Taro Pharmaceuticals has rejected Sun Pharma's latest offer to acquire a 64-per cent stake in the company and, instead, proposed a shareholder referendum in case Sun offered an acceptable price.

Taro said Sun Pharma should join them in a shareholder referendum for the deal and that Sun Pharma should agree to stand still for three years if shareholders reject the offer.

''Our board has asked me to inform you that it did not view the two options set forth in your proposal as constructive, or even in the ball-park,'' Taro chairman Barrie Levitt said in his letter to Sun Pharma chairman and managing director Dilip Sanghvi.

Sun Pharma had sent two proposals  to Taro on 22 December. While one sought an amendment to the agreement on merger, the second one offered to raise the  tender offer to $9 a share for non-Levitt family (the Levitts are the original controlling promoters of Taro).

The latest offer is less than the price offered by Sun Pharma earlier and rejected by Taro. The Levitt family, promoters of Taro, are now unwilling to sell their stake.

Sun has already  acquired 36.4-per cent stake at an average price of about $8 per share. The Israeli court also allowed Sun Pharma to acquire another 12.2 per cent from Taro's promoters at $7.75 per share.

In case Sun Pharma manages to get the additional 12.2 per cent promoters' stake, it will take its Taro stake to over 48 per cent, with voting rights of around 65 per cent. Acquisition of the remaining 51.4-per cent stake would depend on market conditions.

It is unlikely that Sun Pharma will accept the shareholder referendum for the Taro deal and the issue is likely to go back to the court after 9 January.

Sun Pharma's efforts to reconcile the ongoing litigation with Taro Pharma by sending two amended proposals have been rebuffed by the Israeli generic-drugs maker.

''Both Sun's merger proposal, as well as its tender offer alternative, involved prices that represented a significant reduction from the $10.25 price that Sun paid for Brandes' eight per cent minority interest in Taro in February 2008, and which you proposed to pay in your revised merger proposal last May,'' the letter said.

In its counter proposal, Taro's management said that, among other things, it was willing to have a shareholder referendum on a merger price of Sun's own choosing.

Taro's management said it was hard to understand how Sun Pharma could expect that a proposal that valued the entire equity interest in Taro at less than what Sun paid for Brandes' eight per cent interest nearly one year ago, would be a realistic starting point for ''a good faith settlement negotiation to resolve the current impasse''.

The proposals
Earlier in the day, Sun Pharma had outlined its two proposals, as directed by the Israel's Supreme Court, in an effort to settle their on-going tussle. The court's deadline was December 8.

Sun Pharma has agreed to amend the merger agreement and increase the consideration to $ 9.50/share. The initial price was at $ 7.75. But Taro would have to withdraw its termination of the merger agreement, Sun Pharma had said.

Sun Pharma too could terminate the merger agreement if the Israeli injunction prohibiting the closing of the tender offer was not lifted in 30 days or is reinstated at any time, the note had said. But in such a case, Sun Pharma will conditionally agree to pay promoters Levitt/Moros $ 8.75/ordinary share on closing the option agreement, it added. In its second option, Sun Pharma raised the tender offer price to $ 9 for all non-Levitt shareholders.

Through the first option, Sun Pharma would have gained 100 per cent control of Taro, while the second option would see its stake in Taro increase, a company spokesperson said.

Sun Pharma at present holds 36 per cent in Taro, while the Levitt/Moros family holds 12 per cent.

Taro had unilaterally terminated Sun Pharma's $ 454 million proposal to acquire it, a year after the deal was formalised in 2007. The deal then went into litigation in Israel and the US.

(Also see: Sun offers to buy Taro shares at a premium)