IsZo Capital & Black Horse Write to Taro Pharmaceutical Providing Market Check on Sun Pharmaceutical Going Private, Squeeze-Out Merger, Exposing Materially Misleading Statements in Going Private Disclosure and Reasserting Demand for Information

NEW YORK, Sept. 20, 2012  /PRNewswire/ -- IsZo Capital Management LP and Black Horse Capital Advisors LLC, two of the largest minority shareholders of Taro Pharmaceutical Industries Ltd. (NYSE: TARO), announced today that they delivered the following letter to the Special Committee of the Board of Directors of Taro in connection with the approval by Taro's Board of Directors, Special Committee and Audit Committee of the Agreement of Merger, dated as of August 12, 2012, by which Sun Pharmaceutical Industries Ltd. (BSE: SUNPHARMA) proposes to take Taro private and squeeze out Taro's minority shareholders.  The letter cites additional evidence that the consideration Sun proposes to pay to take Taro private is grossly inadequate, contrary to the analysis of truly independent analysts and substantially undervalues Taro.  IsZo and Black Horse further expose the materially misleading statements made in Taro's going private disclosure and reassert their demand for information that IsZo and Black Horse are entitled to receive under Israeli law as Taro minority shareholders.

September 20, 2012

VIA COURIER
Special Committee of the Board of Directors of
Taro Pharmaceutical Industries Ltd.
Euro Park (Italy Building)
Yakum Business Park, Yakum 60972, Israel
Attention: Professor Dov Pekelman, Chairman of the Special Committee

Re: Market Check on Sun Squeeze-Out; Misleading Going Private Disclosure; Failure to Respond to Document Demand
IsZo Capital Letters dated November 29, 2011, December 13, 2011,
December 23, 2011, February 15, 2012, May 10, 2012
and August 31, 2012

Ladies and Gentlemen:                                                     

IsZo Capital Management LP ("IsZo") and Black Horse Capital Advisors LLC ("Black Horse"), two of Taro's largest minority shareholders, have continued to monitor developments with respect to our respective investments in Taro Pharmaceutical Industries Ltd. ("Taro" or the "Company"). After having carefully reviewed Taro's Schedule 13E-3 and related preliminary Proxy Statement (collectively, the "Going Private Disclosure"), filed with the U.S. Securities and Exchange Commission (the "SEC") on August 31, 2012, and taking into account Taro's failure to respond to our earlier demand for information pursuant to the Israeli Companies Law (the "Companies Law"), we are compelled to send you this letter (a) discussing additional evidence clearly indicating that the consideration Sun Pharmaceutical Industries Ltd. (together with its affiliates, "Sun") proposes to pay in exchange for the shares of Taro it does not already own is grossly inadequate, (b) analyzing materially misleading statements made in the Going Private Disclosure and (c) reminding you and Taro that our August 31, 2012 demand for information was not optional.

Background: Previous Sun Offer & Proposed Squeeze-Out

On August 13, 2012, Taro announced that it had entered into an Agreement of Merger, dated as of August 12, 2012 (the "Squeeze-Out Agreement"), with Sun, pursuant to which it is intended that a wholly owned subsidiary of Sun merge with and into Taro (the "Squeeze-Out"), whereupon Taro will become a private company, wholly owned by Sun, and its shares will cease to be traded on the New York Stock Exchange (the "NYSE"). The purpose of this transaction is for Sun, Taro's controlling shareholder, to squeeze out Taro's minority shareholders and acquire Taro's remaining share capital not already owned by Sun at the bargain price of $39.50 per share.

In our previous letters to the Special Committee (the "Special Committee") of the Board of Directors of Taro (the "Board"), we have called attention to Sun's opportunistic attempts to purchase the minority shares of Taro on the cheap to the detriment of Taro's minority shareholders. First, Sun offered $24.50 per Taro share on October 17, 2011 (the "Previous Offer"), seeking to capitalize on the depressed price of Taro's shares as these traded in limited volumes and with reduced liquidity on the Pink Sheets. Although the Previous Offer was grossly inadequate, the Special Committee wasted 9 months to arrive at the conclusion that was painfully obvious to the minority shareholders from day one – that the Previous Offer substantially undervalued Taro on both an absolute basis and relative to Sun. The Special Committee claims that it took 9 months to make a decision because management had not bothered to perform earlier the kind of long-term financial analysis that would have behooved any prudent management team to refine and consult periodically in the discharge of its duties. As we pointed out previously, the Special Committee's inordinate delay in rejecting the Previous Offer resulted in uncertainty in the market and a depressed stock price for the 9-month duration of that delay (the Special Committee then astutely takes credit for securing a premium for the minority shareholders relative to this artificially depressed price in its negotiations with Sun, which we discuss separately below).

After being ignored by the Special Committee for 5 months despite our efforts to reach out to engage in constructive dialogue, we finally received good news when Taro followed one of the recommendations from one of our previous letters by relisting its shares on the NYSE on March 22, 2012. Immediately upon listing, Taro's shares began trading at prices that were considerably higher than the Previous Offer. Given these developments, we expected the Special Committee to delay no further and reject the Previous Offer immediately. However, the Taro minority shareholders were forced to wait another 4 months before the Special Committee finally rejected the Previous Offer on July 19, 2012, even after Sun had publicly stated on March 15, 2012, just 7 days before Taro's shares began trading on the NYSE at prices significantly above the Previous Offer, that it had no intention of increasing the Previous Offer. This statement by Sun cleansed the market of any expectation that a higher offer from Sun would be made if the $24.50 per share offer was rejected by the Special Committee.

When the Special Committee finally rejected the Previous Offer, in no small part due to the numerous public letters written by Taro's minority shareholders against Sun's attempts to steal our company and the prospect of litigation (and personal liability for Taro's directors) looming on the horizon, we thought that perhaps the Special Committee had finally come to its senses. We should have known better, as just 3 weeks later, after only 2 days of negotiations with Sun, the Special Committee inexplicably determined that the Squeeze-Out was in our best interests and agreed to give away our company to Sun at the bargain price of $39.50 per share (the "Squeeze-Out Offer") when Taro's shares closed at $40.97 per share on the last trading day preceding the Squeeze-Out announcement and, as explained in our prior letters, Taro's shares are clearly worth significantly more.

The reasons why we believe that the Previous Offer and the Squeeze-Out Offer are both shameless attempts by the controlling shareholder of our company to wrestle our shares out of our hands are discussed in detail in both our prior letters to you and the letters other minority Taro shareholders have written to the Special Committee. Continuing to add to those reasons, we direct the Special Committee's attention to the recently announced acquisition of Medicis Pharmaceutical Corporation, a leading pharmaceutical company in the dermatology space and a direct competitor of Taro ("Medicis"), by Valeant Pharmaceuticals International ("Valeant") at a multiple more than twice the implied multiple in the Squeeze-Out Offer.

Valeant Acquisition of Medicis

On September 4, 2012, Valeant announced it had entered into a merger agreement to acquire Medicis for $2.6 billion. Valeant is offering to pay $44.00 in cash for each share of Medicis, representing a value of 39% over the closing price of Medicis' shares on August 31, 2012, the last trading day prior to deal announcement. Valeant's offer values Medicis at about 12 times the most recent 12 months' EBITDA, according to data compiled by Bloomberg, compared with the median 14 times EBITDA in eight other recent pharmaceutical takeovers. By way of comparison, Sun's Squeeze-Out Offer values Taro at a mere 5 times the most recent 12 months' EBITDA.

Taro and Medicis have comparable businesses. They are both in the pharmaceuticals industry and, more specifically, they both make a number of dermatology specialty and generic products. These two companies also have similar market capitalizations ($1.94 billion for Taro and $2.60 billion for Medicis) and, as of September 10, 2012, were listed on the NYSE at similar prices per share ($43.44 for Taro and $43.52 for Medicis). The fact that a direct competitor of Taro with a business similar to Taro's is being valued at 12 times EBITDA, and the median for other takeovers in that industry is 14 times EBITDA, makes it clear that Sun's Squeeze-Out Offer significantly undervalues Taro's shares. In an interview published on July 25, 2012, Dilip Shanghvi, Sun's founder and managing director, and until May 2012, its Chairman, self-servingly stated Taro was "over valued at the moment" (Taro opened on that day at $38.10 and closed at $39.30 and has climbed to as high as $44.24 since). Yet, Sun's current offer values Taro's shares at a mere 5 times EBITDA. As shown in our prior letters, which are supported by the EBITDA multiple offered for Medicis and other generic dermatology pharmaceutical acquisition targets, a more accurate value for Taro would be $130.00 to $140.00 per share. The Medicis/Valeant transaction further evidences that the Squeeze-Out Offer is clearly well below market and serves as a true market-check on the Squeeze-Out Offer that the Special Committee cannot ignore.

Materially Misleading Information in Taro's Going Private Disclosure

In addition to the grossly inadequate and unfair price per share in the Squeeze-Out Offer, the proposed transaction suffers from material omissions and misleading statements in the Going Private Disclosure. The material deficiencies described below evidence: (a) a concerted effort by Taro and Sun to distort the public's perceived value of Taro's shares, (b) a disregard by Taro for the true independence required to evaluate Sun's offer and (c) a failure by Taro and Sun to abide by the Companies Law, which governs the Squeeze-Out Agreement and  voting matters at the general meeting of Taro's shareholders to be convened to vote on the Squeeze-Out.

1. Concerted Effort to Distort the Public's Perceived Value of Taro's Shares

a. The Going Private Disclosure states that the Special Committee believes the $39.50 per share Squeeze-Out Offer represents the highest per share consideration that could be obtained by the minority shareholders of Taro. Yet, on the last trading day preceding the announcement of the Squeeze-Out, at a time when the market had processed both the rejection by the Special Committee of the Previous Offer and Sun's public statements concerning its unwillingness to increase the Previous Offer, Taro's shares were trading at $40.97 per share. Accordingly, a Taro shareholder could have sold his or her stock prior to the Squeeze-Out announcement at $40.97, a price that represents a premium of $1.47 per share over the Squeeze-Out Offer. Even today, Taro's shares continue to trade well above the Squeeze-Out Offer price, evidencing the market's negative perception of the Squeeze-Out. Based on yesterday's closing price of $43.94 per share, a Taro shareholder could sell his or her Taro shares at a premium of $4.44 over the Squeeze-Out Offer. These facts call to serious question how the Special Committee could ever think that $39.50 is the "highest per-share consideration that could be obtained," rendering the Going Private Disclosure materially misleading, as noted in our contemporaneous letter to the SEC.

b. In the Going Private Disclosure, the Special Committee touts as one of its justifications for accepting the Squeeze-Out Offer that the Squeeze-Out price of $39.50 per share represents a premium of "103%" to the closing price of Taro's shares on October 17, 2011, the last trading day before Sun announced the Previous Offer. Taro uses the stock price from October 17, 2011 of $19.45 per share throughout the Going Private Disclosure as a gauge for the Squeeze-Out premium. In providing this value, however, Taro fails to mention a crucial point – that on October 17, 2011, Taro's shares were not yet listed on the NYSE, and were still being traded on the Pink Sheets. Taro is well aware that the stock had significantly less volume and liquidity at that time and had an artificially depressed price for the ensuing 9 months due, in no small part, to the Special Committee's inaction with respect to rejecting the grossly inadequate Previous Offer. Repeatedly referring to this straw man price of $19.45 throughout the Going Private Disclosure is disingenuous and materially misleading, if not fraudulent as to Taro's true share value. Taro's stock has only been trading on the NYSE since March 22, 2012, since which time it has traded at a range between $35.55 and $48.17 and stabilized at a price well above the Squeeze-Out Offer. As noted earlier, on August 10, 2012, the last trading day before the Squeeze-Out was announced, Taro's shares were trading above the $39.50 per share Squeeze-Out Offer, closing on that day at $40.97. The stock rising above the Squeeze-Out Offer to $40.97 in the absence of a pending deal is a testament to the fact that the take-under deal proposed by Sun is preventing Taro's shares from appreciating to their full potential. In fact, the Squeeze-Out Offer represents a discount not only relative to the closing price of Taro's shares on August 10, 2012, the last trading day before the announcement of the Squeeze-Out, but also relative to the average closing prices of Taro's shares of $39.86 during the period commencing on the date on which Taro's shares began to trade on the NYSE on March 22, 2012 and ending on August 10, 2012.

c. The Going Private Disclosure provides details regarding the negotiations between the Special Committee and Sun leading up to the Squeeze-Out Offer of $39.50 per share. After the rejection of Sun's Previous Offer, Sun presented a new offer to the Special Committee of $37.50 per share. The following day, the Special Committee submitted a counterproposal to Sun at a price of $40.50 per share. After negotiations that lasted a mere day, the Special Committee accepted Sun's Squeeze-Out Offer at a price of $39.50 per share. It is unclear what led the Special Committee to react so quickly to Sun's offer (especially given the fact that it took the Special Committee 9 months to reject the grossly inadequate Previous Offer) and why the Special Committee decided to counter Sun's offer at the price of $40.50 instead of a higher offer, particularly in light of the various public letters the Special Committee has received from the minority shareholders supporting much higher valuations. Taro's shares closed at prices well above the Squeeze-Out Offer at various times over the 12 months prior to the signing of the Squeeze-Out Agreement and the Special Committee has been unable to explain why it believed that $40.50 was the highest price that Taro minority shareholders could expect to receive for their shares, especially in light of market checks like the Medicis transaction, as described above. The only explanation for the Special Committee's careless rush to lock-in Sun's low-ball  offer is to blatantly favor Sun in the misguided belief that the broad exculpations improperly adopted at Taro's recent Annual Meeting will withstand the scrutiny of the Israeli courts.  In this regard, we remind you that breaches of the duty of loyalty may not be exculpated under Israeli law.

d. In the Going Private Disclosure, Taro's management projects that Taro will have $573.6 million of USD sales and $267.3 of EBITDA in 2012. These low projections are made despite first half sales of $304.2 million and first half EBITDA of $154.3 million. Based on recent script data from IMS Health, Credit Suisse First Boston ("CSFB") predicts that the next two quarters will be strong (as price increases affect results on a lag). CSFB projects that the third quarter will bring sales of greater than $167 million and $92 million of EBITDA. These projections mean that for the first three quarters of 2012, Taro is expected to have sales of $471 million and $246.3 million of EBITDA. Thus, after just 9 months this year, Taro will have already progressed 92% towards hitting its projected EBITDA estimate for the year 2012. If the fourth quarter of 2012 is anything like the projections for the third quarter, then Taro will have 2012 sales of $638 million (as opposed to the $573 million management estimate) and $338 million of EBITDA (compared to the $267 million management estimate). It is clear that management's projections are off by more than 65% for the 6-month forecasted period! The use of these flawed and obviously manipulated projections casts serious doubt upon the competence and credibility of management, Citi as the financial advisor and the Special Committee.

e. The Going Private Disclosure indicates that Taro's sales and profit growth are not sustainable. Apparently, this fact was considered by the Special Committee to be a positive factor in its support of the Squeeze-Out. This assertion regarding Taro's sales and profit growth is highly suspect and has been publicly disputed by Taro's minority shareholders and independent analysts, such as CSFB, which has analyzed Taro's sales and profit growth and recently concluded that nearly 90% of Taro's business is sustainable. Despite the efforts of Taro's management (controlled by Sun) to temper enthusiasm for Taro's strong financial results by highlighting the potential lack of sustainability of Taro's performance, recent IMS prescription data and pricing through the end of August show that Taro's sales and pricing continue to be strong and show no signs of slowing down. Rather than reiterating here the other reasons we have submitted previously for your consideration indicating why Taro's robust financial performance is indeed sustainable, we refer you to our letters dated February 15, 2012 and May 10, 2012. It is apparent that Taro's management seeks to lead Taro's minority shareholders to believe that Taro's business is declining, thereby creating a sense of urgency to sell, for the benefit of the controlling shareholder of our company.

2. Flawed Fairness Opinion; Lack of Financial Advisor Independence

Citigroup Global Markets Inc. ("Citi") is acting as the financial advisor to the Special Committee to evaluate the fairness of the Squeeze-Out. However, Citi's fairness opinion is flawed and Citi has a conflict of interest with regard to the Squeeze-Out.

a. Citi's fairness opinion, attached to the Going Private Disclosure as Appendix B (the "Opinion"), is flawed because it focuses on the historical trading prices of Taro's shares during the 12-month period ended on August 10, 2012, noting that the low to high trading prices during such period were $18.30 to $48.20. The fact that Taro's shares were not listed for trading on the NYSE until March 22, 2012 makes the prior period irrelevant, as the value of the shares was lower when the shares were trading on the Pink Sheets due to having less volume and liquidity. Furthermore, Citi compared the premium paid in 53 minority squeeze-out transactions to the proposed premium to Taro's shareholders over the Taro closing price of $19.45 on October 17, 2011 (the day prior to the announcement of the Previous Offer), without mentioning that the Previous Offer was rejected, that the Squeeze-Out price reflects a discount over the Taro closing price prior to the announcement of the Squeeze-Out Agreement, and without mentioning that on October 17, 2011, Taro's shares were still traded on the Pink Sheets. As explained above, Taro's closing price from October 17, 2011 is not relevant to and does not reflect the true value of Taro.

b. Citi's fairness opinion is also materially misleading in failing to state that the comparables selected by Citi actually trade at an average EV/LTM of 10.5x and that one of the comparables in Citi's set agreed to be acquired in July of 2012 at a multiple greater than 8x, compared to Citi's implied multiples for Taro of between 4.19x to 5.46x. As noted by a Dow Jones independent analyst in an article from September 17, 2012:

In order to calculate fair value for Taro, Citi selected as comps a set of several generic pharmaceutical companies, including Perrigo Company, Hospira Inc., Impax Laboratories Inc., Watson Pharmaceuticals Inc., Par Pharmaceutical Companies, Inc. and Mylan Inc., and used both P/E and discounted cash flow analysis to assess an implied equity value per share range for Taro between $35.50 and $43.70.

Based on Taro's last-twelve-months (LTM) EBITDA to June 30, 2012, the Citi price range implies an EV/EBIDTA between 4.19x to 5.46x. That now looks low, considering that the comp set is trading at an average EV/LTM EBITDA of 10.5, according to S&P Capital IQ. In fact, one of the comps in Citi's set, Par Pharmaceuticals Inc., agreed to be acquired in July at a multiple of over 8x.

c. Citi's Opinion is also misleading in that it fails to clarify that Citi compared Taro to a broad range of "commodity" oriented, non-dermatology, generic pharmaceutical companies, rather than to specialty drug, generic pharmaceutical companies in the dermatology space, like Taro. Taro's true competitors are pharmaceutical companies in the generic dermatology space, which historically have been acquired at higher multiples. By blending all generic pharmaceutical companies together and using companies that are not true competitors of Taro in its financial analysis, Citi's projections for Taro are diluted by the lower multiples for generic (non-dermatology) pharmaceutical companies, thereby depressing the true value of Taro's shares. Further, the relative percentage of the share of the dermatology generic market of each company allegedly comparable to Taro should be disclosed in the Going Private Disclosure. Dermatology margins have been historically wider than non-dermatology generic margins due to lower competition in the specialty sector. Furthermore, Taro is the market leader and dominant player in the generic dermatology market, with a market-leading 25% share. Other competitive players like Perrigo and Fougera have smaller market shares.

d. Citi has a conflict of interest with regard to the Squeeze-Out. Despite referring to Citi throughout the Going Private Disclosure as an "independent financial advisor," Taro has agreed to pay Citi a total of $8.2 million, $5.7 million of which is payable only upon consummation of the Squeeze-Out. Citi notes in the Opinion that Citi "will receive a fee for such services, a significant portion of which is contingent upon the consummation of the Squeeze-Out." Citi also notes that Citi and its affiliates "have provided, and currently provide, services to Taro and Sun unrelated to the proposed Squeeze-Out, for which services [Citi] and such affiliates have received and expect to receive compensation." Thus, not only is a significant portion of Citi's compensation triggered only if the Squeeze-Out is completed, but Citi is also currently providing services to Sun, for which it expects to receive compensation. Citi's conflict of interest given its compensation arrangement with the Special Committee and concurrent representation of both Sun and Taro evidences that Citi does not meet the most basic and essential of the necessary qualifications set out by the Special Committee for candidates to serve as its independent financial advisor – independence. More importantly, although it might not be uncommon in the U.S. for the bulk of a financial advisor's compensation to be based on the consummation of the transaction for which that advisor is providing services, this compensation arrangement contravenes the requirements for an independent financial advisor under Israeli law. The Going Private Disclosure is misleading in that it fails to disclose that the Israeli Supreme Court very recently ruled that the Court would give little to no evidential weight to a valuation where the compensation to the financial advisor is contingent upon the consummation of the transaction. Also, the Tel Aviv District Court (Financial Division) very recently ruled that for an Israeli court to agree to accept as permissible a valuation by an "independent financial advisor," the agreement with such advisor may not include indemnification and exculpation provisions, the compensation paid to such financial advisor must not include any varying components and may not be contingent in any way and the financial advisor must declare in the framework of its opinion that it has no previous relationship with the company, its controlling shareholder or any of their affiliates. Citi's Opinion fails to meet a single criteria set out by the Israeli courts, and would clearly not be deemed as valid under Israeli law, which would apply to the Squeeze-Out, given that the Squeeze-Out Agreement is governed by the laws of the State of Israel. For this reason, we strongly believe that an Israeli court would be likely to discredit Citi as an "independent" financial advisor to the Special Committee and will not agree to place any value on the Opinion.

3. Failure to Abide by Procedural Requirements under the Companies Law

a. The Going Private Disclosure provides that if shareholders sign and return their proxy card without indicating how they wish to vote, their shares will be voted "FOR" the approval of the Squeeze-Out. This practice contradicts Sections 84 and 87(c) of the Companies Law, which specifically provides that a shareholder must specifically express voting instructions in order for its votes to be counted.

b. Taro is not taking any proactive steps to ensure that votes counted as "minority votes" are truly unaffiliated with Sun. To approve the Squeeze-Out Agreement, the Squeeze-Out and the transactions contemplated by the Squeeze-Out Agreement, there must be an affirmative vote by the "majority of the minority" present or represented by proxy at the meeting. In a letter to the shareholders on page 19 of the Going Private Disclosure, Kal Sundaram, Chairman of the Board of Directors of Taro, notes that:

Every shareholder voting at the meetings, or prior thereto by means of the enclosed proxy card, is requested to notify Taro if such shareholder has a "personal interest," as such term is defined in the Companies Law in connection with the merger agreement, the merger and the transactions contemplated by the merger agreement. By signing and mailing the enclosed proxy card or voting by telephone or by Internet you confirm, unless you specifically indicate otherwise on the proxy card or respond otherwise by telephone or by Internet, that you do not have a "personal interest."

By setting up the "personal interest" declaration on an "honor system," wherein the burden is on the voting shareholders to declare whether they have a "personal interest," Taro is not taking any proactive steps to ensure that all of the votes are truly unaffiliated with Sun, and thus properly cast in, or excluded from, the majority of the minority vote. This "honor system" could result in votes of Sun and its affiliates being counted in the majority of the minority determination, despite the stated intent in the Going Private Disclosure to exclude them based on Sun's personal interest in affirming the Squeeze-Out at a low price. The burden should be on Taro to determine which of the votes are unaffiliated with Sun. This method of pushing the burden off onto the shareholders is convenient for Sun but hurts the minority shareholders of Taro.

c. This "honor system" method of determining personal interests in the Squeeze-Out not only hurts the minority shareholders of Taro, but it also contravenes Israeli law. The Companies Law and the regulations promulgated thereunder explicitly require that if a shareholder does not indicate whether it has a personal interest in a transaction with a controlling shareholder, its vote will not be counted as part of the votes of the disinterested shareholders for the purpose of determining whether a majority of the disinterested shareholders voted in favor of the transaction. In clear contradiction of the applicable requirements under the Companies Law, in this case, if a shareholder with a personal interest does not affirmatively declare his or her personal interest on the proxy card, the shareholder's vote will not be further screened by Taro, and will be counted in the majority of the minority vote, which would contravene Israeli Law.

d. In light of the above, we demand that Taro take the following actions forthwith to safeguard the integrity of the majority of the minority vote:

i. Appoint an independent inspector of election (the "Inspector of Election") to review, tabulate and verify the votes at the Company's Shareholders Meeting that will be convened to vote upon the Squeeze-Out, and to identify, separate from any declaration made on the proxy card, which shareholders have a "personal interest," as defined in the Companies Law, in connection with the Squeeze-Out Agreement, the Squeeze-Out and the transactions contemplated by the Squeeze-Out Agreement and for the purposes of determining the success of the majority of the minority vote;

ii. Amend the proxy card to provide that if a shareholder does not indicate whether it has a personal interest in a transaction with a controlling shareholder, its vote will not be counted as part of the votes of the disinterested shareholders for the purpose of determining whether a majority of the disinterested shareholders voted in favor of the Squeeze-Out;

iii. Ensure that the Inspector of Election is an independent entity separate from Taro's proxy solicitation firm, MacKenzie Partners, Inc.;

iv. Clearly disclose in any subsequent amendments to the Going Private Disclosure how many of the ordinary shares are controlled by Sun (directly or indirectly through brokers/affiliates); and

v. Obtain a written certification from Sun's chief executive officer to Taro and the Inspector of Election, under penalty of perjury, of the number of ordinary shares controlled by Sun (directly or indirectly through brokers/affiliates) and a further written certification that Sun has not unduly voted its shares with respect to approving the Squeeze-Out Agreement, the Squeeze-Out and the transactions contemplated by the Squeeze-Out Agreement.

We believe that the Special Committee did a disservice to Taro's minority shareholders by failing to negotiate for the explicit inclusion of these basic procedural protections in the Squeeze-Out Agreement. Notwithstanding the foregoing, we expect Taro to implement these protections and other effective minority safeguards without delay.

e. Taro states in the Going Private Disclosure that "[u]nder Israeli law, [its] shareholders are not entitled to appraisal rights in connection with the merger."  This disclosure is materially misleading because the law in Israel is not highly developed in this area and, in fact, an Israeli court would likely be amenable to granting appraisal rights or similar monetary remedies under other doctrines of the Companies Law in the context of a reverse triangular squeeze out merger (as was very clearly indicated in a recent ruling by the Israeli Supreme Court). Taro was too quick to dismiss appraisal rights in the Going Private Disclosure and its disclosure therein concerning this topic is accordingly materially misleading.

These material deficiencies in the Going Private Disclosure, at best, suggest a high degree of carelessness by Taro in the preparation of these disclosures and, at worst, an intention to misrepresent the facts and mislead the public with regard to the value of Taro's shares for the benefit of  Taro's controlling shareholder. Based on the above, we demand that Taro take corrective action to clarify these defective disclosures in an amended Going Private Disclosure and institute the voting and certification safeguards described above. Notice of these and other deficiencies in the Going Private Disclosure is being delivered concurrently herewith to the Division of Corporation Finance of the SEC.

Failure to Comply with Document Request under Israeli Law

On August 31, 2012, we wrote to Taro demanding, within seven days from the date of our letter, that Taro provide us with copies of several documents relating to the Squeeze-Out and the Previous Offer. As minority shareholders of Taro, we have legal rights under the Companies Law to review these documents. More than seven days have elapsed without any documentation being provided. We would prefer to obtain such documentation outside of the litigation process and now demand again that you provide the Related Documents (as defined in the previous letter) for our review immediately.

We note that in response to our earlier demand, Taro has kindly referred us to the Going Private Disclosure. However, minutes of meetings of special committees, along with many of the other items we requested and are entitled to receive under Israeli law, are not customarily filed with proxy statements; nor does the Going Private Disclosure reference any intent to append or file such documents. Accordingly, unless you intend to append these documents to Taro's SEC filings and make them available for public perusal, please provide that information immediately.

In light of the foregoing, we urge all minority shareholders of Taro to vote against the Squeeze-Out, write to the Special Committee with their concerns and consider their legal options in both Israel and the U.S.  In the interim, we will continue to monitor our respective investments in Taro and take any necessary steps to protect those investments.

This letter does not derogate or exhaust any of our rights, including the right to assert a claim for any damages, or seek any fees and costs we may sustain or incur, including attorneys' fees, against the Company, its board of directors, the Special Committee and/or the Special Committee's advisors in enforcing our legal rights as Taro shareholders.

Sincerely,

/s/ Brian Sheehy 
Brian Sheehy
Managing Partner
IsZo Capital Management LP 

/s/ Dale Chappell 
Dale Chappell
Managing Partner
Black Horse Capital Advisors LLC

SOURCE IsZo Capital Management LP