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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
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`Plaintiff,
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`CASE NO.:
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`ROBIN ODACH
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`-against-
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`AERPIO PHARMACEUTICALS, INC.,
`JOSEPH GARDNER, STEVEN PRELACK,
`CALEY CASTELEIN, CHERYL COHEN,
`ANUPAM DALAL, and PRAVIN DUGEL
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`Defendants.
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`COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934
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`Plaintiff Robin Odach (“Plaintiff”), on behalf of herself, by and through his attorneys,
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`alleges the following upon information and belief, including investigation of counsel and review
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`of publicly-available information, except as to those allegations pertaining to Plaintiff, which are
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`alleged upon personal knowledge:
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`NATURE OF THE ACTION
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`1.
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`This is an action brought by Plaintiff against Aerpio Pharmaceuticals, Inc.,
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`(“Aerpio” or the “Company”) and the members of the Company’s board of directors (collectively
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`referred to as the “Board” or the “Individual Defendants” and, together with Aerpio, the
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`“Defendants”) for their violations of Sections 14(a) and 20(a) of the Securities Exchange Act of
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`1934 (“Exchange Act”), 15 U.S.C. §§ 78n(a), 78t(a) respectively, and United States Securities and
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`Exchange Commission (“SEC”) Rule 14a-9, 17 C.F.R. § 240.14a-9. Plaintiff’s claims arise in
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`connection with the proposed merger of Aadi Bioscience, Inc. (“Aadi”), a privately-held
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`biopharmaceutical company, with Aerpio.
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`2.
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`On May 16, 2021, Aerpio and entered into an Agreement and Plan of Merger (the
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`1
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 2 of 19
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`“Merger Agreement”), providing for Aerpio’s acquisition of Aadi, pursuant to a merger between
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`Aerpio and Aadi, through Aerpio’s wholly owned subsidiaries Aspen Merger Subsidiary, Inc.
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`(“Merger Sub”). Pursuant to the Merger Agreement, Aerpio and Aadi will combine through a
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`merger of Merger Sub with and into Aadi with Aadi as the surviving corporation as a wholly
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`owned subsidiary of Aerpio (“Proposed Transaction”). In connection with the merger, Aerpio will
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`change its name to “Aadi Bioscience, Inc.”
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`3.
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`Pursuant to the terms of the Merger Agreement, Aadi stockholders will receive
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`approximately 5.5096 of Aerpio common stock for each share of Aadi common stock they
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`currently own, without consideration of a proposed reverse stock split, as adjusteddue to
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`subsequent financing transactions (“Merger Consideration”). Immediately following the Proposed
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`Transaction, Aadi’s former stockholders are expected to own approximately 66.8% of the
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`combined company, on a fully-diluted basis, and Aerpio’s stockholders will own approximately
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`33.2% of the combined company.
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`4.
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`On June 21, May 27, 2021, in order to convince Aerpio’s public common
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`stockholders to vote in favor of the Proposed Transaction, Defendants, together with Aadi took a
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`step forward and authorized the filing of a materially incomplete and misleading Preliminary Proxy
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`Statement on Form 14A (the “Proxy”) with the SEC, in violation of Sections 14(a) and 20(a) of
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`the Exchange Act.
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`5.
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`In particular, the Proxy contains materially incomplete and misleading information
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`concerning: (i) financial projections for Aadi prepared by Aerpio management; and (ii) the key
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`inputs for the financial analyses performed by Ladenburg Thalmann & Co. Inc. (“Ladenburg”),
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`and to support their fairness opinions.
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`6.
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`The Proposed Transaction is expected to close early in the third quarter of 2021 and
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`2
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 3 of 19
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`the special meeting of the Company’s stockholders to vote on the Proposed Transaction can be
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`scheduled at any time. It is therefore imperative that the material information that has been omitted
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`from the Proxy is disclosed prior to the special meeting of Aerpio stockholders so Plaintiff can
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`properly exercise her corporate voting rights.
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`7.
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`For these reasons, and as set forth in detail herein, Plaintiff asserts claims against
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`Defendants for violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9.
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`Plaintiff seeks to enjoin Defendants from taking any steps to consummate the Proposed
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`Transaction unless and until the material information discussed below is disclosed to Plaintiff and
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`Aerpio’s public common stockholders sufficiently in advance of the special meeting of the
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`Company’s stockholders or, in the event the Proposed Transaction is consummated, to recover
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`damages resulting from the Defendants’ violations of the Exchange Act.
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`JURISDICTION AND VENUE
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`8.
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`This Court has jurisdiction over all claims asserted herein pursuant to Section 27 of
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`the 1934 Act because the claims asserted herein arise under Sections 14(a) and 20(a) of the 1934
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`Act and Rule 14a-9.
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`9.
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`Personal jurisdiction exists over each Defendant either because the Defendant
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`conducts business in or maintains operations in this District, or is an individual who is either
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`present in this District for jurisdictional purposes or has sufficient minimum contacts with this
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`District as to render the exercise of jurisdiction over each Defendant by this Court permissible
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`under the traditional notions of fair play and substantial justice. “Where a federal statute such as
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`Section 27 of the [Exchange] Act confers nationwide service of process, the question becomes
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`whether the party has sufficient contacts with the United States, not any particular state.” Sec.
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`Inv’r Prot. Corp. v. Vigman, 764 F.2d 1309, 1315 (9th Cir. 1985). “[S]o long as a defendant has
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`3
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 4 of 19
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`minimum contacts with the United States, Section 27 of the Act confers personal jurisdiction over
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`the defendant in any federal district court.” Id. at 1316.
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`10.
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`Venue is proper in this District under Section 27 of the Exchange Act, 15 U.S.C. §
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`78aa, as well as 28 U.S.C. § 1391, because Defendants are found or are inhabitants or transact
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`business in this District. See, e.g., United States v. Svoboda, 347 F.3d 471, 484 n.13 (2d Cir. 2003)
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`(collecting cases). Indeed, Aerpio’s common stock is listed and traded on the Nasdaq Capital
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`Market (“NASDAQ”), which is also headquartered in this District.
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`PARTIES
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`11.
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`Plaintiff is, and has been continuously throughout all times relevant hereto, the
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`holder of Aerpio common stock.
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`12.
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`Defendant Aerpio is a Delaware corporation that maintains its principal place of
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`business at 9987 Carver Road, Cincinnati, OH. Aerpio’s common shares are traded on the
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`NASDAQ under the ticker symbol “ARPO.”
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`13.
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`Individual Defendant Joseph Gardner, is the President and founder of the Company
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`and has been a Director of Aerpio since 2011.
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`14.
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`15.
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`16.
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`17.
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`18.
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`19.
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`Individual Defendant Steven Prelack has been a Director of Aerpio since 2017.
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`Individual Defendant Caley Castelein, has been a Director of Aerpio since 2017.
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`Individual Defendant Cheryl Cohen has been a Director of Aerpio since 2018.
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`Individual Defendant Anupam Dalal, has been a Director of Aerpio since 2011.
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`Individual Defendant Pravin Dugel has been a Director of Aerpio since 2017.
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`The defendants identified in paragraphs 13 through 18 are collectively referred to
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`herein as the “Individual Defendants” or the “Board.” The Individual Defendants together with
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`Aerpio, are referred to herein as the “Defendants.”
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`4
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 5 of 19
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`SUBSTANTIVE ALLEGATIONS
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`Background of the Company and the Proposed Transaction
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`20. Aerpio is a biopharmaceutical company focused on developing compounds that
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`activate Tie2 to treat ocular diseases and diabetic complications. In March 2019, the Company
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`announced top line results of the Phase 2b (“TIME-2b”) clinical trial of AKB-9778 for the
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`treatment of non-proliferative diabetic retinopathy (“NPDR”), a disease characterized by
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`progressive compromise of blood vessels in the back of the eye. While the Company initially
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`believed AKB-9778 had the potential to slow down or possibly reverse retinal vascular changes
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`caused by diabetes, the subcutaneous administration of AKB-9778 twice daily did not meet the
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`study’s primary endpoint of increasing the percentage of patients with an improvement of two or
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`more steps in diabetic retinopathy severity score (“DRSS”), in the study eye, compared to
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`placebo. The TIME-2b study, however, supported the reduction of intraocular pressure (“IOP”)
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`seen with subcutaneous AKB-9778 in the previous TIME-2 study. Importantly, IOP is the only
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`identified modifiable risk factor for prevention of vision loss in patients with open angle
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`glaucoma (“OAG”) and ocular hypertension (“OHT”). Based on these findings, Aerpio
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`developed a topical ocular formulation of AKB-9778 and observed in preclinical studies
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`activation of Tie2 in Schlemm’s canal, IOP reduction via enhanced outflow facility and favorable
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`tolerability. In two consecutive trials, TIME-2 and TIME-2b, subcutaneous AKB-9778 showed
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`reduction in Urine Albumin-Creatinine Ratio (“UACR”), a measure of progression of diabetic
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`kidney disease. In a post-hoc analysis of the earlier TIME-2 clinical trial, there was a 21%
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`reduction (geometric mean) in UACR from baseline in the AKB-9778 treatment arms, but an
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`overall increase in UACR in the placebo arm. The prospective UACR analyses from the recently
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`completed TIME-2b trial largely replicated the results from the previous trial and reinforced the
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 6 of 19
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`potential beneficial effects of Tie2 activation in diabetic kidney disease. The Company believes
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`that systemic treatment with AKB-9778 could have the potential to change the treatment
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`paradigm for diabetics in the future and potentially address a major societal problem by lowering
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`the cost of care associated generally with diabetes.
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`21. Aadi is a clinical stage biopharmaceutical company developing precision therapies
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`for genetically-defined cancers. Aadi’s primary goal is to bring transformational outcomes to
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`cancer patients with mTOR pathway driver alterations where other mTOR inhibitors have not or
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`cannot be effectively exploited due to problems of pharmacology, effective drug delivery, safety,
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`or effective targeting to the disease site. Aadi’s product FYARROTM (sirolimus albumin-bound
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`nanoparticles for injectable suspension; nab-sirolimus; ABI-009) is an mTOR inhibitor bound to
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`human albumin that has demonstrated significantly higher tumor accumulation, mTOR target
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`suppression, and superior efficacy over other mTOR inhibitors in preclinical models.3 Aadi’s
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`initial focus is on treating patients with alterations in TSC1 or TSC2 genes, tumor suppressors
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`that when inactivated, may be drivers in many different cancer types. Aadi’s registration trial in
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`advanced malignant PEComa (the AMPECT trial) of FYARRO demonstrated meaningful
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`clinical efficacy in malignant PEComa4, a type of cancer with the highest known mutation rate
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`of TSC1 or TSC2 genes. Based on the AMPECT trial, emerging data for FYARRO in other solid
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`tumors with TSC1 or TSC2 mutations, and following discussions with the FDA, Aadi plans to
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`initiate a tumor-agnostic registrational trial in cancers harboring TSC1 or TSC2 inactivating
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`alterations by the end of 2021. Aadi also has ongoing studies to evaluate dosing of FYARRO in
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`combination regimens. More information is available on the Aadi website at www.aadibio.com.
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`Aadi has submitted an abstract1 to the ASCO 2021 meeting.
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`22.
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`On May 16, 2021, Aerpio’s Board caused the Company to enter into the Merger
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`6
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 7 of 19
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`Agreement with Aadi. Pursuant to the terms of the Merger Agreement, Aadi stockholders will
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`receive approximately 5.5096 of Aerpio common stock for each share of Aadi common stock they
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`currently own, without consideration of a proposed reverse stock split, as adjusted due to
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`subsequent financing transactions.
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`23.
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`On May 17, 2021 Defendants issued a press release announcing the Proposed
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`Transaction, which stated in relevant part:
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`Aerpio Pharmaceuticals and Aadi Bioscience Enter into a Definitive Merger
`Agreement
`• Transaction to create Nasdaq-listed company focused on advancing Aadi
`Bioscience’s late-stage pipeline for genetically-defined cancers with
`alterations in mTOR pathway genes
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`• Concurrent $155 million PIPE financing is backed by leading life science
`investors led by Acuta Capital Partners and KVP Capital and including
`Avoro Capital Advisors; Avoro Ventures; Venrock Healthcare Capital
`Partners; BVF Partners, L.P.; Vivo Capital; Alta Bioequities, L.P.; Rock
`Springs Capital; RTW Investments, LP; Acorn Bioventures; and Serrado
`Capital LLC
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`• Combined company cash at closing will fund operations into 2024
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`• Rolling NDA submission to the FDA for FYARROTM in advanced
`malignant perivascular epithelioid sarcoma (PEComa) expected to be
`completed in mid-2021
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`• FYARROTM preliminary data in patients with solid tumors harboring
`inactivating alterations in the mTOR pathway genes TSC1 and TSC2 to be
`presented at ASCO 20211
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`• FYARROTM tumor-agnostic registrational trial in solid tumors harboring
`inactivating alterations in the mTOR pathway genes TSC1 and TSC2
`expected to be initiated by the end of 2021
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`CINCINNATI, Ohio and PACIFIC PALISADES, California, May 17, 2021 –
`Aerpio Pharmaceuticals, Inc. (“Aerpio”) (Nasdaq: ARPO), a biopharmaceutical
`company focused on developing compounds that activate Tie2, and Aadi
`Bioscience, Inc. (“Aadi”), a privately-held biopharmaceutical company focusing
`on precision therapies for genetically-defined cancers with alterations in mTOR
`pathway genes, announced their entry into a definitive merger agreement.
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`7
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 8 of 19
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`Following the proposed merger, Aerpio will change its name to “Aadi Bioscience,
`Inc.” and the combined public company will focus on advancing Aadi’s lead
`product candidate, FYARROTM (sirolimus albumin-bound nanoparticles for
`injectable suspension; nab-sirolimus; ABI-009).
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`In support of the merger, Aerpio has entered into subscription agreements to raise
`$155 million in a Private Investment in Public Equity (PIPE) financing led by Acuta
`Capital Partners and KVP Capital and including Avoro Capital Advisors; Avoro
`Ventures; Venrock Healthcare Capital Partners; BVF Partners, L.P.; Vivo Capital;
`Alta Bioequities, L.P.; Rock Springs Capital; RTW Investments, LP; Acorn
`Bioventures; and Serrado Capital LLC as well as other undisclosed institutional
`investors.
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`The PIPE financing is expected to be consummated concurrently with the closing
`of the merger. Proceeds from the PIPE financing are intended to be used for
`commercialization of FYARRO in advanced malignant PEComa and a planned
`tumor-agnostic registrational trial in solid tumors harboring inactivating alterations
`in the mTOR pathway genes TSC1 and TSC2 expected to be initiated by the end of
`2021. Aadi’s first indication, advanced malignant PEComa, is an ultra-rare sarcoma
`enriched in TSC1 and TSC2 alterations. Aadi has received Orphan designation,
`Fast Track designation and Breakthrough Therapy designation from the FDA for
`FYARRO for the treatment of patients with advanced malignant PEComa.
`Together with the cash expected from both companies at closing, the net proceeds
`of the PIPE financing are expected to fund the company into 2024, enabling
`potential approval and commercial launch in PEComa as well as completion of a
`registrational trial in tumors harboring TSC1 or TSC2 inactivating alterations.
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`Caley Castelein, a board member of Aerpio and the proposed chairman of the
`combined company stated, “Aerpio’s board of directors diligently undertook a
`comprehensive strategic review and has concluded that the proposed transaction
`with Aadi is in the best interest of our shareholders. We believe Aadi’s late-stage
`development program may offer significant medical benefit to PEComa patients
`and important potential for patients with tumors harboring TSC1 or TSC2
`inactivating alterations.”
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`Dr. Neil Desai, founder and chief executive officer of Aadi, added, “FYARRO met
`its safety and efficacy endpoints in our study in patients with advanced malignant
`PEComa2 and this finding supports our approach of targeting mTOR pathway
`altered cancers with FYARRO. We are excited about the next chapter of growth for
`Aadi, thankful for the support of our investors, and are energized to continue to
`develop important new treatment options for our patients.”
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`Anupam Dalal, chief investment officer of Acuta Capital Partners stated, “Together
`with a group of renowned institutional investors, we are excited to partner with
`Aadi as it advances FYARRO and strives to unlock the potential of mTOR as a
`therapeutic target.”
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 9 of 19
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`Upon closing of the transaction, the combined company will be led by Aadi’s chief
`executive officer, Neil Desai, and headquartered in Los Angeles, California. Aadi’s
`board members Neil Desai and Richard Maroun; Aadi’s board observer Karin
`Hehenberger; and current Aerpio board members Anupam Dalal and Caley
`Castelein will be members of the board of directors of the combined company. In
`addition, Behzad Aghazadeh, managing partner of Avoro Capital Advisors and
`Avoro Ventures, will also join the board of the combined company upon the closing
`of the transaction.
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`About the Proposed Transaction
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`Under the terms of the merger agreement, shareholders of Aadi will receive shares
`of newly issued Aerpio common stock. On a pro forma basis, shareholders of Aadi
`will own approximately 66.8% and shareholders of Aerpio will own approximately
`33.2% of the combined company upon the closing of the merger, prior to the
`additional PIPE financing transaction. Following the closing of the concurrent PIPE
`financing, Aerpio shareholders will own approximately 14.7% of the combined
`company. The actual allocation is subject to adjustment based on Aerpio’s cash
`balance at the time of closing.
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`The terms of the merger agreement contemplate that a non-transferable contingent
`value right (a “CVR”) will be distributed to Aerpio shareholders as of immediately
`prior to the effective time of the merger, entitling CVR holders to receive net
`proceeds received by Aerpio, if any, associated with Aerpio’s legacy assets. The
`terms and conditions of the CVRs will be pursuant to a CVR Agreement Aerpio
`will enter into prior to the closing of the merger (the “CVR Agreement”).
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`The merger agreement has been approved by the boards of directors of both
`companies. The transaction is expected to close in the third quarter of 2021, subject
`to approval by Aerpio’s shareholders, the completion of the PIPE financing, and
`customary closing conditions. The PIPE financing is expected to close concurrently
`with, and is conditioned upon, the closing of the merger.
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`Additional information about the transaction will be provided in a Current Report
`on Form 8-K that will be filed by Aerpio with the Securities and Exchange
`Commission (“SEC”) and will be available at www.sec.gov.
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`Ladenburg Thalmann & Co. Inc. is acting as financial advisor to Aerpio for the
`transaction and Goodwin Procter LLP is serving as its legal counsel. Perella
`Weinberg Partners LP and Piper Sandler & Co. are acting as financial advisors to
`Aadi for the transaction and Wilson Sonsini Goodrich & Rosati, P.C. is serving as
`legal counsel to Aadi. Jefferies LLC; Cowen and Company, LLC; and Piper Sandler
`& Co. are acting as placement agents for the PIPE financing.
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`* * *
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 10 of 19
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`The Proxy Omits Material Information
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`I.
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`24.
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`On June 21, 2021, Defendants filed a materially incomplete and misleading
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`Proxy with the SEC. The special meeting of Aerpio stockholders to vote on the Proposed
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`Transaction is forthcoming. The Individual Defendants were obligated to carefully review the
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`Proxy before it was filed with the SEC and disseminated to the Company’s shareholders to ensure
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`that it did not contain any material misrepresentations or omissions. However, the Proxy
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`misrepresents or omits material information that is necessary for the Company’s shareholders to
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`make an informed voting decision in connection with the Proposed Transaction.
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`A.
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`25.
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`Materially Misleading Statements and Omissions Regarding Aerpio and Aadi’s
`Financial Projections
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`The Proxy fails to provide material information concerning financial projections
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`by and unaudited financial projections for Aadi prepared by Aerpio management (“Aadi
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`Projections”) which were relied upon by the Board in recommending the Proposed Transaction,
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`as well as Ladenburg in its financial analysis to issue its fairness opinion. The Proxy discloses
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`these management-prepared Aadi Projections which are materially misleading. Proxy 120. These
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`non-public financial projections were provided to the Board to support its recommendation of the
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`Proposed Transactions, and to Ladenburg in rendering its fairness opinions with respect to the
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`Proposed Transaction. Accordingly, the Proxy should have, but fails to provide, certain
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`information in the projections that Aerpio management provided to the Board and the financial
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`advisors. Proxy 118-120.
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`26.
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`For example, the Proxy states that the PEComa Revenues assumed initial 10.0%
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`penetration in 2022 to maximum market penetration of 85.0% in 2031 and assumes a total patient
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`population of 100 patients. Similarly the TSCI/TSC2 Revenues assumed to have an initial
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 11 of 19
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`penetration rate of 1.7% in 2021, which rises to a maximum rate of 83.1% by 2035 with a
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`maximum year-over-year patient population increase of 1.4%. Also assumes a price increase of
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`approximately 4% year-over-year in the U.S. market with a 15% net discount. Lastly, the Risk
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`Adjusted Unlevered Free Cash Flow suffers from a similar problem because the metric was
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`adjusted downward to account for the probability of success given the probability of success for
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`PE Coma (90%) and TSC1 / TSC2 (63.6%), which was determined by analyzing the “Estimation
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`of clinical trial success rates and related parameters” white paper published in 2018. However,
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`the Proxy does not provide the basis for these assumptions and discounts to the metrics.
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`27.
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`Investors are concerned, perhaps above all else, with the projections and cash
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`flows of the companies in which they invest. Under sound corporate finance theory, the market
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`value of a company should be premised on the expected unlevered free cash flows of the
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`corporation. Accordingly, the question that the Company’s shareholders need to answer in
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`determining whether to vote in favor of the Proposed Transaction is clear: Is the Merger
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`Consideration fair to Aerpio stockholders given Aadi’s projected cash flows? Without the line
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`items underlying Aadi’s unlevered free cash flows Aerpio stockholders will not be able to
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`properly assess this critical question and evaluate the fairness of the Merger Consideration.
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`28.
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`For this reason, Courts have recognized that “projections … are probably among
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`the most highly-prized disclosures by investors. Investors can come up with their own estimates
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`of discount rates or [] market multiples. What they cannot hope to do is replicate management’s
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`inside view of the company’s prospects.” In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d
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`171, 201-203 (Del. Ch. 2007).
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`29.
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`If a Proxy discloses financial projections and valuation information, such
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`projections must be complete and accurate. The question here is not the duty to speak, but liability
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 12 of 19
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`for not having spoken enough. With regard to future events, uncertain figures, and other so-
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`called soft information, a company may choose silence or speech elaborated by the factual basis
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`as then known—but it may not choose half-truths. See Campbell v. Transgenomic, Inc., 916 F.3d
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`1121, 1124-1125 (8th Cir. 2019) (noting that “half-truths” are actionable misrepresentations under
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`securities laws and collecting cases). Accordingly, Defendants have disclosed some of the
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`information related to the projections relied upon by Ladenburg, but have omitted crucial line
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`items and reconciliations. Thus, Defendants’ omission renders the projections disclosed on pages
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`196-197 of the Proxy misleading.
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`B.
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`30.
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`Materially Incomplete and Misleading Disclosures Concerning the Financial
`Analyses
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`With respect to Ladenburg’s Discounted Cash Flow Analysis, the Proxy fails to
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`disclose: (i) the line items used to calculate Aadi’s unlevered free cash flows; (ii) the inputs and
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`assumptions used to calculate the adjustment to the Aadi revenue assumptions in the years 2024
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`to 2035 by 90% for PEComaand 63.5% for TSC1/TSC2; (iii) the inputs and assumptions
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`underlying the discount rates ranging from 12.9% to 16.9%; and (iv) the inputs and assumptions
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`used to determine Aadi would have no terminal value in 2035. Proxy, 128-129.
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`31.
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`These key inputs to Ladenburg’s analysis renders the summary of Ladenburg’s
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`Discounted Cash Flow Analysis incomplete and misleading. As one highly-respected law
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`professor explained regarding these crucial inputs, in a discounted cash flow analysis a banker
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`takes management’s forecasts, and then makes several key choices “each of which can
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`significantly affect the final valuation.” Steven M. Davidoff, Fairness Opinions, 55 Am. U.L.
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`Rev. 1557, 1576 (2006). Such choices include “the appropriate discount rate, and the terminal
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`value…” Id. As Professor Davidoff explains:
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 13 of 19
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`There is substantial leeway to determine each of these, and any change
`can markedly affect the discounted cash flow value. For example, a
`change in the discount rate by one percent on a stream of cash flows in
`the billions of dollars can change the discounted cash flow value by tens
`if not hundreds of millions of dollars….This issue arises not only with a
`discounted cash flow analysis, but with each of the other valuation
`techniques. This dazzling variability makes it difficult to rely, compare,
`or analyze the valuations underlying a fairness opinion unless full
`disclosure is made of the various inputs in the valuation process, the
`weight assigned for each, and the rationale underlying these choices.
`The substantial discretion and lack of guidelines and standards also
`makes the process vulnerable to manipulation to arrive at the “right”
`answer for fairness. This raises a further dilemma in light of the
`conflicted nature of the investment banks who often provide these
`opinions.
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`Id. at 1577-78 (emphasis added). Without the above-mentioned information, Aerpio’s
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`shareholders cannot evaluate for themselves the reliability of Ladenburg’s Discounted Cash
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`Flow Analysis – Aerpio and Discounted Cash Flow Analysis -- Aadi, make a meaningful
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`determination of whether the implied equity value ranges reflect the true value of the Company
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`or was the result of an unreasonable judgment by Ladenburg, and make an informed decision
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`regarding whether to vote in favor of the Proposed Transaction.
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`32. With respect to Ladenburg’s Analysis of Selected Initial Public Offering
`
`Transactions the Proxy fails to disclose Ladenburg’s estimates of the pre-money equity value
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`plus indebtedness, liquidation value of preferred stock and non-controlling interest, minus cash
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`and cash equivalents at the time of its IPO for each of the companies observed by Ladenburg to
`
`determine the total enterprise value for each IPO. Proxy, 124-125
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`33. With respect to Ladenburg’s Analysis of Selected Publicly Traded Companies,
`
`the Proxy fails to disclose the individual multiples and metrics for the companies observed by
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`Ladenburg. Proxy, 125-127.
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 14 of 19
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`34. With respect to Ladenburg’s Analysis of Selected Precedent M&A Transactions the
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`Proxy fails to disclose: (i) the dates on which each of the selected transactions observed closed;
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`and (ii) the inputs and assumptions used to determine the enterprise value for the transactions
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`observed. Proxy, 127-128.
`
`
`
`
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`C.
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`Materially Incomplete and Misleading Disclosures Concerning the Financial
`Analyses
`
`35.
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`The Proxy states that the Aerpio Board also directed Aerpio management to work
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`with the second financial advisor to explore opportunities for transactions involving the Company
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`Assets. Proxy, 106. However, no information about the “second financial advisor” is disclosed,
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`including its identity, terms of compensation (if any) or a fair summary of any analyses performed
`
`by them. Similarly, the Proxy does not disclose the reasons the Aerpio Board terminated the
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`engagement of the “second financial advisor” on April 14, 2021.
`
`36.
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`In sum, the omission of the above-referenced information renders the Proxy
`
`materially incomplete and misleading, in contravention of the Exchange Act. Absent disclosure
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`of the foregoing material information prior to the upcoming shareholder vote concerning the
`
`Proposed Transaction, Plaintiff will be unable to make an informed decision regarding whether
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`to vote their shares in favor of the Proposed Transaction, and they are thus threatened with
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`irreparable harm, warranting the injunctive relief sought herein.
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`COUNT I
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`Against All Defendants for Violations of Section 14(a) of the Exchange Act and Rule 14a-9
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`Plaintiff incorporates each and every allegation set forth above as if fully set forth
`
`37.
`
`herein.
`
`38.
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`Section 14(a)(1) of the Exchange Act makes it “unlawful for any person, by the use
`
`of the mails or by any means or instrumentality of interstate commerce or of any facility of a
`
`
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`14
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 15 of 19
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`national securities exchange or otherwise, in contravention of such rules and regulations as the
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`Commission may prescribe as necessary or appropriate in the public interest or for the protection
`
`of investors, to solicit or to permit the use of his name to solicit any Proxy or consent or
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`authorization in respect of any security (other than an exempted security) registered pursuant to
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`section 78l of this title.” 15 U.S.C. § 78n(a)(1).
`
`39.
`
`Rule 14a-9, promulgated by the SEC pursuant to Section 14(a) of the Exchange
`
`Act, provides that Proxy communications shall not contain “any statement which, at the time and
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`in the light of the circumstances under which it is made, is false or misleading with respect to any
`
`material fact, or which omits to state any material fact necessary in order to make the statements
`
`therein not false or misleading.” 17 C.F.R. § 240.14a-9.
`
`40.
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`The omission of information from a Proxy will violate Section 14(a) and Rule 14a-
`
`9 if other SEC regulations specifically require disclosure of the omitted information.
`
`41.
`
`Defendants have issued the Proxy with the intention of soliciting the Company’s
`
`common stockholders’ support for the Proposed Transaction. Each of the Individual Defendants
`
`reviewed and authorized the dissemination of the Proxy, which fails to provide critical information
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`regarding, amongst other things: (i) Aerpio management’s financial projections for Aadi prepared
`
`by management of the two companies; and (ii) the key inputs for the financial analyses performed
`
`by Ladenburg in support of its fairness opinion.
`
`42.
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`In so doing, Defendants made untrue statements of fact and/or omitted material
`
`facts necessary to make the statements made not misleading. Each of the Individual Defendants,
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`by virtue of their roles as officers and/or directors, were aware of the omitted information but failed
`
`to disclose such information, in violation of Section 14(a). The Individual Defendants were
`
`therefore negligent, as they had reasonable grounds to believe material facts existed that were
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`15
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`Case 1:21-cv-05802 Document 1 Filed 07/06/21 Page 16 of 19
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`misstated or omitted from the Proxy, but nonetheless failed to obtain and disclose such information
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`to the Company’s common stockholders