Velan Inc T.VLN

the offer

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• Extensive and Robust Review of Strategic Alternatives. Since March 2020, the Board of Directors has reviewed various Strategic Alternatives (as such term is defined in the Circular) as well as the status quo and a variety of other stand-alone structures available to the Company. The Company, with the assistance of BMO, conducted a wide public solicitation process, contacting 101 potential buyers, with 65 of them executing a NDA (as such term is defined in the Circular), 11 submitting a first round bid, six being admitted to a second round and two, including the Purchaser, submitting a final bid. The Arrangement represents the best and highest proposal received by the Company as part of its process.
  
   

  • Purchaser to Assume the Company’s Asbestos-related Liabilities. By purchasing all of the Shares, the Purchaser will assume the asbestos-related liabilities arising from legal proceedings against certain of the Company’s affiliates and has a plan to manage those liabilities following closing of the Arrangement. Velan has experienced an increase in asbestos- related costs over time. There were 2,039 claims outstanding at the end of the year ended February 28, 2023 (2022 – 2,071, 2021 – 1,696, 2020 – 1,561). During the year ended February 28, 2023, the Company resolved 674 claims (2022 – 315, 2021 – 388, 2020 - 436), The Company was the subject of 642 new claims during the year ended February 28, 2023 (2022 – 690, 2021 – 523, 2020 - 648). For each of the years ended February 28, 2021 and 2020, the Company recorded legal and settlement cash costs for such liabilities of approximately $11 million and $9.6 million, respectively. For the year ended February 28, 2022, the asbestos- related expenses totalled $25.1 million, including legal and settlement cash costs of $12 million and an initial long-term provision of approximately $13 million for claims outstanding but not yet settled at that time. For the year ended February 28, 2023, the asbestos-related expenses totalled $13.8 million, including legal and settlement cash costs of $11.9 million and approximately $1.9 million of additional long-term provision for claims currently outstanding but not yet settled in comparison with the previous year’s provision. The $14.9-million provision is solely related to claims outstanding and does not consider nor is quantifying any future potential new claims.
     

    Background to the Arrangement

    The Arrangement is the result of extensive arm’s length negotiations between the Company (led by the Special Committee), on the one hand, and the Purchaser and the Parent, on the other hand, as well as their respective advisors. The following is a summary of the main events that led to the execution of the Arrangement Agreement (including related definitive transaction agreements) on February 9, 2023 after the close of markets, and certain meetings, negotiations, discussions and actions of the various parties that preceded the public announcement of the Arrangement on February 10, 2023 prior to the open of markets.

    The Board of Directors and senior management of the Company, as part of their ongoing mandate to act in the best interests of the Company, including by strengthening its business, enhancing value for Shareholders and considering the interests of stakeholders, continuously consider and assess the Company’s performance, growth prospects, capital requirements, overall corporate strategy and long-term strategic plans.

    In the first half of 2020, in the context of this ongoing mandate, the Board of Directors decided to pursue a thorough review of potential strategic alternatives available to the Company to enhance Shareholder value (collectively, the “Strategic Alternatives”).

    On May 8, 2020, the Company engaged BMO as financial advisor in connection with the Company’s review of Strategic Alternatives.

    On May 22, 2020, the Company and Velan Holding entered into a confidentiality agreement for the purpose of providing certain confidential information to Velan Holding in connection with the ongoing assessment of Strategic Alternatives. This was deemed necessary and appropriate as Velan Holding owns all of the Multiple Voting Shares of the Company, representing 92.85% of the aggregate voting rights attached to all voting Shares of the Company. From the date of such agreement, the Company has provided Velan Holding with certain information regarding such assessment of Strategic Alternatives.

    In addition, as previously publicly disclosed by the Company, Velan Holding had advised the Company that the disposition of shares by Velan Holding requires the consent of certain Velan family members and controlled entities under an agreement amongst them (the “Velan Holding Unanimous Shareholders’ Agreement”).

    In February 2021, BMO initiated preliminary discussions with a potential financial sponsor that had been identified as an interested party, but such discussions were terminated by the financial sponsor in the weeks after they were initiated.

    On March 4, 2021, the Board of Directors established the Special Committee for the purpose of inter alia: (a) assessing, reviewing and considering the Strategic Alternatives, (b) considering and making recommendations to the Board of Directors concerning the Strategic Alternatives and undertaking a process it considered appropriate in order to provide such recommendations, (c)supervising, conducting, coordinating and managing the process to be followed by the Company in evaluating the Strategic Alternatives or any expressions of interest or proposals received by the Company with respect to any Strategic Alternatives, (d) supervising or, if the Special Committee determined advisable, conducting (with such members of management of the Company as the Special Committee may have determined advisable) with any third party with respect to the terms and conditions of any Strategic Alternative and any agreements relating thereto, and making recommendations to the Board of Directors with respect to the

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    authorization and approval of any definitive agreements with respect to any Strategic Alternative, (e) supervising the preparation of any press release, material change report, proxy circular, directors’ circular and/or other document which may be required by applicable Securities Laws in response to or in order to implement any Strategic Alternative or which the Special Committee otherwise determined was necessary or advisable in connection with any Strategic Alternative, (f) advising the Board of Directors with respect to the recommendation that the Board of Directors should make to the Shareholders in respect of any Strategic Alternative, and (g) making such other recommendations to the Board of Directors as the Special Committee deemed advisable. Since its inception, the Special Committee has been composed solely of independent directors and it is currently composed of James Mannebach (Chair), Dahra Granovsky and Edward Kernaghan.

    The Special Committee first met in March 2021. Throughout its mandate of reviewing and assessing Strategic Alternatives, the Special Committee held formal meetings on 37 occasions, and held numerous discussions with the Company’s senior management and its legal advisors, in addition to consulting with its own financial and legal advisors on numerous occasions.

    In May 2021, the Special Committee retained NRF to act as its independent legal counsel. Throughout the process, NRF has provided guidance and counsel to the Special Committee on the importance of ensuring that an independent and rigorous process be put in place for the review of any Strategic Alternatives and reminded the members of the Special Committee of their duties and responsibilities in their review and evaluation of any potential transaction, as well as their ability to rely on external legal and financial advisors in discharging such duties.

    On May 25, 2021, the Special Committee received a letter from Velan Holding to express the support of the Velan Holding board of directors for the launch of a process to receive offers for the sale of all or substantially all of the Company’s assets.

    Throughout 2021 and early 2022, as part of its mandate, the Special Committee, with the assistance of BMO, NRF and when requested, Davies, and with the support and input of management of the Company, also explored and considered various specific Strategic Alternatives that could be effected by the Company on a stand-alone basis, as well as the status quo.

    In January 2022, following the conclusion of such targeted review, the Special Committee recommended that the Company re-initiate the process to approach potential purchasers with respect to a change of control transaction and began preparations to do so with support from BMO, NRF and, as required, senior management of the Company.

    In May 2022, following the preparation of the relevant documentation and process with the input of the Special Committee and a recommendation of the Special Committee, the Board of Directors authorized BMO to commence outreach to potential purchasers through a confidential auction process to gauge interest in a potential change of control transaction, although alternative transaction structure proposals were welcomed as part of such process. Between May 31 and July 25, 2022, 101 potential purchasers were solicited. In the context of such solicitation, interested parties were sent a form of non-disclosure and standstill agreement (“NDA”) for review and execution prior to receipt of any bid information. Where applicable or necessary, Davies assisted in the negotiation of any such NDAs with BMO acting as intermediary between the parties. Of those potential purchasers solicited, 65 executed an NDA. Each party that executed an NDA had access to a Phase 1 preliminary data room which allowed such party to evaluate the opportunity to submit an initial non-binding proposal by no later than July18, 2022 (the “Phase 1 Deadline”). Once these proposals were received, the Special Committee then determined which interested parties would be allowed to access a Phase 1.5 data room to enable the completion of more fulsome due diligence and the submission of revised proposals by such interested parties.

    On June 9, 2022, the Company entered into an NDA with Flowserve Corporation, being the ultimate parent of the Purchaser.

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    Based on feedback received from interested potential purchasers and to bolster the robustness of the auction process, the Company authorized BMO to accept initial non-binding proposals for a reasonable period of time following the Phase 1 Deadline. The last initial non-binding proposal received in respect of Phase 1 was submitted on July 25, 2022.

    As part of Phase 1 of the auction process, 11 non-binding proposals were received from potential purchasers. In particular, on July 14, 2022, the Purchaser submitted an initial non-binding conditional letter of intent to potentially acquire all of the assets of the Company in an all-cash transaction for an implied Share price ranging from $9.89 to $15.89 depending on whether the Purchaser would assume the asbestos-related liabilities or not (the “Purchaser Initial Offer”). On August 8, 2022, further to discussions between BMO and the Purchaser, the Purchaser confirmed the higher range indicated in the Purchaser Initial Offer, being an implied Share price of $12.89 to $15.89. Following extensive review of the proposals received by the Special Committee (with the assistance of BMO, NRF and Davies), six potential purchasers were selected to proceed to Phase 1.5 of the auction process and were asked to submit revised proposals by no later than October 25, 2022.

    On October 25, 2022, the Purchaser reconfirmed its interest in pursuing a potential transaction with the Company by submitting a revised, non-binding indication of interest to acquire either all of the issued and outstanding Shares in the capital of the Company or all of the assets of the Company for a price in the range of $12.30 to $13.60 per Share in cash (the “Purchaser First Revised Offer”) under which the Purchaser would assume the asbestos-related liabilities of the Company and requested a 45-day exclusivity period. The Company also received another offer from a potential purchaser as part of Phase 1.5 with an inferior implied value per Share and an alternative transaction structure involving certain assets of the Company. The four other potential purchasers that were selected to submit a revised proposal as part of Phase 1.5 of the auction process decided, following significant due diligence efforts and allocation of resources, not to submit a revised offer.

    On October 28, 2022, the Special Committee met to consider each of the two revised offers received as part of Phase 1.5 of the auction process. To assist in its review, BMO presented a reasonably detailed summary of the revised offers to the Special Committee, including a series of relevant comparative factors. Based on such analysis, BMO representatives indicated that they were of the view that (i) the Purchaser First Revised Offer was an attractive offer and superior to the other offer and (ii) the Special Committee should consider making a recommendation to the Board of Directors to further engage and negotiate with the Purchaser on an exclusive basis. Based on the foregoing and other factors, the Special Committee agreed that the Purchaser First Revised Offer should be presented to the Board of Directors along with a recommendation to further engage with the Purchaser on an exclusive basis, subject to, and conditional upon, confirming support from Velan Holding in respect of such further engagement.

    Also on October 28, 2022, the Special Committee agreed to retain the services of Richter as an independent financial advisor to the Special Committee for purposes of delivering a formal fairness opinion in connection with the Arrangement and thereafter, entered into a formal engagement letter with Richter to that effect. Prior to executing the engagement letter, Richter confirmed to the Special Committee that it was free of conflicts to act as independent financial advisor to the Special Committee.

    On November 7, 2022, at a meeting of the Board of Directors, the Chair of the Special Committee presented to the Board of Directors, on behalf of the Special Committee, (i) a report with respect to the conclusion of Phase 1.5 of the auction process and (ii) subject to receipt of confirmation of support from Velan Holding, a recommendation that the Company further engage with the Purchaser, on an exclusive basis, with respect to the Purchaser First Revised Offer. Following the recommendation by the Special Committee, a statement was provided to the Board of Directors on behalf of Velan Holding confirming that the board of directors of Velan Holding was supportive in principle of: (i) the Special Committee continuing discussions with the Purchaser under the terms presented in the Purchaser First Revised Offer; (ii) the Special Committee granting exclusivity to the Purchaser with a view to finalize all definitive agreements; and (iii) the Special Committee negotiating a price per Share towards the top of the range submitted by the Purchaser. Such agreement in principle was only verbal at that time and Velan Holding was in the process of preparing relevant documentation for execution by relevant stakeholders in accordance with the Velan

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    Holding Unanimous Shareholders’ Agreement. Any formal binding support from Velan Holding would be confirmed once all terms of the proposed transaction and of the definitive agreements were made available to Velan Holding.

    Following the date of receipt of the Purchaser First Revised Offer, discussions and negotiations ensued between BMO, the Chair of the Special Committee, and the Purchaser and its financial advisor, resulting in the Purchaser’s submission on November 11, 2022 of a further revised non-binding offer at $14.00 per Share in cash (the “Revised Purchase Price”). On November 13, 2022, the Special Committee received a written statement from Velan Holding confirming its support to further engage with the Purchaser on an exclusive basis subject to the terms and conditions set forth in the Purchaser First Revised Offer and on the basis of the Revised Purchase Price.

    On November 16, 2022, the Company executed the Purchaser First Revised Offer (with reference to the Revised Purchase Price), granting a 45-day exclusivity period (the “Exclusivity Period”), expiring on December 31, 2022, to the Purchaser with a view to completing all diligence and finalizing definitive binding agreements.

    During the Exclusivity Period and thereafter, the Purchaser and its advisors engaged in extensive due diligence (including regulatory analysis), which was supported by the Company and its respective advisors. Senior management of the Company made itself regularly available for diligence calls to respond to diligence inquiries as expeditiously as possible.

    On November 28, 2022, the Company, via BMO, shared a first draft of the Arrangement Agreement, setting forth the terms and conditions of the Arrangement, with the Purchaser and its respective advisors. Such first draft Arrangement Agreement reflected comments of Velan Holding and its legal advisors required for any support of the Arrangement by Velan Holding, including confirming the Purchaser’s intentions to significantly maintain the Company’s employee base and to continue using the brand “Velan” in connection with the businesses and markets in which the Company operates as well as to keep the Company’s head office in Montreal, Quebec. As of such date, the terms and conditions of the Arrangement Agreement were diligently negotiated between the Company (including through the Special Committee) and the Purchaser, with the assistance of their respective advisors.

    On December 5, 2022, the Company’s legal advisors shared with the Purchaser’s legal advisors a first draft of a Support and Voting Agreement prepared with the assistance of Velan Holding’s legal advisors containing terms required by Velan Holding for any support of the proposed Arrangement.

    Between December 21, 2022 and January 10, 2023, BMO and the financial advisor to the Purchaser held discussions regarding the valuation of the proposed Arrangement and the status of the documentation, as informed by the due diligence performed to that point, including certain liabilities of the Company identified by the Purchaser. During the same period, and notwithstanding the Exclusivity Period having expired on December 31, 2022, discussions and negotiations ensued between the Chair of the Special Committee and management of the Purchaser.

    On January 10, 2023, further to the aforementioned discussions and negotiations, the Purchaser submitted a further revised non-binding offer, pursuant to which the Purchaser proposed to acquire, directly or indirectly, all of the Shares for a price of $13.00 per Share in cash, with shareholders of the Multiple Voting Shares or those electing the Qualifying Holdco transaction structure initially receiving $12.00 per Share with the balance aggregate amount (representing the additional $1.00 per Share) to be placed into escrow, while certain liabilities identified by the Purchaser were to be settled (the “Purchaser Second Revised Offer”).

    Between January 10, 2023 and January 13, 2023, numerous discussions were held among the directors of the Company, members of the Special Committee and directors of Velan Holding to consider the Purchaser Second Revised Offer. The different treatment amongst shareholders under the Purchaser Second Revised Offer resulting in Velan Holding as controlling shareholder and any shareholders electing

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    the Qualifying Holdco transaction structure receiving potentially less consideration than other shareholders was not acceptable to Velan Holding nor to the Special Committee.

    After careful review and consideration, it was agreed that the Company would, submit a counter-offer to the Purchaser for a purchase price per Share of $13.60 without any escrow feature. Velan Holding and the Special Committee confirmed that they were supportive of this counter-offer.

    On January 16, 2023, the Chair of the Special Committee presented the Company’s counter-offer to the CEO and President of the Purchaser, who indicated that the Purchaser was not supportive of the revised purchase price under the revised terms, but confirmed that there was still a strong interest in completing a potential transaction between the Purchaser and the Company. Discussions and negotiations between the parties ensued thereafter.

    On January 18, 2023, at a meeting of the Special Committee, the Chair of the Special Committee provided an update to the Special Committee and its advisors regarding the current status of the negotiations and discussions between the parties.

    On January 19, 2023, the Purchaser provided a verbal revised non-binding offer at a purchase price of $13.00 per Share to be paid in cash (the “Final Purchase Price”), with equal treatment to all Shareholders (i.e. without any amount being placed in escrow) (the “Purchaser Final Offer”), the whole subject to completing all diligence and finalizing definitive binding agreements. The Special Committee and Velan Holding confirmed that they were supportive of moving forward with a transaction on the basis of the Purchaser Final Offer (including the Final Purchase Price), subject to the ongoing negotiation and finalization of the definitive agreements. In addition to the Final Purchase Price, Velan Holding considered many other factors in its decision to support the Purchaser Final Offer, including the robust auction process that was conducted, the Company’s ongoing asbestos claims and ligations as disclosed in the Company’s public record and the benefits for Velan and its stakeholders as part of a global flow control leader like Flowserve.

    Between January 19, 2023 and February 8, 2023, the parties exchanged and negotiated drafts of the Arrangement Agreement and the Plan of Arrangement and the Purchaser exchanged and negotiated drafts of the Support and Voting Agreements with each of Velan Holding (and its legal advisors) and Kernwood, respectively. Kernwood is an affiliate of Edward Kernaghan, a director of the Company and member of the Special Committee.

    Throughout this period, the Board of Directors and the Special Committee were kept informed on a timely basis of the ongoing negotiations and status of the definitive agreements.

    On February 8, 2023, when it became apparent that the transaction was close to a successful conclusion and that the current version of the definitive agreements were nearly settled upon by all parties, the Special Committee met to consider the proposed Arrangement and to conduct a final review of its material terms and conditions as set out in the definitive agreements and to receive the advice of Richter, BMO, Davies and NRF.

    At the Special Committee meeting held on February 8, 2023, Richter presented a report of its analysis and reported its preliminary conclusion to the effect that, subject to the scope of review, assumptions, limitations and qualifications to be contained in the Richter Independent Fairness Opinion, as of February 8, 2023, the Consideration to be received by Shareholders under the Arrangement is fair, from a financial point of view, to such holders of Shares. BMO also confirmed that they would be in a position to provide a favourable fairness opinion to the Board of Directors.

    At the same Special Committee meeting, following the presentation by Richter, Davies and NRF provided the members of the Special Committee with an overview of the material terms of the Arrangement, including a summary of the material terms and conditions set forth in the Arrangement Agreement, Plan of Arrangement, Support and Voting Agreements and other transactional documents.

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    Following the presentations by all advisors, the members of the Special Committee discussed the presentations and materials provided to them and the merits of the proposed Arrangement.

    On February 8, 2023, following the meeting of the Special Committee, the Board of Directors met to consider the proposed Arrangement and to conduct a final review of its material terms and conditions as set out in the definitive agreements. Davies provided members of the Board of Directors with an overview of the material terms of the Arrangement Agreement, Plan of Arrangement, the Support and Voting Agreements and other definitive agreements relating to the Arrangement.

    At the same Board of Directors meeting, BMO and Richter each presented a report of its respective analysis and reported its respective preliminary conclusion to the effect that, subject to the scope of review, assumptions, limitations and qualifications to be contained in the BMO Fairness Opinion or the Richter Independent Fairness Opinion, as applicable, as of February 8, 2023, the Consideration to be received by Shareholders under the Arrangement is fair, from a financial point of view, to such Shareholders.

    On February 9, 2023, after the close of markets, the Special Committee met to receive the final advice of Richter and NRF and to determine whether to make any recommendation to the Board of Directors with regards to the Arrangement. Richter verbally delivered its fairness opinion to the Special Committee, which was subsequently delivered in writing, and reported its conclusion to the effect that, subject to the analysis, assumptions, qualifications and limitations set forth in the Richter Independent Fairness Opinion, as at February 9, 2023, the Consideration to be received by the Shareholders under the Arrangement Agreement is fair, from a financial point of view, to such holders of Shares. As part of this opinion, Richter: (i) summarized its mandate and the scope of its review; (ii) provided its comments and observations on the historical results and financial forecasts of the Company; (iii) provided a summary of the valuation methods used and value analysis performed; and (iv) summarized the considerations taken into account in assessing the fairness of the proposed Arrangement. BMO also confirmed that they would be in a position to provide a favourable fairness opinion to the Board of Directors on February 9, 2023. NRF confirmed that no changes were made to the transaction documents since the last Special Committee meeting held on February 8, 2023 and that such documents were in final form.

    Following the presentations by all advisors, the Special Committee finalized its report and recommendation to the Board of Directors, taking into account the Richter Independent Fairness Opinion and such other matters as it considered relevant, including those set forth under the heading “The Arrangement - Reasons for the Arrangement”, and unanimously determined that the Arrangement is in the best interests of the Company and the Shareholders and unanimously recommended that the Board of Directors approve the Arrangement.

    On February 9, 2023, following the meeting of the Special Committee, the Board of Directors met to receive the final advice of BMO, Richter and Davies to determine whether to make any recommendation to the Shareholders with regards to the Arrangement.

    Having provided members of the Board of Directors with an overview of the material terms of the Arrangement Agreement, Plan of Arrangement, the Support and Voting Agreements and other definitive agreements relating to the transaction the day prior to such meeting, Davies confirmed that all legal advisors had approved the current versions of the transaction documents.

    Following the representations by Davies, BMO verbally delivered the BMO Fairness Opinion to the Board of Directors, which was subsequently delivered in writing, and reported its conclusion to the effect that, based upon and subject to the scope of review, assumptions, limitations and qualifications contained in the BMO Fairness Opinion, as at February 9, 2023, the Consideration to be received by the Shareholders in respect of each of their Shares under the Arrangement is fair, from a financial point of view, to such Shareholders. Richter also verbally delivered its fairness opinion to the Board of Directors, as a whole (which opinion was subsequently delivered in writing to the Board of Directors and the Special Committee).

    Following the representations by BMO and Richter, the Chair of the Special Committee presented the unanimous recommendation of the Special Committee to the other members of the Board of Directors.

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    After discussions and having received the unanimous recommendation of the Special Committee in favour of the Arrangement and taking into account the BMO Fairness Opinion, the Richter Independent Fairness Opinion and such other matters as it considered relevant, including those set forth under the heading “The Arrangement - Reasons for the Arrangement”, the Board of Directors unanimously determined (with the Velan Holding Directors having abstained from voting) that the Arrangement is in the best interests of the Company and the Shareholders and that the Consideration to be received by the Shareholders is fair to such holders, and approved the Arrangement.

    The Arrangement Agreement, the Support and Voting Agreements and the other definitive transaction agreements were finalized and executed on February 9, 2023 after the close of markets, and a press release announcing the Arrangement was issued on February 10, 2023 prior to the open of markets.

    The Arrangement Agreement was amended on March 27, 2023 to amend the Plan of Arrangement in order to provide that cheques that are issued but not deposited or have been returned to the Depositary or otherwise remain unclaimed are not to cease to represent a right or claim after the sixth anniversary of the Effective Time and, as such, are to be treated in accordance with applicable law concerning, among other things, unclaimed property.

    On March 30, 2023, the Board of Directors met and approved this Circular and other procedural matters related thereto and to the Arrangement.

    Recommendation of the Special Committee