UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

(RULE 14a-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

þ  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

CORNERSTONE THERAPEUTICS INC.

(Name of Registrant as Specified In Its Charter)

 

Not Applicable

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CORNERSTONE THERAPEUTICS INC.
1255 CRESCENT GREEN DRIVE, SUITE 250
CARY, NORTH CAROLINA 27518

 

[    l    ], 2009

 

Dear Fellow Stockholders:

 

I am pleased to invite you to join us for a Special Meeting of the stockholders of Cornerstone Therapeutics Inc. to be held on [    l    ], 2009 at 10:00 a.m., local time, at The Umstead Hotel and Spa, 100 Woodland Pond, Cary, North Carolina.

 

At the Special Meeting, you will be asked to consider and vote on a proposal to approve the issuance and sale by Cornerstone of shares of our common stock to Chiesi Farmaceutici SpA (“Chiesi”) pursuant to the Stock Purchase Agreement, dated as of May 6, 2009, by and between Chiesi and Cornerstone. The number of shares to be issued and sold to Chiesi in the proposed transaction is to be determined pursuant to the provisions of the Stock Purchase Agreement, in which we have agreed to issue and sell 11,902,741 shares, subject to adjustment. Our best estimate of the aggregate adjusted number of shares we will be required to issue to Chiesi is approximately 12,148,850. If the transaction is approved by our stockholders and consummated, in exchange for the shares to be issued by Cornerstone to Chiesi, Chiesi will (i) grant Cornerstone an exclusive 10-year license to distribute Chiesi’s Curosurf^® product in the U.S., (ii) grant Cornerstone a right of first offer, for a period of two years following the closing of the transaction, on all products and technology that Chiesi wishes to market in the U.S. and (iii) pay Cornerstone $15,465,075 in cash. Curosurf^® is a leading product approved by the U.S. Food and Drug Administration for the treatment of Respiratory Distress Syndrome in premature infants.

 

In connection with the transaction contemplated by the Stock Purchase Agreement, Cornerstone and certain of its stockholders have entered into a series of related agreements with Chiesi pursuant to which, among other things, two entities controlled by Craig A. Collard, Cornerstone’s President and Chief Executive Officer, and Steven M. Lutz, Cornerstone’s Executive Vice President, Manufacturing and Trade, have agreed to sell an aggregate of 1.6 million shares of Cornerstone common stock to Chiesi for $5.50 per share in cash. After giving effect to the proposed sales of common stock by Cornerstone and by the entities controlled by Mr. Collard and Mr. Lutz, Chiesi will own shares representing 51%, on a fully diluted basis, of Cornerstone’s outstanding shares of common stock. Other agreements entered into in connection with the proposed issuance and sale of shares of our common stock to Chiesi pursuant to the Stock Purchase Agreement provide, among other things, for specified governance arrangements for the two years following the closing of the transaction and impose certain restrictions on Chiesi, Mr. Collard, Mr. Lutz and the entities controlled by them during that period, including restrictions on their respective purchases and sales of shares of Cornerstone common stock. Members of our executive management team have entered into new employment agreements that will take effect upon consummation of the proposed transaction that provide, among other things, for restrictions on sales of shares of Cornerstone common stock by these executives for two years. Mr. Collard, Mr. Lutz and the entities controlled by them also have granted Chiesi an option to purchase their remaining Cornerstone shares that is expected to become exercisable two years after the closing of the transaction. The Stock Purchase Agreement and the related agreements are described in the attached proxy statement.

 

The strategic alliance with Chiesi that is contemplated by the Stock Purchase Agreement and related contracts was approved by Cornerstone’s board of directors after careful review and consideration. Our board of directors and our management team believe that the proposed transaction will bring substantial benefits to Cornerstone. In particular, we believe:

 

 

 

OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF CORNERSTONE’S ISSUANCE AND SALE OF SHARES OF OUR COMMON STOCK TO CHIESI PURSUANT TO THE STOCK PURCHASE AGREEMENT.

 

We urge you to read the accompanying proxy statement, which provides important information about the matter to be voted on. Whether or not you plan to attend the Special Meeting, please take the time to complete and sign the enclosed proxy card and mail it to us or submit a proxy over the Internet or by telephone. If you submit a proxy in that way and then attend the Special Meeting, your proxy will, upon your written request, be revoked in order that you may vote in person at the meeting.

 

On behalf of the Board of Directors

 

Yours Sincerely,

 

[scanned signature]

[    l    ]

[    l    ]

 

The accompanying proxy statement is dated [    l    ], 2009 and is first being mailed to stockholders, along with the related proxy card, on or about [    l    ], 2009.

CORNERSTONE THERAPEUTICS INC.
1255 CRESCENT GREEN DRIVE, SUITE 250
CARY, NORTH CAROLINA 27518

 

 

 

To our Stockholders:

 

NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders of Cornerstone Therapeutics Inc. will be held on [    l    ], 2009 at 10:00 a.m., local time, at The Umstead Hotel and Spa, 100 Woodland Pond, Cary, North Carolina. At the meeting, stockholders will consider and vote on the following proposals:

 

 

Stockholders of record as of the close of business on [    l    ], 2009 are entitled to notice of, and to vote at, the Special Meeting or any adjournment thereof. Your vote is important regardless of the number of shares you own. Our stock transfer books will remain open for the purchase and sale of our common stock.

 

In order to ensure that a quorum is present at the meeting, please complete, date, sign and promptly return the enclosed proxy card whether or not you expect to attend the Special Meeting. A postage-prepaid envelope, addressed to BNY Mellon Shareholder Services, our transfer agent and registrar, has been enclosed for our convenience. You may also submit a proxy over the Internet or by telephone. If you attend the meeting, your proxy will, upon your written request, be revoked and you may vote your shares in person.

 

All stockholders are cordially invited to attend the meeting.

 

By Order of the Board of Directors

 

David Price

Secretary

 

Cary, North Carolina

 

Dated: [    l    ], 2009

 

 

 

 

CORNERSTONE THERAPEUTICS INC.
1255 CRESCENT GREEN DRIVE, SUITE 250
CARY, NORTH CAROLINA 27518

 

 

PROXY STATEMENT

 

 

For the Special Meeting of Stockholders
To Be Held on [    l    ], 2009

 

This proxy statement and the enclosed proxy card are being furnished in connection with the solicitation of proxies by the board of directors of Cornerstone Therapeutics Inc. for use at the Special Meeting of Stockholders to be held on [    l    ], 2009 at 10:00 a.m., local time, at The Umstead Hotel and Spa, 100 Woodland Pond, Cary, North Carolina, and any adjournment thereof.

 

At the Special Meeting, you will be asked to vote to approve the issuance and sale to Chiesi Farmaceutici SpA (“Chiesi”) of shares of our common stock pursuant to the provisions of the Stock Purchase Agreement, dated as of May 6, 2009, by and between Chiesi and Cornerstone (the “Stock Purchase Agreement”). The number of shares to be issued and sold to Chiesi in the proposed transaction is to be determined pursuant to the provisions of the Stock Purchase Agreement, in which we have agreed to issue and sell 11,902,741 shares, subject to adjustment. Our best estimate of the aggregate adjusted number of shares that we will be required to issue to Chiesi is approximately 12,148,850. If the transaction is approved by our stockholders and consummated, in exchange for the shares to be issued by Cornerstone to Chiesi, Chiesi will (i) grant Cornerstone an exclusive 10-year license to distribute Chiesi’s Curosurf^® product in the U.S., (ii) grant Cornerstone a right of first offer, for a period of two years following the closing of the transaction, on all products and technology that Chiesi wishes to market in the U.S. and (iii) pay Cornerstone $15,465,075 in cash. Curosurf^® is a leading product approved by the U.S. Food and Drug Administration (the “FDA”), for the treatment of Respiratory Distress Syndrome in premature infants. Two of Cornerstone’s officers, Craig A. Collard and Steven M. Lutz have agreed that, at the closing contemplated by the Stock Purchase Agreement, they, through entities controlled by them, will sell an aggregate of an additional 1.6 million shares of Cornerstone common stock to Chiesi for a price of $5.50 per share in cash. After the completion of these sales of shares by Cornerstone and by the entities controlled by Mr. Collard and Mr. Lutz, Chiesi will own 51%, on a fully-diluted basis, of Cornerstone’s outstanding shares of common stock.

 

OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF CORNERSTONE’S ISSUANCE AND SALE OF SHARES OF OUR COMMON STOCK TO CHIESI PURSUANT TO THE STOCK PURCHASE AGREEMENT.

 

The remainder of this proxy statement contains detailed descriptions of the proposed transaction and the basis for the recommendation of our board of directors that you vote in favor of the transaction, together with descriptions of the interests that certain of our directors and officers have in the transaction. We urge you to review the entire proxy statement carefully.

 

All proxies will be voted in accordance with your instructions. If no choice is specified, proxies furnished to us will be voted in favor of the matters set forth in the accompanying Notice of Meeting. Any proxy may be revoked by a stockholder at any time before it is exercised by attending the meeting and voting in person, by delivering written notice of revocation of your proxy to our Secretary at any time before voting is closed, by timely submitting another signed proxy card bearing a later date or by providing new voting instructions by telephone or over the Internet as described below.

 

This proxy statement is dated [    l    ], 2009 and is first being mailed to stockholders on or about [    l    ], 2009.

 

 

 

 

TABLE OF CONTENTS

 

 

 

This summary highlights selected information from this proxy statement and may not contain all the information that is important to you. You should read carefully this entire proxy statement and the other documents to which we have referred you. See “Where You Can Find Additional Information” on page 72. Each item in this summary refers to the page of this document on which the applicable subject is discussed in more detail. In this proxy statement, the terms “Cornerstone,” the “Company,” “we,” “us,” and “our” refer to Cornerstone Therapeutics Inc. and its subsidiaries.

 

Cornerstone Therapeutics Inc.

1255 Crescent Green Drive, Suite 250

Cary, North Carolina 27518

Telephone: (919) 678-6611

 

Cornerstone Therapeutics Inc. is a specialty pharmaceutical company focused on acquiring, developing and commercializing prescription products for the respiratory market. We were incorporated in Delaware on July 14, 2000 as Medicept, Inc. and changed our name to Critical Therapeutics, Inc. in March 2001. We completed an initial public offering of our common stock in June 2004, and our common stock is currently traded on the NASDAQ Capital Market. On October 31, 2008, we completed our merger with Cornerstone BioPharma, Inc. With effect from the completion of that merger, on October 31, 2008, we changed our name to Cornerstone Therapeutics Inc.

 

Chiesi Farmaceutici SpA

Via Palermo 26/A

43100 Parma

Italy

Telephone: +39 0521 2791

 

Chiesi Farmaceutici SpA is a leading European pharmaceutical company headquartered in Parma, Italy. Founded in Italy in 1935, Chiesi sells its products across five continents via 22 direct affiliates, and maintains three manufacturing plants and three research centers. In 2008, Chiesi achieved revenues of 749 million Euro (up 14.1% over 2007) and its investments in research totaled 108 million Euro, representing 14.5% of consolidated sales. Chiesi employs over 3,200 people, including over 300 in research and development. In addition, Chiesi maintains global alliances with some of the world’s leading pharmaceutical companies, including Takeda Pharmaceuticals, Tanabe Seiyaku, 3M, Abbott, GSK, Novartis, Nycomed, Pfizer and Janssen-Cilag.

 

Curosurf^® is a natural lung surfactant and a world leading treatment approved by the FDA for Respiratory Distress Syndrome in premature infants. Curosurf^® is currently available in over 60 countries, including the U.S. and most of Europe, and has been administered to over one million infants since 1992. Respiratory Distress Syndrome affects approximately 10 of every 100 premature infants in the U.S., or about 40,000 babies, each year. Respiratory Distress Syndrome can lead to serious complications and is one of the most common causes of neonatal mortality.

 

On May 6, 2009, we entered into a Stock Purchase Agreement with Chiesi, in which we agreed, subject to the terms and conditions set forth in the Stock Purchase Agreement, to issue and sell to Chiesi a number of shares of our common stock that is to be determined as described below. In this proxy statement, we refer to the proposed issuance and sale of shares of our common stock to Chiesi pursuant to the Stock Purchase Agreement as the “Company Stock Sale.” If the Company Stock Sale is approved by our stockholders and consummated, in exchange for the shares to be issued by Cornerstone to Chiesi, Chiesi will (i) grant

Cornerstone an exclusive 10-year license, subject to extension or early termination under specified circumstances, to distribute Chiesi’s Curosurf^® product in the U.S., (ii) grant Cornerstone a right of first offer on all products and technology that Chiesi wishes to market in the U.S. for a period of two years following the closing of the Company Stock Sale; and (iii) pay Cornerstone $15,465,075 in cash.

 

In the Stock Purchase Agreement we agreed to issue to Chiesi 11,902,741 shares of our common stock at the closing of the Company Stock Sale. The parties established the number of shares to be issued by Cornerstone based in part on Chiesi’s objective of acquiring a number of shares that will represent 51% of Cornerstone’s outstanding shares of common stock on a fully diluted basis. Accordingly, we have agreed that if Chiesi’s ownership level immediately following the closing of these transactions is below the targeted level of 51% on a fully diluted basis, Chiesi will have the right (but only during the 90-day period following the closing) to require us to issue to Chiesi the number of shares required to achieve Chiesi’s targeted level of ownership, for no additional consideration. Based on the number of shares of restricted stock and stock options that were issued after the date of the Stock Purchase Agreement, we estimate we will be required under the Stock Purchase Agreement to issue an aggregate of 12,148,850 shares of our common stock to Chiesi.

 

In connection with the transactions contemplated by the Stock Purchase Agreement, an entity controlled by our President and Chief Executive Officer, Craig A. Collard, and an entity controlled by our Executive Vice President, Manufacturing and Trade, Steven M. Lutz, have agreed that, simultaneously with the closing of the Company Stock Sale, they will sell an aggregate of 1.6 million shares of Cornerstone common stock to Chiesi for $5.50 per share in cash. After giving effect to the proposed sales of shares of Cornerstone common stock by Cornerstone and by the entities controlled by Mr. Collard and Mr. Lutz, Chiesi will own shares representing 51%, on a fully diluted basis, of Cornerstone’s outstanding shares of common stock.

 

Cornerstone, Chiesi, Mr. Collard, Mr. Lutz and the entities controlled by them that own Cornerstone common stock have also entered into a series of other agreements in connection with the Company Stock Sale that provide for, among other things, specified governance arrangements for the two years following the closing of the Company Stock Sale and impose certain restrictions on Chiesi, Mr. Collard, Mr. Lutz and the entities controlled by them during that period, including restrictions on their respective purchases and sales of shares of Cornerstone common stock. Mr. Collard, Mr. Lutz and the entities controlled by them also have granted Chiesi an option to purchase their remaining Cornerstone shares that is expected to become exercisable two years after the closing of the Company Stock Sale.

 

Consummation of the transactions contemplated by the Stock Purchase Agreement is subject to various conditions, including the receipt of the approval of Cornerstone’s stockholders.

 

Our board of directors carefully considered the terms of the transaction and the other strategic alternatives available to our Company in deciding to enter into the Stock Purchase Agreement and the related agreements and to recommend that our stockholders vote FOR the approval of the issuance and sale of shares of our common stock to Chiesi. Among others, the significant factors considered by our board of directors included the following:

 

 

 

The Stock Purchase Agreement is attached to this proxy statement as Annex A. We encourage you to read the Stock Purchase Agreement as it is the legal document that governs the proposed issuance and sale of shares of our common stock to Chiesi that you will be asked to approve at the Special Meeting.

 

In connection with the Stock Purchase Agreement, Cornerstone and Chiesi have entered into a license and distribution agreement (the “License and Distribution Agreement”), pursuant to which Chiesi has granted us exclusive rights to distribute Curosurf^® in the U.S. for a 10-year term. The License and Distribution Agreement is Exhibit H to the Stock Purchase Agreement. The License and Distribution Agreement will take effect on a date to be selected by Chiesi, in the third or fourth quarter of 2009. It will take effect whether or not the closing under the Stock Purchase Agreement has occurred; however, if the closing under the Stock Purchase Agreement has not occurred by October 31, 2009 or a mutually agreed-upon later date, Chiesi will have the right to terminate the License and Distribution Agreement on prior written notice. Please see the section entitled “The License and Distribution Agreement,” beginning on page 47 of this proxy statement, for a more detailed summary of the License and Distribution Agreement.

 

In connection with the Stock Purchase Agreement, an entity controlled by Craig A. Collard, Cornerstone’s President and Chief Executive Officer, and an entity controlled by Steven M. Lutz, Cornerstone’s Executive Vice President, Manufacturing and Trade, have agreed to sell an aggregate of 1.6 million shares of Cornerstone common stock to Chiesi for $5.50 per share. The closing of that sale of shares of our common stock is conditioned upon (and is required to be completed at the same time as) the closing of the Company Stock Sale.

 

Cornerstone, Chiesi, Mr. Collard, Mr. Lutz and certain entities controlled by them that also hold shares of Cornerstone common stock have entered into various agreements which will become effective following the closing of the Company Stock Sale. Those agreements implement specified governance arrangements for the two years following the closing of the Company Stock Sale and impose certain restrictions on Chiesi, Mr. Collard, Mr. Lutz and the entities controlled by them during that period, including restrictions on their respective purchases and sales of shares of Cornerstone common stock. Mr. Collard, Mr. Lutz and the entities controlled by them that also hold shares of our common stock, Cornerstone Biopharma Holdings, Ltd., Carolina Pharmaceuticals Ltd. and Lutz Family Limited Partnership (collectively, the “Founder Stockholders”) also have granted Chiesi an option to purchase their remaining Cornerstone shares that is expected to become exercisable two years after the closing of the Company Stock Sale for $12.00 per share in cash. The agreements which contain these provisions are known as the “Governance Agreement” and the “Stockholders Agreement,” and are attached to the Stock Purchase Agreement as Exhibit C and Exhibit B, respectively. Please see the sections entitled “The Governance Agreement,” beginning on page 51 of this proxy statement, and “The Stockholders Agreement,” beginning on page 54 of this proxy statement, for more detailed summaries of the Governance Agreement and the Stockholders Agreement.

In connection with the governance arrangements contemplated by the Governance Agreement, we have agreed to amend and restate our bylaws to implement certain provisions of the Governance Agreement. The amended and restated bylaws are attached to the Stock Purchase Agreement as Exhibit G. Please see the section entitled “The Amended Bylaws,” beginning on page 60 of this proxy statement, for additional details. We also have agreed that, following the closing of the Company Stock Sale, we will call and hold another stockholders meeting for the purpose of seeking our stockholders’ approval of an amendment to our certificate of incorporation (the “Charter Amendment”). We have separated the stockholder approvals in this way because we believe it will make them easier to obtain. Please see the section entitled “The Transaction — Certain Corporate Governance Arrangements and Protective Provisions,” beginning on page 28 of this proxy statement, and “The Special Meeting — Purpose of the Special Meeting” beginning on page 11 of this proxy statement, for additional details.

 

We have entered into two registration rights agreements, one with Chiesi and one with the Founder Stockholders, pursuant to which we have agreed to file registration statements under the Securities Act of 1933, as amended (the “Securities Act”), covering the shares of Cornerstone common stock owned by each of Chiesi and the Founder Stockholders, and to take various other actions to facilitate future public sales of their shares. The registration rights agreements will become effective following the closing of the Company Stock Sale. The registration rights agreements are attached to the Stock Purchase Agreement as Exhibit D and Exhibit E, respectively. Please see the section entitled “The Registration Rights Agreements,” beginning on page 58 of this proxy statement, for a more detailed summary of the registration rights agreements.

 

In connection with the Stock Purchase Agreement, Cornerstone, Chiesi, the Founder Stockholders and other stockholders that are members of our management team have entered into a voting agreement pursuant to which the Founder Stockholders and the other management stockholders have granted irrevocable proxies to Chiesi and have agreed to vote the shares of Cornerstone common stock owned by them in favor of the approval of the Company Stock Sale and in favor of the approval and adoption of the Charter Amendment. We have also entered into a voting agreement with Chiesi in which Chiesi has granted us an irrevocable proxy and has agreed to vote all of the shares of Cornerstone common stock owned by it in favor of the approval and adoption of the Charter Amendment. Please see the section entitled “The Voting Agreements,” beginning on page 60 of this proxy statement, for a more detailed summary of the voting agreements.

 

We have entered into employment agreements with Mr. Collard, Mr. Lutz, David Price, Joshua Franklin, Brian Dickson, M.D. and Alan Roberts (all of whom are officers of Cornerstone) that will become effective following the closing of the Company Stock Sale. Among other things, these agreements impose restrictions on sales of Cornerstone common stock by these officers for two years. Please see the section entitled “The Employment Agreements,” beginning on page 64 of this proxy statement, for a more detailed summary of the employment agreements.

 

Our board of directors has adopted a resolution declaring that the transactions contemplated by the Stock Purchase Agreement and the related agreements are fair to and in the best interests of Cornerstone and our stockholders. Our board of directors recommends that you vote FOR the approval of the issuance and sale of shares of our common stock to Chiesi pursuant to the Stock Purchase Agreement.

 

On May 6, 2009, Houlihan Lokey rendered an oral opinion to our board of directors (which was subsequently confirmed in writing), as to the fairness, from a financial point of view, of the consideration to be received by our Company pursuant to the Stock Purchase Agreement (the “Chiesi Investment Consideration”) as of May 6, 2009 (based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion).

 

Houlihan Lokey’s opinion was directed to our board of directors and only addressed the fairness, from a financial point of view, of the Chiesi Investment Consideration and did not address any other aspect or

implication of the transaction. The summary of Houlihan Lokey’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex D to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion. We encourage our stockholders to carefully read the full text of Houlihan Lokey’s written opinion. However, neither Houlihan Lokey’s opinion nor the summary of Houlihan Lokey’s opinion and the related analyses set forth in this proxy statement were intended to be, and did not, constitute advice or a recommendation to our board of directors or any stockholder as to how to act or vote with respect to the transaction or related matters. See “The Transaction — Opinion of Our Financial Advisor” beginning on page 20 of this proxy statement.

 

Date, Time and Place (Page 11).  The Special Meeting of our stockholders will be held on [    l    ], 2009 at 10:00 a.m., local time, at The Umstead Hotel and Spa, 100 Woodland Pond, Cary, North Carolina.

 

Purpose of the Special Meeting (Page [11]).  At the Special Meeting, our stockholders will be asked to vote to approve the issuance and sale of shares of our common stock to Chiesi pursuant to the Stock Purchase Agreement and, if necessary, the adjournment of the Special Meeting to solicit additional proxies in favor of the approval of the proposed issuance and sale of shares of our common stock to Chiesi pursuant to the Stock Purchase Agreement. Our stockholders must approve the Company Stock Sale for the Company Stock Sale to occur.

 

Record Date; Shares Entitled to Vote; Quorum (Page 11).   Our stockholders are entitled to vote at the Special Meeting if they are shown by our records to have owned shares of our common stock as of the close of business on [    l    ], 2009, the record date. On the record date, there were [    l    ] shares of our common stock entitled to vote at the Special Meeting. Stockholders will have one vote at the Special Meeting for each share of our common stock that they owned as of the close of business on the record date.

 

The holders of a majority of our outstanding shares of common stock must be present at a meeting to hold the meeting and conduct business. This is called a quorum. For purposes of determining whether a quorum exists, we count as present any shares that are represented by proxy or that are represented in person at the meeting. We will also count abstentions and broker non-votes for purposes of determining whether a quorum is present.

 

Vote Required (Page 11).  The approval of the Company Stock Sale by our stockholders requires the affirmative vote of a majority of the total votes cast on the proposal to approve the Company Stock Sale, so long as a quorum is present. The approval of the proposal to adjourn the Special Meeting, if necessary, to solicit additional proxies in favor of the proposal to approve the Company Stock Sale requires the affirmative vote of a majority of the shares of our common stock present in person or by proxy and entitled to vote at the Special Meeting, even if less than a quorum.

 

Voting at the Special Meeting; Proxies (Page 12).  We are asking our stockholders to complete, date and sign the accompanying proxy card and promptly return it in the accompanying pre-addressed envelope or to furnish a proxy over the Internet or by telephone by following the instructions contained in this proxy statement. All properly executed proxies that we receive before the vote at the Special Meeting, and that are not revoked, will be voted in accordance with the instructions indicated on the proxies. If no direction is indicated on a properly executed proxy returned to us, then the underlying shares will be voted FOR the approval of the Company Stock Sale and FOR the adjournment of the Special Meeting, if necessary, to solicit additional proxies.

 

If your shares are held by your broker in “street name” and you do not instruct your broker as to how to vote your shares, your broker is not permitted to vote your shares for you.

 

You may revoke a previously given proxy at any time prior to its exercise at the Special Meeting by (i) attending the meeting and voting in person, (ii) delivering written notice of revocation of your proxy to our Secretary at any time before voting is closed or (iii) timely submitting another signed proxy card bearing a

later date or new voting instructions by telephone or over the Internet as described in the section entitled “The Special Meeting—Voting at the Special Meeting; Proxies,” beginning on page 12.

 

If you hold your shares in “street name” and you have instructed your broker to vote your shares, the options for revoking your proxy described in the paragraph above do not apply and instead you must follow the directions provided by your broker to change your vote.

 

Solicitation of Proxies (Page 13).  We will bear the cost and expense associated with the solicitation of proxies from our stockholders. In addition to solicitation by mail, our directors, officers and employees may solicit proxies from our stockholders by telephone, Internet, facsimile or other electronic means or in person, but these persons will not receive any additional compensation for this solicitation. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward soliciting materials to beneficial owners and will be reimbursed for their reasonable expenses incurred in sending proxy materials to beneficial owners. [    l    ] will assist in our solicitation of proxies.

 

In considering the recommendation of our board of directors to vote FOR the proposal to approve the Company Stock Sale you should be aware that some of our directors and executive officers have personal interests in the Company Stock Sale that are, or may be, different from, or in addition to, your interests. These interests consist of the following:

 

 

Our board of directors was aware of these interests and considered them, among other matters, when it approved the Company Stock Sale. For a more complete description, see “The Transaction — Interests of Our Directors and Executive Officers in the Transaction,” beginning on page 34.

 

On the record date, our directors and executive officers were entitled to vote shares of our common stock representing approximately [    l    ]% of the shares of our common stock outstanding on that date. We expect that all of these shares will be voted in favor of the Company Stock Sale at the Special Meeting.

The Founder Stockholders and other members of our management team that beneficially own shares of Cornerstone common stock have entered into a voting agreement with Chiesi pursuant to which the Founder Stockholders and the management stockholders have, among other things, granted Chiesi irrevocable proxies with respect to, and agreed to vote, all of their shares of Cornerstone common stock, representing approximately [    l    ]% of the outstanding shares of our common stock as of the record date, in favor of the approval of the Company Stock Sale and in favor of the approval and adoption of the Charter Amendment.

 

Chiesi has entered into a voting agreement with Cornerstone pursuant to which Chiesi has agreed, among other things, to grant Cornerstone an irrevocable proxy with respect to, and vote, all of the shares of Cornerstone common stock it acquired in the Company Stock Sale, representing 51% of the outstanding shares of our common stock on a fully diluted basis, in favor of the approval and adoption of the Charter Amendment. The Charter Amendment will be voted on at a future stockholders meeting, and not at the Special Meeting.

 

The proposed issuance and sale of shares of our common stock to Chiesi pursuant to the Stock Purchase Agreement between Cornerstone and Chiesi will not result in taxable income or gain for the stockholders that own shares of Cornerstone prior to the transactions. In addition, Cornerstone’s entry into the applicable agreements with Chiesi and the Company Stock Sale will not result in taxable income or gain for Cornerstone.

 

The obligations of the parties to complete the Company Stock Sale are subject to the following conditions:

 

 

The obligations of Cornerstone to complete the closing of the Company Stock Sale are further conditioned on:

 

 

The obligations of Chiesi to complete the Company Stock Sale are further conditioned on:

 

 

 

If applicable law permits, either Cornerstone or Chiesi could choose to waive a condition to its obligation to complete the Company Stock Sale even though that condition has not been satisfied.

 

Subject to certain exceptions, the Stock Purchase Agreement restricts, among other things, our ability to solicit or engage in discussions or negotiations with a third party with respect to proposals by third parties to acquire a substantial interest in, or engage in other similar transactions with, Cornerstone. Notwithstanding these restrictions, the Stock Purchase Agreement provides that if, at any time before obtaining stockholder approval of the Stock Purchase Agreement, we receive an unsolicited takeover proposal (as defined in the Stock Purchase Agreement) that our board of directors determines in good faith to be a superior proposal (as defined in the Stock Purchase Agreement), we may, subject to certain conditions, terminate the Stock Purchase Agreement to enter into a definitive agreement with respect to the superior proposal if our board of directors determines in good faith, after consultation with its legal advisors, that failing to take such action may be inconsistent with its obligations under applicable law. If our board of directors terminates the Stock Purchase Agreement in order for Cornerstone to enter into a definitive agreement with a third party with respect to a superior proposal, as well as in certain other circumstances, we would be obligated to pay Chiesi a termination fee of $2.5 million.

 

The Stock Purchase Agreement contains provisions addressing the circumstances under which we or Chiesi may terminate the Stock Purchase Agreement. In addition, the Stock Purchase Agreement provides that, in certain circumstances, we may be required to pay Chiesi a termination fee of $2.5 million. The Stock Purchase Agreement also provides that termination of the Stock Purchase Agreement will not relieve any party from liability arising out of any knowing or willful breach of any of its representations, warranties, covenants or other undertakings in the Stock Purchase Agreement. Each party will bear its own expenses in connection with the Stock Purchase Agreement except that expenses incurred in connection with the filing, printing and mailing of this proxy statement will be borne equally by Chiesi and Cornerstone.

 

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and the rules and regulations promulgated under that legislation, we and Chiesi cannot complete the Company Stock Sale until we and Chiesi notify and furnish information to the Federal Trade Commission (the “FTC”), and the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”), and specified waiting period requirements have been satisfied. We and Chiesi have filed notification and report forms under the HSR Act with the FTC and the Antitrust Division on [    l    ], 2009, and [    l    ], 2009, respectively.

 

A COPY OF THE STOCK PURCHASE AGREEMENT IS INCLUDED IN THIS PROXY STATEMENT AS ANNEX A. YOU ARE STRONGLY ENCOURAGED TO READ IT CAREFULLY IN ITS ENTIRETY.

 

Cornerstone Therapeutics Inc. is a specialty pharmaceutical company focused on acquiring, developing and commercializing significant products primarily for the respiratory market. Our commercial strategy is to in-license or acquire rights to non-promoted or underperforming, patent-protected, branded pharmaceutical products, or late stage product candidates, and then maximize their potential value and competitive position by promoting the products using our sales and marketing capabilities and applying various life cycle management techniques to extend the period we can sell the product and related derivative products. We currently market our products only in the U.S.

 

We were incorporated in Delaware on July 14, 2000 as Medicept, Inc. and changed our name to Critical Therapeutics, Inc. (“Critical Therapeutics”), in March 2001. We completed an initial public offering of our common stock in June 2004, and our common stock is currently traded on the NASDAQ Capital Market. On October 31, 2008, we completed our merger with Cornerstone BioPharma Inc. (“Cornerstone Biopharma”) pursuant to which all the outstanding shares of Cornerstone BioPharma’s common stock were converted into and exchanged for shares of Critical Therapeutics common stock and all outstanding options, whether vested or unvested, and all outstanding warrants to purchase Cornerstone BioPharma’s common stock were assumed by Critical Therapeutics and became options and warrants to purchase the Critical Therapeutics’s common stock. Following the closing of the merger, former Cornerstone BioPharma stockholders owned approximately 70%, and former Critical Therapeutics stockholders owned approximately 30%, of our common stock, after giving effect to shares issuable pursuant to outstanding options and warrants held by Cornerstone BioPharma’s stockholders immediately prior to the effective time of the merger, but without giving effect to any shares issuable pursuant to options and warrants held by Critical Therapeutics’ stockholders immediately prior to the effective time of the merger. In connection with the completion of the merger, on October 31, 2008, we changed our name to Cornerstone Therapeutics Inc.

 

We currently promote SPECTRACEF, ZYFLO CR and the ALLERX Dose Pack family of products. In addition, we have a co-promotion agreement with DEY for the exclusive co-promotion along with us of ZYFLO CR. Under the DEY agreement, we pay DEY a co-promotion fee equal to the ratio of total prescriptions written by pulmonary specialists to total prescriptions during the applicable period multiplied by a percentage of quarterly net sales of ZYFLO CR and ZYFLO, after third-party royalties. We currently generate revenues from product sales and royalties from the sale of other products that we do not actively promote. Of these, HYOMAX, BALACET 325, APAP 500 and DECONSAL have generated the most net revenues to date for us. Of our marketed products that we do not promote, only our BALACET 325 and APAP 325 products are promoted by a third party. Our product development pipeline includes two SPECTRACEF line extensions, an anticholinergic and antihistamine combination product candidate, and two extended-release antitussive and antihistamine combination product candidates.

 

Chiesi Farmaceutici SpA is a leading European pharmaceutical company headquartered in Parma, Italy. Founded in Italy in 1935, Chiesi sells its products across five continents via 22 direct affiliates, and maintains three manufacturing plants and three research centers. In 2008, Chiesi achieved revenues of 749 million Euro (up 14.1% over 2007) and its investments in research totaled 108 million Euro, representing 14.5% of consolidated sales. Chiesi employs over 3,200 people, including over 300 in research and development. In addition, Chiesi maintains global alliances with some of the world’s leading pharmaceutical companies,

including Takeda Pharmaceuticals, Tanabe Seiyaku, 3M, Abbott, GSK, Novartis, Nycomed, Pfizer and Janssen-Cilag.

 

Curosurf^® is a natural lung surfactant and a world leading treatment approved by the FDA for Respiratory Distress Syndrome in premature infants. Curosurf^® is currently available in over 60 countries, including the U.S. and most of Europe, and has been administered to over one million infants since 1992. Respiratory Distress Syndrome affects approximately 10 of every 100 premature infants in the U.S., or about 40,000 babies, each year. Respiratory Distress Syndrome can lead to serious complications and is one of the most common causes of neonatal mortality.

 

The Special Meeting will be held on [    l    ], 2009 at 10:00 a.m., local time, at The Umstead Hotel and Spa, 100 Woodland Pond, Cary, North Carolina.

 

The Special Meeting has been called pursuant to the requirements of the Stock Purchase Agreement. At the Special Meeting, Cornerstone’s stockholders will be asked to vote to approve the Company Stock Sale and, if necessary in order to solicit additional proxies, to adjourn the Special Meeting. We do not expect that any other business will be conducted at the Special Meeting

 

If our stockholders approve the proposal we intend to hold another special meeting of our stockholders to consider a proposal to approve and adopt an amendment to our certificate of incorporation to implement certain governance provisions we have agreed with Chiesi. Our certificate of incorporation currently requires that amendments to certain portions of our certificate of incorporation, including portions which would be changed by the Charter Amendment, be approved by the affirmative vote of the holders of at least 75% of the votes which all the stockholders would be entitled to cast in any annual election of directors. We are holding a separate special meeting of our stockholders to consider the proposal to approve and adopt the Charter Amendment because following the Company Stock Sale, Chiesi will own 51% of the outstanding shares of our common stock on a fully diluted basis and therefore stockholder approval of the Charter Amendment will be more easily obtained than if we presented the proposal to approve the Charter Amendment at the Special Meeting described in this proxy statement. You will receive separate proxy materials for the special meeting of stockholders to consider the approval and adoption of the Charter Amendment, which will describe the proposal and the special meeting in greater detail.

 

Cornerstone’s board of directors has fixed [    l    ], 2009 as the record date to be used to determine which of Cornerstone’s stockholders are entitled to notice of and to vote at the Special Meeting. As of the record date there were [    l    ] shares of Cornerstone common stock outstanding, held by [    l    ] holders of record. Each holder of record of shares of Cornerstone common stock as of the close of business on the record date is entitled to cast one vote at the Special Meeting for each share the holder owns of record as of the close of business on the record date. Shares of Cornerstone common stock are the only securities eligible to be voted at the Special Meeting. Each share of our common stock is entitled to one vote.

 

A majority of all shares of Cornerstone’s common stock outstanding as of the close of business on the record date, represented in person or by proxy, will constitute a quorum for the transaction of business at the Special Meeting. Abstentions and broker non-votes (described below) are counted for the purpose of determining whether a quorum exists.

 

If a quorum is not present, or if fewer shares of Cornerstone’s common stock are voted in favor of the proposal to approve the Company Stock Sale at the Special Meeting than the number of shares necessary to approve the proposal, we may seek to adjourn the Special Meeting to allow additional time for obtaining additional proxies or votes.

 

The approval of the proposal to approve the Company Stock Sale requires the affirmative vote of a majority of the total votes cast on the proposal to approve the Company Stock Sale. Any proposal to adjourn the Special Meeting to solicit additional proxies will require the affirmative vote of a majority of the shares of Cornerstone common stock present in person or represented by proxy and entitled to vote at the Special Meeting, even if less than a quorum.

Brokers and nominees holding shares of record for customers are not entitled to vote on the proposal to approve the Company Stock Sale or the proposal to adjourn the meeting, if necessary, to solicit additional proxies unless they receive specific voting instructions from the beneficial owner of the shares. If a broker or nominee holding shares of record for a customer submits a properly executed proxy, but indicates that it does not have discretionary authority to vote as to a particular matter, those shares, which are referred to as broker non-votes, will be counted for purposes of determining whether a quorum exists. A broker non-vote will have no effect on the outcome of the proposal to approve the Company Stock Sale and on the outcome of the proposal to adjourn the meeting, if necessary, to solicit additional proxies.

 

An abstention occurs when a stockholder affirmatively instructs a vote to be withheld (by checking the “abstain” box on the proxy card) or when a stockholder who has not given a proxy is present at the Special Meeting but does not cast a ballot or submit a proxy card in person. An abstention will be counted for purposes of determining whether a quorum exists. An abstention will be treated as a vote cast and therefore will have the same effect as a vote against the proposal to approve the Company Stock Sale and against the proposal to adjourn the meeting, if necessary, to solicit additional proxies.

 

As of the close of business on [    l    ], 2009, the record date for the Special Meeting, the directors and executive officers of Cornerstone held and are entitled to vote, in the aggregate, [    l    ] shares of Cornerstone common stock representing approximately [    l    ]% of the outstanding shares of Cornerstone common stock. The directors and executive officers of Cornerstone have informed us that they intend to vote all of their shares of common stock FOR the approval of the Company Stock Sale.

 

The Founder Stockholders and other members of our management team that beneficially own shares of Cornerstone common stock, and only with respect to certain provisions identified therein, Cornerstone, have entered into a voting agreement with Chiesi pursuant to which the Founder Stockholders and the management stockholders have, among other things, granted Chiesi irrevocable proxies with respect to, and agreed to vote, all of their shares of Cornerstone common stock, representing approximately [    l    ]% of the outstanding shares of our common stock as of the record date, in favor of the Company Stock Sale and the approval and adoption of the Charter Amendment.

 

How to Vote.  You can vote in person or by proxy. Submitting a proxy will not affect your right to attend the Special Meeting and vote in person.

 

If your shares are registered directly in your name, you may vote or submit a proxy as follows:

 

 

If your shares are held in “street name” for your account by a bank, broker or other nominee, you may vote as follows:

 

 

How Proxies will be Voted.  All shares of common stock represented by proxies properly executed and received by us before or at the Special Meeting will be voted in accordance with the instructions indicated on the proxies. If the proxy is properly completed, signed and returned but no instructions are indicated, the shares will be voted:

 

 

Shares represented by a proxy that has been returned with instructions to vote against the proposal to approve the Company Stock Sale but which does not include instructions with respect to the adjournment proposal will not be voted in favor of the adjournment proposal.

 

Revoking Your Proxy.  If you grant a proxy in respect of your shares and then attend the Special Meeting, your attendance at the Special Meeting, or at any adjournment or postponement of the Special Meeting, will not automatically revoke your proxy. You can, however, revoke a proxy at any time prior to its exercise by:

 

 

If your shares are held in the name of a broker or nominee, you may change your vote by submitting new voting instructions to your broker or nominee.

 

Proxies may be solicited by mail, personal interview, telephone, facsimile and electronic mail by Cornerstone’s directors, officers and employees on a part-time basis and for no additional compensation. Cornerstone will bear the costs it incurs in the solicitation of proxies under this document, including amounts paid in reimbursement to banks, brokerage firms, custodians, nominees and other for their expenses in forwarding soliciting material to the beneficial owners of Cornerstone common stock.

Cornerstone has retained [    l    ]to assist it with the solicitation of proxies and to verify certain records related to the solicitations. Cornerstone has agreed to pay [    l    ] a fee not to exceed $[    l    ], plus certain expenses, for services rendered.

 

Our board of directors currently is not aware of any business to be acted upon at the Special Meeting other than as described in this document. If, however, other matters are properly brought before the Special Meeting or any adjournments or postponements of the meeting, in the absence of instructions to the contrary, persons appointed as proxies will have discretion to vote or act on those matters in their best judgment.

 

Under Delaware law, our stockholders are not entitled to appraisal rights with respect to the proposed issuance and sale of shares of our common stock to Chiesi pursuant to the Stock Purchase Agreement.

 

Some banks, brokers and other nominee record holders may be participating in the practice of “householding” proxy statements. This means that only one copy of this proxy statement may have been sent to multiple stockholders in your household. We will promptly deliver a separate copy of this proxy statement to you upon written or oral request to Cornerstone Therapeutics Inc., Attention of David Price, Executive Vice President, Finance, and Chief Financial Officer, 1255 Crescent Green Drive, Suite 250, Cary, North Carolina 27518; telephone: (888) 466-6505. If you want to receive separate copies of this proxy statement in the future, or if you are receiving multiple copies and would like to receive only one copy per household, you should contact your bank, broker or other nominee record holder, or you may contact us at the above address and phone number.

 

A key component of our business strategy focuses on our in-licensing or otherwise acquiring rights to non-promoted or underperforming, patent-protected, branded pharmaceutical products, or late stage product candidates. In implementing that component of our strategy, we routinely seek out and meet with potential partners whose products may be candidates for distribution in the U.S. Pursuant to this strategy, in early November 2008, Craig A. Collard, our President and Chief Executive Officer, telephoned one of Chiesi’s business managers for North America to discuss acquiring the U.S. rights to distribute one of Chiesi’s products. On November 24, 2008, Cornerstone and Chiesi entered into a confidentiality agreement with respect to the data for that product. In connection with Cornerstone’s evaluation of Chiesi’s product, Mr. Collard, David Price, our Executive Vice President, Finance, Chief Financial Officer, Treasurer and Secretary, Brian Dickson, M.D., our Chief Medical Officer, and Joshua Franklin, our Vice President, Sales and Marketing, met with Chiesi executives on December 3, 2008, in Parma, Italy, where the Chiesi team raised the possibility that Cornerstone might acquire the rights to distribute other Chiesi products in the U.S., including Curosurf^®. In furtherance of this possibility, on January 6, 2009, Chiesi and Cornerstone entered into a second confidentiality agreement that was broader in scope. Executives from Cornerstone and Chiesi met again on January 15 and January 22, 2009 to discuss Cornerstone acquiring rights to distribute Curosurf^® in the U.S. At the January 22 meeting, Chiesi suggested that Cornerstone and Chiesi should explore potential alliances or other forms of collaboration in the U.S., including through Chiesi’s acquisition of shares of Cornerstone’s common stock.

 

During January 2009, members of Cornerstone’s management held telephonic discussions with Chiesi to discuss a potential strategic alliance between the two companies. Chiesi continued to express an interest in acquiring shares of our common stock and suggested two structures in which the acquisition of shares of Cornerstone common stock might be accomplished: (i) a “going-private” transaction which would result in Chiesi owning 60% of the equity of Cornerstone and Cornerstone’s management owning the remainder; and (ii) the issuance and sale of a sufficient number of shares of Cornerstone common stock by Cornerstone to Chiesi which would result in Chiesi owning 60% of the outstanding shares of Cornerstone common stock.

 

On January 27, 2009, at a meeting of our board of directors, the Cornerstone management team informed our board of Chiesi’s potential interest in acquiring shares of Cornerstone common stock and described the two concepts put forth by Chiesi. After some discussion, the board determined that the management team should continue discussions with Chiesi and that Cornerstone should allow Chiesi to conduct due diligence on Cornerstone.

 

Cornerstone and Chiesi subsequently consulted with their respective legal advisors about issues raised in the discussions among their respective executives. Chiesi retained Morgan, Lewis & Bockius LLP as outside legal counsel and Cornerstone retained Clifford Chance US LLP as outside legal counsel. Together with these advisors, Cornerstone and Chiesi began considering further the potential definitive terms of a transaction.

 

Over the following two weeks, members of the management of Cornerstone and Chiesi conducted several telephone conversations regarding the terms of a possible transaction. During these conversations Chiesi expressed a preference for a transaction structure in which Chiesi would acquire shares of Cornerstone common stock directly from Cornerstone for cash plus the grant by Chiesi to Cornerstone of the exclusive rights to distribute Curosurf^® in the U.S. Chiesi also indicated that it would be willing to incentivize Cornerstone’s management team to remain at Cornerstone following the acquisition of shares of Cornerstone by Chiesi by providing them with an option to sell their shares of Cornerstone common stock to Chiesi, so long as Chiesi had a corresponding option to purchase the shares of Cornerstone common stock owned by the management team.

 

On February 9, 2009, at a meeting of Cornerstone’s board of directors, Cornerstone’s management team updated the board with respect to the discussions with Chiesi’s executives and the transaction structure preferred by Chiesi. The board authorized management to continue discussions for a potential transaction with Chiesi.

On February 12 and February 13, 2009, Cornerstone, Chiesi and their respective legal advisors met in New York, New York to negotiate the terms of a potential transaction that would involve the issuance and sale of shares of Cornerstone common stock to Chiesi. During the meetings Chiesi proposed a transaction structure which would result in Chiesi holding 60% of the outstanding shares of Cornerstone common stock. Specifically, Chiesi proposed to purchase (i) approximately 1.1 million shares of Cornerstone common stock from Mr. Collard and Mr. Lutz for $7.00 in cash per share and (ii) approximately 15.28 million shares of Cornerstone common stock directly from Cornerstone in exchange for $47 million in cash and the grant of exclusive U.S. distribution rights for Curosurf^® for 10 years. In addition, Chiesi clarified that the exercise prices of the put and call options over the shares of Cornerstone owned by the management team would be generated by a formula based on Cornerstone’s financial performance. Chiesi also put forth proposals regarding the composition of the Cornerstone board and the governance arrangements that would take effect after Chiesi became Cornerstone’s majority stockholder, which included having the right to appoint a majority of the Cornerstone board and extensive veto rights over various types of corporate transactions. Cornerstone’s representatives rejected these board composition and governance proposals and made counterproposals that subsequently formed the basis for the governance provisions described elsewhere in this proxy statement.

 

Cornerstone’s management team presented Chiesi’s revised proposal to Cornerstone’s board of directors at a meeting of the board held on February 16, 2009. At that meeting, the topics discussed by the directors included the extent to which the interests of Mr. Collard and Mr. Lutz in the proposed transaction were in conflict with the interests of Cornerstone or the other stockholders. The directors noted among other things that the $7.00 per share price proposed to be paid to Mr. Collard and Mr. Lutz was significantly higher than the price at which Cornerstone’s common stock was then trading. The directors discussed the ways in which the proposed grant of Curosurf^® rights could be valued for purposes of the transaction, and whether Cornerstone would be able to effectively deploy the large cash infusion that Chiesi was proposing. The directors also discussed the impact of the proposed transaction on the stockholders that would become minority stockholders, and discussed various kinds of structural and other protections that could be included in the transaction terms. Following its discussions, the board directed that Cornerstone’s management should continue to explore a possible transaction with Chiesi. The board also directed Cornerstone’s management team to perform diligence on Curosurf^® and to prepare additional analyses of the transaction.

 

Over the next several weeks Chiesi and its advisors continued to perform financial and legal due diligence on Cornerstone, Cornerstone’s team performed diligence on Curosurf^® and Cornerstone’s legal advisors prepared and provided to Chiesi’s legal advisors draft transaction documents. In addition, on February 26, 2009, Cornerstone’s board of directors authorized its management to retain Houlihan Lokey as Cornerstone’s financial advisor.

 

On March 31, 2009, Chiesi’s executives telephoned Cornerstone’s management team to inform them that Chiesi had substantially completed its due diligence on Cornerstone. Over the next three weeks, Cornerstone’s management team held telephonic discussions with Chiesi executives in which Chiesi proposed a revised transaction structure. Under the revised transaction structure prepared by Chiesi, Chiesi would: (i) purchase approximately 1.6 million shares of Cornerstone’s common stock from Mr. Collard and Mr. Lutz for $5.50 per share in cash and (ii) acquire approximately 11.83 million shares of Cornerstone common stock directly from Cornerstone for approximately $15.84 million in cash and a 10-year grant of the exclusive rights to distribute Curosurf^® in the U.S. Chiesi also proposed that Cornerstone’s management would be given the option to require Chiesi to purchase their shares of Cornerstone common stock in phased amounts over a period of three to four years and Chiesi would have the option to purchase the same shares over the same period. The exercise prices for these proposed put and call options would be based on Cornerstone’s financial performance in the year before exercise.

 

Over the next three weeks, Cornerstone’s and Chiesi’s legal advisors negotiated definitive transaction documents incorporating the revised transaction structure.

 

On April 22 and April 23, 2009, representatives of Cornerstone and Chiesi and their respective legal advisors met in New York, New York to negotiate the structure of the transaction and the various corporate governance provisions contemplated by the latest drafts of the transaction documents. The parties agreed on a transaction structure similar to the one proposed by Chiesi on March 31. In the new structure, however, the

put and call options over shares owned by Cornerstone’s management were eliminated. Instead, Chiesi proposed that the Cornerstone shares owned by Mr. Collard and Mr. Lutz and the Cornerstone shares owned by the entities controlled by them would be subject to restrictions on transfer and Chiesi would have a call option over those shares at $12.00 per share in cash, exercisable after approximately two years after the closing of the transaction. Chiesi also proposed that the shares owned by the other members of Cornerstone’s management team be subject to restrictions on transfer. Following these meetings, there remained several material open issues with respect to corporate governance and certain terms of the Stock Purchase Agreement, including proposed termination fees.

 

Over the week of April 27, 2009, Cornerstone and Chiesi and their respective legal advisors held a series of conference calls to review and negotiate the terms of the Stock Purchase Agreement and the other related agreements. The topics discussed included representations and warranties, closing conditions, the circumstances under which the termination fee would be payable and under what circumstances Cornerstone would be entitled to terminate the Stock Purchase Agreement to accept a superior proposal.

 

On May 3, 2009, Cornerstone’s board of directors held a telephonic meeting during which Cornerstone’s negotiating team updated the board on the status of the proposed transaction. Our directors indicated that the changes in the terms being proposed from those initially presented by Chiesi in February were generally favorable from their perspective. First, the reduction in the price per share proposed to be paid to Mr. Collard and Mr. Lutz for their shares, from $7.00 to $5.50, had resulted in a price that was close to prices at which Cornerstone’s shares recently had traded. Indeed, it now seemed likely that those share sales could be at a discount to market. This substantially addressed the directors’ concerns about the fairness of this aspect of the transaction. Second, the reduction in the size of the cash infusion now proposed to be made by Chiesi helped address concerns that it might be difficult to productively invest the cash in a timely manner. Third, the reduction in Chiesi’s proposed initial ownership position, from 60% to 51%, meant that current stockholders were undergoing lesser dilution of their position. Finally, the corporate governance provisions that had been negotiated appeared to provide some helpful protections for the minority stockholders after the closing of the proposed transaction. The board members told management they continued to believe that the proposed transaction, if it could be implemented, potentially offered significant strategic and financial benefits to Cornerstone. Those benefits are described below under “— Reasons for the Transaction.” The directors noted that the proposed transaction should help Cornerstone achieve its objective of improving what some stock analysts might refer to as its quality of earnings. This was because the revenues and earnings that could be expected from Curosurf^® were likely to be consistent, and to grow over time, and reasonably could be expected to last for the 10-year term of the proposed license. This was in contrast to some of Cornerstone’s other revenue sources, which may be more variable and seasonal in nature. In the opinion of the directors, an improvement in Cornerstone’s quality of earnings should enhance the value of Cornerstone and make shares of Cornerstone common stock a more attractive investment. The members of Cornerstone’s board also noted that it could be difficult for Cornerstone to acquire a valuable product such as Curosurf^® for cash, because in order to fund such a purchase, Cornerstone would have to sell a large number of its shares. In the present volatile market conditions, it was not clear that such a stock sale could be completed, and, even if the markets were to be receptive to such an offering by Cornerstone, it seemed likely that the Company’s share price would suffer from the presence of such a large supply of shares. The proposed transaction with Chiesi, then, effectively accomplished in one transaction what would have been difficult to accomplish in two (a cash purchase and a funding transaction to finance the purchase). While the directors recognized that the proposed transaction involved a transfer of control to Chiesi that presumably would not occur in a public offering of Cornerstone’s stock, the likelihood of success in the proposed transaction was much higher than in the alternative transaction structure. Furthermore, in previous discussions, Chiesi had made clear that a strategic relationship with Cornerstone was important to it, and it was unlikely that Chiesi would entertain a proposal for a cash purchase of Curosurf^®, contingent on Cornerstone completing the necessary financing.

 

Throughout May 4 and May 5, 2009, the parties continued negotiations and the parties’ legal advisors worked to finalize the Stock Purchase Agreement and the related agreements. On May 6, 2009, Cornerstone’s board of directors met to discuss the proposed transaction. At that board meeting, Houlihan Lokey rendered its oral opinion, subsequently confirmed in writing, with respect to the fairness, from a financial point of view, of

the consideration to be received by Cornerstone pursuant to the Stock Purchase Agreement, as of May 6, 2009 (based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion) (see “— Opinion of Our Financial Advisor” below).

 

Cornerstone’s board of directors reconvened later on May 6, 2009 and at the reconvened meeting Clifford Chance reviewed for the board the key terms relating to the Stock Purchase Agreement and the related agreements. Following the presentation, the directors addressed questions to, and discussed the proposed transaction with, members of Cornerstone’s management and Cornerstone’s legal advisors. After extensive discussions, the Cornerstone board determined that the transactions contemplated by the Stock Purchase Agreement and the related transactions and agreements were in the best interests of Cornerstone and its stockholders, and the directors voted to approve the Stock Purchase Agreement and the related transactions and agreements and to recommend to our stockholders that they approve the Company Stock Sale and, subsequently, the Charter Amendment.

 

After the meetings of the Cornerstone board adjourned on May 6, 2009, the definitive documentation for the transaction was finalized and the Stock Purchase Agreement and the related agreements were executed.

 

The transaction was announced prior to the opening of trading on the NASDAQ Capital Market on the morning of May 7, 2009.

 

Our board of directors consulted with our senior management team and with our financial and legal advisors and considered a number of factors in reaching its decision to approve the issuance and sale of shares of our common stock to Chiesi pursuant to the Stock Purchase Agreement and in determining to recommend that our stockholders vote FOR the approval of the Company Stock Sale. Those factors included (but were not limited to) the following:

 

 

 

The foregoing discussion of the information and factors considered by our board of directors, while not exhaustive, includes the material factors considered by our board of directors in determining whether to approve the Stock Purchase Agreement and recommend approval of the Company Stock Sale to our stockholders. In view of the variety of factors considered in connection with its evaluation of the Stock

Purchase Agreement and the related transactions and agreements, our board of directors did not find it practicable to, and did not, quantify, rank or otherwise assign relative or specific weight or values to any of these factors, and individual directors may have given different weights to different factors. Our board of directors considered all of the factors as a whole and considered the factors in their totality to be favorable to and supportive of its decision.

 

The foregoing discussion of our board of directors’ considerations relating to the Company Stock Sale is forward-looking in nature. This information should be read in light of the discussions under the heading “Special Note Regarding Forward Looking Statements” in this proxy statement.

 

OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF CORNERSTONE’S ISSUANCE AND SALE OF SHARES TO CHIESI PURSUANT TO THE STOCK PURCHASE AGREEMENT.

 

On May 6, 2009, Houlihan Lokey rendered an oral opinion to our board of directors (which was subsequently confirmed in writing by delivery of Houlihan Lokey’s written opinion dated May 6, 2009), to the effect that, as of May 6, 2009 and based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion, the consideration to be received by Cornerstone pursuant to the Stock Purchase Agreement (the “Chiesi Investment Consideration”), was fair, from a financial point of view, to Cornerstone.

 

Houlihan Lokey’s opinion was directed to our board of directors and only addressed the fairness from a financial point of view of the Chiesi Investment Consideration and did not address any other aspect or implication of the transaction or any related transaction. The summary of Houlihan Lokey’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex D to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion. We encourage our stockholders to carefully read the full text of Houlihan Lokey’s written opinion. Neither Houlihan Lokey’s opinion nor the summary of the Houlihan Lokey’s opinion and the related analyses set forth in this proxy statement were intended to be, and did not, constitute advice or a recommendation to our board of directors or any stockholder as to how to act or vote with respect to the transaction, the related transactions or related matters.

 

In arriving at its opinion, among other things, Houlihan Lokey:

 

 

 

 

 

Houlihan Lokey relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information furnished, or otherwise made available, to it, discussed with or reviewed by it, or publicly available, and did not assume any responsibility with respect to that data, material and other information. In addition, management of Cornerstone advised Houlihan Lokey, and Houlihan Lokey assumed, that the financial projections reviewed by it had been reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of management of Cornerstone as to the future financial results and condition of Cornerstone and the U.S. Curosurf^® rights, and Houlihan Lokey expressed no opinion with respect to the financial projections or the assumptions on which they were based. As Cornerstone was aware, Houlihan Lokey was not an expert in the design, manufacture, marketing, suitability, financial performance or profitability of pharmaceutical and related products or obtaining applicable regulatory and other approvals in connection therewith and, consequently, with our consent, Houlihan Lokey relied on the views of Cornerstone’s and Chiesi’s management with respect to all those matters. Houlihan Lokey relied, without independent verification, on the accuracy and completeness of all information that was publicly available and of all information furnished by or on behalf of Cornerstone or any other potential party to the transaction or any related transaction or otherwise reviewed by Houlihan Lokey. Cornerstone understood and agreed that Houlihan Lokey would not be responsible for the accuracy or completeness of that information, and would not be liable for any inaccuracies or omissions therein. For purposes of its opinion, Houlihan Lokey evaluated the fairness from a financial point of view to Cornerstone of the Chiesi Investment Consideration to be received by Cornerstone pursuant to the Stock Purchase Agreement based on a review of the ranges of values for the approximately 12 million shares of Cornerstone common stock to be issued to Chiesi (the “New Shares”) and U.S. Curosurf^® rights plus the cash investment of approximately $16 million indicated by Houlihan Lokey’s financial analyses based on the financial projections and other information provided to Houlihan Lokey by Cornerstone and Chiesi, respectively, with respect to Cornerstone and the U.S. Curosurf^® rights, which Houlihan Lokey assumed were reasonably prepared and reflected the best estimates and judgments of the managements of Cornerstone with respect to the future financial performance of Cornerstone and the U.S. Curosurf^® rights. Houlihan Lokey relied upon and assumed, without independent verification, that there had been no material change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of Cornerstone or the U.S. Curosurf^® rights since the date of the most recent financial statements provided to it, and that there was no information or any facts that would make any of the information reviewed by it incomplete or misleading. Houlihan Lokey did not consider any aspect or implication of any transaction to which Cornerstone or Chiesi may be a party (other than as specifically described in Houlihan Lokey’s opinion with respect to the Company Stock Sale).

 

Houlihan Lokey relied upon and assumed, without independent verification, that (i) the representations and warranties of all parties to the agreements identified in the first bullet point above and all other related documents and instruments that are referred to therein were true and correct, (ii) each party to those agreements and certain other related documents and instruments would fully and timely perform all of the covenants and agreements required to be performed by that party, (iii) all conditions to the consummation of the transaction and the related transactions would be satisfied without waiver thereof, and (iv) the transaction

and the related transactions would be consummated in a timely manner in accordance with the terms described in the agreements and documents provided to Houlihan Lokey, without any amendments or modifications thereto. Houlihan Lokey also relied upon and assumed, without independent verification, that the transaction and the related transactions would be consummated in a manner that complies in all respects with all applicable international, federal and state statutes, rules and regulations, and that all governmental, regulatory, and other consents and approvals necessary for the consummation of the transaction and the related transactions would be obtained and that no delay, limitations, restrictions or conditions would be imposed or amendments, modifications or waivers made that would result in the disposition of any material portion of the assets of Cornerstone, or otherwise have an adverse effect on Cornerstone or the U.S. Curosurf^® rights or any expected benefits of the transaction or the related transactions. In addition, Houlihan Lokey relied upon and assumed, without independent verification, that the final forms of any draft documents identified above would not differ in any respect from the drafts of those documents.

 

Furthermore, in connection with its opinion, Houlihan Lokey was not requested to make, and did not make, any physical inspection or independent appraisal or evaluation of any of the assets, properties or liabilities (fixed, contingent, derivative, off-balance-sheet or otherwise) of Cornerstone, Chiesi or any other party, nor was Houlihan Lokey provided with any appraisal or evaluation. Houlihan Lokey did not estimate, and expressed no opinion regarding, the liquidation value of any entity. Houlihan Lokey undertook no independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which Cornerstone or Chiesi was or may become a party or was or may become subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which Cornerstone or Chiesi was or may become a party or was or may become subject.

 

Houlihan Lokey was not requested to, and did not, (i) initiate or participate in any discussions or negotiations with, or solicit any indications of interest from, third parties with respect to all or any portion of the transaction or any related transaction, the assets, businesses or operations of Cornerstone or any other party, or any alternatives to all or any portion of the transaction or any related transaction, (ii) negotiate the terms of all or any portion of the transaction or any related transaction, or (iii) advise our board of directors or any other party with respect to alternatives to all or any portion of the transaction or any related transaction. Houlihan Lokey’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Houlihan Lokey as of, the date of its opinion. Houlihan Lokey did not undertake, and was under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring after the date of its opinion. Houlihan Lokey did not express any opinion as to what the value of the New Shares actually would be when issued pursuant to the Company Stock Sale or the price or range of prices at which the New Shares may be purchased or sold at any time.

 

Houlihan Lokey’s opinion was furnished for the use and benefit of our board of directors in connection with its consideration of the Company Stock Sale and may not be used for any other purpose without Houlihan Lokey’s prior written consent. Houlihan Lokey’s opinion should not be construed as creating any fiduciary duty on Houlihan Lokey’s part to any party. Houlihan Lokey’s opinion was not intended to be, and did not constitute, a recommendation to our board of directors, any security holder or any other person as to how to act or vote with respect to any matter relating to the transaction or any related transaction.

 

Houlihan Lokey was not requested to opine as to, and its opinion did not express an opinion as to or otherwise address, among other things: (i) the underlying business decision of Cornerstone, Chiesi, their respective security holders or any other party to proceed with or effect all or any portion of the transaction or any related transaction, (ii) the terms of any arrangements, understandings, agreements or documents related to, or the form or any other portion or aspect of, all or any portion of the transaction, any related transaction or otherwise (other than the Chiesi Investment Consideration to the extent expressly specified therein), (iii) the fairness of any portion or aspect of the transaction or any related transaction to the holders of any class of securities, creditors or other constituencies of Cornerstone or Chiesi, or to any other party, except as set forth in its opinion, (iv) the relative merits of all or any portion of the transaction or any related transaction as compared to any alternative business strategies that might exist for Cornerstone, Chiesi or any other party or the effect of any other transaction in which Cornerstone, Chiesi or any other party might engage, (v) the

fairness of any portion or aspect of the transaction or any related transaction to any one class or group of Cornerstone’s or any other party’s security holders vis-à-vis any other class or group of Cornerstone’s or any other party’s security holders (including, without limitation, the allocation of any consideration amongst or within any classes or groups of security holders), (vi) whether or not Cornerstone, Chiesi, their respective security holders or any other party was receiving or paying reasonably equivalent value in the transaction or any related transaction, (vii) the solvency, creditworthiness or fair value of Cornerstone, Chiesi or any other participant in the transaction or any related transaction under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters, or (viii) the fairness, financial or otherwise, of the amount or nature of any compensation to or consideration payable to or received by any officers, directors or employees of any party to the transaction or any related transaction, any class of those persons or any other party, relative to the Chiesi Investment Consideration or otherwise. Furthermore, no opinion, counsel or interpretation was intended in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. Houlihan Lokey assumed that those opinions, counsel or interpretations had been or would be obtained from the appropriate professional sources. Furthermore, Houlihan Lokey relied, with our consent, on the assessment by Cornerstone and our advisers, as to all legal, regulatory, accounting, insurance and tax matters with respect to Cornerstone, the U.S. Curosurf^® rights and the transaction or any related transaction.

 

In preparing its opinion to our board of directors, Houlihan Lokey performed a variety of analyses, including those described below. The summary of Houlihan Lokey’s analyses is not a complete description of the analyses underlying its opinion. The preparation of a fairness opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytical methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. As a consequence, neither a fairness opinion nor its underlying analyses is readily susceptible to summary description. Houlihan Lokey arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, methodology or factor. Accordingly, Houlihan Lokey believes that its analyses and the following summary must be considered as a whole and that selecting portions of its analyses, methodologies and factors or focusing on information presented in tabular format, without considering all analyses, methodologies and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying Houlihan Lokey’s analyses and its opinion. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques.

 

In performing its analyses, Houlihan Lokey considered general business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. Houlihan Lokey’s analyses involved judgments and assumptions with regard to industry performance, general business, economic, regulatory, market and financial conditions and other matters, many of which are beyond the control of Cornerstone, such as the impact of competition on the business of Cornerstone and on the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of Cornerstone or the industry or in the markets generally. No company, transaction or business used in Houlihan Lokey’s analyses for comparative purposes is identical to Cornerstone or the proposed Company Stock Sale and an evaluation of the results of those analyses is not entirely mathematical. Houlihan Lokey believes that mathematical derivations (such as determining average and median) of financial data are not by themselves meaningful and should be considered together with qualities, judgments and informed assumptions. The estimates contained in Cornerstone’s analyses and the implied reference range values indicated by Houlihan Lokey’s analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond the control of Cornerstone. Much of the information used in, and accordingly the results of, Houlihan Lokey’s analyses are inherently subject to substantial uncertainty.

Houlihan Lokey’s opinion was provided to our board of directors in connection with its consideration of the proposed Company Stock Sale and was only one of many factors considered by our board of directors in evaluating the proposed Company Stock Sale. Neither its opinion nor Houlihan Lokey’s analyses were determinative of the consideration in the Company Stock Sale or of the views of our board of directors or management with respect to the Company Stock Sale or the consideration in the Company Stock Sale. The type and amount of consideration payable in the Company Stock Sale were determined through negotiation between Cornerstone and Chiesi, and the decision to enter into the Company Stock Sale was solely that of our board of directors.

 

The following is a summary of the material analyses reviewed by Houlihan Lokey with our board of directors in connection with Houlihan Lokey’s opinion rendered on May 6, 2009. The order of the analyses does not represent relative importance or weight given to those analyses by Houlihan Lokey. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying, and the assumptions, qualifications and limitations affecting, each analysis, could create a misleading or incomplete view of Houlihan Lokey’s analyses.

 

For purposes of its analyses, Houlihan Lokey reviewed a number of financial and operating metrics, including:

 

 

Unless the context indicates otherwise, enterprise values and equity values derived from the selected companies analysis described below were calculated using the closing price of our common stock and the common stock of the selected pharmaceutical companies listed below as of May 4, 2009, transaction values for the target companies derived from the selected transactions analysis described below were calculated as of the announcement date of the relevant transaction based on the estimated purchase prices paid in the selected transactions, and the estimated purchase prices paid in the selected product acquisitions listed below were calculated as of the announcement date of the relevant acquisition. Accordingly, this information may not reflect current or future market conditions. Estimates of 2009, 2010 and 2011 Revenue and EBITDA for Cornerstone were based on estimates provided by our management, and an estimate of 2008 Revenue associated with the U.S. Curosurf^® rights was based on an estimate provided by Chiesi. Estimates of 2009, 2010 and 2011 Revenue and EBITDA for the selected pharmaceutical companies listed below were based on certain publicly available research analyst estimates for those pharmaceutical companies.

 

Analysis of the U.S. Curosurf^® Rights

 

Selected Product Acquisition Analysis for the U.S. Curosurf^® Rights.  Houlihan Lokey calculated multiples of revenue based on the estimated purchase prices paid in the following selected publicly-announced pharmaceutical product acquisitions:

 

 

The selected product acquisition analysis indicated a revenue multiple range of 0.50x to 4.93x. Houlihan Lokey applied a selected multiple range derived from the selected product acquisitions to corresponding financial data for the U.S. Curosurf^® rights.

 

Discounted Cash Flow Analysis for the U.S. Curosurf^® Rights.  Houlihan Lokey also calculated the net present value of the ten year unlevered, after-tax cash flows associated with the U.S. Curosurf^® rights based on estimates provided by Cornerstone’s management. In performing this analysis, Houlihan Lokey used discount rates ranging from 11% to 15%.

 

Analysis of Cornerstone

 

Selected Companies Analysis for Cornerstone.  Houlihan Lokey calculated multiples of enterprise value based on certain financial data for Cornerstone and the following selected pharmaceutical companies:

 

 

 

The calculated multiples included:

 

 

The selected companies analysis indicated the following:

 

 

Houlihan Lokey applied a selected multiple range derived from the selected companies to corresponding financial data for Cornerstone.

 

Selected Transactions Analysis for Cornerstone.  Houlihan Lokey calculated multiples of enterprise value based on the estimated purchase prices paid in the following selected publicly-announced pharmaceutical transactions:

 

 

The calculated multiples included:

 

 

The selected transactions analysis indicated the following:

 

 

Houlihan Lokey applied a selected multiple range derived from the selected transactions to corresponding financial data for Cornerstone.

 

Discounted Cash Flow Analysis for Cornerstone.  Houlihan Lokey also calculated the net present value of Cornerstone’s unlevered, after-tax cash flows based on estimates provided by Cornerstone’s management. In performing this analysis, Houlihan Lokey used discount rates ranging from 15% to 19% taking into account Cornerstone’s estimated weighted average cost of capital and terminal value multiple ranges of 0.9x to 1.0x Revenue and 4.5x to 5.5x EBITDA, which were selected taking into account the selected companies analyses.

 

Other Matters

 

Houlihan Lokey was engaged by Cornerstone to provide an opinion to our board of directors regarding the fairness from a financial point of view of the Chiesi Investment Consideration. We engaged Houlihan Lokey based on Houlihan Lokey’s experience and reputation. Houlihan Lokey is regularly engaged to render financial opinions in connection with mergers, acquisitions, divestitures, leveraged buyouts, recapitalizations, and for other purposes. Pursuant to the engagement letter, Cornerstone has agreed to pay Houlihan Lokey a customary fee for its services, a portion of which became payable upon the execution of Houlihan Lokey’s engagement letter and the balance of which became payable upon the delivery of Houlihan Lokey’s opinion, regardless of the conclusion reached therein. No portion of Houlihan Lokey’s fee was contingent upon the successful completion of the transaction or the related transactions. Cornerstone has also agreed to reimburse Houlihan Lokey for certain expenses and to indemnify Houlihan Lokey, its affiliates and certain related parties against certain liabilities and expenses, including certain liabilities under the federal securities laws arising out of or relating to Houlihan Lokey’s engagement.

 

In the ordinary course of business, certain of Houlihan Lokey’s affiliates, as well as investment funds in which they may have financial interests, may acquire, hold or sell, long or short positions, or trade or otherwise effect transactions, in debt, equity, and other securities and financial instruments (including loans and other obligations) of, or investments in, Cornerstone, Chiesi, or any other party that may be involved in the transaction or any related transaction and their respective affiliates or any currency or commodity that may be involved in the transaction or any related transaction.

 

Houlihan Lokey and certain of its affiliates may provide investment banking, financial advisory and other financial services to Cornerstone, Chiesi and other participants in the transaction and the related transactions and certain of their respective affiliates in the future, for which Houlihan Lokey and certain of its affiliates may receive compensation.

 

In connection with the Stock Purchase Agreement, Cornerstone, Chiesi and, solely with respect certain sections identified therein, the Founder Stockholders, entered into a Governance Agreement, dated as of May 6,

2009. The Governance Agreement contains certain governance provisions and majority stockholder and minority stockholder protections. The Governance Agreement will become effective following the closing of the Company Stock Sale and continue in effect for 24 months following the closing of the Company Stock Sale (the “Blackout Period”), subject to earlier termination as set forth in the Governance Agreement. Also, in connection with the Stock Purchase Agreement, Cornerstone, Chiesi and the Founder Stockholders entered into a Stockholders Agreement dated as of May 6, 2009. The Stockholders Agreement will become effective following the closing of the Company Stock Sale and (i) restricts the Founder Stockholders from transferring a certain number of shares of Cornerstone common stock owned by them and from acquiring additional shares of Cornerstone common stock for a specified period, (ii) provides Chiesi with the right to require the Founder Stockholders to sell those shares of Cornerstone common stock that may not be transferred for $12.00 per share in cash and (iii) requires the Founder Stockholders to vote the shares of Cornerstone common stock owned by them in the manner specified in the Stockholders Agreement. Following is a summary of certain of the governance arrangements and protective provisions we agreed to in the Governance Agreement, the Stockholders Agreement and related agreements in connection with the Company Stock Sale.

 

Board Composition

 

 

 

 

 

We also agreed to submit for our stockholders’ approval, after the closing of the Company Stock Sale, an amendment to our certificate of incorporation that will, among other things, provide that for so long as Chiesi and its affiliates beneficially own at least 40% of our outstanding shares of common stock on a fully diluted basis (as defined in the Charter Amendment), the directors designated by Chiesi, as a class, will have equal voting power with the other directors, as a class.

 

Limitations on Additional Acquisitions of Shares of Cornerstone Common Stock by Chiesi

 

Chiesi agrees that it will not, directly or indirectly, purchase or otherwise acquire, or propose or offer to purchase or acquire, any shares of our common stock except through acquisitions pursuant to:

 

 

Limitations on Transfer of Shares of Cornerstone Common Stock by Chiesi

 

Chiesi agrees that it and its affiliates will not directly or indirectly:

 

 

Standstill Obligations Undertaken by Chiesi

 

Chiesi agrees that neither it nor its affiliates will directly or indirectly (other than pursuant to the voting agreement entered into in connection with the Stock Purchase Agreement):

 

 

 

Interested Transactions

 

Any future material contract or transaction between Chiesi and Cornerstone will require the approval of our independent directors.

 

Limitations on Transfer of Shares of Cornerstone Common Stock by the Founder Stockholders

 

Within two years of the closing of the Company Stock Sale, each Founder Stockholder has agreed that such Founder Stockholder will not:

 

 

Any transfer or purported transfer in violation of these restrictions will be void and ineffectual, and will not be recognized by Cornerstone. After two years of the closing of the Company Stock Sale, there will be no further share transfer restrictions.

 

Limitations on Additional Acquisitions of Shares of Cornerstone Common Stock by the Founder Stockholders

 

For a period of two years after the closing of the Company Stock Sale, each Founder Stockholder agrees that such Founder Stockholder will not, directly or indirectly, acquire or offer to acquire any shares or beneficial ownership of Cornerstone common stock, except through acquisitions of shares:

 

 

Chiesi’s Call Option on the Founder Stockholders’ Shares

 

Chiesi has the option, exercisable in whole but not in part on a single occasion during the 30 days beginning on the earlier of the date on which the share transfer restrictions lapse, two years after the closing of the Company Stock Sale, or the date following the termination under certain circumstances of specified Cornerstone executives’ employment, to acquire all the Founder Stockholders’ shares that are subject to

restrictions on transfer for $12.00 per share in cash, subject to adjustment for any stock split, stock dividend, reverse stock split or similar adjustment occurring after the date of the Stockholders Agreement.

 

Agreement to Vote

 

Each Founder Stockholder agrees that, at any meeting of Cornerstone stockholders called to consider a transaction in which Chiesi or its affiliate will acquire all the outstanding capital stock of Cornerstone, such Founder Stockholder will vote all shares of common stock owned by such Founder Stockholder at the applicable record date in the same proportions that the shares of common stock owned by the other stockholders (other than Chiesi and its affiliates) are voted on such matter. These obligations of the Founder Stockholders will apply only if (i) a majority of Cornerstone’s directors who were not nominated by, and are otherwise independent of, Chiesi and its affiliates (other than Cornerstone) has approved the transaction to be voted on at the meeting, and has recommended that Cornerstone’s stockholders vote to approve the transaction, and (ii) such approval and recommendation has not been withdrawn.

 

Amended Bylaws

 

It is a condition to the closing of the Company Stock Sale that we adopt amended and restated bylaws (the “Amended Bylaws”) in the form attached to the Stock Purchase Agreement as Exhibit G. Adoption of the Amended Bylaws requires the approval of Cornerstone’s board of directors, and does not require stockholder approval. Following is a summary of the certain of the provisions to be included in the Amended Bylaws.

 

Actions Subject to Approval by the Cornerstone Board

 

The Amended Bylaws will provide that so long as Chiesi beneficially owns shares of our common stock constituting at least 50% of all outstanding shares of our common Stock on a fully diluted basis (as defined in the Amended Bylaws), the following are subject to approval by the Cornerstone board:

 

 

Executive Compensation

 

The Amended Bylaws also provide that all matters relating to executive compensation will require the approval of the Cornerstone compensation committee and the ratification of the Cornerstone board.

 

Please see the section entitled “The Amended Bylaws,” beginning on page 63 of this proxy statement for a more detailed summary of the Amended Bylaws.

 

In connection with the Governance Agreement, we have agreed to, subject to the approval and adoption by our stockholders, amend our certificate of incorporation to implement additional majority stockholder protections. The material provisions of the Charter Amendment are described below. They will not become effective unless our stockholders approve the Charter Amendment.

Charter Amendment — Actions Requiring Approval of Chiesi

 

When the Charter Amendment is implemented, our amended certificate of incorporation will provide, among other things, that so long as Chiesi and its affiliates beneficially own Cornerstone common stock constituting not less than 40% of all outstanding common stock on a fully diluted basis (as defined in the Charter Amendment), Chiesi’s approval will be required for:

 

 

Charter Amendment — Corporate Opportunities

 

When the Charter Amendment is implemented, our amended certificate of incorporation will provide, among other things, that for so long as Chiesi and its affiliates collectively beneficially own Cornerstone common stock representing not less than 50% of all outstanding common stock on a fully diluted basis (as defined in the Charter Amendment):

 

 

Charter Amendment — Other Provisions

 

When the Charter Amendment is implemented, our amended certificate of incorporation will, among other things:

 

 

These changes generally will make it easier for Chiesi to exercise its rights as a stockholder of Cornerstone.

 

As described in the section entitled “The Special Meeting,” beginning on page 11 of this proxy statement, if our stockholders approve the Company Stock Sale, we will hold another special meeting of our stockholders to approve the Charter Amendment. You will receive separate proxy materials for the special

meeting of Cornerstone stockholders where the proposal to approve and adopt the Charter Amendment will be considered. The full text of the Charter Amendment appears at Exhibit F to the Stock Purchase Agreement.

 

 

In considering the recommendation of our board of directors with respect to the proposal to approve the Company Stock Sale, our stockholders should be aware that some of our directors and executive officers have personal interests in the Company Stock Sale that are, or may be, different from, or in addition to, your interests. Our board of directors was aware of the interests described below and considered them, among other matters, when approving the Company Stock Sale and recommending that our stockholders vote to approve the Company Stock Sale. Except as described below, to our knowledge our directors and executive officers have no material interest in the Company Stock Sale that differs from our stockholders’ interests generally.

 

As of [    l    ], 2009, the record date, approximately [    l    ]% of the issued and outstanding shares of our common stock was held by directors and executive officers of Cornerstone and their affiliates.

 

Sale of Shares of Cornerstone Common Stock by Entities Controlled by Craig A. Collard and Steven M. Lutz

 

Concurrently with the execution and delivery of the Stock Purchase Agreement, Chiesi, Cornerstone Biopharma Holdings, Ltd., an entity controlled by Craig A. Collard, Cornerstone’s President and Chief Executive Officer, and Lutz Family Limited Partnership, an entity controlled by Steven M. Lutz, Cornerstone’s Executive Vice President, Manufacturing and Trade, agreed, among other things, to sell to Chiesi 1.6 million shares of Cornerstone common stock. The closing of this sale of shares is conditioned upon the concurrent closing of the Company Stock Sale.

 

Stockholders Agreement

 

The Founder Stockholders are party to the Stockholders Agreement with Chiesi pursuant to which Chiesi may require the Founder Stockholders sell their remaining shares of Cornerstone common stock owned that are covered by the Stockholders Agreement for a per share price of $12.00 in cash exercisable after two years after the closing of the Company Stock Sale. Please see the section entitled “The Stockholders Agreement,” beginning on page 56 of this proxy statement, for a more detailed summary of the Stockholders Agreement.

 

Employment Agreements with Executive Officers

 

We have entered into new employment agreements that will become effective upon the closing of the Company Stock Sale with the following executive officers of Cornerstone: Mr. Collard, Mr. Lutz, Brian Dickson, M.D., Cornerstone’s Chief Medical Officer, David Price, Cornerstone’s Executive Vice President, Finance, Chief Financial Officer, Treasurer and Secretary, Joshua Franklin, Cornerstone’s Vice President, Sales and Marketing, and Alan Roberts, Cornerstone’s Vice President, Scientific Affairs. Some of these employment agreements provide for the grant of options to purchase shares of our common stock to the relevant executive officer. Please see the section entitled “The Employment Agreements,” beginning on page 61 of this proxy statement, for a more detailed summary of the employment agreements.

 

Acceleration of Stock Options and Restricted Stock

 

Several executive officers of Cornerstone are party to an employee duties agreement which provides for all unvested options to purchase shares of our common stock and restricted shares of our common stock granted to the employee party to such an agreement to immediately vest following the closing of the Company Stock Sale.

 

The executive officers identified in the following table will benefit from the acceleration of the vesting of and exercisability of their stock options. The information contained in the table is as of May 28, 2009. Each

of the executive officers named below have agreed to restrictions during the two-year period following the closing of the Company Stock Sale on their ability to sell shares of Cornerstone common stock.

 

 

The following discussion is a summary of U.S. federal income tax considerations relating to the Company Stock Sale. This summary is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder, administrative pronouncements and judicial decisions, all in effect as of the date of this proxy statement and all subject to change, possibly with retroactive effect. This summary does not address consequences of the transactions under state, local and foreign tax laws.

 

The Company Stock Sale will not result in taxable income or gain for the stockholders that own shares of Cornerstone prior to the transactions. In addition, Cornerstone’s entry into the applicable agreements with Chiesi and the Company Stock Sale will not result in taxable income or gain for Cornerstone.

 

Cornerstone and Chiesi intend to treat the consideration provided by Cornerstone to Chiesi under the agreements between the parties as not subject to U.S. federal withholding tax. Cornerstone and Chiesi have not sought a ruling from the Internal Revenue Service (the “IRS”) on this point, however, and it is conceivable that the IRS or a court could disagree with this treatment (in which case such consideration would generally be subjected to U.S. federal withholding tax at rates up to 10%, assuming the tax treaty between Italy and the U.S. applies, plus any applicable interest or penalties).

 

As a result of the Company Stock Sale and the sale of shares of our common stock to Chiesi by certain of the Founder Stockholders, Cornerstone will undergo an “ownership change” within the meaning of Sections 382 and 383 of the Code. In general terms, an ownership change results from transactions increasing the ownership of one or more stockholders in the stock of a corporation by more than 50 percentage points over a period of three years or less. Sections 382 and 383 of the Code impose limitations on a corporation’s ability to utilize its net operating loss carryforwards (“NOLs”), and tax credits if it experiences an ownership change. As of December 31, 2008, Cornerstone had approximately $162.2 million of NOLs, $154.0 million of state net economic loss carryforwards (“NELs”), and $1.9 million of federal tax credits. However, as a result of Cornerstone’s merger with Critical Therapeutics, Inc. during 2008, Cornerstone’s ability to use such NOLs and tax credits is already subject to limitations under Sections 382 and 383 of the Code. As a consequence of those limitations, Cornerstone recorded a full valuation allowance in respect of all of its NOLs, NELs and tax credits in its December 31, 2008 audited financial statements.

 

Under the HSR Act and the rules and regulations promulgated under that legislation, Cornerstone and Chiesi cannot complete the Company Stock Sale until we and Chiesi notify and furnish information to the FTC and the Antitrust Division and specified waiting period requirements have been satisfied. Cornerstone and Chiesi filed notification and report forms under the HSR Act with the FTC and the Antitrust Division on [    l    ], 2009, and [    l    ], 2009, respectively.

 

We are seeking stockholder approval of the Company Stock Sale in accordance with the NASDAQ Listing Rules. These rules are applicable to us because our common stock is listed on the NASDAQ Capital Market.

 

The issuance and sale of shares of our common stock to Chiesi pursuant to the Stock Purchase Agreement will have a dilutive effect on our existing stockholders’ percentage ownership interest and voting power in Cornerstone. The issuance and sale of shares of our common stock to Chiesi will result in Chiesi holding approximately 51% of the outstanding shares of our common stock on a fully diluted basis. Through its ownership of our common stock, and the provisions of the Governance Agreement, the Amended Bylaws and, after the Charter Amendment is adopted, our amended certificate of incorporation, Chiesi will have significant influence over all of our significant corporate actions.

 

The following table sets forth the dilutive effect on the beneficial ownership of the existing stockholders of Cornerstone upon the closing of the transaction with Chiesi. The information contained in the table is as of [    l    ], 2009.

 

 

 

 

If we do not obtain stockholder approval as described in this proxy statement, we will not complete the Company Stock Sale because doing so would not be in compliance with the NASDAQ Listing Rules, and such non-compliance could result in the delisting of our common stock from the NASDAQ Capital Market.

 

In addition, if we do not obtain stockholder approval of the Company Stock Sale and do not complete the Company Stock Sale, we will not receive the cash injection contemplated by Stock Purchase Agreement and Chiesi will be entitled to terminate the grant of exclusive rights to distribute Chiesi’s Curosurf^® treatment. Because completion of the Company Stock Sale is a condition to effectiveness of the other agreements we and certain related parties entered into in connection with the Stock Purchase Agreement, those agreements will terminate. Finally, if we do not obtain stockholder approval of the Company Stock Sale, we will not hold a second special meeting of the stockholders of Cornerstone to approve amendments to our certificate of incorporation as contemplated by the Stock Purchase Agreement.

Even if our stockholders approve the Company Stock Sale, it is possible that the transaction might not be completed. The Stock Purchase Agreement contains certain closing conditions which Chiesi and Cornerstone must satisfy or waive before the parties are obligated to consummate the issuance and sale of our common stock pursuant to the Stock Purchase Agreement.

 

The cash proceeds from the Company Stock Sale are expected to be used for general corporate purposes, more specifically, the continuing development of our existing product pipeline and expansion of our sales organization. In addition, we anticipate the cash proceeds will enable us to more actively pursue opportunities to in-license more pharmaceutical products, thereby further broadening our portfolio and diversifying our revenue base.

 

The following section contains a summary of the Stock Purchase Agreement, a copy of which is attached as Annex A to this proxy statement and is incorporated by reference into this proxy statement. The rights and obligations of the parties to the Stock Purchase Agreement are governed by the express terms and conditions of the Stock Purchase Agreement and not by this summary. This summary and the summaries of the Stock Purchase Agreement elsewhere in this proxy statement may not contain all of the information about the Stock Purchase Agreement that is of importance to you and are qualified in its entirety by reference to the complete text of the Stock Purchase Agreement. We encourage you to read the Stock Purchase Agreement carefully and in its entirety for a more complete understanding of the Stock Purchase Agreement.

 

The Stock Purchase Agreement provides that, subject to the terms and conditions specified in the Agreement, Cornerstone will issue and sell 11,902,741 shares of Cornerstone’s common stock to Chiesi at the closing of the Company Stock Sale and issue a number of shares of our common stock within 90 days of the closing so that Chiesi owns 51% of the outstanding shares of our common stock on a Fully Diluted Basis (as defined in the Stock Purchase Agreement). In exchange Chiesi will (i) grant Cornerstone an exclusive 10-year license to distribute and market Chiesi’s Curosurf^® product in the U.S. and (ii) pay Cornerstone $15,465,075 in cash.

 

The closing of the issuance and sale of shares of our common stock will occur on the second business day following the satisfaction or waiver of all the conditions set forth in the Stock Purchase Agreement, as more fully described under “—Conditions to Closing” below.

 

The representations and warranties of Cornerstone and Chiesi contained in the Stock Purchase Agreement were made as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract between Cornerstone and Chiesi and in a number of cases are subject to important qualifications and limitations agreed to by Cornerstone and Chiesi in connection with the negotiated terms of the Stock Purchase Agreement. Moreover, some of those representations and warranties may not be accurate or complete as of any specified date, may be subject to a contractual standard of materiality different from those generally applicable to stockholders or may have been used for purposes of allocating risk between Cornerstone and Chiesi rather than establishing matters as facts. Accordingly, investors should not rely on these representations and warranties as accurately describing any aspect of Cornerstone or Chiesi or their respective businesses, assets or liabilities.

 

Cornerstone has made certain customary representations and warranties to Chiesi, subject in certain cases to exceptions as set forth in the disclosure schedule delivered to Chiesi prior to the execution and delivery of the Stock Purchase Agreement or as disclosed in any reports on Form 10-K, 10-Q and 8-K or any proxy materials required to be filed with or furnished to the SEC by Cornerstone since October 31, 2008 that were publicly available before the date of the Stock Purchase Agreement (except for the forward-looking statements therein and the risk factors thereof). None of these representations and warranties will survive the closing of the Company Stock Sale. These representations and warranties include, but are not limited to, the following:

 

 

 

 

Chiesi has made certain customary representations and warranties to Cornerstone, none of which representations and warranties will survive the closing of the Company Stock Sale. These representations and warranties include, but are not limited to, the following:

 

 

 

Conduct of Business by Cornerstone

 

Cornerstone agreed in the Stock Purchase Agreement that from May 6, 2009 to the closing of the Company Stock Sale, except as otherwise agreed by Cornerstone and Chiesi, Cornerstone will, and will cause its subsidiaries to, conduct its and their business in the ordinary course and use reasonable best efforts to preserve intact their business organizations and relationships with third parties and to keep available the services of their present officers and employees and preserve their relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with Cornerstone or its subsidiaries. Cornerstone further agreed that from May 6, 2009 until the closing of the Company Stock Sale, Cornerstone will not, and will cause its subsidiaries not to, directly or indirectly:

 

 

 

No Solicitation

 

Cornerstone has agreed in the Stock Purchase Agreement that until the closing of the Company Stock Sale, Cornerstone, its subsidiaries and their representatives will not, directly or indirectly, (x) solicit or encourage (including by providing information) any takeover proposal, or any inquiries that reasonably may be expected to lead to, any takeover proposal or (y) engage in any discussions or negotiations with respect to any takeover proposal or otherwise cooperate with, participate in, or facilitate any such inquiries or negotiations, or provide any confidential information relating to a takeover proposal.

 

This undertaking is subject to the qualification that at any time prior to obtaining stockholder approval of the Company Stock Sale, in response to a written unsolicited takeover proposal received after the date of the Stock Purchase Agreement, (i) Cornerstone may contact the person making such takeover proposal and its advisors solely for the purpose of clarifying the proposal, so as to determine whether the proposal for a takeover proposal is reasonably likely to lead to a superior proposal, as determined by Cornerstone’s board of directors in good faith and after consultation with its financial and legal advisors and (ii) if Cornerstone’s board of directors in fact determines that such takeover proposal is or is reasonably likely to lead to such a superior proposal, Cornerstone’s board of directors may, after providing Chiesi with not less than 72 hours written notice of its intention to take such actions, (x) furnish nonpublic information with respect to Cornerstone and its subsidiaries to the person that made such takeover proposal, subject to certain confidentiality terms, (y) disclose to Cornerstone’s stockholders any information required to be disclosed under applicable law and (z) participate in discussions and negotiations regarding such proposal.

 

Cornerstone is required to notify Chiesi of the material terms of any written proposal that Cornerstone or any of its affiliates may receive after the date of the Stock Purchase Agreement relating to a takeover proposal and will keep Chiesi reasonably informed as to the status of and any material developments regarding any such proposal.

 

The Stock Purchase Agreement further provides that subject to certain exceptions, described below, neither the board of directors of Cornerstone nor any committee thereof will fail to make, withdraw or modify, in a manner adverse to Chiesi, recommendations to Cornerstone’s stockholders that they vote in favor of the Company Stock Sale and in favor of the Charter Amendment. Subject to certain exceptions, described below, including as may be required under applicable law, neither the board of directors of Cornerstone nor any committee thereof may approve, recommend, or declare advisable any takeover proposal or authorize or permit Cornerstone to enter into any letter of intent or other contract constituting a takeover proposal (other than a confidentiality and standstill agreement to the extent permitted by, and in accordance with, the Stock Purchase Agreement), take any action or make any public statement inconsistent with the recommendations described above, or resolve, agree to take or publicly propose to do any of the foregoing actions. Notwithstanding the foregoing, if prior to obtaining the stockholder approval of the Company Stock Sale, Cornerstone’s board of directors in good faith, after consultation with Cornerstone’s legal advisors, determines that the failure to do so would be inconsistent with the directors’ duties under applicable law, the board may (i) withdraw, qualify or modify in a manner adverse to Chiesi, or fail to make, the recommendations described above or recommend that Cornerstone’s stockholders approve a superior proposal, (ii) cause Cornerstone to terminate the Stock Purchase Agreement and (iii) cause Cornerstone to enter into a definitive agreement providing for or implementing a superior proposal, but only (x) not less than 72 hours after providing written notice to Chiesi advising Chiesi that the board of directors of Cornerstone has received a superior proposal, specifying the material terms and conditions of such superior proposal and identifying the person making such superior proposal, accompanied by a copy of the definitive agreement proposed to be entered into with the person making the superior proposal and (y) if Cornerstone pays a termination fee as described in “—Expenses; Termination Fee” below.

 

For purposes of the Stock Purchase Agreement, a “takeover proposal” means any of the following (other than the transactions expressly provided for in the Stock Purchase Agreement): (i) any merger, consolidation,

share exchange, business combination or similar transaction involving Cornerstone; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 15% or more of the fair market value of the assets (including by means of an issuance, sale or other disposition of voting securities) of Cornerstone and its subsidiaries, taken as a whole, or to which 15% or more of Cornerstone’s revenues or earnings on a consolidated basis are attributable; (iii) any direct or indirect acquisition (whether in a single transaction or a series of transactions) of beneficial ownership (within the meaning of Section 13 under the Exchange Act) of 15% or more of any class of equity securities of Cornerstone; or (iv) any tender offer or exchange offer that if consummated would result in any person or “group” (as defined in Section 13(d) of the Exchange Act) beneficially owning 15% or more of any class of voting securities of Cornerstone.

 

For purposes of the Stock Purchase Agreement, a “superior proposal” means a bona fide written proposal for a takeover proposal made by a third party after the date of the Stock Purchase Agreement that Cornerstone’s board of directors determines (after taking into account any amendments to the Stock Purchase Agreement entered into or which Chiesi irrevocably covenants to enter into and for which all internal approvals of Chiesi have been obtained prior to the date of such determination), in good faith and after consultation with its financial and legal advisors, is on terms that are more favorable to Cornerstone’s stockholders than the Company Stock Sale (based upon such considerations as Cornerstone’s board of directors in the exercise of its fiduciary responsibilities deems relevant), except that for the purpose of the definition of “superior proposal”, the references to “15%” in the definition of “takeover proposal” and deemed to refer to 50%.

 

Stockholder Approval; Preparation of Proxy Statements

 

Cornerstone has agreed that, in accordance with applicable law and its certificate of incorporation and bylaws, it will duly call, give notice of, convene and hold a meeting of its stockholders for the purpose of obtaining stockholder approval of the Company Stock Sale and file a proxy statement with the SEC in connection therewith.

 

Charter Amendment

 

Cornerstone has agreed that, in accordance with applicable law and its certificate of incorporation and bylaws, following the closing of the Company Stock Sale it will duly call, give notice of, convene and hold a meeting of its stockholders for the purpose of obtaining stockholder approval of the Charter Amendment and file a proxy statement with the SEC in connection therewith.

 

Reasonable Best Efforts

 

The parties to the Stock Purchase Agreement have agreed to use reasonable best efforts to take all actions and to do all things necessary, proper or advisable to consummate the transactions contemplated by the Stock Purchase Agreement as promptly as practicable, including, without limitation, filings under the applicable rules and regulations of the HSR Act and the antitrust or competition laws of other jurisdictions. Each party has agreed to use its reasonable best efforts to respond to any comments of the SEC or its staff, and to any request by the SEC or its staff for amendments or supplements to the proxy statements contemplated by the Stock Purchase Agreement. The parties have agreed to use reasonable best efforts to prepare, execute and deliver such instruments and take or cause to be taken such actions as any other party may reasonably request and have agreed to notify and consult in good faith with the other party with respect to such filings.

 

Share Issuance Top-Up

 

The Stock Purchase Agreement provides that Chiesi will have 90 days following the closing of the Company Stock Sale to confirm that the shares of Cornerstone common stock it acquired at the closing from Cornerstone, together with the shares it purchased simultaneously from Mr. Collard and Mr. Lutz, represented 51% of the outstanding shares of Cornerstone’s common stock on a Fully Diluted Basis as of the completion of the closing, and will have access to Cornerstone’s books and records in order to do so. If during that 90-day period Chiesi establishes that the shares it acquired represented less than the targeted 51% ownership level,

Cornerstone will be required to “top up” Chiesi’s share ownership to that level by issuing additional shares to Chiesi for no additional consideration. “Fully Diluted Basis” is defined as a calculation that gives effect to the number of shares of Cornerstone common stock then issued and outstanding plus the aggregate number of all shares of common stock that Cornerstone may be required to issue as of such date pursuant to all options, warrants, rights, convertible or exchangeable securities or similar obligations then outstanding, whether or not such securities are then exercisable and exchangeable but excluding, however, any options, warrants or other similar rights outstanding at the date of the Stock Purchase Agreement that have an exercise price equal to or greater than $26.00 per share.

 

Other Covenants

 

The parties to the Stock Purchase Agreement have agreed to various other covenants in the Stock Purchase Agreement. Some of the covenants are mutual while others have been made either only by Cornerstone or Chiesi. The other covenants relate to the following:

 

 

The obligations of the parties to complete the closing of the Company Stock Sale are subject to the following mutual conditions:

 

 

The obligations of Cornerstone to complete the closing of the Company Stock Sale are further conditioned on:

 

 

 

The obligations of Chiesi to complete the closing of the Company Stock Sale are further conditioned on:

 

 

If applicable law permits, either Cornerstone or Chiesi could choose to waive a condition to its obligation to complete the Company Stock Sale even though that condition has not been satisfied.

 

The Stock Purchase Agreement may be terminated at any time prior to the Company Stock Sale, whether before or after Cornerstone’s stockholders approve the transaction, under certain circumstances. The Stock Purchase Agreement may be terminated by mutual written consent of both parties or by either party if: (i) the closing of the Company Stock Sale has not occurred by the close of business on October 31, 2009, (ii) a governmental authority has permanently enjoined, restrained or otherwise prohibited the Company Stock Sale by final and nonappealable action or (iii) the required vote at a duly held meeting of Cornerstone stockholders was not obtained.

 

Chiesi may terminate the Stock Purchase Agreement if:

 

 

Cornerstone may terminate the Stock Purchase Agreement if:

 

 

If the Stock Purchase Agreement is terminated by either party, there will be no liability or obligation on the part of any party under the Stock Purchase Agreement, except no party will be relieved from liability arising out of any knowing or willful breach of any of its representations, warranties, covenants or other undertakings set forth in the Stock Purchase Agreement.

 

Whether or not the Company Stock Sale is consummated and except as otherwise provided in this Agreement, each party shall bear its own expenses in connection with the transactions contemplated by this Agreement, except that the expenses incurred in connection with the filing, printing and mailing of the proxy statement shall be borne equally by Chiesi and Cornerstone.

 

Cornerstone will pay Chiesi a termination fee of $2.5 million if the Stock Purchase Agreement is terminated:

 

 

If Cornerstone fails to pay any amount of any termination fee it is required to pay, and, in order to obtain such payment, Chiesi commences a suit that results in a judgment against Cornerstone for such amount,

Cornerstone will have to reimburse Chiesi for all its expenses in connection with such suit, including any costs of collection, together with interest on the amount of the judgment at the highest rate permitted by applicable law from the date such fee was required to be paid.

 

The Stock Purchase Agreement also provides that termination of the Stock Purchase Agreement will not relieve any party from liability arising out of any knowing or willful breach of any of its representations, warranties, covenants or other undertakings in the Stock Purchase Agreement.

 

The following section contains a summary of the License and Distribution Agreement, a copy of which is attached as Exhibit H to the Stock Purchase Agreement and is incorporated by reference into this proxy statement. The rights and obligations of the parties to the License and Distribution Agreement are governed by the express terms and conditions of the License and Distribution Agreement and not by this summary. This summary and the summaries of the License and Distribution Agreement elsewhere in this proxy statement may not contain all of the information about the License and Distribution Agreement that is of importance to you and are qualified in its entirety by reference to the complete text of the License and Distribution Agreement. We encourage you to read the License and Distribution Agreement carefully and in its entirety for a more complete understanding of the License and Distribution Agreement.

 

On May 6, 2009, Chiesi and Cornerstone entered into the License and Distribution Agreement pursuant to which Chiesi will grant Cornerstone exclusive rights to distribute Curosurf^® in the U.S. to Cornerstone for a 10-year term.

 

Pursuant to the License and Distribution Agreement, Chiesi will grant Cornerstone a non-transferable, exclusive license to import, store, handle, promote, distribute, market, offer for sale and sell Curosurf^® in the U.S. for a 10-year term. During the term of the agreement, Cornerstone agrees to refer to Chiesi all external business opportunities relating to the sale, delivery or use of Curosurf^® outside the scope of the license which becomes known to Cornerstone. Cornerstone may not grant sublicenses or enter into co-promotion agreements for Curosurf^® without Chiesi’s prior written consent. The term of the License and Distribution Agreement will commence on the applicable date whether or not the closing of the Company Stock Sale has occurred and even if the Stock Purchase Agreement has been terminated; however, if the closing of the Company Stock Sale has not occurred by October 31, 2009, Chiesi will have the right to terminate the License and Distribution Agreement with the specified notice.

 

In exercising its distribution rights, Cornerstone is obligated to:

 

 

 

Chiesi agrees to procure the transfer of the marketing authorization held by the prior U.S. licensee to Cornerstone on the specified date at Cornerstone’s expense. Following the transfer date, Cornerstone will be fully responsible for maintaining or obtaining a new marketing authorization at its own expense, unless Chiesi desires a new marketing authorization, in which case, the application expenses will be borne equally between the parties.

 

Cornerstone must obtain Chiesi’s approval prior to undertaking any study relating to Curosurf^®. Chiesi will have the right to disagree with or request a modification of any proposed study. Upon request and at least once every six months, Cornerstone will provide Chiesi with written reports on the progress of such studies. In addition, Cornerstone must immediately provide to Chiesi any results from Cornerstone’s studies, which Chiesi will be free to use in and outside the U.S. Chiesi is also obligated to immediately provide to Cornerstone any results from Chiesi’s studies relating to Curosurf^®, which results Cornerstone will be free to use in the U.S. The parties have agreed to meet at least twice a year to share, discuss and evaluate information relevant to Curosurf^®.

 

The parties have agreed to enter into a pharmacovigilance agreement for the exchange of adverse event and safety information concerning Curosurf^® within 10 weeks of May 6, 2009.

 

Chiesi has agreed to use commercially reasonable efforts to produce and supply Cornerstone’s entire requirement of Curosurf^®, and Cornerstone has agreed to purchase Curosurf^® exclusively from Chiesi, subject to the terms of the License and Distribution Agreement relating to (i) inventory allocation in the event of a shortage, (ii) timeliness of deliveries, (iii) title, (iv) possession and risk of loss and (v) non-conforming deliveries. During the term of the agreement, Chiesi and its contract manufacturer collectively will hold and maintain all licenses and permits as required to fabricate, package, label, test, store and sell Curosurf^® in the U.S.

 

Cornerstone and Chiesi have agreed to enter into a technical agreement in which they define their respective responsibilities in relation to the current good manufacturing practice and quality matters, technical specifications, release and supply of Curosurf^®.

 

At least quarterly, the parties will discuss in a meeting or via telephone any supply chain or other delivery issues that have arisen during the quarter.

 

Until a specified date, the supply price for Curosurf^® will equal the greater of a specified percent of its net sales price, or the applicable floor price. The initial floor price is specified in the License and Distribution

Agreement, and thereafter may be adjusted by Chiesi at specified times in accordance with evolving manufacturing and other relevant costs.

 

Cornerstone has agreed to pay any value added tax provided that Chiesi will use commercially reasonable efforts to procure any available exemption from or refund of value added tax.

 

Within a specified period after the end of each quarter, Cornerstone will deliver a report to Chiesi specifying:

 

 

Any party made aware of an assertion or change in law requiring income or withholding taxes to be withheld from any payments will inform the other party within 30 days and will consult with the other party regarding the consequences. Cornerstone will be entitled to deduct and pay the applicable tax, provided that it takes all reasonable steps to allow Chiesi to take advantage of any relevant double taxation treaties to minimize withholding taxes, and Chiesi promptly provides any necessary forms, certificates or other documentation or information reasonably requested by Cornerstone.

 

Cornerstone retains the right to determine the prices at which Curosurf^® purchased by Cornerstone may be sold to any third party.

 

Cornerstone has agreed to provide Chiesi with its proposed annual marketing plan, which will be duly carried out by Cornerstone taking into account all of Chiesi’s comments and suggestions, and will submit copies of all marketing materials relating to Curosurf^® for prior written approval. Within a specified period after the end of each quarter, Cornerstone will send Chiesi a written report detailing the marketing activities in such quarter.

 

Chiesi will grant Cornerstone the right to link to the healthcare provider section of the Curosurf^® website from the Cornerstone website and, to the extent applicable, will grant Cornerstone website access rights commensurate with those granted to physicians generally.

 

Chiesi or its affiliates or licensors will remain the owner of the intellectual property relating to Curosurf^®. Cornerstone will promptly notify Chiesi of any improvements, which will be the sole property of Chiesi regardless of inventorship, and will assign, or cause to be assigned, all rights to such improvements at no cost to Chiesi. Cornerstone will provide Chiesi with reasonable support and any available relevant information in the filing and prosecution of any patent applications for improvements.

 

Cornerstone will promptly inform Chiesi in writing of any actual or alleged unauthorized use of Chiesi’s intellectual property of which it becomes aware and provide Chiesi with any available evidence. Chiesi will have the right, but not the obligation, to enforce its rights in the intellectual property with Cornerstone’s reasonable cooperation.

 

Cornerstone will only market and sell Curosurf^® under the trademark. Chiesi may terminate the License and Distribution Agreement if Cornerstone takes any action which materially impairs any right, title or interest of Chiesi or its affiliate or licensors in the trademark. Chiesi will not have any rights in Cornerstone’s logo and any other Cornerstone-owned trade dress included on Curosurf^® packages, labeling and inserts. In the event Cornerstone acquires any rights relating to the trademark, it will immediately assign such to Chiesi at no cost. Cornerstone will use its best efforts to avoid any act which might endanger, destroy or similarly affect

the value of the trademark or any related goodwill, and will comply with all reasonable instructions issued by Chiesi relating to the form and manner in which to use the trademark.

 

Chiesi will be entitled to conduct all enforcement proceedings and decide how to respond to any claim associated with the trademark. Any such efforts will be conducted at Chiesi’s expense, and Cornerstone will reasonably cooperate with Chiesi. No settlement or consent judgment or other voluntary final disposition of an intellectual property suit may be entered into by either party without the prior written consent of the other party. Chiesi will execute or cause the execution of such legal papers in connection with the foregoing as may be reasonably requested by Cornerstone. In the event of any intellectual property claim, threat or suit by a third party against either Cornerstone or Chiesi, the notified party will promptly notify the other party in writing and the parties will defend in close cooperation. Such defense will be at Chiesi’s expense unless the alleged infringement relates to Cornerstone’s corporate logo or any other Cornerstone-owned trade dress. In the event that a conflict arises between the interests of Chiesi and Cornerstone in any intellectual property litigation, the non-funding party will have the right to be represented by counsel of its own choice and at its sole expense.

 

Each party has made certain customary representations, warranties and covenants, including representations and warranties regarding:

 

 

Cornerstone has made certain additional representations, warranties and covenants, including, that:

 

 

Chiesi has made, or will require that its contract manufacturers make certain additional representations, warranties and covenants, including, that:

 

 

Neither the License and Distribution Agreement nor any rights or obligations under the License and Distribution Agreement may be assigned or otherwise transferred by either party without the prior written consent of the other, except that (i) Chiesi may assign the License and Distribution Agreement to any entity controlled by, under common control with or controlling Chiesi and (ii) either party may assign the License and Distribution Agreement to any successor by means of sale of all or substantially all of the assets of such party or sale of a majority of its voting stock.

 

The License and Distribution Agreement has an initial term of 10 years from the transfer date. Following the initial term, the License and Distribution Agreement will automatically renew for successive one-year periods, unless terminated by a party upon six months prior written notice.

 

Cornerstone may terminate the License and Distribution Agreement upon 30 business days prior written notice in the event of any adverse agency action that permanently prevents Cornerstone from importing, marketing or selling Curosurf^® in the U.S., or in the event a regulatory authority requires Cornerstone to cease selling or distributing Curosurf^® in the U.S.

 

If either party materially breaches the License and Distribution Agreement and such breach is not cured within 30 business days, the non-breaching party will (i) be entitled to bring action against the breaching party to recover damages arising from such breach and (ii) have the right to terminate the License and Distribution Agreement upon 30 business days written notice if it can prove a permanent material adverse effect on the economic value of the License and Distribution Agreement would result absent termination.

 

If the closing of the Company Stock Sale has not occurred by October 31, 2009, Chiesi will have the right to terminate the License and Distribution Agreement upon the specified notice, and if it exercises the termination right Chiesi will have the right to make employment offers to employees of Cornerstone’s Curosurf^® business without any interference by Cornerstone.

 

Upon expiry or termination of the License and Distribution Agreement, Chiesi will have the option to repurchase all Curosurf^® stocks held by Cornerstone at supply price within 30 days. If this repurchase option is not exercised, Cornerstone will be entitled to continue to sell the Curosurf^® stock in the U.S. for the specified period.

 

The following section contains a summary of the Governance Agreement, a copy of which is attached as Exhibit C to the Stock Purchase Agreement and is incorporated by reference into this proxy statement. The rights and obligations of the parties to the Governance Agreement are governed by the express terms and conditions of the Governance Agreement and not by this summary. This summary and summaries of the Governance Agreement elsewhere in this proxy statement may not contain all of the information about the Governance Agreement that is of importance to you and are qualified in its entirety by reference to the complete text of the Governance Agreement. We encourage you to read the Governance Agreement carefully and in its entirety for a more complete understanding of the Governance Agreement.

 

On May 6, 2009, Cornerstone, Chiesi and the Founder Stockholders entered into the Governance Agreement. The Governance Agreement will become effective upon the closing of the Company Stock Sale.

 

The Governance Agreement provides that during the two-year period beginning on the closing of the Company Stock Sale (the “Blackout Period”), Chiesi will not directly or indirectly acquire or offer to acquire any shares of Cornerstone common stock except (i) with the approval of the Cornerstone’s board or a majority of its independent directors, (ii) as effected solely to the extent necessary to maintain the beneficial ownership of Chiesi and its affiliates at an amount equal to 51% of the shares of Cornerstone common stock on a Fully Diluted Basis (as defined in the Governance Agreement), (iii) pursuant to open market purchases in the same number of shares as the Founder Stockholders transfer during the same period, (iv) in order to effect the acquisition of all of the outstanding capital stock of Cornerstone by Chiesi and/or any of its affiliates, in accordance with the provisions of the Governance Agreement, and (v) pursuant to a mandatory tender offer by Chiesi that Chiesi will be required to make if Chiesi and its affiliates beneficially own 85% or more of the Cornerstone’s capital stock on a Fully Diluted Basis (as defined in the Governance Agreement) to acquire all the shares of Cornerstone common stock not then owned by Chiesi or its affiliates, at a minimum cash price per share equal to the highest per share price paid by Chiesi or any of its affiliates, directly or indirectly, to acquire any share of Cornerstone common stock in the 18 months prior to the commencement of such tender offer.

 

During the Blackout Period, Chiesi also will be prohibited from selling or otherwise transferring any shares of Cornerstone common stock except pursuant to a bona fide acquisition of Cornerstone by a third party through a merger, consolidation, stock exchange or tender offer that was not solicited by Chiesi or its affiliates and that was approved by the Cornerstone’s board and a majority of its independent directors. Neither Chiesi nor any of its affiliates will directly or indirectly transfer any shares of Cornerstone’s common stock to any person if immediately following the sale or transfer such person would beneficially own (together with such person’s affiliates) a number of shares representing more than five percent of all shares of Cornerstone’s common stock then outstanding, except pursuant to a sale to a bona fide underwriter that will acquire the shares pursuant to a distribution, upon completion of which, no purchaser will own in excess of five percent of all shares of Cornerstone’s common stock then outstanding.

 

On the date the Governance Agreement becomes effective, the Company’s board of directors will be reconstituted to consist of its chief executive officer, three independent directors under the NASDAQ rules and four persons designated by Chiesi. Chiesi is entitled to designate for consideration for election to the Company’s board of directors a number of persons such that if Chiesi and its affiliates beneficially own Cornerstone common constituting beneficial ownership of all outstanding Cornerstone common stock on a Fully Diluted Basis (as defined in the Governance Agreement) of:

 

 

 

After the Charter Amendment takes effect, the persons designated by Chiesi shall be referred to as the Class B directors and all other directors shall be collectively referred to as the Class A Directors. A majority of the total authorized number of directors, including at least one Class B director, shall constitute a quorum for the transaction of business. Cornerstone’s nominating committee will nominate the Company’s chief executive officer and three independent directors. The nominating committee will also nominate each individual designated by Chiesi in accordance with the Governance Agreement, unless the nominating committee determines such individual lacks the proper qualifications to serve as a director or is otherwise ineligible due to a conflict of interest and accordingly notifies Chiesi to designate another individual for nomination.

 

Cornerstone has agreed to use its best efforts to solicit from its stockholders eligible to vote for the election of directors proxies in favor of the nominees designated in accordance with the procedures described above. In any election of directors or any stockholders meeting called for the election of directors, Chiesi and each of the Founder Stockholders agreed to cause attendance at such meetings and voting by the record holder(s) of all shares of common stock beneficially owned by them, respectively, in a manner consistent with the terms of the Governance Agreement.

 

Chiesi has further agreed to certain “standstill” obligations, pursuant to which Chiesi and certain related persons are prohibited during the Blackout Period from (other than pursuant to the Purchaser Voting Agreement):

 

 

“Fully Diluted Basis” is defined in the Governance Agreement as a calculation that gives effect to the number of shares of Cornerstone common stock then issued and outstanding plus the aggregate number of all shares of common stock that Cornerstone may be required to issue as of such date pursuant to all options, warrants, rights, convertible or exchangeable securities or similar obligations then outstanding, whether or not such securities are then exercisable and exchangeable but excluding, however, any options, warrants or other similar rights outstanding at the date of the Governance Agreement that have an exercise price equal to or greater than $26.00 per share.

 

Chiesi and Cornerstone each granted the other party a right of first offer, for a period of two years following the closing of the Company Stock Sale, with respect to distribution and marketing of its products within certain territories. Chiesi agreed to provide Cornerstone with a right of first offer with respect to the distribution and marketing in the U.S. of any pharmaceutical products owned or controlled by Chiesi or any of its affiliates that Chiesi makes available for distribution in the U.S. Cornerstone agreed to provide Chiesi with a right of first offer with respect to the distribution and marketing outside the U.S. of any pharmaceutical products owned or controlled by Cornerstone that Cornerstone makes available for distribution outside the U.S. Each right of offer will be available for a period of 30 days following receipt by the applicable party of written notice that a product is available for distribution in a given territory. The parties will have a specified number of days to negotiate and enter into a definitive agreement, and neither party will have any further obligations to offer rights to that product after such time.

 

Cornerstone further agreed to take all lawful action necessary to ensure that its organizational and governance documents are not at any time inconsistent with the provisions of the Governance Agreement. Cornerstone and Chiesi also agreed that, in the event any law, rule or regulation comes into effect that conflicts with the terms and conditions of the Governance Agreement, they will negotiate in good faith to revise the Governance Agreement to achieve the parties’ original intention set forth therein.

 

The Governance Agreement, including each party’s right of first offer on the other party’s products, will terminate (i) automatically if the Stock Purchase Agreement is terminated pursuant to its terms, (ii) on the second anniversary of the date of the closing of the Company Stock Sale or (iii) at the earliest of (a) such time as Chiesi and its affiliates beneficially own Cornerstone common stock constituting 100% of all outstanding common stock on a “Fully Diluted Basis” (as defined in the Governance Agreement), (b) such time as Chiesi and its affiliates beneficially own Cornerstone common stock constituting less than 10% of all outstanding common stock on a Fully Diluted Basis, or (c) the effective time of a “Change in Control” (as defined in the Governance Agreement). In addition, the Governance Agreement will terminate with respect to any Founder Stockholder when such Founder Stockholder is no longer employed by Cornerstone.

 

The following section contains a summary of the Stockholders Agreement, a copy of which is attached as Exhibit B to the Stock Purchase Agreement and is incorporated by reference into this proxy statement. The rights and obligations of the parties to the Stockholders Agreement are governed by the express terms and conditions of the Stockholders Agreement and not by this summary. This summary and the summaries of the Stockholders Agreement elsewhere in this proxy statement may not contain all of the information about the Stockholders Agreement that is of importance to you and are qualified in its entirety by reference to the complete text of the Stockholders Agreement. We encourage you to read the Stockholders Agreement carefully and in its entirety for a more complete understanding of the Stockholders Agreement.

 

On May 6, 2009 Cornerstone, Chiesi and the Founder Stockholders entered into the Stockholders Agreement. The Stockholders Agreement will become effective upon the closing of the Company Stock Sale and (i) restricts the Founder Stockholders from transferring a certain number of shares of Cornerstone common stock owned by them and from acquiring additional shares of Cornerstone common stock for a specified period, (ii) provides Chiesi with the right to require the Founder Stockholders to sell those shares of Cornerstone stock that may not be transferred at a specified price and (iii) requires the Founder Stockholders to vote the shares of Cornerstone common stock owned by them in the manner specified in the Stockholders Agreement.

 

Each Founder Stockholder made certain customary representations and warranties, severally but not jointly and solely with respect to such Founder Stockholder and not with respect to the other Founder Stockholders, to Chiesi, with respect to the following:

 

 

Within two years of the closing of the Company Stock Sale, no Founder Stockholder will:

 

 

Any transfer or purported transfer in violation of these restrictions will be void and ineffectual, and will not be recognized by Cornerstone. After two years of the closing of the Company Stock Sale, there will be no further share transfer restrictions.

 

Within two years of the closing of the Company Stock Sale, no Founder Stockholder will directly or indirectly, acquire or offer to acquire any shares or beneficial ownership of common stock, except through acquisitions of shares:

 

 

 

Chiesi will have the option, exercisable in whole but not in part on a single occasion during the 30 days beginning on the earlier of the date on which the share transfer restrictions lapse, two years after the closing of the Company Stock Sale, or the date following the termination under certain circumstances of specified Cornerstone executives’ employment, to acquire all the Founder Stockholders’ covered shares (as defined in the Stockholders Agreement) for $12.00 per share in cash, subject to adjustment for any stock split, stock dividend, reverse stock split or similar adjustment occurring after the date of the Stockholders Agreement.

 

Each Founder Stockholder agrees that, at any meeting of Cornerstone stockholders called to consider a transaction in which Chiesi or its affiliate will acquire all the outstanding capital stock of Cornerstone, such Founder Stockholder will vote all shares of common stock owned by such Founder Stockholder at the applicable record date in the same proportions that the shares of common stock owned by the other stockholders (other than Chiesi and its affiliates) are voted on such matter. These obligations of the Founder Stockholders will apply only if (i) a majority of Cornerstone’s directors who were not designated by, and are otherwise independent of, Chiesi and its affiliates (other than Cornerstone) has approved the transaction to be voted on at the meeting, and has recommended that Cornerstone’s stockholders vote to approve the transaction, and (ii) such approval and recommendation has not been withdrawn.

 

The Stockholders Agreement will terminate:

 

 

The following section contains a summary of the Stockholders Registration Rights Agreement and the Purchaser Registration Rights Agreement, copies of which are attached as Exhibit E and Exhibit D to the Stock Purchase Agreement, respectively, and are incorporated by reference into this proxy statement. The rights and obligations of the parties to the Stockholders Registration Rights Agreement and the Purchaser Registration Rights Agreement are governed by the express terms and conditions of such agreements and not by this summary. This summary and the summaries of the Stockholders Registration Rights Agreement and the Purchaser Registration Rights Agreement elsewhere in this proxy statement may not contain all of the information about the Stockholders Registration Rights Agreement and the Purchaser Registration Rights Agreement that is of importance to you and are qualified in its entirety by reference to the complete text of each of the Stockholders Registration Rights Agreement and the Purchaser Registration Rights Agreement. We encourage you to read each of the Stockholders Registration Rights Agreement and the Purchaser Registration Rights Agreement carefully and in its entirety for a more complete understanding of those agreements.

 

On May 6, 2009, Cornerstone and the Founder Stockholders entered into a registration rights agreement (the “Stockholders Registration Rights Agreement”) pursuant to which we agreed to provide registration rights, as described below, to the Founder Stockholders with respect to the shares of Cornerstone common stock owned by them.

 

Demand Registration Rights

 

The Founder Stockholders are entitled to demand that Cornerstone prepare and file with the SEC a registration statement relating to the sale of their shares of Cornerstone common stock, including in an underwritten offering. The Founder Stockholders are entitled to an aggregate of two demand registrations before the expiration of the lockup restrictions in the Stockholders Agreement and three demand registrations thereafter, so long as the shares requested to be registered have a market value of at least $5 million or represent all of the shares then beneficially owned by the Founder Stockholder that initially sent Cornerstone the notice requesting such demand registration. Upon receipt of a demand notice from a Founder Stockholder, Cornerstone is required to promptly give notice of such requested registration to all other Founder Stockholders, who may elect to include their shares in such registration.

 

Upon receipt of a demand notice, Cornerstone must prepare and file a registration statement with the SEC as soon as practicable and, in any event, within 45 days after receipt of the notice (subject to Cornerstone’s right described below to delay such filing), and use its reasonable efforts to cause the same to be declared effective by the SEC as promptly as practicable after filing. Additionally, Cornerstone is required to use reasonable efforts to keep the registration statement effective until the earlier of 24 months after the effective time of such registration statement and the date on which all the applicable securities are sold.

 

Cornerstone may, once in any period of 12 months, defer the filing for up to 90 days if it determines to effect a registered underwritten public offering of its common stock, or securities convertible into or exchangeable for its common stock, for Cornerstone’s account in connection with a material public financing transaction that Cornerstone is proceeding to effect. Cornerstone may also decline to include securities in a demand registration if the managing underwriters advise Cornerstone and the requesting stockholders that the aggregate amount of securities requested to be included is sufficiently large to have an adverse effect on the success of any such offering.

 

Piggyback Registration Rights

 

The registration rights agreements also provide the Founder Stockholders with piggyback registration rights such that if Cornerstone proposes to file a registration statement (other than a registration statement on Form S-8 or Form S-4) in connection with a public offering of any securities of Cornerstone, Cornerstone is required to give at least 20 business days prior written notice of such proposed filing to the Founder Stockholders, and the notice must offer the Founder Stockholders the opportunity to register such number of

securities as each may request. Upon receipt of such notice, the Founder Stockholders have 15 business days to specify the amount of securities to be included in the proposed registration.

 

In connection with an underwritten offering, if the managing underwriters advise that inclusion of the securities requested to be registered by the Founder Stockholders would have an adverse effect on the success of the offering, Cornerstone’s shares (or another Cornerstone stockholder’s shares, in the case of an underwritten offering that was initiated by such stockholder) have first priority, shares of the Founder Stockholders have second priority and shares of other holders have third priority.

 

Expenses

 

Cornerstone will bear all registration expenses specified in the Purchaser Registration Rights agreement as well as all other expenses incurred by it in connection with the performance of its obligations under the registration rights agreements. The Founder Stockholders will bear any underwriting discounts, commissions, or fees attributable to the sale of the applicable shares whether or not any registration statement becomes effective, and the fees and expenses of any counsel, accountants or other accountants retained or employed by the Founder Stockholders.

 

Termination

 

The Stockholders Registration Rights Agreement will terminate automatically, without action by any party thereto, if the Stock Purchase Agreement is terminated pursuant to its terms. Furthermore, Cornerstone will have no further obligations pursuant to the registration rights agreements at such time as all shares of common stock that are beneficially owned by the Founder Stockholders, as applicable, have been effectively registered under Section 5 of the Securities Act and disposed of pursuant to an effective registration statement or such shares may be freely transferred without restriction under the Securities Act.

 

On May 6, 2009, Cornerstone and Chiesi entered into a registration rights agreement (the “Purchaser Registration Rights Agreement”) pursuant to which we agreed to provide registration rights to Chiesi with respect to the shares of Cornerstone common stock owned by them following the closing of the Company Stock Sale.

 

Demand Registration Rights

 

Chiesi is entitled to demand that Cornerstone prepare and file with the SEC a registration statement relating to the sale of their shares of Cornerstone common stock, including in an underwritten offering. Chiesi is entitled to request four such demand registrations at any time after the second anniversary of the date of the Company Stock Sale, so long as the shares requested to be registered have a market value of at least $50 million or represent all of the shares then beneficially owned by Chiesi.

 

Upon receipt of a demand notice, Cornerstone must prepare and file a registration statement with the SEC as soon as practicable and, in any event, within 45 days after receipt of the notice (subject to Cornerstone’s right described below to delay such filing), and use its reasonable efforts to cause the same to be declared effective by the SEC as promptly as practicable after filing. Additionally, Cornerstone is required to use reasonable efforts to keep the registration statement effective until the earlier of 24 months after the effective time of such registration statement and the date on which all the applicable securities are sold.

 

Cornerstone may, once in any period of 12 months, defer the filing for up to 90 days if it determines to effect a registered underwritten public offering of its common stock, or securities convertible into or exchangeable for its common stock, for Cornerstone’s account in connection with a material public financing transaction that Cornerstone is proceeding to effect. Cornerstone may also decline to include securities in a demand registration if the managing underwriters advise Cornerstone and the requesting stockholders that the aggregate amount of securities requested to be included is sufficiently large to have an adverse effect on the success of any such offering.

Piggyback Registration Rights

 

The registration rights agreements also provide Chiesi with piggyback registration rights such that if Cornerstone proposes to file a registration statement (other than a registration statement on Form S-8 or Form S-4) in connection with a public offering of any securities of Cornerstone, Cornerstone is required to give at least 20 business days prior written notice of such proposed filing to Chiesi, and the notice must offer Chiesi the opportunity to register such number of securities as each may request. Upon receipt of such notice, Chiesi has 15 business days to specify the amount of securities to be included in the proposed registration.

 

In connection with an underwritten offering, if the managing underwriters advise that inclusion of the securities requested to be registered by Chiesi would have an adverse effect on the success of the offering, Cornerstone’s shares (or another Cornerstone stockholder’s shares, in the case of an underwritten offering that was initiated by such stockholder) have first priority, shares of Chiesi have second priority and shares of other holders have third priority.

 

Expenses

 

Cornerstone will bear all registration expenses specified in the registration rights agreements as well as all other expenses incurred by it in connection with the performance of its obligations under the registration rights agreements. Chiesi will bear any underwriting discounts, commissions, or fees attributable to the sale of the applicable shares whether or not any registration statement becomes effective, and the fees and expenses of any counsel, accountants or other accountants retained or employed by Chiesi.

 

Termination

 

The Purchaser Registration Rights Agreement will terminate automatically, without action by any party thereto, if the Stock Purchase Agreement is terminated pursuant to its terms. Furthermore, Cornerstone will have no further obligations pursuant to the registration rights agreements at such time as all shares of common stock that are beneficially owned by Chiesi, as applicable, have been effectively registered under Section 5 of the Securities Act and disposed of pursuant to an effective registration statement or such shares may be freely transferred without restriction under the Securities Act.

 

The following section contains a summary of the Stockholders Voting Agreement and the Purchaser Voting Agreement, copies of which are attached as Annex B and Annex C, respectively, to this proxy statement and are incorporated by reference into this proxy statement. The rights and obligations of the parties to the Stockholders Voting Agreement and the Purchaser Voting Agreement are governed by the express terms and conditions of such agreements and not by this summary. This summary and summaries of the Stockholders Voting Agreement and the Purchaser Voting Agreement elsewhere in this proxy statement may not contain all of the information about the Stockholders Voting Agreement and the Purchaser Voting Agreement that is of importance to you and are qualified in its entirety by reference to the complete text of each of the Stockholders Voting Agreement and the Purchaser Voting Agreement. We encourage you to read each of the Stockholders Voting Agreement and the Purchaser Voting Agreement carefully and in its entirety for a more complete understanding of those agreements.

 

On May 6, 2009, Chiesi, the Founder Stockholders, David Price, Joshua Franklin, Brian Dickson, M.D., Alan Roberts and, solely with respect to the sections identified therein, Cornerstone, entered into a voting agreement (the “Stockholders Voting Agreement”) pursuant to which the Founder Stockholders and the other management stockholder have agreed to vote all their shares of common stock in favor of the approval of the Company Stock Sale and the approval and adoption of the Charter Amendment.

Voting

 

Each stockholder covenants and agrees to vote, or cause to be voted, in person or by proxy, all such stockholder’s shares of Cornerstone common stock owned as of the record date:

 

 

Irrevocable Proxy

 

Each stockholder irrevocably grants to and appoints Chiesi, and its executive officers, as their proxy and attorney-in-fact (with the full power of substitution and resubstitution) to vote the shares of common stock held by such stockholder as agreed upon in the Stockholders Voting Agreement.

 

In connection with the grant of this irrevocable proxy, each stockholder revokes any and all other proxies given in respect to its Cornerstone shares.

 

Chiesi may terminate this proxy with respect to each stockholder at any time at its sole election by written notice provided to such stockholder. This proxy will terminate upon the termination of the Stockholders Voting Agreement.

 

Restrictions on Transfer

 

During the agreement term, each stockholder will not, except as the result of the death of such stockholder or as otherwise permitted, transfer any of its Cornerstone shares unless the transferee will have executed and delivered an agreement to be bound by the terms and conditions of the by the Stockholders Voting Agreement.

 

If any stockholder attempts to transfer, vote or provide any other person with the authority to vote any of its Cornerstone shares other than in compliance with the Stockholders Voting Agreement, Cornerstone will not (i) permit any such transfer on its books and records, (ii) issue a new certificate representing any such shares or (iii) record such vote, in each case, unless and until such stockholder will have complied with the terms of the Stockholders Voting Agreement.

 

Each stockholder may not:

 

 

Solicitation

 

During the agreement term, each stockholder will not directly or indirectly (i) solicit, initiate, encourage, induce or knowingly facilitate the communication, making, submission or announcement of any alternative acquisition proposal or inquiry, or take any action that could reasonably be expected to lead to an alternative acquisition proposal or inquiry, (ii) engage in discussions or negotiations relating to any alternative acquisition proposal or inquiry, (iii) approve, endorse or recommend any alternative acquisition proposal, or (iv) enter into any letter of intent or similar document or any contract relating to any alternative acquisition proposal.

 

Termination

 

The Stockholders Voting Agreement will terminate upon the earlier of (i) the approval and adoption of the Charter Amendment or (ii) the termination of the Stock Purchase Agreement pursuant to its terms.

 

Voting

 

On May 6, 2009, Chiesi and Cornerstone entered into a voting agreement (the “Purchaser Voting Agreement”) pursuant to which Chiesi covenants and agrees to vote, or cause to be voted, in person or by proxy, all its shares of Cornerstone common stock owned as of the record date in favor of the approval and adoption of the Charter Amendment.

 

Irrevocable Proxy

 

Chiesi irrevocably grants to and appoints Cornerstone, and its executive officers, as its proxy and attorney-in-fact (with the full power of substitution and resubstitution) to vote the shares of Cornerstone common stock held by Chiesi as agreed upon in the Purchaser Voting Agreement. In connection with the grant of this irrevocable proxy, Chiesi revokes any and all other proxies given in respect to its Cornerstone shares.

 

Cornerstone may terminate this proxy at any time at its sole election by written notice provided to Chiesi. This proxy will terminate upon the termination of the Purchaser Voting Agreement.

 

Restrictions on Transfer

 

During the term of the Purchaser Voting Agreement, Chiesi will not transfer any of its Cornerstone shares. If Chiesi attempts to transfer, vote or provide any other person with the authority to vote any of its Cornerstone shares other than in compliance with the Purchaser Voting Agreement, Cornerstone will not (i) permit any such transfer on its books and records, (ii) issue a new certificate representing any such shares or (iii) record such vote, in each case, unless and until Chiesi has complied with the terms of the Purchaser Voting Agreement.

 

In addition, Chiesi may not:

 

 

Termination

 

The Purchaser Voting Agreement will terminate upon the earlier of (i) the approval and adoption of Charter Amendment or (ii) the termination of the Stock Purchase Agreement pursuant to its terms.

 

The following section contains a summary of the Amended Bylaws, a copy of which is attached as Exhibit G to the Stock Purchase Agreement and is incorporated by reference into this proxy statement. The rights and obligations of Cornerstone are governed by the express terms and conditions of the Amended Bylaws. This summary and the summaries of the Amended Bylaws elsewhere in this proxy statement may not contain all of the information about the Amended Bylaws that is of importance to you and are qualified in their entirety by reference to the complete text of the Amended Bylaws. We encourage you to read the Amended Bylaws carefully and in their entirety for a more complete understanding of the Amended Bylaws.

 

The Stock Purchase Agreement and the Governance Agreement contemplate that Cornerstone’s bylaws will be amended to be consistent with the terms of the Governance Agreement. It is a condition to Chiesi’s obligation to consummate the Company Stock Sale that the Amended Bylaws will be in effect. Adoption of the Amended Bylaws requires the approval of Cornerstone’s board of directors, and does not require stockholder approval. While the Governance Agreement is in effect, the Amended Bylaws provide (i) that a majority of the total authorized number of directors and at least one Chiesi designated or nominated director shall constitute a quorum of Cornerstone’s board of directors, (ii) a majority in voting power of the Cornerstone board will constitute action by the Cornerstone board, (iii) any vacancies will be filled in accordance with the Governance Agreement and (iv) all matters relating to executive compensation will require the approval of the Cornerstone compensation committee and the ratification of the Cornerstone board. In addition, so long as Chiesi beneficially owns Cornerstone common stock constituting at least 50% of all outstanding common stock on a Fully Diluted Basis (as defined in the Amended Bylaws) the following actions are subject to approval by the Cornerstone board of directors:

 

 

“Fully Diluted Basis” is defined in the Amended Bylaws as a calculation that gives effect to the number of shares of Cornerstone common stock then issued and outstanding plus the aggregate number of all shares of common stock that Cornerstone may be required to issue as of such date pursuant to all options, warrants, rights, convertible or exchangeable securities or similar obligations then outstanding, whether or not such securities are then exercisable and exchangeable but excluding, however, any options, warrants or other similar rights outstanding at the date the Amended Bylaws are adopted that have an exercise price equal to or greater than $26.00 per share.

 

The following section contains a summary of the Employment Agreements, copies of which are attached as Exhibit A to the Stock Purchase Agreement and are incorporated by reference into this proxy statement. The rights and obligations of the parties to each Employment Agreement are governed by the express terms and conditions of such Employment Agreement. This summary and the summaries of the Employment Agreements elsewhere in this proxy statement may not contain all of the information about the Employment Agreements that is of importance to you and are qualified in their entirety by reference to the complete text of the Employment Agreements. We encourage you to read the Employment Agreements carefully and in their entirety for a more complete understanding of the Employment Agreements.

 

On May 6, 2009, Cornerstone entered into employment agreements with the following individuals: Craig A. Collard, Steven M. Lutz, David Price, Joshua Franklin, Brian Dickson, M.D., and Alan Roberts (the “Employment Agreements”). Each of these individuals other than Mr. Roberts is currently an officer of Cornerstone and has agreed to continue to serve as an officer of Cornerstone, effective as of the closing of the Company Stock Sale. These agreements will become effective only if Cornerstone Stock Sale is consummated.

 

Mr. Collard’s Employment Agreement provides that Mr. Collard will continue to serve as Cornerstone’s President and Chief Executive Officer. The initial term of the Employment Agreement will end on the one-year anniversary of the date of the closing of the Company Stock Sale, with automatic renewal for additional one-year terms unless either party gives notice of non-renewal at least 90 days prior to the end of the then current term or the agreement is terminated. Under the terms of the agreement, Mr. Collard is entitled to a minimum base salary of $394,784, which may be increased from time to time by the Cornerstone board, and an annual target cash bonus of up to 50% of his then annual base salary. Mr. Collard’s Employment Agreement also provides that while employed by Cornerstone, Mr. Collard will have full use of the motor vehicle leased by Cornerstone that Mr. Collard is currently using and Cornerstone will pay, or reimburse Mr. Collard for, the lease payments, automobile insurance, taxes and title fees associated with such vehicle. Mr. Collard will not be eligible to receive any annual equity awards unless otherwise approved by the Cornerstone board, but will be entitled to participate in all employee bonus and benefit programs of Cornerstone to the extent Mr. Collard’s position, tenure, salary, age, health and other qualifications make him eligible to participate.

 

If Mr. Collard’s employment is terminated by Cornerstone without Cause or by Mr. Collard for Good Reason and such termination is not during a Change of Control Period, and if Mr. Collard executes a release and settlement agreement in a form acceptable to Cornerstone, he will be entitled to:

 

 

If Mr. Collard’s employment is terminated by Cornerstone without Cause or by Mr. Collard for Good Reason and such termination is during a Change in Control Period, and if Mr. Collard executes a release and settlement agreement in a form acceptable to Cornerstone, he will be entitled to:

 

 

 

The terms Cause, Good Reason and Change of Control Period are specifically defined in Mr. Collard’s Employment Agreement. Upon termination of Mr. Collard’s employment, Cornerstone will pay, or reimburse Mr. Collard for, the balance of the remaining lease payments on the vehicle provided by Cornerstone for his use, and will assign and transfer title and other appropriate evidence of ownership of the vehicle to him in exchange for $100.00.

 

Under the terms of his Employment Agreement, Mr. Collard agreed not to compete with Cornerstone during his employment with Cornerstone and if his employment is terminated, for (i) one and a half years following a termination without Cause or for Good Reason and not during a Change of Control Period, (ii) two years following a termination without Cause or for Good Reason during a Change of Control Period and (iii) one year following a termination under any other circumstances. Mr. Collard also agreed to a provision that prohibits him from soliciting, among others, Cornerstone’s employees and customers during the term of his employment and for one year following the termination of his employment. The Employment Agreement also contains customary provisions relating to confidentiality, proprietary information and non-disparagement.

 

Mr. Lutz’s Employment Agreement provides that he will continue to serve as Cornerstone’s Executive Vice President, Manufacturing and Trade. The initial term of the Employment Agreement will end on the one-year anniversary of the date of the closing of the Company Stock Sale, with automatic renewal for additional one-year terms unless either party gives notice of non-renewal at least 90 days prior to the end of the then current term or the agreement is terminated. Under the terms of the agreement, Mr. Lutz is entitled to a minimum base salary of $260,000, which may be increased from time to time by the Cornerstone board, an annual target cash bonus of up to 40% of his then annual base salary. Mr. Lutz’s Employment Agreement also provides that while employed by Cornerstone, Mr. Lutz will have full use of the motor vehicle leased by Cornerstone that Mr. Lutz is currently using and Cornerstone will pay, or reimburse Mr. Lutz for, the lease payments, automobile insurance, taxes and title fees associated with such vehicle. Mr. Lutz will not be eligible to receive any annual equity awards unless otherwise approved by the Cornerstone board, but will be entitled to participate in all employee bonus and benefit programs of Cornerstone to the extent Mr. Lutz’s position, tenure, salary, age, health and other qualifications make him eligible to participate.

 

If Mr. Lutz’s employment is terminated by Cornerstone without Cause or by Mr. Lutz for Good Reason, and if Mr. Lutz executes a release and settlement agreement in a form acceptable to Cornerstone, he will be entitled to:

 

 

The terms Cause, Good Reason and Change of Control Period are specifically defined in Mr. Lutz’s Employment Agreement.

 

Under the terms of his Employment Agreement, Mr. Lutz agreed not to compete with Cornerstone during his employment with Cornerstone and for year following termination of his employment. Mr. Lutz also agreed to a provision that prohibits him from soliciting, among others, Cornerstone’s employees and customers during

the term of his employment and for one year following the termination of his employment. The Employment Agreement also contains customary provisions relating to confidentiality, proprietary information and non-disparagement.

 

Each of the Employment Agreements of David Price, Brian Dickson, M.D., Joshua Franklin and Alan Roberts (collectively, the “Executives”), provide that such Executives will, with respect to Mr. Price, continue to serve as the Executive Vice President, Finance, Chief Financial Officer, Treasurer and Secretary of Cornerstone, with respect to Dr. Dickson, continue to serve as Chief Medical Officer of Cornerstone, with respect to Mr. Franklin, continue to serve as Vice President, Sales and Marketing of Cornerstone, and with respect to Mr. Roberts, continue to serve as Vice President, Scientific Affairs of Cornerstone. The initial term of each Employment Agreement will end on the one year anniversary of the date of the closing of the Company Stock Sale, with automatic renewal for additional one-year terms unless either party gives notice of non-renewal at least 90 days prior to the end of the then current term or the agreement is terminated. Under the terms of the Employment Agreements, each Executive is entitled to a minimum base salary of $288,791, with respect to Mr. Price, $281,216, with respect to Dr. Dickson, $222,600, with respect to Mr. Franklin and $225,000, with respect to Mr. Roberts, which may be increased from time to time by the Cornerstone board, an annual target cash bonus of up to 35% of his then annual base salary and, with respect to Mr. Price, Mr. Franklin and Mr. Roberts a monthly car allowance of $850. Dr. Dickson’s Employment Agreement provides that while employed by Cornerstone, Dr. Dickson will have full use of the motor vehicle leased by Cornerstone that Dr. Dickson is currently using and Cornerstone will pay, or reimburse Dr. Dickson for, the lease payments, automobile insurance, taxes and title fees associated with such vehicle. Under the terms of each Employment Agreement, Cornerstone has agreed to grant the Executive an option to purchase 50,000 shares of Common Stock, and each Executive will be eligible to receive an annual performance-based equity award in the form of an option to purchase, in whole or in part, up to 50,000 shares of Common Stock in each of the year 2010, 2011 and 2012, vesting ratably over a four-year period. For a period of two years, Executives may not, directly or indirectly, transfer any of his shares of Cornerstone common stock except as permitted under the Employment Agreements.

 

If an Executive’s employment is terminated by Cornerstone without Cause or by such Executive for Good Reason and if such Executive executes a release and settlement agreement in a form acceptable to Cornerstone, he will be entitled to:

 

 

The terms Cause, Good Reason and Change of Control Period are specifically defined in the Employment Agreements.

 

Under the terms of the Employment Agreements, each Executive agrees not to compete with Cornerstone during his employment with Cornerstone and for one year following termination of such Executive’s employment. Each Executive has also agreed to a provision that prohibits him from soliciting, among others, Cornerstone’s employees and customers during the term of his employment and for one year following the termination of his employment. The Employment Agreements also contain customary provisions relating to confidentiality, proprietary information and non-disparagement.

 

The following table sets forth information regarding beneficial ownership of our common stock as of [    l    ] by:

 

 

Beneficial ownership is determined in accordance with the applicable rules of the SEC and includes voting or investment power with respect to shares of our common stock. Shares of common stock issuable under stock options and warrants that are currently exercisable or exercisable within 60 days of [    l    ], 2009 are deemed to be beneficially owned by the person holding the option or warrant for purposes of calculating the percentage ownership of that person but are not deemed outstanding for purposes of calculating the percentage ownership of any other person. The information set forth below is not necessarily indicative of beneficial ownership for any other purpose, and the inclusion of any shares deemed beneficially owned in this table does not constitute an admission of beneficial ownership of those shares. Unless otherwise indicated, to our knowledge, all persons named in the table have sole voting and investment power with respect to the shares of common stock beneficially owned by them, except, where applicable, to the extent authority is shared by spouses under community property laws.