PROPOSAL NO. 2
REINCORPORATION IN DELAWARE
Introduction
For the reasons set forth below, the Board of Directors believes that the best interests of the Company and it
shareholders will be served by changing the state of incorporation of the Company from California to
Delaware (the "Reincorporation Proposal" or the "Proposed Reincorporation"). Shareholders are urged to
read carefully the following sections of this Proxy Statement, including the related exhibits, before voting on
the Reincorporation Proposal. Throughout the Proxy Statement, the term "Cygnus California" refers to the
existing California corporation and the term "Cygnus Delaware" refers to the new Delaware corporation, a
wholly owned subsidiary of Cygnus California, which is the proposed successor to Cygnus California.
The Reincorporation Proposal will be effected by merging Cygnus California into Cygnus Delaware. Upon
completion of the merger, Cygnus California will cease to exist and Cygnus Delaware will continue to
operate the business of the Company under the name Cygnus Therapeutic Systems, Inc.
Pursuant to the Agreement and Plan of Merger, a copy of which is attached hereto as Exhibit A (the "Merger
Agreement"), each outstanding share of Cygnus California Common Stock, no par value, will automatically
be converted into one share of Cygnus Delaware Common Stock, par value $0.001, upon the effective date of
the merger. Each stock certificate representing issued and outstanding shares of Cygnus California Common
Stock will continue to represent the same number of shares of Common Stock of Cygnus Delaware. IT
WILL NOT BE NECESSARY FOR SHAREHOLDERS TO EXCHANGE THEIR EXISTING
STOCK CERTIFICATES FOR STOCK CERTIFICATES OF CYGNUS DELAWARE. However,
shareholders may exchange their certificates if they so choose. The Common Stock of Cygnus California is
listed for trading on the Nasdaq National Market, and after the merger Cygnus Delaware's Common Stock
win continue to be traded on the Nasdaq National Market without interruption, under the same symbol
("CYGN") employed by the Company prior to the merger.
Under California law, the affirmative vote of a majority of the outstanding shares of Common Stock of
Cygnus California is required for approval of the Merger Agreement and the other terms of the Proposed
Reincorporation. See "Vote Required for the Reincorporation Proposal." The Proposed Reincorporation has
been unanimously approved by Cygnus California's Board of Directors. If approved by the shareholders, it is
anticipated that the merger will become effective as soon as practicable (the "Effective Date") fol lowing the
Annual Meeting of Shareholders. However, pursuant to the Merger Agreement, the merger may be
abandoned or the Merger Agreement may be amended by the Board of Directors (except that the principal
terms may not be amended without shareholder approval) either before or after shareholder approval has
been obtained and prior to the Effective Date of the Proposed Reincorporation if, in the opinion of the Board
of Directors of either company, circumstances exist which make it inadvisable to proceed under the original
terms of the Merger Agreement.
Shareholders of Cygnus California will have no dissenters' rights of appraisal with respect to the Rein-
corporation Proposal. See "Significant Differences Between the Corporation Laws of California and
Delaware-Appraisal Rights."
The discussion set forth below is qualified in its entirety by reference to the Merger Agreement, the
Certificate of Incorporation of Cygnus Delaware (the "Certificate of Incorporation") and the Bylaws of
Cygnus Delaware, copies of which are attached hereto as Exhibit A, B and C, respectively.
APPROVAL BY SHAREHOLDERS OF THE PROPOSED REINCORPORATION WILL
CONSTITUTE APPROVAL OF THE MERGER AGREEMENT, THE CERTIFICATE OF
INCORPORATION AND THE BYLAWS OF CYGNUS DELAWARE AND ALL PROVISIONS
THEREOF.
Vote Required for the Reincorporation Proposal
Approval of the Reincorporation Proposal, which will also constitute approval of (i) the Merger Agreement,
the Certificate of Incorporation and the Bylaws of Cygnus Delaware, (ii) the assumption of Cygnus
California's employee benefit plans and stock option and purchase plans by Cygnus Delaware, (iii) the
assumption of Cygnus California's shareholder rights plan and (iv) revisions in the Company's
indemnification agreements with its officers and directors to take full advantage of Delaware law, will
require the affirmative vote of the holders of a majority of the outstanding shares of Cygnus California
entitled to vote.The Board recommends a vote FOR the proposed reincorporation in Delaware. The effect of an
abstention is the same as that of a vote against the Reincorporation Proposal.
Principal Reasons for the Proposed Reincorporation
For many years Delaware has followed a policy of encouraging incorporation in that state and, in furtherance
of that policy, has been a leader in adopting, construing and implementing comprehensive, flexible corporate
laws responsive to the legal and business needs of corporations organized under its laws. Many corporations
have initially chosen Delaware for their state of incorporation or have subsequently changed their corporate
domicile to Delaware in a manner similar to that proposed by the Company. Because of Delaware's
prominence as the state of incorporation for many major corporations, both the legislature and courts in
Delaware have demonstrated an ability and a willingness to act quickly and effectively to meet changing
business needs. The Delaware courts have developed considerable expertise in dealing with corporate issues
and a substantial body of case law has developed construing Delaware law and establishing public policies
with respect to corporate legal affairs.
Anti-takeover Implications
Delaware law has been widely viewed to permit a corporation, greater flexibility in governing its internal
affairs and its relationships with shareholders and other parties than do the laws of many other states,
including California. In particular, Delaware law permits a corporation to adopt a number of measures
designed to reduce a corporation's vulnerability to hostile takeover attempts. Such measures are either not
currently permitted or are more narrowly drawn under California law. The Reincorporation Proposal is not
being proposed in order to prevent such a change in control, nor is it in response to any present attempt
known to the Board of Directors to acquire control of the Company, obtain representation on the Board of
Directors or take significant action which affects the Company.
In the discharge of its fiduciary obligations to its shareholders, the Board of Directors has evaluated the
Company's vulnerability to potential unsolicited bidders. On September 21, 1993, the Board adopted a
shareholder rights plan. Shareholder rights plans have generally been accepted by Delaware courts, while
their validity under California law is much less certain. Cygnus Delaware will assume the shareholder rights
plan of Cygnus California in the Proposed Reincorporation and the Certificate of Incorporation sets forth
the rights, preferences and privileges of the Series A Junior Participating Preferred Stock issuable pursuant
to such plan. The Board of Directors of the Company may consider in the future certain other defensive
strategies designed to enhance the Board's ability to negotiate with an unsolicited bidder. These strategies
include, but are not limited to, severance agreements for its management and key employees which bec ome
effective upon the occurrence of a change in control of the Company and the designation and issuance of
preferred stock, the rights and preferences of which are determined by the Board of Directors. Some of these
measures may be implemented under California law. There is nonetheless substantial judicial precede nt in
the Delaware courts as to the legal principles applicable to such defensive measures and as to the conduct of
the Board of Directors under the business judgment rule with respect to unsolicited takeover attempts. In
particular, certain types of "poison pill" defenses have been upheld by Delaware courts, while California
courts have yet to decide on the validity of such defenses, thus rendering their effectiveness in California less
certain.
Certain effects of the Reincorporation Proposal may be considered to have anti-takeover implications.
Section 203 of the Delaware General Corporation Law, from which Cygnus Delaware does NOT intend to
opt out, restricts certain "business combinations" with "interested shareholders" for three years following the
date that a person becomes an interested shareholder, unless the Board of Directors approves the business
combination. See "Significant Differences Between the Corporation Laws of California and Delaware-
Shareholder Approval of Certain Business Combinations." Furthermore, certain changes to the relative rights
of shareholders and management which have anti-takeover implications maybe implemented under Delawa re
law. Certain of these changes, including the elimination of the right of shareholders controlling at least ten
percent (10%) of the voting shares to call a special meeting of shareholders and the elimination of the right of
shareholders to remove a director other than for cause, will be implemented as part of the Proposed
Reincorporation. In addition, certain changes which reduce shareholder participation in important corporate
decisions and which could be instituted in California without reincorporating in Delaware will also be
implemented as part of the Proposed Reincorporation. These changes include the elimination of the right of
shareholders to act by written consent and the establishment of procedural requirements for shareholders
wishing to nominate directors or present proposals for shareholder consideration. There can be no assurance
that the Board of Directors will not adopt any further anti-takeover measures available under Delaware law
(some of which may not require shareholder approval). For a detailed discussion of all of the changes which
will be implemented as part of the Proposed Reincorporation, see "The Charters and Bylaws of Cygnus
California and Cygnus Delaware." For a discussion of these and other differences between the laws of
California and Delaware, see "Significant Differences Between the Corporation Laws of California and
Delaware."
Shareholder Rights PlanUnder the Cygnus Shareholder Rights Plan, the stockholders will receive one Preferred Stock Purchase Right
(collectively, the "Rights") for each outstanding share of Cygnus Delaware Common Stock. The Rights will
be exercisable only if a person or group acquires 15% or more of the Cygnus Delaware Common Stock or
announces a tender offer the consummation of which would result in ownership by a person or group of 15%
or more of the Company's Common Stock. Each Right will entitle stockholders to buy one-hundredth of a
share of Series A Junior Participating Preferred Stock at an exercise price of $40 upon the occurrence of
certain events. If, after the Rights become exercisable, Cygnus Delaware is acquired in a merger or other
business combination transaction, or sells 50% or more of its assets or earnings power, each Right will entitle
its holder to purchase, at the Right's then-current price, a number of the acquiring company's common shares
having a market value at the time of twice the Right's exercise price. In addition, if a person or group
acquires 15% or more of the Cygnus Delaware outstanding Common Stock, otherwise; than pursuant to a
tender offer for all shares which is determined by the Board of Directors to be fair and in the best interests of
the Company and its stockholders, each Right will entitle its holder (other than such person or members of
such group) to purchase, at the Right's then-current exercise price, a number of Cygnus Delaware's common
shares (or cash, other securities or property) having a market value of twice the Right's exercise price.
Following the acquisition by a person or group of beneficial ownership of 15% or more of the Cygnus
Delaware Common Stock and prior to an acquisition of 50% or more of the Cygnus Delaware Common
Stock, the Board of Directors may exchange the Rights (other than Rights owned by such person or group),
in whole or in part, at an exchange ratio of one share of Common Stock (or one one-hundredth of a share of
Series A Junior Participating Preferred Stock) per Right. At any time prior to ten days after a person or group
has acquired beneficial ownership of 15% or more of the Cygnus Delaware Common Stock, the Rights are
redeemable for one cent per Right at the option of the Board of Directors. The Rights are intended to enable
all stockholders to realize the long-term value of their investment in the Company. The Rights will not
prevent a takeover, but should encourage anyone seeking to acquire the Company to negotiate with the Board
of Directors prior to attempting a takeover.
The Board of Directors believes that unsolicited takeover attempts may be unfair or disadvantageous to the
Company and its stockholders because a non-negotiated takeover bid may be timed to take advantage of
temporarily depressed stock prices or may be designed to foreclose or minimize the possibility of more
favorable competing bids. In addition, a non-negotiated takeover bid may involve the acquisition of only a
controlling interest in the corporation's stock, without affording all stockholders the opportunity to receive
the same economic benefits.
By contrast, in a transaction in which an acquiror must negotiate with an independent board of directors, the
board can and should take account of the underlying and long-term values of assets, the possibilities for
alternative transactions on more favorable terms, possible advantages from a tax-free reorganization,
anticipated favorable developments in the Company's business not yet reflected in the stock price and
equality of treatment of all stockholders.
Despite the belief of the Board of Directors as to the benefits to shareholders of the Reincorporation
Proposal, it may be disadvantageous to the extent that it has the effect of discouraging a future takeover
attempt which is not approved by the Board of Directors, but which a majority of the shareholders may deem
to be in their best interests or in which stockholders may receive a substantial premium for their shares over
the then current market value or over their cost basis in such shares. As a result of such effects of the
Reincorporation Proposal, stockholders who might wish to participate in a tender offer may not have an
opportunity to do so. In addition, to the extent that such provisions enable the Board of Directors to resist a
takeover or a change in control of the Company, they could make it more difficult to change the existing
Board of Directors and management.
Possible Disadvantages
Despite the unanimous belief of the Board of Directors that the Reincorporation Proposal is in the best
interests of Cygnus California and its shareholders, it should be noted that Delaware law has been criticized
by some commentators on the grounds that it does not afford minority shareholders the same substantive
rights and projections as are available in a number of other states. For a comparison of shareholders' rights
and the powers of management under Delaware and California law, see "Significant Differences Between the
Corporation Laws of California and Delaware." In addition, the Reincorporation Proposal includes certain
permitted changes to the Restated Articles of Incorporation (the "Articles of Incorporation") and Bylaws of
the Company which alter the relative rights of shareholders and management and which reduce shareholder
participation in important corporate decisions. Furthermore, there may be circumstances in which Cygnus
California could recover damages from a director for actions or omissions that result in damage to the
Company, in which Cygnus Delaware will not be able to recover from such director due to the broader
protection afforded under Cygnus Delaware's Certificate of Incorporation and Bylaws. In this regard it
should be noted that the current directors of the Company will benefit from the director liability provision
contained in Cygnus Delaware's Certificate of Incorporation and Bylaws, as to actions or omissions by them
after the Proposed Reincorporation is consummated, and accordingly have a personal interest in approval of
the Reincorporation Proposal. At present, there is no material pending litigation or proceeding involving a
director, officer, employee or agent for which indemnification is sought, and the Company is not aware of
any material threatened litigation or proceeding that may result in a claim for indemnification. For a detailed
discussion of the changes which will be implemented as part of the Proposed Reincorporation, see "The
Charters and Bylaws of Cygnus California and Cygnus Delaware."
No Change in the Name, Board Members, Business, Management, Employee Plans or Location of
Principal Facilities of the Company
The Reincorporation Proposal will effect only a change in the legal domicile of the Company and other
changes of a legal nature, certain of which are described in this Proxy Statement. The Proposed
Reincorporation will NOT result in any change in the name, business, management, fiscal year, assets or
liabilities or location of the principal facilities of the Company. The five directors who are electe d at the
Annual Meeting of Shareholders will become the directors of Cygnus Delaware. All employee benefit, stock
option and purchase plans of Cygnus California (including the 1986 Incentive Stock Plan, the 1991
Employee Stock Purchase Plan, as amended, and the 1994 Stock Option/Award Plan) will be continued by
Cygnus Delaware, and each option or right issued pursuant to such plans will automatically be converted into
an option or right to purchase the same number of shares of Cygnus Delaware Common Stock, at the same
price per share, upon the same terms, and subject to the same conditions, as set forth in such plans.
Shareholders should note that approval of the Reincorporation Proposal will also constitute approval of the
assumption of these plans by Cygnus Delaware. Other employee benefit arrangements of Cygnus California
will also be continued by Cygnus Delaware upon the terms and subject to the conditions currently in effect.
As noted above, after the merger the shares of Common Stock of Cygnus Delaware will continue to be
traded, without interruption, in the same principal market and under the same symbol ("CYGN") as the
shares of Common Stock of Cygnus California prior to the merger.
The Charters and Bylaws of Cygnus California and Cygnus Delaware
The provisions of the Cygnus Delaware Certificate of Incorporation and Bylaws are similar to those of the
Cygnus California Articles of Incorporation and Bylaws in many respects. However, the Reincorporation
Proposal includes the implementation of certain provisions in the Cygnus Delaware Certificate of
Incorporation and Bylaws which alter the rights of shareholders and the powers of management and which
reduce shareholder participation in important corporate decisions. These provisions have anti-takeover
implications and are described in detail below. Approval by shareholders of the Proposed Reincorporation
will constitute an approval of the inclusion in the Cygnus Delaware Certificate of Incorporation and Bylaws
of each of the provisions described below. ' In addition, certain other changes altering the rights of
shareholders and powers of management could be implemented in the future by amendment of the Certificate
of Incorporation following shareholder approval and certain such changes could be implemented by
amendment of the Bylaws of Cygnus Delaware without shareholder approval. For a discussion of such
changes, see "Significant Differences Between the Corporation Laws of California and Delaware." This
discussion of the Certificate of Incorporation and Bylaws of Cygnus Delaware is qualified by reference to
Exhibits B and C hereto, respectively.
Elimination of Shareholder Actions by Written Consent and Right to Call Special Meetings. The Certificate
of Incorporation and Bylaws of Cygnus Delaware will provide that shareholders may act only at an annual or
special meeting of shareholders and not by written consent. Although the Bylaws of Cygnus California
provide for shareholder actions by written consent, the Company has not used this method of obtaining
shareholder approval since becoming a public company in 1991, and because of the large number of
shareholders of the Company and its current practice of soliciting proxies and holding meetings, the
Company does not expect to use this procedure in the future. In addition, the Bylaws of Cygnus Delaware
provide that special meetings of shareholders can be called only by the Board of Directors, the Chairman of
the Board or the Chief Executive Officer. Shareholders are not permitted to call a special meeting or to
require that the Board call a special meeting of shareholders. Moreover, the business permitted to be
conducted at any special meeting of shareholders is limited to the business brought before the meeting by or
at the discretion of the Board of Directors.
Reasons for Elimination of Shareholder Action by Written Consent and Right to Call Special Meetings. The
provisions prohibiting shareholder action by written consent would ensure that all shareholders of the
Company get the opportunity to participate in determining any proposed shareholder action and would
prevent the holders of a majority of the voting power of the Company from using the written consent
procedure to take shareholder action. Persons attempting unfriendly takeovers of corporations have attempted
to use written consent procedures in order to deal directly with shareholders and avoid negotiations with the
boards of directors of such companies. The provisions regarding the elimination of the right of shareholders
to call a special meeting would mean that a shareholder could not force shareholder consideration of a
proposal over the opposition of the Board of Directors by calling a special meeting of shareholders prior to
such time as the Board believed such consideration to be appropriate. By eliminating the use of the written
consent procedure and the ability of shareholders to call a special meeting, the Company intends to
encourage persons seeking to acquire control of the Company to initiate such an acquisition through arm's-
length negotiations with the Company's management and Board of Directors.
Possible Disadvantages of Elimination of Shareholder Actions by Written Consent and Right to Call Special
Meetings. The provisions restricting shareholder action by written consent and the elimination of the
shareholders' ability to call special meetings may have the effect of delaying consideration of a shareholde r
proposal until the next annual meeting unless a special meeting is called by the Board of Directors. Because
elimination of the procedures for shareholders to act by written consent or to call special meetings could
make more difficult an attempt to obtain control of the Company, such action could have the effect of
discouraging a third party from making a tender offer or otherwise attempting to obtain control of the
Company. Because tender offers for control usually involve a purchase price higher than the prevailing
market price, the provisions restricting shareholder action by written consent and the elimination of the
shareholders' ability to call special meetings may have the effect of preventing or delaying a bid for the
Company's shares which could be beneficial to the Company and its shareholders. Elimination of the written
consent procedure also means that a meeting of shareholders would be required in order for the Company's
shareholders to replace the Board. The restriction on the ability of shareholders to call a special meeting
means that a proposal to replace the Board could be delayed until the next annual meeting. These provisions
thus will make the removal of directors more difficult. In addition, elimination of the written consent
procedure may lengthen the amount of time required to take shareholder actions since certain actions by
written consent are not subject to the minimum notice requirement of a shareholders' meeting.
Two thirds Voting Provisions Regarding Certain Actions. The Cygnus Delaware Certificate of Incorporation
contains a requirement of approval of two thirds of the shareholders to alter, amend or repeal certain articles
of the Cygnus Delaware Certificate of Incorporation. The provisions of the Certificate of Incorporation
subject to the greater percentage vote requirement are Article VII, concerning the election of directors
without a written ballot; Article VIII, concerning the size of and removal from the Board of Directors; Article
IX, concerning alteration or amendment of the Bylaws; Article X, concerning indemnification of directors;
Article XI, concerning terms of directors, filling of vacancies on the Board of Directors and the elimination
of cumulative voting; Article XIII, concerning shareholder actions by written consent; and Article XIV,
concerning this two thirds voting requirement.
The "supermajority" voting provisions are an essential part of the overall structure being proposed to
encourage individuals or groups who desire to propose takeover bids or similar transactions to negotiate with
the Board of Directors. For example, the "supermajority" voting provisions in the Cygnus Delaware
Certificate of Incorporation and Bylaws prevent a shareholder or group of shareholders with less than two
thirds of the outstanding voting stock from amending the Certificate of Incorporation or Bylaws to delete the
provision which requires shareholders to act only at annual or special meetings and not by written consent.
This provision prevents a shareholder with a majority of the voting power of the Company from avoiding the
requirements of the provision by simply repealing it. To the extent that this supermajority requirement adds
to the effectiveness of the other provisions discussed herein, it would also incorporate the possible
disadvantages discussed herein regarding such provision.
Elimination of Cumulative Voting. Unlike the Bylaws of Cygnus California, the Certificate of Incorporation
and Bylaws of Cygnus Delaware do not permit cumulative voting. Cumulative voting entitles each
shareholder to cast a number of votes that is equal to the number of voting shares held by such shareholder
multiplied by the total number of directors to be elected, and to cast all such votes for one nominee or
distribute such votes among up to as many candidates as there are positions to be filled. (For a further
description of the mechanics of cumulative voting, see the section entitled "Share Ownership and Voting" on
page 1 of this Proxy Statement.) Without cumulative voting, a shareholder or group of shareholders must
hold a majority of the voting shares to cause the election of one or more nominees. Cumulative voting may
enable a minority shareholder or group of shareholders to elect at least one representative to the Board. For
example, in each election of directors under cumulative voting rules where five directors are to be elected, a
shareholder or group holding greater than 16.7% of the voting shares is guaranteed the ability to elect one
director. If the Reincorporation Proposal is adopted, in all future elections of the Board of Directors,
commencing with the Annual Meeting to be held in 1995, the holders of a majority of the shares actually
voted (assuming that a quorum is present) will be guaranteed the right to elect all of the directors being
elected at that time.
Reasons for Elimination of Cumulative Voting. The Board of Directors believes that each director elected to
the Board should represent the interests of all shareholders. The elimination of cumulative voting should help
ensure that each director acts in the best interests of all shareholders, because shareholders holding a majority
of the voting shares will have the power to elect every director to be elected at any annual meeting. The
election of the Board by holders of a majority of the voting stock is not a departure from the manner in which
the Company's directors have been elected in the past. Even though the Company has always permitted
cumulative voting, such voting has never been used in the election of a director to the Company's Board.
Possible Disadvantages of Elimination of Cumulative Voting. The elimination of cumulative voting win
make it more difficult for a minority shareholder or group of shareholders to elect a representative to the
Board of Directors. In addition, it should be noted that the elimination of cumulative voting may also have
certain anti-takeover effects. It may, under certain circumstances, discourage or render more difficult a
merger, tender offer proxy contest or acquisition of large blocks of the Company's shares by persons who
would not make such acquisition without assurance of the ability to place a representative on the Board of
Directors; deter or delay the assumption of control by a holder of a large block of the Company's shares; or
render more difficult the replacement of incumbent directors and management. The Board is not aware that
any existing shareholder or group of shareholders intend to exercise cumulative voting rights at the Annual
Meeting.
Nominations of Director Candidates and Introduction of Business at Shareholder Meetings.
There is no specific statutory requirement under either California law or Delaware law with regard to
advance notice of director nominations and shareholder proposals. Absent a Bylaw restriction, director
nominations and shareholder proposals may be made without advance notice at the annual meeting. The
Bylaws of Cygnus Delaware establish an advance notice procedure with regard to the nomination, other than
by or at the direction of the Board of Directors, of candidates for election as directors (the "Nomination
Procedure") and with regard to certain matters to be brought before an annual meeting of shareholders (the
"Business Procedure"). The Cygnus California Bylaws do not contain any provisions regarding advance
notice of director nominations and shareholder proposals.
The Nomination Procedure provides that only persons nominated by or at the direction of the Board of
Directors or by a shareholder who has given timely written notice to the Secretary of the Company prior to
the meeting, will be eligible for election as directors. The Business Procedure provides that, subject to any
other applicable requirements, only such business may be conducted at an annual meeting as has been
brought before the meeting by or at the direction of the Board of Directors or by a shareholder who has given
timely written notice to the Secretary of the Company of such shareholder's intention to bring such business
before the meeting. In all cases, to be timely, notice must be received by the Company not less than 60 days
prior to the meeting (or if fewer than 70 days' notice or prior public disclosure of the meeting date is given or
made to shareholders, not later than the tenth day following the day on which such notice was mailed or such
public disclosure was made).
Under the Nomination Procedure, a shareholder's notice to the Company must contain certain information
about the nominee, including name, address, the consent to be nominated and such other information as
would be required to be included in a proxy statement soliciting proxies for the election of the proposed
nominee, and certain information about the shareholder proposing to nominate that person, including name,
address, a representation that the shareholder is a holder of record of stock entitled to vote at the meeting and
a description of all arrangements or understandings between the shareholder and each nominee. Under the
Business Procedure, notice relating to the conduct of business at an annual meeting other than the nomination
of directors must contain certain information about the business and about the shareholder who proposes to
bring the business before the meeting. If the Chairman or other officer presiding at the meeting determines
that a person was not nominated in accordance with the Nomination Procedure, such person will not be
eligible for election as a director, or if he or she determines that other business was not properly brought
before such meeting in accordance with the Business Procedure, such business will not be conducted at such
meeting. Nothing in the Nomination Procedure or the Business Procedure will preclude discussion by any
shareholder of any nomination or business properly made or brought before the annual meeting in
accordance with the above-described procedures.By requiring advance notice of nominations by shareholders, the Nomination Procedure affords the Board of
Directors an opportunity to consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Board, to inform the shareholders about such qualifications. By requiring
advance notice of proposed business, the Business Procedure provides the Board with an opportunity to
inform shareholders of any business proposed to be conducted at a meeting and the Board's position on any
such proposal, enabling shareholders to better determine whether they desire to attend the meeting or grant a
proxy to the Board of Directors as to the disposition of such business. In addition, the Business Procedure
provides for a more orderly procedure for conducting the annual meeting of shareholders. Although the
Cygnus Delaware Bylaws do not give the Board any power to approve or disapprove shareholder
nominations for the election of directors or any other business desired by shareholders to be conducted at an
annual meeting, the Cygnus Delaware Bylaws may have the effect of precluding a nomination for the
election of directors or of precluding any other business at a particular annual meeting if the proper
procedures are not followed. In addition, the procedures may discourage or deter a third party from
conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain
control of the Company, even if the conduct of such business or such attempt might be beneficial to the
Company and its shareholders.
Authorized Stock. The Articles of Incorporation of Cygnus California authorize 35,000,000 shares of capital
stock, no par value, which consists of 30,000,000 shares of Common Stock and 5,000,000 shares of Preferred
Stock. The Certificate of Incorporation of Cygnus Delaware will provide for the same number of shares of
Common and Preferred Stock, each with par value of $0.001. The Articles of Incorporation of Cygnus
California and the Certificate of Incorporation of Cygnus Delaware each authorize the Board of Directors to
fix the rights, preferences, privileges and restrictions of one or more series out of the authorized shares of
Preferred stock (which would include dividend rights, conversion rights, voting rights, terms of redemption
and liquidation preferences) without further vote or action by the shareholders. The Certificate of
Incorporation designates 500,000 shares of Preferred Stock as Series A Junior participating Preferred Stock
which shares are issuable upon exercise of certain rights under the Company's Shareholder Rights Plan.
Issuance of the Series A Junior Participating Preferred Stock or other authorized Preferred Stock with terms
giving it substantial voting power, conversion or other rights could have the effect of (i) delaying, deferring
or preventing a change in control of the Company or (ii) otherwise modifying the rights of holders of the
Company's Common Stock under either California or Delaware law. See "Anti-takeover Implications -
Shareholder Rights Plan."
Monetary Liability of Directors. The Articles of Incorporation of Cygnus California and the Certificate of
Incorporation of Cygnus Delaware both provide for the elimination of personal monetary liability of directors
to the fullest extent permissible under the laws of each corporation's respective state of incorporation. The
provision eliminating monetary liability of directors set forth in, the Certificate of Incorporation of Cygnus
Delaware is potentially more expansive in that it incorporates future amendments to Delaware law with
respect to the elimination of such liability.
Compliance With Delaware and California Law
California. Following the Annual Meeting of Shareholders, if this Proposal is approved, the Company will
submit the Merger Agreement to the office of the California Secretary of State for filing.
Delaware. Following the Annual Meeting of Shareholders, if this Proposal is approved, the Company will
submit the Merger Agreement to the office of the Delaware Secretary of State for filing.
Significant Differences Between the Corporation Laws of California and Delaware
The General Corporation Laws of California and Delaware differ in many respects. It is not practical to
summarize all of such differences in this Proxy Statement, but some of the principal differences which could
materially affect the rights of shareholders are discussed below.
Size of the Board of Directors. Under California law, the number of directors of a corporation may be fixed
in the articles of incorporation or bylaws of a corporation, or a range may be established for the number of
directors, with the Board of Directors given authority to fix the exact number of directors within such range.
The Bylaws of Cygnus California establish a range of four to seven for the number of directors of the
Company, with the exact number currently set at seven. The provision setting forth the number of directors in
the Bylaws of Cygnus California may not be amended to reduce the minimum number of directors below
five if the votes cast against the adoption of such amendment at a meeting, or the shares not consenting in the
case of action by written consent, are equal to more than 16 2/3% of the outstanding shares entitled to vote.Under Delaware law, the number of directors of a corporation, or the range of authorized directors, may be
fixed or changed by the board of directors acting alone, by amendment to the corporation's bylaws, unless the
directors are not authorized to amend the bylaws or the number of directors is fixed in the certificate of
incorporation, in which cases shareholder approval is required. The Bylaws of Cygnus Delaware establish the
number of directors at seven, and Cygnus Delaware's Certificate of Incorporation authorizes the Board of
Directors to make, alter, amend or repeal the Bylaws, and accordingly a majority of Cygnus Delaware's
Board of Directors will have the power to change the authorized number of directors. The Board does not
have this power under California law.
Cumulative Voting. Under California law, if any shareholder has given notice of his or her intention to
cumulate votes for the election of directors, any other shareholder of the corporation is also entitled to
cumulate his or her votes at such election. Under California law, corporations such as Cygnus California that
have 800 or more shareholders of record and have their stock listed on the Nasdaq National Market may
eliminate such cumulative voting rights by adopting amendments to their articles and bylaws, which
amendments must be approved by the shareholders. Cumulative voting is not available under Delaware law
unless specifically provided for in a corporation's certificate of incorporation. The Certificate of
Incorporation does not provide for cumulative voting and, therefore, the shareholders of Cygnus Delaware
will no longer have cumulative voting rights. The elimination of cumulative voting limits the ability of
minority shareholders to obtain representation on the Board of Directors. For a more detailed description of
the implications of the elimination of cumulative voting, see "The Charters and Bylaws of Cygnus California
and Cygnus Delaware."
Classified Board of Directors. A classified board is one on which a certain number, but not all, of the
directors are elected on a rotating basis each year. Under California law, directors generally are elect ed
annually; however, corporations such as Cygnus California that have 800 or more shareholders of record and
have their stock traded on the Nasdaq National Market may designate a classified board by adopting
amendments to their articles and bylaws which amendments must be approved by the shareholders. Delaware
law permits, but does not require, a classified board of directors, with staggered terms under which one-half
or one-third of the directors are elected for terms of two or three years, respectively. This method of electing
directors makes a change in the composition of the board of directors, and a potential change in control of a
corporation, a lengthier and more difficult process. The Certificate of Incorporation and Bylaws of Cygnus
Delaware do not provide for a classified Board of Directors.
Written Consent of Shareholders. Both the California and Delaware General Corporation Laws provide that
the shareholders of a corporation may take action by written consent without a meeting, unless the
corporation's charter documents provide otherwise. The Articles of Incorporation of Cygnus California do
not contain any provisions prohibiting actions by written consent and, accordingly, the shareholders of
Cygnus California may take action by written consent without a meeting. The Certificate of Incorporation of
Cygnus Delaware explicitly prohibits shareholder actions by written consent. As a result, the shareholders of
Cygnus Delaware can take action only at a duly called meeting of the shareholders. For a more detailed
discussion of the implications of the elimination of such shareholder consents, see "The Charters and Bylaws
of Cygnus California and Cygnus Delaware."
Power to Call Special Shareholders' Meetings. Under California law, a special meeting of shareholders may
be called by the board of directors, the chairman of the board, the president, the holders of shares entitled to
cast not less than ten percent of the votes at such meeting and such additional persons as are authorized by
the articles of incorporation or the bylaws. Under Delaware law, a special meeting of shareholders may be
called by the board of directors or by any other person authorized to do so in the certificate of incorporation
or the bylaws. The Certificate of Incorporation and Bylaws of Cygnus Delaware do not contain provisions
granting shareholders the right to call a special meeting of shareholders. Because the right of shareholders to
call a special meeting is not set forth in the Certificate of Incorporation or Bylaws of Cygnus Delaware,
shareholders will no longer be able to call a special meeting of shareholders to vote on a transaction that is
opposed by the Board of Directors. For a more detailed discussion of the implications of the elimination of
such power to call special shareholder meetings, see "The Charters and Bylaws of Cygnus California and
Cygnus Delaware."
Shareholder Approval of Certain Business Combinations. In the last several years, a number of states (but
not California) have adopted special laws designed to subject to shareholder approval certain kinds of
"unfriendly" corporate takeovers, or other transactions involving a corporation and one or more of its
significant shareholders. Under Section 203 of the Delaware General Corporation Law ("Section 203"),
certain "business combinations" with "interested shareholders" of Delaware corporations are subject to a
three-year moratorium unless specified conditions are met. With certain exceptions, an interested shareholder
is a person or group who or which owns 15% or more of the corporation's outstanding voting stock
(including any rights to acquire stock pursuant to an option, warrant, agreement, arrangement or
understanding, or upon the exercise of conversion or exchange rights, and stock with respect to which the
person has voting rights only), or is an affiliate or associate of the corporation and was the owner of 15% or
more of such voting stock at any time within the previous three years.For purposes of Section 203, the term "business combination" is defined broadly to include mergers with or
caused by the interested shareholder; sales or other dispositions to the interested shareholder (except
proportionately with the corporation's other shareholders) of assets of the corporation or a subsidiary equal to
ten percent or more of the aggregate market value of the corporation's consolidated assets or its outstanding
stock; the issuance or transfer by the corporation or a subsidiary of stock of the corporation or such
subsidiary to the interested shareholder (except for transfers in a conversion or exchange or a pro rata
distribution or certain other transactions, none of which increase the interested shareholder's proportionate
ownership of any class or series of the corporation's or such subsidiary's stock); or receipt by the interested
shareholder (except proportionately as a shareholder), directly or indirectly, of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203 does not apply if: (i) prior to
the date on which such shareholder becomes an interested shareholder the board of directors approves either
the business combination or the transaction which resulted in the person becoming an interested shareholder;
(ii) the interested shareholder owns 85% of the corporation's voting stock upon consummation of the
transaction which made him or her an interested shareholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares held by employee stock plans
which do not permit employees to decide confidentially whether to accept a tender or exchange offer); or (iii)
on or after the date such person becomes an interested shareholder, the board approves the business
combination and it is also approved at a shareholder meeting by sixty-six and two-thirds percent (66 2/3%) of
the voting stock not owned by the interested shareholder.
Section 203 only applies to Delaware corporations which have a class of voting stock that is listed on a
national securities exchange, such as the Nasdaq National Market (as is Cygnus California and as Cygnus
Delaware would be) or are held of record by more than 2,000 shareholders. However, a Delaware
corporation may elect not to be governed by Section 203 by a provision in its original certificate of
incorporation or an amendment thereto or to the bylaws, which amendment must be approved by majority
shareholder vote and may not be further amended by the board of directors. Cygnus Delaware does not
intend to opt out of Section 203; therefore, Section 203 will apply to Cygnus Delaware.
Section 203 has been challenged in lawsuits arising out of ongoing takeover disputes, and it is not yet clear
whether and to what extent its constitutionality will be upheld by the courts. Although the United States
District Court for the District of Delaware has consistently upheld the constitutionality of Section 203, the
Delaware Supreme Court has not yet considered the issue. The Company believes that so long as the
constitutionality of Section 203 is upheld, Section 203 will encourage any potential acquiror to negotiate wi th
the Company's Board of Directors. Section 203 also has the effect of limiting the ability of potential acquiror
to make a two-tiered bid for Cygnus Delaware in which all shareholders would not be treated equally.
Section 203 should also discourage certain potential acquirors unwilling to comply with its provisions.
Removal of Directors. Under California law, any director or the entire board of directors may be removed,
with or without cause, with the approval of a majority of the outstanding shares entitled to vote; however, no
individual director may be removed (unless the entire board is removed) if the number of votes cast against
such removal would be sufficient to elect the director under cumulative voting. Under Delaware law, a
director of a corporation that does not have a classified board of directors or cumulative voting may be
removed with or without cause with the approval of a majority of the outstanding shares entitled to vote. In
the case of a Delaware corporation having cumulative voting, if less than the entire board is to be removed, a
director may not be removed without cause unless the number of shares voted against such removal would
not be sufficient to elect the director under cumulative voting. A director of a corporation with a classified
Board of Directors may be removed only for cause, unless the certificate of incorporation otherwise provides.
The Certificate of Incorporation of Cygnus Delaware does not provide for a classified Board of Directors.
However, the Certificate of Incorporation of Cygnus Delaware specifically provides that directors of Cygnus
Delaware may be removed from office by shareholders only for cause. The term "cause" with respect to the
removal of directors is not defined in the Delaware General Corporation Law and its meaning has not been
precisely delineated by the Delaware courts.,
Filling Vacancies on the Board of Directors. Under California law, any vacancy on the board of directors
other than one created by removal of a director may be filled by the board. If the number of directors is less
than a quorum, a vacancy may be filled by the unanimous written consent of the directors then in office, by
the affirmative vote of a majority of the directors at a meeting held pursuant to notice or waivers of notice or
by a sole remaining director. A vacancy created by removal of a director may be filled by the board only if so
authorized by a corporation's articles of incorporation or by a bylaw approved by the corporation's
shareholders. Cygnus California's Bylaws permit directors to fill vacancies created by removal of a director.
Under Delaware law, vacancies and newly created directorships may be filled by a majority of the directors
then in office (even though less than a quorum) unless otherwise provided in the certificate of incorporation
or bylaws (and unless the certificate of incorporation directs that a particular class is to elect such director, in
which case any other directors elected by such class, or a sole remaining director, shall fill such vacancy).
The Bylaws of Cygnus Delaware provide, consistent with the Bylaws of Cygnus California, that any vacancy
created by the removal of a director by the stockholders of Cygnus Delaware or by court order may be filled
only by the stockholders.
Loans to Officers and Employees. Under California law, any loan or guaranty to or for the benefit of a
director or officer of the corporation or its parent requires approval of the shareholders unless such loan or
guaranty is provided under a plan approved by shareholders owning a majority of the outstanding shares of
the corporation. In addition, under California law, shareholders of any corporation with 100 or more
shareholders of record may approve a bylaw authorizing the board of directors alone to approve loans or
guaranties to or on behalf of officers (whether or not such officers are directors) if the board determines that
any such loan or guaranty may reasonably be expected to benefit the corporation. The Bylaws of Cygnus
California authorize such loans or guaranties. Under Delaware law, a corporation may make loans to,
guarantee the obligations of or otherwise assist its officers or other employees and those of its subsidiaries
(including directors who are also officers or employees) when such action, in the judgment of the directors,
may reasonably be expected to benefit the corporation.
Indemnification and Limitation of Liability. California and Delaware have similar laws respecting
indemnification by a corporation of its officers, directors, employees and other agents. The laws of both
states also permit corporations to adopt a provision in their articles of incorporation eliminating the li ability
of a director to the corporation or its shareholders for monetary damages for breach of the director's fiduciary
duty of care. There are nonetheless certain differences between the laws of the two states respecting
indemnification and limitation of liability.
The Articles of Incorporation of Cygnus California eliminate the liability of directors to the Company t o the
fullest extent permissible under California law. California law does not permit the elimination of mone tary
liability where such liability is based on: (a) intentional misconduct or knowing and culpable violation of
law-, (b) acts or omissions that a director believes to be contrary to the best interest of the corporation or its
shareholders, or that involve the absence of good faith on the part of the director; (c) receipt of an improper
personal benefit; (d) acts or omissions that show reckless disregard for the director's duty to the corporation
or its shareholders where the director in the ordinary course of performing a director's duties should be aware
of a risks of serious injury to the corporation or its shareholders; (e) acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation and its
shareholders; (f) interested transactions between the corporation and a director in which a director has a
material financial interest; and (g) liability for improper distributions, loans or guarantees.
The Certificate of Incorporation of Cygnus Delaware also eliminates the liability of directors to the ful lest
extent permissible under Delaware law, as such law exists currently or as it may be amended in the future.
Under Delaware law, such provision may not eliminate or limit director monetary liability for (a) breac hes of
the director's duty of loyalty to the corporation or its shareholders; (b) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (c) the payment of unlawful dividends or
unlawful stock repurchases or redemptions; or (d) transactions in which the director received an improper
personal benefit. Such limitation of liability provision also may not limit a director's liability for vi olation of,
or otherwise relieve Cygnus Delaware or its directors from the necessity of complying with federal or state
securities laws, or affect the availability of non-monetary remedies such as injunctive relief or rescissi on.
California law permits indemnification of expenses incurred in derivative or third-party actions, except tha t
with respect to derivative actions (a) no indemnification may be made without court approval when a person
is adjudged liable to the corporation in the performance of that person's duty to the corporation and its
shareholders, unless a court determines such person is entitled to indemnity for expenses, and then such
indemnification may be made only to the extent that such court shall determine, and (b) no indemnification
may be made without court approval in respect of amounts paid or expenses incurred in settling or otherwise
disposing of a threatened or pending action or amounts incurred in defending a pending action which is
settled or otherwise disposed of without court approval.. Delaware allows indemnification of such expenses
without court approval.
Delaware law generally permits indemnification of expenses incurred in the defense or settlement of a
derivative or third-party action, provided there is a determination by a disinterested quorum of the directors,
by independent legal counsel or by a majority vote of a quorum of the shareholders that the person seeking
indemnification acted in good faith and in a manner reasonably believed to be in or (in contrast to Californi a
law) not opposed to the best interests of the corporation. Without court approval, however, no
indemnification may be made in respect of any derivative action in which such person is adjudged liable for
negligence or misconduct in the performance of his or her duty to the corporation. Delaware law requires
indemnification of expenses when the individual being indemnified has successfully defended the action on
the merits or otherwise.
Indemnification is permitted by California law only for acts taken in good faith and believed to be in the best
interests of the corporation and its shareholders, as determined by a majority vote of a disinterested quorum
of the directors, independent legal counsel (if a quorum of independent directors is not obtainable), a
majority vote of a quorum of the shareholders (excluding shares owned by the indemnified party), or the
court handling the action. California law requires indemnification when the individual has successfully
defended the action on the merits (as opposed to Delaware law which requires indemnification relating to a
successful defense on the merits or otherwise).
California corporations may include in their articles of incorporation a provision which extends the scope of
indemnification through agreements, bylaws or other corporate action beyond that specifically authorized by
statute. The Articles of Incorporation of Cygnus California includes such a provision. In 1988, following
shareholder approval, Cygnus California amended its Articles of Incorporation to permit indemnification
beyond that expressly mandated by the California Corporations Code and to limit director monetary liability
to the extent permitted by California law. Cygnus California also entered into indemnification agreem ents
with its officers and directors, following approval of such agreements by the Company's shareholders in 1988.
Delaware law states that the indemnification provided by statute shall not be deemed exclusive of any ot her
rights under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise. Under
Delaware law, therefore, the indemnification agreements entered into by Cygnus California with its officers
and directors may be assumed by Cygnus Delaware upon completion of the Proposed Reincorporation. If the
Proposed Reincorporation is approved, the indemnification agreements will be amended to the extent
necessary to take full advantage of Delaware law, and a vote in favor of the Proposed Reincorporation is also
approval of such amendments to the indemnification agreements. In particular, the indemnification
agreements will be amended to include within their purview future changes in Delaware law which expand
the permissible scope of indemnification of directors and officers of Delaware corporations.
Currently, there are no actions pending against officers or directors of the Company in their capacities as
such.
The indemnification and limitation of liability provisions of California law, and not Delaware law, will a pply
to actions of the directors and officers of Cygnus California made prior to the Proposed Reincorporation. In
considering the Reincorporation Proposal, the Board has recognized that the individual directors have a
personal interest in obtaining the application of Delaware law, but that the expense to the Company might be
greater after the Proposed Reincorporation to the extent that any director or officer is actually indemnified in
circumstances where indemnification would not be available under California law. The Board believes,
however, that the overall effect of reincorporation is to provide a corporate legal environment that enhances
the Company's ability to attract and retain high quality outside directors and thus enhances the interests of the
Company and its shareholders.
Inspections of Shareholders List. Both California and Delaware law allow any shareholder to inspect the
shareholders list for a purpose reasonably related to such person's interest as a shareholder. California law
provides, in addition, for an absolute right to inspect and copy the corporation's shareholder list by persons
holding an aggregate of five or more percent of a corporation's voting shares, or shareholders holding an
aggregate of 1% or more of such shares who have filed a Schedule 14B with the Securities and Exchange
Commission relating to the election of directors. Delaware law does not provide for any such absolute right
of inspection, and no such right is granted under the Certificate of Incorporation or Bylaws of Cygnus
Delaware. Lack of access to shareholder records, even though unrelated to the shareholder's interest as a
shareholder, could result in impairment of the shareholder's ability to coordinate opposition to management
proposals, including proposals with respect to a change in control of the Company.
Dividends and Repurchases of Shares. California law dispenses with the concepts of par value of shares as
well as statutory definitions of capital, surplus and the like. The concepts of par value, capital and surplus are
retained under Delaware law.
Under California law, a corporation may not make any distribution (including dividends, whether in cash or
other property, and repurchases of its shares) unless either the corporation's retained earnings immediately
prior to the proposed distribution equal or exceed the amount of the proposed distribution or, immediately
after giving effect to such distribution, the corporation's assets (exclusive of goodwill, capitalized research
and development expenses and deferred charges) would be at least equal to 1.25 times its liabilities (not
including deferred taxes, deferred income and other deferred credits), and the corporation's current assets
would be at least equal to its current liabilities (or 1.25 times its current liabilities if the ave rage pre-tax and
pre-interest expense earnings for the preceding two fiscal years were less than the average interest expense
for such years). Such tests are applied to California corporations on a consolidated basis.
Delaware law permits a corporation to declare and pay dividends out of surplus or, if there is no surplus, out
of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year as long
as the amount of capital of the corporation following the declaration and payment of the dividend is not less
than the aggregate amount of the capital of the corporation represented by the issued and outstanding stock of
all classes having a preference upon the distribution of assets. In addition, Delaware law generally provides
that a corporation may redeem or repurchase its shares only if such redemption or repurchase would not
impair the capital of the corporation.
To date, the Company has not paid cash dividends on its capital stock. It is the present policy of the Board of
Directors to retain earnings for use in the Company's business, and therefore, the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
Shareholder Voting. Both California and Delaware law generally require that a majority of the shareholders
of both acquiring and target corporations approve statutory mergers. Delaware law does not require a
shareholder vote of the surviving corporation in a merger (unless the corporation provides otherwise in its
certificate of incorporation) if (a) the merger agreement does not amend the existing certificat e of
incorporation, (b) each share of the surviving corporation outstanding before the merger is an identical
outstanding or treasury share after the merger, and (c) the number of shares to be issued by the surviving
corporation in the merger does not exceed 20% of the shares outstanding immediately prior to the merger.
California law contains a similar exception to its voting requirements for reorganizations where shareholders
or the corporation itself, or both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than five-sixths of the voting power of the surviving or
acquiring corporation or its entity.
Both California and Delaware law also require that a sale of all or substantially all of the assets of a
corporation be approved by a majority of the voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers, reorganizations, certain sales
