Aduro Biotech, Inc. (NASDAQ:ADRO) Files An 8-K Entry into a Material Definitive Agreement
Item 1.01 Entry into a Material Definitive Agreement.
Agreement and Plan of Merger
On June 1, 2020, Aduro Biotech, Inc. (Aduro or the Company), Aspire Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (Merger Sub), and Chinook Therapeutics U.S., Inc., a Delaware corporation (Chinook), entered into an Agreement and Plan of Merger and Reorganization (the Merger Agreement), to which, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Chinook, with Chinook continuing as a wholly owned subsidiary of the Company and the surviving corporation of the merger (the Merger).
The Merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the Merger Agreement was adopted as a plan of reorganization within the meaning of Treasury Regulations Section 1.368-2(g).
Merger Consideration
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the Effective Time), (a) each outstanding share of Chinook common stock and Chinook preferred stock (collectively, the Chinook Capital Stock) will be converted into the right to receive a number of shares of the Companys common stock (Company Common Stock) equal to the exchange ratio described below, and (b) each outstanding Chinook stock option that has not previously been exercised prior to the closing of the Merger will be assumed by the Company and become an option to purchase a number of shares of Company Common Stock equal to the exchange ratio described below.
Under the exchange ratio formula in the Merger Agreement, as of immediately after the Merger, the former Chinook securityholders are expected to own approximately 50% of the outstanding shares of Company Common Stock on a fully-diluted basis and securityholders of the Company as of immediately prior to the Merger are expected to own approximately 50% of the outstanding shares of Company Common Stock on a fully-diluted basis, subject to certain assumptions, including, but not limited to, (a) the Companys net cash as of closing being equal to $145,000,000 and (b) Chinooks cash and cash equivalents as of closing being equal to $10,000,000.
Conditions to the Merger
The closing of the Merger is subject to satisfaction or waiver of certain conditions including, among other things, (i) the required approvals by the parties stockholders, (ii) the accuracy of the respective representations and warranties of each party, subject to certain materiality qualifications, (iii) compliance by the parties with their respective covenants, (iv) no law or order preventing the Merger and related transactions, (v) the closing of the sale and issuance of the Notes to the Note Purchase Agreement (as such terms are defined below) in which the aggregate proceeds to Chinook are not less than $25,000,000, (vi) the continuous listing of the shares of Company Common Stock on The Nasdaq Stock Market LLC (Nasdaq) from the date of the Merger Agreement through the closing date, (vii) the shares of Company Common Stock to be issued in the Merger being approved for listing (subject to official notice of issuance) on Nasdaq as of the closing, (viii) the Registration Statement (as defined below) having become effective in accordance with the provisions of the Securities Act of 1933, as amended, and not being subject to any stop order or proceeding (or threatened proceeding by the Securities and Exchange Commission (the SEC)) seeking a stop order with respect to the Registration Statement that has not been withdrawn, (ix) the Companys net cash as of closing being equal to or greater than $135,000,000, and (x) Chinooks cash and cash equivalents as of closing being equal to or greater than $5,000,000.
Governance
At the Effective Time, the Board of Directors of the Company (the New Company Board) is expected to consist of seven members, two of whom will be designated by the Company, three of whom will be designated by Chinook (of which one will be the chief executive officer of the Company). The Company has designated William M. Greenman and Ross Haghighat to serve as members of the New Company Board and Chinook has designated Eric
Dobmeier, Jerel Davis and Srinivas Akkaraju as members of the New Company Board. It is anticipated that two additional directors will be selected by the New Company Board. In addition, upon the closing of the Merger, Chinooks Chief Executive Officer, Eric Dobmeier, will serve as Chief Executive Officer, Tom Frohlich will serve as Chief Business Officer, Alan Glicklich, M.D., will serve as Chief Medical Officer, Andrew King, D.V.M., Ph.D., will serve as Head of Renal Discovery and Translational Medicine, and Renata Oballa, Ph.D., will serve as Vice President of Chemistry, of the combined company.
Certain Other Terms of the Merger Agreement
The Merger Agreement contains customary representations, warranties and covenants made by the Company and Chinook, including covenants relating to obtaining the requisite approvals of the stockholders of the Company and Chinook, indemnification of directors and officers, and the Companys and Chinooks conduct of their respective businesses between the date of signing the Merger Agreement and the closing of the Merger.
In connection with the Merger, the Company will prepare and file a registration statement on Form S-4 (the Registration Statement), in which a proxy statement will be included as a prospectus (the Proxy Statement) and seek the approval of the Companys stockholders with respect to certain actions, including (i) the issuance of Company Common Stock that represents more than 20% of the shares of Company Common Stock outstanding immediately prior to the Closing to the Chinook stockholders in connection with the Merger and related transactions, to the Nasdaq rules, and (ii) if deemed necessary by the parties, the amendment of the Companys certificate of incorporation to effect a reverse stock split of all outstanding shares of Company Common Stock (collectively, the Company Stockholder Matters).
The Merger Agreement contains certain customary termination rights, including, among others, (i) the right of either the Company or Chinook to terminate the Merger Agreement if the Companys stockholders fail to approve the issuance of Company Common Stock in the Merger, (ii) the right of the Company to terminate the Merger Agreement if Chinook does not deliver its required stockholder vote within five business days after the Registration Statement becomes effective, (iii) the right of either party to terminate the Merger Agreement if the other partys board of directors changes or withdraws its recommendation in favor of the transactions, (iv) the right of either party to terminate the Merger Agreement if the Merger has not occurred by December 31, 2020, subject to certain conditions, (v) the right of either party to terminate the Merger Agreement due to a material breach by the other party of any of its representations, warranties or covenants which would result in the closing conditions not being satisfied, subject to certain conditions, and (vi) the right of either party to terminate the Merger Agreement if a court of competent jurisdiction or other governmental body issues a final and non-appealable order, decree or ruling, or has taken any other action, having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger and related transactions.
The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $6,400,000, or in some circumstances reimburse the other partys expenses up to a maximum of $2,000,000.
The foregoing summary does not purport to be a complete description and is qualified in its entirety by reference to the full text of the Merger Agreement, which is attached hereto as Exhibit 2.1 and is incorporated herein by reference.
The Merger Agreement has been attached as an exhibit to this Current Report on Form 8-K in order to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about the Company, Chinook or their respective affiliates or to modify or supplement any factual disclosures about the Company, Chinook or their respective affiliates in public reports filed with the SEC. The Merger Agreement includes representations, warranties and covenants of the Company and Chinook that were made solely for the purposes of the Merger Agreement and as of specific dates, were solely for the benefit of the parties thereto, and which may be subject to important qualifications and limitations agreed to by the Company and Chinook in connection with the negotiated terms of the Merger Agreement. Moreover, such representations and warranties may not be accurate or complete as of any specified date, have been modified or qualified by certain disclosures between the parties made in connection with the negotiation of the Merger Agreement, which disclosures are not reflected in the Merger Agreement itself, and may apply contractual standards of materiality in a way that is different from that which may be viewed as material by the Companys stockholders, Chinooks stockholders or other security holders. In addition, the representations and warranties were made for purposes of allocating risk among the parties to the Merger Agreement and were not intended, and should not be relied upon, as statements of fact. Information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Companys or Chinooks public disclosures.
Note Purchase Agreement
On June 1, 2020, Chinook and certain investors named therein (the Investors) entered into a Note Purchase Agreement (the Note Purchase Agreement), to which, immediately prior to the closing of the Merger, the Investors will purchase convertible promissory notes in an aggregate amount of $25,000,000 (the Notes), which Notes are convertible into shares of Company Common Stock after closing based on the volume weighted average closing trading price of a share of Company Common Stock on Nasdaq for the five trading days ending the trading day immediately prior to the date such Notes are converted, which must occur within 30 days following the Merger, or alternatively into securities of the Company issued in an equity financing transaction that closes concurrently with or within 30 days following the Merger in which the aggregate gross purchase price paid to the combined company is no less than $15,000,000 (the Merger Financing).
The conversion of the Notes into securities of the Company as well as any Merger Financing will result in material dilution to the percentage ownership of the Companys stockholders in the combined company. There can be no assurance that any Merger Financing will occur.
The foregoing summary does not purport to be a complete description and is qualified in its entirety by reference to the full text of the Note Purchase Agreement and form of Note, which are attached hereto as Exhibits 10.1 and 10.2, respectively, and are incorporated herein by reference.
Support Agreements
Concurrently with the execution and delivery of the Merger Agreement, certain executive officers, directors and stockholders of Chinook (solely in their respective capacities as Chinook stockholders) who beneficially own an aggregate of approximately 85% of the outstanding Chinook Capital Stock have entered into support agreements with the Company to vote all of their shares of Chinook Capital Stock in favor of adoption of the Merger Agreement (the Chinook Support Agreements), to which such individuals have agreed, among other things, to vote their respective shares of Chinook Capital Stock in favor of the adoption of the Merger Agreement and approval of the Merger, and against any competing acquisition proposal and against any action or agreement that would reasonably be expected to materially impede, interfere with, delay, postpone, discourage or adversely affect the Merger or any of the transactions contemplated by the Merger Agreement.
The foregoing description of the Chinook Support Agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the form of the Chinook Support Agreement, which is filed herewith as Exhibit 10.3 and is incorporated by reference herein.
Concurrently with the execution and delivery of the Merger Agreement, certain executive officers, directors and stockholders of the Company (solely in their respective capacities as the Company stockholders) who beneficially own an aggregate of approximately 22.4% of the outstanding Company Common Stock have entered into support agreements with Chinook to vote all of their shares of Company Common Stock in favor of approval of the Merger Agreement (the Company Support Agreements), to which such individuals have agreed, among other things, to vote their respective shares of Company Common Stock in favor of the issuance of Company Common Stock in the Merger and the other transactions contemplated by the Merger Agreement, against any competing acquisition proposal, and against any action or agreement that would reasonably be expected to materially impede, interfere with, delay, postpone, discourage or adversely affect the Merger or any of the transactions contemplated by the Merger Agreement.
The foregoing description of the Company Support Agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the form of Company Support Agreement, which is filed herewith as Exhibit 10.4 and is incorporated by reference herein.
Lock-Up Agreements
Concurrently with the execution and delivery of the Merger Agreement, certain officers, directors and stockholders of the Company holding approximately 22.4% of the outstanding Company Common Stock and certain officers, directors and stockholders of Chinook holding approximately 85% of the Chinook Capital Stock have entered into lock-up agreements (the Lock-Up Agreements) to which they accepted certain restrictions on transfers of shares of Company Common Stock for the 180-day period following the closing of the Merger.
The foregoing description of the Lock-Up Agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the form of Lock-Up Agreement, which is filed herewith as Exhibit 10.5 and is incorporated by reference herein.
Contingent Value Rights Agreement
At the Effective Time, the Company and Computershare Trust Company, N.A., as rights agent (the Rights Agent), will enter into a Contingent Value Rights Agreement (the CVR Agreement), to which the Companys common stockholders of record as of the close of business on the last business day prior to the day on which the Effective Time occurs will receive one contingent value right (each, a CVR) for each outstanding share of Company Common Stock held by such stockholder on such date.
Each CVR will represent the contractual right to receive payments from the Company upon the actual receipt by the Company or its affiliates of certain contingent proceeds derived from any consideration that is paid to the Company as a result of the disposition of any of the Companys non-renal assets or revenue received from the license of certain non-renal assets, or as a result of the Companys equity ownership in any subsidiary that is established to hold such non-renal assets or the subsequent disposition of any such equity securities (collectively, the CVR Milestones), net of any tax, transaction costs and certain other expenses.
The contingent payments under the CVR Agreement, if they become payable, will become payable to the Rights Agent for subsequent distribution to the holders of the CVRs. In the event that no CVR Milestones occur, holders of the CVRs will not receive any payment to the CVR Agreement. There can be no assurance that any CVR Milestones will be achieved or that any holders of CVRs will receive payments with respect thereto.
The right to the contingent payments contemplated by the CVR Agreement is a contractual right only and will not be transferable, except in the limited circumstances specified in the CVR Agreement. The CVRs will not be evidenced by a certificate or any other instrument and will not be registered with the SEC. The CVRs will not have any voting or dividend rights and will not represent any equity or ownership interest in the Company or any of its affiliates. No interest will accrue on any amounts payable in respect of the CVRs.
The foregoing summary of the CVR Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the form of CVR Agreement, which is filed as Exhibit 10.6 to this Current Report on Form 8-K and is incorporated herein by reference.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
The information disclosed under the section titled Governance under Item 1.01 above is incorporated herein by reference.
As previously disclosed, on March 19, 2020, Andrea van Elsas, Ph.D., the chief scientific officer of the Company, notified the Company of his intent to resign from the Company effective as of June 30, 2020 (the Termination Date). On June 1, 2020, the Company and Dr. van Elsas entered into a consulting agreement, to which Dr. van Elsas will provide consulting services to the Company at an hourly rate of 500 Euros following the Termination Date until December 31, 2020, subject to earlier termination.
Participants in the Solicitation
This document does not constitute a solicitation of proxy, an offer to purchase or a solicitation of an offer to sell any securities. The Company and Chinook, and each of their respective directors, executive officers and certain employees may be deemed to be participants in the solicitation of proxies from the stockholders of the Company in connection with the proposed merger. Security holders may obtain information regarding the names, affiliations and interests of the Companys directors and officers in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on March 9, 2020, and its definitive proxy statement for the 2020 annual meeting of stockholders, which was filed with the SEC on March 24, 2020. To the extent the holdings of the Companys securities by the Companys directors and executive officers have changed since the amounts set forth in the Companys proxy statement for its 2020 annual meeting of stockholders, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC. Additional information regarding the interests of such individuals in the proposed merger will be included in the proxy statement/prospectus relating to the proposed merger when it is filed with the SEC. These documents (when available) may be obtained free of charge from the SECs website at www.sec.gov and the Companys website at www.aduro.com.
Forward-Looking Statements
This current report on Form 8-K contains forward-looking statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking words such as may, will, continue, anticipate, intend, could, project, expect or the negative or plural of these words or similar expressions. Forward-looking statements in this current report on Form 8-K include, but are not limited to, statements regarding the expected ownership in the combined company of the former Chinook securityholders and securityholders of Aduro as of immediately prior to the Merger; assumptions regarding Aduros net cash and Chinooks cash and cash equivalents as of closing; governance of the combined company; the closing of the transactions contemplated by the Note Purchase Agreement; entry into the Chinook Support Agreements and the Company Support Agreements; and the contingent payments contemplated by the CVR Agreement and the CVR Milestones. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated, including, but not limited to: the risk that the proposed Merger may not be completed in a timely manner or at all, which may adversely affect Aduros business and the price of Company Common Stock; the failure of either party to satisfy any of the conditions to the consummation of the proposed Merger, including the approval of Company Stockholder Matters by Aduros stockholders; uncertainties as to the timing of the consummation of the proposed Merger; the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement; the effect of the announcement or pendency of the proposed Merger on Aduros business relationships, operating results and business generally; risks that the proposed Merger disrupts current plans and operations and the potential difficulties in employee retention as a result of the proposed Merger; risks related to diverting managements attention from Aduros ongoing business operations; the outcome of any legal proceedings that may be instituted against Aduro related to the Merger Agreement or the proposed Merger; unexpected costs, charges or expenses resulting from the proposed Merger; Aduros history of net operating losses and uncertainty regarding its ability to achieve profitability; Aduros ability to develop and commercialize product candidates; Aduros ability to use and expand technology platforms to build a pipeline of product candidates; Aduros ability to obtain and maintain regulatory approval of product candidates; Aduros ability to operate in a competitive industry and compete successfully against competitors that have greater resources; Aduros reliance on third parties; Aduros ability to obtain and adequately protect intellectual property rights for product candidates; and the effects of COVID-19 on clinical programs and business operations. Aduro discusses many of these risks in greater detail under the heading Risk Factors contained in its quarterly report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 4, 2020, and its other filings with the SEC. Any forward-looking statements in this current report on Form 8-K speak only as of the date of this current report on Form 8-K. Neither Aduro nor Chinook assumes any obligation to update forward-looking statements whether as a result of new information, future events or otherwise, after the date of this current report on Form 8-K.
