stock equal to the number of shares of Common
Stock subject to such Option immediately prior to the Effective Time, at the
price or prices per share in effect pursuant to the terms of such Option
immediately prior to the Effective Time. Holders of Options include officers and
directors of the Company who were involved in the negotiation of the Proposed
Transactions. To the extent that the Proposed Transactions would have a positive
effect upon the trading price of the shares underlying such Options or would, as
a result of the Put Rights, place a "floor" on the value of such underlying
shares, such Options, as is the case with the underlying shares held by
stockholders of the Company, would receive those same benefits.
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SOURCE OF FUNDS; EXPENSES
Until such time, if any, as either the Call Rights or the Put Rights are
exercised, Genentech will not be obligated to pay any funds in connection with
the exercise of such Rights. Based on the 61,868,803 shares of Common Stock
outstanding and issuable pursuant to securities outstanding on the Record Date
and held by persons other than Roche and its affiliates, exercise of the Call
Rights during the quarter ending June 30, 1999 would require the payment of
approximately $5.1 billion, and, if the Call Rights were not exercised, complete
exercise by Genentech's stockholders of the Put Rights would require the payment
of approximately $3.7 billion.
Under the Amended Governance Agreement, Roche will, if the Call Rights are
exercised, pay to a depositary sufficient funds to satisfy the Company's
obligations in respect of the Call Rights. See "The Amended Governance
Agreement -- Redemption of Special Common Stock."
The Company's obligation to pay the Put Price to stockholders who properly
exercise their Put Rights will be conditioned upon Genentech's having received
from Roche, or an affiliate of Roche, the funds required to be contributed to
the Company by Roche under the Amended Governance Agreement. See "The Charter
Amendment; Description of the Special Common Stock -- Put Rights;" "-- Condition
to the Company's Obligations;" "The Amended Governance Agreement -- Put Rights
with Respect to the Special Common Stock;" "-- Capital Contribution and
Assumption of Put Obligations by Roche" and "Certain Information Concerning
Roche and Roche Holding." Under the Amended Governance Agreement, Roche has
agreed to either (i) contribute to Genentech the funds required to satisfy the
Put Rights and certain other liabilities of the Company or (ii) elect to
purchase directly from Genentech's stockholders the shares of Special Common
Stock which such stockholders elect to have purchased pursuant to their exercise
of the Put Rights. If Roche makes the contribution referred to in clause (i) of
the preceding sentence, Genentech will issue to Roche (or an affiliate of Roche)
a number of shares of Common Stock equal to the number of shares of Special
Common Stock redeemed by Genentech pursuant to exercises of the Put Rights. See
"The Amended Governance Agreement -- Capital Contribution and Assumption of Put
Obligations by Roche" and "Certain Information Concerning Roche and Roche
Holding." The obligations of Roche referred to in the second preceding sentence
are guaranteed by Roche Holding. See "Guaranty of Roche Holding." Amended
Article Third provides that Genentech will take (and will have no authority not
to take) all necessary action to enforce, and to cause the performance of,
Roche's and Roche Holding's obligations with respect to payment of the Put Price
under the Amended Governance Agreement and the Guaranty and to ensure that Roche
and Roche Holding otherwise comply with their respective obligations described
under "The Amended Governance Agreement -- Capital Contribution and Assumption
of Put Obligations by Roche" and under the Guaranty. See "Guaranty of Roche
Holding." Genentech has appointed the Agent to enforce the respective
obligations of Roche and Roche Holding described under "The Amended Governance
Agreement -- Capital Contribution and Assumption of Put Obligations by Roche"
and under the Guaranty in the event of the occurrence of an Insolvency Event.
See "The Amended Governance Agreement -- The Agency Agreement."
Genentech expects to incur certain near-term expenses in connection with
the negotiation of the Proposed Transactions, the preparation of this Proxy
Statement/Prospectus and the payment of applicable filing fees. Such expenses
are estimated to be $5,000,000 (legal), $5,800,000 (financial advisors),
$500,000 (accounting), $500,000 (printing), $15,000 (solicitation), $1,000,000
(filing) and up to $3,500,000 (settlement of Stockholder Litigation). At such
time, if any, as the Call Rights and Put Rights are exercised, the Company is
likely to incur additional expenses related to printing costs and filing fees,
and possibly, legal and accounting expenses. In addition to the fees of the
Independent Committee's and the Special Committee's financial advisors set forth
above, if Genentech effects the redemption of the Special Common Stock pursuant
to Roche's exercise of the Call Rights, Lehman Brothers will be entitled to an
additional fee of $3,000,000 and Morgan Stanley will be entitled to an
additional fee of $2,000,000. See "The Proposed Transactions -- Opinions of
Financial Advisors -- Lehman Brothers -- Engagement of Lehman Brothers"
and -- "Morgan Stanley -- Engagement of Morgan Stanley."
STOCKHOLDER LITIGATION
The Company, its directors (other than Dr. Levinson), Roche, and former
director Dr. Armin Kessler and former director and Chief Executive Officer, G.
Kirk Raab are named as defendants in several
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shareholder class action and derivative complaints, pending in the Court of
Chancery of the State of Delaware in and for New Castle County consolidated
under the caption In re Genentech, Inc. Shareholders Litigation, Cons. C.A. No.
14265 (the "Action"). Plaintiffs in the Action, who purport to represent the
public shareholders of Genentech and, in the derivative actions, the Company, as
a nominal plaintiff, allege, among other things, that: the terms of the Proposed
Transactions are unfair, and were imposed by Roche for Roche's own benefit; the
prices at which Roche would be able to cause redemption of the Special Common
Stock are unfairly low, and that the trading price of such shares would be
higher if the trading prices were not "capped" by the existence of the Call
Rights option; that the directors of Genentech breached their fiduciary duties
by negotiating and agreeing to the Proposed Transactions; and that the election
of directors at Genentech's regular Annual Meeting on April 13, 1995 was void
because the disclosures in connection with such meeting did not disclose that
the Genentech Board was negotiating the terms of the Proposed Transactions with
Roche. As relief, the complaints in the Action seek, among other things, a
preliminary and permanent injunction against consummation of the Proposed
Transactions, including against any exercise by Roche of its right to cause
redemption and against any exercise by the holders of Special Common Stock of
the Put Rights; an order voiding the Proposed Transactions in the event it is
approved by the vote of the stockholders; and damage in an unspecified amount.
On July 7, 1995, counsel for defendants and counsel for plaintiffs in the
Action entered into an agreement in principle contemplating the settlement of
the Action. Subject to final court approval, the settlement provides that the
prices to be paid by Roche if the Call Rights are exercised will be $0.50 per
share higher in each period than would otherwise be applicable pursuant to the
terms of the Proposed Transactions, resulting in a final price of $82.50. See
"The Charter Amendment; Description of the Special Common Stock -- Call Rights"
for a description of the circumstances under which court approval, if any, would
become final. In addition, the proposed settlement provides that the terms of
the Licensing Agreement shall be amended to provide that the Company (rather
than Roche) shall be responsible for the cost, if incurred, of termination of up
to six Genentech Europe Limited employees. The agreement in principle further
provides for the review by plaintiffs' counsel of draft proxy materials and for
the amendments to the Certificate of Incorporation of the Company to be adopted
pursuant to the Proposed Transactions to include a provision reflecting the
terms of the Governance Agreement relating to the exercise of the Call Rights.
The agreement in principle further recognizes that the Independent Committee was
created and that the Independent Committee engaged in the review and
consideration described under " -- Background of the Proposed Transactions." The
agreement in principle, the terms of which are reflected in a memorandum of
understanding, is further subject to the completion of discovery procedures by
plaintiffs' counsel, and certain other conditions. In the event that a
definitive stipulation of settlement is entered into in connection with the
proposed settlement and such settlement is approved by the court, the terms of
such settlement are contemplated to include the settlement, release and bar of
all claims against the defendants and certain other claims which have been or
could have been asserted relating to the Proposed Transactions, the actions of
Roche and the other defendants relating to the Proposed Transactions, including
without limitation any claims with respect to Mr. Raab's request for personal
financial assistance from Roche Holding and any related discussions,
communication and action, this Proxy Statement/Prospectus or any of the
transactions, disclosures, facts and allegations that are or could be (insofar
as such transactions, disclosures, facts and allegations relate to the Proposed
Transactions) the subject of the Action. In addition, the agreement in principle
provides that the defendants will not oppose any application that plaintiffs'
counsel may make in connection with the proposed settlement for an award from
the court of counsel fees and expenses in an amount not to exceed $3.5 million.
Any such court-awarded counsel fees and expenses will be paid by the Company. If
the settlement is presented to the court for approval, shareholders of the
Company will receive a detailed written notice describing the background of the
settlement, the terms of the settlement and the effect of judicial approval of
the settlement upon the future assertion of claims against the defendants.
There can be no assurance that the settlement submitted for court approval
will be approved by the court. In the event that the settlement is not approved,
the parties would be placed in the same positions they would have held had the
parties not agreed in principle to the proposed settlement of the Action.
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Although plaintiffs' counsel have been given an opportunity to review and
comment upon draft proxy materials pursuant to the agreement in principle,
plaintiffs' counsel do not assume responsibility for the accuracy of this Proxy
Statement/Prospectus.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS AND ACCOUNTING TREATMENT
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Wachtell, Lipton, Rosen & Katz, special counsel to the Company, are of the
opinion that the following are the material United States federal income tax
consequences, under currently applicable law, of the Merger as well as of the
ownership of the Special Common Stock, to the holders of shares of Common Stock
who are United States citizens or resident individuals and who hold such shares
as capital assets and will hold Special Common Stock as a capital asset. It
should be noted that an opinion of counsel is not binding on the Internal
Revenue Service and that no ruling will be requested from the Internal Revenue
Service on these or any other issues. The following discussion may not be
applicable with respect to other categories of stockholders, including corporate
and foreign stockholders and stockholders who acquired their shares of Common
Stock pursuant to the exercise of employee stock options or otherwise as
compensation. Such discussion does not address the tax consequences of the
Merger to holders of Options.
The Merger. Each share of Common Stock held by a stockholder prior to the
Effective Time will be considered to have been exchanged with the Company for
the Special Common Stock (the "Exchange"). Although the issue is not free from
doubt, except as described below, a stockholder whose shares of Common Stock are
exchanged for Special Common Stock by virtue of the Merger (a "Receiving
Stockholder") should not recognize gain or loss with respect to each share so
exchanged, and the Receiving Stockholder's basis for the Special Common Stock
should be equal to such stockholder's basis in the shares of Common Stock
exchanged by virtue of the Merger for Special Common Stock. The holding period
of the Special Common Stock received in the Exchange will include the period
during which the stock surrendered in the Exchange was held by the Receiving
Stockholder.
In connection with the Proposed Transactions, Roche and Roche Holding have
undertaken certain obligations to the Company with respect to the stockholders'
rights to put the Special Common Stock to the Company (the "Put Obligation").
See "The Charter Amendment; Description of the Special Common Stock -- Put
Rights." Counsel believes that the Put Obligation should be treated as an
integral and incidental part of the Special Common Stock and should not cause
the Special Common Stock to be characterized as anything other than stock of the
Company for federal income tax purposes. These issues are not free from doubt,
however. If the Put Obligation were to be considered a property right separate
from the Special Common Stock, it could be treated as additional taxable
consideration received by the Receiving Stockholders in the Exchange.
The Special Common Stock. Distributions, if any, paid with respect to the
Special Common Stock will be taxable dividends to the extent of the Company's
applicable earnings and profits. To the extent that distributions on the Special
Common Stock exceed the Company's applicable earnings and profits, the amount
distributed will be applied to reduce the tax basis in such Special Common Stock
and, to the extent that any such amount distributed exceeds such tax basis, will
constitute long-term or short-term capital gain depending on the holding period
for such Special Common Stock.
Because of the Call Rights and Put Rights to which the Special Common Stock
is subject, the Special Common Stock could be viewed, for federal income tax
purposes, as not "participating in corporate growth to any significant extent,"
in which case it would be treated as preferred stock for purposes of Section 305
of the Code. In that event, a holder of Special Common Stock would be required,
during the period starting at the Effective Time and ending during the Put
Period, to include currently in gross income, to the extent of the Company's
applicable earnings and profits, for each share of Special Common Stock a
portion (determined by analogy to the original issue discount rules for debt
instruments) of the excess of (x) the per share price paid to holders upon
exercise of the Put Rights over (y) the fair market value of such share at
issuance. While there is no authority directly on point and the issue is not
free from doubt, counsel believes that the Special
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Common Stock should not be recharacterized as preferred stock for this purpose
and the Company intends to treat it accordingly.
Gain or loss on the sale of Special Common Stock (including a redemption
pursuant to the Call Rights, or the exercise of Put Rights by the stockholder
with respect to all the Special Common Stock a person holds or is considered to
hold through the application of certain ownership attribution rules) should be
long- or short-term capital gain or loss depending on such stockholder's holding
period. The redemption of the Special Common Stock pursuant to the exercise of
Put Rights by a stockholder of less than all the Special Common Stock such
stockholder holds or is considered to hold through the application of certain
ownership attribution rules will be subject to the stock redemption rules of
Section 302 of the Code. Under those rules, the entire cash proceeds received
will be treated as a distribution taxable as a dividend (to the extent of the
Company's available earnings and profits), unless the redemption is
"substantially disproportionate" with respect to the stockholder or is "not
essentially equivalent to a dividend" with respect to the stockholder.
The Special Common Stock should not be "Section 306 stock" within the
meaning of Section 306(c) of the Code nor should it constitute a "conversion
transaction" within the meaning of Section 1258(c) of the Code. Consequently,
the provisions of Sections 306 and 1258 of the Code, which, generally, would
increase the amount of ordinary income and decrease the amount of capital gain
recognized by a stockholder as a result of holding or disposing of the Special
Common Stock, should not be applicable to the Special Common Stock.
Backup Withholding. Under certain circumstances, a holder of Common Stock
or Special Common Stock may be subject to "backup withholding." This withholding
applies only if the holder, among other things, (i) has failed to furnish the
Company with his or her taxpayer identification number, (ii) has furnished the
Company with an incorrect taxpayer identification number, (iii) has failed
properly to report interest or dividends, or (iv) under certain circumstances
fails to provide the Company or his or her securities broker with a certified
statement, under penalty of perjury, that he or she is not subject to
withholding. The backup withholding rate is 31% of "reportable payments."
Reports will be furnished to the holders of Common Stock and Special Common
Stock and the Internal Revenue Service for each calendar year stating the amount
of reportable payments paid during such year and the amount of tax withheld, if
any, with respect thereto.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR STOCKHOLDER IN LIGHT OF SUCH
HOLDER'S PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. STOCKHOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF
THE MERGER AND THE OWNERSHIP, EXCHANGE, REDEMPTION OR SALE OF THE SPECIAL COMMON
STOCK INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS AND
POSSIBLE FUTURE CHANGES IN FEDERAL TAX LAWS.
ACCOUNTING TREATMENT
There will be no change in the total stockholders' equity of the Company as
a result of the exchange of Common Stock for Special Common Stock. No pro forma
presentation of the effect of transferring the operations of Genentech Canada,
Inc., Genentech Europe Limited, and Genentech Ltd. (Japan) to Roche under the
Licensing Agreement is presented in this Proxy Statement/Prospectus because the
financial impact of such transfers is not material to revenues, costs and
expenses, net income or the balance sheet of Genentech.
In connection with the Proposed Transactions, Genentech expects to incur
expenses totaling approximately $21 million of nonrecurring costs, which
includes investment banking fees and legal fees incurred in connection with the
negotiation and implementation of the Proposed Transactions, legal fees and
other costs incurred in connection with the Stockholder Litigation, and other
miscellaneous expenses. See "The Proposed Transactions -- Source of Funds;
Expenses" and "-- Stockholder Litigation."
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THE MERGER AGREEMENT
GENERAL
THE FOLLOWING DESCRIPTION OF THE MERGER AGREEMENT DOES NOT PURPORT TO BE
COMPLETE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE TEXT OF THE
MERGER AGREEMENT, WHICH IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX
A AND IS INCORPORATED HEREIN BY REFERENCE.
THE MERGER
The Merger Agreement provides that, subject to the approval and adoption of
the Merger Agreement by the stockholders of Genentech and the satisfaction or
waiver of the other conditions to the Merger, Merger Subsidiary will be merged
with and into Genentech in accordance with the Delaware Law, whereupon the
separate existence of Merger Subsidiary will cease, and Genentech will be the
surviving corporation. At the Effective Time, the conversion of Common Stock,
and the conversion of shares of Merger Subsidiary Common Stock, will be effected
as described in "-- Conversion and Exchange of Common Stock and Merger
Subsidiary Common Stock."
EFFECTIVE TIME
Following the adoption of the Merger Agreement and subject to satisfaction
or waiver of the conditions to closing, contained in the Merger Agreement, the
Merger will become effective at such time as the Certificate of Merger is duly
filed with the Secretary of State of Delaware or at such later date and time as
is specified in the Certificate of Merger. It is currently anticipated that the
filing of the Certificate of Merger will be made as soon as practicable after
all conditions contemplated by the Merger Agreement have been satisfied or
waived and that the Effective Time will occur on the date of the Special
Meeting, or as soon thereafter as practicable, assuming the conditions set forth
in the Merger Agreement are fully satisfied or waived. See "-- Conditions to
Consummation of the Merger."
CONVERSION AND EXCHANGE OF COMMON STOCK AND MERGER SUBSIDIARY COMMON STOCK
At the Effective Time:
(a) Each share of Common Stock issued and outstanding immediately
prior to the Effective Time (other than shares of Common Stock held by
Roche or its affiliates (the "Roche Shares"), which shares of Common Stock
will be cancelled, and thereupon the holders thereof will cease to have
rights with respect thereto, and other than shares held in the treasury of
Genentech) will be converted into one share of Special Common Stock.
(b) The common stock, par value $.02 per share, of Merger Subsidiary
issued and outstanding immediately prior to the Effective Time will be
converted into a number of shares of Common Stock equal to, in the
aggregate, the number of Roche Shares.
(c) Each outstanding Option issued pursuant to the Option Plans
(whether or not vested or exercisable) will, without any action by the
holder thereof, constitute an option to acquire, on the same terms and
conditions as were applicable under such Option immediately prior to the
Effective Time, that number of shares of Special Common Stock equal to the
number of shares of Common Stock subject to such Option immediately prior
to the Effective Time, at the price or prices per share in effect pursuant
to the terms of such Option immediately prior to the Effective Time.
EXCHANGE OF STOCK CERTIFICATES
The Merger Agreement provides that, at the Effective Time, Genentech shall
make available to an exchange agent selected by it (the "Exchange Agent"), for
the benefit of holders of Common Stock, a sufficient number of certificates
representing shares of Special Common Stock required to effect the delivery of
the aggregate number of shares of Special Common Stock required to be issued
pursuant to the Merger
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Agreement (the certificates representing such shares of Special Common Stock
being referred to herein as the "Exchange Fund").
Promptly after the Effective Time, the Exchange Agent will mail to each
holder of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of Common Stock (which may be
certificates that formerly represented shares of Redeemable Common Stock which
were automatically converted into Common Stock after June 30, 1995) (the
"Certificates") (i) a form of letter of transmittal (which will specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to the Exchange Agent) and
(ii) instructions for use in effecting the surrender of the Certificates for
exchange. Upon surrender of Certificates to the Exchange Agent, together with
such letter of transmittal duly executed and any other required documents, the
holder of such Certificates will be entitled to receive for the shares of Common
Stock represented by such Certificates a like number of shares of Special Common
Stock and the Certificates so surrendered will be canceled.
Until so surrendered, Certificates will represent solely the right to
receive shares of Special Common Stock. No dividends or other distributions, if
any, that are declared after the Effective Time on the Special Common Stock and
payable after the Effective Time will be paid to persons entitled by reason of
the Merger to receive shares of Special Common Stock until such persons
surrender their Certificates. Upon such surrender, there will be paid to the
person in whose name the shares of Special Common Stock are issued any dividends
or other distributions having a record date after the Effective Time and payable
with respect to such Special Common Stock between the Effective Time and the
time of such surrender. After such surrender, there will be paid to the person
in whose name the shares of Special Common Stock are issued any dividends or
other distributions on such Special Common Stock which have a record date after
the Effective Time and prior to such surrender and a payment date after such
surrender; such payment will be made on such payment date. In no event will the
persons entitled to receive such dividends or other distributions be entitled to
receive interest on such dividends or other distributions. If any certificate
representing Special Common Stock is to be issued in a name other than that in
which the Certificate surrendered in exchange therefor is registered, it will be
a condition of such exchange that the Certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the Exchange Agent any transfer or other
taxes required by reason of the issuance of certificates for such Special Common
Stock in a name other than that of the registered holder of the Certificate
surrendered, or will establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not applicable.
The Exchange Agent will not be entitled to vote or exercise any rights of
ownership with respect to the Special Common Stock held by it from time to time
hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such Special Common Stock for
the account of the persons entitled thereto.
Any portion of the Exchange Fund which remains unclaimed by the former
holders of shares of Common Stock for one year after the Effective Time will be
delivered to Genentech and any former holders of Common Stock will thereafter
have the right to look only to Genentech for payment of their claim for the
Special Common Stock issuable to them.
NO TRANSFERS OF COMMON STOCK WILL BE MADE ON THE STOCK TRANSFER BOOKS OF
GENENTECH AFTER THE CLOSE OF BUSINESS ON THE DAY PRIOR TO THE DATE OF THE
EFFECTIVE TIME.
STOCKHOLDERS OF GENENTECH SHOULD NOT SEND CERTIFICATES REPRESENTING THEIR
SHARES TO GENENTECH OR TO THE EXCHANGE AGENT PRIOR TO RECEIPT OF THE LETTER OF
TRANSMITTAL.
ADDITIONAL COVENANTS AND AGREEMENTS
Pursuant to the Merger Agreement, the Company, Roche and Merger Subsidiary
have also agreed as follows:
Stockholder Meeting. The Company has agreed to cause a meeting of its
stockholders (the "Stockholder Meeting") to be duly called and held as soon as
reasonably practicable for the purpose of voting on the
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approval and adoption of the Merger Agreement and the Merger (including the
amendments to the Certificate of Incorporation of the Company to be effected by
the Merger), and the directors of the Company have agreed, subject to their
fiduciary duties, to recommend approval and adoption of the Merger Agreement and
the Merger (including such amendments) by the Company's stockholders. In
connection with such meeting, the Company has agreed (i) to prepare promptly and
file with the Commission, to use all reasonable efforts to have cleared by the
Commission and to thereafter mail to its stockholders as promptly as practicable
this Proxy Statement/Prospectus, a registration statement and all other
documents which may be required to be filed or mailed in connection with such
meeting and the consummation of the Proposed Transactions, (ii) to, subject to
the fiduciary duties of the Genentech Board, use all reasonable efforts to
obtain the necessary approvals by its stockholders of the Merger Agreement and
(iii) to otherwise comply with all legal requirements applicable to such
meeting.
Registration Statement. Genentech has agreed to prepare promptly and file
with the Commission the Registration Statement with respect to the Special
Common Stock and has agreed to use all reasonable efforts to cause the
Registration Statement to be declared effective as promptly as practicable.
Genentech has also agreed to take any action required to be taken under foreign
or state securities or Blue Sky laws in connection with the issuance of Special
Common Stock in the Merger.
Reasonable Efforts. The Company and Roche have agreed to, and to use all
reasonable efforts to, cause their respective subsidiaries to: (i) promptly make
all filings and seek to obtain all authorizations required under all applicable
laws with respect to the Merger and the Proposed Transactions and to cooperate
with each other with respect thereto; (ii) use all reasonable efforts to
promptly take, or cause to be taken, all other actions and do, or cause to be
done, all other things necessary, proper or appropriate to satisfy the
conditions set forth in the Merger Agreement and to consummate and make
effective the Proposed Transactions as soon as practicable (including seeking to
remove promptly any injunction or other legal barrier that may prevent such
consummation); and (iii) not take any action which might reasonably be expected
to impair the ability of the parties to consummate the Merger at the earliest
possible time (regardless of whether such action would otherwise be permitted or
not prohibited under the Merger Agreement).
Continued Applicability of the Existing Governance Agreement. The Company
and Roche have agreed, from and after July 1, 1995, that the arrangements
between the Company and Roche under the Existing Governance Agreement will
continue to bind the parties and that the time periods therein that expired on
June 30, 1995 would be extended from June 30, 1995 until the Termination Date or
the consummation of the transactions contemplated by the Merger Agreement, at
which time the Amended Governance Agreement takes effect.
Compliance with Securities Laws. The Company and Roche have agreed to
take, and to cause their respective affiliates to take, all actions necessary to
comply with the Securities Act and the Exchange Act and the rules and
regulations promulgated under such statutes in connection with the Merger and
the Proposed Transactions.
Option Plans. Genentech has agreed (i) to take all action necessary to
ensure that Options outstanding immediately prior to the Effective Time will
represent, at and after the Effective Time, Options to acquire shares of Special
Common Stock on the same terms as in effect immediately prior to the Effective
Time pursuant to such Options (and the related Option Plans) with respect to
shares of Common Stock; (ii) to reserve for issuance a sufficient number of
shares of Special Common Stock for delivery upon exercise of the Options; and
(iii) to file a registration statement on Form S-8 (or any successor form) or
another appropriate form, effective as of the Effective Time, with respect to
the Special Common Stock subject to such Options and to use all reasonable
efforts to maintain the effectiveness of such registration statement or
registration statements for so long as such Options remain outstanding.
Additional Agreements. The Company and Roche have agreed to execute each
of the Amended Governance Agreement and the Licensing Agreement in the forms
attached as exhibits to the Merger Agreement, immediately prior to the Effective
Time.
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Voting. Roche has agreed to vote all shares of Common Stock owned by it or
any of its affiliates in favor of the Proposal.
Certain Proceedings. Genentech and Roche have also agreed to cooperate and
use their respective reasonable efforts to vigorously defend against and respond
to any action, suit, proceeding or investigation relating to the Merger
Agreement or to the Proposed Transactions. See "The Proposed Transactions --
Stockholder Litigation."
CONDITIONS TO CONSUMMATION OF THE MERGER
CONDITIONS TO THE OBLIGATIONS OF BOTH PARTIES. The respective obligations
of each of the Company and Roche to consummate the transactions contemplated by
the Merger Agreement are subject to the fulfillment at or prior to the Effective
Time of each of the following conditions, any or all of which may be waived in
whole or in part by the party being benefitted thereby, to the extent permitted
by applicable law:
Stockholder Approval. The Merger Agreement shall have been duly approved
or ratified by the requisite vote of holders of Genentech Common Stock in
accordance with applicable law, the Genentech Certificate of Incorporation and
By-Laws and the Existing Governance Agreement.
Additional Agreements. The Amended Governance Agreement and the Licensing
Agreement shall have been executed in substantially the forms attached as
exhibits to the Merger Agreement, and shall be in full force and effect.
Amendment of Certificate of Incorporation. The amendment of Article Third
of the Genentech Certificate of Incorporation, which, among other things,
creates the Special Common Stock, shall have been effected.
No Injunction. No provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation of the
Merger.
Registration Statement. The Registration Statement shall have been
declared effective and shall be effective at the Effective Time, and no stop
order suspending effectiveness shall have been issued, no action, suit,
proceeding or investigation by the SEC to suspend the effectiveness thereof
shall have been initiated and be continuing, and all necessary approvals under
state securities laws or the Securities Act or Exchange Act relating to the
issuance or trading of the Special Common Stock shall have been received.
Listing of Special Common Shares on NYSE. The Special Common Stock to be
issued pursuant to the Merger Agreement shall have been approved for listing on
the NYSE, subject only to official notice of issuance.
Third Party Consents. All required authorizations, consents or approvals
of any third party, the failure to obtain which would have a material adverse
effect on the Company and its subsidiaries taken as a whole, shall have been
obtained.
CONDITION TO OBLIGATIONS OF ROCHE AND MERGER SUBSIDIARY. The respective
obligations of Roche and Merger Subsidiary to consummate the transactions
contemplated by the Merger Agreement are subject to the fulfillment at or prior
to the Effective Time of the condition, which may be waived in whole or part by
Roche and Merger Subsidiary to the extent permitted by applicable law, that the
Company shall have performed or complied in all material respects with all
agreements and conditions contained in the Merger Agreement required to be
performed or complied with by it prior to or at the time of the Closing.
CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the Company
to consummate the transactions contemplated by the Merger Agreement are subject
to the fulfillment at or prior to the Effective Time of the conditions, which
may be waived in whole or in part by the Company to the extent permitted by
applicable law, that (a) Roche shall have performed or complied in all material
respects with all agreements and conditions contained therein required to be
performed or complied with by it prior to or at the time of the Closing; and (b)
the Guaranty shall have been executed in substantially the form attached as an
exhibit to the Merger Agreement and will be in full force and effect.
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TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement provides that it may be terminated and the Merger may
be abandoned at any time:
(a) prior to the Effective Time, before or after the approval by holders of
Common Stock, by the mutual written consent of Roche and the Company;
(b) by either the Company or Roche, upon written notice to the other
parties thereto, if the stockholder approval described above under
"-- Conditions to Consummation of the Merger -- Conditions to the
Obligations of Both Parties" is not obtained by the Company at the
Special Meeting; or
(c) by either the Company or Roche if the Effective Time has not occurred
on or prior to October 31, 1995.
ADDITIONAL PROVISIONS OF THE MERGER AGREEMENT
The Merger Agreement provides that each party thereto will bear its own
expenses, including the fees and expenses of any attorneys, accountants,
investment bankers, brokers, finders or other intermediaries or other persons
engaged by it, incurred in connection with such agreement and the transactions
contemplated thereby.
The Merger Agreement provides that the rights and obligations of the
parties under the Merger Agreement may not be assigned or delegated without
prior written consent of the other party. The Merger Agreement also provides
that such agreement is not intended to be for the benefit of and will not be
enforceable by any person or entity who or which is not a party thereto.
THE CHARTER AMENDMENT; DESCRIPTION OF THE
SPECIAL COMMON STOCK
Pursuant to the Merger Agreement and effective upon consummation of the
Merger, the Certificate of Incorporation of Genentech will be amended by
operation of the Merger to, among other things, authorize the issuance by
Genentech of Special Common Stock.
Under Article Third of the Certificate of Incorporation ("Article Third"),
as proposed to be amended in connection with the Merger ("Amended Article
Third"), the rights, preferences, privileges and restrictions of the Special
Common Stock and the Common Stock will be identical in all respects, except as
specifically set forth in Article Third. Set forth below is a description of the
terms of the Special Common Stock, including (i) the differences between such
terms and the terms of the Common Stock as set forth in Article Third and (ii)
the differences between the Special Common Stock and the Redeemable Common
Stock. THE FOLLOWING DESCRIPTION OF THE TERMS OF THE SPECIAL COMMON STOCK DOES
NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
TEXT OF AMENDED ARTICLE THIRD, WHICH IS ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AS EXHIBIT C TO ANNEX A AND IS INCORPORATED HEREIN BY
REFERENCE.
As indicated above, Amended Article Third sets forth the terms of and the
rights and preferences with respect to the Special Common Stock. In addition, as
is the case in Article Third, it provides that Preferred Stock (as hereinafter
defined) may be issued from time to time in one or more series. The Genentech
Board is authorized to fix or alter the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, and the liquidation
preferences of any wholly unissued series of Preferred Stock, and the number of
shares constituting any such series and the designation thereof, or any of them;
and to increase or decrease the number of shares of any series subsequent to the
issue of shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status which
they had prior to the adoption of the resolution originally fixing the number of
shares of such series. Were Roche not to own its current position in Genentech,
the authorized but unissued shares of Preferred Stock could be used by the
Genentech Board to make a change in control of Genentech more difficult, or to
discourage an attempt to acquire control of Genentech. For example, the
Genentech Board could, subject to certain limitations, authorize and issue a
class of Preferred Stock which is
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entitled to vote as a class with respect to mergers or other extraordinary
transactions. The Genentech Board has no current intention of using the
authorized and unissued shares of Preferred Stock for any such purposes.
AUTHORIZED SHARES
Article Third authorizes the issuance of 100,000,000 shares of preferred
stock ("Preferred Stock"), 100,000,000 shares of Redeemable Common Stock and
200,000,000 shares of Common Stock. Amended Article Third would not change the
number of authorized shares of capital stock of the Company, but would replace
the Redeemable Common Stock with the Special Common Stock and would amend the
terms thereof as described below.
VOTING RIGHTS
As is the case in Article Third, Amended Article Third provides that the
holders of Special Common Stock (or Redeemable Common Stock, in the case of
Article Third) and Common Stock are, on all matters submitted to a vote of the
stockholders, entitled to one vote per share, voting together as a single class
unless otherwise provided for in the Certificate of Incorporation or required by
applicable law.
DIVIDENDS; RECLASSIFICATIONS; MERGERS
Holders of Special Common Stock and Common Stock are entitled to receive
such dividends and other distributions in cash or property as may be declared
thereon by the Genentech Board from time to time out of assets or funds of
Genentech legally available therefor, and shall share equally on a per share
basis in all such dividends and other distributions. In the case of dividends or
other distributions payable in stock of Genentech other than Preferred Stock,
including distributions pursuant to stock splits or divisions of stock of
Genentech other than Preferred Stock, only shares of Common Stock shall be paid
or distributed with respect to shares of Common Stock and only shares of Special
Common Stock in an amount per share equal to the amount per share paid or
distributed with respect to shares of Common Stock shall be paid or distributed
with respect to Special Common Stock. In the case of any combination or
reclassification of the Special Common Stock or the Common Stock, the Special
Common Stock or the Common Stock, as the case may be, shall also be combined or
reclassified so that the number of shares of Common Stock outstanding
immediately following such combination or reclassification shall bear the same
relationship to the number of shares of Common Stock outstanding immediately
prior to such combination or reclassification as the number of shares of Special
Common Stock outstanding immediately following such combination or
reclassification bears to the number of shares of Special Common Stock
outstanding immediately prior to such combination or reclassification. Amended
Article Third would not effect any substantive amendments to this provision.
In the event Genentech enters into any consolidation, merger, combination
or other transaction in which the Common Stock is exchanged for or changed into
other stock or securities, cash and/or any other property, then in any such case
each share of Special Common Stock shall at the same time be similarly exchanged
or changed into an amount per share, equal to the aggregate amount of stock or
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged;
provided that any such stock may be made redeemable on terms no less favorable
to the holder thereof than the terms upon which the Special Common Stock is
redeemable pursuant to the Call Rights; and provided, further, that any such
stock shall be subject to a right on the part of the holder to put such stock on
terms no less favorable to the holder thereof than the terms upon which the
Special Common Stock is required to be redeemed by the Company pursuant to the
Put Rights. Except for such requirements with respect to the Put Rights, Amended
Article Third would not effect any substantive amendments to this provision.
LIQUIDATION
As is the case in Article Third, Amended Article Third provides that upon
any liquidation, dissolution or winding up of Genentech, no distribution shall
be made (1) to the holders of shares of Common Stock unless, prior thereto, the
holders of shares of Special Common Stock (Redeemable Common Stock in the case
of
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Article Third) shall have received $.01 per share, plus an amount equal to
declared and unpaid dividends and distributions thereon to the date of such
payment; provided that the holders of shares of Special Common Stock shall be
entitled to receive an aggregate amount per share equal to the aggregate amount
to be distributed per share to holders of shares of Common Stock, or (2) to the
holders of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Special Common Stock, except
distributions made ratably on the Special Common Stock and all such other parity
stock in proportion to the total amounts to which the holders of all such shares
are entitled upon such liquidation, dissolution or winding up.
CALL RIGHTS
Subject to the provisions of the Amended Goverance Agreement, as such
agreement may be amended from time to time, the Special Common Stock may, and
where the Amended Goverance Agreement so requires, shall be redeemed, in whole
but not in part, at the option of Genentech, during certain periods, at certain
prices and upon certain terms and conditions. Under the Amended Governance
Agreement (as is the case with the Existing Governance Agreement and as was the
case with the Redeemable Common Stock), Genentech has agreed that it shall,
subject to the provisions of the Amended Governance Agreement, redeem the
Special Common Stock at the request of Roche and not otherwise. See "The Amended
Governance Agreement -- Redemption of Special Common Stock." Amended Article
Third provides that the redemption price for any date of redemption (the
"Redemption Date") during the periods set forth below (and prior to final court
approval of the proposed settlement of the Stockholder Litigation) shall be the
price per share set forth opposite such period in the following table, adjusted
if necessary as described below:
<TABLE>
<CAPTION>
PERIOD PRICE
<S> <C>
October 1, 1995 to December 31, 1995.............................. $62.50
January 1, 1996 to March 31, 1996................................. $63.75
April 1, 1996 to June 30, 1996.................................... $65.00
July 1, 1996 to September 30, 1996................................ $66.25
October 1, 1996 to December 31, 1996.............................. $67.50
January 1, 1997 to March 31, 1997................................. $68.75
April 1, 1997 to June 30, 1997.................................... $70.00
July 1, 1997 to September 30, 1997................................ $71.50
October 1, 1997 to December 31, 1997.............................. $73.00
January 1, 1998 to March 31, 1998................................. $74.50
April 1, 1998 to June 30, 1998.................................... $76.00
July 1, 1998 to September 30, 1998................................ $77.50
October 1, 1998 to December 31, 1998.............................. $79.00
January 1, 1999 to March 31, 1999................................. $80.50
April 1, 1999 to June 30, 1999.................................... $82.00
</TABLE>
Upon final court approval of the settlement of the Stockholder Litigation,
each of the redemption prices applicable pursuant to the Call Rights set forth
above will be increased by $0.50 per share of Special Common Stock, resulting in
a final price of $82.50, as provided by the settlement. If such final court
approval occurs after payment of the applicable redemption price pursuant to the
Call Rights, such $0.50 increase will be promptly thereafter paid by Genentech
to such person to whom payment of the applicable redemption price was previously
made. "Final court approval" of the settlement of the Stockholder Litigation is
defined in the settlement papers to mean that the Delaware Court of Chancery has
entered an order approving the settlement on the terms contemplated by the
parties, and that such order is finally affirmed on appeal or is no longer
subject to appeal. See "The Proposed Transactions -- Stockholder Litigation."
The applicable appeal period under Delaware law is 30 days from the entry of a
final order approving the settlement.
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Notice of any proposed redemption of the Special Common Stock will be given
by mailing a copy of such notice (the "Call Notification") to the holders of
record of the shares of Special Common Stock, not more than 30 or less than 10
days prior to the date fixed for redemption.
The redemption prices for the Redeemable Common Stock from September 1990
through June 30, 1995 were as follows:
<TABLE>
<CAPTION>
PERIOD PRICE
<S> <C>
Prior to December 31, 1990.......................................... $38.00
January 1, to March 31, 1991........................................ $39.00
April 1, 1991 to June 30, 1991...................................... $40.00
July 1, 1991 to September 30, 1991.................................. $41.25
October 1, 1991 to December 31, 1991................................ $42.50
January 1, 1992 to March 31, 1992................................... $43.75
April 1, 1992 to June 30, 1992...................................... $45.00
July 1, 1992 to September 30, 1992.................................. $46.25
October 1, 1992 to December 31, 1992................................ $47.50
January 1, 1993 to March 31, 1993................................... $48.75
April 1, 1993 to June 30, 1993...................................... $50.00
July 1, 1993 to September 30, 1993.................................. $51.25
October 1, 1993 to December 31, 1993................................ $52.50
January 1, 1994 to March 31, 1994................................... $53.75
April 1, 1994 to June 30, 1994...................................... $55.00
July 1, 1994 to September 30, 1994.................................. $56.25
October 1, 1994 to December 31, 1994................................ $57.50
January 1, 1995 to March 31, 1995................................... $58.75
April 1, 1995 to June 30, 1995...................................... $60.00
</TABLE>
PUT RIGHTS
Amended Article Third will provide that, unless the Call Rights have been
previously exercised, during the Put Period, each holder of the Special Common
Stock will have (by delivery of the Put Notice (as hereinafter defined)) the
option pursuant to the Put Rights to require the purchase of all or part of the
Special Common Stock held by such holder at a price of $60 per share, subject to
adjustment (the "Put Price"). Holders of the Redeemable Common Stock did not
(and the holders of Common Stock do not) have any rights comparable to the Put
Rights.
At least 10 and not more than 30 days prior to the beginning of the Put
Period or, in the event of an acceleration of the Put Rights described below, as
soon as practicable following the date of the occurrence of the Insolvency Event
giving rise to such acceleration (but in no event later than the tenth day
following such date), the Company will mail the Put Notification (as hereinafter
defined) to each holder of Special Common Stock. To facilitate the giving of the
Put Notification to the holders of Special Common Stock, the Genentech Board may
fix a record date for determination of holders of Special Common Stock entitled
to be given the Put Notification, which record date may not be more than five
days prior to the date the Put Notification is given pursuant to Amended Article
Third.
ADJUSTMENTS
The redemption prices pursuant to the Call Rights and the Put Rights are
subject to appropriate adjustment in the case of any dividend payable in shares
of Special Common Stock, or any subdivision or combination of the Special Common
Stock and, subject to certain exceptions, in the event of certain other
extraordinary dividends payable in respect of the Special Common Stock.
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CONDITION TO THE COMPANY'S OBLIGATIONS
Notwithstanding any other provision of Amended Article Third, the Company's
obligation to pay the Put Price in respect of shares of Special Common Stock
with respect to which Put Rights have been properly exercised (and to deposit
with the Depositary the requisite funds) will be conditioned upon Genentech's
having received from Roche, or any affiliate of Roche, (i) funds in an amount
equal to the product of the number of shares of Special Common Stock with
respect to which Put Rights have been properly exercised multiplied by the Put
Price plus (ii) such additional funds, if any, sufficient to permit the Company
to redeem the shares of Special Common Stock with respect to which Put Rights
has been properly exercised without violating Section 160 of the Delaware Law,
any bankruptcy or insolvency law or other law or regulation for the protection
of creditors.
ENFORCEMENT OF ROCHE OBLIGATIONS
Amended Article Third provides that Genentech will take (and will have no
corporate power or capacity not to take) such action as may be necessary to
enforce the obligations of Roche and its affiliates to pay the Put Price (and
any other amounts payable pursuant to the provisions of the Amended Governance
Agreement described under "The Amended Governance Agreement -- Capital
Contribution and Assumption of Put Obligations by Roche"), including, without
limitation, all actions required to cause Roche and its affiliates to perform
their respective obligations described under "The Amended Governance
Agreement -- Capital Contribution and Assumption of Put Obligations by Roche"
and under the Guaranty. See "Guaranty of Roche Holding."
PAYMENT
CALL RIGHTS. Under Amended Article Third, on or prior to the date any Call
Notification is first sent or given, the Company will deposit the aggregate
redemption price (together with accrued and unpaid dividends to such date) of
the shares to be redeemed with the Depositary, in trust for payment to the
holders of the Special Common Stock, and deliver irrevocable written
instructions authorizing the Depositary to apply such deposit solely to the
redemption of the shares to be redeemed. The amount of funds required to be
deposited in connection with the Call Rights pursuant to the foregoing sentence
will be reduced by the aggregate redemption price of any shares of Special
Common Stock deposited by Roche in lieu of such funds. In the case of the
exercise of the Call Rights, each holder of shares of Special Common Stock will
be paid the redemption price for such shares within three business days
following the surrender of the certificate or certificates representing such
shares to the Depositary, together with a properly executed letter of
transmittal covering such shares. The Company's written instructions to the
Depositary may provide that any of such deposit remaining unclaimed at the
expiration of two years after the date fixed for redemption pursuant to the Call
Rights by the holder of any of such shares be returned to the Company and revert
to the general funds of the Company, after which return such holder will have no
claim against the Depositary but will have a claim as an unsecured creditor
against the Company for the redemption price together with accrued and unpaid
dividends to such redemption date, without interest. The Call Notification
having been duly given, or the Depositary having been irrevocably authorized by
the Company to give said notice, and the redemption price (together with accrued
and unpaid dividends to such redemption date) of the shares to be redeemed
having been deposited, then all shares of Special Common Stock with respect to
which such deposit will have been made pursuant to exercise of the Call Rights
will forthwith, whether or not the date fixed for such redemption shall have
occurred or the certificates for such shares shall have been surrendered for
cancellation, be deemed no longer to be outstanding for any purpose, and all
rights with respect to such shares will thereupon cease and terminate, except
the right of the holders of such shares to receive, out of such deposit in
trust, on the redemption date the redemption price (together with accrued and
unpaid dividends to such redemption date) to which they are entitled, without
interest.
PUT RIGHTS. Under the terms of Amended Article Third, promptly following
the end of the Put Period, the Company (or under certain circumstances, Roche)
will deposit or cause to be deposited with the Depositary funds in an amount
sufficient to pay the Put Price for all shares of Special Common Stock with
respect to which the Put Rights have been properly exercised. Each holder of
shares of Special Common
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Stock who has properly exercised the Put Rights, and who has surrendered the
shares of Special Common Stock with respect to which the Put Rights have been
exercised, will be paid promptly following the end of the Put Period. In the
event of the exercise of the Put Rights for less than all of the shares of
Special Common Stock represented by a certificate, a new certificate
representing the shares of Common Stock into which the shares of Special Common
Stock not redeemed pursuant to the exercise of the Put Rights have been
converted will be issued to the holder of such shares.
DEFAULT AND ACCELERATION OF PUT RIGHTS
Unless the Call Rights have been previously exercised, if, prior to the
last day of the Put Period, (i) the Company files a voluntary petition in
bankruptcy or seeks reorganization in order to effect a plan or other
arrangement with creditors or any other relief under the Bankruptcy Reform Act,
Title 11 of the United States Code, as amended or recodified from time to time
(the "Bankruptcy Code"), or under any state or federal law granting relief to
debtors, or (ii) any involuntary petition or proceeding pursuant to the
Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors is filed or commenced
against the Company and the same is not dismissed within 30 days, or the Company
files an answer admitting the jurisdiction of the court and the material
allegations of any involuntary petition, or (iii) the Company is adjudicated a
bankrupt, or an order for relief is entered by any court of competent
jurisdiction under the Bankruptcy Code or any other applicable state or federal
law relating to bankruptcy, reorganization or other relief for debtors, then,
and upon the occurrence of such event (an "Insolvency Event"), without notice of
any kind whatsoever, the right of the holders of the Special Common Stock to
exercise the Put Rights will accelerate, and the Put will be exercisable
immediately upon the occurrence of such event and until the end of the Put
Period.
CONVERSION
Each share of Special Common Stock outstanding following the close of
business on the last day of the Put Period (the "Conversion Date") will, unless
previously called for redemption on or prior to such date, automatically be
converted into one share of Common Stock.
Notice of the Conversion Date will be given by mail to the holders of
record of the shares of Special Common Stock, not more than 30 nor less than 10
days prior to the Conversion Date. Upon request of any holder, Genentech will
issue and deliver to the holder as promptly, as practicable after the Conversion
Date, a replacement certificate for the number of Shares issuable upon
conversion of such Special Common Stock. No shares of Special Common Stock will
be issued after the Conversion Date.
Genentech will provide, free from preemptive rights, out of its authorized
but unissued shares of Common Stock, or out of shares of Common Stock held in
its treasury, sufficient shares of Common Stock to provide for the conversion of
the Special Common Stock outstanding on the Conversion Date. Amended Article
Third will provide that all shares of Common Stock which may be issued upon
conversion of Special Common Stock will upon issue be fully paid and
non-assessable by Genentech and free from all taxes, liens and charges with
respect to the issue thereof. Amended Article Third will further provide that,
if on the Conversion Date the Special Common Stock shall be listed on the NYSE
or on any other national securities exchange or the NASDAQ National Market,
Genentech will, if permitted by the rules thereof, seek to list on each such
exchange or the NASDAQ National Market, as the case may be, all shares of Common
Stock issuable upon conversion of the Special Common Stock.
LEGEND
Each certificate representing shares of Special Common Stock will bear the
following legend:
"The shares of Callable Putable Common Stock represented hereby are
subject to (i) redemption at the option of the corporation during the
periods, at the prices and on the terms and conditions specified in the
corporation's certificate of incorporation, (ii) an option on the part of
the holder, under certain circumstances, to require the corporation to
redeem such shares of Callable Putable Common Stock, at the price and on
the terms and conditions specified in the corporation's certificate of
incorporation and
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(iii) conversion into Common Stock, par value $.02, of the corporation on
the date specified, and upon the terms and conditions set forth in, such
certificate of incorporation. After redemption the shares represented by
this certificate shall cease to be outstanding for all purposes and the
holder hereof shall be entitled to receive only the redemption price of
such shares, without interest. After conversion this certificate shall
represent the shares of Common Stock into which the shares of Callable
Putable Common Stock represented hereby shall have been converted, and this
certificate may be exchanged for a new certificate representing such shares
of Common Stock."
CLASS VOTE
In addition to any other affirmative vote required by law or the Genentech
Certificate of Incorporation, any amendment of the provisions of Amended Article
Third will require the affirmative vote of the holders of a majority of the
shares of Common Stock entitled to vote and of the holders of a majority of the
shares of Special Common Stock entitled to vote, each voting separately as a
class. See "The Amended Governance Agreement -- Certain Agreements of Roche as
to Voting."
PUT AND CALL NOT BUSINESS COMBINATIONS
Amended Article Third will provide that the transactions to be consummated
pursuant to the Call Rights or the Put Rights will not be deemed to be Business
Combinations for purposes of Article Eleventh of the Genentech Certificate of
Incorporation. See "Article Eleventh of the Certificate of Incorporation." Thus,
other than the vote sought to be obtained in connection with the Proposal, no
separate vote of the Company's stockholders will be required to be obtained
prior to consummation of the transactions contemplated by the Call Rights or the
Put Rights.
CERTAIN DEFINITIONS
For purposes of the foregoing discussion of Amended Article Third, the
following terms will have the following meaning:
"Business Day" means any day which is not a Saturday, Sunday or a
federal holiday.
"Depositary" means the bank or trust company in the Borough of
Manhattan, the City and State of New York, having combined capital, surplus
and undivided profits of at least $500 million which is appointed by the
Company to serve as agent for the purpose of receiving certificates
representing shares of the Special Common Stock upon exercise of the Put
Rights or Call Rights, as the case may be, and distributing the Redemption
Price or the Put Price therefor, as the case may be.
"Put Notice" means a written notice electing to have shares of Special
Common Stock redeemed by the Company pursuant to the exercise of the Put
Rights.
"Put Notification" means a written notice from the Company to the
holders of the Special Common Stock and the holders of options to purchase
shares of the Special Common Stock informing each such holder of (A) the
rights of such holder to cause the Company to redeem shares of Special
Common Stock during the Put Period, (B) the date of the commencement and
termination of the Put Period, (C) the Put Price, (D) the identity and
address of the Depositary and (E) instructions as to how to exercise the
Put Rights. The Put Notification will, in all respects, comply with the
requirements of the Exchange Act.
"Put Period" means, subject to acceleration upon the occurrence of
certain Insolvency Events, the period commencing on July 1, 1999 and ending
on the close of business on the thirtieth Business Day thereafter or such
later date as may be required under the Exchange Act; provided that, in the
event of acceleration of the Put Period following the occurrence of an
Insolvency Event, the Put Period will be the period commencing as soon as
practicable following the date of the occurrence of the Insolvency Event
giving rise to such acceleration (but in no event later than ten days
following such date) and ending on the close of business on the 60th
Business Day thereafter or such later date as may be required under the
Exchange Act.
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ARTICLE ELEVENTH OF THE
CERTIFICATE OF INCORPORATION
Article Eleventh of the Genentech Certificate of Incorporation ("Article
Eleventh") will remain unchanged in the Merger.
Article Eleventh will continue to provide that, in addition to any
affirmative vote required by law or any other provision of the Genentech
Certificate of Incorporation, any Business Combination (as hereinafter defined)
with Roche or any affiliate of Roche (a "Subject Person") shall require (1) the
affirmative vote of the holders of at least 50% of the voting power of the then
outstanding shares of capital stock of Genentech entitled to vote generally in
the election of directors (the "Voting Stock"), voting together as a single
class, who are entitled to vote thereon (it being understood that for purposes
of Article Eleventh, each share of Voting Stock will have the number of votes
granted pursuant to Amended Article Third) and (2) the approval of a majority of
the members of the Genentech Board who are entitled to vote thereon in such
capacity. For purposes of Article Eleventh, (x) no Subject Person or any member
of a group of which a Subject Person is a member, shall be entitled to vote any
shares of Voting Stock beneficially owned by it or any member of such group and
(y) no person or group that beneficially owns at least 12% of the Voting Stock
not beneficially owned by all Subject Persons shall be entitled to vote with
respect to that portion of his or its shares of Voting Stock which exceed 12% of
the Voting Stock not beneficially owned by all Subject Persons. For purposes of
Article Eleventh, no director will be entitled to vote on any such Business
Combination in his capacity as director who is an officer of the corporation or
who is an employee, director, principal stockholder or partner of a Subject
Person or of an entity (other than Genentech or any of its subsidiaries) that
was dependent upon a Subject Person for more than 10% of its revenues or
earnings in its most recent fiscal year.
For the purposes of Article Eleventh, "Business Combination" is defined to
include (i) any merger or consolidation of Genentech or any majority-owned
subsidiary with a Subject Person; (ii) any sale, lease, license, exchange,
mortgage, pledge, transfer or other disposition (in one transaction or a series
of transactions) to or with a Subject Person of any assets of Genentech or any
majority-owned subsidiary of Genentech having an aggregate fair market value
equal to or greater than 10% of Genentech's assets; (iii) the issuance or
transfer by Genentech or any majority-owned subsidiary (in one transaction or a
series of transactions) of any securities of Genentech or any majority-owned
subsidiary to a Subject Person in exchange for cash, securities or other
property (or a combination thereof) having an aggregate fair market value of $20
million or more; or (iv) any reclassification of securities (including any
reverse stock split), or recapitalization of Genentech, or any merger or
consolidation of Genentech with any of its majority-owned subsidiaries or any
other transaction (whether or not with or into or otherwise involving Roche)
which has the effect, directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity or convertible securities
of Genentech or any majority-owned subsidiary which is, directly or indirectly,
owned by a Subject Person). Amended Article Third will provide that the
transactions to be consummated pursuant to the Call Rights or the Put Rights
will not be deemed to be Business Combinations for purposes of Article Eleventh.
See "The Charter Amendment; Description of the Special Common Stock." Thus,
other than the vote sought to be obtained in connection with the Proposal, no
separate vote of the Company's stockholders will be required to be obtained
prior to consummation of the transactions contemplated by the Call Rights or the
Put Rights.
Article Eleventh provides that in the event any person becomes bound by the
Amended Governance Agreement, the provisions of Article Eleventh will continue
to be applicable, provided that each reference to Roche therein shall also be
deemed a reference to such person.
Article Eleventh further provides that, in addition to any vote required by
law, any amendment, modification or repeal of the provisions of Article Eleventh
will require the same stockholder and Genentech Board approval as any Business
Combination subject to Article Eleventh would require at the time of such
amendment, modification or repeal.
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THE AMENDED GOVERNANCE AGREEMENT
The Amended Governance Agreement represents, in general, an extension of
the term of the Existing Governance Agreement between the Company and Roche, its
majority stockholder, which has been in effect since the 1990 Merger, and also
represents, with respect to certain matters as noted below, a modification of
the Existing Governance Agreement. The Amended Governance Agreement sets forth
certain rights and obligations of Genentech and Roche concerning, among other
things, the redemption of the Special Common Stock, the corporate governance of
Genentech, future acquisitions or dispositions of securities of Genentech by
Roche and obligations of Genentech and Roche in connection with the Put Rights.
THE FOLLOWING DESCRIPTION OF THE AMENDED GOVERNANCE AGREEMENT DOES NOT
PURPORT TO BE COMPLETE, AND IS QUALIFIED IN ITS ENTIRETY BY THE TEXT OF THE
AMENDED GOVERNANCE AGREEMENT, A FORM OF WHICH IS ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AS EXHIBIT A TO ANNEX A AND IS INCORPORATED HEREIN BY
REFERENCE.
REDEMPTION OF SPECIAL COMMON STOCK
In the Amended Governance Agreement, Genentech agrees that, promptly upon
receipt of a written request from Roche for the redemption of the Special Common
Stock pursuant to the Call Rights, it will designate a Depositary for such
redemption in accordance with the terms of the Genentech Certificate of
Incorporation and notify Roche of such designation. Upon confirmation from the
Depositary that it has received sufficient funds from Roche to pay the aggregate
redemption price of all outstanding Special Common Stock (other than Special
Common Stock deposited or caused to be deposited with such depositary by Roche),
Genentech will give notice of the exercise of the Call Rights and the redemption
of the Special Common Stock. Genentech will set as the Redemption Date the date
set forth in Roche's written request for redemption; provided that such date
shall be consistent with the notice requirements of the Genentech Certificate of
Incorporation. The Redemption Date will in no event be later than the earlier of
June 30, 1999 or such earlier date on which a Triggering Disposition occurs.
Roche's right to cause Genentech to exercise the Call Rights terminates upon the
occurrence of a Triggering Disposition. The redemption price will be set in
accordance with the Genentech Certificate of Incorporation.
PUT RIGHTS WITH RESPECT TO SPECIAL COMMON STOCK
In the Amended Governance Agreement, Genentech also agrees that, prior to
commencement of the Put Period, it will designate a Depositary for the purchase
by the Company (or, under certain circumstances, by Roche) of shares of Special
Common Stock pursuant to exercises of the Put Rights by holders of Special
Common Stock in accordance with the terms of the Genentech Certificate of
Incorporation and will notify Roche of such designation. Prior to commencement
of the Put Period, Genentech will give notice of the availability of the Put
Rights to holders of the Special Common Stock. The redemption price will be $60
per share of Special Common Stock, subject to adjustment in accordance with the
Genentech Certificate of Incorporation. Unless accelerated pursuant to an
Insolvency Event, the Put Period will be the period commencing on July 1, 1999
and ending on the close of business on the 30th Business Day thereafter.
SUSPENSION OF OBLIGATIONS
The Amended Governance Agreement provides that Genentech's obligations
under the Amended Governance Agreement to effect the redemption of the Special
Common Stock pursuant to the Call Rights or the Put Rights will be suspended
during any period when, in the good faith judgment of the majority of
Genentech's directors, the redemption of the Special Common Stock would be
prohibited under the Delaware Law. During any such period, however, Roche's
obligations in respect of the Call Rights and the Put Rights would remain in
full force and effect. See "-- Redemption of Special Common Stock" and
"-- Capital Contribution and Assumption of Put Obligation by Roche."
INDEMNIFICATION
Roche has agreed in the Amended Governance Agreement to indemnify Genentech
and its officers and directors against all losses, claims, damages, liabilities
and expenses (including attorneys' fees) arising out of
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the redemption of the Special Common Stock pursuant to the Call Rights or the
Put Rights in accordance with the provisions of the Amended Governance Agreement
(including, without limitation, in the event of the Company's consummation of
the redemption of Special Common Stock in contravention of Section 160 of the
Delaware Law or any other law for the protection of creditors), other than any
such losses, claims, damages, liabilities and expenses that result primarily
from actions taken or omitted in bad faith by the indemnified person or from the
indemnified person's gross negligence or willful misconduct.
OPTIONS
Roche and the Company have agreed in the Amended Governance Agreement to
make appropriate provisions to assure that any options, warrants, rights or
securities issued by the Company convertible into or exercisable or exchangeable
for Special Common Stock outstanding on the Redemption Date or the final day of
the Put Period (whether or not convertible, vested, exercisable or exchangeable
on such date) become convertible into or exercisable or exchangeable for
consideration of the same type and amount as the holders thereof would have
received had they converted, exercised or exchanged such options, warrants,
rights or securities prior to the Redemption Date or the final day of the Put
Period. The Amended Governance Agreement provides, however, that such provision
will not be deemed or construed as a waiver of any other rights that a holder of
any such securities may have.
FURTHER ACQUISITIONS OF SECURITIES OF GENENTECH BY ROCHE
The Amended Governance Agreement provides that Roche will not, prior to
June 30, 1999 (as opposed to June 30, 1995 under the Existing Governance
Agreement), propose any Business Combination (as defined under "Article Eleventh
of the Certificate of Incorporation") with Roche or any affiliate of Roche
unless a majority of the Independent Directors determine that there has been a
sustained, substantial impairment of the business, prospects or financial
viability of Genentech and its subsidiaries, taken as a whole, since the
Effective Time (as opposed to September 7, 1990 under the Existing Governance
Agreement). Unless such a determination is made, Roche will not propose any such
Business Combination during the period commencing on July 1, 1999 and
terminating on June 30, 2000, at a price per share for the unaffiliated holders
of the Common Stock into which shares of Special Common Stock will have been
converted on June 30, 1999 less than the price per share at which shares of
Special Common Stock could have been redeemed on such date, adjusted for any
event occurring since such date as if the Special Common Stock had continued to
be outstanding. In addition, any Business Combination with Roche or any
affiliate of Roche, whether or not prior to June 30, 2000, must be approved by
the affirmative vote of the Independent Directors and the holders of a majority
of the Equity Securities not beneficially owned by Roche or its affiliates. See
"Article Eleventh of the Certificate of Incorporation."
The Amended Governance Agreement provides that for purposes of the approval
of the Genentech Board required under Article Eleventh for any Business
Combination permitted by the Amended Governance Agreement, the Independent
Directors will consider whether the Business Combination is fair to the minority
stockholders of Genentech without taking into account any possible discount due
to the fact that there exists a controlling stockholder of Genentech.
Except pursuant to the Call Rights, the Put Rights and Business
Combinations described in the second succeeding paragraph, Roche has also agreed
in the Amended Governance Agreement that it will not, directly or indirectly,
purchase or otherwise acquire, or propose or offer to purchase or acquire, any
Equity Security of Genentech, whether by tender offer, market purchase,
privately negotiated purchase, merger or otherwise, except that Roche may
acquire Equity Securities such that Roche Holding's Voting Interest (as
hereinafter defined) in Genentech would not immediately after such acquisition
exceed 79.9%. Roche has agreed that in no event will it, directly or indirectly,
prior to June 30, 2000, make any tender offer for Equity Securities of Genentech
without the consent of the majority of the Independent Directors other than as
permitted in connection with the exercise of the Put Rights. For purposes of the
Amended Governance Agreement, (i) "Equity Security" means any (A) voting stock
of Genentech (other than shares of voting stock not having the right to vote
generally in any election of directors of Genentech), (B) securities of
Genentech convertible into or exchangeable for such stock, and (C) options,
rights and warrants issued by Genentech to acquire such
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stock; (ii) "Roche Holding's Voting Interest" means the percentage of votes for
elections of directors of Genentech generally controlled, directly or
indirectly, by Roche Holding, assuming the conversion, exchange or exercise into
or for voting stock of all Equity Securities other than voting stock and not
taking into account any voting agreements or arrangements granting to a third
party control over the voting of voting stock (including those contained
therein) beneficially owned by Roche Holding; and (iii) "Independent Director"
means a director of Genentech who would be entitled for purposes of Article
Eleventh of the Certificate of Incorporation to vote on a Business Combination
with Roche. See "Article Eleventh of the Certificate of Incorporation."
CAPITAL CONTRIBUTION AND ASSUMPTION OF PUT OBLIGATIONS BY ROCHE
Pursuant to the Amended Governance Agreement, Roche has agreed to, or to
cause one or more of its affiliates to, contribute to the Company, immediately
prior to the time that any amounts become due and payable to the holders of
Special Common Stock pursuant to the Put Rights, (i) funds in an amount equal to
the product of the number of shares of Special Common Stock with respect to
which the Put Rights have been properly exercised multiplied by the Put Price
plus (ii) such additional funds, if any, sufficient to permit the Company to
redeem the shares of Special Common Stock with respect to which the Put Rights
have been properly exercised without violating Section 160 of the Delaware Law,
any bankruptcy or insolvency law or other law or regulation for the protection
of creditors. In exchange for such payment, the Company has agreed to issue to
Roche (or to its designated affiliate) a number of duly authorized and validly
issued shares of Common Stock equal to the number of shares of Special Common
Stock acquired thereby by the Company. Notwithstanding the foregoing, Roche's
obligation to make any such payment to the Company shall be void and of no
further force and effect if, in lieu thereof, Roche shall (or shall cause one of
its affiliates to) elect to purchase, and make all arrangements necessary
(including compliance by Roche, or any such affiliate or affiliates, with the
Securities Act, the Exchange Act and any other applicable federal or state
securities laws) to purchase, at the expiration of the Put Period, directly from
the holders of Special Common Stock at the Put Price the shares of Special
Common Stock which such holders elect to have purchased.
Notwithstanding any other term or provision of the Amended Governance
Agreement, the Merger Agreement, the Licensing Agreement, the Guaranty, Amended
Article THIRD, the Amended Governance Agreement provides that Roche will either
(i) make (or cause one or more of its affiliates to make) the aggregate payments
described in the first sentence of the immediately preceding paragraph or (ii)
if such payments are not made for any reason, make (or cause one of its
affiliates to make) the election to purchase referred to in the third sentence
of the immediately preceding paragraph and comply (or cause one of its
affiliates to comply) fully with such sentence; provided, however, that if an
Insolvency Event occurs, Roche will, within 10 days after the occurrence of such
Insolvency Event, either (x) contribute (or cause one or more of its affiliates
to contribute) to the Company an amount equal to the aggregate amount that would
be required to be contributed to the Company under the first sentence of the
immediately preceding paragraph assuming (for purposes of clause (i) of such
sentence) that the holders of all of the then outstanding shares of Special
Common Stock (on a fully diluted basis) were to exercise their Put Rights or (y)
elect (or cause one of its affiliates to elect) to purchase, and make all
arrangements necessary (including compliance by Roche, or any such affiliate,
with the Exchange Act and the Securities Act and any other Federal or state
securities laws) to purchase, at the expiration of the Put Period, directly from
the holders of Special Common Stock at the Put Price the shares of Special
Common Stock which such stockholders elect to have purchased. The Amended
Governance Agreement also provides that, in exchange for the payment by Roche of
the amount specified in clause (x) of the immediately preceding sentence, the
Company will issue to Roche (or its designated affiliate) a number of duly
authorized and validly issued shares of Common Stock equal to the number of then
outstanding shares of Special Common Stock (on a fully diluted basis).
The Amended Governance Agreement also provides that immediately following
the expiration of the Put Period, if the Put Rights have not been exercised with
respect to all of the then outstanding shares of Special Common Stock (on a
fully diluted basis) and if Roche has complied with such clause (x) of the first
sentence of the immediately preceding paragraph, (1) the Company will refund to
Roche (or its designated affiliate) an amount (together with any interest
actually earned thereon) equal to the product of the Put Price times the
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number of outstanding shares of Special Common Stock (on a fully diluted basis)
with respect to which the Put Rights have not been exercised and (2) Roche (or
its designated affiliate) will, in exchange for such payment by the Company,
contribute to the Company a number of shares of Common Stock equal to the number
of outstanding shares of Special Common Stock (on a fully diluted basis) with
respect to which the Put Rights have not been exercised. In the event that Roche
pays the amount specified in clause (x) of the first sentence of the immediately
preceding paragraph, none of Roche, Roche Holding or any of their respective
affiliates will be entitled to any payments or other distributions on or in
respect of any equity security of the Company unless and until the Company has
redeemed all of the shares of Special Common Stock with respect to which the Put
Rights have been properly exercised. Under the Amended Governance Agreement, if
(x) an Insolvency Event occurs and (y) Roche does not timely comply with its
obligations under the proviso to the first sentence of the immediately preceding
paragraph, the amounts required to be paid by Roche pursuant to such proviso
will be increased by $1,000,000, and the Agent under the Agency Agreement dated
as of September 6, 1995 between the Company, the Agent and Roche Holding (the
"Agency Agreement") will have an undivided interest in the aggregate amount
payable under such proviso, which undivided interest will (i) be limited to, and
will in no event exceed, $1,000,000 and (ii) be paid by Roche directly to the
Agent.
The Amended Governance Agreement provides that, if Roche so elects, the
obligations of Roche to purchase shares of Special Common Stock pursuant to any
of the provisions described in this section may, at the election of Roche, be
assigned by Roche to Roche Holding or any affiliate of Roche Holding (other than
Genentech). No such assignment will relieve Roche of any of its obligations in
respect of the Put Rights or otherwise.
The Amended Governance Agreement also provides that the Company will take
(and will have no corporate power or capacity to refuse to take) such actions as
may be necessary to enforce the obligations of Roche with respect to the Put
Rights, and the obligations of Roche Holding under the Guaranty, directly
against Roche and Roche Holding, or in the event of assignment by Roche, against
Roche, Roche Holding and any affiliate of Roche Holding to which any assignment
is made.
THE AGENCY AGREEMENT
Under the Agency Agreement, Genentech has appointed the Agent as its
irrevocable agent to seek to enforce, under certain specified circumstances, the
respective obligations of Roche and Roche Holding described under "-- Capital
Contribution and Assumption of Put Obligations by Roche" and under the Guaranty.
Under the Agency Agreement, upon consummation of the Merger, the Company will
deposit with the Agent the sum of $1,000,000 (the "Enforcement Amount"), which,
if necessary, will be disbursed by the Agent for the purposes described in the
next paragraph. Under the Agency Agreement, the Agent is authorized to receive
and hold any additional funds contributed at any time by any other person or
persons to the Enforcement Amount, and any such additional funds will, for all
intents and purposes of the Agency Agreement, be deemed thereafter to be
included in the Enforcement Amount.
Under the Agency Agreement, if the Agent has been notified by the Company
or by any person who is then an officer or director of the Company that (x) an
Insolvency Event has occurred and (y) Roche and Roche Holding have failed to
timely perform their respective obligations described under "-- Capital
Contribution and Assumption of Put Obligations by Roche" and under the Guaranty
within 10 days after the occurrence of such Insolvency Event, the Agent will
take all steps necessary (including the commencement and prosecution of legal
action) to seek to enforce performance of such obligations, in the right of and
as the agent of the Company, by (i) retaining counsel of reputation and
standing, (ii) instructing such counsel to use best efforts to seek to cause
Roche and Roche Holding to perform such obligations, (iii) disbursing all or
such portion of the Enforcement Amount as may be necessary in connection with
the foregoing, and (iv) taking any such other action as it may be advised by
such counsel is necessary and appropriate to seek to enforce such obligations.
See "The Charter Amendment; Description of the Special Common Stock -- Default
and Acceleration of Put Rights" and "-- Capital Contribution and Assumption of
Put Obligations by Roche."
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The Agency Agreement also provides that after receipt of written notice
from the Company to the effect that either (x) the redemption of all of the then
outstanding shares of the Special Common Stock pursuant to Call Rights has been
consummated, (y) Roche and Roche Holding have fully complied with their
respective obligations described under "-- Capital Contribution and Assumption
of Put Obligations by Roche" and under the Guaranty or (z) the Put Rights have
been eliminated pursuant to the vote of the Company's stockholders required to
be obtained under the Genentech Certificate of Incorporation and the Amended
Governance Agreement, the Agent shall pay the remaining Enforcement Amount, if
any, to the Company and to any other person which has contributed to the
Enforcement Amount, in proportion to their respective contributions. See "The
Charter Amendment; Description of the Special Common Stock -- Class Vote;" and
"The Amended Governance Agreement -- Certain Agreements of Roche as to Voting."
All investment or interest income earned with respect to the Enforcement Amount
during the term of the Agency Agreement will be added to the Enforcement Amount.
In a separate letter agreement, dated September 6, 1995, Roche and Roche Holding
have, in effect, agreed with Genentech that with respect to any enforcement
action by the Agent following the notice described in the immediately preceding
paragraph, neither Roche nor Roche Holding will assert as a defense that the
Agent does not have standing or is an improper party for purposes of seeking
enforcement of their respective obligations with respect to the Put Rights or
the fact that Genentech or its estate in bankruptcy may have rejected or failed
to perform an arrangement between the parties.
The Agency Agreement provides for customary fees and expenses of the Agent
to be paid periodically out of the Enforcement Amount. The Agency Agreement also
provides for certain customary indemnification of the Agent by Roche Holding.
The Agency Agreement terminates once the entire Enforcement Amount has been
disbursed.
BOARD OF DIRECTORS
Pursuant to the Amended Governance Agreement, the number of directors
comprising the Genentech Board immediately after the Effective Time will be
thirteen and the directors of the Company after the Effective Time will be the
directors who were serving immediately prior to the Effective Time, until their
successors have been duly elected or appointed and qualified or until the
earlier death, resignation or removal in accordance with the Genentech
Certificate of Incorporation and By-Laws and the Amended Governance Agreement.
After the Effective Time, the Genentech Board will continue to include two
nominees of Roche, whom Roche will continue to designate prior to the mailing of
the applicable annual proxy statement of the Company. Such nominees will
continue to serve in the class or classes of directors in which they served
prior to the Effective Time. The Amended Governance Agreement provides that,
notwithstanding any other provision of the Amended Governance Agreement, the
Genentech Certificate of Incorporation or By-Laws or applicable law, Roche will
not at any time prior to the day following the last day of the Put Period be
entitled to designate, or to cause the nomination or election of, more than two
members of the Genentech Board. Directors nominated by Roche pursuant to the
Amended Governance Agreement are referred to as "Investor Directors" and all
other directors are referred to as "Noninvestor Directors."
Pursuant to the Amended Governance Agreement, after the last day of the Put
Period, the Genentech Board will include up to two nominees designated by Roche
and two officers of Genentech nominated by the nominating or proxy committee of
the Genentech Board. The remainder of the Genentech Board at such time is to be
comprised of Independent Directors. Upon its request, Roche will be entitled to
designate nominees for a number of such Independent Directors equal to Roche
Holding's Voting Interest times the total number of such Independent Directors,
rounded up to the next whole number if Roche Holding's Voting Interest is
greater than 50% and rounded down to the next whole number if Roche Holding's
Voting Interest is less than or equal to 50%. Notwithstanding the foregoing, (i)
the number of Independent Directors designated by Roche will not exceed 50%
after any Triggering Disposition and (ii) Roche will have no right to designate
any nominees for directors pursuant to the Amended Governance Agreement at any
time after Roche Holding's Voting Interest has fallen below 20%. Under the
Amended Governance Agreement, Roche will not have the right to nominate or
designate any additional directors to the Genentech Board unless and until (i)
the Depositary has received the Put Price in respect of shares of Special Common
Stock with respect to which the Put Rights have been properly exercised and has
been irrevocably instructed to pay the Put Price to stockholders that have
exercised their Put Rights; (ii) Roche has made (or caused one of its affiliates
to
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make) the election to purchase referred to in the third sentence of the first
paragraph under "-- Capital Contribution and Assumption of Put Obligations by
Roche" above and has complied (or caused one or more of its affiliates to
comply) fully with the provisions described in such sentence; or (iii) the
obligations of Roche described in such sentence have otherwise been fully
satisfied through Roche Holding's performance under the Guaranty.
The Amended Governance Agreement provides that Genentech will cause the
Genentech Board to be increased or decreased in size, and will cause the
Genentech Board to fill the vacancies created by any such increase, as
appropriate in order to achieve the Genentech Board's proportionality required
by the foregoing. Any directors elected to fill a vacancy will serve until the
next annual meeting of stockholders, at which the newly created positions shall
be assigned to classes of directors consistent with the terms of the Genentech
Certificate of Incorporation and the By-Laws. Whenever necessary to maintain the
proportionality of the Genentech Board required by the Amended Governance
Agreement, Roche will cause directors designated by Roche to resign from the
Genentech Board. At such time as Roche Holding's Voting Interest falls below
20%, Roche will cause all the Investor Directors to resign from the Genentech
Board.
Under the Amended Governance Agreement, Roche and the nominating or proxy
committee will have the right to designate or nominate any replacement for a
director designated by Roche or nominated by such committee, respectively, at
the termination of such director's term or upon such director's death,
resignation, retirement, disqualification, removal from office or other cause by
which such nominee ceases to be a director. To the extent permitted by the
Genentech Certificate of Incorporation or the By-Laws, the Genentech Board will
elect each person so designated or nominated.
The Amended Governance Agreement provides that no individual designated by
Roche will serve as a director unless such individual has such business or
technical experience, stature and character as is commensurate with service on
the board of a publicly held enterprise. No such individual who is an officer,
director, partner or principal stockholder of any competitor of Genentech and
its subsidiaries (other than Roche and its affiliates) will serve as a director
of Genentech.
Pursuant to the Amended Governance Agreement, the Genentech Board will
designate a nominating or proxy committee, an executive committee, an audit
committee and a compensation committee. Each committee of the Genentech Board
(other than any special committee or committee of Independent Directors
constituted for the purposes of making any determination that is to be made
under the terms of the Amended Governance Agreement or the Certificate of
Incorporation) will at all times include at least one director designated by
Roche and no action by any such committee shall be valid unless taken at a
meeting for which adequate notice has been duly given to or waived by the
members of such committee. Such notice will be required to include a description
of the general nature of the business to be transacted at the meeting, and no
other business may be transacted at such meeting. Any committee member unable to
participate in person at any meeting will be given the opportunity to
participate by telephone. The director designated by Roche to serve on any
committee will be entitled to designate as his alternate another director
designated by Roche.
The Amended Governance Agreement provides that the nominating or proxy
committee will include, in addition to the director designated by Roche, one
Noninvestor Director who is an officer of Genentech and one Independent
Director, and shall have the exclusive authority to nominate individuals to fill
all Genentech Board positions, except for those to be designated by Roche after
the last day of the Put Period pursuant to the relevant provisions of the
Amended Governance Agreement. With respect to any election of directors, any
nomination of a person not then serving as a director will require the unanimous
approval of the nominating or proxy committee; provided that the two Investor
Directors designated by Roche and the Independent Directors initially nominated
by Roche will not require such unanimous approval. Genentech has agreed to use
all reasonable efforts to solicit proxies for the nominees for director
nominated by such committee from all holders of voting stock entitled to vote
thereon.
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CERTAIN APPROVAL RIGHTS
The Amended Governance Agreement provides that the approval of the
directors designated by Roche pursuant to the Amended Governance Agreement
(other than those designated pursuant to Roche's right to designate Independent
Directors) will be required to approve any of the following:
(a) the acquisition by Genentech of any business or assets that would
constitute a substantial portion of the business or assets of Genentech,
whether such acquisition be by merger or consolidation or the purchase of
stock or assets or otherwise;
(b) the sale, lease, license, transfer or other disposal of all or a
substantial portion of the business or assets of Genentech other than in
the ordinary course of business, other than any such sale, lease, license,
transfer or other disposal which is subject to the provisions described
below restricting Genentech and its subsidiaries from entering such
transactions prior to first negotiating with Roche;
(c) the issuance of any Equity Securities or other capital stock of
Genentech, except for (i) issuances of shares of Special Common Stock (or,
after the conversion thereof, into shares of Common Stock, issuances of
shares of Common Stock) or options, warrants or rights to acquire, or
securities convertible into or exchangeable for, such Special Common Stock
(or Common Stock) pursuant to any employee compensation plan that has been
approved by a majority of the Independent Directors; (ii) issuances thereof
upon the exercise, conversion or exchange of any outstanding Equity
Securities or other capital stock; and (iii) other issuances thereof during
any 24-month period not exceeding 5% of the voting stock of Genentech
outstanding at the beginning of such 24-month period; or
(d) the repurchase or redemption of any Equity Securities or other
capital stock of Genentech, other than redemptions required by the terms
thereof and purchases made at fair market value in connection with any
deferred compensation plan maintained by Genentech.
The Amended Governance Agreement provides that for purposes of clauses (a)
and (b) above, unless the majority of Independent Directors shall have made a
contrary determination in good faith, a "substantial portion of the business or
assets of Genentech" will mean a portion of the business or assets of Genentech
accounting for 10% of the consolidated total assets, contribution to net income
or revenues of Genentech and its consolidated subsidiaries.
AFFILIATION ARRANGEMENTS
Pursuant to the Amended Governance Agreement, except as otherwise provided
in the Licensing Agreement, Genentech will not, and will not permit any of its
subsidiaries to, enter into any material licensing or marketing agreement with
respect to any products, processes, inventions or developments made by Genentech
or any subsidiary of Genentech unless it shall have first negotiated in good
faith with Roche for a reasonable period of not less than three or more than six
months with a view towards reaching a mutually beneficial licensing or marketing
agreement with respect to such products, processes, inventions or developments.
CERTAIN AGREEMENTS OF ROCHE AS TO VOTING
Pursuant to the Amended Governance Agreement, Roche will vote its shares of
Common Stock and shares of Special Common Stock in any election of directors for
all nominees in proportion to the votes cast by the other holders of Special
Common Stock (excluding, at Roche's option, any votes cast by any person or
group that beneficially owns at least 12% of the Equity Securities not
beneficially owned by Roche Holding); provided that it may cast all of its votes
in favor of any nominee designated by it pursuant to the provisions of the
Amended Governance Agreement.
Pursuant to the Amended Governance Agreement, in any vote to amend the
terms of the Special Common Stock, Roche will vote its shares of Special Common
Stock, if any, in proportion to the votes cast by the holders of Special Common
Stock (other than Roche and its affiliates).
RESTRICTIONS ON TRANSFERS OF COMMON STOCK BY ROCHE
Roche has agreed in the Amended Governance Agreement that it will not sell
or otherwise transfer any shares of Common Stock or shares of Special Common
Stock, except (i) pursuant to a registered
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underwritten public offering subsequent to April 30, 2000 (or earlier, if it
becomes illegal for Roche to own Genentech stock or exercise rights of ownership
with respect to the Genentech stock) in accordance with its registration rights
under the Amended Governance Agreement (see " -- Registration Rights"), (ii)
pursuant to Rule 144 promulgated under the Securities Act, subsequent to April
30, 2000 (or earlier, if it becomes illegal for Roche to own the Genentech Stock
or exercise rights of ownership with respect to the Genentech Stock), provided
that any such sale will be subject to the volume and manner of sale limitations
set forth in such rule, whether or not legally required, (iii) to any entity
directly or indirectly 100% owned by Roche Holding or (iv) after the last day of
the Put Period in a Liquidating Sale (as hereinafter defined) so long as the
sale is a sale of all Common Stock and Special Common Stock beneficially owned
by Roche Holding and Roche Holding's Voting Interest is not below 50%.
In the event Roche determines to sell its entire equity interest in
Genentech after the last day of the Put Period, the Amended Governance Agreement
is designed to afford the minority holders the ability to participate in such a
transaction provided that a majority of the Independent Directors and minority
stockholders approve. Thus, for purposes of the foregoing, a "Liquidating Sale"
means (i) a sale of all Genentech stock beneficially owned by Roche Holding to
any person or group that is acquiring all the outstanding voting stock of
Genentech at a per share consideration having at least the same value, and to be
paid in the same form as (or in cash), and not later than, the per share
consideration to be paid to Roche and its affiliates in a transaction that has
been approved by the Genentech Board and the stockholders in accordance with the
requirements that would be applicable to a Business Combination under Article
Eleventh proposed by Roche or (ii) if such transaction proposed by such person
or group has been rejected by the Independent Directors or the stockholders
entitled to vote thereon under Article Eleventh, the sale of all the Genentech
stock beneficially owned by Roche Holding to such person or group for per share
consideration having not more than the same value, and payable in the same form,
as was so proposed to be paid to stockholders.
Notwithstanding the foregoing, (x) no Liquidating Sale may be made prior to
the time that such transaction is either rejected by the Independent Directors
or the stockholders or consummated and (y) prior to the first anniversary of the
last day of the Put Period, the per share value offered to the public in any
Liquidating Sale may not be less than the final redemption price of the Special
Common Stock under the Call Rights (adjusted appropriately for events occurring
after the conversion thereof as if it were still outstanding). The good faith
determination of the majority of the Independent Directors of the value of the
consideration offered in any proposal will be conclusive and binding.
The Amended Governance Agreement provides, however, that no Liquidating
Sale will be permitted unless the transferee and each entity controlling such
transferee shall have agreed in writing to be bound, and to cause their
affiliates to be bound, by the terms of the Amended Governance Agreement as if
it were Roche and has entered into a confidentiality agreement with Genentech
substantially in the form of the confidentiality agreement between Roche Holding
and Genentech dated October 13, 1989 (as modified by Section 6.01 of the 1990
Merger Agreement); provided that no transferee in a Liquidating Sale shall be
entitled to Roche's rights under the Amended Governance Agreement with respect
to the composition of the Genentech Board and the committees of the Genentech
Board and the covenants of Genentech with respect to severance arrangements and
marketing agreements.
Roche has agreed in the Amended Governance Agreement that in the event of a
Triggering Disposition, it will use its best efforts to sell additional shares
of Common Stock within three years of the Triggering Disposition such that it
will beneficially own not more than 20% of the outstanding shares of Common
Stock. After a Triggering Disposition, Roche will have no further rights (i) to
request redemption of the Special Common Stock, or (ii) with respect to the
designation of members of committees of the Genentech Board, the requirement of
unanimous approval with respect to certain Genentech Board nominees, the right
to approve certain actions as described above and the right to negotiate first
with Genentech and its subsidiaries with respect to material licensing or
marketing agreements; provided, however, that no Triggering Disposition will
relieve Roche of any of its obligations in connection with the Put Rights. Other
than in connection with its obligations with respect to the Put Rights as
described in " -- Capital Contribution and Assumption of Put Obligations by
Roche," after a Triggering Disposition, Roche will not, without the prior
written consent of the Genentech Board, acting alone or as part of a group,
acquire or offer or agree to acquire, directly or indirectly,
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by purchase or otherwise, any Equity Securities or all or any substantial
portion of the assets of, or otherwise seek to influence or control, in any
manner whatsoever, the management or policies of Genentech until the fifteenth
anniversary of the date it ceases to beneficially own more than 20% of the
outstanding shares of Common Stock, provided that the foregoing will not apply
to any of Roche's portfolio managers whose investment decisions are not directed
by Roche.
REGISTRATION RIGHTS
The Amended Governance Agreement provides that, at any time after April 30,
2000 or such earlier date as it shall have become illegal for Roche Holding to
continue to own Genentech stock, directly or indirectly, or to exercise fully
all rights of ownership with respect to Genentech stock, upon the request of
Roche, Genentech will file a registration statement under the Securities Act as
to the number of shares of Common Stock or Special Common Stock specified in
such request; provided that, subject to certain exceptions, Genentech will not
be required to file more than three registration statements that become
effective and remain effective for a specified period. Roche's right to request
such registrations is subject to certain conditions set forth in the Amended
Governance Agreement, and Roche and Genentech have agreed to certain procedures
relating to such registration rights, which are set forth in the Amended
Governance Agreement; these conditions and procedures, however, remain identical
to those of the Existing Governance Agreement. Roche is required to use all
reasonable efforts to effect as wide a distribution of registered shares as
possible, and no sale may be knowingly made to any person or entity which is
part of any group that would, after giving effect to such sale, own more than 5%
of the outstanding Shares or 5% of the Company's Equity Securities.
All expenses incident to the performance by Genentech of its obligations
with respect to the registration of Roche's Genentech stock will be borne by
Genentech except that Roche has agreed to pay any registration or filing fees
payable under any federal or state securities or Blue Sky laws and certain
expenses to be directly incurred by Roche, including underwriting fees,
discounts and commissions and counsel fees. Genentech and Roche each have agreed
to indemnify the other, in certain instances, with respect to liability incurred
in connection with such registrations.
CERTAIN COVENANTS
Genentech, pursuant to the Amended Governance Agreement, will not and will
not permit any of its subsidiaries to, (i) enter into any contract, agreement,
plan or arrangement covering any director, officer or employee of Genentech or
any of its subsidiaries that provides for the making of any payments, the
acceleration of vesting of any benefit or right of any other entitlement
contingent upon (A) the Merger or the exercise by Roche of any of its rights
under the Amended Governance Agreement to representation on the Genentech Board
(and its committees) or any acquisition by Roche of securities of Genentech
(whether by merger, tender offer, private or market purchases or otherwise) not
prohibited by the Amended Governance Agreement or (B) the termination of
employment after the occurrence of any such contingency if such payment,
acceleration or entitlement would not have been provided but for such
contingency or (ii) amend any existing contract, agreement, plan or arrangement
to so provide.
AMENDMENTS; TERMINATION
The provisions of the Amended Governance Agreement, by its terms, may not
be waived or amended without the approval of a majority of the Independent
Directors. Genentech intends to notify stockholders in the event that any
material provision of the Amended Governance Agreement is waived or amended.
The Amended Governance Agreement, by its terms, will terminate at such time
as Roche and its affiliates beneficially own 100% of the voting stock of
Genentech, except that Roche's agreement with respect to the indemnification of
Genentech and certain other persons in connection with a redemption of the
Special Common Stock pursuant to the Call Rights or the Put Rights and Roche's
agreement with respect to the treatment of options, warrants and convertible
securities following any such redemption, will survive such termination.
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GUARANTY OF ROCHE HOLDING
GENERAL
Upon consummation of the transactions contemplated by the Merger Agreement,
Roche Holding will deliver the Guaranty to Genentech. THE FOLLOWING DESCRIPTION
OF THE TERMS AND CONDITIONS OF THE GUARANTY DOES NOT PURPORT TO BE COMPLETE AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE GUARANTY, A FORM OF WHICH IS
ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS EXHIBIT B TO ANNEX A AND
INCORPORATED HEREIN BY REFERENCE.
Pursuant to the Guaranty, Roche Holding unconditionally and irrevocably
guarantees to Genentech the prompt and full discharge by Roche of all of Roche's
covenants, agreements, obligations and liabilities described under "The Amended
Governance Agreement -- Capital Contribution and Assumption of Put Obligations
by Roche." The Guaranty applies to all such obligations, including, without
limitation, the due and punctual payment of all amounts which may become due and
payable to the Company and/or to the holders of Special Common Stock. With
respect to all obligations to pay money, such Guaranty is a guaranty of payment
and not merely of collection. If Roche defaults in the due and punctual
performance of any of its covenants, agreements, obligations and liabilities
described above, or in the full and timely payment of any amounts owed pursuant
to such covenants, agreements, obligations and liabilities described above,
Roche Holding has agreed to forthwith perform or cause to be performed such
covenants, agreements, obligations and liabilities described above, and
forthwith make full payment of any amount due with respect thereto at its sole
cost and expense. For information concerning Roche, Roche Holding and the Roche
Group, see "Certain Information Concerning Roche and Roche Holding" below.
COVENANTS
Under the Guaranty, Roche Holding has agreed to be bound by the provisions
of the Amended Governance Agreement and to abide, and to cause its affiliates to
abide, by the obligations and limitations set forth therein as if it were Roche,
and has agreed and acknowledged that any limitation or restriction on Roche set
forth therein will be deemed to be, and will be construed as, a limitation or
restriction on Roche Holding and its affiliates taken as a whole.
THE LICENSING AGREEMENT
THE FOLLOWING DESCRIPTION OF THE LICENSING AGREEMENT DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE TEXT OF THE
LICENSING AGREEMENT, A COPY OF WHICH WAS FILED WITH THE COMMISSION AS AN EXHIBIT
TO THE REGISTRATION STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE.
LICENSES, OPTIONS, KNOW-HOW AND TRADEMARKS
Pursuant to the Licensing Agreement, Genentech would agree to grant to HLR
an exclusive patent, know-how and trademark license to use, sell and, under
certain conditions, make in Canada: Activase(R) tissue plasminogen activator;
Protropin(R) and Nutropin(R) human growth hormone; and Actimmune(R) interferon
gamma 1-b, each as sold in Canada (collectively, the "Canada Products").
Genentech has also agreed to grant to HLR an exclusive patent, know-how and
trademark license to use, sell and, under certain conditions, make Pulmozyme(R),
dornase alpha ("DNase"), outside the United States (the "Roche Territory").
Except as noted below with respect to certain "in-licensed" products, the
Licensing Agreement provides that Genentech will grant to HLR an option for an
exclusive patent, know-how and trademark license in the Roche Territory on a
product-by-product basis to use, sell and, under certain circumstances, make
other Genentech products for which Genentech has rights as of April 12, 1995 or
for which Genentech subsequently acquires rights ("Genentech Products"). For
certain products in-licensed from (x) Scios Nova Inc. ("Scios Nova") (such
products being referred to as "Scios Product") and (y) IDEC Pharmaceuticals
Corporation ("IDEC") (such products being referred to as "IDEC Product"),
Genentech will also grant to Roche an option for an exclusive patent and
know-how license outside the United States with respect to Scios Product and
IDEC Product to use, sell and, under certain conditions, make such product. In
Canada, HLR's rights with respect to Scios Product and IDEC Product are subject
to the preexisting co-promotion obligations of Genentech with respect
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to such products. For other human pharmaceutical products for which Genentech
acquires rights in the HLR Territory by means of a patent and/or know-how
license from a third party ("In-Licensed Product"), subject to the terms and
conditions of the relevant license agreements relating to such products and
HLR's acceptance of the terms and conditions thereunder, Genentech will grant to
HLR an option for an exclusive patent and know-how license in the Roche
Territory on a product-by-product basis to use, sell and, under certain
circumstances, make such In-Licensed Products.
Prior to the completion of the first Phase II trial for a particular
product, Genentech retains authority to discontinue sole development of a
product and, subject to the provisions of the Amended Governance Agreement, to
license such product to a third party. See "The Amended Governance Agreement --
Affiliation Arrangements" above. Upon the completion of Phase II for a product,
Genentech must notify HLR of this event and supply to HLR a reasonable summary
of information regarding the product, including data from any Phase II trials.
Within 30 days of such notification, the joint Commercialization Committee (as
defined in the Licensing Agreement) must meet to review the results of the Phase
II trials and other relevant data. Within 30 days of the commencement of such
meeting, Roche must either exercise its option for the product or irrevocably
waive it. For those products for which Phase II trials have already been
completed as of the Effective Date, the Commercialization Committee must meet
within 45 days of the Effective Date to review summary results of clinical data
for such products. Within 90 days of the commencement of this meeting, HLR must
either exercise or waive its option for a license for each such product on a
product-by-product basis. If HLR waives its option, Genentech is free to develop
and sell the product itself or with another party. If Genentech and HLR mutually
agree, the options granted in the Licensing Agreement can be exercised prior to
the completion of Phase II.
The licenses and options for licenses described above are conditioned on
HLR's using its best efforts in each country in the Roche Territory to take all
steps necessary to obtain regulatory approval in an expeditious fashion and to
sell the product in a manner so as to maximize revenues. The options granted in
the Licensing Agreement expire ten years after the Effective Date. Thus, any
option exercised by HLR during the ten-year term remains in effect for the full
term of the license (as described below) and any unexercised option at the end
of the ten-year period terminates.
Under the Licensing Agreement with respect to the current Genentech and HLR
collaborations on IIbIIIa antagonists and ras farnesyltransferase inhibitors,
Genentech has the sole right in the United States, and HLR has the sole right in
the Roche Territory, to use and sell such products. All research efforts on
these products will continue to be shared in an equal manner; no royalties on
sales shall be due from either party to the other. See "Certain Relationships
and Related Transactions." The costs for development of certain products will be
shared as described below under "-- Development and Marketing."
COMMERCIALIZATION COMMITTEES
To manage collaborations between Genentech and HLR, the Licensing Agreement
provides for the establishment of four committees: A Commercialization Committee
to provide a forum for the exchange of information about Genentech Products; a
Development Committee to coordinate development efforts between Genentech and
HLR; a Management Committee to review annually the development and
commercialization of all products covered by the Licensing Agreement, and a
Finance Committee to discuss financial activities relating to the Licensing
Agreement.
DEVELOPMENT AND MARKETING
Under the Licensing Agreement, Genentech will have sole responsibility and
full autonomy for the development and marketing of its products in the United
States, and also in the Roche Territory with respect to products for which HLR
does not exercise its option for a license. HLR will have sole responsibility
for the development and marketing of products in the Roche Territory for which
it has been granted an exclusive license or exercised its option for a license.
Under the Licensing Agreement, HLR will, in general, reimburse Genentech
for 50% of Genentech's development costs, depending on the payment mechanism
described below, incurred in connection with a
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product for which HLR has been granted a license or for which HLR has exercised
its option for a license, and for IIbIIIa antagonists and ras
farnesyltransferase. With respect to Canada Products, HLR will reimburse
Genentech for 10% of Genentech's development costs incurred in connection with
such products. The mechanism for reimbursement of development costs incurred up
to the date of HLR's exercise of its option for a product shall be either, at
Genentech's election and with HLR's consent, of the following: (i) upon HLR's
exercise of its option by payment by in full of 50% of the previously incurred
development costs for that Product or (ii) by the payment of 150% of prospective
development costs for that product until 50% of all previously incurred
development costs for that product have been reimbursed. One-half of all
development costs incurred after HLR's exercise of its option shall be
reimbursed by HLR on an ongoing basis.
PRODUCTION AND SUPPLY
Pursuant to the Licensing Agreement, Genentech will manufacture and supply
to HLR clinical requirements of Genentech Products at cost and commercial
requirements at cost plus a margin of 20% on such cost. HLR will manufacture and
supply to Genentech clinical requirements of synthetic molecules other than
peptides or proteins ("Small Molecule Products") at cost and commercial
requirements at cost plus a margin of 20% on such cost. In-Licensed Products
will be manufactured and supplied to Roche, whether by Genentech, the licensor
or a third party, in a manner consistent with the license agreement for that
product. HLR will pay 50% of Genentech's costs associated with developing a
manufacturing process for products licensed by HLR. Genentech will pay that
proportion of HLR's costs associated with developing a manufacturing process for
a Small Molecule Product licensed by HLR that Genentech's expected revenues for
sales of that product in the United States bears to expected worldwide sales of
that product.
ROYALTIES AND OTHER PAYMENTS
Genentech will receive the following royalties on product sales from HLR:
(i) On DNase, (x) a royalty of 20% on sales in countries that are
members of the European Economic Community or the European Free Trade
Association and in Canada and (y) in all other countries which are part of
the Roche Territory, a royalty of 12.5% for the first $100 million in
aggregate sales and thereafter a royalty of 15% for aggregate sales in
excess of $100 million until the later in each country of the expiration of
Genentech patents or 25 years from first commercial introduction;
(ii) On Canada Products, a royalty of 20% on sales of each such
product until the later of the expiration of a relevant Genentech patent in
Canada or 25 years from the Effective Date (with respect to Activase, HLR
will pay an additional 10% royalty on sales in each year that exceed 110%
of 1994 Activase sales up to a total payment of $27 million);
(iii) On each Genentech Product for which HLR exercises its option, a
royalty of 12.5% for the first $100 million in aggregate sales and
thereafter a royalty of 15% for aggregate sales in excess of $100 million
until the later in each country of the expiration of a relevant Genentech
patent or 25 years from first commercial introduction;
(iv) On Scios Product if HLR exercises its option, a royalty of 20% on
sales for so long as Genentech is paying royalties to Scios Nova on sales
of Scios Product and thereafter a royalty of 8% for aggregate annual sales
of $150 million or less and 10% for aggregate annual sales in excess of
$150 million until the later in each country of the expiration of a
relevant Genentech patent or 25 years from first commercial introduction;
(v) On IDEC Product if HLR exercises its option, a royalty of 20% on
sales for so long as Genentech is paying royalties to IDEC on sales of IDEC
Product and thereafter a royalty of 8% for aggregate annual sales of $75
million or less and 10% for aggregate annual sales in excess of $75 million
until the later in each country of the expiration of a relevant Genentech
patent or 25 years from first commercial introduction;
(vi) On In-Licensed Products, a mutually agreeable royalty to be
negotiated for each such product; and
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(vii) On the expiration of any of the foregoing royalties, on a
product for which HLR continues to use a Genentech trademark, a royalty of
2% for so long as the trademark is used.
In addition to the foregoing royalties, if HLR exercises its option for
Scios Product, HLR will pay Genentech $25 million and will reimburse Genentech
for certain one-time milestone payments that Genentech is obligated to pay upon
the occurrence of such milestones to Scios Nova. If Roche exercises its option
for IDEC Product, HLR will pay Genentech $10 million and will reimburse
Genentech for 50% of certain Genentech development costs and for certain
one-time milestone payments that Genentech is obligated to pay upon the
occurrence of such milestones to IDEC.
TRANSITION PROVISIONS
Pursuant to the Licensing Agreement, the operations of Genentech Canada,
Inc., Genentech Europe Limited and Genentech Ltd. (Japan) will be transferred to
HLR as soon as possible following consummation of the Merger but by no later
than January 1, 1996. Genentech and HLR will discuss and mutually agree with
respect to the continuing status of the employees of those organizations. The
records for those organizations and any appropriate product dossiers and
registrations will be transferred to HLR. HLR will assume any real property
leases of those organizations as well as any other liabilities that have arisen
in the normal course of business, with the exception of a line of credit to
Genentech Canada, Inc. used to purchase Activase rights and severance costs
relating to not more than six employees of Genentech Europe Limited.
TERM AND TERMINATION
The Licensing Agreement expires with respect to any individual product when
royalties are no longer payable by HLR to Genentech on sales of such product.
Other termination provisions include the following: HLR has the right to
terminate a license for a product upon six months notice if it has completed at
least one Phase III clinical trial and the results of that trial are unable to
support the registration of that product, or the results of other trials
establish that further development would not provide data sufficient to support
registration, and in such case, all rights to the product revert to Genentech.
If HLR fails to use its best efforts to commercialize a product in a country and
fails to take adequate remedial measures, Genentech may (i) terminate the
agreement with respect to that product in that country if a registration has not
been initiated or (ii) convert the exclusive license for that product in that
country to a nonexclusive one if registration has been initiated. Genentech may
terminate its development or commercialization at any time for any product which
has been licensed to HLR, and such product shall then be subject to Section 3.07
of the Amended Governance Agreement, provided that if such termination is for
reasons other than safety concerns, Genentech will have an obligation for up to
two years to provide HLR's clinical and commercial requirements. Either party
may terminate the Licensing Agreement for the breach of a material obligation of
the other. Genentech may terminate HLR's option for a license for products if
HLR's equity ownership in Genentech is less than 50% at any time.
HOLDERS OF GENENTECH'S DEBENTURES AND WARRANTS
Holders of the 5% Convertible Subordinated Debentures due 2002 of Genentech
(the "Debentures") who convert their Debentures into Common Stock prior to the
Effective Time pursuant to the terms of the Indenture, dated as of March 27,
1987 (the "Indenture"), by and between Genentech and The Bank of New York (the
"Trustee"), will have their Common Stock converted into and exchanged for
Special Common Stock on the same basis as other holders of Common Stock. See
"The Merger Agreement -- Conversion and Exchange of Common Stock and Merger
Subsidiary Common Stock."
Debentures not converted into Common Stock prior to the Effective Time will
remain outstanding following the Effective Time as obligations of Genentech as
the surviving corporation in the Merger. Pursuant to the Indenture, the holders
of the Debentures who do not convert their Debentures prior to the Effective
Time will thereafter have the right to convert such Debentures into the number
of shares of Special Common Stock they would have received in the Merger had
they converted their Debentures immediately prior to the Effective Time (subject
to further adjustment for events subsequent to the Merger (including the
conversion,
80
<PAGE> 94
if any, of Special Common Stock into Common Stock in 1999) in the manner
provided in the Indenture). As required by the Indenture, Genentech will deliver
a Supplemental Indenture to the Trustee at the Effective Time which will provide
for such adjustment.
For information as to the terms of the Debentures, including the terms
relating to conversion, see the Annual Report on Form 10-K of Genentech for the
year ended December 31, 1994, which is incorporated herein by reference.
Holders of warrants issued by Genentech (the "Warrants") to purchase Common
Stock who exercise such Warrants and purchase Common Stock prior to the
Effective Time pursuant to the terms of the Warrants, will have their Common
Stock converted into and exchanged for Special Common Stock on the same basis as
other holders of Common Stock. See "The Merger Agreement -- Conversion and
Exchange of Common Stock and Merger Subsidiary Common Stock."
The Warrants will remain outstanding following the Effective Time as
obligations of Genentech as the surviving corporation in the Merger. Pursuant to
the terms of the Warrants, each Warrant that is not exercised prior to the
Effective Time will become exercisable, in accordance with its terms, for the
number of shares of Special Common Stock that the holder of such Warrant would
have received in the Merger had such holder exercised such Warrant immediately
prior to the Effective Time (subject to the adjustment for events subsequent to
the Merger (including the conversion, if any, of Special Common Stock into
Common Stock in 1999) in the manner provided in the Warrants). As required by
the Warrants, Genentech will file in the custody of its Secretary or an
Assistant Secretary at its principal office and with its stock transfer agent an
officer's certificate which will provide for the adjustment described above.
Roche will agree in the Amended Governance Agreement to make appropriate
provisions to assure that any options, warrants, rights or securities
convertible into or exercisable or exchangeable for Special Common Stock
outstanding on the date of redemption of the Special Common Stock pursuant to
the Call Rights or the Put Rights (whether or not convertible, vested,
exercisable or exchangeable on such date) become convertible into or exercisable
or exchangeable for consideration of the same type and amount as the holders
thereof would have received had they converted, exercised or exchanged such
options, warrants, rights or securities prior to such date. The Amended
Governance Agreement provides, however, that such provision will not be deemed
or construed as a waiver of any other rights that a holder of any such
securities may have.
CERTAIN PROJECTIONS OF FUTURE OPERATIONS AND OTHER INFORMATION
The projected financial information set forth below was not prepared with a
view to publication nor with a view toward complying with published guidelines
of the Commission or the American Institute of Certified Public Accountants
regarding projections and forecasts. The projections set forth under "-- April
Information" are included herein only because they were considered by the
Special Committee and the Genentech Board during the course of its decision to
enter into the Proposed Transactions and because they were provided to Roche,
and the projections set forth under "September Information" are included because
they update the prior information.
APRIL INFORMATION
The following projected financial information was completed by Genentech on
April 28, 1995, was delivered to Roche on April 29, 1995 and was presented to
the Special Committee at the meetings held on April 29 and 30, 1995. Although
the Company had previously prepared projected financial information, such
projections were revised downward to reflect the Company's belief that certain
products in development would be commercially viable at dates later than had
previously been anticipated.
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<PAGE> 95
The information was presented in two forms, the first of which did not take
into account the effects of the Licensing Agreement:
1995-2000 BASE FINANCIAL PROJECTIONS -- BEFORE NEW LICENSING AGREEMENT
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997 1998 1999 2000
----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................ $ 930 $1,025 $1,190 $1,380 $1,600 $1,965
Net Income...................................... 165 185 210 255 325 470
Earnings Per Share.............................. 1.35 1.50 1.64 2.00 2.48 3.55
</TABLE>
Under the Licensing Agreement, the international (European and Canadian)
operations included in the foregoing projected financial information would be
excluded. In lieu of these operations, Genentech would receive royalties on
product sales outside the U.S. and a margin on sales of product supplied by
Genentech to Roche for these markets. In addition Roche would pay 50% of the
development costs incurred by Genentech in respect of products with respect to
which Roche exercises its option under the Licensing Agreement. See "The
Licensing Agreement."
The second set of projected financial information gives effect to the
estimated effects on the above Base Financial Projections of the Licensing
Agreement:
1995-2000 FINANCIAL PROJECTIONS -- AFTER NEW LICENSING AGREEMENT
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... $1,005 $1,065 $1,210 $1,305 $1,460 $1,725
Net Income..................................... 230 260 275 300 335 445
Earnings Per Share............................. 1.87 2.10 2.19 2.33 2.57 3.38
</TABLE>
Both sets of projected financial information set forth above were based on
certain common assumptions: (i) the absence of dividends or share repurchases by
the Company; (ii) no significant acquisitions by the Company; (iii) certain
assumed rates of taxation; and (iv) probability adjusted projections of expenses
and sales. The projected financial information which takes account of the
potential impact of the Licensing Agreement further assumes that: (i) Roche will
exercise its option with respect to all of the Company's products in
development, and the Company will be reimbursed for 50% of the total amount of
costs incurred with respect to a product up to the date of the exercise of such
option; (ii) Roche will pay the Company for 50% of such previously incurred
development costs by reimbursing the Company at 150% of prospectively incurred
development costs as described under "The Licensing Agreement -- Development and
Marketing;" (iii) Roche will accept the Company's calculation of development
costs associated with such products; (iv) sales of the Company's currently
existing products outside the United States will remain at approximately the
same levels assumed in the Base Financial Projections set forth above; (v) any
increase in revenues resulting from the Licensing Agreement would flow to
earnings rather than be used by the Company to accelerate new product
development; (vi) 1995 special charges, including expenses associated with the
Merger are excluded; and (vii) Genentech's operations outside the United States
will be transferred to Roche as of January 1, 1996.
SEPTEMBER INFORMATION
On September 8, 1995, the following updated projected financial information
was delivered to the Genentech Board and to Roche. Such information takes into
account developments since the preparation of the projected financial
information set forth above under "-- April Information" and reflects
Genentech's management's estimates of the effect of such developments on such
previously prepared information. Specifically, management of Genentech took into
account the effects of (i) updated estimates as to the timing
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<PAGE> 96
of the development and approval of certain products, (ii) updated estimates as
to the probability of successful development and approval of certain products,
and (iii) Genentech's management's updated projections of sales and related
expenses for certain current products and products in development. Other than as
described in this paragraph and as set forth below, the assumptions upon which
the following information is based are substantially the same as those set forth
in the immediately preceding paragraph.
Three sets of projected financial information were delivered to the
Genentech Board and to Roche on September 8, 1995.
The first set of projected financial information reflects the estimated
effects of developments since April 1995 on the "1995 - 2000 Base Financial
Projections -- Before New Licensing Agreement" set forth above under "-- April
Information." As was the case in connection with the preparation of the
projected financial information set forth above under "-- April Information,"
the following projected financial information assumes that one new product will
be put into development each year:
UPDATED 1995 - 2000 BASE FINANCIAL PROJECTIONS -- BEFORE NEW LICENSING AGREEMENT
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999 2000
---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $942 $1,003 $1,098 $1,228 $1,390 $1,679
Net Income............................ 171 174 179 206 238 360
Earnings Per Share.................... 1.40 1.41 1.41 1.62 1.82 2.73
</TABLE>
The second set of projected financial information reflects the estimated
effects of developments since April 1995 on the "1995 - 2000 Financial
Projections -- After New Licensing Agreement" set forth above under "-- April
Information." As was the case in connection with the preparation of the April
information, this second set of projected financial information gives effect to
the estimated impact on the Updated Base Financial Projections of the Licensing
Agreement and, in addition, takes into account the possibility that HLR may
elect not to exercise its option with respect to all development projects. See
"The Licensing Agreement." As in the case of the projected financial information
set forth in the immediately preceding table, the following projected financial
information assumes that one new product will be put into development each year:
UPDATED 1995 - 2000 FINANCIAL PROJECTIONS -- AFTER NEW LICENSING AGREEMENT
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999 2000
---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $958 $1,032 $1,134 $1,205 $1,345 $1,555
Net Income............................ 184 248 252 268 291 387
Earnings Per Share.................... 1.52 2.02 2.02 2.08 2.23 2.92
</TABLE>
The third set of projected financial information reflects the estimated
effects on the projections set forth in the immediately preceding table of the
Company's current intention to accelerate its product development efforts by
bringing three new products or product indications into development in the next
year, rather than one product, as is assumed in each of the other sets of
projected financial information set forth in this section. The third set of
information also assumes that in addition to product revenue reflected in the
immediately preceding table, one additional new product or product indication
will be approved during the period covered
83
<PAGE> 97
by the projections. All other assumptions used in preparing the following
projections are consistent with the assumptions upon which the projected
financial information set forth in the preceding table is based:
UPDATED 1995 - 2000 FINANCIAL PROJECTIONS -- AFTER NEW LICENSING AGREEMENT
AND WITH ACCELERATED PRODUCT DEVELOPMENT
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997 1998 1999 2000
------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 958 $ 1,031 $ 1,132 $ 1,203 $ 1,390 $ 1,580
Net Income............................ 184 227 236 243 305 389
Earnings Per Share.................... 1.52 1.85 1.90 1.89 2.34 2.94
</TABLE>
CERTAIN SIGNIFICANT CONSIDERATIONS
All of the projections set forth above are necessarily based upon
assumptions with respect to Genentech, the pharmaceutical and biotechnology
industries, general business and economic conditions, and other matters and are
inherently uncertain and involve numerous factors beyond Genentech's control,
including, without limitation, Roche's decision whether to exercise its options
under the Licensing Agreement. To the extent that such projections reflect the
anticipated sales performance of products currently marketed by Genentech and
products currently licensed by Genentech to third parties, such projections were
developed based upon information, in the nature of estimates, forecasts and
projections, provided by members of Genentech's staff. The anticipated sales
performance of potential new products that are currently in various stages of
Genentech's research and development process, and new indications for existing
products, were generated for purposes of the projections from estimates of the
potential markets for such products based upon analyses of the patient
populations for the health conditions to be treated by such products and
estimates of sale prices for such products. The projections assumed that such
new products will in fact be developed; will be effective; will obtain all
necessary governmental approvals; and will be introduced into the market; all in
accordance with management's current plans, including the timing assumptions
thereof, with respect to such products and, in most cases, prior to the
introduction of competitive products. However, in light of the uncertainties
inherent in any predictions as to whether and when the development of such
products can be successfully completed, management probability adjusted such
projected expenses and sales for new products and new indications on a
product-by-product basis in arriving at the projections set forth above.
Management believes that this probability adjustment, although subjective, is
appropriate in light of the uncertainties inherent in Genentech's business.
The methods and assumptions used in preparing the projected financial
information set forth in this section "Certain Projections of Future Operations
and Other Information" involved significant elements of subjective judgment
which may or may not prove to be correct. Further, management recognized that
the product-by-product probability adjustment applied in the projections (to the
extent they relate to or are derived from the potential sales and expenses of
new products and new indications) may not adequately take into account the
possibility that some or all of the projected new products and indications may
not be successfully developed within the five-year period. ACCORDINGLY, SUCH
PROJECTED FINANCIAL INFORMATION IS NOT NECESSARILY INDICATIVE OF FUTURE
PERFORMANCE OF GENENTECH, WHICH MAY BE SIGNIFICANTLY LESS FAVORABLE OR MORE
FAVORABLE THAN AS SET FORTH ABOVE. THE INCLUSION OF SUCH PROJECTED FINANCIAL
INFORMATION HEREIN SHOULD NOT BE REGARDED AS A REPRESENTATION BY GENENTECH THAT
THE PROJECTED RESULTS INDICATED WILL BE ACHIEVED OR THAT THE SPECIFIC
DEVELOPMENT STRATEGY REFLECTED IN EACH OF THE CASES SET FORTH ABOVE WILL BE
ADOPTED. BECAUSE SUCH PROJECTED FINANCIAL INFORMATION IS INHERENTLY SUBJECT TO
UNCERTAINTY, GENENTECH ASSUMES NO RESPONSIBILITY FOR ITS ACCURACY.
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<PAGE> 98
The foregoing projections are not included in this Proxy
Statement/Prospectus in order to induce any stockholder to vote for approval of
the Proposal. Neither Genentech nor any of its financial or other advisors or
any of their respective directors or officers assumes any responsibility for the
accuracy of such projections. Genentech's independent auditors have not
performed any procedures with respect to such projections and, accordingly,
assume no responsibility for them. Such projections are not to be regarded as
facts and should not be relied upon as an accurate representation of future
results. In addition, because the estimates and assumptions underlying such
projections are based upon events and circumstances that have not taken place
and are inherently subject to significant scientific, financial, market,
economic and competitive uncertainties and contingencies which are difficult or
impossible to predict accurately and are beyond Genentech's control, there can
be no assurance that the projections will be realized. Accordingly, it is
expected that there will be differences between actual and projected results,
and actual results may be materially higher or lower than those set forth above.
None of the Special Committee, the Independent Committee, the Genentech
Board nor Roche has been provided further updates of the projected financial
information set forth above since their respective presentation to the Genentech
Board on April 29 and 30, 1995 and delivery to the Genentech Board and Roche on
September 8, 1995.
CERTAIN INFORMATION CONCERNING
ROCHE AND ROCHE HOLDING
Roche Holding is the parent company of an international health care concern
operating in more than 100 countries and employing approximately 60,000 people
worldwide. It was incorporated in 1896 in Basel, Switzerland, under the name of
F. Hoffmann-La Roche & Co. Limited Company. In June 1989, Roche Holding assumed
its present name and transferred its operating businesses and related assets and
liabilities to a newly established subsidiary, F. Hoffmann-La Roche Ltd, also
incorporated in Switzerland and having its principal office in Basel. The
address of the principal office of Roche Holding is Grenzacherstrasse 124,
CH-4002, Basel, Switzerland. Roche Holding's business consists principally of
four divisions: Pharmaceuticals, Vitamins and Fine Chemicals, Diagnostics and
Fragrances and Flavors.
Roche Holding's capital stock is officially listed on the stock exchanges
of Zurich, Basel and Geneva.
Roche, which was incorporated in the State of Delaware in 1987, is an
indirect wholly owned subsidiary of Roche Holding and is the holding company for
the principal operating subsidiaries of Roche Holding in the United States.
Roche, through its various direct and indirect subsidiaries, engages primarily
in the development and manufacture of pharmaceuticals, vitamins and fine
chemicals, diagnostics, flavors and fragrances, and in the business of
analytical laboratory services. In 1994, revenues of Roche were $4.5 billion, an
increase of 15% over the previous year. Roche and Roche Holding are members of
the Roche Group. Certain financial statements of the Roche Group are set forth
below.
Roche Finance Ltd, a Swiss corporation ("Roche Finance"), owns 100% of the
stock of Roche, and in turn is a wholly owned subsidiary of Roche Holding. Roche
Finance is a holding company having participations in various subsidiaries of
Roche Holding. Roche Finance was incorporated in 1971 in Basel, Switzerland,
under the name Roche Chemie AG and assumed its present name in July 1989. The
address of the principal office of Roche Finance is Grenzacherstrasse 124,
CH-4002, Basel, Switzerland.
None of Roche, Roche Holding, or Roche Finance has during the last five
years (i) been convicted in a criminal proceeding (excluding traffic violations
or other similar misdemeanors); or (ii) been a party to a civil proceeding of a
judicial or administrative body of competent jurisdiction as a result of which
such person was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to, federal
or state securities laws or finding any violation with respect to such laws.
Other than as described in "Summary and Special Factors -- The 1990
Merger", "General Information -- Required Vote", none of Roche, Roche Holding,
or Roche Finance is the direct or indirect beneficial owner of any security of
Genentech or, other than as described in this Proxy Statement/Prospectus, has
any contract, arrangement, understanding or relationship with respect to any
securities of Genentech.
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<PAGE> 99
Other than as described in "The Proposed Transactions -- Background of the
Proposed Transactions," none of Roche, Roche Holding, or Roche Finance has since
January 1, 1993 had any contacts, negotiations, or entered into any transactions
with Genentech concerning a merger, consolidation or acquisition, a tender offer
or other acquisition of securities, an election of directors, or a sale or other
transfer of a material amount of assets, or entered any contracts, arrangements,
understandings or relationships with Genentech or any of its executive officers,
directors, controlling persons or subsidiaries.
Merger Subsidiary, a wholly owned subsidiary of Roche, was incorporated in
the State of Delaware in May of 1995 and has never carried on any independent
business activities other than those incident to its formation and the Merger.
For these reasons, no meaningful financial data are available with respect to
Merger Subsidiary. Merger Subsidiary owns no physical properties and has no
subsidiaries. There are no pending legal proceedings to which Merger Subsidiary
is a party or which relate to the property of Merger Subsidiary.
FINANCIAL INFORMATION OF THE ROCHE GROUP
The following consolidated financial statements relating to the Roche Group
have been extracted from the 1994 Annual Report and 1995 Half-Year Report of the
Roche Group which have been submitted to the Commission pursuant to Rule
12g3-2(b) under the Exchange Act. The consolidated financial statements for the
two-year period ended December 31, 1994 and at December 31, 1994 and 1993 were
audited by Price Waterhouse AG, Group Auditors. The consolidated financial
statements for the half-years ended June 30, 1995 and June 30, 1994 have not
been audited. The financial data set forth below are qualified in their entirety
by reference to the 1994 Annual Report and 1995 Half-Year Report of the Roche
Group and the other documents submitted by Roche Holding to the Commission under
Rule 12g3-2b including the financial statements and related notes contained
therein. These documents may be obtained from Roche Holding at the address
listed above or inspected and copied at the public reference facilities
maintained by the Commission located at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
The Roche Group prepared its consolidated financial statements published in
the 1994 Annual Report and the 1995 Half-Year Report and presented below in
accordance with the accounting principles formulated by the International
Accounting Standards Committee ("IASC"). The IASC was established in 1973 by
professional accountancy bodies from around the world (including the American
Institute of Certified Public Accountants) with the following objectives: (i) to
formulate and publish in the public interest accounting standards to be observed
in the presentation of financial statements and to promote their worldwide
acceptance and observance; and (ii) to work generally for the improvement and
harmonization of regulations, accounting standards and procedures relating to
the presentation of financial statements.
There are currently 110 member bodies of the IASC in 82 countries,
including the United States. With representation on the board of the IASC, the
influence of the United States is noticeable in the extent to which
International Accounting Standards ("IAS") rely on United States generally
accepted accounting principles ("US GAAP") in many cases.
Because of the need initially to satisfy the requirements of many diverse
legal and accounting systems around the world, the 31 standards originally
issued by the IASC contain alternative accounting treatments for similar
transactions. With a view to facilitating multinational securities offerings,
the IASC is continuing to work toward improving existing standards so that they
may be accepted by the International Organization of Securities Commissions as
mutually acceptable standards of accounting and disclosure. The key to this
process is harmonization through reduction of the number of alternative
accounting treatments considered as acceptable under IAS. In January 1989, the
IASC published an exposure draft ("E 32") on "Comparability of Financial
Statements" setting forth proposals to eliminate or restrict 26 available
options. Following comments received on E 32, the proposals -- in some cases in
modified form -- were built into a "Statement of Intent" (July 1991). The latter
has formed the basis for a series of exposure drafts setting forth the detail of
the proposed revisions to current IAS. In November 1993, the board of the IASC
approved revisions to 10 current standards which took effect on January 1, 1995.
These revised standards generally do not require material changes in the
principles of valuation and measurement currently applied by the Roche Group.
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<PAGE> 100
However, application of the revised standard for business combinations will
require that the Roche Group recognize goodwill arising after January 1, 1995 as
an intangible asset to be amortized by charging it as an expense over its useful
life. Further revisions are being considered on an ongoing basis. At the end of
this revision process, the accounting and disclosure requirements will be
somewhat more restrictive than at present, and adaptations of Roche Group
accounting policies may well ensue.
The specific accounting principles adopted by the Roche Group from the
alternatives currently allowed under IAS are generally similar to US GAAP.
However, the following divergences in respect of recognition and measurement
criteria exist:
- Amortization of intangible assets: As under US GAAP, the Roche Group
amortizes purchased intangible assets over their estimated economic
lives. However, a maximum life of 20 years is allowed, in contrast to the
40 years permitted under US GAAP.
- Business combinations: US GAAP requirements for accounting for business
combinations are similar to those applied by the Roche Group, except with
respect to the treatment of goodwill, certain limited matters relating to
the determination of fair value and acquisition costs and the treatment
of acquired in-process research and development. US GAAP requires
capitalization of goodwill on acquisitions, with amortization over a
maximum of 40 years. Further, US GAAP requires the determination of a
fair value for in-process research and development which has been
acquired and the charging to expense of the amount so determined. The
Roche Group charged acquired goodwill directly to retained earnings for
business combinations through December 31, 1994, as was allowed under IAS
22, and includes acquired in-process research and development as part of
the goodwill amount.
- Capitalization of borrowing costs: US GAAP requires, under certain
circumstances, the capitalization of the interest costs incurred on
qualifying assets in preparing them for their intended use. In contrast,
the Roche Group expenses all such interest cost, as allowed by IAS 23.
- Pensions: Through December 31, 1994, IAS allowed a wider range of
alternative valuation and actuarial methods for accounting for pensions
than does Financial Accounting Standard ("FAS") 87 in the United States.
Local companies of the Roche Group accounted for pensions in accordance
with the legal regulations, fiscal requirements and economic conditions
of the countries in which employees are employed. Funded pension plans in
the companies in the United States follow FAS 87.
- Marketable securities: US GAAP requires that investments in equity
securities that have readily determinable fair values and investments in
debt securities be classified in three categories and accounted for as
follows:
-- debt securities that the enterprise has the positive intent and
ability to hold to maturity be classified as "held to maturity
securities" and reported at amortized cost.
-- debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as
"trading securities" and reported at fair value, with unrealized
gains and losses included in earnings.
-- debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified as
"available-for-sale securities" and reported at fair value, with
unrealized gains and losses excluded from earnings and reported in
a separate component of shareholders' equity.
The Roche Group's marketable securities are included at the lower of cost
or market value.
The Roche Group's treatment of foreign currency exchange differences is
consistent with both IAS 21 and FAS 52 in the United States: currency
transaction differences are taken directly to income, while currency translation
differences arising on the translation of the financial statements of
subsidiaries reporting in currencies other than the Swiss franc ("Sfr.") are
taken directly to retained earnings.
The Roche Group's accounting policy for post-retirement benefits other than
pensions was changed in 1992 to comply with FAS 106. A liability has been
included in the financial statements which is sufficient to
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<PAGE> 101
cover the present value of the accumulated benefit obligation based on certain
assumptions. A charge has been made as a separate item in the statement of
income which reflects the cumulative after-tax effect.
The consolidated financial statements of the Roche Group are published in
Swiss francs. The following table sets forth, for the periods and dates
indicated, certain information concerning the exchange rate for Swiss francs
into U.S. dollars based upon the noon buying rate in New York City for cable
transfers in foreign currencies as determined from publicly available sources,
are provided for convenience, and are not necessarily the rates used by the
Roche Group.
(SFR. PER U.S. DOLLAR)
<TABLE>
<CAPTION>
PERIOD AT DECEMBER 31 AVERAGE RATE(1) HIGH LOW
---------------------------- -------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
1992........................ Sfr. 1.4665 Sfr. 1.4060 Sfr. 1.5508 Sfr. 1.2173
1993........................ 1.4850 1.4778 1.5470 1.3849
1994........................ 1.3100 1.3581 1.491 1.2450
</TABLE>
---------------
(1) The average of the exchange rates on the last day of each month during the
year.
The noon buying rate in New York City on June 30, 1995 and on August 24,
1995, were, respectively, 1.1515 Sfr. per U.S. dollar and 1.2210 Sfr. per U.S.
dollar.
88
<PAGE> 102
CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
ASSETS
LONG-TERM ASSETS
Property, plant and equipment(2)......................................... 8,050 6,789
Intangible assets(3)..................................................... 4,261 1,496
Other long-term assets(4)................................................ 1,238 1,237
------- -------
Total long-term assets.............................................. 13,549 9,522
------- -------
CURRENT ASSETS
Inventories(5)........................................................... 3,690 3,127
Accounts receivable -- trade(6).......................................... 2,987 2,664
Other receivables and prepaid expenses(7)................................ 1,709 917
Marketable securities(8)................................................. 13,116 12,801
Cash..................................................................... 1,182 1,895
------- -------
Total current assets................................................ 22,684 21,404
------- -------
Total assets........................................................ 36,233 30,926
======= =======
EQUITY AND LIABILITIES
EQUITY
Share capital............................................................ 160 160
Retained earnings and reserves........................................... 16,262 17,754
------ ------
Shareholders' equity per accompanying statement(9)....................... 16,422 17,914
Minority interests(10)................................................... 861 625
------ ------
Total shareholders' equity and minority interests................... 17,283 18,539
------ ------
LONG-TERM DEBT(11)....................................................... 5,210 4,723
------ ------
NON-CURRENT LIABILITIES
Deferred income taxes(12)................................................ 1,088 888
Pensions and similar obligations(13)..................................... 733 725
Obligations for warrants(11)............................................. 1,055 612
Other.................................................................... 1,948 973
------ ------
Total non-current liabilities....................................... 4,824 3,198
------ ------
CURRENT LIABILITIES
Accounts payable -- trade................................................ 751 662
Other payables and accrued liabilities(14)............................... 4,198 2,984
Current portion of long-term debt(11).................................... 669 163
Short-term debt(11)...................................................... 3,298 657
------ ------
Total current liabilities........................................... 8,916 4,466
------ ------
TOTAL EQUITY AND LIABILITIES............................................. 36,233 30,926
====== ======
</TABLE>
Reference numbers indicate corresponding Notes to the Consolidated Financial
Statements
89
<PAGE> 103
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
SHARE CAPITAL
Balance at 1 January....................................................... 160 160
------- -------
Balance at 31 December..................................................... 160 160
------- -------
RETAINED EARNINGS AND RESERVES
Balance at 1 January....................................................... 17,754 15,886
Additional paid-in capital from the exercise of warrants(9)................ 558 --
Net income................................................................. 2,860 2,478
Dividends paid............................................................. (404) (312)
Goodwill of businesses acquired(1)......................................... (4,327) (382)
Currency translation differences........................................... (179) 84
------- -------
Balance at 31 December..................................................... 16,262 17,754
------- -------
TOTAL SHAREHOLDERS' EQUITY AT 31 DECEMBER............................. 16,422 17,914
======= =======
</TABLE>
Reference numbers indicate corresponding Notes to the Consolidated Financial
Statements.
90
<PAGE> 104
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
SALES...................................................................... 14,748 14,315
Cost of goods sold......................................................... (4,870) (5,178)
------- -------
GROSS PROFIT............................................................... 9,878 9,137
Marketing and distribution................................................. (3,764) (3,527)
Research and development(15)............................................... (2,332) (2,269)
Administrative............................................................. (863) (821)
Other operating income (expense), net(16).................................. (263) (172)
------- -------
OPERATING PROFIT........................................................... 2,656 2,348
Non-operating income (expense), net(17).................................... 936 786
------- -------
INCOME BEFORE TAXES........................................................ 3,592 3,134
Taxes(18).................................................................. (674) (622)
------- -------
INCOME BEFORE MINORITY INTERESTS........................................... 2,918 2,512
Income applicable to minority interest(10)................................. (58) (34)
------- -------
NET INCOME............................................................ 2,860 2,478
======= =======
</TABLE>
Reference numbers indicate corresponding Notes to the Consolidated Financial
Statements.
91
<PAGE> 105
CONSOLIDATED STATEMENTS OF CASH FLOWS
See note 22
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................. 2,860 2,478
Depreciation(2)............................................................ 712 652
Amortization of intangibles(3)............................................. 267 278
Deferred income taxes(18).................................................. 16 45
Income applicable to minority interests.................................... 58 34
Increase in current assets................................................. (706) (605)
Increase in current liabilities............................................ 252 407
Other...................................................................... (339) (313)
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES...................................... 3,120 2,976
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from new long-term debt(11)....................................... 1,360 2,754
Repayment of long-term debt(11)............................................ (613) (2,066)
Proceeds from exercise and sale of warrants................................ 887 596
Payment on exercise of bull spread warrants(11)............................ (730) --
Increase (decrease) in short-term debt, net................................ 2,274 (143)
Dividends paid............................................................. (404) (312)
Other...................................................................... 98 61
------- -------
CASH PROVIDED BY FINANCING ACTIVITIES...................................... 2,872 890
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment(2).............................. (1,355) (1,407)
Proceeds from disposal of property, plant and equipment and
from sale of other assets................................................ 522 176
Acquisitions of businesses, net of cash acquired(1)........................ (6,564) (384)
Sales (purchases) of marketable securities, net and other.................. 714 (3,260)
------- -------
CASH USED IN INVESTING ACTIVITIES.......................................... (6,683) (4,875)
------- -------
Net effect of currency translation on cash................................. (22) (13)
------- -------
DECREASE IN CASH........................................................... (713) (1,022)
------- -------
Cash at beginning of year.................................................. 1,895 2,917
------- -------
CASH AT END OF YEAR........................................................ 1,182 1,895
======= =======
</TABLE>
Reference numbers indicate corresponding Notes to the Consolidated Financial
Statements.
92
<PAGE> 106
SUMMARY OF ACCOUNTING POLICIES
BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements of the Roche Group are based on the separate
financial information of the Group companies prepared for the year ending 31
December using the accounting policies summarized below, which are in accordance
with the principles formulated by the International Accounting Standards
Committee. Certain amounts in the 1993 financial statements have been
reclassified to be comparable with the 1994 presentation.
BASIS OF CONSOLIDATION
The financial statements of the Group include Roche Holding Ltd and the
companies which it controls. Control is the power to govern the financial and
operating policies of an enterprise so as to obtain benefits from its
activities. This control is normally evidenced when the Group owns, either
directly or indirectly, more than 50% of the voting rights of a company's share
capital. The equity and net income attributable to minority shareholders'
interests are shown separately in the balance sheet and statement of income,
respectively. All intercompany transactions and balances with companies included
in the consolidation are eliminated. Companies acquired during the year are
consolidated from their date of acquisition and subsidiaries disposed of are
included up to the effective date of disposal.
Investments in associated companies are accounted for by the equity method.
These are companies over which the Group exercises significant influence, but
which it does not control. This is normally evidenced when the Group owns 20% or
more of the voting rights of the company. Interests in certain joint ventures
are reported using the line-by-line proportionate consolidation method. Other
investments are carried at cost after deducting appropriate provisions for
permanent impairment and are included in other long-term assets.
CURRENCY TRANSLATION
Assets and liabilities of Group companies reporting in currencies other
than Swiss francs are translated into Swiss francs using year-end rates of
exchange. Sales, costs, expenses and net income and cash flows are translated at
the average rates of exchange for the year. Translation differences due to the
changes in exchange rates between the beginning and the end of the year and the
difference between net income translated at the average and year-end exchange
rates are taken directly to retained earnings. Exchange gains and losses on
hedges of non-Swiss franc net investments and on intercompany balances of a
long-term investment nature are also taken to retained earnings.
Group companies operating in highly inflationary economies maintain
financial information for Group reporting purposes in US dollars or Swiss francs
depending on the circumstances. The effect of exchange rate differences between
the local currency and the US dollar or Swiss franc in respect of monetary
assets and liabilities is included in income.
Gains and losses on exchange arising in Group companies as a result of
their foreign currency transactions are included in income.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost of purchase or
construction and depreciated on a straight-line basis. Estimated useful lives of
major classes of depreciable assets range from 25 to 40 years (principally 33
years) for buildings and from 3 to 15 years (principally 10 years) for machinery
and equipment. Cost includes the Group's own services where appropriate.
Investment grants or similar assistance for projects are initially recorded as
deferred income (in other liabilities) and subsequently amortized to income over
the useful lives of the related assets. Interest costs on borrowings to finance
additions prior to their use are expensed as incurred, along with other interest
expense.
Assets acquired under leasing agreements which provide Group companies with
substantially all benefits and risks of ownership are capitalized at amounts
equivalent to the estimated present value of the underlying
93
<PAGE> 107
lease payments. The corresponding rental obligations, net of finance charges,
are included in debt. Leased assets are depreciated over their estimated useful
lives.
INTANGIBLE ASSETS
Intangible assets comprise acquired intellectual property (including
patents, technology and know-how), trademarks, licenses, and other similarly
identified rights. They are recorded at their acquisition cost and are amortized
using the straight-line basis over their estimated economic lives for a period
not exceeding 20 years from date of acquisition.
Costs associated with internally developed intangible assets are expensed
as incurred.
GOODWILL
Goodwill, which relates to the excess of the cost of acquisition of a
subsidiary or associated company over the fair value of its attributable net
assets at the date of acquisition, is taken directly to retained earnings.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value.
Provision is made for slow-moving goods and obsolete materials are written off.
Cost is determined by the first-in first-out or average method. The cost of
finished goods and work in progress comprises raw materials, other direct costs
and related production overheads.
CASH AND MARKETABLE SECURITIES
Cash comprises cash on hand and time, call and current balances with banks
and similar institutions.
Marketable securities, comprising highly liquid investments purchased by
the Group as part of its funds management policy, are included at the lower of
cost or market value.
DEFERRED INCOME TAXES
Deferred income taxes are provided using the comprehensive liability method
of accounting for income taxes, under which deferred tax consequences are
recognized for differences between the tax bases of assets and liabilities and
their carrying values for financial reporting purposes. The amount of deferred
income taxes on these differences is determined using the provisions of local
tax laws, including rates, and is adjusted upon enactment of changes in these
laws.
Provision has not been made for taxes on possible future distribution of
earnings retained by subsidiary and associated companies as these earnings have
been, or will be, substantially re-invested by the companies concerned. It is
not, therefore, meaningful to provide for these taxes nor is it practicable to
estimate their full amount or the withholding tax element.
EMPLOYEE RETIREMENT BENEFITS
Retirement plans are provided for employees of all major Group companies.
Plans are generally funded by payments from employees and by the Group to trusts
independent of the Group's finances. Where, due to local conditions, a plan is
not funded, a liability is recorded in the financial statements. Valuations of
both funded and unfunded plans are carried out by independent actuaries.
Contributions to funded plans and changes in liabilities for unfunded plans are
based on the advice of the actuaries.
Some Group companies provide certain post-retirement healthcare and life
insurance benefits to their retirees, the entitlement to which is usually based
on the employee remaining in service up to retirement age and the completion of
a minimum service period. The expected costs of these benefits are accrued over
the periods employees render service. A liability is included in the financial
statements which is sufficient to cover the present value of the accumulated
benefit obligation based on certain assumptions. These benefits are partially
funded by means of a trust. Valuations of these obligations are carried out by
independent actuaries.
94
<PAGE> 108
This policy was adopted in 1992. Prior to that, the payments made for the
benefits were charged to income as incurred.
DERIVATIVE FINANCIAL INSTRUMENTS
The Group utilizes various strategies to manage its exposure to foreign
currency and interest rate risks. These risks may be managed through the use of
certain types of derivative financial instruments. Gains and losses from forward
exchange contracts, options and currency swaps used to hedge potential exchange
rate exposures are offset against losses and gains on the specific transactions
being hedged. Interest differentials under swap arrangements, forward rate
agreements and interest rate caps used to manage interest rate exposures are
recognized by adjustments to interest expense. When such derivative financial
instruments are used for trading purposes any gains and losses from changes in
their market value are taken to income as they arise. Certain covered call
option contracts entered into by the Group require that the underlying
securities be lodged with the financial institutions involved in the
arrangement.
SALES AND COST OF GOODS SOLD
Sales represent goods supplied and services rendered to customers less
volume discounts and sales taxes. Cost of goods sold also includes the costs of
services rendered.
RESEARCH AND DEVELOPMENT
Research and development costs are charged against income as incurred, with
the exception of buildings and major items of equipment, which are capitalized
and depreciated.
95
<PAGE> 109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. CHANGES IN GROUP ORGANIZATION
Effective 1 November 1994, Roche acquired all of the outstanding common
stock of Syntex Corporation, an international healthcare company involved in the
research, development, manufacturing and marketing of pharmaceutical products.
The cost of the acquisition including expenses incidental thereto was 5,560
million US dollars principally comprised of the cash consideration of 5,158
million US dollars and shares of Limited Conversion Preferred Stock of Roche
Capital Corporation (see Note 10). The acquisition was accounted for under the
purchase method of accounting. Accordingly the cost of the acquisition was
allocated to identifiable assets and liabilities based on their estimated fair
values. In determining the fair values consideration was given to intended
changes in Group activities resulting from the acquisition of Syntex. These
changes necessitated the creation of provisions for expected costs such as
employee termination and plant closing costs. Goodwill of 4,183 million Swiss
francs has been charged directly to retained earnings. The results of operations
of Syntex have been included in those of the Group since the acquisition and
contributed sales of 332 million Swiss francs.
In December 1994 Roche entered into an agreement providing for the merger
of Roche Biomedical Laboratories, Inc. (RBL), with and into National Health
Laboratories Holdings Inc. (NHL). Both companies operate clinical laboratories
in the United States. All the outstanding shares of RBL will be converted into
newly issued shares of NHL common stock representing 49.9% of the total number
of shares of NHL common stock outstanding at the effective date of the merger.
In addition the merger agreement provides for Roche to purchase 8,325,000
warrants for 51 million US dollars and a cash contribution to NHL of 135 million
US dollars. The merger is subject to various regulatory clearances and approval
from the NHL shareholders. If the merger is consummated, Roche will account for
its investment using the equity method. RBL had sales in 1994 of 730 million US
dollars (996 million Swiss francs).
With effect from 5 February 1993 Roche acquired the consumer healthcare
business of Fisons pic in the United Kingdom and Ireland for a cash
consideration of 90 million pounds sterling. The acquisition was made in order
to expand Roche's position in the self-medication market in Europe.
96
<PAGE> 110
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
BUILDINGS
AND MACHINERY
LAND AND CONSTRUCTION IN
LAND IMPROVEMENTS EQUIPMENT PROGRESS 1994 TOTAL 1993 TOTAL
---- ------------ --------- --------------- ---------- ----------
(IN MILLIONS OF SWISS FRANCS)
<S> <C> <C> <C> <C> <C> <C>
COST
At beginning of year......... 406 4,725 7,510 965 13,606 12,477
Currency translation
effects.................... (19 ) (187) (440) (44) (690) 69
Changes in Group
organization............... 46 635 333 150 1,164 (9)
Additions.................... 10 36 249 1,060 1,355 1,407
Disposals.................... (18 ) (106) (305) (59) (488) (338)
Transfers.................... -- 130 463 (593) -- --
--- ------ ------ ----- ------ ------
At end of year............... 425 5,233 7,810 1,479 14,947 13,606
--- ------ ------ ----- ------ ------
ACCUMULATED DEPRECIATION
At beginning of year......... (2,085) (4,732) (6,817) (6,432)
Currency translation
effects.................... 94 264 358 (59)
Changes in Group
organization............... -- 11
Depreciation for the year.... (175) (537) (712) (652)
Disposals.................... 58 216 274 315
------ ------ ------ ------
At end of year............... (2,108) (4,789) (6,897) (6,817)
------ ------ ------ ------
Net book value............... 425 3,125 3,021 1,479 8,050 6,789
=== ====== ====== ===== ====== ======
</TABLE>
The capitalized cost of machinery and equipment under lease contracts
amounts to 54 million Swiss francs and the net book value of these assets
amounts to 37 million Swiss francs.
Repairs and maintenance expense for 1994 (paid to third parties) was 534
million Swiss francs (1993: 374 million Swiss francs).
3. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
1994 1993
------ -----
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
COST
At beginning of year................................................ 2,456 2,560
Currency translation effects........................................ (78) 15
Changes in Group organization....................................... 3,000 8
Additions........................................................... 54 34
Disposals........................................................... (3) (161)
------- ------
At end of year...................................................... 5,429 2,456
------- ------
ACCUMULATED AMORTIZATION
At beginning of year................................................ (960) (786)
Currency translation effects........................................ 59 (8)
Amortization for the year........................................... (267) (278)
Disposals........................................................... -- 112
------- ------
At end of year...................................................... (1,168) (960)
------- ------
Net book value...................................................... 4,261 1,496
======= ======
</TABLE>
97
<PAGE> 111
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER LONG-TERM ASSETS
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
Investments in associated companies.................................. 8 56
Other investments.................................................... 319 356
Restricted funds..................................................... 543 608
Loans receivable..................................................... 111 56
Amounts receivable under sales-type leases........................... 17 22
Other................................................................ 240 139
----- -----
Total other long-term assets......................................... 1,238 1,237
===== =====
</TABLE>
5. INVENTORIES
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
Raw materials and supplies........................................... 875 831
Work in process...................................................... 417 328
Finished goods....................................................... 2,398 1,968
----- -----
Total inventories.................................................... 3,690 3,127
===== =====
</TABLE>
6. ACCOUNTS RECEIVABLE -- TRADE
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
Accounts receivable.................................................. 3,002 2,681
Notes receivable..................................................... 124 108
Current amounts receivable under sales-type leases................... 16 19
Less: provision for doubtful accounts................................ (155) (144)
----- -----
Total accounts receivable -- trade................................... 2,987 2,664
===== =====
</TABLE>
7. OTHER RECEIVABLES AND PREPAID EXPENSES
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
Accrued interest income.............................................. 107 223
Prepaid expenses..................................................... 404 215
Assets held for sale, net............................................ 479 --
Income taxes recoverable............................................. 103 69
Other receivables.................................................... 616 410
----- -----
Total other receivables and prepaid expenses......................... 1,709 917
===== =====
</TABLE>
98
<PAGE> 112
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. MARKETABLE SECURITIES
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
Bonds and debentures............................................... 2,437 6,228
Equity securities.................................................. 9,624 4,856
Money market instruments........................................... 1,055 1,717
----- -----
Total marketable securities........................................ 13,116 12,801
===== =====
</TABLE>
The aggregate market value of the portfolio approximates the carrying
amount at 31 December 1994.
9. SHAREHOLDERS' EQUITY
Share capital:
At 31 December 1994 and 1993, the authorized and called-up share capital
was 1,600,000 shares with a nominal value of Sfr. 100 each.
Based on information available to Roche, a shareholders' group with pooled
voting rights, comprising the Hoffmann and Oeri-Hoffmann families and Dr. P.
Sacher, hold 800,200 shares as in the preceding year. (This figure does not
include shares without pooled voting rights held outside the group by individual
members of the group.) There were no transactions with these individuals other
than those in the ordinary course of business.
Retained earnings and reserves:
As of 31 December 1994 and 1993, 7,025,627 non-voting equity securities
(Genussscheine) had been issued. These have no nominal value and are not part of
the share capital under Swiss company law. Each non-voting equity security
confers the same rights as any of the shares to participate in the net profit
and any remaining proceeds from liquidation following repayment of the nominal
value of the shares and, if any, participation certificates. Also outstanding at
31 December 1993 were 4,127,354 warrants which entitled the holders up to 5
December 1994 to acquire one non-voting equity security at a price of Sfr. 2,800
in exchange for twenty of the warrants. Of the issued non-voting equity
securities, 206,368 were reserved for the exercise of these warrants. During
1994 all of these warrants were exercised and the Group received 558 million
Swiss francs which has been reflected as additional paid-in capital in the
statement of changes in shareholders' equity for 1994.
10. MINORITY INTERESTS
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Genentech, Inc....................................................... 622 622
Limited Conversion Preferred Stock................................... 231 --
Other................................................................ 8 3
--- ---
Total minority interests............................................. 861 625
=== ===
</TABLE>
The minority interest of approximately 35% in Genentech is publicly held by
third parties in the form of 41,274,925 shares of redeemable common stock. These
shares are redeemable by Genentech at the option of Roche in whole (not in part)
at US$58.75 per share in the first calendar quarter of 1995 and increasing to
US$60.00 per share on 1 April 1995. The redemption right expires on 30 June
1995. Roche has a contractual right with Genentech by terms of a governance
agreement to cause this redemption right to be exercised upon deposit in trust
by Roche of the required funds. In accordance with this agreement, Roche may
continue to make further purchases of Genentech stock up to an amount not
exceeding 75% of the whole. After 1 July
99
<PAGE> 113
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995, Roche may submit at any time a bid to purchase the remaining shares of
Genentech. The bid is subject to the approval of the Board of Directors of
Genentech and, subsequently, of the non-Roche stockholders and for the period 1
July 1995 until 30 June 1996 must be for not less than US$60.00 per share.
At 31 December 1994, there were 277,830 (31 December 1993: 1,296,714)
outstanding warrants to purchase Genentech stock, exercisable at prices ranging
from US$27.57 to US$28.26. As a result of the Genentech merger, each such
warrant entitles the holder to receive, upon exercise, one half-share of
Genentech redeemable common stock and US$18 in cash. As contemplated by the
Genentech merger agreement, the Group is required to reimburse Genentech for the
cash amount payable upon exercise of such warrants. The warrants expire on 31
July 1996.
The Group currently treats costs incurred in purchasing additional
Genentech stock as goodwill, which is charged directly to retained earnings.
At 31 December 1994 Genentech had options outstanding which entitled the
holders on exercise of the options to purchase 15,980,807 shares of its
redeemable common stock at prices ranging from US$14.08 to US$50.75.
In connection with the acquisition of Syntex Corporation in 1994, an
indirectly wholly owned subsidiary of Roche Holding Ltd issued 175,960 shares of
Limited Conversion Preferred Stock (LCPS) with a total value of 176 million US
dollars (231 million Swiss francs). The LCPS are subject to mandatory redemption
in 2004 and holders receive dividends at a rate of 3% per annum on the
liquidation value of each share. Shares of LCPS may be exchanged for non-voting
equity securities (Genussscheine) of Roche Holding Ltd. If all the LCPS were
exchanged, it would require 24,630 non-voting equity securities.
100
<PAGE> 114
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. DEBT
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
LONG-TERM DEBT
UNSECURED:
Amounts due to banks and other financial institutions................ 1,905 1,599
3 1/2 percent US dollar bond less unamortized discount of 321 million
Swiss francs (sold with detachable bull spread warrants)........... 989 1,069
2 3/4 percent US dollar bonds less unamortized discount of 211
million Swiss francs (sold with detachable knock-out warrants)..... 1,099 1,202
Zero coupon US dollar exchangeable notes less unamortized discount of
959 million Swiss francs........................................... 901 950
1 percent Japanese yen bonds less unamortized discount of 353 million
Swiss francs (sold with detachable Samurai warrants)............... 967 --
SECURED:
Capitalized lease obligations........................................ 16 53
Other borrowings..................................................... 2 13
----- -----
Total long-term debt............................................ 5,879 4,886
Less: current portion of long-term debt.............................. (669) (163)
----- -----
Total long-term debt excluding current portion.................. 5,210 4,723
----- -----
Repayments of long-term debt are scheduled as follows:
1995................................................................. 669
1996................................................................. 472
1997................................................................. 282
1998................................................................. 982
1999................................................................. 43
Thereafter........................................................... 3,431
-----
Total long-term debt....................................... 5,879
=====
</TABLE>
The zero coupon US dollar exchangeable notes are reflected as due in 1998,
which is the first year that the holders of the notes can request the Group to
purchase the notes.
In April 1991 the Group issued 3 1/2 percent bonds due in 2001 with an
aggregate principal amount of 1 billion US dollars and detachable bull spread
warrants related to the shares of Roche Holding Ltd. The proceeds, net of
expenses, of 975 million US dollars were allocated between the bonds and the
warrants in proportion to their respective fair market values at the time of
issue. The discount arising from the low coupon rate and represented by the
difference between the principal amount and the net proceeds of 639 million US
dollars allocated to the bonds is being charged to interest expense over the
life of the bonds.
The holders of the bull spread warrants exercised them on 16 May 1994 and
received Sfr 10,000 for each 100 warrants or a total of 730 million Swiss
francs. This amount had been accrued by the Group over the period the warrants
were outstanding.
In April 1993 the Group issued 2 3/4 percent bonds due in 2000 with an
aggregate principal amount of 1 billion US dollars and detachable knock-out
warrants relating to non-voting equity securities (Genussscheine) of Roche
Holding Ltd. The proceeds, net of expenses, of 977 million US dollars were
allocated between the bonds and the warrants in proportion to their respective
fair market values at the time of issue. The discount arising from the low
coupon rate and represented by the difference between the principal amount and
the net proceeds of 793 million US dollars allocated to the bonds is being
charged to interest expense over the life of the bonds.
101
<PAGE> 115
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the 4,600,000 warrants issued with the bonds, the Group
simultaneously issued a further identical 5,000,000 warrants. The proceeds
relating to the value of the warrants sold were 400 million US dollars (596
million Swiss francs).
On the exercise date, 22 May 1996, each 60 warrants will entitle the holder
to receive the amount of Sfr 6,000 or, at the option of the Group, one
non-voting equity security (Genussschein). If all of the warrants are exercised,
the holders will receive either 960 million Swiss francs or 160,000 non-voting
equity securities. The maximum cash obligation for the warrants is being accrued
over the period the warrants will be outstanding. At 31 December 1994 the
liability was 720 million Swiss francs and was included in non-current
liabilities.
In September 1993 the Group issued zero coupon exchangeable notes due in
2008. The notes were sold at an original issue discount from their principal
amount at maturity of 1,420 million US dollars. The difference between the
proceeds, net of expenses, of 685 million US dollars and the principal amount at
maturity is being charged to interest expense over the life of the notes, and
results in a yield to maturity of 4 3/4% per annum computed on a semi-annual
bond equivalent basis for the holders of the notes.
On either 23 September 1998 or 23 September 2003 the holders of the notes
can request the Group to purchase the notes. From 23 September 1998 the notes
can be redeemed for cash at the option of the Group. In each case the purchase
price will be the issue price plus accrued original issue discount to the date
of purchase. In the aggregate at 23 September 1998 and 23 September 2003 the
purchase prices would be 888 million US dollars and 1,123 million US dollars,
respectively.
The notes are exchangeable at the option of the holder at any time, unless
previously redeemed or otherwise purchased, for American Depositary Shares
(ADSs), each representing one hundredth of one non-voting equity security
(Genussschein) issued by Roche Holding Ltd. All exchanges will be made at an
exchange rate of 10.44298 American Depositary Shares per US $1,000 principal
amount at maturity of the notes. If the notes were all exchanged for American
Depositary Shares, it would require 148,290 non-voting equity securities to meet
the exchange obligations.
In November 1994 the Group issued 1 percent bonds due in 2002 with an
aggregate principal amount of 100 billion Japanese yen and detachable Samurai
warrants relating to non-voting equity securities (Genussscheine) of Roche
Holding Ltd. The proceeds, net of expenses, of 97.73 billion Japanese yen were
allocated between the bonds and the warrants in proportion to their respective
fair market values at the time of issue. The discount arising from the low
coupon rate and represented by the difference between the principal amount and
the net proceeds of 72.82 billion Japanese yen allocated to the bonds is being
charged to interest expense over the life of the bonds.
The proceeds relating to the warrants sold were 24.92 billion Japanese yen.
For each 1 million Japanese yen of principal, 69 warrants were issued which are
exercisable only on 15 June 1998. On that day each 100 warrants will entitle the
holder to receive, at the option of the Group, either one non-voting equity
security (Genussschein), an amount equivalent to the market price (as defined)
of one non-voting equity security, or Sfr. 7,100.
If all of the warrants are exercised, the holders will receive either 490
million Swiss francs or 69,000 non-voting equity securities (or cash equivalent
of their market value). The maximum cash obligation for the warrants is being
accrued over the period the warrants will be outstanding. At 31 December 1994
the liability was 335 million Swiss francs and was included in non-current
liabilities.
The repayment at maturity of zero-percent subordinated bonds with nominal
value of 250 million Swiss francs was fully provided for during 1992. To this
end the necessary amount of high-quality securities were irrevocably deposited
with a bank. The bank was instructed to apply the proceeds from the sale of
these
102
<PAGE> 116
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securities to the repayment of the bondholders at maturity in 1997. The Group
has recognized this transaction as an extinguishment of debt although the Group
is not released from the debt obligation.
<TABLE>
<CAPTION>
1994 1993
----- ----
(IN MILLIONS
OF
SWISS FRANCS)
<S> <C> <C>
SHORT-TERM DEBT
Amounts due to banks.................................................. 3,273 638
Other borrowings...................................................... 25 19
----- ---
Total short-term debt............................................ 3,298 657
===== ===
</TABLE>
12. DEFERRED INCOME TAXES
Deferred taxes represent the future tax consequences for differences
between the tax bases of assets and liabilities and their values for financial
reporting purposes. The tax consequences of these differences occurring during
the year are charged to income (Note 18).
Deferred taxation arises in respect of the following:
<TABLE>
<CAPTION>
1994 1993
----- ----
(IN MILLIONS
OF
SWISS FRANCS)
<S> <C> <C>
Property, plant and equipment......................................... 307 368
Intangible assets..................................................... 749 263
Restructuring provisions.............................................. (336) --
Other differences in basis, net....................................... 368 257
----- ---
Total deferred income taxes........................................... 1,088 888
===== ===
</TABLE>
13. PENSIONS AND SIMILAR OBLIGATIONS
Pension plans:
Most employees are covered by pension plans sponsored by Group companies or
state authorities. The nature of such plans varies according to legal
regulations, fiscal requirements and economic conditions of the countries in
which the employees are employed. Generally the plans provide defined benefits
based on employees' years of service and average final remuneration. Valuations
are made using the most recent available actuarial reports and are based on
conservative financial assumptions and valuation methods. A summary of the
status of principal plans is shown below.
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
FUNDED PENSION PLANS
Actuarial present value of benefits due to past and present
employees.......................................................... 4,884 4,301
Plan assets at fair value............................................ 4,996 4,366
----- -----
Plan assets in excess of liability................................... 112 65
===== =====
</TABLE>
Amounts shown for 1994 include the liability and assets relating to the
pension plan at Syntex Corporation. Amounts for 1993 have been modified to
reflect greater uniformity in calculation methods in the Group for pension data.
<TABLE>
<S> <C> <C>
UNFUNDED PENSION PLANS
Actuarial present value of benefits due to past and present employees
recorded as a liability in the Group financial statements.......... 475 509
===== =====
</TABLE>
103
<PAGE> 117
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Post-retirement benefits other than pensions:
The cost of benefits earned during 1994 was approximately 25 million Swiss
francs as compared to approximately 32 million Swiss francs in 1993. The status
of these benefits is shown below.
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
Present value of accumulated benefit obligation...................... 463 446
Plan assets at fair value............................................ (205) (198)
Amounts not yet recognized........................................... -- (32)
----- -----
Liability in the Group financial statement........................... 258 216
===== =====
</TABLE>
The assumptions used to determine this US dollar obligation included a
discount rate of 8.85%, an expected long-term rate of return on assets of 9.5%,
and a healthcare cost trend rate of 9.5% in 1994.
14. OTHER PAYABLES AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS
OF SWISS
FRANCS)
<S> <C> <C>
Income taxes payable................................................. 281 117
Deferred income...................................................... 177 15
Sales and other taxes................................................ 125 68
Accrued payrolls and related items................................... 331 251
Interest payable..................................................... 154 48
Amounts owed to social institutions.................................. 56 64
Restructuring provisions............................................. 890 80
Other accounts payable............................................... 394 368
Obligation for warrants.............................................. -- 709
Other accrued liabilities............................................ 1,790 1,264
----- -----
Total other payables and accrued liabilities............... 4,198 2,984
===== =====
</TABLE>
15. RESEARCH AND DEVELOPMENT
The following are the components of research and development:
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS
OF SWISS
FRANCS)
<S> <C> <C>
Pharmaceuticals...................................................... 1,988 1,907
Other................................................................ 344 362
----- -----
Total research and development............................. 2,332 2,269
===== =====
</TABLE>
104
<PAGE> 118
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. OTHER OPERATING INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS
OF SWISS FRANCS)
<S> <C> <C>
Royalty income..................................................... 341 234
Other operating income............................................. 462 529
------- -------
803 763
------- -------
Amortization of intangibles........................................ (267) (278)
Royalty expense.................................................... (166) (128)
Restructuring expense.............................................. (259) (37)
Other operating expenses........................................... (374) (492)
------- -------
(1,066) (935)
------- -------
Other operating income (expense), net (263) (172)
======= =======
</TABLE>
17. NON-OPERATING INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS
OF SWISS FRANCS)
<S> <C> <C>
Interest and dividend income....................................... 689 795
Exchange gains..................................................... 490 528
Income from sale of marketable securities and other income......... 1,752 1,110
------- -------
2,931 2,433
------- -------
Interest expense................................................... (649) (524)
Exchange losses.................................................... (837) (606)
Losses from sale of marketable securities and other expense........ (509) (517)
------- -------
(1,995) (1,647)
------- -------
Total non-operating income (expense), net................ 936 786
======= =======
</TABLE>
18. TAXES
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS
OF SWISS FRANCS)
<S> <C> <C>
Current taxes...................................................... 658 577
Deferred taxes(12)................................................. 16 45
------- -------
Total taxes.............................................. 674 622
======= =======
</TABLE>
Current taxes include income taxes paid or payable to tax authorities based
on the current year's income, as determined by the rules and regulations of each
applicable country and business, and withholding, capital and other taxes which
in part are not based on income. Also included in current taxes are benefits
from previous years' tax losses recognized in the year. Unrecognized tax losses
carried forward by Group companies at 31 December 1994 and available for future
utilization against taxable profits approximate 370 million Swiss francs and
relate primarily to Genentech, Inc., and Syntex Corporation.
105
<PAGE> 119
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. EMPLOYEES' REMUNERATION
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS OF
SWISS FRANCS)
<S> <C> <C>
Wages and salaries................................................... 3,982 3,867
Social security costs................................................ 443 413
Pension plans........................................................ 220 227
Other employee benefits.............................................. 307 262
----- -----
Total employees' remuneration........................................ 4,952 4,769
===== =====
</TABLE>
20. INFORMATION BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
1994
------------------------------------------
OPERATING
THIRD-PARTY ASSETS CAPITAL
SALES EMPLOYED* EXPENDITURE
----------- ---------- -----------
(IN MILLIONS OF SWISS FRANCS)
<S> <C> <C> <C>
Pharmaceuticals................................... 8,339 13,085 878
Vitamins and fine chemicals....................... 3,204 2,896 256
Diagnostics....................................... 1,591 1,521 103
Others............................................ 89 204 13
------ ------ -----
Healthcare........................................ 13,223 17,706 1,250
Fragrances and flavors............................ 1,525 1,282 105
------ ------ -----
Consolidated totals 1994.......................... 14,748 18,988 1,355
====== ====== =====
</TABLE>
In 1994 Operating profit from Healthcare was 2,463 million Swiss francs and
from Fragrances and flavors 193 million Swiss francs, totaling 2,656 million
Swiss francs.
<TABLE>
<CAPTION>
1993
------------------------------------------
OPERATING
THIRD-PARTY ASSETS CAPITAL
SALES EMPLOYED* EXPENDITURE
----------- ---------- -----------
(IN MILLIONS OF SWISS FRANCS)
<S> <C> <C> <C>
Pharmaceuticals................................... 7,810 7,474 819
Vitamins and fine chemicals....................... 3,270 3,381 336
Diagnostics....................................... 1,712 1,785 138
Others............................................ 87 101 9
------ ------ -----
Healthcare........................................ 12,879 12,741 1,302
Fragrances and flavors............................ 1,436 1,335 105
------ ------ -----
Consolidated totals 1993.......................... 14,315 14,076 1,407
====== ====== =====
</TABLE>
---------------
* Property, plant and equipment, intangible assets, inventories and accounts
receivable-trade.
106
<PAGE> 120
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. INFORMATION BY GEOGRAPHICAL AREA
<TABLE>
<CAPTION>
1994
-------------------------------------------------------
OPERATING
THIRD-PARTY ASSETS CAPITAL NUMBER OF
SALES EMPLOYED* EXPENDITURE EMPLOYEES
----------- --------- ----------- ---------
(IN MILLIONS OF SWISS FRANCS)
<S> <C> <C> <C> <C>
Switzerland..................................... 301 3,366 308 10,512
European Union.................................. 4,041 3,569 285 13,628
Rest of Europe.................................. 714 259 27 1,177
------ ------ ----- ------
Europe as a whole............................... 5,056 7,194 620 25,317
North America................................... 5,839 9,023 565 24,581
Latin America................................... 1,342 1,087 34 5,452
Asia............................................ 1,986 1,407 125 4,643
Africa, Australia and Oceania................... 525 277 11 1,388
------ ------ ----- ------
Consolidated total 1994......................... 14,748 18,988 1,355 61,381
====== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
1993
-------------------------------------------------------
OPERATING
THIRD-PARTY ASSETS CAPITAL NUMBER OF
SALES EMPLOYED* EXPENDITURE EMPLOYEES
----------- --------- ----------- ---------
(IN MILLIONS OF SWISS FRANCS)
<S> <C> <C> <C> <C>
Switzerland..................................... 315 3,331 336 10,652
European Union.................................. 4,058 2,920 286 12,622
Rest of Europe.................................. 717 212 21 1,132
------ ------ ----- ------
Europe as a whole............................... 5,090 6,463 643 24,406
North America................................... 5,609 5,431 645 21,978
Latin America................................... 1,208 627 34 4,133
Asia............................................ 1,923 1,327 75 4,214
Africa, Australia and Oceania................... 485 228 10 1,351
------ ------ ----- ------
Consolidated total 1993......................... 14,315 14,076 1,407 56,082
====== ====== ===== ======
</TABLE>
---------------
* Property, plant and equipment, intangible assets, inventories and accounts
receivable-trade.
Sales between geographical areas and operating profit by area are not
presented because compiling such information would require inordinate effort not
commensurate with the benefits. Sales made in North America in 1994 are 39.6% of
total sales.
22. STATEMENTS OF CASH FLOWS
The statements of cash flows reflect cash flows arising from the activities
of Group companies as measured in their own currencies translated into Swiss
francs at the average rates of exchange for the year. Accordingly the cash flows
in the statements exclude the currency translation differences which arise as a
result of translating the assets and liabilities of Group companies reporting in
currencies other than Swiss francs into Swiss francs at year-end rates of
exchange (except for those arising on cash). Also excluded are non-cash
investing and financing activities.
The issuance of Limited Conversion Preferred Stock in connection with the
acquisition of Syntex Corporation (see Note 10) has been excluded from the 1994
statement of cash flows since it is a non-cash item.
107
<PAGE> 121
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. COMMITMENTS AND CONTINGENCIES
COMMITMENTS:
At 31 December 1994 the future minimum payments under non-cancellable
operating leases were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS OF
SWISS FRANCS)
<S> <C>
1995.......................................... 105
1996.......................................... 65
1997.......................................... 47
1998.......................................... 24
1999.......................................... 19
Thereafter.................................... 71
---
Total minimum payments........................ 331
===
</TABLE>
Total rental expense for all operating leases was 241 million Swiss francs
for 1994 (1993: 253 million Swiss francs).
CONTINGENCIES:
At 31 December 1994 warrants are outstanding which entitle the holders to
receive at certain future dates cash payments or, at the option of the Group,
229,000 non-voting equity securities. In addition the holders of exchangeable
notes may exchange the notes for American Depositary Shares (ADSs). If the notes
were all exchanged it would require 148,290 non-voting equity securities to meet
the exchange obligations relating to the ADSs (see Note 11). Also if all the
holders of the Limited Conversion Preferred Stock exchanged their shares, it
would require 24,630 non-voting equity securities (see Note 10). It is generally
the policy of the Group to provide for the various alternative arrangements
which are necessary to ultimately settle these obligations.
The operations and earnings of the Group continue, from time to time and in
varying degrees, to be affected by political, legislative, fiscal and regulatory
developments, including those relating to environmental protection, in the
countries in which it operates. The industries in which the Group is engaged are
also subject to physical risks of various kinds. The nature and frequency of
these developments and events, not all of which are covered by insurance, as
well as their effect on future operations and earnings are not predictable.
Group companies are defendants in various legal actions. In the opinion of
management, after taking appropriate legal advice, the results of such actions
will not have a material effect on the Group's financial position.
24. GROUP COMPANIES
An overview of the operating subsidiaries and associated companies is
included on pages 108 to 112 of the 1994 Annual Report of the Roche Group. In
addition to the operating companies, the Group has holding and finance
companies. All Group companies are included in the scope of consolidation as set
forth in the basis of consolidation in the summary of accounting policies.
108
<PAGE> 122
REPORT OF THE GROUP AUDITORS**
To the General Meeting of Roche Holding Ltd, Basel
We have audited the Consolidated Financial Statements of the Roche Group on
pages 60 to 88 presented by the Board of Directors for the year ended 31
December 1994 in accordance with the provisions of the Swiss Code of
Obligations. Our audit was conducted in accordance with auditing standards
promulgated by the profession in Switzerland and in accordance with the
International Standards on Auditing issued by the International Federation of
Accountants. We confirm that we comply with the legal requirements concerning
professional qualification and independence.
These Consolidated Financial Statements are the responsibility of the Board
of Directors of Roche Holding Ltd. Our responsibility is to express an opinion
on these Consolidated Financial Statements based on our audit. We are required
to plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Board of Directors, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion the Consolidated Financial Statements referred to above
present fairly, in all material respects, the financial position of the Roche
Group at 31 December 1994, and the changes in its shareholders' equity, the
results of operations and its cash flows for the year then ended in accordance
with International Accounting Standards. Based on our audit we conclude that the
Consolidated Financial Statements are in accordance with the provisions of the
Swiss Code of Obligations and with the principles of consolidation and valuation
described in the summary of accounting policies on pages 66 to 68.
We recommend that the Consolidated Financial Statements submitted to you be
approved.
PRICE WATERHOUSE AG
<TABLE>
<S> <C> <C>
Jack W. Flamson Ralph R. Reinertsen
Certified Public Accountant Certified Public Accountant
Auditors in
charge
</TABLE>
Basel, 27 April 1995
---------------
** The Report of the Group Auditors has been reprinted from the 1994 Annual
Report of the Roche Group. The references to pages 60 to 88 and the
pages 66 to 68 are references to the 1994 Annual Report of the Roche
Group and are pages 89 to 108 and Pages 93 to 95, respectively, in this
Proxy Statement/Prospectus.
109
<PAGE> 123
FINANCIAL STATEMENTS OF THE ROCHE GROUP FOR HALF-YEAR 1995
SUMMARIZED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FIRST HALF FIRST HALF
1995 1994
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS OF SWISS
FRANCS)
<S> <C> <C>
Consolidated Group sales............................................. 7,495 7,323
Cost of goods sold................................................... (2,261) (2,449)
Gross profit......................................................... 5,234 4,874
------ ------
Operating costs...................................................... (3,419) (3,313)
Operating profit..................................................... 1,815 1,561
------ ------
Non-operating income (expense), net.................................. 598 506
Taxes................................................................ (469) (410)
Inc(UNAUDITED)ome applicable to minority interests.............................. (32) (34)
------ ------
Net income................................................. 1,912 1,623
====== ======
</TABLE>
SUMMARIZED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
30 JUNE 31 DECEMBER
1995 1994
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS OF SWISS
FRANCS)
<S> <C> <C>
Long-term assets.................................................... 13,322 13,549
Current assets...................................................... 22,584 22,684
------ ------
Total assets................................................... 35,906 36,233
------ ------
Shareholders' equity................................................ 17,648 16,422
Minority interests.................................................. 724 861
Long-term debt and non-current liabilities.......................... 11,496 10,034
Current liabilities................................................. 6,038 8,916
------ ------
Total equity and liabilities.............................. 35,906 36,233
====== ======
</TABLE>
110
<PAGE> 124
CONDUCT OF GENENTECH'S BUSINESS AFTER
COMPLETION OF THE PROPOSED TRANSACTIONS;
ROCHE'S PLANS WITH RESPECT TO GENENTECH
As a result of the Licensing Agreement, Genentech expects that it will
terminate all or a substantial portion of its operations outside the United
States for at least ten years. As noted under "Certain Projected Financial
Information -- September Information" above, Genentech intends to accelerate its
product development efforts by bringing three new products or product
indications into development in the next year, rather than one product, as had
previously been the Company's intention. No other changes to Genentech's
business and operations are anticipated to occur as a result of the Proposed
Transactions, and Genentech is unaware of any new plans of Roche with respect to
Genentech or its investment in Genentech.
PRINCIPAL STOCKHOLDERS OF GENENTECH
The following table sets forth, as of September 19, 1995, unless otherwise
noted, certain information regarding all stockholders known by Genentech to be
the beneficial owners of more than 5% of any class of Genentech's voting
securities:
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF PERCENT
OF BENEFICIAL OWNER SHARES CLASS OF CLASS
------------------- --------- ------------- ------------------
<S> <C> <C> <C>
Roche Holdings, Inc................... 76,621,009 Common Stock approximately 65%
15 East North Street
Dover, DE 19901
</TABLE>
111
<PAGE> 125
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of shares of Common
Stock and of the equity securities of Roche Holding as of September 12, 1995,
unless otherwise noted, of (i) each director of Genentech, (ii) the Chief
Executive Officer and each of Genentech's four other most highly compensated
executive officers at December 31, 1994 (the "Named Executive Officers"), and
(iii) all directors and executive officers of Genentech as a group:
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
GENENTECH EQUITY SECURITIES OF
COMMON STOCK ROCHE HOLDING LTD
------------------------- -----------------------
PERCENT PERCENT
NAME OF BENEFICIAL OWNER SHARES OF CLASS SHARES OF CLASS
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Herbert W. Boyer.......................... 794,570(1) * 0 0
Jurgen Drews(2)........................... 30,200(3) *(4) 0 0
Franz B. Humer(2)......................... 0 * 0 0
Louis J. Lavigne, Jr...................... 109,415(5) * 0 0
Arthur D. Levinson........................ 250,329(6) * 0 0
Linda Fayne Levinson...................... 15,200(7) * 0 0
John P. McLaughlin........................ 158,753(8) * 0 0
J. Richard Munro.......................... 40,000(9) * 0 0
Donald L. Murfin.......................... 38,250(10) * 0 0
John T. Potts, Jr......................... 45,667(11) * 0 0
G. Kirk Raab.............................. 127,088(12) * 0 0
C. Thomas Smith, Jr....................... 40,000(9) * 0 0
Robert A. Swanson......................... 1,915,120(13) 1.61% 0 0
David S. Tappan, Jr....................... 42,000(14) * 0 0
William D. Young.......................... 193,630(15) * 0 0
All Directors and Executive Officers as a
Group (36 persons)...................... 4,748,280(16) 3.93% 0 0
</TABLE>
---------------
(1) Includes stock options outstanding on September 12, 1995 to purchase 30,000
shares of Common Stock which are currently exercisable.
(2) Pursuant to the 1990 Merger, Roche acquired 67,133,409 shares of Common
Stock, and in addition as of September 12, 1995 owns 9,487,600 shares of
Common Stock, which it has purchased (as Redeemable Common Stock) on the
open market since 1990. Roche currently owns approximately 65% of the
outstanding Common Stock. Pursuant to the Existing Governance Agreement,
Roche has appointed Drs. Drews and Humer as its representatives on the
Genentech Board.
(3) Includes stock options outstanding on September 12, 1995 to purchase 30,000
shares of Common Stock which are currently exercisable.
(4) Asterisk (*) indicates that the amount beneficially owned is less than one
percent (1%) of the outstanding shares of Common Stock.
(5) Includes stock options outstanding on September 12, 1995 to purchase 93,490
shares of Common Stock which are currently exercisable.
(6) Includes stock options outstanding on September 12, 1995 to purchase
244,690 shares of Common Stock which are currently exercisable.
(7) Includes stock options outstanding on September 12, 1995 to purchase 15,000
shares of Common Stock which are currently exercisable.
(8) Includes stock options outstanding on September 12, 1995 to purchase
158,753 shares of Common Stock which are currently exercisable.
112
<PAGE> 126
(9) Includes stock options outstanding on September 12, 1995 to purchase 38,000
shares of Common Stock which are currently exercisable.
(10) Includes stock options outstanding on September 12, 1995 to purchase 38,250
shares of Common Stock which are currently exercisable.
(11) Includes stock options outstanding on September 12, 1995 to purchase 41,334
shares of Common Stock which are currently exercisable.
(12) Includes stock options outstanding on September 12, 1995 to purchase
124,586 shares of Common Stock which are currently exercisable. On July 7,
1995, Mr. Raab resigned as President, Chief Executive Officer and a
director of the Company. See "The Proposed Transactions -- Background of
the Proposed Transactions."
(13) Includes stock options outstanding on September 12, 1995 to purchase
236,190 shares of Common Stock which are currently exercisable. Also
includes 1,678,928 shares of Common Stock held as trustee of six trusts.
Mr. Swanson disclaims beneficial ownership of the 553,473 shares held by
five of such trusts. Excludes ownership of 146,980 shares held by a
charitable foundation of which Mr. Swanson is one of the directors.
(14) Includes stock options outstanding on September 12, 1995 to purchase 42,000
shares of Common Stock which are currently exercisable.
(15) Includes stock options outstanding on September 12, 1995 to purchase
126,147 shares of Common Stock which are currently exercisable.
(16) Includes all shares of Common Stock reflected in footnotes 1, 3 and 5
through 15 above and also includes outstanding stock options held by 21
other executive officers on September 12, 1995 to purchase 865,915 shares
of Common Stock which are currently exercisable and warrants issued in
connection with the formation of Genentech Clinical Partners IV exercisable
for 72 shares of Common Stock.
113
<PAGE> 127
CERTAIN INFORMATION CONCERNING DIRECTORS AND
EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS
The following table sets forth the name, age, and position of the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
------------------------------------- ----- ----------------------------------------------
<S> <C> <C>
Arthur D. Levinson, Ph.D............. 45 President and Chief Executive Officer
Gregory P. Baird*.................... 44 Vice President -- Corporate Communications
David W. Beier....................... 47 Vice President -- Government Affairs
Richard B. Brewer.................... 44 Senior Vice President
Robert L. Garnick, Ph.D.............. 45 Vice President -- Quality
Marty Glick.......................... 46 Vice President and Treasurer
Bradford S. Goodwin.................. 41 Vice President and Controller
Dennis Henner, Ph.D.................. 44 Vice President -- Research Technology
Paul F. Hohenschuh................... 52 Vice President -- Manufacturing
Edmon R. Jennings.................... 48 Vice President -- Sales and Marketing
Stephen G. Juelsgaard................ 46 Vice President, General Counsel & Assistant
Secretary
Kurt Kopp**.......................... 46 Vice President -- General Manager, Europe
Louis J. Lavigne, Jr................. 47 Senior Vice President and Chief Financial
Officer
Bryan Lawlis, Ph.D................... 43 Vice President -- Process Science
M. David MacFarlane.................. 54 Vice President -- Regulatory Affairs
John P. McLaughlin................... 43 Senior Vice President and Secretary
Polly Moore, Ph.D.................... 48 Vice President -- Information Resources
James Panek.......................... 42 Vice President -- Engineering & Facilities
Eric J. Patzer, Ph.D................. 46 Vice President -- Development
Kim Popovits......................... 36 Vice President -- Sales
Stephen Raines, Ph.D................. 57 Vice President -- Intellectual Property &
Assistant Secretary
Barry M. Sherman, M.D................ 54 Senior Vice President and Chief Medical
Officer
Nicholas Simon, III.................. 41 Vice President -- Business Development
David Stump, M.D. ................... 45 Vice President -- Clinical
William D. Young..................... 51 Senior Vice President
</TABLE>
---------------
* Prior to joining Genentech in 1992, Mr. Baird was employed by G.D.
Searle & Co. for five years as Vice President of Corporate Communications.
** Mr. Kopp joined the Company in January 1993 as Vice President and
General Manager, Europe. Prior to joining Genentech in 1993, Mr. Kopp was
employed by F. Hoffmann-La Roche, Ltd from 1980 until December 1992, most
recently as Regional Director for Latin America. Mr. Kopp is a citizen of
Switzerland.
During the last five years, no person named above has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors).
During the last five years, no person named above was a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction as a
result of which such person was or is subject to a judgment, decree or final
order enjoining future violations of, or prohibiting or mandating activities
subject to, federal or state securities laws or finding any violation with
respect to such laws.
Except as indicated above, (i) each person named above has been an officer
and/or employee of Genentech or one or more of its subsidiaries during each of
the preceding five years; (ii) each person named above is a citizen of the
United States of America; and (iii) the business address of each person listed
above is 460 Point San Bruno Boulevard, South San Francisco, California.
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<PAGE> 128
DIRECTORS
The following table sets forth the name and age (as of the date of the
Special Meeting) of the directors of the Company, the class to which each has
been elected, their principal occupations at present, the positions and offices
held by each with the Company in addition to the position as a director, and the
period during which each has served as a director of the Company.
<TABLE>
<CAPTION>
SERVED AS
PRINCIPAL OCCUPATION -- DIRECTOR
NAME AGE POSITION HELD SINCE
---- ---------------------------------------------- ----------
<S> <C> <C> <C>
1998 CLASS
Jurgen Drews............. 62 President, International Research and 1990
Development of the Roche Group
Franz B. Humer........... 49 Director and Head of the Pharmaceuticals 1995
Division, Roche Holding
Donald L. Murfin......... 52 General Partner of Chemical and Materials 1980
Enterprise Associates, L.P.
John T. Potts, Jr. ...... 63 Physician-in-Chief at Massachusetts General 1982
Hospital
Arthur D. Levinson....... 45 President and Chief Executive Officer of 1995
Genentech
1997 CLASS
Herbert W. Boyer......... 59 Director of Genentech 1976
Linda Fayne Levinson..... 53 President of Fayne Levinson Associates, Inc. 1992
1996 CLASS
J. Richard Munro......... 64 Chairman of the Executive Committee of the 1988
Board of Time Warner Inc.
C. Thomas Smith, Jr. .... 57 President and Chief Executive Officer of VHA, 1986
Inc.
Robert A. Swanson........ 47 Chairman of the Board of Genentech, Inc. 1976
David S. Tappan, Jr. .... 73 Director of Genentech 1981
</TABLE>
1998 Class
Dr. Drews has been President, International Research and Development, and a
member of the Executive Committee, of the Roche Group, an international health
care concern, since 1991. Dr. Drews served as Chairman of the Research Board and
a member of the Executive Committee of HLR from 1986 to 1991, and served as the
Director of Pharmaceutical Research at HLR from 1985 to 1986. These Roche
entities are affiliated with the Company. Dr. Drews served as Head of
Pharmaceutical Research and Development for Sandoz Ltd from 1982 to 1985, and as
Head of the Sandoz Research Institute from 1979 to 1982. Dr. Drews is a citizen
of Germany; his business address is c/o Hoffmann-LaRoche Inc., 340 Kingsland
Street, Nutley, New Jersey.
Dr. Humer was elected to the Genentech Board in June 1995 to fill the
vacancy created by the retirement of Roche's designee Dr. Armin M. Kessler. Dr.
Humer joined Roche Holding in the spring of 1995 as the head of its
Pharmaceuticals Division. He is also a member of Roche Holding's board of
directors and corporate executive committee. Prior to joining Roche Holding, Dr.
Humer was an Executive Director and Chief Operating Officer of Glaxo Holdings, a
United Kingdom public limited company. Dr. Humer also serves as a director of
Cadbury Schweppes p.l.c. Dr. Humer is a citizen of Switzerland; his business
address is c/o Roche Holding Ltd, Grenzacherstrasse 124, CH-4002 Basel,
Switzerland.
Mr. Murfin is General Partner of Chemicals and Materials Enterprise
Associates, L.P., a venture capital firm focusing on businesses based on
specialty chemicals and materials. Mr. Murfin was Managing Partner of Trident
Venture Partners from 1988 to 1989. Mr. Murfin served from 1979 to 1988 as
President of Lubrizol Enterprises, Inc., a venture development subsidiary of The
Lubrizol Corporation, a manufacturer of chemical additives for lubricants and
fuels and specialty chemicals for industrial applications, of which he was Vice
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<PAGE> 129
President from 1985 to 1988. Mr. Murfin served as Chairman of the Board of Genex
Corporation from 1990 to 1991. Mr. Murfin is a director of Corvita Corporation,
a Trustee of the Edison BioTechnology Center and serves on the boards of
directors of a number of private technology based businesses. Mr. Murfin is a
citizen of the United States; his business address is Chemicals & Materials
Enterprise Assoc., One Cleveland Center, Suite 2700, Cleveland, Ohio.
Dr. Potts has been Physician-in-Chief at Massachusetts General Hospital and
Jackson Professor of Clinical Medicine at Harvard Medical School since 1981. Dr.
Potts also serves as a consultant to the Company. Dr. Potts' accomplishments
have been recognized with a series of honors over the years, including the
prestigious Fred Conrad Koch Award of the Endocrine Society, the Prize Andre
Lichwitz, and the American Society of Bone and Mineral Research's highest honor,
the William F. Neumann Award. He holds many active and honorary memberships in
scientific and professional organizations, including the Institute of Medicine,
the American Academy of Arts and Sciences, and the Association of Professors of
Medicine. Dr. Potts is a citizen of the United States; his business address is
Massachusetts General Hospital, Medical Services, Bigelow 740, Boston,
Massachusetts.
Dr. Levinson was elected President and Chief Executive Officer and a
director of the Company on July 7, 1995. Since joining the Company in 1980, Dr.
Levinson has been a senior Scientist, Staff Scientist and the Director of the
Company's Cell Genetics Department. Dr. Levinson was appointed Vice President of
Research Technology in April 1989, Vice President of Research in May 1990 and
Senior Vice President in December 1992. Dr. Levinson has been a member of
Genentech's Operations Committee since 1990. Dr. Levinson is currently on the
editorial boards of "Molecular Biology" and "Medicine," as well as "Molecular
and Cellular Biology" and is active in the American Society of Microbiology, the
New York Academy of Sciences, the American Association for the Advancement of
Science, and the American Society for Biochemistry and Molecular Biology. From
1977 to 1980, Dr. Levinson was a Postdoctoral Fellow in the Department of
Microbiology at the University of California, San Francisco. In 1977, Dr.
Levinson received his Ph.D. in Biochemistry from Princeton University. Dr.
Levinson is a citizen of the United States; his business address is Genentech,
Inc., 460 Point San Bruno Blvd., South San Francisco, California.
1997 Class
Dr. Boyer, a founder of the Company, has been a director of the Company
since 1976 and is a consultant to the Company. He served as Vice President of
the Company from 1976 to 1991. Dr. Boyer, a Professor of Biochemistry at the
University of California at San Francisco from 1976 to 1991, demonstrated the
usefulness of recombinant DNA technology to produce medicines economically,
which laid the groundwork for the Company's development. In 1993, Dr. Boyer
received the 1993 Helmut Horten Research Award. He also received the National
Medal of Science from President Bush in 1990, the National Medal of Technology
in 1989 and the Albert Lasker Basic Medical Research Award in 1980. He is an
elected member of the National Academy of Sciences and a Fellow in the American
Academy of Arts and Sciences. Dr. Boyer is a citizen of the United States; his
business address is Genentech, Inc., 460 Point San Bruno Blvd., South San
Francisco, California.
Ms. Levinson has served as the President of Fayne Levinson Associates,
Inc., a general management consulting firm to consumer and financial service
organizations, since 1982. Ms. Levinson also serves as a member of the Board of
Egghead, Inc. Ms. Levinson was an executive at Creative Artists Agency, Inc.
from 1993 through February 1994 and was a partner of Wings Partners, a Los
Angeles-based merchant bank whose holdings include Northwest Airlines, from 1989
until 1993. Ms. Levinson was a Senior Vice President at American Express Travel
Related Services Co., Inc., from 1984 until 1987. In 1982, Ms. Levinson served
as Executive Vice President, Marketing, Hotel Group at John B. Coleman & Co. Ms.
Levinson was at McKinsey & Co., a worldwide general management consulting firm,
from 1972 through 1981, where she was made the first woman partner in 1979. Ms.
Levinson is a citizen of the United States; her business address is 710 22nd
Street, Santa Monica, California. Ms. Levinson is not related to Dr. Levinson.
116
<PAGE> 130
1996 Class
Mr. Munro is Chairman of the Executive Committee of the Board of Directors
of Time Warner Inc., a media and entertainment company. Mr. Munro was Chairman
of Time, Inc., a predecessor of Time Warner Inc., from 1986 to 1989 and its
Chief Executive Officer from 1980 to 1989. Mr. Munro is a director of Time
Warner Inc., Mobil Corporation, Kellogg Company, and K-Mart Corporation. Mr.
Munro is a member of the National Coalition of AIDS Research (Washington, D.C.)
and the Counsel on Foreign Relations, Chairman of the Points of Light
Foundation, a director of the United Negro College Fund, and a trustee of
Hamilton College, St. Lawrence University, Teacher's College, Columbia
University and the Salisbury School. Mr. Munro is a citizen of the United
States; his business address is Time Warner, Inc., 300 First Stamford Plaza,
Stamford, Connecticut.
Mr. Smith has been President and Chief Executive Officer of VHA, Inc., an
alliance of 1,150 healthcare organizations in 47 states, since 1991. Mr. Smith
served as President of Yale-New Haven Hospital, a nonprofit teaching hospital
affiliated with Yale University Medical School, from 1977 to 1991. Mr. Smith was
the 1991 Chairman of the Board of Trustees of the American Hospital Association,
and serves on the Board of VHA and the National Committee on Quality of Health
Care. Previously he was on the Board of the Association of American Medical
Colleges. Mr. Smith was the 1991 Rene Sand lecturer at the Congress of the
International Hospital Federation, the third American to be so honored. Mr.
Smith is a citizen of the United States; his business address is VHA, Inc., 220
E. Las Colinas Blvd., Irving, Texas.
Mr. Swanson, a founder of the Company and its Chief Executive Officer from
1976 to 1990, has been Chairman of the Genentech Board since 1990. Prior to
forming the Company, Mr. Swanson was a partner with Kleiner & Perkins venture
capital partnership in San Francisco, and from 1970 to 1974, he was an
investment officer with Citicorp Venture Capital Ltd. Mr. Swanson serves on the
Board of Fellows of the Faculty of Medicine at Harvard University, and is a
member of the Biology Visiting Committee of, and has served as a Trustee for,
the Massachusetts Institute of Technology. Mr. Swanson is a member of the Royal
Swedish Academy of Engineering Sciences and a member of the Board of Molten
Metal Technology, Inc. He also serves as a trustee of the San Francisco Ballet,
the San Francisco Museum of Modern Art, and the Nueva School. Mr. Swanson is a
citizen of the United States; his business address is Genentech, Inc., 460 Point
San Bruno Blvd., South San Francisco, California.
Mr. Tappan served as Chairman of the Board of Fluor Corporation ("Fluor"),
an international engineering, construction and technical services company, from
1984 through 1990, at which time he retired. Mr. Tappan was Chief Executive
Officer of Fluor from 1984 to 1990. Mr. Tappan is a director of Beckman
Instruments, Inc., Advanced Tissue Sciences, Inc., and Allianz Insurance
Company. Mr. Tappan is a member of the Board of Trustees of the University of
Southern California and The Scripps Research Institute Board of Trustees. Mr.
Tappan is a citizen of the United States; his business address is Genentech,
Inc., 460 Point San Bruno Blvd., South San Francisco, California.
To the knowledge of the Company, none of the Company's directors has,
during the last five years, been convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors), or has been party to a civil
proceeding of a judicial or administrative body of competent jurisdiction as a
result of which such person was or is subject to a judgment, decree or final
order enjoining further violations of, or prohibiting or mandating activities
subject to, federal or state securities laws or finding any violation with
respect to such laws.
TRANSACTIONS IN SECURITIES OF GENENTECH DURING THE LAST 60 DAYS
This section sets forth the transactions in the Company's Common Stock
effected in the 60-day period preceding July 31, 1995 by certain affiliates and
former affiliates of the Company. No transactions by any such affiliates have
been effected since July 31, 1995. All dollar amounts are per share of Common
Stock. On July 14, 1995, G. Kirk Raab sold 2,129 shares of Common Stock for
$47.375 per share. On July 24, 1995 Mr. Raab exercised options to purchase
70,003 shares of Common Stock for $15.625 per share and sold such shares of
Common Stock on the same day for $47.00 per share. On July 24, 1995 Mr. Raab
also exercised options to purchase 76,597 shares of Common Stock for $25.50 per
share and sold such shares of Common
117
<PAGE> 131
Stock on the same day for $47.00 per share. On July 25, 1995 Mr. Raab exercised
options to purchase 2,300 shares of Common Stock for $25.50 per share and sold
such shares of Common Stock on the same day for $47.00 per share. On July 25,
1995 Mr. Raab also exercised options to purchase 11,100 shares of Common Stock
for $25.50 per share and sold such shares of Common Stock on the same day for
$46.75 per share.
On July 3, 1995, each of the following officers of the Company, or his or her
spouse where indicated, purchased under the Company's Employee Stock Plan (the
"ESP") the number of shares of Common Stock noted in parentheses after his or
her name for $30.49 per share of Common Stock: David Beier (123); Paul
Hohenschuh's wife, Marjorie Winkler (133); Bryan Lawlis (8); Louis Lavigne (26);
Polly Moore (32) and Dr. Moore's husband, Stuart Builder (203); Eric Patzer (71)
and Mr. Patzer's wife, Janet Briggs (154); and Nicholas Simon (61).
CERTAIN INFORMATION CONCERNING
THE DIRECTORS AND EXECUTIVE OFFICERS
OF ROCHE AND ROCHE HOLDING
DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE
The following table sets forth the name, business address and present
principal occupation or employment, and material occupations, positions, offices
or employments for the past five years of each director and executive officer of
Roche. Except as otherwise noted, the business address of each such person is
c/o Roche Holding, Grenzacherstrasse 124, CH-4002 Basel, Switzerland and each
such person is a Swiss citizen, except that Mr. Schiller is a citizen of the
United States. Directors are identified by an asterisk next to their names.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION
NAME AND OR EMPLOYMENT AND FIVE-YEAR
BUSINESS ADDRESS EMPLOYMENT HISTORY
------------------------------- ------------------------------------------------------
<S> <C> <C>
* Mr. Fritz Gerber Chairman of the Board and Chief Executive Officer of
(President) Roche Holding. Mr. Gerber is also a director of
Nestle, S.A., Swiss Credit Bank and IBM.
* Dr. Henri B. Meier Chief Financial Officer of Roche Holding. Prior to
(Vice President 1994, Dr. Meier was a General Manager of Roche
and Treasurer) Holding.
Peter N. Schiller Attorney-at-Law.
Hoffstots Lane
Sands Point, New York 11050
(Secretary)
</TABLE>
To the best knowledge of Roche, no person named above has during the last
five years (i) been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors); or (ii) been a party to a civil proceeding
of a judicial or administrative body of competent jurisdiction as a result of
which such person was or is subject to a judgment, decree or final order
enjoining future violations of, or prohibiting or mandating activities subject
to, federal or state securities laws or finding any violation with respect to
such laws.
To the best knowledge of Roche, no person named above is the direct or
indirect beneficial owner of any security of Genentech, or has any contract,
arrangement, understanding or relationship with respect to any securities of
Genentech.
To the best knowledge of Roche, other than as described in "The Proposed
Transactions -- Background of the Proposed Transactions," no person named above
has since January 1, 1993 had any contacts, negotiations, or entered into any
transactions with Genentech, Inc. concerning a merger, consolidation or
acquisition, a tender offer or other acquisition of securities, an election of
directors, or a sale or other transfer of a material amount of assets, or
entered any contracts, arrangements, understandings or relationships with
Genentech or any of its executive officers, directors, controlling persons or
subsidiaries.
118
<PAGE> 132
DIRECTORS AND EXECUTIVE OFFICERS OF ROCHE HOLDING
The following table sets forth the name, business address and present
principal occupation or employment, and material occupations, positions, offices
or employments for the past five years of each director and executive officer of
Roche Holding. Except as otherwise noted, the business address of each such
person is c/o Roche Holding, Grenzacherstrasse 124, CH-4002 Basel, Switzerland,
and such person is a Swiss citizen except that Dr. Drews is a German citizen and
Mr. Belingard is a French citizen. In addition, except as otherwise noted, each
executive officer of Roche Holding has been employed by Roche Holding in the
positions listed below during the last five years. Directors are identified by
an asterisk next to their names.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION
NAME AND OR EMPLOYMENT AND FIVE-YEAR
BUSINESS ADDRESS EMPLOYMENT HISTORY
------------------------------- ------------------------------------------------------
<S> <C> <C>
* Mr. Fritz Gerber Chairman of the Board and Chief Executive Officer. Mr.
Gerber is also a director of Nestle, S.A., Swiss
Credit Bank and IBM.
</TABLE>
<TABLE>
<S> <C> <C>
* Dr. Lukas Hoffmann Vice Chairman of the Board. Dr. Hoffmann is also the
Le petit Essert Vice Chairman of World Wildlife Fund International (a
1147 Montricher, nonprofit organization) and is the founder and head of
Switzerland Station Biologique, a private research center in
France.
* Dr. Andres F. Leuenberger Vice Chairman and Delegate of the Board. Prior to
1990, Dr. Leuenberger was a member of the Board of
Directors and Managing Director of Roche Holding. Dr.
Leuenberger is also Chairman of the Swiss Federation
of Commerce and Industry and a director of the
Swiss-American Chamber of Commerce.
* Dr. h.c. Paul Sacher Conductor and founder of the Paul Sacher Foundation (a
Haus auf Burg nonprofit organization).
Muensterplatz 4
Basel 4051, Switzerland
* Dr. Franz B. Humer Member of the Executive Committee. Head of Roche
Holding's Pharmaceuticals Division. Dr. Humer is also
a Director of Genentech. Prior to 1995, Dr. Humer was
an Executive Director of Glaxo Holdings, a United
Kingdom public limited company.
* Dr. Henri B. Meier Member of the Executive Committee. Chief Financial
Officer. Prior to 1994, Dr. Meier was a General
Manager of Roche Holding Ltd.
* Dr. Jakob Oeri Surgeon and retired Head Physician, Kantonsspital
St. Alban -- Vorstadt 71 Basel (hospital).
4052 Basel, Switzerland
* Prof. jur. Kurt Jenny Attorney. Prior to 1993, Prof. Jenny held various
Aeschengraben 18 positions in the Basel state government, including
4051 Basel, Switzerland President and Head of the Department of Finance.
* Prof. Dr. Werner Stauffacher Head, Department of Research,
Department of Research University of Basel.
University of Basel
Hebelstrasse 32
4056 Basel, Switzerland
* Prof. Charles Weissmann Professor, University of Zurich.
Institut fur Molekularbiologie
I
der Universitaet Zurich
Hoenggerberg
8903 Zurich, Switzerland
Dr. Markus Altwegg Member of the Executive Committee. Head of Pharma
Stammhaus Basel, Group Informatics.
</TABLE>
119
<PAGE> 133
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION
NAME AND OR EMPLOYMENT AND FIVE-YEAR
BUSINESS ADDRESS EMPLOYMENT HISTORY
------------------------------- ------------------------------------------------------
<S> <C>
Mr. Jean-Luc Belingard Member of the Executive Committee. Head of Diagnostics
Division.
Dr. Roland Bronnimann Member of the Executive Committee. Head of Vitamins
and Fine Chemicals Division.
Prof. Jurgen Drews Member of the Executive Committee. Head of Research
and Development. Prof. Drews is also a director of
Genentech.
</TABLE>
To the best knowledge of Roche, no person named above has during the last
five years (i) been convicted in a criminal proceeding (excluding traffic
violations or other misdemeanors); or (ii) been a party to a civil proceeding of
a judicial or administrative body of competent jurisdiction as a result of which
such person was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to, federal
or state securities laws or finding any violation with respect to such laws.
To the best knowledge of Roche, other than as described in "Security
Ownership of Management", no person named above is the direct or indirect
beneficial owner of any security of Genentech, or has any contract, arrangement,
understanding or relationship with respect to any securities of Genentech.
To the best knowledge of Roche, other than as described in "The Proposed
Transactions -- Background of the Proposed Transactions," no person named above
has since January 1, 1993 had any contacts, negotiations, or entered into any
transactions with Genentech concerning a merger, consolidation or acquisition, a
tender offer or other acquisition of securities, an election of directors, or a
sale or other transfer of a material amount of assets, or entered any contracts,
arrangements, understandings or relationships with Genentech or any of its
executive officers, directors, controlling persons or subsidiaries.
TRANSACTIONS IN SECURITIES OF GENENTECH DURING THE LAST 60 DAYS
None of Roche, Roche Holding, Roche Finance, or any of the directors of
Roche or Roche Holding have effected any transactions with respect to securities
of Genentech in the 60-day period preceding the date of this Proxy
Statement/Prospectus.
120
<PAGE> 134
TRANSACTIONS IN SECURITIES OF GENENTECH DURING THE LAST TWO YEARS
Since January 1, 1993, Roche has purchased an aggregate of 7,780,500 shares
of Redeemable Common Stock of Genentech. The range of prices paid and the
average purchase price for such purchases of Redeemable Common Stock on a
quarterly basis is included in the following chart.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
AMOUNT OF AVERAGE
SHARES PURCHASE
QUARTER ENDED PURCHASED HIGH LOW PRICE
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993
March 31 2,036,700 $35.00 $32.25 $33.45
---------------------------------------------------------------------------------
June 30 709,500 $35.00 $34.625 $34.65
---------------------------------------------------------------------------------
September 30 0 0 0 0
---------------------------------------------------------------------------------
December 31 0 0 0 0
---------------------------------------------------------------------------------
1994
---------------------------------------------------------------------------------
March 31 0 0 0 0
---------------------------------------------------------------------------------
June 30 3,271,400 $50.00 $44.375 $47.63
---------------------------------------------------------------------------------
September 30 0 0 0 0
---------------------------------------------------------------------------------
December 31 1,106,300 $48.00 $42.25 $46.76
---------------------------------------------------------------------------------
1995
---------------------------------------------------------------------------------
March 31 512,000 $47.875 $44.625 $45.92
---------------------------------------------------------------------------------
June 30 144,600 $47.00 $46.50 $46.68
---------------------------------------------------------------------------------
Through September 19 0 0 0 0
---------------------------------------------------------------------------------
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1980, Genentech and Hoffmann-La Roche Inc. ("Hoffmann-La Roche")
entered into an agreement regarding the development and commercialization of
human leukocyte ("alpha") and fibroblast ("beta") interferons. Hoffmann-La Roche
is a New Jersey corporation and a subsidiary of Roche, and, as such, is
affiliated with Genentech. Pursuant to this agreement, as amended from time to
time, Genentech granted Hoffmann-La Roche a sole and exclusive, worldwide
license to use and sell (and, under certain circumstances, manufacture) alpha
and beta interferons using organisms and know-how developed by Genentech, and
under patent rights belonging to Genentech, for a period of 20 years. Pursuant
to this agreement, Genentech is entitled to royalties on sales of interferons by
Hoffmann-La Roche for 10 years after commercial introduction, unless the period
of exclusivity is extended for an additional five-year royalty-bearing period.
These royalties totaled $7.9 million in 1994.
In May 1991, Genentech entered into an agreement with Hoffmann-La Roche in
settlement of all disputes, including all issues in litigation between the
parties, relating to the patent on human growth hormone and methods for its
preparation. Under the settlement agreement, Genentech received a non-exclusive
license under the patent and will make payments and/or grant credits, against
future royalties under the interferon license described above, to Hoffmann-La
Roche totalling $4 million over a ten-year period. In addition, Hoffmann-La
Roche received a paid-up non-exclusive license under certain Genentech patents
for specific product applications.
In January 1992, Genentech entered into an agreement with HLR relating to
the development and supply of a recombinant tumor necrosis factor ("TNF")
receptor-fusion protein being evaluated for in septic shock, rheumatoid
arthritis and multiple sclerosis. Pursuant to this agreement, Genentech is
responsible for developing and scaling up a recombinant production process for
TNF receptor-fusion protein and for supplying preclinical and clinical
requirements of such material and, eventually, commercial requirements. HLR
121
<PAGE> 135
reimburses Genentech for certain costs of developing and scaling its
manufacturing capability and will purchase manufactured TNF receptor-fusion
protein from Genentech; for calendar year 1994, such costs totalled
approximately $7.1 million. In addition, Genentech has the option to participate
in certain commercial opportunities with HLR.
In March 1992, Genentech announced a collaborative agreement with HLR
intended to combine the resources of the two companies to focus on
commercialization of Genentech's drug Pulmozyme(R). HLR is a Swiss corporation
and a subsidiary of Roche Holding, and as such is affiliated with Genentech.
Pulmozyme(R) is also being evaluated in both the United States and Europe as a
potential treatment for chronic obstructive pulmonary diseases. Specifically,
the agreement between Genentech, Genentech Europe Limited, a wholly-owned
subsidiary of Genentech, and HLR calls for the collaborative clinical
development, registration and marketing of Pulmozyme by Genentech and HLR in 17
European countries (the "Collaborative Countries"). Genentech Europe Limited and
its affiliates are responsible for the manufacture and supply of Pulmozyme
throughout the Collaborative Countries and for the marketing of the product in
certain of the Collaborative Countries. HLR provides technical support to
Genentech and will make milestone payments of up to $30 million to Genentech if
certain conditions are met. HLR and Genentech Europe Limited share the
developmental costs and the marketing and selling effort for Pulmozyme(R) and
profits from product sales. As of December 31, 1994, Genentech has earned and
received $19 million in milestone payments from HLR (including $10.0 million
earned in the fiscal year 1994) and Genentech Europe Limited had received $10.5
million in payments in accordance with the profit sharing arrangement between
the companies (including $8.7 million accrued in fiscal year 1994). On January
1, 1995, Genentech Europe Limited's rights and obligation under this Agreement
were assigned to Genentech Biopharmaceuticals Limited. Genentech Europe Limited
has also granted HLR exclusive licenses to sell Pulmozyme(R) in the countries
outside of the Collaborative Countries, the United States and Canada under a
common Genentech trademark in exchange for royalties and, in the case of Japan,
for the payment of $5 million, which includes payments to be made if certain
development targets are met. Also, during fiscal year 1994, Genentech Europe
Limited sold $6.7 million worth of Pulmozyme(R) to HLR. Such agreement will be
terminated if the Proposal is approved, and its subject matter will become part
of the Licensing Agreement. See "The Licensing Agreement."
Genentech and Roche also entered into a Small Molecule Screening Agreement
for the screening of Roche's chemical library using certain mutually agreed
Genentech assays to find lead molecules for development into small molecule
therapeutics. Roche has the responsibility for supplying the chemical library to
be screened. Genentech has the responsibility for supplying the assays and for
undertaking the initial screening. If the screening results in the
identification of a molecule of interest to one of the parties, that party shall
advise the other party of its interest. The second party can then elect to
proceed with the interested party and jointly develop the molecule or it can
choose to let the interested party develop the molecule on its own. If a
molecule is jointly developed, the parties are to share equally the cost of
joint development and to agree to a plan proportioning research and development
responsibilities between them based on their capability. If a product is jointly
developed, both Genentech and Roche have the right to make, use and sell that
product and will negotiate an allocation of the major marketing territories
between them as well as appropriate royalties payable by each to the other for
sales of that product in that party's marketing territory. As a general
principle, the markets for each product are to be allocated on an equal basis,
but Genentech is to have at least 50% of the marketing rights in North America
and Roche is to have at least 50% of the marketing rights in Europe, subject to
certain exceptions. After allocation of marketing rights, each party is to pay
the other a royalty on sales in that party's marketing territory with the
royalty to be determined by negotiation. As a general principle, the percentage
royalty payable on sales by either party to the other should have equivalent
royalty rates. If a product is unilaterally developed, the party unilaterally
developing that product has the sole right to make, use and sell that product
throughout the world and will pay the other party a royalty of 5% of sales.
In 1994 Genentech entered into four research and development collaboration
agreements with HLR (and Hoffmann-La Roche, Inc.), each an affiliate of
Genentech (collectively, "HLR/Roche") which involve consideration in excess of
$60,000. The four collaborations are in the areas of IIb/IIIa antagonists, IL-8
antagonists, LFA/ICAM antagonists, and ras farnesyltransferase inhibitors. The
collaboration pursuant to the
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IL-8 agreement is in the process of being terminated. In general, under the IIb
IIIa antagonists collaboration agreement Genentech will have marketing rights in
the United States and Canada (the "Genentech Countries") to products developed
through the collaboration, and HLR will have marketing rights to products in the
rest of the world ("ROW Countries"). In general, Genentech and HLR will share
equally all development costs of products for the Genentech Countries and
Europe; however, HLR will bear all such costs associated with other countries.
In general, Genentech will pay royalties to HLR on product sales in each of the
Genentech Countries, and HLR will pay an equivalent royalty rate to Genentech on
product sales in each of the ROW Countries. If under certain circumstances one
of the parties declines to participate and share in future research and
development of a product, royalties to be received by such party shall be
reduced. For the year ended December 31, 1994 no amounts have been paid under
this agreement. This agreement will be revised if the Proposal is approved and
certain of its terms will be modified in accordance with the Licensing
Agreement. See "The Licensing Agreement."
In general, under each of the LFA/ICAM antagonists and ras
farnesyltransferase inhibitors agreements, Genentech and HLR/Roche will share
equally (i) the rights to market and sell any products in the United States,
Canada, Mexico and Europe (the "Collaborative Countries") and (ii) any profits
from product sales in the Collaborative Countries. HLR/Roche will have the
rights to market and sell any products in the rest of the world, including, in
certain circumstances, Japan (the "ROW Countries"). In general, Genentech and
HLR/Roche will share equally all development costs of products for the
Collaborative Countries; however, HLR/Roche will bear all such costs associated
with ROW Countries. In general, if Genentech meets certain requirements as to
its development and sales efforts in Japan, each party will (i) share equally
all development costs for products in Japan, (ii) have the right to use, market
and sell such products in Japan, and (iii) pay a royalty to the other party on
product sales in Japan. Otherwise, Japan shall be considered part of HLR/Roche's
ROW Countries and HLR/Roche shall pay Genentech a royalty on products sales in
Japan. Under certain circumstances, each party has the option to decline to
participate and share in future research and development of products (the
"Optout Option"). If Genentech has not exercised its Optout Option, HLR/Roche
will pay a royalty to Genentech on sales of products in each of the ROW
Countries, and if Genentech has exercised its Optout Option, HLR/Roche will pay
a reduced royalty to Genentech on worldwide sales of products. If HLR/Roche has
exercised its Optout Option, Genentech will pay a royalty to HLR/Roche on sales
of products in each of the Collaborative Countries. For the year ended December
31, 1994, no amounts have been paid under these agreements. The ras
farnesyltransferase inhibitors agreement will be revised if the Proposal is
approved and certain of its terms will be modified in accordance with the
Licensing Agreement. See "The Licensing Agreement."
In addition to the foregoing agreements, Genentech is developing a
mammalian cell line for HLR to produce a molecule that HLR is developing. HLR
will provide Genentech future services of an equivalent value in exchange for
Genentech's development efforts.
OTHER MATTERS
The Genentech Board does not intend to bring any other matters before the
Special Meeting.
AUDITORS' REPRESENTATIVES
Representatives of Ernst & Young LLP, Genentech's independent auditors,
will be present at the Special Meeting and will have the opportunity to make a
statement if they desire to do so. Such representatives are also expected to be
available to respond to appropriate questions.
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LEGAL MATTERS
The legality of the shares of Special Common Stock to be issued in
connection with the Merger will be passed upon by Wachtell, Lipton, Rosen &
Katz, New York, New York, special counsel for Genentech. The discussion of the
federal income tax consequences of the Merger to Genentech's stockholders
contained herein is based upon an opinion of Wachtell, Lipton, Rosen & Katz, New
York, New York, special counsel for Genentech.
EXPERTS
The consolidated financial statements of Genentech incorporated by
reference in Genentech's 1994 Annual Report on Form 10-K for the year ended
December 31, 1994, have been audited by Ernst & Young LLP, independent auditors,
and incorporated by reference in this Proxy Statement/Prospectus which are
referred to and made a part of this Registration Statement, as set forth in
their report thereon incorporated by reference therein and herein. Such
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of the Roche Group as of December 31,
1994 and 1993 and for each of the two years in the period ended December 31,
1994 included in this Proxy Statement/Prospectus have been so included in
reliance on the report of Price Waterhouse AG, Group Auditors, given on the
authority of said firm as experts in auditing and accounting.
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ANNEX A
[CONFORMED COPY, INCLUDING ALL AMENDMENTS
MADE THROUGH SEPTEMBER 6, 1995]
AGREEMENT AND PLAN OF MERGER
AMONG
ROCHE HOLDINGS, INC.,
HLR (U.S.) II, INC.
AND
GENENTECH, INC.
DATED MAY 23, 1995,
AS AMENDED AND RESTATED
<PAGE> 139
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
Definitions.......................................................................... A-1
ARTICLE II
The Merger; Effective Time; Closing.................................................. A-2
2.1. The Merger................................................................. A-2
2.2. Effective Time............................................................. A-2
2.3. Closing.................................................................... A-3
ARTICLE III
Terms of Merger...................................................................... A-3
3.1. Certificate of Incorporation............................................... A-3
3.2. The By-Laws................................................................ A-3
3.3. Directors.................................................................. A-3
3.4. Officers................................................................... A-3
ARTICLE IV
Merger Consideration; Conversion or Cancellation of Shares in the Merger............. A-3
4.1. Share Consideration; Conversion or Cancellation of Shares in the Merger.... A-3
4.2. Exchange of Shares in the Merger........................................... A-4
4.3. Transfer of Shares after the Effective Time................................ A-5
ARTICLE V
Additional Covenants and Agreements.................................................. A-5
5.1. Stockholder Meeting; Proxy Material; Registration Statement; Stock Exchange A-5
Listing....................................................................
5.2. Reasonable Efforts......................................................... A-5
5.3. Continued Applicability of Governance Agreement............................ A-5
5.4. Compliance with Securities Laws............................................ A-6
5.5. Option Plans............................................................... A-6
5.6. Additional Agreements...................................................... A-6
5.7. Voting..................................................................... A-6
5.8. Certain Proceedings........................................................ A-6
ARTICLE VI
Conditions........................................................................... A-6
6.1. Conditions to Each Party's Obligations..................................... A-6
6.2. Condition to Obligations of Roche and Merger Sub........................... A-7
6.3. Conditions to Obligations of the Company................................... A-7
ARTICLE VII
Termination.......................................................................... A-7
7.1. Termination................................................................ A-7
7.2. Effect of Termination and Abandonment...................................... A-7
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE VIII
Miscellaneous and General............................................................ A-8
8.1. Expenses................................................................... A-8
8.2. Notices, Etc............................................................... A-8
8.3. Amendments, Waivers, Etc................................................... A-8
8.4. No Assignment.............................................................. A-8
8.5. Entire Agreement........................................................... A-9
8.6. No Third Party Beneficiaries............................................... A-9
8.7. Jurisdiction............................................................... A-9
8.8. Governing Law.............................................................. A-9
8.9. Name, Captions, Etc........................................................ A-9
8.10. Counterparts............................................................... A-9
</TABLE>
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AGREEMENT AND PLAN OF MERGER*
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated May 23, 1995, among Roche
Holdings, Inc., a Delaware corporation ("Roche"), HLR (U.S.) II, Inc., a newly
formed Delaware corporation which is a direct wholly-owned subsidiary of Roche
("Merger Sub"), and Genentech, Inc., a Delaware corporation (the "Company").
RECITALS
WHEREAS, the Boards of Directors of Roche, Merger Sub and the Company each
have determined that it is in the best interests of their respective
stockholders for Merger Sub to merge with and into the Company, upon the terms
and subject to the conditions of this Agreement;
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements set forth herein, Roche, Merger Sub and the Company
hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
"Affiliate": As defined in Rule 12b-2 under the Exchange Act.
"Authorization": Any consent, approval or authorization of, expiration or
termination of any waiting period requirement by, or filing, registration,
qualification, declaration or designation with, any Governmental Body.
"Certificate of Merger": The certificate of merger with respect to the
merger of Merger Sub with and into the Company, containing the provisions
required by, and executed in accordance with, Section 251 of the DGCL.
"Certificates": As defined in Section 4.2(b).
"Closing Date": The date on which the Effective Time occurs.
"Code": The Internal Revenue Code of 1986, as amended, and all regulations
promulgated thereunder, as in effect from time to time.
"Common Shares": The shares of Common Stock, par value $.02 per share, of
the Company.
"DGCL": The General Corporation Law of the State of Delaware.
"Effective Time": As defined in Section 2.2.
"Exchange Act": The Securities Exchange Act of 1934, as amended, including
the rules and regulations promulgated thereunder.
"Exchange Agent": As defined in Section 4.2(a).
"Exchange Fund": As defined in Section 4.2(a).
"Governance Agreement": The Governance Agreement dated as of September 7,
1990 between Roche and the Company.
"Governmental Body": Any Federal, state, municipal, political subdivision
or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign.
---------------
* This Agreement and Plan of Merger and the exhibits hereto reflect
amendments executed by the parties on July 7 and September 6, 1995.
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"Marketing Agreement": The Agreement between F. Hoffmann -- La Roche Ltd.
and the Company, to be dated as of the Closing Date, in substantially the form
attached hereto as Exhibit D.
"Merger": As defined in Section 2.1.
"New Governance Agreement": The Amended and Restated Governance Agreement
between Roche and the Surviving Corporation, to be dated as of the Closing Date,
in substantially the form attached hereto as Exhibit A.
"New Guaranty": The Guaranty of Roche Holding Ltd, a Swiss corporation, to
be dated as of the Closing Date, in substantially the form attached hereto as
Exhibit B.
"NYSE": The New York Stock Exchange, Inc.
"Option": As defined in Section 4.1(d).
"Option Plans": As defined in Section 4.1(d).
"Person": Any individual or corporation, company, partnership, trust,
incorporated or unincorporated association, joint venture or other entity of any
kind.
"Redeemable Common Shares": The shares of Redeemable Common Stock, par
value $.02 per share, of the Company.
"Roche Shares": The Common Shares held by Roche or any Affiliate thereof.
"S-4 Registration Statement": As defined in Section 5.1(b).
"SEC": The Securities and Exchange Commission.
"Securities Act": The Securities Act of 1933, as amended, including the
rules and regulations promulgated thereunder.
"Share Consideration": The Special Common Shares which the holders of
Common Shares (other than Roche or any Affiliate of Roche) will be entitled to
receive in the Merger pursuant to Section 4.1(a) hereof.
"Shares": Collectively, the Common Shares and the Redeemable Common Shares
(other than Common Shares or Redeemable Common Shares owned by Roche or any
Affiliate of Roche).
"Special Common Shares": The shares of Special Common Stock, par value
$.02 per share, of the Surviving Corporation.
"Stockholder Meeting": As defined in Section 5.1.
"Surviving Corporation": The surviving corporation in the Merger.
"Termination Date": As defined in Section 5.3.
ARTICLE II
THE MERGER; EFFECTIVE TIME; CLOSING
2.1. The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as hereinafter defined), Merger Sub, which at such time
shall have no assets or business operations and shall exist solely for the
purpose of effecting the Merger, shall be merged (the "Merger") with and into
the Company in accordance with the provisions of Section 251 of the DGCL and
with the effect provided in Sections 259 and 261 of the DGCL. The separate
corporate existence of Merger Sub shall thereupon cease and the Company shall be
the Surviving Corporation and shall continue to be governed by the laws of the
State of Delaware.
2.2. Effective Time. The Merger shall become effective on the date and at
the time (the "Effective Time") that the Certificate of Merger shall have been
accepted for filing by the Secretary of State of the State
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of Delaware (or such later date and time as may be specified in the Certificate
of Merger), which shall be the Closing Date or as soon as practicable
thereafter.
2.3. Closing. The consummation of the transactions contemplated by this
Agreement shall take place (i) at the offices of Wachtell, Lipton, Rosen & Katz,
New York, New York, at 10:00 a.m. on the second business day following the date
on which the last of the conditions set forth in Article VI hereof is fulfilled
or (subject to applicable law) waived or (ii) at such other place and/or time
and/or on such other date as Roche and the Company may agree or as may be
necessary to permit the fulfillment or waiver of the conditions set forth in
Article VI.
ARTICLE III
TERMS OF MERGER
3.1. Certificate of Incorporation. The Certificate of Incorporation of the
Company as in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation, until duly amended in
accordance with the terms thereof, of the New Governance Agreement and of the
DGCL, except that at the Effective Time Article THIRD of such Certificate of
Incorporation shall be amended by operation of the Merger, of this Agreement and
of the DCGL in substantially the form attached hereto as Exhibit C.
3.2. The By-Laws. The By-Laws of the Company in effect at the Effective
Time shall be the By-Laws of the Surviving Corporation, until duly amended in
accordance with the terms thereof, of the Certificate of Incorporation of the
Surviving Corporation, of the New Governance Agreement and of the DGCL.
3.3. Directors. The directors of the Company at the Effective Time shall,
from and after the Effective Time, be the directors of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Certificate of Incorporation and By-Laws and the New
Governance Agreement.
3.4. Officers. The officers of the Company at the Effective Time shall,
from and after the Effective Time, be the officers of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Certificate of Incorporation and By-Laws and the New
Governance Agreement.
ARTICLE IV
MERGER CONSIDERATION; CONVERSION OR
CANCELLATION OF SHARES IN THE MERGER
4.1. Share Consideration; Conversion or Cancellation of Shares in the
Merger. Subject to the provisions of this Article IV, at the Effective Time, by
virtue of the Merger and without any action on the part of the holders thereof,
the shares of the constituent corporations and options issued by any such
corporation in respect of any such shares shall be treated as follows:
(a) Each Common Share issued and outstanding immediately prior to the
Effective Time (other than the Roche Shares, which Common Shares shall be
cancelled, and thereupon the holders thereof shall cease to have rights
with respect thereto, and other than shares held in the treasury of the
Company) shall be converted into one Special Common Share.
(b) All Common Shares converted into Special Common Shares pursuant to
Section 4.1(a) shall cease to be outstanding, shall be cancelled and
retired and shall cease to exist, and each holder of a certificate
theretofore representing any such Common Shares shall thereafter cease to
have any rights with respect to such Common Shares, except the right to
receive for each Common Share, upon the surrender of such certificate in
accordance with Section 4.2, the Share Consideration.
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(c) The common stock, par value $.02 per share, of Merger Sub issued
and outstanding immediately prior to the Effective Time shall be converted
into a number of Common Shares equal to, in the aggregate, the number of
Roche Shares.
(d) Each outstanding option to purchase Redeemable Common Shares or
Common Shares, as the case may be (each, an "Option"), issued pursuant to
the Company's stock option plans (collectively, the "Option Plans")
(whether or not vested or exercisable) shall, without any action by the
holder thereof, constitute an option to acquire, on the same terms and
conditions as were applicable under such Option immediately prior to the
Effective Time, that number of Special Common Shares equal to the number of
Redeemable Common Shares or Common Shares, as the case may be, subject to
such Option immediately prior to the Effective Time, at the price or prices
per share in effect pursuant to the terms of such Option immediately prior
to the Effective Time.
4.2. Exchange of Shares in the Merger. The manner of exchanging Shares
converted in the Merger pursuant to Section 4.1(a) hereof shall be as follows:
(a) At the Effective Time, the Company shall make available to an
exchange agent selected by the Company (the "Exchange Agent"), for the
benefit of those Persons who immediately prior to the Effective Time were
the holders of Shares, a sufficient number of certificates representing
Special Common Shares required to effect the delivery of the aggregate
Share Consideration required to be issued pursuant to Section 4.1(a) (the
certificates representing Special Common Shares comprising such aggregate
Share Consideration being hereinafter referred to as the "Exchange Fund").
(b) Promptly after the Effective Time, the Exchange Agent shall mail
to each holder of record of a certificate or certificates which immediately
prior to the Effective Time represented outstanding Shares (the
"Certificates") (i) a form of letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent) and (ii) instructions for use in effecting the
surrender of the Certificates for exchange therefor. Upon surrender of
Certificates to the Exchange Agent, together with such letter of
transmittal duly executed and any other required documents, the holder of
such Certificates shall be entitled to receive for the Shares represented
by such Certificates the Share Consideration and the Certificates so
surrendered shall forthwith be canceled. Until so surrendered, Certificates
shall represent solely the right to receive the Share Consideration. No
dividends or other distributions that are declared after the Effective Time
on Special Common Shares and payable to the holders of record thereof after
the Effective Time will be paid to Persons entitled by reason of the Merger
to receive Special Common Shares until such Persons surrender their
Certificates. Upon such surrender, there shall be paid to the Person in
whose name the Special Common Shares are issued any dividends or other
distributions having a record date after the Effective Time and payable
with respect to such Special Common Shares between the Effective Time and
the time of such surrender. After such surrender there shall be paid to the
Person in whose name the Special Common Shares are issued any dividends or
other distributions on such Special Common Shares which shall have a record
date after the Effective Time and prior to such surrender and a payment
date after such surrender; such payment shall be made on such payment date.
In no event shall the Persons entitled to receive such dividends or other
distributions be entitled to receive interest on such dividends or other
distributions. If any certificate representing Special Common Shares is to
be issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of such exchange
that the Certificate so surrendered shall be properly endorsed and
otherwise in proper form for transfer and that the Person requesting such
exchange shall pay to the Exchange Agent any transfer or other taxes
required by reason of the issuance of certificates for such Special Common
Shares in a name other than that of the registered holder of the
Certificate surrendered, or shall establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not applicable. The
Exchange Agent shall not be entitled to vote or exercise any rights of
ownership with respect to the Special Common Shares held by it from time to
time hereunder, except that it shall receive and hold all dividends or
other distributions paid or distributed with respect to such Special Common
Shares for the account of the Persons entitled thereto.
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(c) Any portion of the Exchange Fund which remains unclaimed by the
former holders of Shares for one year after the Effective Time shall be
delivered to the Surviving Corporation, upon demand of the Surviving
Corporation, and any former holders of Shares shall thereafter look only to
the Surviving Corporation for payment of their claim for the Share
Consideration for the Shares. If, after the Effective Time, certificates
representing Shares outstanding prior to the Effective Time are presented
to the Surviving Corporation, they shall be cancelled and exchanged for the
consideration provided for, and in accordance with the procedures set
forth, in this Article IV.
4.3. Transfer of Shares after the Effective Time. No transfers of Shares
shall be made on the stock transfer books of the Company after the close of
business on the day prior to the date of the Effective Time.
ARTICLE V
ADDITIONAL COVENANTS AND AGREEMENTS
5.1. Stockholder Meeting; Proxy Material; Registration Statement; Stock
Exchange Listing. (a) The Company shall cause a meeting of its stockholders
(the "Stockholder Meeting") to be duly called and held as soon as reasonably
practicable for the purpose of voting on the approval and adoption of this
Agreement and the Merger (including the amendments to the Certificate of
Incorporation of the Company to be effected by the Merger). The directors of the
Company shall, subject to their fiduciary duties, recommend approval and
adoption of this Agreement and the Merger (including such amendments) by the
Company's stockholders. In connection with such meeting, the Company (i) will
promptly prepare and file with the SEC, will use all reasonable efforts to have
cleared by the SEC and will thereafter mail to its stockholders as promptly as
practicable a proxy statement/prospectus, registration statement and all other
documents which may be required to be filed or mailed in connection with such
meeting and the consummation of the transactions contemplated hereby, (ii) will,
subject to the fiduciary duties of its board of directors, use all reasonable
efforts to obtain the necessary approvals by its stockholders of this Agreement
and the transactions contemplated hereby and (iii) will otherwise comply with
all legal requirements applicable to such meeting.
(b) The Company shall promptly prepare and file with the SEC under the 1933
Act a registration statement on Form S-4 with respect to the Special Common
Stock (the "S-4 Registration Statement") and shall use all reasonable efforts to
cause the S-4 Registration Statement to be declared effective as promptly as
practicable. The Company shall take any action required to be taken under
foreign or state securities or Blue Sky laws in connection with the issuance of
Special Common Stock in the Merger.
(c) The Company shall use all reasonable efforts to cause the Special
Common Stock to be issued in connection with the Merger, and upon exercise of
Options which are exercised after the Effective Time to be listed on the NYSE,
subject to official notice of issuance and evidence of satisfactory
distribution.
5.2. Reasonable Efforts. The Company and Roche shall and shall use all
reasonable efforts to cause their respective subsidiaries to: (i) promptly make
all filings and seek to obtain all Authorizations required under all applicable
laws with respect to the Merger and the other transactions contemplated hereby
and will cooperate with each other with respect thereto; (ii) use all reasonable
efforts to promptly take, or cause to be taken, all other actions and do, or
cause to be done, all other things necessary, proper or appropriate to satisfy
the conditions set forth in Article VI and to consummate and make effective the
transactions contemplated by this Agreement on the terms and conditions set
forth herein as soon as practicable (including seeking to remove promptly any
injunction or other legal barrier that may prevent such consummation); and (iii)
not take any action which might reasonably be expected to impair the ability of
the parties to consummate the Merger at the earliest possible time (regardless
of whether such action would otherwise be permitted or not prohibited
hereunder); provided that the foregoing shall not require Roche to furnish,
other than for itself and its United States Affiliates, financial statements
prepared in accordance with United States generally accepted accounting
principles or any reconciliation of financial statements with United States
generally accepted accounting principles.
5.3. Continued Applicability of the Governance Agreement. On and after
July 1, 1995, each of Roche and the Company shall continue to abide by the terms
of the Governance Agreement, except that the
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references (a) in Section 2.01 to "June 30, 1996" shall be deemed to be replaced
by the date that is the first anniversary of the date, if any, upon which this
Agreement is terminated pursuant to Section 7.01 hereof (the "Termination
Date"); (b) in Sections 3.01 and 3.02(a) to "July 1, 1995" shall be deemed to be
replaced by the date that is the Termination Date; (c) in Section 4.01 to "June
30, 1995" shall be deemed to be replaced by the Termination Date; and (d) in
Section 4.01 to "June 30, 1996" shall be deemed to be replaced by the first
anniversary of the Termination Date.
5.4. Compliance with Securities Laws. The parties hereto agree to take,
and to cause their respective affiliates to take, all actions necessary to
comply with the Securities Act and the Exchange Act and the rules and
regulations promulgated under such statutes in connection with the Merger and
the transactions contemplated by this Agreement; provided that the foregoing
shall not require Roche to furnish, other than for itself and its United States
Affiliates, financial statements prepared in accordance with United States
generally accepted accounting principles or any reconciliation of financial
statements with United States generally accepted accounting principles.
5.5. Option Plans. The Surviving Corporation shall take all action
necessary to ensure that, as provided in Section 4.1(d) hereof, Options
outstanding immediately prior to the Effective Time shall represent, at and
after the Effective Time, Options to acquire Special Common Shares on the same
terms as in effect immediately prior to the effective time pursuant to such
Options (and the related Option Plans) with respect to Shares. The Surviving
Corporation shall take all corporate action necessary to reserve for issuance a
sufficient number of Special Common Shares for delivery upon exercise of the
Options. The Surviving Corporation shall file a registration statement on Form
S-8 (or any successor form) or another appropriate form, effective as of the
Effective Time, with respect to Special Common Shares subject to such Options
and shall use all reasonable efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as such
Options remain outstanding.
5.6. Additional Agreements. The Company and Roche agree to execute each of
the New Governance Agreement and the Marketing Agreement in the forms attached
hereto as Exhibits A and D, respectively, immediately prior to the Effective
Time.
5.7. Voting. Roche agrees to vote all Common Shares owned by it or any of
its affiliates in favor of the Merger.
5.8. Certain Proceedings. In the event that any action, suit, proceeding
or investigation relating hereto or to the transactions contemplated by this
Agreement is commenced, whether before or after the Closing Date, the parties
hereto agree to cooperate and use their respective reasonable efforts to
vigorously defend against and respond thereto.
ARTICLE VI
CONDITIONS
6.1. Conditions to Each Party's Obligations. The respective obligations of
each party to consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or prior to the Effective Time of each of the
following conditions, any or all of which may be waived in whole or in part by
the party being benefitted thereby, to the extent permitted by applicable law:
(a) Stockholder Approval. This Agreement and the amendments to
Article THIRD of Company's Certificate of Incorporation shall have been
duly approved or ratified by the requisite vote of holders of Common Shares
and Redeemable Common Shares in accordance with applicable law, the
Certificate of Incorporation (including Article ELEVENTH thereof) and
By-Laws of the Company and the Governance Agreement.
(b) Additional Agreements. The New Governance Agreement and the
Marketing Agreement shall have been executed in substantially the forms
attached hereto as Exhibits A and D, respectively, and shall be in full
force and effect.
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(c) Amendment of Certificate of Incorporation. Article THIRD of the
Certificate of Incorporation shall have been amended by operation of the
Merger in substantially the form attached hereto as Exhibit C.
(d) No Injunction. No provision of any applicable law or regulation
and no judgment, injunction, order or decree shall prohibit the
consummation of the Merger.
(e) Registration Statement. The S-4 Registration Statement shall have
been declared effective and shall be effective at the Effective Time, and
no stop order suspending effectiveness shall have been issued, no action,
suit, proceeding or investigation by the SEC to suspend the effectiveness
thereof shall have been initiated and be continuing, and all necessary
approvals under state securities laws or the Securities Act or Exchange Act
relating to the issuance or trading of the Special Common Shares shall have
been received.
(f) Listing of Special Common Shares on NYSE. The Special Common
Shares required to be issued hereunder (including upon exercise of Options
as referred to in Section 4.1(d)) shall have been approved for listing on
the NYSE, subject only to official notice of issuance.
(g) Third Party Consents. All required authorizations, consents or
approvals of any third party, the failure to obtain which would have a
material adverse effect on the Company and its subsidiaries taken as a
whole, shall have been obtained.
6.2. Condition to Obligations of Roche and Merger Sub. The respective
obligations of Roche and Merger Sub to consummate the transactions contemplated
by this Agreement are subject to the fulfillment at or prior to the Effective
Time of the condition, which may be waived in whole or part by Roche and Merger
Sub, as the case may be, to the extent permitted by applicable law, that the
Company shall have performed or complied in all material respects with all
agreements and conditions contained herein required to be performed or complied
with by it prior to or at the time of the Closing.
6.3. Conditions to Obligations of the Company. The obligations of the
Company to consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or prior to the Effective Time of the following
conditions, which may be waived in whole or in part by the Company to the extent
permitted by applicable law:
(a) Performance. Roche shall have performed or complied in all
material respects with all agreements and conditions contained herein
required to be performed or complied with by it prior to or at the time of
the Closing.
(b) New Guaranty. The New Guaranty shall have been executed in
substantially the form attached as Exhibit B hereto and shall be in full
force and effect.
ARTICLE VII
TERMINATION
7.1. Termination. This Agreement may be terminated and the Merger may be
abandoned at any time:
(a) Prior to the Effective Time, before or after the approval by
holders of Common Shares or Redeemable Common Shares, by the mutual written
consent of Roche and the Company;
(b) By either the Company or Roche, upon written notice to the other
parties hereto, if the stockholder approval contemplated by Section 6.1(a)
hereof is not obtained by the Company at the Stockholder Meeting; or
(c) By either the Company or Roche if the Effective Time has not
occurred on or prior to October 31, 1995.
7.2. Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article VII, no
party hereto (or any of its directors or officers)
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shall have any liability or further obligation to any other party to this
Agreement, except that nothing herein will relieve any party from liability for
any breach of this Agreement.
ARTICLE VIII
MISCELLANEOUS AND GENERAL
8.1. Expenses. Each party shall bear its own expenses, including the fees
and expenses of any attorneys, accountants, investment bankers, brokers, finders
or other intermediaries or other Persons engaged by it, incurred in connection
with this Agreement and the transactions contemplated hereby.
8.2. Notices, Etc. All notices, requests, demands or other communications
required by or otherwise with respect to this Agreement shall be in writing and
shall be deemed to have been duly given to any party when delivered personally
(by courier service or otherwise), when delivered by telecopy and confirmed by
return telecopy, or seven days after being mailed by first-class mail, postage
prepaid and return receipt requested in each case to the applicable addresses
set forth below:
If to the Company:
Genentech, Inc.
490 Point San Bruno Boulevard
South San Francisco, California 94080
Attn.: John P. McLaughlin
Telecopy: 415-952-9881
Richard D. Katcher, Esq.
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Telecopy: 212-403-2000
If to Roche:
Roche Holdings, Inc.
c/o Roche Holding Ltd
Grenzacherstrasse 124
CH-4002 Basel
Switzerland
Telecopy: 011-41-61-688-1396
Attn.: Dr. Felix Amrein
with a copy to:
Peter R. Douglas, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopy: 212-450-4800
or to such other address as such party shall have designated by notice so given
to each other party.
8.3. Amendments, Waivers, Etc. This Agreement may not be amended, changed,
supplemented, waived or otherwise modified except by an instrument in writing
signed by the party against whom enforcement is sought.
8.4. No Assignment. This Agreement shall be binding upon and shall inure
to the benefit of and be enforceable by the parties and their respective
successors and assigns; provided that, except as otherwise expressly set forth
in this Agreement, neither the rights nor the obligations of any party may be
assigned or delegated without the prior written consent of the other party.
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8.5. Entire Agreement. Except as otherwise provided herein, this Agreement
and the exhibits hereto embody the entire agreement and understanding between
the parties relating to the subject matter hereof and supersedes all prior
agreements and understandings relating to such subject matter. There are no
representations, warranties or covenants by the parties hereto relating to such
subject matter other than those expressly set forth in this Agreement and the
exhibits hereto and any writings expressly required hereby or thereby.
8.6. No Third Party Beneficiaries. This Agreement is not intended to be
for the benefit of and shall not be enforceable by any Person or entity who or
which is not a party hereto.
8.7. Jurisdiction. Each party hereby irrevocably submits to the exclusive
jurisdiction of the United States District Court for the Southern District of
New York or any court of the State of New York located in the City of New York
in any action, suit or proceeding brought by either party hereto and arising in
connection with this Agreement, and agrees that any such action, suit or
proceeding shall be brought only in such court (and waives any objection based
on forum non conveniens or any other objection to venue therein); provided,
however, that such consent to jurisdiction is solely for the purpose referred to
in this Section 8.7 and shall not be deemed to be a general submission to the
jurisdiction of said Courts or in the State of New York other than for such
purpose. Roche and the Company hereby waive any right to a trial by jury in
connection with any such action, suit or proceeding.
8.8. Governing Law. This Agreement and all disputes hereunder shall be
governed by and construed and enforced in accordance with the internal laws of
the State of Delaware, without regard to principles of conflict of laws.
8.9. Name, Captions, Etc. The name assigned this Agreement and the section
captions used herein are for convenience of reference only and shall not affect
the interpretation or construction hereof. Unless otherwise specified, (a) the
terms "hereof", "herein" and similar terms refer to this Agreement as a whole
and (b) references herein to Articles or Sections refer to articles or sections
of this Agreement.
8.10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one instrument. Each counterpart may consist of a
number of copies each signed by less than all, but together signed by all, the
parties hereto.
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IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties set forth below.
GENENTECH, INC.
By: /s/ ARTHUR D. LEVINSON
------------------------------------
Name: Arthur D. Levinson
Title: President and CEO
ROCHE HOLDINGS, INC.
By: /s/ HENRI B. MEIER
------------------------------------
Name: Henri B. Meier
Title: Vice President
HLR (U.S.) II, INC.
By: /s/ FELIX AMREIN
------------------------------------
Name: Felix Amrein
Title: Vice President
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EXHIBIT A
AMENDED AND RESTATED GOVERNANCE AGREEMENT
AGREEMENT DATED AS OF , 1995 between Roche Holdings, Inc., a
Delaware corporation ("Roche"), and Genentech, Inc., a Delaware corporation (the
"Company").
WHEREAS, Roche, a subsidiary of Roche ("Merger Sub") and the Company have
entered into an Agreement and Plan of Merger dated as of , 1995 (the
"Merger Agreement") pursuant to which, among other things, (i) Merger Sub is
being merged (the "Merger") with and into the Company on the date hereof, (ii)
all capital stock of the Company not owned by Roche or any Affiliate (as
hereinafter defined) of Roche shall be converted into shares of Callable Putable
Common Stock, par value $.02 per share (the "Special Common Stock"), of the
Surviving Corporation (as defined in the Merger Agreement), and (iii) all of the
common stock of Merger Sub owned by Roche shall be converted into Common Stock
(as defined below), all upon the terms and subject to the conditions set forth
in the Merger Agreement; and
WHEREAS, Roche and the Company have previously entered into a Governance
Agreement, dated as of September 7, 1990 (the "Governance Agreement"); and
WHEREAS, Roche and the Company have agreed that the Governance Agreement
shall be amended and restated in its entirety contemporaneously with the
effectiveness of the Merger; and
WHEREAS, Roche and the Company have agreed to set forth in this Agreement
the terms and conditions upon which the Company shall redeem the Special Common
Stock; and
WHEREAS, Roche and the Company have agreed to establish in this Agreement
certain terms and conditions concerning the corporate governance of the Company;
and
WHEREAS, Roche and the Company also have agreed to establish in this
Agreement certain terms and conditions concerning the acquisition and
disposition of securities of the Company by Roche and its Affiliates;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and agreements contained herein, Roche and the Company hereby agree, and hereby
amend and restate the Governance Agreement in its entirety, as follows:
ARTICLE I
REDEMPTION AND REPURCHASE OF
SPECIAL COMMON STOCK
SECTION 1.01. Redemption and Repurchase of Special Common Stock. (a)
Subject to Sections 1.01(c) and 4.02, the Company shall, promptly upon receipt
of a written request from Roche for the redemption of the Special Common Stock,
designate a depositary (the "Depositary") for such redemption in accordance with
paragraph (A) of Article THIRD, Section (c)(iv) of the Company's certificate of
incorporation (the "Certificate of Incorporation") and notify Roche of such
designation. Upon confirmation from the Depositary that it has received
sufficient funds from Roche to pay the aggregate Redemption Price (as defined in
the Certificate of Incorporation) in respect of all outstanding shares of
Special Common Stock, the Company shall give, or cause to be given, the Call
Notification (as defined in the Certificate of Incorporation) in accordance with
such paragraph (B) of Article THIRD, Section (c)(ii). The Company shall set as
the date of redemption (the "Redemption Date") the date set forth in Roche's
written request for redemption; provided that such date shall be consistent with
the notice requirements of such paragraph (B). The Redemption Date shall in no
event be later than the earlier of June 30, 1999 or such earlier date on which
Roche's right to request redemption pursuant to this Section 1.01 shall
terminate. The calculation of the Redemption Price per share of Special Common
Stock, which shall be made in accordance with paragraphs (A) and (C) of Article
THIRD, Section (c)(ii) of the Certificate of Incorporation, shall be verified
with Roche prior to the mailing of such notice. In the event that additional
amounts become payable, pursuant to the second sentence of Article THIRD,
Section (c)(ii)(C) of the Certificate of Incorporation in connection with a
redemption of the Special Common Stock pursuant to this Section 1.01(a), Roche
shall promptly make available to the Depositary the aggregate additional amount
required to be paid pursuant to such second sentence of Article THIRD, Section
(c)(ii)(C).
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(b) At least ten, but not more than thirty, days prior to the commencement
of the Put Period (as defined in the Certificate of Incorporation), or, in the
event of an acceleration of the Put in accordance with the terms of Section
(c)(v) of Article THIRD of the Certificate of Incorporation, as soon as
practicable following the date of the occurrence of the Insolvency Event (as
defined in the Certificate of Incorporation) giving rise to such acceleration
(but in no event later than the tenth day following such date), the Company
shall (i) designate the Depositary for making payments to, and receiving shares
from, holders of Special Common Stock in connection with exercises of the Put
(as defined in the Certificate of Incorporation) in accordance with paragraph
(A) of Article THIRD, Section (c)(iv) of the Certificate of Incorporation and
notify Roche of such designation and (ii) give, or cause to be given, the Put
Notification (as defined in the Certificate of Incorporation) in accordance with
paragraph (B) of Article THIRD, Section (c)(iii) of the Certificate of
Incorporation or Section (c)(v) thereof, as the case may be. The Company shall
set as the Put Period the period required to be set pursuant such Section
(c)(iii) or Section (c)(v), as the case may be.
(c) The Company's obligations under Sections 1.01(a) and 1.01(b) hereof
shall be suspended during any period when, in the good faith judgment of the
majority of the Company's directors, the redemption of the Special Common Stock
would be prohibited under the Delaware General Corporation Law (the "DGCL").
(d) Subject to the provisions of Section 1.01(c), the Company hereby
irrevocably appoints Roche its attorney-in-fact for purposes of redeeming the
Special Common Stock in accordance with the terms of Sections 1.01(a) and
1.01(b) hereof and the Certificate of Incorporation.
SECTION 1.02. Deposit of Shares in Lieu of Cash. If so instructed in
connection with any redemption of the Special Common Stock pursuant to Sections
1.01(a) hereof and Article THIRD, Section (c)(ii) of the Certificate of
Incorporation, the Company shall deposit or cause to be deposited with the
Depositary any certificates representing shares of Special Common Stock
delivered to it by or on behalf of Roche promptly after the receipt thereof.
SECTION 1.03. Indemnification. Roche shall indemnify the Company and its
officers and directors against all losses, claims, damages, liabilities and
expenses (including attorneys' fees) arising out of the redemption (pursuant to
the Call or the Put (each as defined in the Certificate of Incorporation)) of
the Special Common Stock in accordance with the provisions of this Agreement
(including, without limitation, in the event of the Company's consummation of
the redemption of Special Common Stock in contravention of Section 160 of the
DGCL or any other law for the protection of creditors), other than any such
losses, claims, damages, liabilities and expenses that result primarily from
actions taken or omitted in bad faith by the indemnified person or from the
indemnified person's gross negligence or willful misconduct.
SECTION 1.04. Options, Etc. Roche and the Company will make appropriate
provisions to assure that any options, warrants, rights or securities issued by
the Company and convertible into or exercisable or exchangeable for shares of
Special Common Stock outstanding on the Redemption Date or the final day of the
Put Period (whether or not convertible, vested, exercisable or exchangeable on
such date) become convertible into or exercisable or exchangeable for
consideration of the same type and amount as the holders thereof would have
received had they converted, exercised or exchanged such options, warrants,
rights or securities prior to the Redemption Date or the final day of the Put
Period. Nothing herein shall be deemed or construed as a waiver of any other
rights that a holder of any such securities may have.
ARTICLE II
FURTHER ACQUISITIONS OF
COMPANY SECURITIES BY ROCHE
SECTION 2.01. Mergers, Etc. (a) Unless a majority of the Independent
Directors (as hereinafter defined) shall have determined that there has been a
sustained, substantial impairment of the business, prospects or financial
viability of the Company and its subsidiaries, taken as a whole, since the
effective time of the Merger (the "Effective Time"), Roche shall not, prior to
June 30, 1999, propose any Business Combination (as such term is used in Article
ELEVENTH of the Certificate of Incorporation) with Roche or any affiliate (an
"Affiliate") of Roche, as such term is defined in Rule 12b-2 promulgated under
the Securities
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Exchange Act of 1934, as amended (such Act, including the rules and regulations
promulgated thereunder, the "1934 Act"). Unless such a determination shall be
made, Roche shall not propose any such Business Combination during the period
commencing on July 1, 1999 and terminating on June 30, 2000, at a price per
share for the unaffiliated holders of the common stock into which shares of
Special Common Stock shall have been converted on June 30, 1999 less than the
price per share at which shares of Special Common Stock could have been redeemed
on such date, adjusted for any event occurring since such date as if the Special
Common Stock had continued to be outstanding.
(b) For purposes of the approval of the board of directors of the Company
(the "Board") required under Article ELEVENTH of the Certificate of
Incorporation for any transaction permitted by Section 2.01(a), the Independent
Directors shall consider whether the Business Combination is fair to the
minority stockholders of the Company without taking into account any possible
discount due to the fact that there exists a controlling stockholder of the
Company.
(c) The term "Independent Director" means a director of the Company who
would be entitled for purposes of Article ELEVENTH of the Certificate of
Incorporation to vote on a Business Combination with Roche.
SECTION 2.02. Additional Limitation. Subject to (a) Sections 1.01 and 2.01
and (b) the obligation of the Company to honor the rights of holders of Special
Common Stock to sell Special Common Stock to the Company in accordance with the
Call and the Put, Roche shall not, directly or indirectly, purchase or otherwise
acquire, or propose or offer to purchase or acquire, any Equity Security (as
defined below) of the Company, whether by tender offer, market purchase,
privately negotiated purchase, merger or otherwise, except that Roche may
acquire Equity Securities such that Parent's Voting Interest (as defined below)
in the Company would not immediately after such acquisition exceed 79.9%. Except
as expressly required pursuant to the terms of the Special Common Stock and this
Agreement, in no event will Roche, directly or indirectly, make any tender offer
for Equity Securities of the Company without the consent of the majority of the
Independent Directors. For purposes of this Agreement, (i) "Equity Security"
means any (A) voting stock of the Company (other than shares of voting stock not
having the right to vote generally in any election of directors of the Company),
(B) securities of the Company convertible into or exchangeable for such stock,
and (C) options, rights and warrants issued by the Company to acquire such
stock; and (ii) "Parent's Voting Interest" means the percentage of votes for
elections of directors of the Company generally controlled directly or
indirectly by Roche Holding Ltd, a Swiss corporation ("Parent"), assuming the
conversion, exchange or exercise into or for voting stock of all Equity
Securities other than voting stock and not taking into account any voting
agreements or arrangements granting to a third party control over the voting of
voting stock (including those contained herein) beneficially owned by Parent.
SECTION 2.03. Capital Contribution and Assumption of Put Obligations. (a)
Roche agrees to, or to cause one or more of its Affiliates to, contribute to the
Company, immediately prior to the time that any amounts become due and payable
to the holders of Special Common Stock pursuant to Article THIRD, Section
(c)(iii) of the Company's Certificate of Incorporation, (i) funds in an amount
equal to the product of the number of shares of Special Common Stock with
respect to which the Put has been properly exercised multiplied by the Put Price
(as defined in Article THIRD of the Company's Certificate of Incorporation) plus
(ii) such additional funds, if any, sufficient to permit the Company to redeem
the shares of Special Common Stock with respect to which the Put has been
properly exercised without violating Section 160 of the DGCL, any bankruptcy or
insolvency law or other law or regulation for the protection of creditors. In
exchange for such payment, the Company will issue to Roche (or to its designated
Affiliate) a number of duly authorized and validly issued shares of Common Stock
equal to the number of shares of Special Common Stock acquired thereby by the
Company. Notwithstanding the foregoing, Roche's obligation to make any such
payment to the Company under this Section 2.03 shall be void and of no further
force and effect if, in lieu thereof, Roche shall (or shall cause one of its
Affiliates to) elect to purchase, and make all arrangements necessary (including
compliance by Roche, or any such Affiliate or Affiliates, with the 1934 Act, the
1933 Act (as hereinafter defined) and any other applicable Federal or state
securities laws) to purchase, at the expiration of the Put Period, directly from
the holders of Special Common Stock at the Put Price the shares of Special
Common Stock which such holders elect to have purchased.
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(b) Notwithstanding any other term or provision hereof or of the Merger
Agreement, the Marketing Agreement (as defined below), the Guaranty dated as of
the date hereof by Parent of Roche's obligations under this Section 2.03,
Article Third of the Company's Certificate of Incorporation or any other
agreement, Roche agrees that it shall either (i) make (or cause one or more of
its Affiliates to make) the aggregate payments required to be made under the
first sentence of Section 2.03(a) hereof or (ii) if such payments are not made
for any reason, make (or cause one of its Affiliates to make) the election to
purchase referred to in the third sentence of Section 2.03(a) hereof and comply
(or cause one of its Affiliates to comply) fully with such sentence; provided,
however, that if an Insolvency Event (as defined in Article Third of the
Company's Certificate of Incorporation) occurs, Roche shall, within 10 days
after the occurrence of such Insolvency Event, either (x) contribute (or cause
one or more of its Affiliates to contribute) to the Company an amount equal to
the aggregate amount that would be required to be contributed to the Company
under the first sentence of Section 2.03(a) hereof assuming (for purposes of
clause (i) of such sentence) that the holders of all of the then outstanding
shares of Special Common Stock (on a fully diluted basis) were to exercise the
Put or (y) elect (or cause one of its Affiliates to elect) to purchase, and make
all arrangements necessary (including compliance by Roche, or any such
Affiliate, with the 1934 Act, the 1933 Act and any other Federal or state
securities laws) to purchase, at the expiration of the Put Period, directly from
the holders of Special Common Stock at the Put Price the shares of Special
Common Stock which such stockholders elect to have purchased. In exchange for
the payment by Roche of the amount specified in clause (x) of the immediately
preceding sentence (which amount shall be invested by the Company in a money
market fund which holds primarily U.S. government obligations until such time as
any amounts are paid to creditors or stockholders), the Company will issue to
Roche (or its designated Affiliate) a number of duly authorized and validly
issued shares of Common Stock equal to the number of then outstanding shares of
Special Common Stock (on a fully diluted basis). Immediately following the
expiration of the Put Period, if the Put has not been exercised with respect to
all of the then outstanding shares of Special Common Stock (on a fully diluted
basis) and if Roche shall have complied with clause (x) of the first sentence of
this Section 2.03(b), (1) the Company shall refund to Roche (or its designated
Affiliate) an amount (together with any interest actually earned thereon) equal
to the product of the Put Price times the number of outstanding shares of
Special Common Stock (on a fully diluted basis) with respect to which the Put
has not been exercised and (2) Roche (or by its designated Affiliate) shall, in
exchange for such payment by the Company, contribute to the Company a number of
shares of Common Stock equal to the number of outstanding shares of Special
Common Stock (on a fully diluted basis) with respect to which the Put has not
been exercised. In the event that Roche pays the amount specified in clause (x)
of the first sentence of this Section 2.03(b), none of Roche, Parent or any of
their respective Affiliates shall be entitled to any payments or other
distributions on or in respect of any Equity Security unless and until the
Company has redeemed all of the shares of Special Common Stock with respect to
which the Put has been properly exercised. If (x) an Insolvency Event occurs and
(y) Roche does not timely comply with its obligations under the proviso to the
first sentence of this Section 2.03(b), the amounts required to be paid by Roche
pursuant to such proviso shall be increased by $1,000,000, and the agent (the
"Agent") under the Agency Agreement dated as of September 6, 1995 between the
Company, the Agent and Parent shall have an undivided interest in the aggregate
amount payable under such proviso, which undivided interest shall (i) be limited
to, and shall in no event exceed, $1,000,000 and (ii) be paid by Roche directly
to the Agent.
(c) It is understood and agreed that, if Roche so elects, the obligation of
Roche to purchase shares of Special Common Stock pursuant to any of the
provisions in this Section 2.03 may, at the election of Roche, be assigned by
Roche to Parent or any Affiliate of Parent (other than the Company). No
assignment pursuant to this Section 2.03(c) shall relieve Roche of any of its
obligations under this Section 2.03 or otherwise.
(d) The Company shall take (and shall have no corporate power or capacity
to refuse to take) such actions as may be necessary to enforce the obligations
of Roche under this Section 2.03 and the obligations of Parent under the
Guaranty dated as of the date hereof by Parent of Roche's obligations under this
Section 2.03 (the "Guaranty") directly against Roche and Parent, or in the event
of assignment by Roche, against Roche, Parent and any Affiliate of Parent to
which any assignment is made.
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ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01. Initial Composition of Board of Directors at the Effective
Time. The number of directors comprising the Board immediately after the
Effective Time shall be 13. The directors of the Company following the Effective
Time shall be the directors of the Company immediately prior to the Effective
Time, until their successors have been duly elected or appointed and qualified
or until the earlier death, resignation or removal in accordance with the
Company's Certificate of Incorporation and By-Laws and this Agreement. After the
Effective Time, the Board shall continue to include up to two nominees of Roche,
whom Roche shall continue to designate prior to the mailing of the applicable
annual proxy statement of the Company. Such nominees shall continue to serve in
the class or classes of directors in which they served prior to the Effective
Time in a manner consistent with the terms of the Certificate of Incorporation
and bylaws of the Company. Directors nominated by Roche pursuant to this Section
3.01 or Section 3.02 are referred to herein as "Investor Directors" and all
other directors are referred to herein as "Noninvestor Directors".
Notwithstanding any other provision of this Agreement, the Certificate of
Incorporation or by-laws of the Company or applicable law, Roche shall not at
any time prior to the day following the last day of the Put Period be entitled
to designate, or cause the nomination or election of, more than two members of
the Board.
SECTION 3.02. Proportional Representation. (a) The Company agrees that
after the last day of the Put Period the Board shall include two nominees
designated by Roche and two officers of the Company nominated by the nominating
or proxy committee of the Board. The remainder of the Board shall be comprised
of Independent Directors. Upon its request, Roche shall be entitled to designate
nominees for a number of such Independent Directors equal to Parent's Voting
Interest times the total number of such Independent Directors, rounded up to the
next whole number if Parent's Voting Interest is greater than 50% and rounded
down to the next whole number if Parent's Voting Interest is less than or equal
to 50%. Notwithstanding the foregoing, (i) the number of Independent Directors
designated by Roche shall not exceed 50% after any Triggering Disposition (as
defined in Section 4.02) and (ii) Roche shall have no right to designate any
nominees for directors hereunder at any time after Parent's Voting Interest has
fallen below 20%. Roche shall not have the right to nominate or designate any
additional directors to the Board pursuant to this Section 3.02(a) unless and
until (i) the Depositary shall have received the Put Price in respect of shares
of Special Common Stock with respect to which the Put has been properly
exercised and shall have been irrevocably instructed to pay the Put Price to
stockholders that have exercised the Put; (ii) Roche shall have made (or caused
one of its Affiliates to make) the election to purchase referred to in the third
sentence of Section 2.03(a) hereof and shall have complied (or caused one or
more of its Affiliates to comply) fully with such sentence; or (iii) the
obligations of Roche under the third sentence of Section 2.03(a) hereof shall
have otherwise been fully satisfied through Parent's performance under the
Guaranty.
(b) The Company agrees to cause the Board to be increased or decreased in
size, and to cause the Board to fill the vacancies created by any such increase,
as appropriate in order to achieve the proportionality required by Section
3.02(a). Any directors elected to fill a vacancy shall serve until the next
annual meeting of stockholders, at which the newly created positions shall be
assigned to classes of directors consistent with the terms of the Certificate of
Incorporation and the Company's bylaws. Whenever necessary to maintain the
proportionality required by Section 3.02(a), Roche will cause directors
designated by Roche to resign from the Board. At such time as Parent's Voting
Interest falls below 20%, Roche will cause all the Investor Directors to resign
from the Board.
(c) Roche and the nominating or proxy committee shall have the right to
designate or nominate any replacement for a director designated by Roche or
nominated by such committee, respectively, at the termination of such director's
term or upon death, resignation, retirement, disqualification, removal from
office or other cause. To the extent permitted by the Certificate of
Incorporation or bylaws of the Company, the Board shall elect each person so
designated or nominated.
(d) No individual designated by Roche shall serve as a director unless such
individual has such business or technical experience, stature and character as
is commensurate with service on the board of a publicly held enterprise. No such
individual who is an officer, director, partner or principal stockholder of any
competitor of
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the Company and its subsidiaries (other than Roche and its Affiliates) shall
serve as a director of the Company.
SECTION 3.03. Committees. The Board shall designate a nominating or proxy
committee, an executive committee, an audit committee and a compensation
committee. Each committee of the Board (other than any special committee or
committee of Independent Directors constituted for the purposes of making any
determination that is to be made under the terms of this Agreement or the
Certificate of Incorporation) shall at all times include at least one director
designated by Roche and no action by any such committee shall be valid unless
taken at a meeting for which adequate notice has been duly given to or waived by
the members of such committee. Such notice shall include a description of the
general nature of the business to be transacted at the meeting and no other
business may be transacted at such meeting. Any committee member unable to
participate in person at any meeting shall be given the opportunity to
participate by telephone. The director designated by Roche to serve on any
committee may designate as his alternate another director designated by Roche.
SECTION 3.04. Nomination of Other Directors. (a) The nominating or proxy
committee shall include, in addition to the director designated by Roche, one
Noninvestor Director who is an officer of the Company and one Independent
Director, and shall have the exclusive authority to nominate individuals to fill
all Board positions except for those designated by Roche pursuant to the first
sentence of Section 3.02(a). With respect to any election of directors, any
nomination of a person not then serving as a director shall require the
unanimous approval of the nominating or proxy committee; provided that the
directors designated by Roche pursuant to Section 3.01, the directors designated
by Roche pursuant to the first sentence of Section 3.02(a), and the directors
initially nominated by Roche pursuant to the third sentence of Section 3.02(a)
shall not require such unanimous approval.
(b) The Company agrees to use all reasonable efforts to solicit proxies for
the nominees for director nominated by such committee from all holders of voting
stock entitled to vote thereon.
SECTION 3.05. Roche Approval Required for Certain Actions. The approval of
the directors designated by Roche pursuant to Section 3.01 or the first sentence
of 3.02(a) shall be required to approve any of the following:
(a) the acquisition by the Company of any business or assets that
would constitute a substantial portion of the business or assets of the
Company, whether such acquisition be by merger or consolidation or the
purchase of stock or assets or otherwise;
(b) the sale, lease, license, transfer or other disposal of all or a
substantial portion of the business or assets of the Company other than in
the ordinary course of business, other than any such sale, lease, license,
transfer or other disposal which is subject to the provisions of Section
3.07;
(c) the issuance of any Equity Securities or other capital stock of
the Company, except for (i) issuances of shares of Special Common Stock
(or, after the conversion thereof into shares of the Company's Common
Stock, par value $.02 per share (the "Common Stock"), Common Stock) or
options, warrants or rights to acquire, or securities convertible into or
exchangeable for, such Special Common Stock (or Common Stock) pursuant to
any employee compensation plan that has been approved by a majority of the
Independent Directors, (ii) issuances thereof upon the exercise, conversion
or exchange of any outstanding Equity Securities or other capital stock;
and (iii) other issuances thereof during any 24 month period not exceeding
5% of the voting stock of the Company outstanding at the beginning of such
24 month period; or
(d) the repurchase or redemption of any Equity Securities or other
capital stock of the Company, other than redemptions required by the terms
thereof and purchases made at fair market value in connection with any
deferred compensation plan maintained by the Company.
For purposes of clauses (a) and (b), unless the majority of Independent
Directors shall have made a contrary determination in good faith, a "substantial
portion of the business or assets of the Company" shall mean a
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portion of the business or assets of the Company accounting for 10% of the
consolidated total assets, contribution to net income or revenues of the Company
and its consolidated subsidiaries.
SECTION 3.06. Voting of Shares. (a) In any election of directors, Roche
will vote its shares of Common Stock and of Special Common Stock for all
nominees in proportion to the votes cast by the other holders of Special Common
Stock (excluding, at Roche's option, any votes cast by any person (as such term
is defined in Section 16(a) of the 1934 Act) or group (as defined in Section
13(d) of the 1934 Act) that beneficially owns (as defined in Rule 13d-3
promulgated under the 1934 Act) at least 12% of the Equity Securities not
beneficially owned by Parent); provided that it may cast all of its votes in
favor of any nominee designated by it pursuant to the provisions of this
Agreement.
(b) In any vote to amend the terms of the Special Common Stock, Roche will
vote its shares of Special Common Stock, if any, in proportion to the votes cast
by the holders of Special Common Stock (other than Roche and its Affiliates).
SECTION 3.07. Affiliation Arrangements. Except as otherwise provided in
the Marketing Agreement between F. Hoffmann -- La Roche Ltd and the Company
dated as of the date hereof (the "Marketing Agreement"), the Company will not,
and will not permit any of its subsidiaries to, enter into any material
licensing or marketing agreement with respect to any products, processes,
inventions or developments made by the Company or any subsidiary of the Company
unless it shall have first negotiated in good faith with Roche for a reasonable
period of not less than three or more than six months with a view towards
reaching a mutually beneficial licensing or marketing agreement with respect to
such products, processes, inventions or developments.
ARTICLE IV
RESTRICTIONS ON TRANSFER
OF COMMON STOCK
SECTION 4.01. Restrictions on Transfer of Common Stock. (a) Roche agrees
that it will not sell or otherwise transfer any shares of Common Stock or
Special Common Stock except (i) pursuant to a registered underwritten public
offering in accordance with Article V, (ii) pursuant to Rule 144 promulgated
under the Securities Act of 1933, as amended (such Act, including the rules and
regulations promulgated thereunder, the "1933 Act"), provided that Roche at or
prior to the time of such sale or transfer could have requested a registration
pursuant to Section 5.01 and that any such sale shall be subject to the volume
and manner of sale limitations set forth in such rule, whether or not legally
required, (iii) to any entity that is directly or indirectly 100% owned by
Parent or (iv) after the last day of the Put Period and so long as Parent's
Voting Interest is not below 50%, in a Liquidating Sale, as defined below;
provided that (x) no Liquidating Sale shall be made prior to the time that such
transaction is either rejected by the Independent Directors or the stockholders,
or consummated and (y) prior to the first anniversary of the last day of the Put
Period the per share value offered to the public in any Liquidating Sale shall
not be less than the final Redemption Price of the Special Common Stock
(adjusted appropriately for events occurring after the conversion thereof as if
it were still outstanding). The good faith determination of the majority of the
Independent Directors of the value of the consideration offered in any proposal
shall be conclusive and binding.
(b) "Liquidating Sale" shall mean (i) a sale of all shares of Common Stock
and Special Common Stock beneficially owned by Parent to any person or group
that is acquiring all outstanding voting stock of the Company at a per share
consideration having at least the same value, and to be paid in the same form as
(or in cash), and not later than, the per share consideration to be paid to
Roche and its Affiliates in a transaction that has been approved by the Board
and the stockholders in accordance with the requirements that would be
applicable to a Business Combination under Article ELEVENTH of the Certificate
of Incorporation proposed by Roche or (ii) if such transaction proposed by such
person or group has been rejected by the Independent Directors or the
stockholders entitled to vote thereon under Article ELEVENTH of the Certificate
of Incorporation, the sale of all the shares of Common Stock and Special Common
Stock beneficially owned by
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Parent to such person or group for per share consideration having not more than
the same value, and payable in the same form, as was so proposed to be paid to
stockholders.
(c) If requested by Roche, the Company shall use its best efforts to
consider any proposal involving a Liquidating Sale expeditiously and, if
recommended by the Board or any independent or special committee thereof to the
stockholders, to cause a stockholder meeting to be convened as promptly as
practicable for the purpose of voting on such proposal.
(d) Notwithstanding the foregoing, no Liquidating Sale shall be permitted
unless the transferee and each entity controlling such transferee shall have
agreed in writing to be bound, and to cause their Affiliates to be bound, by the
terms of this Agreement (including, without limitation, Section 3.06 hereof) as
if it were Roche and has entered into a confidentiality agreement with the
Company substantially in the form of the Confidentiality Agreement between
Parent and the Company dated October 13, 1989 (as modified by Section 6.01 of
the Agreement and Plan of Merger dated as of February 2, 1990 among the Company,
Roche and HLR (U.S.), Inc.); provided that no transferee in a Liquidating Sale
shall be entitled to the rights of Roche set forth in Articles III (other than
Section 3.06) and VII hereof.
SECTION 4.02. Commitment to Complete Disposition. In the event that Roche
sells shares of Common Stock in an underwritten public offering or pursuant to
Rule 144 prior to April 30, 2004 (a "Triggering Disposition"), it shall use its
best efforts to sell additional shares of Common Stock within three years of the
Triggering Disposition such that it will beneficially own not more than 20% of
the outstanding shares of Common Stock. After a Triggering Disposition, Roche
shall have no further rights (i) to request redemption of the Special Common
Stock or (ii) pursuant to Sections 3.03, 3.04, 3.05 and 3.07 or Article VII;
provided, however, that no Triggering Disposition shall relieve Roche of any of
its obligations pursuant to the Put. Other than in connection with its
obligations with respect to the Put pursuant to Section 2.03 hereof, after a
Triggering Disposition, Roche shall not, without the prior written consent of
the Board, acting alone or as part of a group, acquire or offer or agree to
acquire, directly or indirectly, by purchase or otherwise, any Equity Securities
or all or any substantial portion of the assets of, or otherwise seek to
influence or control, in any manner whatsoever, the management or policies of
the Company until the fifteenth anniversary of the date it ceases to
beneficially own more than 20% of the outstanding shares of Common Stock,
provided that the foregoing shall not apply to any of Roche's portfolio managers
whose investment decisions are not directed by Roche.
ARTICLE V
REGISTRATION RIGHTS
SECTION 5.01. Registration. (a) The Company agrees that, at any time after
April 30, 2000 or such earlier date as it shall have become illegal for Parent
to continue to own the shares of Common Stock or Special Common Stock directly
or indirectly or to exercise fully all rights of ownership with respect to the
shares of Common Stock or Special Common Stock, upon the request of Roche it
will file a registration statement (a "Registration Statement") under the 1933
Act as to the number of shares of Common Stock and/or Special Common Stock
specified in such request (the "Registered Shares"); provided that, subject to
Section 5.04, the Company shall not be required to file more than three
Registration Statements that become effective and remain effective for the
period referred to in Section 5.01(b).
(b) The Company agrees to use its best efforts to have any registration of
the Registered Shares declared effective as promptly as practicable after the
filing thereof and (ii) to keep such registration statement effective for a
period (up to three months) sufficient to complete the distribution of the
Registered Shares. The Company further agrees to supplement or make amendments
to the Registration Statement, if required by (x) the registration form utilized
by the Company for such registration or by the instructions applicable to such
registration form, (y) the 1933 Act or the rules and regulations thereunder or
(z) Roche (or any underwriter for Roche) with respect to information concerning
Roche or such underwriter or the plan of distribution to be utilized with
respect to the Registered Shares. The Company agrees to furnish to Roche
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copies of any such supplement or amendment prior to its being used or filed with
the Securities and Exchange Commission (the "SEC").
SECTION 5.02. Registration Procedures. Subject to the provisions of
Section 5.01 hereof, in connection with the registration of shares of Common
Stock hereunder, the Company will as expeditiously as possible:
(a) furnish to Roche, prior to the filing of a Registration Statement,
copies of such Registration Statement as is proposed to be filed, and
thereafter such number of copies of such Registration Statement, each
amendment and supplement thereto (in each case including all exhibits
thereto), the prospectus included in such Registration Statement (including
each preliminary prospectus) and such other documents in such quantities as
Roche may reasonably request from time to time in order to facilitate the
disposition of the Registered Shares;
(b) use all reasonable efforts to register or qualify the Registered
Shares under such other securities or blue sky laws of such jurisdiction as
Roche reasonably requests and do any and all other acts and things as may
be reasonably necessary or advisable to enable Roche to consummate the
disposition in such jurisdictions of the shares of Common Stock or Special
Common Stock owned by Roche; provided that the Company will not be required
to (i) qualify generally to do business in any jurisdiction where it would
not otherwise be required to qualify but for this subsection (b), (ii)
subject itself to taxation in any such jurisdiction or (iii) consent to
general service of process in any such jurisdiction;
(c) use all reasonable efforts to cause the Registered Shares to be
registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and operations of
the Company to enable Roche to consummate the disposition of such shares of
Common Stock or Special Common Stock;
(d) notify Roche, at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act, of the happening of any event
as a result of which the prospectus included in such Registration Statement
or amendment contains an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, and the Company will prepare a
supplement or amendment to such prospectus so that, as thereafter delivered
to the purchasers of the Registered Shares, such prospectus will not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading;
(e) enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of the
Registered Shares;
(f) make available for inspection by Roche, any underwriter
participating in any disposition pursuant to such registration, and any
attorney, accountant or other agent retained by any Roche or any such
underwriter (collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "Records") as shall be reasonably necessary to enable
them to exercise their due diligence responsibility, and cause the
officers, directors and employees of the Company to supply all information
reasonably requested by any such Inspector in connection with such
registration; provided that (i) records and information obtained hereunder
shall be used by such persons only to exercise their due diligence
responsibility and (ii) records or information which the Company
determines, in good faith, to be confidential shall not be disclosed by the
Inspectors unless (x) the disclosure of such Records or information is
necessary to avoid or correct a misstatement or omission in the
Registration Statement or (y) the release of such Records or information is
ordered pursuant to a subpoena or other order from a court or governmental
authority of competent jurisdiction. Roche shall use reasonable efforts,
prior to any such disclosure, to inform the Company that such disclosure is
necessary to avoid or correct a misstatement or omission in the
Registration Statement. Roche further agrees that it will, upon learning
that disclosure of such Records or information is sought in a court or
governmental authority, give notice to the Company and allow the Company,
at the expense of
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the Company, to undertake appropriate action to prevent disclosure of the
Records or information deemed confidential;
(g) use all reasonable efforts to obtain a comfort letter from the
independent public accountants for the Company in customary form and
covering such matters of the type customarily covered by comfort letters as
Roche reasonably requests;
(h) otherwise use all reasonable efforts to comply with all applicable
rules and regulations of the
SEC, and make generally available to its security holders, as soon as
reasonably practicable, an earnings statement covering a period of twelve
months, beginning within three months after the effective date of the
registration, which earnings statement shall satisfy the provisions of
Section 11(a) of the 1933 Act and Rule 158 thereunder; and
(i) use all reasonable efforts to cause all Registered Shares to be
listed on each securities exchange on which similar securities issued by
the Company are listed.
SECTION 5.03. Conditions to Offerings. The obligations of the Company to
take the actions contemplated by Sections 5.01 and 5.02 with respect to an
offering of shares of Common Stock shall be subject to the following conditions:
(i) The Registered Shares shall (unless reduced pursuant to Section
5.04(b)) constitute at least 10% of the outstanding common stock of the
Company and shall be distributed in an underwritten firm commitment public
offering. Roche shall have the right to select the investment banker or
bankers and lead manager or managers to administer the offering and its or
their counsel; provided that such lead manager or managers and such counsel
must be reasonably satisfactory to the Company.
(ii) There shall not have been an offering registered pursuant to
Section 5.01 within the immediately preceding twelve months and if such
earlier offering was completed or is continuing.
(iii) Roche shall conform to all applicable requirements of the 1933
Act and the 1934 Act with respect to the offering and sale of securities
and advise each underwriter, broker or dealer through which any of the
Registered Shares are offered that the Registered Shares are part of a
distribution that is subject to the prospectus delivery requirements of the
1933 Act.
(iv) Roche shall use all reasonable efforts to effect as wide a
distribution of such Registered Shares as reasonably practicable, and in no
event shall any sale of Registered Shares be made knowingly to any person
(including such person's Affiliates and any person or entities which are to
the knowledge of Roche part of any group (as defined in Section 13(d) of
the 1934 Act) which includes such purchaser (or any of its Affiliates))
who, after giving effect to such sale, would beneficially own (as defined
in Rule 13d-3 promulgated under the 1934 Act) Equity Securities
representing more than 5% of the Company's outstanding Common Stock or 5%
of the Company's Equity Securities.
The Company may require Roche to furnish to the Company such information
regarding Roche or the distribution of the Registered Shares as the Company may
from time to time reasonably request in writing, in each case only as required
by the 1933 Act or the rules and regulations thereunder or under state
securities or Blue Sky laws.
Roche agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 5.02(d) hereof, such
holder will forthwith discontinue disposition of Registered Shares pursuant to
the registration covering such shares of Common Stock until Roche's receipt of
the copies of the supplemented or amended prospectus contemplated by Section
5.02(d) hereof.
SECTION 5.04. Additional Conditions. (a) The Company's obligations
pursuant to Section 5.01 shall be suspended if (i) the fulfillment of such
obligations would require the Company to make a disclosure that would, in the
reasonable good faith judgment of the Company's board of directors, be
detrimental to the Company and premature, (ii) the Company has filed a
registration statement with respect to securities to be distributed in an
underwritten public offering and it is advised by its lead or managing
underwriter that an offering by Roche of the Registered Shares would materially
adversely affect the distribution of such equity
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securities or (iii) the fulfillment of such obligations would require the
Company to prepare audited financial statements not required to be prepared for
the Company to comply with its obligations under the 1934 Act as of any date not
coincident with the last day of any fiscal year of the Company. Such obligations
shall be reinstated (x) in the case of clause (i) above, upon the making of such
disclosure by the Company (or, if earlier, when such disclosure would either no
longer be necessary for the fulfillment of such obligations or no longer be
detrimental), (y) in the case of clause (ii) above, upon the conclusion of any
period during which the Company would not, pursuant to the terms of its
underwriting arrangements, be permitted to sell the Registered Securities for
its own account and (z) in the case of clause (iii) above, as soon as it would
no longer be necessary to prepare such financial statements to comply with the
1933 Act. The period during which Roche is required to sell its shares of Common
Stock pursuant to Section 5.05 shall be tolled for the duration of any
suspension pursuant to this paragraph.
(b) The number of shares of Common Stock to be registered pursuant to
Section 5.01 shall be reduced to the extent that the Company is advised in
writing by an investment banker of national standing that the sale of all shares
of Common Stock requested to be registered by Roche would materially and
adversely affect the market price of the Company's equity securities. No
registration reduced pursuant to this Section 5.04(b) shall be counted for
purposes of the proviso to Section 5.01(a).
SECTION 5.05. Registration Expenses. All expenses incident to the
performance of or compliance with this Article by the Company, including,
without limitation, all fees and expenses of compliance with securities or blue
sky laws (including reasonable fees and disbursements of counsel in connection
with blue sky qualifications of the Registered Shares), rating agency fees,
printing expenses, messenger and delivery expenses, internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the fees and expenses incurred
in connection with the listing of the securities to be registered on each
securities exchange on which similar securities issued by the Company are then
listed, fees and disbursements of counsel for the Company and its independent
certified public accountants (including the expenses of any comfort letters
required by or incident to such performance), securities acts liability
insurance (if the Company elects to obtain such insurance), the reasonable fees
and expenses of any special experts retained by the Company in connection with
such registration and the fees and expenses of other persons retained by the
Company (all such expenses being herein called "Registration Expenses"), will be
borne by the Company. The Company will not have any responsibility for any
registration or filing fees payable under any federal or state securities or
Blue Sky laws or for any of the expenses of the holders of Registrable
Securities incurred in connection with any registration hereunder including,
without limitation, underwriting fees, discounts and commissions and transfer
taxes, if any, attributable to the sale of Registrable Securities, counsel fees
of such holders and travel costs.
SECTION 5.06. Indemnification; Contribution. (a) Indemnification by the
Company. The Company agrees to indemnify, to the fullest extent permitted by
law, Roche, its directors and officers and each person who controls Roche
(within the meaning of either the 1933 Act or the 1934 Act) against any and all
losses, claims, damages, liabilities and expenses (including attorneys' fees)
caused by any untrue or alleged untrue statement of material fact contained in
any Registration Statement, prospectus or preliminary prospectus (each as
amended and or supplemented, if the Company shall have furnished any amendments
or supplements thereto), or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein (in the case of a prospectus, in the light of the circumstances under
which they were made) not misleading, provided that the Company shall not be
required to indemnify any holder or its officers, directors or controlling
persons for any losses, claims, damages, liabilities or expenses resulting from
any such untrue statement or omission if such untrue statement or omission is
made in reliance on and conformity with any information with respect to such
holder furnished to the Company by such holder expressly for use therein. In
connection with an underwritten offering, the Company will indemnify each
underwriter thereof, the officers and directors of such underwriter, and each
person who controls such underwriter (within the meaning of either the 1933 Act
or 1934 Act) to the same extent as provided above with respect to the
indemnification of Roche; provided that such underwriter agrees to indemnify the
Company to the same extent as provided below with respect to the indemnification
of the Company by Roche.
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(b) Indemnification by Roche. In connection with any registration in which
Roche is participating, Roche will furnish to the Company in writing such
information and affidavits with respect to Roche as the Company reasonably
requests for use in connection with any such registration, prospectus, or
preliminary prospectus and agrees to indemnify the Company, its directors, its
officers who sign the Registration Statement and each person, if any, who
controls the Company (within the meaning of either the 1933 Act or of the 1934
Act) to the same extent as the foregoing indemnity from the Company to such
holder, but only with respect to information relating to such holder furnished
to the Company in writing by Roche expressly for use in the Registration
Statement, the prospectus, any amendment or supplement thereto, or any
preliminary prospectus.
(c) Conduct of Indemnification Proceedings. In case any proceeding
(including any governmental investigation) shall be instituted involving any
person in respect of which indemnity may be sought pursuant to Section 5.07(a)
or Section 5.07(b), such person (hereinafter called the indemnified party) shall
promptly notify the person against whom such indemnity may be sought
(hereinafter called the indemnifying party) in writing and the indemnifying
party, upon request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party and any
others the indemnifying party may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and the indemnified party
shall have been advised by counsel that representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all such indemnified parties, and that
all such fees and expenses shall be reimbursed as they are incurred. In the case
of any such separate firm for the indemnified parties, such firm shall be
designated in writing by the indemnified parties. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the third sentence of this
Section 5.07(c), the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement in entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request or reasonably
objected in writing, on the basis of the standards set forth herein, to the
propriety of such reimbursement prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.
(d) Contribution. If the indemnification provided for in this Section 5.07
from the indemnifying party is unavailable to an indemnified party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to in
this Section 5.07, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
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such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 5.07(c), any legal or
other fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5.07(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
If indemnification is available under this Section 5.07, the indemnifying
parties shall indemnify each indemnified party to the full extent provided in
Sections 5.06(a) and (b) without regard to the relative fault of said
indemnifying party or indemnified party or any other equitable consideration
provided for in this Section 5.06(d).
SECTION 5.07. Rule 144. The Company covenants that it will file the
reports required to be filed by it under the 1933 Act and the 1934 Act and the
rules and regulations adopted by the SEC thereunder, and it will take such
further action as Roche may reasonably request, all to the extent required from
time to time to enable Roche to sell shares of Common Stock without registration
under the 1933 Act within the limitation of the exemptions provided by (a) Rule
144 under the 1933 Act, as such Rule may be amended from time to time, or (b)
any similar rule or regulation hereafter adopted by the SEC. Upon the request of
Roche, the Company will deliver to Roche a written statement as to whether it
has complied with such requirements.
SECTION 5.08. No Inconsistent Agreements; etc. (a) The Company will not
hereafter enter into any agreement with respect to its securities which is
inconsistent with the rights granted to Roche in this Agreement.
(b) Any determination required to be made by the Company under this Article
V shall be made by the Independent Directors.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
SECTION 6.01. Representations of the Company. (a) The execution, delivery
and performance by the Company of this Agreement and the consummation by the
Company of the transactions contemplated hereby are within the Company's
corporate powers and have been duly authorized by all necessary corporate
action. This Agreement constitutes a valid and binding agreement of the Company.
(b) The execution, delivery and performance by the Company of this
Agreement require no action by or in respect of, or filing with, any
governmental body, agency, official or authority, other than (i) compliance with
any applicable requirements of the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder, as amended (the "1934 Act"); (ii)
compliance with any applicable requirements of the Securities Act of 1933, as
amended (the "1933 Act"); and (iii) compliance with any applicable foreign or
state securities or Blue Sky laws.
(c) The execution, delivery and performance by the company of this
Agreement and the consummation by the Company of the transactions contemplated
hereby do not and will not (i) contravene or conflict with the certificate of
incorporation or bylaws of the Company, and (ii) assuming compliance with the
matters referred to in Section 6.01(b), contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgment,
injunction, order or decree binding upon or applicable to the Company.
SECTION 6.02. Representations of Roche. (a) The execution, delivery and
performance by Roche of this Agreement and the consummation by Roche of the
transactions contemplated hereby are within Roche's
AA-13
<PAGE> 164
corporate powers and have been duly authorized by all necessary corporate
action. This Agreement constitutes a valid and binding agreement of Roche.
(b) The execution, delivery and performance by Roche of this Agreement
require no action by or in respect of, or filing with, any governmental body,
agency, official or authority, other than (i) compliance with any applicable
requirements of the 1934 Act; (ii) compliance with any applicable requirements
of the 1933 Act; and (iii) compliance with any applicable foreign or state
securities or Blue Sky laws.
(c) The execution, delivery and performance by Roche of this Agreement and
the consummation by Roche of the transactions contemplated hereby do not and
will not (i) contravene or conflict with the certificate of incorporation or
bylaws of Roche, and (ii) assuming compliance with the matters referred to in
Section 6.01(b), contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree binding
upon or applicable to Roche.
ARTICLE VII
COVENANTS
SECTION 7.01. Severance Arrangements. The Company will not and will not
permit any of its subsidiaries to, (i) enter into any contract, agreement, plan
or arrangement covering any director, officer or employee of the Company or any
Subsidiary that provides for the making of any payments, the acceleration of
vesting of any benefit or right or any other entitlement contingent upon (A) the
Merger or the exercise by Roche of any of its rights under this Agreement to
representation on the Board of Directors (and its committees) or any acquisition
by Roche of securities of the Company (whether by merger, tender offer, private
or market purchases or otherwise) not prohibited by this Agreement or (B) the
termination of employment after the occurrence of any such contingency if such
payment, acceleration or entitlement would not have been provided but for such
contingency or (ii) amend any existing contract, agreement, plan or arrangement
to so provide.
SECTION 7.02. Marketing Agreements. Roche and the Company agree to
negotiate in good faith with respect to the establishment of a marketing
arrangement under which the Company would market, on agreed terms, certain
products of Roche and its Affiliates.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including telecopy or similar writing)
and shall be given,
If to the Company:
Genentech, Inc.
490 Point San Bruno Boulevard
South San Francisco, California 94080
Attn: John P. McLaughlin
Telecopy: 415-952-9881
With a copy to:
Richard D. Katcher, Esq.
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Telecopy: 212-403-2000
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<PAGE> 165
If to Roche:
Roche Holdings, Inc.
c/o Roche Holding Ltd
Grenzacherstrasse 124
CH-4002 Basel
Switzerland
Telecopy: 011-41-61-688-1396
Attn: Dr. Felix Amrein
with a copy to:
Peter R. Douglas, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopy: 212-450-4800
or such other address or telecopier number as such party may hereafter specify
for the purpose by notice to the other parties hereto. Each such notice, request
or other communication shall be effective (i) if given by telecopier, when such
telecopy is transmitted to the telecopier number specified in this Section and
the appropriate answerback is received or (ii) if given by any other means, when
delivered at the address specified in this Section.
SECTION 8.02. Amendments; No Waivers. (a) Any provision of this Agreement
may be amended or waived if, and only if, such amendment or waiver is in writing
and signed, in the case of an amendment, by Roche and the Company, or in the
case of a waiver, by the party against whom the waiver is to be effective;
provided that no such amendment or waiver shall be effective without the
approval of a majority of the Independent Directors.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 8.03. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other party hereto except that, subject to the
limitations set forth in Section 4.01(d), Roche may assign its rights to any
transferee of its shares of Common Stock permitted under clause (iii) or (iv) of
Section 4.01.
SECTION 8.04. Governing Law. This Agreement shall be construed in
accordance with and governed by the law of the State of Delaware.
SECTION 8.05. Counterparts; Effectiveness. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by the other party hereto.
SECTION 8.06. Specific Performance. The Company acknowledges and agrees
that Roche's and the Company's respective remedies at law for a breach or
threatened breach of any of the provisions of this Agreement would be inadequate
and, in recognition of that fact, agrees that, in the event of a breach or
threatened breach by the Company or Roche of the provisions of this Agreement,
in addition to any remedies at law, Roche and the Company, respectively, without
posting any bond shall be entitled to obtain equitable relief in the form of
specific performance, a temporary restraining order, a temporary or permanent
injunction or any other equitable remedy which may then be available.
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<PAGE> 166
SECTION 8.07. Termination. This Agreement (other than Sections 1.03 and
1.04 hereof) shall terminate at such time as Roche and its Affiliates
beneficially own 100% of the voting stock of the Company.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
GENENTECH, INC.
By
------------------------------------
Title:
ROCHE HOLDINGS, INC.
By
------------------------------------
Title:
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<PAGE> 167
EXHIBIT B
GUARANTY
SECTION 1. The Guaranty. Roche Holding Ltd, a Swiss corporation
("Guarantor"), hereby unconditionally and irrevocably guarantees to Genentech,
Inc., a Delaware corporation (the "Company"), the prompt and full discharge by
Roche Holdings, Inc., a Delaware corporation ("Roche"), of all of Roche's
covenants, agreements, obligations and liabilities under Section 2.03 of the
Amended and Restated Governance Agreement between Roche and the Company (the
"Amended and Restated Governance Agreement") (collectively, the "Obligations"),
in accordance with the terms hereof and thereof. Guarantor hereby so guarantees
full and complete performance by Roche of each and all of the Obligations,
including, without limitation, the due and punctual payment of all amounts which
may become due and payable to the Company and/or to the holders of Callable
Putable Common Stock, par value $.02 per share (the "Special Common Stock"), of
the Company. Guarantor acknowledges and agrees that, with respect to all
obligations to pay money, such guaranty shall be a guaranty of payment and not
of collection. If Roche shall default in the due and punctual performance of any
of the Obligations or in the full and timely payment of any amounts owed
pursuant to the Obligations, Guarantor will forthwith perform or cause to be
performed such Obligations and will forthwith make full payment of any amount
due with respect thereto at its sole cost and expense.
SECTION 2. Guaranty Unconditional. The liabilities and obligations of
Guarantor to the Company pursuant to this Guaranty shall be unconditional and
irrevocable and shall not be conditioned or contingent upon the pursuit of any
remedies against Roche or any other person.
SECTION 3. Waivers of Guarantor. (a) Guarantor hereby waives any right,
whether legal or equitable, statutory or non-statutory, to require the Company
to proceed against or take any action against or pursue any remedy with respect
to Roche or any other person or make presentment or demand for performance or
give any notice of nonperformance before the Company may enforce rights against
Guarantor hereunder. The unconditional obligation of Guarantor hereunder will
not be affected, impaired or released by any extension, waiver, amendment or
thing whatsoever which would release a guarantor (other than performance).
(b) Guarantor hereby waives irrevocably any defense based upon or arising
by reason of any disability or incapacity of Roche or lack of authority of any
officer or director of Roche, and any immunity (whether on the basis of
sovereignty or otherwise) from the jurisdiction, attachment or execution to
which it or its property might otherwise be entitled in any action arising out
of or based upon this Guaranty which may be instituted in the courts of the
State of Delaware, the State of New York, the United States of America, or any
other domestic or foreign jurisdiction.
SECTION 4. Definitions. Terms used herein that are defined in the Amended
and Restated Governance Agreement are, unless otherwise defined, used herein as
therein defined.
SECTION 5. Representations and Warranties. (a) Corporate Existence and
Power. The Guarantor is a corporation duly incorporated, validly existing and
in good standing under the laws of Switzerland, and has all corporate powers
required to carry on its business as now conducted. The Guarantor is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned or leased by it or
the nature of its activities makes such qualification necessary, except for
those jurisdictions where the failure to be so qualified would not, individually
or in the aggregate, have a material adverse effect on the financial condition,
business or results of operations of the Guarantor.
(b) Corporate Authorization. The execution, delivery and performance by
the Guarantor of this Guaranty and the consummation by the Guarantor of the
transactions contemplated hereby are within the Guarantor's corporate powers.
This Guaranty is a valid and binding obligation of the Guarantor, enforceable in
accordance with its terms, except as (i) the enforceability hereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (ii) the availability of equitable remedies may be limited by
equitable principles of general applicability.
AB-1
<PAGE> 168
(c) Governmental Authorization. The execution, delivery and performance by
the Guarantor of this Guaranty require no action by or in respect of, or filing
with, any governmental body, agency, official or authority other than such
filings or registrations with, or authorizations, consents or approvals of,
governmental bodies, agencies, officials or authorities, (i) as may be required
by applicable Federal and state securities laws or as may be required in
connection with a tender offer or (ii) the failure of which to make or obtain
would not reasonably be expected to prevent performance hereof or have a
material adverse effect on the financial condition, business or results of
operations of Guarantor.
(d) Non-Contravention. The execution, delivery and performance by the
Guarantor of this Guaranty and the consummation by the Guarantor of the
transactions contemplated hereby do not and will not (i) contravene or conflict
with the certificate of incorporation or bylaws of the Guarantor, (ii) assuming
compliance with the matters referred to in Section 5(c), contravene or conflict
with or constitute a violation of any provision of any law, regulation,
judgment, injunction, order or decree binding upon or applicable to the
Guarantor or any of its Subsidiaries or (iii) constitute a default under or give
rise to a right of termination, cancellation or acceleration of any right or
obligation of the Guarantor or to a loss of any benefit to which the Guarantor
is entitled under any provision of any agreement, contract or other instrument
binding upon the Guarantor or any license, franchise, permit or other similar
authorization held by the Guarantor, except such as would not prevent
performance hereof or have a material adverse effect on the business, financial
condition or results of operations of the Guarantor and its subsidiaries, taken
as a whole.
SECTION 6. Covenants of Guarantor. Guarantor, for itself and its
affiliates (as such term is defined in Rule 12b-2 promulgated under the
Securities Exchange Act of 1934, as amended), agrees to be bound by the
provisions of the Amended and Restated Governance Agreement and abide, and to
cause its affiliates to abide, by the obligations and limitations set forth
therein as if it were Roche, and agrees and acknowledges that any limitation or
restriction on Roche set forth therein shall be deemed to be, and shall be
construed as, a limitation or restriction on Guarantor and its affiliates taken
as a whole.
SECTION 7. Notice. All notices, requests and other communications to any
party hereunder shall be in writing (including telecopy or similar writing) and
shall be given,
if to Guarantor:
Roche Holdings, Inc.
c/o Roche Holding Ltd
Grenzacherstrasse 124
CH-4002 Basel
Switzerland
Attn.: Dr. Felix Amrein
Telecopy: 011-41-61-688-1396
with a copy to:
Peter R. Douglas, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopy: 212-450-4800
If to the Company to:
Genentech, Inc.
460 Point San Bruno Boulevard
South San Francisco, California 94080
Attn.: John P. McLaughlin
Telecopy: 415-952-9881
AB-2
<PAGE> 169
with a copy to:
Richard D. Katcher, Esq.
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Telecopy: 212-403-2000
or such other address or telecopier number as such party may hereafter specify
in writing. Each such notice, request or other communication shall be effective
(i) if given by telecopier, when such telecopy is transmitted to the telecopier
number specified in this Section or (ii) if given by any other means, when
delivered at the address specified in this Section.
SECTION 8. Authorized Agent. The Guarantor hereby appoints Davis Polk &
Wardwell as its authorized agent upon whom process may be served in any action
or proceeding arising out of or based upon this Guaranty. The Guarantor hereby
expressly submits to the jurisdiction of any State or Federal court in New York
City or the State of Delaware.
SECTION 9. Successors and Assigns. The provisions of this Guaranty shall
be binding upon and inure to the benefit of the Company and Guarantor and their
respective successors and assigns.
SECTION 10. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE.
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed
as of this day of , 1995.
ROCHE HOLDING LTD
By
--------------------------------------
Title:
Agreed and Accepted:
GENENTECH, INC.
By
----------------------------------------------------
Title:
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<PAGE> 170
EXHIBIT C
THIRD: (a) The corporation is authorized to issue three (3) classes of
stock to be designated, respectively, preferred stock, callable putable common
stock and common stock. The total number of shares which the corporation is
authorized to issue is four hundred million (400,000,000) shares. One hundred
million (100,000,000) shares shall be designated preferred stock, par value $.02
per share ("Preferred Stock"), one hundred million (100,000,000) shares shall be
designated callable putable common stock, par value $.02 per share ("Special
Common Stock"), and two hundred million (200,000,000) shares shall be designated
common stock, par value $.02 per share ("Common Stock").
(b) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized to fix or alter the dividend
rights, dividend rate, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or prices,
and the liquidation preferences of any wholly unissued series of Preferred
Stock, and the number of shares constituting any such series and the designation
thereof, or any of them; and to increase or decrease the number of shares of any
series subsequent to the issue of shares of that series, but not below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
(c) The holders of Special Common Stock and Common Stock shall, on all
matters submitted to a vote of the stockholders of the corporation, each be
entitled to one vote per share, voting together as a single class unless
otherwise provided for in this certificate of incorporation or required by
applicable law. The rights, preferences, privileges and restrictions of Special
Common Stock and Common Stock shall be identical in all respects, except as
follows:
(i) Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the corporation, no distribution shall be made (1)
to the holders of shares of Common Stock unless, prior thereto, the holders of
shares of Special Common Stock shall have received $.01 per share, plus an
amount equal to declared and unpaid dividends and distributions thereon to the
date of such payment; provided that the holders of shares of Special Common
Stock shall be entitled to receive an aggregate amount per share equal to the
aggregate amount to be distributed per share to holders of Common Stock, or (2)
to the holders of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Special Common Stock, except
distributions made ratably on the Special Common Stock and all such other parity
stock in proportion to the total amounts to which the holders of all such shares
are entitled upon such liquidation, dissolution or winding up.
(ii) Redemption. Subject to the provisions of the Amended and Restated
Governance Agreement, dated as of , 1995, between Roche
Holdings, Inc., a Delaware corporation ("Roche"), and the Company, as such
agreement may be amended from time to time (such agreement, as amended from time
to time, the "Governance Agreement"), the Special Common Stock may, and, where
the Governance Agreement so requires, shall be redeemed, in whole but not in
part (the "Call") during the periods and at the prices and upon the terms and
conditions set forth below.
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<PAGE> 171
(A) Price. The redemption price for any redemption date during the periods
set forth below shall be the price set forth opposite such period in the
following table, adjusted as set forth in paragraph (C) below (the "Redemption
Price"):
<TABLE>
<CAPTION>
PERIOD PRICE
-------------------------------------------------------------------- ------
<S> <C>
July 1, 1995 to September 30, 1995.................................. $61.25
October 1, 1995 to December 31, 1995................................ $62.50
January 1, 1996 to March 31, 1996................................... $63.75
April 1, 1996 to June 30, 1996...................................... $65.00
July 1, 1996 to September 30, 1996.................................. $66.25
October 1, 1996 to December 31, 1996................................ $67.50
January 1, 1997 to March 31, 1997................................... $68.75
April 1, 1997 to June 30, 1997...................................... $70.00
July 1, 1997 to September 30, 1997.................................. $71.50
October 1, 1997 to December 31, 1997................................ $73.00
January 1, 1998 to March 31, 1998................................... $74.50
April 1, 1998 to June 30, 1998...................................... $76.00
July 1, 1998 to September 30, 1998.................................. $77.50
October 1, 1998 to December 31, 1998................................ $79.00
January 1, 1999 to March 31, 1999................................... $80.50
April 1, 1999 to June 30, 1999...................................... $82.00
</TABLE>
(B) Notice. Notice of any proposed redemption of the Special Common Stock
shall be given by mailing a copy of such notice (the "Call Notification"),
postage prepaid, to the holders of record of the shares of Special Common Stock
at their respective addresses then appearing on the books of the corporation,
not more than 30 or less than 10 days prior to the date fixed for redemption,
but neither failure to mail such notice nor any defect therein or in the mailing
thereof shall affect the validity of the proceeding for the redemption of the
Special Common Stock.
(C) Adjustments. Upon "final Court approval of the Settlement", as defined
in the Memorandum of Understanding dated July 7, 1995 relating to the
consolidated action pending in the Delaware Chancery Court entitled In re
Genentech, Inc. Shareholders Litigation, Cons. C.A. No. 14265 (or in any
superseding stipulation of settlement accepted by the corporation and the Roche
defendants in that action), each Redemption Price set forth in paragraph (A)
above shall be increased by $0.50 per share of Special Common Stock. If such
"final Court approval of Settlement" occurs after payment of the Redemption
Price pursuant to the Call, such $0.50 increase shall be promptly thereafter
paid by the corporation pursuant to Section (c)(iv)(A)(1) of this Article THIRD
for each share of Special Common Stock for which payment of the Redemption Price
had previously been paid pursuant to such Call. If the corporation shall at any
time after the initial issuance of any Special Common Stock pay any dividend on
Special Common Stock payable in Special Common Stock or effect a subdivision or
combination of the Special Common Stock (by reclassification or otherwise) into
a greater or lesser number of shares of Special Common Stock, then in each such
case the Redemption Prices set forth above shall be adjusted by multiplying each
Redemption Price in effect immediately prior to such event by the ratio of the
number of shares of Special Common Stock outstanding immediately prior to such
event to the number of shares of Special Common Stock outstanding immediately
after such event. If the corporation shall at any time after the initial
issuance of any Special Common Stock declare or pay any dividend on Special
Common Stock in cash, securities or other property other than Special Common
Stock, the Redemption Prices in effect for each period after such event shall
each be reduced by the per share value of such dividend multiplied by a fraction
the numerator of which equals the Redemption Price which would otherwise be in
effect for such period and the denominator of which equals the Redemption Price
in effect at the time of such event; provided that such adjustment shall not be
made with respect to cash dividends determined by the majority of the Board of
Directors to be in the ordinary course and approved by the majority of the
Investor Directors (as defined in the Governance Agreement). The Board of
Directors shall determine in good faith the value of any noncash dividend for
purposes of those adjustments.
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<PAGE> 172
(iii) Put by Holders. Unless the Call has been previously exercised,
during the Put Period (as defined below), each holder of the Special Common
Stock shall have the option (the "Put") to require the corporation to redeem all
or part of the Special Common Stock held by such holder.
(A) Price. In connection with the exercise of the Put by any holder of
Special Common Stock, the corporation shall redeem each share of Special Common
Stock subject to the Put at a redemption price per share equal to the Put Price
(as defined below). The holder shall have the right to require the corporation
to redeem all or part of the Special Common Stock held by such holder by
delivery of the Put Notice (as defined below) during the Put Period to the
corporation or the Depositary (as defined below) electing to have shares of
Special Common Stock redeemed by the corporation and specifying therein the
number of whole shares of Special Common Stock which such holder has elected to
cause the corporation to redeem, accompanied by a certificate or certificates
representing such shares.
(B) Notice. At least ten and not more than thirty days prior to the
beginning of the Put Period or, in the event of an acceleration of the Put in
accordance with the terms of Section (c)(v) of this Article THIRD, as soon as
practicable following the date of the occurrence of the Insolvency Event giving
rise to such acceleration (but in no event later than the tenth day following
such date), the corporation shall mail the Put Notification (as defined below)
to each holder of Special Common Stock at such holder's address as it appears on
the transfer books of the corporation and to each holder of an option to
purchase shares of the Special Common Stock at the address for such holder set
forth in the records of the corporation, in each case together with a form of
Put Notice to be used by such holder in exercising the Put. The Put Notification
shall comply in all respects with applicable provisions of the Securities
Exchange Act as in effect at the time the Put Notification is given. A notice
similar to the Put Notification shall be given by the corporation by publication
in a newspaper of general circulation in the State of New York, City of New York
at least ten and no more than thirty days prior to the beginning of the Put
Period or, in the event of an acceleration of the Put in accordance with the
terms of Section (c)(v) of this Article THIRD, as soon as practicable following
the date of the occurrence of the Insolvency Event giving rise to such
acceleration (but in no event later than the tenth day following such date). If
the corporation shall fail to give the Put Notification to the holders of
Special Common Stock at least ten days prior to the beginning of the Put Period
or, in the event of an acceleration of the Put in accordance with the terms of
Section (c)(v) of this Article THIRD, as soon as practicable following the date
of the occurrence of the Insolvency Event giving rise to such acceleration (but
in no event later than the tenth day following such date), as provided herein,
the rights of the holders of Special Common Stock shall not be prejudiced
thereby and the Put shall nevertheless become exercisable at the beginning of
the Put Period as herein provided but the expiration of the Put Period shall be
extended to that date which is thirty-five Business Days, or, in the event of
such acceleration, sixty-five Business Days, from the date the Put Notification
is given to holders of Special Common Stock. To facilitate the giving of the Put
Notification to the holders of Special Common Stock, the Board of Directors may
fix a record date for determination of holders of Special Common Stock entitled
to be given the Put Notification, which record date may not be more than five
days prior to the date the Put Notification is given pursuant to this paragraph
(B).
(C) Adjustments. If the corporation shall at any time after the initial
issuance of any Special Common Stock effect a subdivision or combination of the
Special Common Stock (by reclassification or otherwise) into a greater or lesser
number of shares of Special Common Stock, then in each such case the Put Price
shall be adjusted by multiplying the Put Price in effect immediately prior to
such event by the ratio of the number of shares of Special Common Stock
outstanding immediately prior to such event to the number of shares of Special
Common Stock outstanding immediately after such event.
(D) Condition to the Corporation's Obligations. Notwithstanding any other
provision of this Article THIRD, the corporation's obligation to pay the Put
Price in respect of shares of Special Common Stock with respect to which the Put
has been properly exercised (and to deposit with the Depositary funds pursuant
to Section (c)(iv)(A)(2) of this Article THIRD) shall be conditioned upon the
corporation's having received from Roche, or any affiliate of Roche, (i) funds
in an amount equal to the product of the number of shares of Special Common
Stock with respect to which the Put has been properly exercised multiplied by
the Put Price plus (ii) such additional funds, if any, sufficient to permit the
corporation to redeem the shares of Special
AC-3
<PAGE> 173
Common Stock with respect to which the Put has been properly exercised without
violating Section 160 of the Delaware General Corporation Law, any bankruptcy or
insolvency law or other law or regulation for the protection of creditors.
(E) Enforcement of Roche Obligations. The corporation shall take (and
shall have no corporate power or capacity not to take) such action as may be
necessary to enforce the obligations of Roche and its affiliates to pay the Put
Price (and any other amounts payable pursuant to Section 2.03 of the Governance
Agreement), including, without limitation, all actions required to cause Roche
and its affiliates to perform their respective obligations under Section 2.03 of
the Governance Agreement and under the Guaranty, dated , 1995, by
Roche Holding Ltd, a Swiss corporation, of the obligations of Roche under
Section 2.03 of the Governance Agreement.
(iv) Procedures.
(A) Payment. (1) On or prior to the date any Call Notification is first
sent or given, the corporation shall deposit or cause to be deposited the
aggregate of the Redemption Price (in each case, together with accrued and
unpaid dividends to such date) of the shares to be redeemed with the Depositary,
in trust for payment to the holders of the Special Common Stock, and deliver
irrevocable written instructions authorizing the Depositary to apply such
deposit solely to the redemption of the shares to be redeemed. The amount of
funds required to be deposited in connection with the Call pursuant to the first
sentence of this Section (c)(iv)(A) shall be reduced by the aggregate Redemption
Price of any shares of Special Common Stock deposited by Roche Holdings, Inc., a
Delaware corporation, in lieu of such funds. In the case of the exercise of the
Call, each holder of shares of Special Common Stock will be paid within three
Business Days following the surrender of the certificate or certificates
representing such shares to the Depositary together with a properly executed
letter of transmittal covering such shares of stock, the Redemption Price for
such shares. The corporation's written instructions to the Depositary may
provide that any of such deposit remaining unclaimed, at the expiration of two
years after the date fixed for redemption pursuant to the Call, by the holder of
any of such shares be returned to the corporation and revert to the general
funds of the corporation, after which return such holder shall have no claim
against the Depositary but shall have a claim as an unsecured creditor against
the corporation for the Redemption Price together with accrued and unpaid
dividends to such redemption date, without interest. The Call Notification
having been duly given, or the Depositary having been irrevocably authorized by
the corporation to give said notice, and the Redemption Price (together with
accrued and unpaid dividends to such redemption date) of the shares to be
redeemed having been deposited, all as aforesaid, then all shares of Special
Common Stock with respect to which such deposit shall have been made pursuant to
exercise of the Call shall forthwith, whether or not the date fixed for such
redemption shall have occurred or the certificates for such shares shall have
been surrendered for cancellation, be deemed no longer to be outstanding for any
purpose, and all rights with respect to such shares shall thereupon cease and
terminate, except the right of the holders of such shares to receive, out of
such deposit in trust, on the redemption date the Redemption Price (together
with accrued and unpaid dividends to such redemption date) to which they are
entitled, without interest.
(2) Promptly following the end of the Put Period, the corporation shall
deposit or cause to be deposited with the Depositary funds in an amount
sufficient to pay the Put Price for all shares of Special Common Stock with
respect to which the Put has been properly exercised and for which certificates
representing such shares, together with a properly executed Put Notice, have
been surrendered to the Depositary. Each holder of shares of Special Common
Stock who has properly exercised the Put, and who has surrendered the shares of
Special Common Stock with respect to which the Put has been exercised, together
with a properly executed Put Notice, shall be paid promptly following the end of
the Put Period. In the event of the exercise of the Put for less than all of the
shares of Special Common Stock represented by a certificate, a new certificate
representing the shares of Common Stock into which the shares of Special Common
Stock not redeemed pursuant to the exercise of the Put have been converted
pursuant to Section (c)(vi) of this Article THIRD shall be issued to the holder
of such shares.
(B) Redeemed Shares. All shares of Special Common Stock redeemed by the
corporation pursuant to the Call or the Put, as the case may be, shall be
retired and cancelled promptly after the redemption thereof.
AC-4
<PAGE> 174
All such shares shall upon their cancellation become authorized but unissued
shares of common stock without designation as to series and may be reissued as
part of any series of common stock existing or to be created by resolution or
resolutions of the Board of Directors as permitted by this Certificate of
Incorporation or as otherwise permitted under Delaware law. No shares of Special
Common Stock shall be issued after the date of redemption of the Special Common
Stock pursuant to the Call.
(v) Default. Unless the Call has been previously exercised, if, prior to
the last day of the Put Period, (i) the corporation shall file a voluntary
petition in bankruptcy, or seek reorganization, in order to effect a plan or
other arrangement with creditors or any other relief under the Bankruptcy Reform
Act, Title 11 of the United States Code, as amended or recodified from time to
time (the "Bankruptcy Code"), or under any state or federal law granting relief
to debtors, whether now or hereafter in effect, or (ii) any involuntary petition
or proceeding pursuant to the Bankruptcy Code or any other applicable state or
federal law relating to bankruptcy, reorganization or other relief for debtors
is filed or commenced against the corporation and the same is not dismissed
within thirty (30) days, or the corporation shall file an answer admitting the
jurisdiction of the court and the material allegations of any involuntary
petition, or (iii) the corporation shall be adjudicated a bankrupt, or an order
for relief shall be entered by any court of competent jurisdiction under the
Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors, then, and upon the
occurrence of such event (an "Insolvency Event"), without notice of any kind
whatsoever, the right of the holders of the Special Common Stock to exercise the
Put shall accelerate, and the Put shall be exercisable immediately upon the
occurrence of such event and until the end of the Put Period.
(vi) Conversion. Each share of Special Common Stock outstanding following
the close of business on the last day of the Put Period (the "Conversion Date"),
shall, unless previously called for redemption on or prior to such date,
automatically be converted into one share of Common Stock in accordance with the
terms and conditions set forth below; provided, however, that the conversion
provided in this Section (c)(vi) shall not impair or otherwise affect the right
of the holder of any Special Common Stock to receive the Put Price for any
shares of Special Common Stock with respect to which the Put has been exercised
prior to the Conversion Date.
(A) Notice; Replacement of Shares. Notice of the Conversion Date shall be
given by mailing a copy of such notice, postage prepaid, to the holders of
record of the shares of Special Common Stock at their respective addresses then
appearing on the books of the corporation, not more than 30 nor less than 10
days prior to the Conversion Date, but neither failure to mail such notice nor
any defect therein or in the mailing thereof shall affect the validity of the
conversion of the Special Common Stock. Upon request of any holder, the
corporation shall issue and deliver to the holder as promptly as practicable
after the Conversion Date a replacement certificate for the number of shares
issuable upon conversion of such Special Common Stock. Thereafter, all Special
Common Stock shall immediately cease to be outstanding for any purpose, except
the right to request Common Stock certificates upon surrender of the
certificates representing Special Common Stock and the right to receive declared
and unpaid dividends on such Special Common Stock. No shares of Special Common
Stock shall be issued after the Conversion Date.
(B) Reservation of Shares. The corporation shall provide, free from
preemptive rights, out of its authorized but unissued shares, or out of shares
held in its treasury, sufficient shares of Common Stock to provide for the
conversion of the Special Common Stock of all issued and outstanding shares of
Special Common Stock on the Conversion Date. The corporation covenants that all
shares of Common Stock which may be issued upon conversion of Special Common
Stock will upon issue be fully paid and non-assessable by the corporation and
free from all taxes, liens and charges with respect to the issue thereof. The
corporation further covenants that, if on the Conversion Date the Special Common
Stock shall be listed on the New York Stock Exchange or an any other national
securities exchange or the NASDAQ National Market System, the corporation will,
if permitted by the rules of such exchange, seek to list on each such exchange
or the NASDAQ National Market System, as the case may be, all Common Stock
issuable upon conversion of the Special Common Stock.
AC-5
<PAGE> 175
(vii) Dividends, etc. Subject to the rights of the holders of Preferred
Stock, and subject to any other provisions of this Certificate of Incorporation,
holders of Special Common Stock and Common Stock shall be entitled to receive
such dividends and other distributions in cash, Preferred Stock, stock of any
corporation other than the corporation or property of the corporation as may be
declared thereon by the Board of Directors from time to time out of assets or
funds of the corporation legally available therefor and shall share equally on a
per share basis in all such dividends and other distributions. In the case of
dividends or other distributions payable in stock of the corporation other than
Preferred Stock, including distributions pursuant to stock splits or divisions
of stock of the corporation other than Preferred Stock which occur after the
initial issuance of shares of Special Common Stock by the corporation, only
shares of Common Stock shall be paid or distributed with respect to Common Stock
and only shares of Special Common Stock in an amount per share equal to the
amount per share paid or distributed with respect to Common Stock shall be paid
or distributed with respect to Special Common Stock. In the case of any
combination or reclassification of the Special Common Stock or the Common Stock,
the shares of the Common Stock or the Special Common Stock, as the case may be,
shall also be combined or reclassified so that the number of shares of Special
Common Stock outstanding immediately following such combination or
reclassification shall bear the same relationship to the number of shares of
Special Common Stock outstanding immediately prior to such combination or
reclassification as the number of shares of Common Stock outstanding immediately
following such combination or reclassification bears to the number of shares of
Common Stock outstanding immediately prior to such combination or
reclassification.
(viii) Consolidation, Merger, etc. In case the corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case, each share of
Special Common Stock shall at the same time be similarly exchanged or changed
into an amount per share, equal to the aggregate amount of stock, securities,
cash and/or any other property (payable in kind), as the case may be, into which
or for which each share of Common Stock is changed or exchanged; provided that
any such stock may be made redeemable on terms no less favorable to the holder
thereof than the terms upon which the Special Common Stock is redeemable; and
provided further, that any such stock shall be subject to a right on the part of
the holder to put such stock on terms no less favorable to the holder thereof
than the terms upon which the Special Common Stock is required to be redeemed by
the corporation pursuant to the Put.
(ix) Rank. The Special Common Stock shall rank junior (as to dividends and
upon liquidation, dissolution and winding up) to all series of the corporation's
Preferred Stock.
(x) Legend. Each certificate representing shares of Special Common Stock
shall bear the following legend:
"The shares of Callable Putable Common Stock represented hereby are
subject to (i) redemption at the option of the corporation during the
periods, at the prices and on the terms and conditions specified in the
corporation's certificate of incorporation, (ii) an option on the part
of the holder, under certain circumstances, to require the corporation
to redeem such shares of Callable Putable Common Stock, at the price and
on the terms and conditions specified in the corporation's certificate
of incorporation and (iii) conversion into Common Stock, par value $.02,
of the corporation on the date specified, and upon the terms and
conditions set forth in, such certificate of incorporation. After
redemption the shares represented by this certificate shall cease to be
outstanding for all purposes and the holder hereof shall be entitled to
receive only the redemption price of such shares, without interest.
After conversion this certificate shall represent the shares of Common
Stock into which the shares of Callable Putable Common Stock represented
hereby shall have been converted, and this certificate may be exchanged
for a new certificate representing such shares of Common Stock."
(d) In addition to any affirmative vote required by law or this Certificate
of Incorporation, any amendment of the provisions of this Article THIRD shall
require the affirmative vote of the holders of a majority of the shares of
Common Stock entitled to vote and of the holders of a majority of the shares of
Special Common Stock entitled to vote, each voting separately as a class.
AC-6
<PAGE> 176
(e) Certain Definitions. For purposes of this Article THIRD, the following
terms shall have the following meaning:
(1) "Business Day" means any day which is not a Saturday, Sunday or a
federal holiday.
(2) "Depositary" shall mean the bank or trust company in the Borough of
Manhattan, the City and State of New York, having combined capital, surplus and
undivided profits of at least $500,000,000 which is appointed by the corporation
to serve as agent for the purpose of receiving certificates representing shares
of the Special Common Stock upon exercise of the Put or Call, as the case may
be, and distributing the Redemption Price or the Put Price therefor, as the case
may be.
(3) "Put Notice" shall mean a written notice electing to have shares of
Special Common Stock redeemed by the corporation pursuant to the exercise of the
Put.
(4) "Put Notification" shall mean a written notice from the corporation to
the holders of the Special Common Stock and the holders of options to purchase
shares of the Special Common Stock informing each such holder of (A) the rights
of such holder to cause the corporation to redeem shares of Special Common Stock
during the Put Period, (B) the date of the commencement and termination of the
Put Period, (C) the Put Price, (D) the identity and address of the Depositary
and (E) instructions as to how to exercise the Put. The Put Notification shall,
in all respects, comply with the requirements of the Securities Exchange Act (as
defined below).
(5) "Put Period" shall mean, subject to paragraph (B) of subsection
(c)(iii) of this Article THIRD, the period commencing on July 1, 1999 and ending
on the close of business on the thirtieth Business Day thereafter or such later
date as may be required under the Securities Exchange Act; provided, that in the
event of acceleration of the Put Period pursuant to subsection (c)(v) of this
Article THIRD, the Put Period shall be the period commencing as soon as
practicable following the date of the occurrence of the Insolvency Event giving
rise to such acceleration (but in no event later than ten days following such
date) and ending on the close of business on the sixtieth Business Day
thereafter or such later date as may be required under the Securities Exchange
Act.
(6) "Put Price" shall mean a purchase price of $60.00 per share of Special
Common Stock, subject to adjustment as provided in paragraph (C) of subsection
(c)(iii) of this Article THIRD.
(7) "Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
(f) Put and Call Not Business Combinations. Notwithstanding any other
provision of this Article THIRD or of Article ELEVENTH of this Certificate of
Incorporation, the transactions to be consummated pursuant to exercise of the
Put or the Call shall not be deemed to be "Business Combinations" for purposes
of Article ELEVENTH of this Certificate of Incorporation.
AC-7
<PAGE> 177
ANNEX B
April 30, 1995
Special Committee of the Board of Directors
Genentech, Inc.
460 Point San Bruno Boulevard
South San Francisco, CA 94080
Members of the Special Committee:
We understand that Genentech, Inc. (the "Company") and Roche Holdings, Inc.
("Roche") are proposing to enter into a Transaction Agreement, to be dated as of
the date hereof (together with all exhibits thereto, the "Transaction
Agreement"), pursuant to which the Company and Roche would, among other matters,
agree to: (i) amend the terms of the Redeemable Common Stock ("Redeemable Common
Stock") of the Company to (x) extend the redemption period with respect to the
Redeemable Common Stock (which will be renamed "Special Common Stock") for an
additional four years, (y) establish prices at which the Company may redeem such
shares, and (z) provide a right on the part of holders of such shares to require
the Company to purchase such shares during a specified period (the "Put"). The
four-year extension of the redemption period will have a schedule of redemption
prices starting at a price of $61.25 per share for the quarter ending September
30, 1995 and increasing over time on a quarterly basis to $82 per share for the
quarter ending June 30, 1999, after which the Company's redemption option
expires. Under the terms of the Special Common Stock, each holder of shares of
Special Common Stock will have the right pursuant to the Put to sell all or a
portion of such holder's shares to the Company, at a price of $60 per share,
exercisable during a thirty-day period following the expiration of the
redemption option, or under certain circumstances, during a sixty-day period
following certain insolvency events of the Company. The obligation of the
Company with respect to the Put is to be guaranteed by Roche, with Roche's
obligations guaranteed by Roche Holding Ltd. Such extension of the redemption
period and grant and guarantee of the Put are referred to herein as the
"Extension."
We further understand that as a condition to entering into the Transaction
Agreement, the Company and Roche propose to extend and modify certain governance
arrangements between the Company and Roche (the "Governance Arrangements") and
to enter into certain marketing and licensing agreements with respect to certain
of the Company's products (the "Marketing Agreement"). The Governance
Arrangements provide, among other matters, for (i) the composition of the Board
of Directors of the Company, (ii) limitations on business combinations with and
acquisitions of additional Company securities by Roche, (iii) Roche's rights and
obligations in respect of the Extension, (iv) Roche's rights in connection with
certain extraordinary transactions involving the Company, (v) voting
arrangements with respect to the Common Stock and Special Common Stock owned and
to be owned by Roche, and (vi) restrictions on the transfer of such shares by
Roche. The Marketing Agreement provides, among other matters, for the grant to
F. Hoffmann-LaRoche Ltd., an affiliate of Roche, of certain product rights and
options with respect to certain other product rights of the Company, outside the
United States. The Extension, the Governance Arrangements and the commercial
arrangements contemplated by the Marketing Agreement are herein referred to
together as the "Proposed Transactions" and the terms and conditions of the
Proposed Transactions are set forth in more detail in the Transaction Agreement.
We also understand that the Company and Roche may, if the timing of the
consummation of the Proposed Transactions so requires, enter into an agreement
and plan of merger (the "Contingent Merger Agreement") among the Company, Roche
and a subsidiary of Roche ("Merger Sub"). We further understand that the
Contingent Merger Agreement would provide for the merger of Merger Sub with and
into the Company, the effect of which would be the same to the Company and its
stockholders as the
B-1
<PAGE> 178
Special Committee of the Board of Directors
Genentech, Inc.
April 30, 1995
Page 2
consummation of the transactions contemplated by the Transaction Agreement and
that all of the transactions contemplated by the Contingent Merger Agreement
would be effected in a manner that would put the Company, Roche and the holders
of Redeemable Common Stock in the same position (with the same rights and
obligations) as they would have been had the Proposed Transactions been
consummated pursuant to the Transaction Agreement. Accordingly, our opinion set
forth herein with respect to the Proposed Transactions also would constitute an
opinion with respect to the transactions contemplated by the Contingent Merger
Agreement, in the event that such an agreement is entered into by the parties.
We have been requested by the Company to render our opinion with respect to
the fairness, from a financial point of view, to the holders of the Redeemable
Common Stock (other than Roche) of the consideration to be received by such
holders and the Company in connection with the Proposed Transactions.
In arriving at our opinion, we have reviewed and analyzed: (1) the
Transaction Agreement, (2) the Certificate of Incorporation and By-Laws of the
Company, (3) the Merger Agreement dated February 2, 1990 between Roche and the
Company, (4) the existing governance arrangements between the Company and Roche,
(5) publicly available information concerning the Company which we believe to be
relevant to our inquiry including, but not limited to, the latest annual report
on Form 10-K of the Company dated December 31, 1994 and the draft of the latest
quarterly report on Form 10-Q of the Company dated March 31, 1995, (6) financial
and operating information with respect to the business, operations and prospects
of the Company furnished to us by the Company, (7) a trading history of the
Company's common stock from 1991 to the present and a comparison of that trading
history with those of other companies which we deemed relevant, (8) a comparison
of the historical financial results and present financial condition of the
Company with those of other companies which we deemed relevant, (9) the
financial terms of certain other recent transactions which we deemed relevant,
(10) reports of research analysts with respect to the Company and the potential
effect of the expiration of Roche's current option on the price of the
Redeemable Common Stock, (11) valuations of the Redeemable Common Stock using
various methodologies, (12) the financial terms of certain other commercial
arrangements between biotechnology and pharmaceutical companies which we deemed
relevant, and (13) analyses of the potential pro forma effects on the Company of
the commercial arrangements contemplated by the Marketing Agreement. In
addition, we have held discussions with the management of the Company concerning
its business, operations, assets, financial condition and prospects and
undertook such other studies, analyses and investigations as we deemed
appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts that would make such information inaccurate or
misleading. With respect to the financial projections of the Company, upon
advice of the Company we have assumed that such projections 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 and that the Company will perform substantially in
accordance with such projections. In arriving at our opinion, we have not made
nor obtained any evaluations or appraisals of the assets or liabilities of the
Company. Our opinion is necessarily based upon market, economic and other
conditions as they exist on, and can be evaluated as of, the date of this
letter. In addition, we do not express any opinion as to the actual prices at
which shares of the Special Common Stock will trade following the consummation
of the Proposed Transactions.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be
received by the holders of shares of the Redeemable Common Stock (other than
Roche) and the Company in connection with the Proposed Transactions is fair to
such holders.
B-2
<PAGE> 179
Special Committee of the Board of Directors
Genentech, Inc.
April 30, 1995
Page 3
We have acted as financial advisor to the Company in connection with the
Proposed Transactions, have received a fee for the rendering of this opinion and
will receive an additional fee for our services which is contingent upon the
consummation of the Extension. In addition, the Company has agreed to indemnify
us for certain liabilities which may arise out of the rendering of this opinion.
We also have performed various investment banking services for the Company in
the past (including acting as advisor to the Company with respect to the 1990
transaction between Roche and the Company) and have received customary fees for
such services. In the ordinary course of our business, we actively trade in the
Redeemable Common Stock and the debt and equity securities of Roche for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities.
This opinion is for the use and benefit of the Special Committee of the
Board of Directors of the Company. This opinion is not intended to be and does
not constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote with respect to the proposed amendment to the Company's
certificate of incorporation.
Very truly yours,
LEHMAN BROTHERS
B-3
<PAGE> 180
ANNEX C
July 7, 1995
Independent and Special Committees of the Board of Directors
Genentech, Inc.
460 Point San Bruno Boulevard
South San Francisco, CA 94080
Members of the Independent and Special Committees:
We understand that Genentech, Inc. (the "Company") and Roche Holdings, Inc.
("Roche") have entered into an Agreement and Plan of Merger (together with all
exhibits thereto, the "Merger Agreement"), dated May 23, 1995, among Roche, HLR
(U.S.) II, Inc. ("Merger Sub") and the Company, as contemplated by the
Transaction Agreement, dated April 30, 1995 (together with all exhibits thereto,
the "Transaction Agreement"). We further understand that the Merger Agreement
provides for (i) the merger of Merger Sub with and into the Company (the
"Merger"), (ii) the conversion of each issued and outstanding share of common
stock, par value $0.02 per share ("Common Stock"), of the Company, other than
shares of Common Stock held by Roche or any affiliate thereof and shares held in
the treasury of the Company, into one share of special common stock, par value
$0.02 per share ("the Special Common Stock"), of the Company, (iii) the
cancellation of all shares of Common Stock held by Roche and its affiliates, and
(iv) the conversion of the aggregate number of issued and outstanding shares of
common stock, par value $0.02 per share, of Merger Sub into a number of shares
of Common Stock equal to, in the aggregate, the number of shares of Common Stock
held by Roche and its affiliates immediately prior to the Merger. The terms of
the Special Common Stock will have the effect of (x) establishing a Special
Common Stock for four years, (y) establishing prices at which the Company may
redeem such shares, and (z) providing a right on the part of holders of such
shares to require the Company to purchase such shares during a specified period
(the "Put"). The four-year redemption period will have a schedule of redemption
prices starting at a price of $61.25 per share for the quarter ending September
30, 1995 and increasing over time on a quarterly basis to $82 per share for the
quarter ending June 30, 1999, after which the Company's redemption option
expires. Under the terms of the Special Common Stock, each holder of shares of
Special Common Stock will have the right pursuant to the Put to sell all or a
portion of such holder's shares to the Company, at a price of $60 per share,
exercisable during a thirty-day period following the expiration of the
redemption option, or under certain circumstances, during the sixty-day period
following certain insolvency events of the Company. The obligation of the
Company with respect to the Put is to be guaranteed by Roche, with Roche's
obligations guaranteed by Roche Holding Ltd. Such establishment of the
redemption period and grant and guarantee of the Put are referred to herein as
the "Redemption Rights."
We further understand that as a condition to the consummation of the
Merger, the Company and Roche propose to extend and modify certain governance
arrangements between the Company and Roche (the "Governance Arrangements") and
to enter into certain marketing and licensing agreements with respect to certain
of the Company's products (the "Marketing Agreement"). The Governance
Arrangements provide, among other matters, for (i) the composition of the Board
of Directors of the Company, (ii) limitations on business combinations with and
acquisitions of additional Company securities by Roche, (iii) Roche's rights and
obligations in respect of the Redemption Rights, (iv) Roche's rights in
connection with certain
C-1
<PAGE> 181
Independent and Special Committees of the Board of Directors
Genentech, Inc.
July 7, 1995
Page 2
extraordinary transactions involving the Company, (v) voting arrangements with
respect to the Common Stock and Special Common Stock to be owned by Roche, and
(vi) restrictions on the transfer of such shares by Roche. The Marketing
Agreement provides, among other matters, for the grant to F. Hoffman-LaRoche
Ltd., an affiliate of Roche, of certain product rights and options with respect
to certain other product rights of the Company, outside the United States. The
Redemption Rights, the Governance Arrangements and the commercial arrangements
contemplated by the Marketing Agreement are herein referred to together as the
"Proposed Transactions" and the terms and conditions of the Proposed
Transactions are set forth in more detail in the Merger Agreement.
You have asked for our opinion as to whether the consideration to be
received by the holders of shares of Common Stock (other than Roche and its
affiliates) and the Company pursuant to the Merger Agreement is fair from a
financial point of view to such holders, in connection with the Proposed
Transactions.
For purposes of the opinion set forth herein, we have:
(i) analyzed certain publicly available financial statements and other
information of the Company;
(ii) analyzed certain internal financial statements and other financial
and operating data concerning the Company prepared by the
management of the Company;
(iii) analyzed certain financial projections prepared by the management
of the Company;
(iv) discussed the past and current operations and financial condition
and the prospects of the Company with senior executives of the
Company, and analyzed the pro forma impact of the commercial
arrangements contemplated by the Marketing Agreement on the
Company's earnings per share;
(v) reviewed the reported prices and trading activity for the
Redeemable Common Stock and the Common Stock;
(vi) compared the financial performance of the Company and the prices
and trading activity of the Common Stock with that of certain
other comparable publicly-traded companies and their securities;
(vii) reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions and other
commercial arrangements which we deemed relevant;
(viii) reviewed the Merger Agreement, the Merger Agreement dated
February 2, 1990 between Roche and the Company and the existing
governance arrangements between the Company and Roche; and
(ix) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company. We have not made any independent valuation or appraisal of the assets
or liabilities of the Company, nor have we been furnished with any such
appraisals. Our opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. In addition we do not express any opinion as to the actual price at
which the Special Common Stock will trade following the consummation of the
Proposed Transactions.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the Company
or any of its assets, nor did we negotiate with any of the parties, other than
in one meeting with Roche.
C-2
<PAGE> 182
Independent and Special Committees of the Board of Directors
Genentech, Inc.
July 7, 1995
Page 3
This opinion is not intended to be and does not constitute a recommendation
to any stockholder of the Company as to how such stockholder should vote with
respect to the Proposed Transactions.
We have acted as financial advisor to the Independent and Special
Committees of the Board of Directors of the Company in connection with this
transaction and will receive a fee for our services.
It is understood that this letter is for the information of the Independent
and Special Committees of the Board of Directors of the Company only and may not
be used for any other purpose without our prior written consent. We hereby
consent, however, to the inclusion of this opinion as an exhibit to any proxy or
registration statement distributed in connection with the Proposed Transactions.
Based on the foregoing, we are of the opinion on the date hereof that the
consideration to be received by the holders of shares of Common Stock (other
than Roche and its affiliates) and the Company pursuant to the Merger Agreement
is fair from a financial point of view to such holders in connection with the
Proposed Transactions.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
C-3
<PAGE> 183
GENENTECH, INC.
460 POINT SAN BRUNO BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Arthur D. Levinson and John P. McLaughlin as
proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and vote all the shares of the Common Stock, $.02 par value,
of the Corporation which the undersigned would be entitled to vote if personally
present at the Special Meeting to be held on October 25, 1995, or at any
adjournment or postponement thereof, (1) as specified below on the matter listed
and more fully described in the Notice of Special Meeting and Proxy Statement of
said meeting, receipt of which is acknowledged, and (2) in their discretion on
such matters as may properly come before the meeting or any adjournment or
postponement thereof.
The shares represented by this Proxy will be voted as directed by the
shareholder. If no direction is given, shares will be voted FOR the proposal.
Specific choices may be made on the reverse side of this Proxy.
SEE REVERSE
SIDE
(Continued and to be signed on the other side)
/X/ PLEASE MARK YOUR VOTES
AS IN THIS EXAMPLE.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE FOLLOWING
PROPOSAL:
Approval and adoption of an Agreement and Plan of Merger dated as of May 23,
1995, as amended and restated (the "Merger Agreement"), among Genentech, Inc.
("Genentech"), Roche Holdings, Inc., and HLR (U.S.) II, Inc. ("Merger Sub"),
which provides for, among other matters, the merger (the "Merger") of Merger Sub
with and into Genentech upon the terms and subject to the conditions set forth
in the Merger Agreement and the exhibits thereto, and the amendment, pursuant to
the Merger, of Article THIRD of Genentech's Certificate of Incorporation, as
more fully described in the accompanying Proxy Statement/Prospectus.
FOR / / AGAINST / / ABSTAIN / /
THIS PROXY WILL BE VOTED FOR THE
PROPOSAL UNLESS INSTRUCTIONS TO THE
CONTRARY ARE INDICATED. PLEASE NOTE
THAT MARKING ABSTAIN WILL HAVE THE
SAME EFFECT AS A VOTE AGAINST THE
PROPOSAL.
Please sign exactly as name appears on
this Proxy. When shares are held by
joint tenants, both should sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by an authorized
officer. If a partnership, please sign
in partnership name by an authorized
person.
PLEASE SIGN AND RETURN THIS PROXY
PROMPTLY USING THE ENCLOSED ENVELOPE.
--------------------------------------, 1995
Signature Date
--------------------------------------, 1995
Signature (if held jointly) Date
