Item 1.01. Entry into a Material Definitive Agreement.
On December 21, 2016, Tokai Pharmaceuticals, Inc. (Tokai or the Company), Otic Pharma, Ltd., a private limited
company organized under the laws of the State of Israel (Otic), and the shareholders of Otic named therein (the Selling Shareholders) entered into a Share Purchase Agreement (the Share Purchase Agreement),
pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set forth in the Share Purchase Agreement, each Selling Shareholder agreed to sell to Tokai, and Tokai agreed to purchase from each Selling Shareholder,
all of the ordinary and preferred shares of Otic (the Otic Shares) owned by such Selling Shareholder (the Transaction).
The Selling Shareholders own 100% of the outstanding Otic Shares and following the consummation of the Transaction, Otic will become a wholly
owned subsidiary of Tokai.
Subject to the terms and conditions of the Share Purchase Agreement, it is currently anticipated that at the
closing of the Transaction, the Selling Shareholders will collectively receive approximately 32,172,209 shares of Tokais common stock. Also in connection with the Transaction, Tokai will assume the (i) outstanding stock option awards of
Otic, and (ii) outstanding warrants of Otic, each of which will be adjusted to reflect the exchange ratio for the Transaction. Immediately following the closing of the Transaction, the Selling Shareholders are expected to own approximately 60%
of the outstanding common stock of Tokai.
Each of Tokai, Otic and the Selling Shareholders has agreed to customary representations,
warranties and covenants in the Share Purchase Agreement including, among others, covenants relating to (1) using commercially reasonable efforts to obtain the requisite approvals of the stockholders of Tokai to the Tokai Voting Proposal
described below,
(2) non-solicitation
of competing acquisition proposals by each of Tokai and Otic, (3) Tokai using commercially reasonable efforts to maintain the existing listing of the
Companys common stock on The NASDAQ Stock Market, Inc. (NASDAQ), and (4) Tokais and Otics conduct of their respective businesses during the period between the date of signing the Share Purchase Agreement and the
closing of the Transaction.
Consummation of the Transaction is subject to certain closing conditions, including, among other things,
(1) approval by the stockholders of Tokai in accordance with applicable NASDAQ rules of the issuance of the shares of the Companys common stock in the Transaction (the Tokai Voting Proposal), (2) the absence of any order or
injunction preventing the consummation of the Transaction or any legal requirement that makes the consummation of the Transaction illegal, (3) the approval by NASDAQ of the NASDAQ Listing ApplicationFor Companies Conducting a Business
Combination that Results in a Change of Control with respect to the shares of Tokai common stock to be issued in connection with the Transaction and (4) obtaining certain governmental authorizations or consents, including certain Israeli tax
rulings. Each partys obligation to consummate the Transaction is also subject to other specified customary conditions, including (1) the representations and warranties of the other party being true and correct as of the date of the Share
Purchase Agreement and as of the closing date of the Transaction, generally subject to an overall material adverse effect qualification, and (2) the performance in all material respects by the other party of its obligations under the Share
Purchase Agreement. The Share Purchase Agreement contains certain termination rights for both Tokai and Otic, and further provides that, upon termination of the Share Purchase Agreement under specified circumstances, Tokai may be required to pay
Otic a termination fee of $1 million, or Otic may be required to pay Tokai a termination fee of $1.5 million.
The Share
Purchase Agreement contains a
lock-up
covenant from the Selling Shareholders, which provides that for 180 days following the closing of the Transaction, no Selling Shareholder shall offer, sell, or otherwise
dispose of, directly or indirectly, any securities of Tokai, or otherwise enter into a transaction that would have similar effect.
Under the Share Purchase Agreement, the Company has agreed that promptly following the closing of the Transaction, it will take all action
necessary to fix the number of members of the Board of Directors of Tokai at seven; to cause to be elected to the Board of Directors of Tokai four persons identified by Otic, who are each reasonably acceptable to the Company; and to cause
(i) the resignations of three members of the Board of Directors of Tokai or (ii) the resignations of four members of the Board of Directors of Tokai, and the election of one person identified by Tokai, who is reasonably acceptable to Otic.
In addition, the Company has agreed to take all action necessary to cause the persons identified by Otic to be appointed as executive officers of the Company.
In connection with the Transaction, Tokai will change its name to OticPharma, Inc., subject to
the consummation of the Transaction. In addition, if necessary, Tokai may seek stockholder approval to effect a reverse split of Tokai common stock at a ratio to be determined by Tokai, which is intended to ensure that the listing requirements of
NASDAQ are satisfied.
Also in connection with the Share Purchase Agreement, the officers and directors of the Company and certain
entities affiliated with Apple Tree Partners holding in the aggregate approximately 36.3% of the outstanding common stock of Tokai as of the date of the Stock Purchase Agreement have each entered into a support agreement in favor of Otic
(collectively, the Support Agreements). The Support Agreements place certain restrictions on the transfer of the shares of Tokai common stock held by the respective signatories thereto and covenants on the voting of such shares in favor
of approving the Tokai Voting Proposal and against any actions that could adversely affect the consummation of the Transaction.
In
addition, Tokai has entered into commitment letters with Otic and certain purchasers set forth therein under which the purchasers have agreed to invest up to $7,000,000 of new capital in Otic and/or Tokai prior to or upon the closing of the
Transaction. Up to $4,000,000 of this amount will be invested in Tokai through the purchase of 3,603,603 shares of Tokai common stock at a price of $1.11 per share pursuant to a stock purchase agreement, substantially in the form attached to the
commitment letter, to be entered into by the Company, such purchasers, and potentially other third parties (the Commitment Letter). The stock purchase agreement will be executed and delivered on or prior to
January 31, 2017 and will provide for the purchase and sale of the Companys common stock to occur at the time of the closing of the Transaction. The remaining $3,000,000 will be invested in Otic prior to the closing of the Transaction
through the exercise of outstanding warrants.
The foregoing description of the (i) Share Purchase Agreement and the Transaction,
(ii) the Support Agreements and (iii) the Commitment Letter, and the transactions contemplated thereby, in each case, do not purport to be complete and are qualified in their entirety by reference to the Share Purchase Agreement, which is
filed as Exhibit 2.1 hereto and which is incorporated herein by reference, to the Support Agreement, which is filed as Exhibit 10.1 hereto and which is incorporated herein by reference, and to the Commitment Letter, which is filed as Exhibit 10.2
hereto and which is incorporated herein by reference. The Share Purchase Agreement, the Support Agreement and the Commitment Letter have been included to provide investors and security holders with information regarding their terms. They are not
intended to provide any other factual information about Tokai, Otic, the Selling Shareholders or their respective subsidiaries and affiliates. The Share Purchase Agreement contains representations and warranties by Otic and the Selling Shareholders,
on the one hand, and by Tokai, on the other hand, made solely for the benefit of the other. The assertions embodied in those representations and warranties are qualified by information in confidential disclosure schedules delivered by each party in
connection with the signing of the Share Purchase Agreement, certain representations and warranties in the Share Purchase Agreement were made as of a specified date, may be subject to a contractual standard of materiality different from what might
be viewed as material to investors, or may have been used for the purpose of allocating risk between the Selling Shareholders and Otic. Accordingly, the representations and warranties in the Share Purchase Agreement should not be relied on by any
persons as characterizations of the actual state of facts about the Company at the time they were made or otherwise. In addition, information concerning the subject matter of the representations and warranties may change after the date of the Share
Purchase Agreement, which subsequent information may or may not be fully reflected in Tokais public disclosures.