ATSI Ats Medical (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

Filed by the Registrant       þ
Filed by a Party other than the Registrant       o
Check the appropriate box:
þ       Preliminary Proxy Statement
o       Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o       Definitive Proxy Statement
o       Definitive Additional Materials
o       Soliciting Material Pursuant to §240.14a-12

ATS Medical, Inc.

(Name of Registrant as Specified In Its Charter)

Payment of Filing Fee (Check the appropriate box):

o		No fee required.
o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

1)

Title of each class of securities to which transaction applies:

o

Common stock, par value $0.01 per share (“ Common Stock ”)

2)

Aggregate number of securities to which transaction applies:

	o		79,222,007 shares of Common Stock (representing the number of shares of Common Stock outstanding on May 20, 2010);
	o		warrants to purchase 6,147,192 shares of Common Stock (as of May 20, 2010) (“ Warrants ”);
	o		options to purchase 2,488,225 shares of Common Stock (as of May 20, 2010) (“ Options ”); and
	o		5,279,115 shares of Common Stock issuable upon vesting of outstanding restricted stock units (as of May 20, 2010) (“ Restricted Stock Units ”).

	3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
			Calculated solely for the purpose of determining the filing fee . The transaction value was determined based upon the sum of:

	o		$316,888,028 (79,222,007 shares of Common stock multiplied by $4.00 per share);
	o		$6,986,171 (4,803,192 Warrants with an exercise price of less than $4.00 per share multiplied by the difference between $4.00 and the applicable exercise price of each Warrant);
	o		$3,694,747 (2,311,225 Options with an exercise price of less than $4.00 per share multiplied by the difference between $4.00 and the applicable exercise price of each Option); and
	o		$21,116,460 (5,279,115 shares of Common Stock issuable upon vesting of outstanding Restricted Stock Units, multiplied by $4.00 per share).

			In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by multiplying .0000713 by the proposed maximum aggregate value of the transaction of $348,685,406.
	4)		Proposed maximum aggregate value of transaction: $348,685,406
	5)		Total fee paid: $24,862

þ		Fee paid previously with preliminary materials:
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	1)		Amount Previously Paid:
	2)		Form, Schedule or Registration Statement No.:
	3)		Filing Party:
	4)		Date Filed:

 

SPECIAL MEETING OF SHAREHOLDERS — MERGER VOTE REQUIRED

 

To the Shareholders of ATS Medical, Inc.:

 

On April 28, 2010, we entered into an Agreement and Plan of Merger with Medtronic, Inc. and Pilgrim Merger Corporation, a wholly owned subsidiary of Medtronic. If the merger is completed pursuant to the terms of the merger agreement, Pilgrim Merger Corporation will be merged with and into ATS Medical, and ATS Medical will become a wholly owned subsidiary of Medtronic. Upon completion of the merger, holders of our outstanding common stock will be entitled to receive $4.00 in cash, without interest, and less any applicable withholding taxes, for each share of common stock they own at the effective time of the merger, subject to decrease only if it were determined that (i) the outstanding common stock, options to purchase shares of our common stock, warrants to purchase shares of our common stock or restricted stock units reflected in our records is inaccurate or we issue shares of our common stock, warrants to purchase shares of our common stock or restricted stock units in amounts exceeding agreed-upon thresholds, or (ii) the aggregate amount of third party expenses incurred by us in connection with the merger exceeds $7,800,000 (plus any amounts incurred by us as a result of additional requests for information under certain antitrust laws) and, but for the decrease, the aggregate consideration payable by Medtronic would exceed $348,650,883 plus the aggregate exercise price of all in the money options and warrants outstanding as of the date of the merger agreement that are properly exercised between the date of the merger agreement and the effective time of the merger (which amount, in the aggregate, reflects merger consideration of $4.00 per share).

 

In connection with our merger agreement with Medtronic, we will hold a special meeting of our shareholders on • , 2010 at • , local time, at the offices of Dorsey & Whitney LLP, 50 South Sixth Street, Suite 1500, Minneapolis, Minnesota (on the corner of Sixth Street and Nicollet Avenue in downtown Minneapolis). Shareholders will be asked at the special meeting to consider and vote upon the approval of the merger agreement. After careful consideration, our board of directors has unanimously approved and has declared the proposed merger, the merger agreement and the transactions contemplated by the merger agreement advisable, and has determined that it is in the best interests of our shareholders that ATS Medical enter into the merger agreement and consummate the proposed merger on the terms and conditions set forth in the merger agreement. Accordingly, our board of directors unanimously recommends that ATS Medical shareholders vote “FOR” the approval of the merger agreement. We are also asking you to vote “FOR” any proposal by our board of directors to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement.

 

The merger cannot be completed unless the holders of a majority of the outstanding shares of our common stock at the close of business on the record date for the special meeting vote “FOR” the approval of the merger agreement. The completion of the merger is also subject to the satisfaction or waiver of other specified closing conditions. The accompanying proxy statement provides you with more detailed information about the proposed merger and the special meeting. We encourage you to read the accompanying proxy statement carefully and in its entirety because it explains the proposed merger, the documents related to the merger and other related matters.

 

Your vote is very important, regardless of the number of shares you hold. Whether or not you plan to attend the special meeting, please take the time to submit a proxy by following the instructions on your proxy card as soon as possible. If your shares are held in an account at a brokerage firm, bank or other nominee, you should instruct your broker, bank or nominee how to vote in accordance with the voting instruction form furnished by your broker, bank or nominee. If you submit your proxy but do not indicate how you want to vote, your proxy will be voted “FOR” the approval of the merger agreement and “FOR” any proposal by our board of directors to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the merger agreement. If you do not vote or do not instruct your broker, bank or nominee how to vote, it will have the same effect as voting “AGAINST” the proposal to approve the merger agreement — so please vote.

 

We are very excited about the merger and I join the other members of our board of directors in recommending that you vote “FOR” the approval of the merger agreement. After you have reviewed the enclosed materials, please vote by one of the means specified in the proxy statement as soon as you can. Thank you in advance for your continued support.

 

Sincerely,

 

Michael D. Dale

Chief Executive Officer

 

 

This transaction has not been approved or disapproved by the Securities and Exchange Commission or any state securities commission. Neither the Securities and Exchange Commission nor any state securities commission has passed upon the merits or fairness of this transaction or upon the adequacy or accuracy of the information contained in this proxy statement. Any representation to the contrary is a criminal offense.

 

This proxy statement is dated • , 2010 and is first being mailed to shareholders of ATS Medical, Inc. on or about • , 2010.

 

3905 Annapolis Lane North
Minneapolis, Minnesota 55447
Telephone: (763) 553-7736

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON • , 2010

 

To the Shareholders of ATS Medical, Inc.:

 

NOTICE IS HEREBY GIVEN THAT a special meeting of shareholders of ATS Medical, Inc., a Minnesota corporation, will be held on • , 2010 at • , local time, at the offices of Dorsey & Whitney LLP, 50 South Sixth Street, Suite 1500, Minneapolis, Minnesota (on the corner of Sixth Street and Nicollet Avenue in downtown Minneapolis):

 

 

Our board of directors has unanimously approved the merger agreement and recommends that ATS Medical shareholders vote “FOR” the approval of the merger agreement. Our board of directors also recommends that ATS Medical shareholders vote “FOR” any proposal by our board of directors to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement.

 

Our board of directors has fixed the close of business on • , 2010 as the record date for the determination of shareholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement of the special meeting. Only holders of record of shares of our common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting or any adjournment or postponement of the special meeting. At the close of business on the record date, ATS Medical had outstanding and entitled to vote • shares of common stock. ATS Medical shareholders who do not wish to accept the merger consideration for their shares and who do not vote in favor of the approval of the merger agreement may have dissenters’ rights under Minnesota law in connection with the merger if they meet specified conditions. See the section of this proxy statement entitled “The Merger — Dissenters’ Rights” beginning on page • .

 

Your vote is very important, regardless of the number of shares you hold. The affirmative vote of the holders of a majority of the outstanding shares of our common stock at the close of business on the record date is required to approve the merger agreement. The affirmative vote of the holders of a majority of the shares of our common stock at the close of business on the record date that are present in person or represented by proxy at the special meeting and entitled to vote may approve any proposal by our board of directors to adjourn the meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the approval of the merger agreement. The chairperson of the special meeting may also adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the approval of the merger agreement.

 

Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return the enclosed proxy card and thus ensure that your shares will be represented at the special meeting if you are unable to attend. You may also vote your shares by using a toll-free number or via the internet. If you submit your proxy but

do not indicate how you wish to vote, your proxy will be counted as a vote “FOR” the approval of the merger agreement and “FOR” any proposal by our board of directors to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement. If you do not vote, it will have the same effect as a vote “AGAINST” the proposal to approve the merger agreement and make it more difficult for ATS Medical to achieve a quorum at the special meeting — so please vote. If you do not vote, it will not affect the outcome of any proposal to adjourn the special meeting, but will reduce the number of votes required to approve such a proposal. If you do attend the special meeting and wish to vote in person, you may withdraw your proxy and vote in person.

 

This proxy statement contains detailed information about the merger and the other transactions contemplated by the merger agreement. Please read this proxy statement and the merger agreement attached to it as Annex A carefully and in their entirety. For specific instructions on how to vote your shares, please refer to the section of this proxy statement entitled “The Special Meeting” beginning on page • .

 

By Order of the Board of Directors,

 

Michael D. Dale

Chief Executive Officer

 

Minneapolis, Minnesota
 • , 2010

SUMMARY VOTING INSTRUCTIONS

 

YOUR VOTE IS IMPORTANT

 

Ensure that your shares can be voted at the special meeting by submitting your proxy or contacting your broker, bank or other nominee. If you do not vote or do not instruct your broker, bank or other nominee how to vote, it will have the same effect as voting “AGAINST” the approval of the merger agreement.

 

If your shares are registered in the name of a broker, bank or other nominee:   check the voting instruction card forwarded by your broker, bank or other nominee to see which voting options are available or contact your broker, bank or other nominee in order to obtain directions as to how to ensure that your shares are voted in favor of the proposals at the special meeting.

 

If your shares are registered in your name:   submit your proxy as soon as possible by telephone, via the Internet or by signing, dating and returning the enclosed proxy card in the enclosed postage-paid envelope, so that your shares can be voted in favor of the proposals at the special meeting.

 

Instructions regarding telephone and Internet voting are included on the proxy card.

 

YOU SHOULD NOT SEND YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD.

 

If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact:

 

ATS Medical, Inc.

Attn: Chief Financial Officer

3905 Annapolis Lane North

Minneapolis, Minnesota 55447

Telephone: (763) 553-7736

 

TABLE OF CONTENTS

 

 

This proxy statement contains information related to our special meeting of shareholders to be held on • , 2010 at • , local time, at the offices of Dorsey & Whitney LLP, 50 South Sixth Street, Suite 1500, Minneapolis, Minnesota (on the corner of Sixth Street and Nicollet Avenue in downtown Minneapolis), and at any adjournments or postponements thereof. We are furnishing this proxy statement to the shareholders of ATS Medical, Inc. as part of the solicitation of proxies by ATS Medical’s board of directors for use at the special meeting.

 

The following are some questions that you, as a shareholder of ATS Medical, may have regarding the proposed merger and the special meeting of ATS Medical shareholders as well as brief answers to such questions. We urge you to read carefully the entirety of this proxy statement because the information in this section does not provide all the information that may be important to you with respect to the approval of the merger agreement. Additional important information is also contained in the annexes to this proxy statement.

 

Throughout this proxy statement we refer to ATS Medical, Inc. as “ ATS Medical ” and as “ we ,” “ our ,” “ us ” and similar words.

 

 

 

 

 

 

 

This summary highlights the most material terms of the proposed merger. While this summary describes the principal terms of the merger, this summary may not contain all of the information that is important to you. To understand the merger fully and for a more complete description of the legal terms of the merger, you should carefully read this entire proxy statement and the documents to which we have referred you. In particular, you should read the annexes attached to this proxy statement, including the Agreement and Plan of Merger, dated as of April 28, 2010, by and among ATS Medical, Medtronic and Merger Sub, which is attached as Annex A to this proxy statement. We have included page references in parentheses to direct you to a more complete description of the topics presented in this summary. See the section of this proxy statement entitled “Where You Can Find More Information” beginning on page • .

 

ATS Medical, Inc.

3905 Annapolis Lane North

Minneapolis, Minnesota 55447

Telephone: (763) 553-7736

 

ATS Medical was incorporated in Minnesota in 1987 and our common stock is quoted on the NASDAQ Global Market under the symbol “ATSI.” ATS Medical develops, manufactures and markets medical devices for the treatment of structural heart disease. Our product offerings are focused on heart valve therapy and the surgical treatment of cardiac arrhythmias and our core mission is to build a company with a diversified product portfolio focused exclusively on the cardiac surgeon. Additional information regarding ATS Medical is contained in our filings with the Securities and Exchange Commission, or the SEC. See the section of this proxy statement entitled “Where You Can Find More Information” beginning on page • .

 

Medtronic, Inc.

World Headquarters

710 Medtronic Parkway

Minneapolis, Minnesota 55432

Telephone: (763) 514-4000

 

Medtronic, Inc. was founded in 1949, incorporated as a Minnesota corporation in 1957, and today serves physicians, clinicians and patients in more than 120 countries worldwide. Medtronic is the global leader in medical technology, alleviating pain, restoring health, and extending life for millions of people around the world. Medtronic is committed to offering market-leading therapies to restore patients to fuller, healthier lives. With beginnings in the treatment of heart disease, Medtronic has expanded well beyond its historical core business and today provides a wide range of products and therapies that help solve many challenging, life-limiting medical conditions.

 

Pilgrim Merger Corporation

c/o Medtronic, Inc.

World Headquarters

710 Medtronic Parkway

Minneapolis, Minnesota 55432

Telephone: (763) 514-4000

 

Pilgrim Merger Corporation is a Minnesota corporation and a wholly owned subsidiary of Medtronic. Merger Sub exists solely to facilitate the merger and has not engaged in any operations other than in connection with its formation and the negotiation and execution of the merger agreement.

 

This proxy statement relates to the proposed acquisition of us by Medtronic pursuant to an Agreement and Plan of Merger, dated as of April 28, 2010, among Medtronic, Merger Sub and us. We have attached a copy of this

agreement, which we refer to as the merger agreement, as Annex A to this proxy statement. We encourage you to read the merger agreement in its entirety. Upon the terms and subject to the conditions of the merger agreement, Merger Sub will be merged with and into ATS Medical. As a result of the merger, we will become a wholly owned subsidiary of Medtronic.

 

If the merger is completed, you will receive the merger consideration (subject to decrease under the limited circumstances referred to below) in cash for each share of our common stock that you own immediately prior to the effective time of the merger, unless you exercise and perfect your dissenters’ rights under Minnesota law. Upon completion of the merger, shareholders of ATS Medical will no longer have any equity or ownership interest in ATS Medical.

 

As described in greater detail in the section of this proxy statement entitled “The Merger Agreement — Effect on Capital Stock” beginning on page • , pursuant to the merger agreement, the merger consideration is subject to decrease only if it were determined that (i) the number of outstanding shares of common stock as of immediately prior to the effective time of the merger exceeds 79,010,969 (provided that we will not be deemed to have exceeded this threshold to the extent any excess is the result of the proper exercise of Options or Warrants or proper vesting of Restricted Stock Units between the date of the merger agreement and the effective time of the merger), (ii) as of immediately prior to the effective time of the merger, our outstanding Options and Warrants are exercisable to purchase more than 8,754,392 shares of our common stock in the aggregate, (iii) the number of outstanding Restricted Stock Units as of immediately prior to the effective time of the merger exceeds 5,461,064, (iv) any of our outstanding Options or Warrants are exercisable at a price lower than the exercise price disclosed to Medtronic in connection with signing the merger agreement, or (v) the aggregate amount of third party expenses incurred by us in connection with the merger exceeds $7,800,000 (plus any amounts incurred by us as a result of additional requests for information under certain antitrust laws) and, but for the decrease, the aggregate consideration payable by Medtronic would exceed $348,650,883 plus the aggregate exercise price of all in the money Options and Warrants outstanding as of the date of the merger agreement that are properly exercised between the date of the merger agreement and the effective time of the merger (which amount, in the aggregate, reflects merger consideration of $4.00 per share). While the merger agreement also provides for a decrease in the merger consideration in the event that the aggregate principal amount of our 6% Convertible Senior Notes due 2025 (which we refer to as our “ 2025 Notes ”) outstanding exceeds $22,400,000 or the conversion price thereof is less than $4.20, on June 10, 2010 we redeemed all of the outstanding $22,400,000 aggregate principal amount of our 2025 Notes at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest thereon up to, but excluding, the redemption date. The conversion price as of the redemption date was $4.20. Accordingly, the merger consideration will not be subject to a decrease based on the aggregate principal amount of the 2025 Notes or the conversion price thereof.

 

Options

 

Each Option that is outstanding immediately prior to the effective time of the merger will, at such time, be canceled in exchange for the right to receive an amount equal to the total number of shares of common stock subject to the Option multiplied by the excess, if any, of the merger consideration over the exercise price of the Option, less applicable withholding taxes, if any.

 

Restricted Stock Units

 

Each Restricted Stock Unit that is outstanding immediately prior to the effective time of the merger will, at such time, be canceled in exchange for the right to receive an amount equal to the total number of shares of common stock represented by such Restricted Stock Unit as of the effective time of the merger, multiplied by the merger consideration, less applicable withholding taxes, if any.

Warrants

 

Each Warrant outstanding immediately prior to the effective time of the merger will, at such time, be converted into the right to receive, upon exercise of a replacement Warrant required to be delivered by the surviving corporation following the merger, an amount equal to the total number of shares of common stock with respect to which the Warrant was exercisable as of immediately prior to the effective time of the merger, multiplied by the excess, if any, of the merger consideration over the exercise price of the Warrant, less applicable withholding taxes, if any.

 

The obligations of each of Medtronic and Merger Sub, on the one hand, and us, on the other hand, to complete the merger depend on the satisfaction or waiver, on or prior to the effective time of the merger, of a number of conditions, including:

 

 

The obligation of Medtronic and Merger Sub to complete the merger is subject to the following additional conditions:

 

 

The merger is not conditioned upon Medtronic or Merger Sub obtaining financing.

 

Termination

 

The merger agreement may be terminated and the merger may be abandoned at any time prior to the effective time of the merger, regardless of whether our shareholders have adopted the merger agreement:

 

 

 

 

 

 

 

 

Termination Fee; Expenses

 

The merger agreement provides that we will be required to pay Medtronic a termination fee of $13,000,000 under circumstances that involve any of the following:

 

 

 

 

We may be obligated to reimburse Medtronic for its reasonably documented out-of-pocket fees and expenses, up to a maximum of $1,500,000, following termination in connection with our failure to obtain the required shareholder approval. The reimbursement amount will be offset against any termination fee that subsequently becomes due.

 

No Solicitation of Alternative Transactions

 

The merger agreement contains restrictions on our ability to solicit or engage in discussions or negotiations with a third party with respect to a proposal to acquire a significant interest in us. Notwithstanding these restrictions, the merger agreement provides that under specified circumstances, if prior to the approval of the merger agreement by our shareholders, we receive an unsolicited acquisition proposal from a third party that our board of directors determines in good faith, after consultation with outside legal counsel and financial advisors, is or is reasonably likely to result in a superior proposal, we may, if our board of directors also determines in good faith (after receiving advice of outside legal counsel) that the failure to take such action would constitute a breach of the board of

directors’ fiduciary duties to our shareholders and if we provide Medtronic with at least one business day advance notice, furnish nonpublic information to that third party and engage in negotiations with that third party.

 

After careful consideration of the factors described in the section of this proxy statement entitled “The Merger — Recommendation of our Board of Directors” beginning on page • , our board of directors unanimously:

 

 

Our board of directors also recommends that ATS Medical shareholders vote “FOR” any proposal by our board of directors to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement.

 

See the section of this proxy statement entitled “The Merger — Recommendation of our Board of Directors” beginning on page • .

 

Time, Date and Place.   A special meeting of our shareholders will be held on • , 2010 at • , local time, at the offices of Dorsey & Whitney LLP, 50 South Sixth Street, Suite 1500, Minneapolis, Minnesota (on the corner of Sixth Street and Nicollet Avenue in downtown Minneapolis), to consider and vote upon a proposal to approve the merger agreement and consider and vote upon a proposal to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement.

 

Record Date and Voting Power.   You are entitled to vote at the special meeting if you owned shares of our common stock at the close of business on • , 2010, the record date set by our board of directors for the special meeting. You will have one vote at the special meeting for each share of our common stock you owned at the close of business on the record date. As of the record date, there were • shares of our common stock outstanding and entitled to be voted at the special meeting. Holders of our common stock are entitled to cast a total of • votes at the special meeting.

 

Required Vote.   The approval of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock as of the close of business on the record date. In addition, the affirmative vote of the holders of a majority of our shares of common stock present in person or represented by proxy at the special meeting and entitled to vote may approve any proposal by our board of directors to adjourn the special meeting to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement. As a condition to Medtronic and Merger Sub entering into the merger agreement, Alta, Essex and Mr. Skokos, three of our significant shareholders, entered into voting agreements with Merger Sub pursuant to which they have agreed, among other things, to vote an aggregate of • shares of our common stock owned by them, representing approximately 19.9% of the shares of our common stock outstanding as of • , 2010, the record date for the special meeting, in favor of the approval of the merger agreement. See the section of this proxy statement entitled “The Merger — Voting Agreements” beginning on page • and Annex B hereto.

 

Share Ownership of Directors and Management.   As of the record date, our directors and executive officers and their affiliates owned approximately • % of the shares entitled to vote at the special meeting.

 

See the section of this proxy statement entitled “The Special Meeting” beginning on page • .

 

J.P. Morgan Securities, Inc. (which we sometimes refer to as “JPMorgan” ) acted as our financial advisor in connection with the proposed merger. We requested that JPMorgan, in its role as financial advisor, evaluate the

fairness, from a financial point of view, of the consideration to be received by the holders of our common stock pursuant to the merger agreement. On April 28, 2010, JPMorgan delivered its oral opinion, which it subsequently confirmed in writing, to our board of directors that, as of such date and based upon and subject to the factors and assumptions set forth in its opinion, the consideration to be received by holders of our common stock pursuant to the merger agreement was fair, from a financial point of view, to such holders.

 

The full text of JPMorgan’s fairness opinion, which sets forth the assumptions made, matters considered and limits on the review undertaken by JPMorgan in rendering its opinion, is attached as Annex C to this proxy statement and is incorporated herein by reference. Our shareholders are urged to read the opinion in its entirety. JPMorgan provided its opinion for the information and assistance of our board of directors in connection with our consideration of the merger. The JPMorgan opinion does not address any other aspect of the merger and is not a recommendation to any holder of our common stock as to how to vote on the merger agreement or any other matter. All summaries of the opinion of JPMorgan set forth in this proxy statement are qualified in their entirety by reference to the full text of such opinion.

 

JPMorgan acted as our financial advisor in connection with the merger and will receive customary compensation in respect thereof from us, a significant portion of which is contingent upon the consummation of the merger. In addition, we agreed to reimburse JPMorgan for its reasonable expenses incurred in connection with its services, including the reasonable fees and disbursements of outside counsel and other professional advisors, and will indemnify JPMorgan from and against certain liabilities, including liabilities arising under the federal securities laws.

 

See the section of this proxy statement entitled “The Merger — Opinion of J.P. Morgan Securities, Inc.” beginning on page • .

 

When considering the recommendation by our board of directors to vote in favor of the approval of the merger agreement, you should be aware that a number of our executive officers and directors have interests in the merger that are different from yours, including, among others:

 

 

 

 

See the section of this proxy statement entitled “The Merger — Interests of our Directors and Executive Officers in the Merger” beginning on page • .

 

As a condition to Medtronic and Merger Sub entering into the merger agreement, Alta, Essex and Mr. Skokos, three of our significant shareholders, entered into voting agreements with Merger Sub pursuant to which they have agreed, among other things, to vote a portion of the shares owned by them in favor of the approval of the merger agreement. As of • , 2010, the record date for the special meeting, an aggregate of • shares of our common stock, representing approximately 19.9% of the shares of our common stock outstanding and entitled to vote as of that date, were subject to these voting agreements. Of those shares, • , or approximately • %, are held by Alta; • , or approximately • %, are held by Essex; and • , or approximately • %, are held by Mr. Skokos (all of which are held directly by Mr. Skokos and not indirectly, through any partnership, corporation or other legal entity). In order to comply with the anti-takeover provisions of the Minnesota Business Corporation Act (the “MBCA” ), the voting agreements were approved by our board of directors and a special committee of our board of directors, and are limited to the number of shares which, when added to the 36,854 shares owned by Medtronic, do not exceed 19.9% of our outstanding common stock. See the section of this proxy statement entitled “The Merger — Voting Agreements” beginning on page • and Annex B hereto.

 

Our common stock is listed on the NASDAQ Global Market under the symbol “ATSI.” On April 28, 2010, the last full trading day prior to the public announcement of the proposed merger, our common stock closed at a price of $2.59. On • , 2010 the last practicable trading day prior to the printing of this proxy statement, our common stock closed at a price of $ • . To date, we have not paid any dividends on our common stock. See the section of this proxy statement entitled “The Merger — Market Price and Dividend Data” beginning on page • .

 

If the merger is completed, our common stock will no longer be traded on the NASDAQ Global Market and will be deregistered under the Securities Exchange Act of 1934, as amended, and we will no longer be required to file periodic reports with the SEC with respect to our shares of common stock.

 

The exchange of shares of our common stock for the merger consideration will be a taxable transaction to our shareholders for United States Federal income tax purposes.

 

You should read the section of this proxy statement entitled “The Merger — Material United States Federal Income Tax Consequences” beginning on page • for a more complete discussion of the federal income tax consequences of the merger. Tax matters can be complicated, and the tax consequences of the merger to you will depend on the facts of your own situation. You should consult your own tax advisor to fully understand the tax consequences to you.

 

We and Medtronic have agreed to use our reasonable best efforts to make any required submissions under the HSR Act, and any applicable foreign antitrust laws which we or Medtronic determine should be made with respect to the merger, the merger agreement, and the other transactions contemplated by the merger and the merger agreement. On May 21, 2010, we and Medtronic filed notification reports with the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission, and are required to make filings and obtain regulatory approvals from governmental authorities in Austria, Portugal and Spain. See the section of this proxy statement entitled “The Merger — Regulatory Matters” beginning on page • .

 

The laws of the State of Minnesota entitle any holder of our common stock as of the record date for the special meeting, in lieu of receiving the merger consideration that such holder would otherwise be entitled pursuant to the merger agreement, to dissent from the merger and obtain payment in cash for the “fair value” of the shares of our

common stock held by such holder. ANY SHAREHOLDER CONTEMPLATING THE EXERCISE OF THESE DISSENTERS’ RIGHTS SHOULD REVIEW CAREFULLY THE PROVISIONS OF SECTIONS 471 AND 473 OF THE MBCA (COPIES OF WHICH ARE ATTACHED AS ANNEX D TO THIS PROXY STATEMENT), PARTICULARLY THE SPECIFIC PROCEDURAL STEPS REQUIRED TO PERFECT SUCH RIGHTS. SUCH RIGHTS WILL BE LOST IF THE PROCEDURAL REQUIREMENTS OF SECTION 473 OF THE MBCA ARE NOT FULLY AND PRECISELY SATISFIED. See the section of this proxy statement entitled “The Merger — Dissenters’ Rights” beginning on page • .

 

Wells Fargo Shareowner Services will act as the paying agent in connection with the merger.

 

This proxy statement contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “predict,” “intend,” “plan,” “anticipate,” “believe,” “will,” “may,” “should,” “would,” and similar expressions are intended to identify forward-looking statements. These statements are based on the current expectations and beliefs of our management and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These statements are not guarantees of future performance, involve risks, uncertainties and assumptions that are difficult to predict, and are based upon assumptions as to future events that may not prove accurate. Therefore, actual outcomes and results may differ materially from what is expressed in the forward-looking statements. Such risks, uncertainties and assumptions include, but are not limited to, our reliance on our mechanical heart valve as our primary source of revenue, our ability to successfully market our products on a broad basis, the sufficiency of our current cash and investment balances, the recent global economic downturn, actions by the FDA related to our products, healthcare reform legislation, the availability of third party reimbursement, doing business in international markets, our ability to compete effectively, our development of new products, exposure to possible product liability claims, our ability to protect our intellectual property, our dependence on third party distributors in international markets, the loss of key vendors, completing our proposed merger with Medtronic and exposure to litigation in connection with our proposed merger with Medtronic and the costs related thereto.

 

In any forward-looking statement in which we express an expectation or belief as to future results, that expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement or expectation or belief will result or be achieved or accomplished. Risks and uncertainties could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties are detailed in various SEC filings made periodically by us, particularly our latest report on Form 10-K and subsequent report or reports on Form 10-Q, copies of which are available from us without charge or online at http://www.atsmedical.com. Please review such filings and do not place undue reliance on these forward-looking statements.

 

You should carefully consider the cautionary statements contained or referred to in this section in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We do not undertake any obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances that occur after the date of this proxy statement or to reflect the occurrence of unanticipated events.

 

The enclosed proxy is solicited on behalf of the board of directors of ATS Medical for use at the special meeting of shareholders or at any adjournment or postponement thereof.

 

We will hold the special meeting at • , 2010 at • , local time at the offices of Dorsey & Whitney LLP, 50 South Sixth Street, Suite 1500, Minneapolis, Minnesota (on the corner of Sixth Street and Nicollet Avenue in downtown Minneapolis).

 

At the special meeting, we are asking holders of record of our common stock to consider and vote on the following proposals:

 

 

We do not expect a vote to be taken on any other matters at the special meeting. If any other matters are properly presented at the special meeting for consideration, however, the holders of the proxies, if properly authorized, will have discretion to vote on these matters in accordance with their best judgment.

 

After careful consideration, our board of directors determined that it is advisable, fair to and in the best interests of our shareholders for ATS Medical to enter into the merger agreement and consummate the merger and the other transactions contemplated by the merger agreement.

 

Our board of directors unanimously recommends that our shareholders vote “FOR” the proposal to approve the merger agreement. Our board of directors also recommends that ATS Medical shareholders vote “FOR” any proposal by our board of directors to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement. Our board of directors will determine whether to make such a proposal to adjourn the special meeting in accordance with its obligations under the merger agreement and its fiduciary duties to our shareholders.

 

In considering such recommendation, you should be aware that some of our directors and officers have interests in the merger that are different from, or in addition to, those of our shareholders generally. See the section of this proxy statement entitled “The Merger — Interests of our Directors and Executive Officers in the Merger” beginning on page • .

 

If your submitted proxy does not specify how you want to vote your shares, your shares will be voted “FOR” the proposal to approve the merger agreement and “FOR” any proposal by our board of directors to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement.

 

Only holders of record of our common stock at the close of business on • , 2010, the record date set by our board of directors, are entitled to notice of and to vote at the special meeting. On the record date, • shares of our common stock were issued and outstanding and held by approximately • holders of record.

 

A quorum will be present at the special meeting if a majority of the outstanding shares of our common stock on the record date is present in person or by proxy. In the event that a quorum is not present at the special meeting, it is expected that the meeting will be postponed to solicit additional proxies. Holders of record of our common stock on the record date are entitled to one vote per share at the special meeting on the proposals to approve the merger agreement and adjourn the special meeting.

 

The approval of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock. If a shareholder abstains from voting or does not vote, either in person or by proxy, it will have the same effect as a vote against the approval of the merger agreement — so please vote. The

affirmative vote of the holders of a majority of the outstanding shares of common stock of ATS Medical present in person or represented by proxy at the special meeting and entitled to vote may adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement. If a shareholder does not vote, either in person or by proxy, such failure will not affect the outcome of any proposal to adjourn the special meeting, but will reduce the number of votes required to approve such a proposal. If a shareholder abstains from voting, either in person or by proxy, it will count as a vote against any proposal to adjourn the special meeting.

 

At the close of business on the record date, our directors and executive officers and their affiliates owned and were entitled to vote • shares of our common stock, which represented approximately • % of the shares of our common stock outstanding on that date. At the close of business on the record date, Alta was entitled to vote • shares of our common stock, and Essex was entitled to vote • shares of our common stock. Guy P. Nohra, one of our directors and the founder and managing director of Alta, was first appointed to our board of directors in June 2007 as Alta’s designee in connection with the closing of a common stock and warrant purchase agreement between Alta and us. Martin P. Sutter, one of our directors and the co-founder and managing director at Essex, was first appointed to our board of directors in December 2008 in connection with the closing of a common stock and warrant purchase agreement among us, Essex and certain of its affiliates. Mr. Nohra and Mr. Sutter remain affiliated with Alta and Essex, respectively. In addition, Mr. Skokos owns the entities that are the general partners of 3F Partners Limited Partnership and 3F Partners Limited Partnership II. At the close of business on the record date, these partnerships were entitled to vote • shares and • shares, respectively, of our common stock. See the section of this proxy statement entitled “Security Ownership of Certain Beneficial Owners and Management.”

 

As a condition to Medtronic and Merger Sub entering into the merger agreement, Alta, Essex and Mr. Skokos, three of our significant shareholders, entered into voting agreements with Merger Sub pursuant to which they have agreed, among other things, to vote a portion of the shares owned by them in favor of the approval of the merger agreement. As of • , 2010, the record date for the special meeting, an aggregate of • shares of our common stock, representing approximately 19.9% of the shares of our common stock outstanding and entitled to vote as of that date, were subject to these voting agreements.

 

See the section of this proxy statement entitled “The Merger — Voting Agreements” beginning on page • and Annex B hereto.

 

All shares represented by properly executed proxies received in time for the special meeting will be voted at the special meeting in the manner specified by the holders. Properly executed proxies that do not contain voting instructions will be voted “FOR” the approval of the merger agreement and “FOR” any proposal by our board of directors to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement.

 

Shares of our common stock represented at the special meeting but not voting, including shares of our common stock for which proxies have been received but for which shareholders have abstained, will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business.

 

Only shares affirmatively voted for the approval of the merger agreement, including properly executed proxies that do not contain voting instructions, will be counted as favorable votes for that proposal. Only shares affirmatively voted for any proposal by our board of directors to adjourn the special meeting, including properly executed proxies that do not contain voting instructions, will be counted as favorable votes for such a proposal. No proxy that is specifically marked “AGAINST” approval of the merger proposal will be voted in favor of the meeting adjournment proposal, unless it is specifically marked “FOR” the discretionary authority to adjourn the special meeting to a later date. If a shareholder does not return a proxy or abstains from voting, it will effectively count as a vote “AGAINST” the approval of the merger agreement and a vote “AGAINST” the adjournment of the special meeting — so please vote. If a shareholder does not vote, either

in person or by proxy, it will effectively count as a vote “AGAINST” the approval of the merger agreement and it will not affect the outcome of any proposal to adjourn the special meeting, but will reduce the number of votes required to approve any such proposal.

 

Brokers who hold shares of our common stock in “street name” for customers who are the beneficial owners of such shares may not give a proxy to vote those customers’ shares in the absence of specific instructions from those customers. Any “broker non-votes” would be considered present for purposes of determining whether or not a quorum is present, but would not be considered entitled to vote on a particular proposal. Failing to instruct your broker on how to vote your shares on the proposal to approve the merger agreement will have the same effect as a vote “AGAINST” such proposal — so please vote. Failing to instruct your broker on how to vote your shares on any proposal to adjourn the special meeting will have no effect on the outcome of such a proposal, but will reduce the number of votes required to approve that proposal.

 

The grant of a proxy on the enclosed form of proxy does not preclude you from voting in person at the special meeting. If you are a shareholder of record you may revoke your proxy and change your vote at any time before your vote is counted at the special meeting by submitting a later-dated proxy by telephone, internet or mail, or by voting in person at the meeting. Attending the meeting will not revoke your proxy unless you specifically request to revoke it. To request an additional proxy card, or if you have any questions about the special meeting or how to vote or revoke your proxy, you should write to ATS Medical, Inc., Attn: Chief Financial Officer, 3905 Annapolis Lane North, Minneapolis, Minnesota 55447 or call (763) 553-7736. If you hold your shares in “street name” and have instructed a broker, bank or nominee to vote your shares, you must follow directions received from your broker, bank or nominee to change those instructions.

 

ATS Medical is conducting this proxy solicitation and will bear the cost of soliciting proxies, including the preparation, assembly, printing and mailing of this proxy statement, the proxy card and any additional information furnished to shareholders. In addition, we have engaged The Proxy Advisory Group, LLC to assist in the solicitation of proxies and to provide related advice and informational support for a services fee, plus customary disbursements, which are not expected to exceed $15,000 in total. We also reimburse brokerage houses and other custodians, nominees and fiduciaries for their costs of forwarding proxy and solicitation materials to beneficial owners.

 

Shareholders should not send stock certificates with their proxies. A letter of transmittal with instructions for the surrender of stock certificates will be mailed to our shareholders as soon as practicable after completion of the merger. The instructions will provide that, at the election of the shareholder, certificates may be surrendered, and the merger consideration in exchange for the certificates may be collected, by hand delivery.

 

Under applicable Minnesota law, if you do not vote to approve the merger agreement and if you follow certain procedures in lieu of receiving the merger consideration, you have the right to receive payment in cash for the “fair value” of your shares of our common stock. If you are seeking to exercise your statutory dissenters’ rights, you must follow certain procedures as outlined in Sections 471 and 473 of the MBCA. Merely voting against the approval of the merger agreement will not preserve your dissenters’ rights. See the section of this proxy statement entitled “The Merger — Dissenters’ Rights” beginning on page • .

 

If you need assistance submitting your proxy or have questions regarding the ATS Medical special meeting, please contact:

 

ATS Medical, Inc.

Attn: Chief Financial Officer

3905 Annapolis Lane North

Minneapolis, Minnesota 55447

Telephone: (763) 553-7736

 

The following discussion summarizes the material terms of the proposed merger. Shareholders should read the merger agreement, which is a attached as Annex A to this proxy statement, carefully and in its entirety.

 

Pursuant to the merger agreement, at the effective time of the merger, Merger Sub will merge with and into ATS Medical, with ATS Medical surviving as a wholly owned subsidiary of Medtronic (which we sometimes refer to in this proxy statement as the “surviving corporation”).

 

If we complete the merger, each share of our common stock issued and outstanding immediately prior to the effective time of the merger, other than:

 

 

will be automatically converted into and represent the right to receive the merger consideration (subject to decrease under the limited circumstances referred to below) as described in the section of this proxy statement entitled “The Merger Agreement — Effect on Capital Stock” beginning on page • . After the merger is effective, shareholders will no longer have any rights with respect to their shares, except for the right to receive the merger consideration. No interest will accrue or be paid with respect to the merger consideration. At the effective time of the merger, shares of our common stock will no longer be outstanding, will automatically be canceled and will cease to exist.

 

Pursuant to the merger agreement, the merger consideration is subject to decrease only if it were determined that (i) the number of outstanding shares of common stock as of immediately prior to the effective time of the merger exceeds 79,010,969 (provided that we will not be deemed to have exceeded this threshold to the extent any excess is the result of the proper exercise of Options or Warrants or proper vesting of Restricted Stock Units between the date of the merger agreement and the effective time of the merger), (ii) as of immediately prior to the effective time of the merger, our outstanding Options and Warrants are exercisable to purchase more than 8,754,392 shares of our common stock in the aggregate, (iii) the number of outstanding Restricted Stock Units as of immediately prior to the effective time of the merger exceeds 5,461,064, (iv) any of our outstanding Options or Warrants are exercisable at a price lower than the exercise price disclosed to Medtronic in connection with signing the merger agreement, or (v) the aggregate amount of third party expenses incurred by us in connection with the merger exceeds $7,800,000 (plus any amounts incurred by us as a result of additional requests for information under certain antitrust laws) and, but for the decrease, the aggregate consideration payable by Medtronic would exceed $348,650,883 plus the aggregate exercise price of all in the money Options and Warrants outstanding as of the date of the merger agreement that are properly exercised between the date of the merger agreement and the effective time of the merger (which amount, in the aggregate, reflects merger consideration of $4.00 per share). While the merger agreement also provides for a decrease in the merger consideration in the event that the aggregate principal amount of our 2025 Notes outstanding exceeds $22,400,000 or the conversion price thereof is less than $4.20, on June 10, 2010 we redeemed all of the outstanding $22,400,000 aggregate principal amount of our 2025 Notes at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest thereon up to, but excluding, the redemption date. The conversion price as of the redemption date was $4.20. Accordingly, the merger consideration will not be subject to a decrease based on the aggregate principal amount of the 2025 Notes or the conversion price thereof. Additional detail regarding the calculation of the amount of any such decrease is provided in the section of this proxy statement entitled “The Merger Agreement — Effect on Capital Stock — Common Stock” beginning on page • .

 

While we cannot guarantee that the merger consideration will be $4.00 per share and that such amount will not be decreased pursuant to the merger agreement provisions described above, as of the date of this proxy statement we do not anticipate that there will be any such decrease. With respect to the outstanding common stock, Options, Warrants and Restricted Stock Units reflected in our records, we were able to negotiate for reasonable margins for error such that we do not believe the actual numbers of outstanding common stock, Options, Warrants or Restricted Stock Units will fall outside the permitted margins, as explained in more detail in the in the section of this proxy statement entitled “The Merger Agreement — Effect on Capital Stock” beginning on page • . In addition, with respect to third party expenses, absent unforeseen circumstances that require us to devote significant legal and accounting resources toward the merger in the future, we do not expect the amount of third party expenses incurred by us as of the date of this proxy statement, together with the amount of such expenses we expect to incur prior to the closing of the merger, will exceed $7,800,000. Further, even if we did exceed the aforementioned thresholds, the effect of any such excess would be distributed over all of the shares, Options, Warrants and Restricted Stock Units whose holders are entitled to receive merger consideration therefor. See the section of this proxy statement entitled “The Merger Agreement — Effect on Capital Stock — Common Stock” for further discussion of the potential effects of exceeding these thresholds.

 

Shareholders of record will not receive the merger consideration until they surrender their stock certificates for certificated shares to the paying agent for exchange or comply with the procedures for lost certificates (each as described below), and otherwise comply with the procedures described under “The Merger Agreement — Procedures for Exchange of Certificates” beginning on page • .

 

Medtronic has represented to us under the merger agreement that it has, and will have as of the effective time of the merger, sufficient funds to complete the merger and pay all amounts it is required to pay under the merger agreement.

 

If we complete the merger, at the effective time of the merger:

 

 

On an ongoing basis, our board of directors has reviewed and evaluated, with our management, the strategic direction for ATS Medical in light of our financial performance and market, economic, competitive and other conditions and developments. These discussions have included the possibility of, among other things, business combinations involving ATS Medical and other medical device companies, particularly in view of the increasing competition in our industry. In an effort to maximize shareholder value, our management and board of directors have also regularly considered a variety of business strategies, including the continued pursuit of organic growth, strategic alliances and acquisitions, as well as regularly reviewing our prospects as an independent public company.

 

From time to time, Michael Dale, our chief executive officer, John Liddicoat, Medtronic’s vice president and general manager of its structural heart disease division, and Scott Ward, Medtronic’s senior vice president and president of its cardiovascular division, have discussed the complementary aspects of ATS Medical’s business and Medtronic’s business. In July 2008, Medtronic submitted an indication of interest to acquire ATS Medical for consideration in the range of $2.85 to $3.10 per share. Our board of directors determined that Medtronic’s offer price at such time was not compelling enough to move forward in discussions with Medtronic, ending the acquisition discussions between ATS Medical and Medtronic at that time. In October 2009, Mr. Dale contacted

Mr. Ward to inquire about Medtronic’s interest in selling certain assets. Mr. Ward indicated that Medtronic was not interested in such a sale, but suggested that ATS Medical and Medtronic explore a possible business combination.

 

On November 13, 2009, Mr. Dale and Michael Kramer, our chief financial officer, met with Mr. Ward, Mr. Liddicoat and John Mack, Medtronic’s senior director of strategy and business development for its structural heart disease division. At this meeting, Messrs. Dale and Kramer provided a general business update and overview regarding our products in development. The parties discussed the complementary nature of our products and Medtronic’s products. Messrs. Ward, Liddicoat and Mack expressed an interest in further exploring a merger between ATS Medical and Medtronic and indicated they would perform additional analysis to determine whether they would make an offer to acquire ATS Medical.

 

On November 17, 2009, Mr. Kramer, Mr. Mack and Will Au-Young, a Medtronic business development associate, had a follow-up phone conversation during which they discussed certain aspects of ATS Medical’s manufacturing operations, cost structure and sources of revenue.

 

On November 20, 2009, Mr. Dale received a written indication of interest from Chad Cornell, Medtronic’s vice president of corporate development, to acquire ATS Medical for up to $3.75 per share, as well as a request to commence due diligence and a request for a sixty day exclusivity period.

 

After receiving the indication of interest from Medtronic, our board of directors determined that it was advisable to seek the assistance and advice of a financial advisor. The board determined that JPMorgan was best positioned to represent us in evaluating Medtronic’s indication of interest due to JPMorgan’s extensive experience in advising similar companies in similar transactions, JPMorgan’s knowledge of our business, our prior consideration and review of JPMorgan as a potential financial advisor for other transactions and JPMorgan’s relationships with Medtronic and other potential acquirors. On November 20, 2009, Mr. Dale contacted representatives of JPMorgan to request that JPMorgan assist ATS Medical with the review of ATS Medical’s strategic direction and potential strategic transactions, including a potential transaction with Medtronic. Thereafter, in reviewing our strategic direction and our prospects as an independent company, our board of directors and management conferred with, and obtained advice from, representatives of JPMorgan from time to time.

 

On November 29, 2009, JPMorgan provided its initial analysis of Medtronic’s indication of interest to Messrs. Dale and Kramer.

 

At a December 3, 2009 meeting of our board of directors, JPMorgan provided its initial analysis of Medtronic’s indication of interest to our board of directors. Following a detailed discussion of this analysis and the current status of our business and its future prospects, our board of directors determined that Medtronic’s offer price of $3.75 per share was not compelling enough to move forward in discussions with Medtronic, ending the acquisition discussions between ATS Medical and Medtronic at that time.

 

On December 4, 2009, at the direction of our board of directors, JPMorgan informed Medtronic that the $3.75 per share value included in Medtronic’s indication of interest was not sufficient and that under no circumstances would Medtronic or any other potential bidder be given exclusivity.

 

On December 8, 2009, our board of directors held a regular meeting, at which our board of directors discussed the possibility that Medtronic would respond with an increased per share purchase price. Our board of directors concluded that Medtronic’s $3.75 per share offer price did not reflect ATS Medical’s potential value if ATS Medical’s new product development efforts and market introductions plans were successful, nor did such price reflect ATS Medical’s potential value if ATS Medical was successful in acquiring complementary businesses to add operational scale and improve profitability. Our board of directors also discussed the risks and uncertainties to which ATS Medical would be exposed as a standalone public company, as well as the uncertainty associated with our new product development timeline, the need to refinance our outstanding 2025 Notes (which the holders thereof would have had the right to require us to repurchase in October 2010 had such 2025 Notes not been redeemed on June 10, 2010 as described below under “The Merger Agreement — ATS Medical’s 6% Convertible Senior Notes due 2025”), and the potential for future dilution to our shareholders resulting from our need for additional cash to pursue our new product development. Our board concluded that, if Medtronic responded with an increased offer, these risks and uncertainties would require the board of directors to carefully consider Medtronic’s new offer. Our board of directors advised management to pursue an increased per share offer price with Medtronic or provide

Medtronic with a price or range of prices at which our board of directors would consider moving forward, or explore transactions with other potential acquirors.

 

On December 29, 2009, our board of directors held a special meeting to discuss ATS Medical’s anticipated fourth quarter results, which would be below analysts’ expectations. After the scheduled business was addressed at the special meeting, our board of directors discussed the status of the discussions between ATS Medical and Medtronic. During the discussion Mr. Dale reviewed for our board of directors the recent contacts between representatives of JPMorgan and Medtronic and the continuing interest of Medtronic in a transaction with ATS Medical.

 

On January 20, 2010, our board of directors held a special meeting to review management’s forecast for the business and the progress made in securing debt financing needed to redeem the 2025 Notes, and to review and discuss ATS Medical’s future funding requirements if it continued as a stand-alone entity. At this meeting, Messrs. Dale and Kramer reviewed for the board various convertible and structured debt and equity financing alternatives, and the dilutive impact those financings would have on shareholder value. Mr Dale also updated the board on the current status of discussions with Medtronic regarding a proposed transaction.

 

On February 6, 2010, Mr. Dale contacted Mr. Ward to indicate that ATS Medical’s board of directors remained interested in a potential acquisition by Medtronic and reiterated that the previous proposal of $3.75 per share was not compelling enough to move forward. Mr. Ward indicated that Medtronic remained interested in a potential acquisition of ATS Medical and indicated he would follow up with a revised proposal.

 

On February 16, 2010, Mr. Ward contacted Mr. Dale to inquire whether Mr. Dale believed ATS Medical’s board of directors would be amenable to moving forward if Medtronic’s offer was $4.00 per share in cash. Mr. Ward reiterated Medtronic’s interest in ATS Medical’s business and the complementary fit of ATS Medical’s business with Medtronic’s business. Following receipt of this proposal, the ATS board of directors authorized JPMorgan to initiate a strategic process to evaluate interest from other potential acquirors of ATS Medical.

 

On February 17, 2010, our board of directors held a regular meeting, at which JPMorgan informed our board of directors that Medtronic had indicated that it may increase its indication of interest to $4.00 per share, and again asked for exclusivity. Our board of directors then reviewed discussions with Medtronic to date, the steps that would need to be taken and timeline required for a transaction with Medtronic to occur, and possible alternatives to the proposed acquisition of ATS Medical by Medtronic. Following that discussion, the board authorized our management to commence management presentations and due diligence with Medtronic on a non-exclusive basis, to negotiate an engagement letter with JPMorgan, with final approval of the terms by the board, and to direct JPMorgan in the conduct of a market check for potential alternative acquirors.

 

On February 21, 2010, ATS Medical delivered a letter to Medtronic indicating that Medtronic’s increased cash offer of $4.00 per share had been reviewed by our board of directors and that the board had authorized ATS Medical to allow Medtronic to initiate due diligence.

 

Between February 19, 2010 and February 22, 2010, and at the direction of our board of directors, JPMorgan contacted representatives from six potential strategic acquirors that had been identified as potentially being interested in entering into a strategic transaction with ATS Medical, to gauge their interest in a transaction with ATS Medical. Pursuant to these discussions, JPMorgan sent a preliminary package of non-confidential information on ATS Medical for each party to consider.

 

On February 24, 2010, ATS Medical entered into a confidentiality agreement with Company A.

 

On February 26, 2010, JPMorgan organized a preliminary diligence call between representatives of Company A and ATS Medical to discuss aspects of our business and technology. Over the next week, JPMorgan sent Company A follow up information prepared by ATS Medical’s management regarding the regulatory status of ATS Medical’s products and expected approval timelines.

 

In parallel with JPMorgan’s efforts to contact other potential acquirors, Medtronic initiated its due diligence process. On or about March 3, 2010, ATS Medical and Medtronic entered into a confidentiality agreement, and representatives of Medtronic and its outside legal counsel were given access to ATS Medical’s virtual data room. In addition, in connection with Medtronic’s due diligence review of ATS Medical, the parties entered into a common

interest agreement as of March 3, 2010. Medtronic followed up on March 10, 2010 with a due diligence request list. Representatives and advisors of Medtronic reviewed the information and documentation contained in the data room, and the Company’s management conducted numerous in person and telephonic meetings with representatives of Medtronic in connection with their due diligence of the Company.

 

Between March 5, 2010 and March 8, 2010, representatives from the six other potential strategic acquirors, including Company A, communicated to JPMorgan they were not interested in pursuing further due diligence.

 

On March 9, 2010, at the direction of our board of directors, JPMorgan contacted representatives at another potential strategic acquiror (Company B) to gauge their interest in a potential transaction with ATS Medical. In the following days, Company B communicated to JPMorgan that they were not interested in proceeding.

 

On March 15, 2010, JPMorgan and ATS Medical finalized the terms of an engagement letter, pursuant to which ATS Medical formally engaged JPMorgan as an outside financial advisor in connection with the proposed transaction.

 

On March 23 and 24, 2010, members of management of the two companies and their respective legal advisors, and ATS Medical’s financial advisor, participated in due diligence sessions and management presentations at the offices of Dorsey & Whitney LLP, our outside legal counsel ( “Dorsey & Whitney” ), in Minneapolis, Minnesota. During these meetings, members of our management gave presentations about ATS Medical, and Medtronic was provided the opportunity to ask members of our management questions about our business, operating results and financial condition. Due diligence activities continued until shortly before conclusion of negotiations with respect to the merger agreement. During these meetings, Mr. Kramer and Jeff Steinle, Medtronic’s senior director of corporate development, discussed the possibility of Medtronic providing bridge financing to ATS Medical to refinance its debt, including the redemption of ATS Medical’s 2025 Notes. Had the 2025 Notes not been redeemed on June 10, 2010 as described below under “The Merger Agreement — ATS Medical’s 6% Convertible Senior Notes due 2025,” the noteholders would have had the right to require us to repurchase their 2025 Notes in October 2010. Accordingly, since October 2009 our board of directors had been exploring and evaluating different alternatives for securing debt financing necessary to redeem the 2025 Notes. On February 25, 2010 we received a letter committing to provide us with a four-year term loan of approximately $30 million (which we refer to in this proxy as the “ Skokos Commitment Letter ”) from Mr. Skokos, a significant shareholder and member of our board of directors, and The Ted and Shannon Skokos Foundation (the “ Skokos Foundation ”). That financing was intended to be used to redeem the 2025 Notes and to repay our term loan to Silicon Valley Bank, together totaling approximately $26 million, as well as to provide general corporate working capital. In light of the discussions with Medtronic regarding a proposed transaction, however, our management raised the possibility of Medtronic providing the bridge financing necessary to redeem the 2025 Notes and allowing the Skokos Commitment Letter to expire, if the terms offered by Medtronic were more favorable than those offered under the Skokos Commitment Letter.

 

On March 31, 2010, our board of directors held a special meeting to consider and act upon various matters in preparation for our 2010 Annual Meeting of Shareholders. At this meeting, Mr. Dale reported to the board that Medtronic was fully engaged in the diligence process and that our management team was responding to numerous requests for additional information.

 

On April 14, 2010, Fredrikson & Byron, P.A., outside counsel to Medtronic ( “Fredrikson & Byron” ), distributed an initial draft merger agreement to Dorsey & Whitney subject to the caveat that several due diligence issues were being considered by Medtronic and that Medtronic reserved the right to address those issues in subsequent drafts of the merger agreement. Representatives of Dorsey & Whitney and Fredrikson & Byron also discussed the possibility of Medtronic providing bridge financing to ATS Medical.

 

On April 15, 2010, representatives of Dorsey & Whitney circulated a list of issues raised by the draft merger agreement to representatives of ATS Medical, including Messrs. Dale and Kramer, and JPMorgan. A conference call was held later that day to discuss these issues. Later that afternoon, Dorsey & Whitney circulated to Fredrikson & Byron an initial list of issues that representatives of ATS Medical had with respect to the merger agreement, highlighting concerns surrounding the conditionality of the merger, the size of the termination fee, and ATS Medical’s need for bridge financing before the time within which a merger could be completed.

On April 15, 2010, Messrs. Dale and Kramer held a conference call with representatives from JPMorgan, during which JPMorgan confirmed that Medtronic’s indication of interest remained at $4.00 per share.

 

On the morning of April 16, 2010, representatives of Dorsey & Whitney, Fredrikson & Byron, JPMorgan and Medtronic held a telephone conference to discuss the list of issues previously circulated by Dorsey & Whitney.

 

On April 16, 2010, Fredrikson & Byron distributed a draft form of voting agreement and communicated the desire of Medtronic for three of ATS Medical’s significant shareholders, Essex, Alta and Mr. Skokos, to sign such voting agreement and provide any consent that was required of them in connection with the proposed acquisition.

 

On April 18, 2010, representatives of Dorsey & Whitney forwarded a revised draft of the merger agreement to representatives of Fredrikson & Byron.

 

On April 21, 2010, representatives of Dorsey & Whitney, Fredrikson & Byron, JPMorgan, ATS Medical and Medtronic held a telephone conference to discuss the revised draft of the merger agreement previously circulated by Dorsey & Whitney. Also on April 21, 2010, Messrs. Dale and Kramer met with Mr. Mack and several of his colleagues to begin planning and coordinating communication strategies for employees, customers, media and the investment community. Subsequent communications planning meetings were held on April 26, 2010 and April 28, 2010.

 

On April 22, 2010, representatives of Fredrikson & Byron forwarded a revised draft of the merger agreement to representatives of Dorsey & Whitney.

 

On April 23, 2010, our board of directors held a meeting, with representatives of JPMorgan and Dorsey & Whitney present, to discuss the recently distributed draft of the merger agreement and JPMorgan’s preliminary financial analysis of the proposed transaction.

 

On April 23, 2010, Mr. Steinle distributed to representatives of JPMorgan a proposed term sheet relating to a proposed secured bridge loan from Medtronic to ATS Medical, the proceeds of which were to be used to, among other things, finance the redemption of our outstanding 2025 Notes, repay our term loan to Silicon Valley Bank, and provide working capital. After reviewing the proposed terms, our management determined that the terms offered by Medtronic were more favorable than the terms proposed pursuant to the Skokos Commitment Letter discussed above. For example, the interest rate offered by Medtronic was 1.95% per annum less than the rate offered under the terms of the Skokos Commitment Letter. In addition, under the terms of the Skokos Commitment Letter we would have been required to issue warrants to purchase shares of our common stock to Mr. Skokos and the Skokos Foundation prior to the funding of the loan. The Medtronic term sheet, however, provided only for the issuance of warrants to Medtronic in the event the bridge loan remained outstanding upon termination of the merger agreement. Furthermore, under the terms of the Skokos Commitment Letter, we would have been required to pay a prepayment penalty of up to 6% of the outstanding principal balance of the loan if we were to repay the loan prior to its maturity date, while the Medtronic term sheet did not provide for a prepayment penalty. Accordingly, our management continued to negotiate the terms of a bridge loan from Medtronic. Comments to the term sheet were provided by ATS Medical, with input from its legal and financial advisors, later on April 23, 2010. Mr. Kramer and representatives from JPMorgan also had a conference call with Mr. Steinle to discuss the proposed term sheet.

 

On April 23, 2010, Medtronic’s board of directors approved the merger.

 

On April 23, 2010, Mr. Kramer held a conference call with Mr. Mack, Mr. Steinle and certain of their colleagues at Medtronic during which Mr. Kramer provided an update regarding ATS Medical’s financial results for the quarter ended April 3, 2010.

 

Between April 23, 2010 and April 28, 2010, representatives of Dorsey & Whitney and Fredrikson & Byron held numerous telephone conferences and exchanged numerous e-mail messages regarding the merger agreement and related due diligence issues and exchanged numerous drafts of the merger agreement. The parties and their respective legal advisors continued negotiating the draft agreement until April 28, 2010. During this time period, ATS Medical’s management team provided additional information regarding our technology, business, operations and financial condition to Medtronic.

 

On April 24, 2010, Fredrikson & Byron distributed a draft form of noncompetition agreement and communicated the desire of Medtronic for a number of ATS Medical’s key employees to sign such noncompetition

agreement. Discussions regarding the length of the noncompetition period, the geographical scope of the covenant, and the list of individuals expected to sign the agreement continued until April 28, 2010.

 

On April 26, 2010, drafts of the bridge loan agreements, including a promissory note, security agreement and form of warrant, were distributed by Fredrikson & Byron. A draft pledge agreement was later circulated on April 28. Between April 26 and April 28, numerous discussions took place between representatives of ATS Medical and Medtronic and their respective legal advisors regarding the proposed terms of the bridge loan documents, including the extent to which financial covenants would be included in the promissory note.

 

On April 27, 2010, representatives of Dorsey & Whitney, JPMorgan and ATS Medical held a conference call to discuss the remaining open issues in the merger agreement and the bridge loan documents, as well as the status of discussions regarding the individuals expected to execute a noncompetition agreement with Medtronic.

 

On April 28, 2010, representatives of Dorsey & Whitney, Fredrikson & Byron, ATS Medical and Medtronic held a telephone conference to discuss the material open items in the merger agreement. Also on April 28, 2010, Mr. Kramer, Mr. Steinle and representatives of JPMorgan held a conference call to finalize the remaining open issues with respect to the bridge financing.

 

On April 28, 2010 at approximately 3:00 p.m., ATS Medical’s board of directors held a board meeting to consider the proposed merger, including the merger agreement and the bridge loan agreements. During the meeting, representatives of Dorsey & Whitney reviewed for the members of our board their fiduciary duties owed to our shareholders in connection with a potential business combination, including a sale transaction, and updated the board regarding the negotiation process to date. Representatives of Dorsey & Whitney then reviewed with the board the proposed terms of the merger agreement. Representatives of JPMorgan reviewed with the board JPMorgan’s financial analysis of the proposed merger. At the conclusion of its presentation, JPMorgan rendered to the ATS Medical board of directors its oral opinion (subsequently confirmed in writing) to the effect that, as of the date of its opinion, and subject to and based on the factors, assumptions, limitations and qualifications set forth in its opinion, the consideration to be paid to the holders of ATS Medical’s common stock in the proposed merger was fair, from a financial point of view, to such holders. See “The Merger — Opinion of JPMorgan Securities, Inc.” Members of the board then discussed the proposed terms of the merger, the merger agreement, the bridge loan documents and other related agreements in detail, plus various matters associated with announcement of the deal and potential risks that may be faced by ATS Medical between signing and closing. Representatives of Dorsey & Whitney then reviewed with the board the proposed resolutions to be adopted.

 

After this review, the board and a special committee formed for purposes of compliance with Minnesota anti-takeover laws, unanimously approved the merger agreement and the voting agreements and authorized our officers to execute the merger agreement and to proceed with the merger. During the evening of April 28, 2010, ATS Medical, Medtronic and their respective legal counsel finalized the merger agreement and related documents, and a joint press release, and exchanged executed signature pages to the merger agreement on behalf of ATS Medical and Medtronic. Also on April 28, 2010, Mr. Skokos and representatives of Essex and Alta executed voting agreements, and Medtronic and one of ATS Medical’s executive officers executed a noncompetition agreement which will become effective at the effective time of the merger.

 

On April 29, 2010, ATS Medical and Medtronic issued the joint press release announcing the execution of the merger agreement.

 

Reasons for the Merger.   In the course of reaching its decision to approve the merger and enter into the merger agreement, our board of directors consulted with our management, outside legal counsel and our financial advisor, and reviewed a significant amount of information and considered a number of factors, including, among others, the following factors:

 

 

 

Our board of directors also identified and considered a number of positive factors supporting its decision to approve the merger and enter into the merger agreement, including, but not limited to:

 

 

 

 

In the course of its deliberations, our board of directors also identified and considered a variety of risks and other countervailing factors, including:

 

 

 

While our board of directors considered potentially negative and potentially positive factors, the board of directors concluded that overall, the potentially positive factors outweighed the potentially negative factors.

 

The preceding discussion is not meant to be an exhaustive description of the information and factors considered by our board of directors, but is believed to address the material information and factors considered. Our board of directors collectively reached the unanimous decision to approve the merger agreement in light of the factors described above and other factors that each member of the board of directors felt were appropriate. In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, many of which are qualitative or difficult to quantify, and the quality and amount of information considered, our board of directors did not find it practicable to and did not make specific assessments of, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination. In considering the factors described above, individual members of the board may have given different weight to different factors.

 

Board of Directors Recommendation.   After careful consideration, and taking into account all of the factors outlined above, our board of directors unanimously determined that the merger is advisable and fair to and in the best interests of ATS Medical and its shareholders, and authorized and approved the merger agreement and the other transactions contemplated by the merger agreement, including the voting agreements referred to in the merger agreement, and our board of directors unanimously recommends that our shareholders vote “FOR” the approval of the merger agreement. Our board of directors also recommends that ATS Medical’s shareholders vote “FOR” any proposal by our board of directors to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement.

 

Pursuant to an engagement letter dated March 15, 2010, we retained JPMorgan as our financial advisor in connection with the proposed merger.

 

At the meeting of our board of directors on April 28, 2010, JPMorgan rendered its oral opinion to our board of directors that, as of such date and based upon and subject to the factors and assumptions set forth in its opinion, the consideration to be paid to holders of our common stock in the proposed merger was fair, from a financial point of view, to such shareholders. JPMorgan has confirmed its April 28, 2010 oral opinion by delivering its written opinion to our board of directors, dated April 28, 2010, that, as of such date, the consideration to be paid to holders of our common stock in the proposed merger was fair, from a financial point of view, to such shareholders. No limitations were imposed by our board of directors upon JPMorgan with respect to the investigations made or procedures followed by it in rendering its opinions.

 

The full text of the written opinion of JPMorgan dated April 28, 2010, which sets forth the assumptions made, matters considered and limits on the review undertaken, is attached as Annex C to this proxy statement and is incorporated herein by reference. Our shareholders are urged to read the opinion in its

entirety. JPMorgan’s written opinion was addressed to our board of directors, was directed only to the fairness, from a financial point of view, of the consideration to be paid to the holders of our common stock in the merger and does not constitute a recommendation to any of our shareholders as to how such shareholder should vote with respect to the merger agreement or any other matter. All summaries of the opinion of JPMorgan set forth in this proxy statement are qualified in their entirety by reference to the full text of such opinion.

 

In arriving at its opinions, JPMorgan, among other things:

 

 

JPMorgan also held discussions with certain members of our management with respect to certain aspects of the merger, and the past and current business operations of ATS Medical, the financial condition and future prospects and operations of ATS Medical, and certain other matters JPMorgan believed necessary or appropriate to its inquiry.

 

In giving its opinion, JPMorgan relied upon and assumed, without assuming responsibility or liability for independent verification, the accuracy and completeness of all information that was publicly available or was furnished to or discussed with JPMorgan by us or otherwise reviewed by or for JPMorgan. JPMorgan did not conduct and was not provided with any valuation or appraisal of any assets or liabilities, nor did JPMorgan evaluate the solvency of ATS Medical or Medtronic under any state or federal laws relating to bankruptcy, insolvency or similar matters. At the direction of our board of directors, JPMorgan relied on financial analyses and forecasts provided to it by us, and JPMorgan assumed and was advised by our management that they were reasonably prepared based on assumptions reflecting the best currently available estimates and judgments by our management as to the expected future results of operations and financial condition of ATS Medical to which such analyses or forecasts relate. JPMorgan expressed no view as to such analyses or forecasts or the assumptions on which they were based. JPMorgan also assumed that the merger will be consummated as described in the merger agreement, and that the definitive merger agreement would not differ in any material respect from the draft thereof provided to JPMorgan. JPMorgan also assumed that the representations and warranties made by us and Medtronic in the merger agreement and the related agreements were and will be true in all respects material to JPMorgan’s analysis. JPMorgan relied as to all legal, regulatory and tax matters relevant to the rendering of its opinion upon the advice of advisors to ATS Medical. JPMorgan further assumed that all material governmental, regulatory or other consents and approvals necessary for the consummation of the merger will be obtained without any adverse effect on us or on the contemplated benefits of the merger.

 

The projections furnished to JPMorgan for ATS Medical were prepared by our management. We do not publicly disclose internal management projections of the type provided to JPMorgan in connection with JPMorgan’s analysis of the merger, and such projections were not prepared with a view toward public disclosure. These projections were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management, including, without limitation, factors related to general economic and competitive conditions and prevailing interest rates. Accordingly, actual results could vary significantly from those set forth in such projections.

JPMorgan’s opinion is based on economic, market and other conditions as in effect on, and the information made available to JPMorgan as of, the date of such opinion. Subsequent developments may affect JPMorgan’s opinion, and JPMorgan does not have any obligation to update, revise, or reaffirm such opinion. JPMorgan’s opinion is limited to the fairness, from a financial point of view, of the consideration to be paid to the holders of our common stock in the proposed merger, and JPMorgan has expressed no opinion as to the fairness of the merger to any person or entity, or as to the fairness of any consideration paid in connection with the merger to, the holders of any other class of securities, creditors or other constituencies of ATS Medical or as to the underlying decision by us to engage in the merger. JPMorgan expressed no opinion with respect to the amount or nature of any compensation to any officers, directors or employees of any party to the merger, or any class of such persons relative to the consideration to be paid to the holders of our common stock or with respect to the fairness of any such compensation. JPMorgan expressed no opinion as to the price at which our common stock will trade at any future time, whether before or after the closing of the merger.

 

In accordance with customary investment banking practice, JPMorgan employed generally accepted valuation methods in reaching its opinion. The following is a summary of the material financial analyses utilized by JPMorgan in connection with providing its opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand JPMorgan’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data described below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of JPMorgan’s financial analyses. All market data used by JPMorgan in its analyses was as of April 27, 2010.

 

Public Trading Multiples.   Using publicly available information, JPMorgan compared selected financial data of ATS Medical with similar data for selected publicly traded companies engaged in businesses which JPMorgan judged to be analogous to ATS Medical. The companies selected by JPMorgan were the following:

 

 

These companies were selected, among other reasons, because they share similar business characteristics to ATS Medical based on operational characteristics and financial metrics. For each comparable company, JPMorgan calculated the firm value to revenue multiples. For purposes of this analysis, a company’s firm value was calculated as the diluted equity value using the treasury stock method based on options outstanding as of that company’s latest SEC filing prior to April 27, 2010, plus the value of such company’s indebtedness and minority interests and preferred stock as of that company’s latest SEC filing prior to April 27, 2010, minus such company’s cash, cash equivalents and marketable securities as of the company’s latest SEC filing prior to April 27, 2010. The firm value was divided by publicly available equity research projections of future calendar-year revenues for 2010 and 2011, which are referred to below as “2010 Revenue” and “2011 Revenue,” to derive trading multiples for each company. JPMorgan noted that for the comparable companies, this analysis showed:

 

 

Based on the results of this analysis and other factors which it considered appropriate, JPMorgan applied a Firm Value/2010 Revenue multiple range of 1.25x to 3.25x to our 2010 Revenue and a Firm Value/2011 Revenue multiple range of 1.10x to 2.75x to our 2011 Revenue and then calculated our implied equity value per share. In performing these calculations, JPMorgan used two sets of financial forecasts: (1) the “Street Case”, based on consensus estimates of Wall Street analysts; and (2) the “Management Case”, provided by us. This analysis showed the following:

 

 

All values presented were rounded to the nearest $0.05. In each case, JPMorgan compared the implied equity values per share to the per share consideration of $4.00 in cash to be paid to the holders of our common stock in the merger and the $2.53 per share closing price of our common stock as of April 27, 2010.

 

Selected Transaction Analysis.   Using publicly available information, JPMorgan reviewed the following precedent transactions involving businesses which JPMorgan judged to be analogous to our business. These transactions were selected, among other reasons, because the businesses involved in these transactions share similar business characteristics to ATS Medical based on operational characteristics and financial metrics. The transactions considered and the date each transaction was announced are as follows:

 

 

Using publicly available estimates, JPMorgan reviewed the transaction values as a multiple of (1) the target company’s revenue for the twelve-month period immediately preceding announcement of the transaction ( “LTM Revenue” ), which is referred to below as “Firm Value/LTM Revenue,” and (2) to the extent available, the target company’s revenue for the twelve-month period immediately following the announcement of the transaction ( “FTM Revenue” ), which is referred to below as “Firm Value/FTM Revenue.” For the precedent transactions, JPMorgan noted that this analysis showed:

 

 

Based on the results of this analysis and other factors that JPMorgan considered appropriate, JPMorgan applied a Firm Value/LTM Revenue multiple range of 1.60x to 4.30x to our LTM Revenue and a Firm Value/FTM Revenue multiple range of 1.35x to 3.75x to our FTM Revenue from the “Management Case” described above. This analysis showed the following:

 

 

All values presented were rounded to the nearest $0.05. In each case, JPMorgan compared the implied equity values per share to the per share consideration of $4.00 in cash to be paid to the holders of our common stock in the merger and the $2.53 per share closing price of our common stock as of April 27, 2010.

Discounted Cash Flow Analysis.   JPMorgan conducted a discounted cash flow analysis for the purpose of determining the fully diluted equity value per share for our common stock. JPMorgan calculated the unlevered free cash flows that we are expected to generate during fiscal years 2010 through 2020, based upon financial projections prepared by our management. JPMorgan then calculated the terminal value as of December 31, 2020 by applying, based upon JPMorgan’s judgment and experience, a range of perpetual revenue growth rates from 2.5% to 3.5%. The unlevered free cash flows from December 31, 2009 through December 31, 2020 and the range of terminal values were then discounted to present values using a range of discount rates from 12.0% to 16.0% and added together in order to derive the implied firm value of ATS Medical. The discount rate range was chosen by JPMorgan based upon an analysis of the weighted-average cost of capital of ATS Medical conducted by JPMorgan and applied using the mid-year convention for discounting. In calculating the estimated diluted equity value per share, JPMorgan adjusted the calculated firm value for our cash and total debt as of December 31, 2009 and divided by the fully diluted shares outstanding of ATS Medical. Based on the foregoing, this analysis indicated an implied equity value per share of our common stock of $1.25 to $2.70. All values presented were rounded to the nearest $0.05. In each case, JPMorgan compared implied equity values per share to the per share consideration of $4.00 in cash to be paid to the holders of our common stock in the merger and the $2.53 per share closing price of our common stock as of April 27, 2010.

 

Historical Share Price Analysis.   JPMorgan reviewed the price performance of our common stock during various periods ending on April 27, 2010 on a standalone basis and also in relation to the S&P 500 and a composite index consisting of the publicly traded companies listed under “Public Trading Multiples” above. JPMorgan also noted that the merger consideration of $4.00 per share of our common stock represented:

 

 

JPMorgan noted that historical stock trading analyses are not valuation methodologies but were presented merely for informational purposes.

 

General

 

The foregoing summary of certain material financial analyses does not purport to be a complete description of the analyses or data presented by JPMorgan. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. JPMorgan believes that the foregoing summary and its analyses must be considered as a whole and that selecting portions of the foregoing summary and these analyses, without considering all of its analyses as a whole, could create an incomplete view of the processes underlying the analyses and its opinion. In arriving at its opinion, JPMorgan did not attribute any particular weight to any analyses or factors considered by it and did not form an opinion as to whether any individual analysis or factor (positive or negative), considered in isolation, supported or failed to support its opinion. Rather, JPMorgan considered the totality of the factors and analyses performed in determining its opinion. Analyses based upon forecasts of future results are inherently uncertain, as they are subject to numerous factors or events beyond the control of the parties and their advisors. Accordingly, forecasts and analyses used or made by JPMorgan are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by those analyses. Moreover, JPMorgan’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which businesses actually could be bought or sold. None of the selected companies reviewed as described in the above summary is identical to ATS Medical, and none of the selected transactions reviewed was identical to the merger. However, the companies selected were chosen because they are publicly traded companies with operations and businesses that, for purposes of JPMorgan’s analysis, may be considered similar to those of ATS Medical. The transactions selected were similarly chosen because their participants, size and other factors, for purposes of JPMorgan’s analysis, may be considered similar to the merger. The analyses necessarily involve

complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors that could affect the companies compared to ATS Medical and the transactions compared to the merger.

 

As a part of its investment banking business, JPMorgan and its affiliates are continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for estate, corporate and other purposes. JPMorgan was selected to advise ATS Medical with respect to the merger and to deliver an opinion to our board of directors with respect to the merger on the basis of such experience and its familiarity with ATS Medical.

 

Under the terms of a letter agreement, dated March 15, 2010, we memorialized our engagement of JPMorgan to act as our financial advisor in connection with the proposed merger. Pursuant to the terms of the letter agreement, we agreed to pay JPMorgan a transaction fee of 1.40% of the aggregate consideration to be paid in the transaction, or approximately $5.0 million, payable upon consummation of the transaction. We also paid JPMorgan a fee of $750,000 upon delivery of the opinion, and such amount will be offset against the transaction fee upon completion of the merger. In addition, we agreed to reimburse JPMorgan for its reasonable expenses incurred in connection with its services, including reasonable fees and disbursements of outside counsel and other professional advisors, and to indemnify JPMorgan from and against certain liabilities, including liabilities arising under federal securities laws.

 

During the two years preceding the date of the opinion, neither JPMorgan nor its affiliates have had any other significant financial advisory or other significant commercial or investment banking relationships with ATS Medical. During the two years preceding the date of this letter, JPMorgan and its affiliates have had commercial or investment banking relationships with Medtronic, for which JPMorgan and its affiliates have received customary compensation. Such services during such period have included acting as a joint bookrunner for Medtronic’s $1,250,000,000 bond offering in 2009 and acting as a joint bookrunner for Medtronic’s $3,000,000,000 bond offering in 2010. In addition, JPMorgan’s commercial banking affiliate is a lender under outstanding credit facilities of Medtronic, for which it receives customary compensation or other financial benefits. In the ordinary course of JPMorgan’s businesses, JPMorgan and its affiliates may actively trade the debt and equity securities of ATS Medical or Medtronic for its own account or for the accounts of customers and, accordingly, JPMorgan may at any time hold long or short positions in such securities.

 

As a condition to Medtronic and Merger Sub entering into the merger agreement, Merger Sub entered into a voting agreement with each of Alta, Essex and Mr. Skokos, each a significant shareholder of ATS Medical, concurrently with the execution and delivery of the merger agreement. As of the record date for the special meeting, an aggregate of • shares of our common stock, representing approximately 19.9% of the shares of our common stock outstanding on the record date, were subject to these voting agreements. Of those shares:

 

 

See the section of this proxy statement entitled “The Merger — Voting Agreements” beginning on page  • and Annex B hereto. The voting agreements are attached as Annex B hereto.

Pursuant to the voting agreements, Alta, Essex and Mr. Skokos agreed, among other things, to vote all of their respective shares of our common stock that are subject to the voting agreements:

 

 

In addition, Alta, Essex and Mr. Skokos have given representatives of Merger Sub an irrevocable proxy to vote their respective shares of ATS Medical common stock that are subject to the voting agreements in this manner.

 

The voting agreements prohibit each of Alta, Essex and Mr. Skokos from:

 

 

Affiliates of Alta and Essex who are members of our board of directors, as well as Mr. Skokos, who is a member of our board of directors, are not prevented by the voting agreements from taking any action solely in their respective capacities as members of the board of directors in the exercise of their fiduciary duties, including with respect to an acquisition proposal.

 

The Voting Agreements are limited to the number of shares which, when added to the 36,854 shares owned by Medtronic, do not exceed 19.9% of our outstanding common stock. The voting agreements terminate upon the earlier of the effective time of the merger or the termination of the merger agreement.

 

We are governed by the provisions of Sections 302A.671 and 302A.673 of the MBCA, which in some cases may discourage a negotiated acquisition of ATS Medical and thus deprive our shareholders of an opportunity to sell their shares at a premium over the market price. In general, Section 302A.671 provides that a public Minnesota corporation’s shares acquired in a control share acquisition have no voting rights unless voting rights are approved in a prescribed manner. A “control share acquisition” is a direct or indirect acquisition of beneficial ownership of shares that would, when added to all other shares beneficially owned by the acquiring person, entitle the acquiring person to have voting power of 20% or more in the election of directors. In general, Section 302A.673 prohibits a public Minnesota corporation from engaging in a business combination with an interested shareholder for a period of four years after the date of the transaction in which the person became an interested shareholder, unless the business combination is approved in a prescribed manner. The term “business combination” includes mergers, asset sales and other transactions resulting in a financial benefit to the interested shareholder, and an “interested shareholder” is a person who is the beneficial owner, directly or indirectly, of 10% or more of a corporation’s voting stock, or who is an affiliate or associate of the corporation, and who, at any time within four years before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the corporation’s voting stock. Section 302A.673 does not apply if a committee of our board of directors consisting of one or more of our disinterested directors (excluding our current and former officers) approves the proposed transaction or the interested shareholder’s acquisition of shares before the interested shareholder becomes an interested shareholder.

In order to ensure that Sections 302A.671 and 302A.673 would not be triggered by the entry by Essex, Alta and Mr. Skokos into the voting agreements described above (and thus potentially prohibit the merger), our board of directors formed a special committee of the board comprised of Messrs. Steven M. Anderson, Robert E. Munzenrider and Eric W. Sivertson, each of whom is a “disinterested director” for purposes of Section 302A.673, to approve the merger agreement, the voting agreements, the merger and the business combination represented by the merger, all for the purposes of exempting the merger and the transactions contemplated thereby, and the respective parties thereto, from the restrictions and limitations of Section 302A.673, and rendering the restrictions and limitations set forth in Sections 302A.671 and 302A.673 inapplicable to the merger agreement and the transactions contemplated thereby.

 

In considering the recommendation of our board of directors in favor of the approval of the merger agreement, you should be aware that members of our board of directors and our executive officers have interests in the merger that are different from, or in addition to, yours.

 

All such additional interests are described below, to the extent material, and except as described below, such persons have, to our knowledge, no material interest in the merger apart from those of shareholders generally. Our board of directors was aware of, and considered the interests of, our directors and executive officers in approving the merger agreement and the merger.

 

Change in Control Agreements with Executive Officers

 

We have entered into change in control agreements with each of our executive officers. The change in control agreements provide that if the officer’s employment with us is terminated within 24 months after a change in control either by us (other than for cause or disability), or by the officer for good reason, then the officer will be entitled to a lump-sum severance payment equal to two times the executive officer’s base salary, as limited by Section 280G of the Internal Revenue Code of 1986, as amended (to which we refer in this proxy statement as the “ Code ”). “Good reason” is defined as the termination of employment as a result of a diminution in the officer’s responsibilities, a reduction in salary or benefits, or a relocation of our office of more than 35 miles. A “change in control” is generally defined as an acquisition of more than 35% of our outstanding common stock by any person or group, the merger or sale of ATS Medical or the replacement of a majority of our board of directors with directors not recommended by the existing board of directors.

 

If the effective time of the merger had been May 13, 2010 and the employment of the executive officers had been immediately terminated, either by us (other than for cause or disability) or by the officer for good reason, the executive officers would have been entitled to receive, pursuant to the terms of the change in control agreements, lump sum payments upon termination in the amounts set forth in the table below. In addition, the unvested Restricted Stock Units and Options held by the executive officers would have vested.

 

 

 

 

Stock held by our Officers and Directors

 

As of May 13, 2010, our directors and executive officers and their affiliates beneficially owned approximately 34.6% of our outstanding common stock, excluding shares that may be acquired through the exercise of Options and Warrants or vesting of Restricted Stock Unit awards. The following table summarizes the shares of common stock beneficially owned as of May 13, 2010 by our executive officers and directors, excluding shares that may be acquired through the exercise of Options and Warrants or vesting of Restricted Stock Unit awards, and the consideration that each of them will receive pursuant to the merger agreement in connection with the ownership of their shares.

 

 

 

 

 

 

 

 

Options

 

As of May 13, 2010, our executive officers and directors as a group held 506,500 Options with an exercise price less than the merger consideration, having a weighted average exercise price of $1.62 per share. In accordance with the merger agreement, at the effective time of the merger, each of these Options, together with all other outstanding Options, will be canceled in exchange for the right to receive an amount equal to the total number of shares of common stock subject to the Options multiplied by the excess, if any, of the merger consideration over the exercise

price of the Options, less applicable withholding taxes, if any. As a result, directors or executive officers holding such “in the money” Options may have a financial interest that is different from, or in addition to, the interest of holders of our common stock.

 

The following table summarizes the Options held as of May 13, 2010 by our executive officers and directors, and the consideration that each of them will receive pursuant to the merger agreement in connection with the ownership of their Options.

 

 

 

 

Restricted Stock Units

 

Certain of our executive officers and directors hold Restricted Stock Units. In accordance with the merger agreement, at the effective time of the merger, each of these Restricted Stock Units, together with all other outstanding Restricted Stock Units, will be accelerated and canceled in exchange for the right to receive an amount equal to the total number of shares of common stock represented by such Restricted Stock Unit, multiplied by the merger consideration, less applicable withholding taxes, if any. As a result, executive officers and directors holding such Restricted Stock Units may have a financial interest that is different from, or in addition to, the interest of holders of our common stock.

The following table summarizes the Restricted Stock Units held as of May 13, 2010 by executive officers and directors and the consideration that each of them will receive pursuant to the merger agreement in connection with the ownership of their Restricted Stock Units.

 

 

 

 

Warrants

 

As of May 13, 2010, Essex Woodlands Health Ventures Fund VIII, L.P., Essex Woodlands Health Ventures Fund VIII-A, L.P. and Essex Woodlands Health Ventures Fund VIII-B, L.P. held Warrants to purchase 1,407,580, 101,487 and 44,125 shares of our common stock, respectively, at an exercise price of $2.85 per share. Mr. Sutter, one of our directors, is a managing director of the Essex funds and has shared voting and investment power with respect to the securities held by the Essex funds. In accordance with the merger agreement, at the effective time of the merger, each of these Warrants, together with all other outstanding Warrants, will be converted into the right to receive, upon exercise of a replacement Warrant required to be delivered by the surviving corporation following the merger, an amount equal to the total number of shares of common stock with respect to which the Warrant was exercisable as of immediately prior to the effective time of the merger, multiplied by the excess, if any, of the merger consideration over the exercise price of the Warrant, less applicable withholding taxes, if any. In the aggregate, the Essex funds will receive $1,786,171 as consideration for the Warrants pursuant to the merger agreement.

 

Indemnification; Insurance

 

The merger agreement provides that for a period of six years after the effective time of the merger, the surviving corporation in the merger will fulfill and honor in all respects the indemnification and advancement of expenses obligations of ATS Medical pursuant to our organizational documents or any indemnification agreements between ATS Medical and our directors, officers, employees or agents as of the date of execution of the merger agreement against all losses or claims arising out of such person having served as a director, officer, employee or agent of ATS Medical or any of our subsidiaries or having served at the request of ATS Medical or any of our subsidiaries as a director, officer, employee or agent of any other person pertaining to any matter existing or occurring or any acts or omissions occurring prior to the effective time of the merger, whether or not such losses or claims are asserted prior to the effective time of the merger.

In addition, the merger agreement provides that we will cause the surviving corporation to maintain in effect directors’ and officers’ liability insurance in an amount and on terms no less advantageous to those applicable to current directors and officers of ATS Medical. We may fulfill these obligations by purchasing a policy of directors’ and officers’ insurance or a “tail” policy under our existing directors’ and officers’ insurance policy, in either case which has an effective term of six years from the effective time of the merger.

 

See the section of this proxy statement entitled “The Merger Agreement — Indemnification; Insurance” beginning on page • .

 

Expiration of Skokos Commitment Letter

 

On February 25, 2010, Mr. Skokos and the Skokos Foundation executed the Skokos Commitment Letter discussed above under “The Merger — Background to the Merger.” We intended to use this financing to call and retire our 2025 Notes and repay our term loan from Silicon Valley Bank, as well as for general corporate working capital. The availability of this commitment was, at that time, critical to preserve our ability to continue as an independent company because commencing in October 2010, the holders of our 2025 Notes would have had the right to require us to repurchase their 2025 Notes. In light of the proposed merger with Medtronic and Medtronic’s agreement to provide us with bridge loan financing on terms we determined to be more favorable than those offered pursuant to the Skokos Commitment Letter, we allowed the Skokos Commitment Letter to expire. The interest rate offered by Medtronic is 1.95% per annum less than the rate offered under the terms of the Skokos Commitment Letter, and we were permitted to pay interest only for the first 24 months under the Medtronic arrangement, whereas the Skokos Commitment Letter provided for interest-only payments only for the first 12 months. In addition, under the terms of the Skokos Commitment Letter we would have been required to issue warrants to purchase shares of our common stock to Mr. Skokos and the Skokos Foundation prior to the funding of the loan, whereas under our agreement with Medtronic, we are only required to issue warrants to Medtronic in the event the bridge loan remains outstanding upon termination of the merger agreement. Furthermore, under the terms of the Skokos Commitment Letter, we would have been required to pay a prepayment penalty of up to 6% of the outstanding principal balance of the loan if we were to repay the loan prior to its maturity date, while our agreement with Medtronic does not provide for a prepayment penalty. Moreover, the Skokos Commitment Letter provided for certain financial covenants, including a minimum revenue covenant and a covenant to maintain a specified quarterly minimum cash balance. The terms offered by Medtronic do not include a quarterly minimum cash balance requirement, and while they do include a minimum revenue covenant, we are not required to comply with that covenant unless and until the merger agreement is terminated. Additional terms relating to the Medtronic bridge loan financing are described below under “The Merger Agreement — ATS Medical’s 6% Convertible Senior Notes due 2025.”

 

As required under the terms of the Skokos Commitment Letter, we paid a one-time $450,000 facility fee during the first quarter of 2010 and a break-up fee of $450,000 in the second quarter of 2010 in connection with the expiration of the Skokos Commitment Letter. We were required to pay this break-up fee regardless of whether or not our shareholders approve the merger agreement. Prior to execution of the Merger Agreement, Mr. Skokos indicated that he would be willing to amend the Skokos Commitment Letter to make the loan proposed by Mr. Skokos and the Skokos Foundation available to ATS Medical on the same terms as the bridge loan financing provided by Medtronic. We considered this alternative, but determined to pursue the bridge loan proposed by Medtronic, in large part because it was an integral part of the overall merger transaction proposed by Medtronic and changing course would have required us to modify the terms of the merger transaction with Medtronic.

 

Our common stock is traded on the NASDAQ Global Market under the symbol “ATSI.” The following table sets forth, for the periods indicated, the high and low closing sales prices per share of our common stock as reported

on the NASDAQ Global Market. These prices do not include adjustments for retail mark-ups, mark-downs, or commissions.

 

 

We are currently restricted from declaring or paying dividends on our common stock under our loan agreements with Silicon Valley Bank. We have never declared or paid cash dividends in the past and intend to retain all future earnings for the operation and expansion of our business.

 

The following table sets forth the closing per share sales price of our common stock, as reported on the NASDAQ Global Market on April 28, 2010, the last full trading day before the public announcement of the merger, and on • , 2010, the latest practicable trading day prior to the printing of this proxy statement:

 

		Common Stock
Date		Closing Price
April 28, 2010		$	2.59
• , 2010		$	•

 

Following the merger, there will be no further market for our common stock and our stock will be delisted from the NASDAQ Global Market and deregistered under the Securities Exchange Act of 1934, as amended.

 

We and Medtronic have agreed to use our reasonable best efforts to make any required submissions under the HSR Act, and any applicable foreign antitrust laws which we or Medtronic determine should be made with respect to the merger, the merger agreement, and the other transactions contemplated by the merger and the merger agreement.

 

Mergers and acquisitions that may have an impact in the United States are subject to review by the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission to determine whether they comply with applicable antitrust laws. Under the HSR Act, mergers and acquisitions that meet certain jurisdictional thresholds, such as the merger between us and Merger Sub, may not be completed until the expiration of a waiting period that follows the filing of notification forms by both parties to the transaction with the Department of Justice and the Federal Trade Commission. The initial waiting period is 30 days after both parties have filed notification forms, but this period may be shortened if the reviewing agency grants “early termination” of the waiting period, or it may be lengthened if the reviewing agency determines that an in-depth investigation is required and issues a formal request for additional information and documentary material (referred to as a “Second Request”). On May 21, 2010, we and Medtronic filed notification reports with the Department of Justice and Federal Trade Commission under the HSR Act. The waiting period under the HSR Act expired at 11:59 p.m. on June 21, 2010 with no further action by the Department of Justice or the Federal Trade Commission.

 

In addition, we and Medtronic are required to make filings and obtain regulatory approvals from various other governmental authorities, including in Austria, Portugal and Spain. We must receive approval of the Austrian, Portuguese and Spanish governmental authorities prior to completion of the merger. We made the Portuguese filing on May 7, 2010 and received clearance from the Portuguese governmental authorities on June 11, 2010. We made

the Austrian filing on May 25, 2010 and received clearance from the Austrian governmental authorities on June 22, 2010. We made a prenotification filing with the Spanish governmental authorities on June 15, 2010 and made the official Spanish notification filing on July 5, 2010.

 

It is possible that one or more of the government entities with which filings are made may seek various regulatory concessions as conditions for granting approval of the merger. There can be no assurance that we will obtain all of the regulatory approvals necessary to complete the merger or that the granting of these approvals will not involve the imposition of conditions on completion of the merger or require changes to the terms of the merger. These conditions or changes could result in conditions to completion of the merger not being satisfied. See “The Merger Agreement — Covenants Relating to the Conduct of Our Business” and “The Merger Agreement — Conditions to Completion of the Merger.”

 

Sections 471 and 473 of the MBCA entitle any holder of our common stock as of the record date for the special meeting of our shareholders, in lieu of receiving the merger consideration that such holder would otherwise be entitled pursuant to the merger agreement, to dissent from the merger and obtain payment in cash for the “fair value” of the shares of our common stock held by such holder. ANY SHAREHOLDER CONTEMPLATING THE EXERCISE OF THESE DISSENTERS’ RIGHTS SHOULD REVIEW CAREFULLY THE PROVISIONS OF SECTIONS 471 AND 473 OF THE MBCA (COPIES OF WHICH ARE ATTACHED AS ANNEX D TO THIS PROXY STATEMENT), PARTICULARLY THE SPECIFIC PROCEDURAL STEPS REQUIRED TO PERFECT SUCH RIGHTS. SUCH RIGHTS WILL BE LOST IF THE PROCEDURAL REQUIREMENTS OF SECTION 473 OF THE MBCA ARE NOT FULLY AND PRECISELY SATISFIED.

 

Set forth below is a brief description of the procedures relating to the exercise of dissenters’ rights, which should be read in conjunction with the full text of Section 473 of the MBCA appearing in Annex D to this proxy statement. The following description does not purport to be a complete statement of the provisions of Section 473 of the MBCA and is qualified in its entirety by reference thereto.

 

Under Section 473, Subd. 3 of the MBCA, a holder of our common stock as of the record date of our special meeting of shareholders who wishes to exercise dissenters’ rights (sometimes referred to as a “dissenter” ) must give to ATS Medical (at ATS Medical, Inc., 3905 Annapolis Lane North, Minneapolis, Minnesota 55447, Attention: Chief Financial Officer), before the vote on the merger, a written notice that such holder objects to the merger proposal and that such holder intends to demand the “fair value” of such holders’ shares of our common stock if the merger proposal is approved. IN ADDITION, THE SHAREHOLDER MUST NOT VOTE HIS OR HER SHARES OF OUR COMMON STOCK IN FAVOR OF APPROVING THE MERGER AGREEMENT. A VOTE AGAINST APPROVING THE MERGER AGREEMENT WILL NOT ITSELF CONSTITUTE SUCH A WRITTEN NOTICE AND A FAILURE TO VOTE WILL NOT AFFECT THE VALIDITY OF A TIMELY NOTICE. HOWEVER, THE SUBMISSION OF A BLANK PROXY WILL CONSTITUTE A VOTE IN FAVOR OF APPROVING THE MERGER AGREEMENT AND A WAIVER OF STATUTORY DISSENTERS’ RIGHTS.

 

If the merger is approved by our shareholders, we will send to all dissenters who filed the necessary notice of intent to demand the “fair value” of their shares of our common stock, and who did not vote their shares of our common stock in favor of approving the merger agreement, a notice containing certain information required by Section 473, Subd. 4 of the MBCA, including, without limitation, (i) the address to which a dissenter must send a demand for payment and certificates representing shares of our common stock in order to obtain payment for such shares and the date by which they must be received and (ii) a form to be used to certify the date on which the dissenter (or the beneficial owner on whose behalf the dissenter dissents) acquired such shares of stock (or an interest in them) and to demand payment. In order to receive the “fair value” of the shares of our common stock under Section 473 of the MBCA, a dissenter must demand payment and deposit certificates representing shares of our common stock within 30 days after such notice from us is given. Under Minnesota law, notice by mail is given by us when deposited in the United States mail. A SHAREHOLDER WHO FAILS TO MAKE DEMAND FOR PAYMENT AND TO DEPOSIT CERTIFICATES AS REQUIRED BY SECTION 473, SUBD. 4 OF THE MBCA WILL NOT BE A DISSENTER AND WILL LOSE THE RIGHT TO RECEIVE THE “FAIR

VALUE” OF HIS OR HER SHARES OF OUR COMMON STOCK UNDER SUCH SECTION NOTWITHSTANDING THE TIMELY FILING OF NOTICE OF INTENT TO DEMAND PAYMENT UNDER SECTION 473 SUBD. 3 OF THE MBCA, BUT WILL BE ENTITLED TO THE MERGER CONSIDERATION PAYABLE UNDER THE MERGER AGREEMENT, WHICH MAY BE MORE OR LESS THAN OR EQUAL TO THE “FAIR VALUE” OF THE SHARES DETERMINED UNDER 473 OF THE MBCA.

 

The merger will be accounted for as a “purchase transaction” for financial accounting purposes.

 

This section discusses the material United States Federal income tax consequences of the merger to U.S. holders and non-U.S. holders (each, as defined below) of our capital stock who will surrender their shares of our stock in the merger in exchange for cash. This discussion is included for general information purposes only and does not constitute, and is not, a tax opinion or tax advice to any particular holder of our stock. This summary is based on the provisions of the Code, the Treasury Regulations promulgated thereunder, judicial decisions, administrative rulings and other legal authorities, all in effect as of the date hereof and all of which are subject to change, possibly with retroactive effect. No ruling from the Internal Revenue Service, or the “IRS,” or opinion of counsel will be requested concerning the United States Federal income tax consequences of the merger. The tax consequences set forth in the following discussion are not binding on the IRS or the courts, and no assurance can be given that contrary positions will not be successfully asserted by the IRS or adopted by a court.

 

The following discussion is not intended to constitute a complete description of all U.S. Federal income tax consequences relating to the merger, and does not address potential foreign, state, local and other tax consequences of the merger. In addition, the discussion does not address all of the United States Federal income tax consequences that may be relevant to a particular holder of our stock, including holders who, in light of their particular circumstances, may be subject to special rules, including, without limitation:

 

 

The discussion below applies only to shareholders that hold our stock as a capital asset at the time of the completion of the merger. The discussion does not include any description of the tax laws of any state, local or foreign government that may be applicable to holders of our stock.

 

If shares of our stock are held by a partnership, the U.S. Federal income tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. Partnerships that hold shares of our stock and partners in such partnerships should consult their own tax advisors regarding the tax consequences to them of the merger.

For purposes of this summary, a “U.S. holder” is a beneficial owner of shares of our stock, who is, for U.S. federal income tax purposes:

 

 

A “non-U.S. holder” is a beneficial owner of shares of our stock that is not a U.S. holder, subject to the limitations set forth above for holders to whom special rules apply.

 

U.S. Holders

 

General

 

The exchange of shares of our stock for cash in the merger will be a taxable transaction for United States Federal income tax purposes. Accordingly, a U.S. holder generally will recognize capital gain or capital loss equal to the difference, if any, between the amount of cash received in the merger and the U.S. holder’s adjusted tax basis in the shares surrendered.

 

Gain or loss will be calculated separately for each block of shares (or shares acquired at the same cost in a single transaction) exchanged in the merger. If, at the time of the merger, a non-corporate U.S. holder’s holding period for the shares of our stock is more than twelve months, any gain recognized generally will be subject to tax at the rate applicable to long term capital gains. If a non-corporate U.S. holder’s holding period for the shares of our stock is twelve months or less at the time of the merger, any gain will be subject to United States Federal income tax at the same graduated rates as ordinary income. For corporations, capital gain is taxed at the same rates as ordinary income. The deductibility of capital losses is subject to limitations.

 

Backup Withholding

 

To prevent Federal backup income tax withholding with respect to cash received pursuant to the merger, each U.S. holder must either (1) provide a correct taxpayer identification number and certify under penalties of perjury that such U.S. holder is not subject to backup withholding of Federal income tax by completing the substitute Form W-9 included in the letter of transmittal or (2) establish a basis for exemption from backup withholding. U.S. holders who fail to provide their correct taxpayer identification numbers and the appropriate certifications or to establish an exemption will be subject to backup withholding on the cash received in exchange for their shares at a tax withholding rate of 28% and may be subject to penalties imposed by the IRS. If the amount withheld on a payment to a U.S. holder results in an overpayment of taxes, a refund generally may be obtained from the IRS, provided that the required information is timely furnished to the IRS. Certain taxpayers, such as corporations and financial institutions, are exempt from backup withholding.

 

Non-U.S. Holders

 

General

 

Any gain realized on the receipt of cash in the merger by a non-U.S. holder generally will not be subject to U.S. Federal income tax unless:

 

 

 

Unless a tax treaty provides otherwise, a non-U.S. holder whose gain is described in the first bullet point above will be subject to tax on its net gain in the same manner as if it were a U.S. holder. A non-U.S. holder that is a corporation and whose gain is described under the first bullet point above may be subject to an additional branch profits tax equal to 30% of its effectively connected earnings and profits (including such gain) or at such lower rate as may be specified by an applicable income tax treaty.

 

An individual non-U.S. holder described in the second bullet point above generally will be subject to tax at a 30% rate on the gain realized, equal to the difference, if any, between the amount of cash received in exchange for shares of our stock and the non-U.S. holder’s adjusted tax basis in such shares, which may be offset by certain U.S.-source capital losses incurred in the same taxable year, even though the individual is not considered a resident of the United States.

 

We believe that we are not currently and have not previously been a USRPHC for U.S. Federal income tax purposes.

 

Information Reporting and Backup Withholding

 

Cash received by non-U.S. holders in the merger will be subject to information reporting, unless an exemption applies. Moreover, backup withholding of tax (at a rate of 28%) may apply to cash received by a non-U.S. holder, unless the holder or other payee establishes an exemption in a manner satisfactory to the paying agent (generally, by providing the paying agent with a signed statement on an applicable Form W-8 attesting to such non-U.S. holder’s exempt status) and otherwise complies with the backup withholding rules. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder’s U.S. Federal income tax liability if the required information is timely furnished to the IRS.

 

EACH HOLDER OF OUR CAPITAL STOCK SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISORS TO DETERMINE THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO SUCH HOLDER AS A RESULT OF THE MERGER AND ANY STATE, LOCAL OR FOREIGN TAX CONSEQUENCES RELEVANT TO SUCH HOLDER AS A RESULT OF THE MERGER.

 

IN ACCORDANCE WITH TREASURY DEPARTMENT CIRCULAR 230, IN ORDER TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE U.S. INTERNAL REVENUE SERVICE, WE INFORM YOU THAT: (I) ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THIS PROXY STATEMENT IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING TAX PENALTIES UNDER THE CODE; (II) SUCH ADVICE WAS WRITTEN IN CONNECTION WITH SEEKING OUR SHAREHOLDERS’ APPROVAL OF THE MERGER AGREEMENT; AND (III) YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES APPLICABLE TO YOU RELATING TO THE MATTERS ADDRESSED HEREIN, INCLUDING THE APPLICABILITY OF U.S. FEDERAL, STATE AND LOCAL TAX LAWS AND NON-U.S. TAX LAWS, ANY CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.

 

If the merger is completed, our common stock will no longer be traded on the NASDAQ Global Market and will be deregistered under the Securities Exchange Act of 1934, as amended, as soon as practicable following the completion of the merger. The delisting and deregistration will be accomplished by filing a Form 25 and a Form 15 with the SEC.

 

On May 4, 2010, a class action complaint was filed in the District Court of the State of Minnesota Hennepin County concerning the proposed merger. The class action was instituted by Patrick Vandenberghe, individually and on behalf of all public shareholders of ATS Medical, against ATS Medical, our board of directors, our president and chief executive officer, Medtronic and Merger Sub. The complaint alleges breach of fiduciary duty by the members of our board of directors arising out of the attempt to sell ATS Medical by means of unfair process with preclusive deal protection devices and at an unfair price of $4.00 in cash for each share of our common stock. The complaint also alleges that ATS Medical and Medtronic aided and abetted the alleged breaches of fiduciary duties by the other defendants. On June 2, 2010, we received notice of an amended class action complaint, which further alleges that the preliminary proxy statement we filed on May 25, 2010 fails to provide our shareholders with material information and/or provides our shareholders with materially misleading information, which the complaint alleges renders our shareholders unable to make an informed decision on whether to vote in favor of the proposed merger. The amended class action complaint includes a claim brought pursuant to Minnesota Statutes §302A.467, alleging that each member of our board of directors violated the standard of conduct imposed on him pursuant to Minnesota Statutes §302A.251 and that each such member and our president and chief executive officer violated the standard of conduct imposed on him pursuant to Minnesota Statutes §302A.361, in each case by allegedly failing to discharge his respective duties as a member of our board of directors in good faith, in a manner he reasonably believes to be in the best interests of our shareholders and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. The complaint seeks damages, costs and injunctive relief to prevent the consummation of the proposed merger, or in the event that the proposed merger is consummated, then rescission or rescissory damages, and such further relief as the court deems just and proper.

 

On May 4, 2010, we received notice of a class action complaint venued in the District Court of the State of Minnesota Hennepin County concerning the proposed merger. The class action was instituted by Scott Kirklighter, individually and on behalf of all public shareholders of ATS Medical, against ATS Medical, our board of directors, our chief executive officer, our chief financial officer, Medtronic and Merger Sub. The complaint alleges breach of fiduciary duty by the members of our board of directors, our chief executive officer and our chief financial officer arising out of the attempt to sell ATS Medical by means of unfair process with preclusive deal protection devices and at an unfair price of $4.00 in cash for each share of our common stock. The complaint also alleges that ATS Medical, Medtronic, Merger Sub and our chief financial officer aided and abetted the breach of fiduciary duties. On June 11, 2010, we received a notice of motion and motion for leave to amend the complaint, accompanied by supporting documents, including a proposed amended complaint. The proposed amended complaint further alleges that the preliminary proxy statement we filed on May 25, 2010 contains numerous material misleading statements or omissions. The complaint seeks costs and injunctive relief to prevent the consummation of the proposed merger unless and until we adopt and implement a procedure or process to obtain a transaction that provides the best possible terms for our shareholders, and, rescission of, to the extent already implemented, the merger agreement or any of the terms thereof. The complaint also seeks a declaration and decree that the merger agreement was agreed to in breach of the fiduciary duties of the members of our board of directors, our chief executive officer and our chief financial officer, a direction from the court to the members of our board of directors, our chief executive officer and our chief financial officer to exercise their fiduciary duties to commence a sale process that is reasonably designed to secure the best possible consideration for ATS Medical and the imposition of a constructive trust, in favor of Mr. Kirklighter and members of the purported class, upon any benefits improperly received by the defendants as a result of their alleged wrongful conduct.

 

On May 10, 2010, we received notice of a class action complaint venued in the District Court of the State of Minnesota Hennepin County concerning the proposed merger. The class action was instituted by Vance S. Dahle, individually and on behalf of all public shareholders of ATS Medical, against ATS Medical, our board of directors, Medtronic and Merger Sub. The complaint alleges breach of fiduciary duty by the members of our board of directors arising out of the attempt to sell ATS Medical by means of unfair process with preclusive deal protection devices, and at an unfair price of $4.00 in cash for each share of our common stock. The complaint also alleges that Medtronic and Merger Sub aided and abetted the alleged breach of fiduciary duties. An amended complaint, dated May 28, 2010, further alleges that the preliminary proxy statement we filed on May 25, 2010 is deficient with respect to disclosures pertaining to the proposed merger, the financial analyses conducted by J.P. Morgan and the

alleged conflict of interest of various parties involved in the proposed merger. The complaint seeks damages, costs, injunctive relief to prevent the consummation of the proposed merger, or in the event that the proposed merger is consummated, then rescission or rescissory damages, and filing an updated proxy statement to correct the alleged disclosure deficiencies articulated in the complaint.

 

On May 20, 2010, we received notice of a class action complaint venued in the District Court of the State of Minnesota Hennepin County concerning the proposed merger. The class action was instituted by Pricha Tuksaudom, individually and on behalf of all public shareholders of ATS Medical, against ATS Medical and our board of directors. The complaint alleges breach of fiduciary duty by the members of our board of directors arising out of the attempt to sell ATS Medical by means of unfair process with preclusive deal protection devices, and at an unfair price of $4.00 in cash for each share of our common stock. An amended complaint, dated May 28, 2010, further alleges that the preliminary proxy statement we filed on May 25, 2010 fails to provide our shareholders with material information and/or provides our shareholders with materially misleading information, which the complaint alleges renders our shareholders unable to make an informed decision on whether to vote in favor of the proposed merger. The complaint seeks damages, costs and injunctive relief to prevent the consummation of the proposed merger, or in the event that the proposed merger is consummated, then rescission or rescissory damages.

 

On May 21, 2010, we received notice of a class action complaint venued in the District Court of the State of Minnesota Hennepin County concerning the proposed merger. The class action was instituted by Marian J. Holmquist, individually and on behalf of all public shareholders of ATS Medical, against ATS Medical, our board of directors, our chief executive officer and our chief financial officer. The complaint alleges breach of fiduciary duty by the members of our board of directors arising out of the attempt to sell ATS Medical by means of unfair process with preclusive deal protection devices, and at an unfair price of $4.00 in cash for each share of our common stock. The complaint seeks costs and injunctive relief to prevent the consummation of the proposed merger, to prevent the defendants from taking any actions that violate their fiduciary duties to our shareholders and to prevent the defendants from taking any actions that impede or deter other potential acquirers.

 

On May 26, 2010, we received notice of a class action complaint venued in the District Court of the State of Minnesota Hennepin County concerning the proposed merger. The class action was instituted by Mark W. Johnson, individually and on behalf of all public shareholders of ATS Medical, against ATS Medical, our board of directors, Medtronic and Merger Sub. The complaint alleges breach of fiduciary duty by the members of our board of directors arising out of the attempt to sell ATS Medical by means of unfair process with preclusive deal protection devices, and at an unfair price of $4.00 in cash for each share of our common stock. The complaint also alleges that ATS Medical and Medtronic aided and abetted the alleged breach of fiduciary duties. The complaint also alleges that the preliminary proxy statement we filed on May 25, 2010 fails to disclose certain material information necessary for our shareholders to make a rational and fully-informed decision regarding the proposed merger. The complaint seeks costs and injunctive relief to prevent the consummation of the proposed merger, or in the event that the proposed merger is consummated, then rescission or rescissory damages.

 

On June 22, 2010, we became aware of the filing of a class action complaint venued in the U.S. District Court for the District of Minnesota concerning the proposed merger. The class action was instituted by Larry P. Fournier and Patrice M. Fournier individually and on behalf of all public shareholders of ATS Medical against ATS Medical, our board of directors, Medtronic and Merger Sub. The complaint alleges: (a) violations of Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 promulgated thereunder by all defendants arising out of the defendants’ alleged dissemination of a false and misleading preliminary proxy statement, in reference to the preliminary proxy statement we filed on May 25, 2010, which the plaintiffs allege the defendants knew or should have known was misleading in that it allegedly contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, including regarding alleged conflicts of interest of certain members of our board of directors; (b) breach of fiduciary duty by the members of our board of directors arising out of the attempt to sell ATS Medical by means of unfair process with preclusive deal protection devices, and at an unconscionable, unfair and grossly inadequate price of $4.00 in cash for each share of our common stock; (c) breach of fiduciary duty by the members of our board of directors arising out of the alleged failure of our preliminary proxy statement, which we filed on May 25, 2010, to provide our shareholders with material information and/or providing them with materially misleading information, thereby rendering our shareholders unable to make an informed decision regarding whether to vote in favor of the

proposed merger; and (d) that ATS Medical and Medtronic aided and abetted the alleged breach of fiduciary duties. The complaint seeks costs and injunctive relief to prevent the consummation of the proposed merger.

 

On June 16, 2010 the cases filed in state court were consolidated. Various plaintiffs have filed motions for lead plaintiff status, but a lead plaintiff has not been designated by the court. In addition, some of the plaintiffs have filed motions for expedited discovery, but these motions have not yet been ruled on by the court. Some plaintiffs have also indicated that they intend to file motions for preliminary injunction. The defendants have filed a motion to dismiss the state court claims, a motion to stay discovery pending resolution of the motion to dismiss, and a motion to stay the state court cases pending resolution of the federal case. The court has not ruled on these pending motions.

 

We believe the class actions described above are without merit, and we intend to vigorously defend against the claims asserted.

PROPOSAL NO. 1: THE MERGER AGREEMENT

 

The following is a description of the material aspects of the merger agreement but does not purport to describe all of the terms of the merger agreement. While we believe that the following description covers the material terms of the merger agreement, the description may not contain all of the information that is important to you. We encourage you to read carefully this entire document, including the merger agreement attached to this proxy statement as Annex A, for a more complete understanding of the merger. The following description is subject to, and is qualified in its entirety by reference to, the merger agreement.

 

The merger agreement has been included to provide you with information regarding its terms. It is not intended to provide any other factual information about ATS Medical or its business. Such information can be found elsewhere in this proxy statement and in the other public filings we make with the SEC, which are available without charge at www.sec.gov .

 

Pursuant to the merger agreement, Merger Sub will merge with and into ATS Medical, with ATS Medical surviving as a wholly owned subsidiary of Medtronic. At the effective time of the merger, all of ATS Medical’s property, rights, privileges, powers and franchises before the merger will vest in the surviving corporation and all of ATS Medical’s debt, liabilities and duties before the merger will become the debts, liabilities and duties of the surviving corporation.

 

The consummation of the merger will take place on the later of (i) the fifth business day following the satisfaction or waiver of the conditions to the closing of the merger set forth in the merger agreement and described in this proxy statement or (ii) if Merger Sub or Medtronic identifies an event or circumstance that constitutes or would be reasonably likely to result in a violation of any anti-bribery law, the tenth business day after Merger Sub or Medtronic identifies such likely violation, or on such other day as ATS Medical and Medtronic may mutually agree. The merger will become effective upon the filing of the articles of merger with the Secretary of State of the State of Minnesota or at such later time as is agreed in writing by ATS Medical and Medtronic and specified in the articles of merger.

 

The merger agreement provides that at the effective time of the merger, the articles of incorporation of Merger Sub immediately prior to the effective time will be the articles of incorporation of the surviving corporation, except as amended to change the name of the surviving corporation to “Medtronic ATS Medical, Inc.” The bylaws of Merger Sub as in effect immediately prior to the effective time of the merger will be the bylaws of the surviving corporation.

 

The initial directors of the surviving corporation will be the directors of Merger Sub immediately prior to the effective time of the merger. The initial officers of the surviving corporation will be the officers of ATS Medical immediately prior to the effective time of the merger.

 

Common Stock

 

At the effective time of the merger, each share of our common stock issued and outstanding immediately prior to the effective time of the merger will be canceled and extinguished and automatically converted into the right to receive an amount equal to $4.00 in cash, without interest, and less any applicable withholding taxes (which amount, subject to decrease in the limited circumstances described below, we sometimes refer to in this proxy statement as the “merger consideration” ), other than the following shares:

 

 

Pursuant to the merger agreement, the merger consideration is subject to decrease only if it were determined that (i) the number of outstanding shares of common stock as of immediately prior to the effective time of the merger exceeds 79,010,969 (provided that we will not be deemed to have exceeded this threshold to the extent any excess is the result of the proper exercise of Options or Warrants or proper vesting of Restricted Stock Units between the date of the merger agreement and the effective time of the merger), (ii) as of immediately prior to the effective time of the merger, our outstanding Options and Warrants are exercisable to purchase more than 8,754,392 shares of our common stock in the aggregate, (iii) the number of outstanding Restricted Stock Units as of immediately prior to the effective time of the merger exceeds 5,461,064, (iv) any of our outstanding Options or Warrants are exercisable at a price lower than the exercise price disclosed to Medtronic in connection with signing the merger agreement, or (v) the aggregate amount of third party expenses incurred by us in connection with the merger exceeds $7,800,000 (plus any amounts incurred by us as a result of additional requests for information under certain antitrust laws) and, but for the decrease, the aggregate consideration payable by Medtronic would exceed $348,650,883 plus the aggregate exercise price of all in the money Options and Warrants outstanding as of the date of the merger agreement that are properly exercised between the date of the merger agreement and the effective time of the merger (which amount, in the aggregate, reflects merger consideration of $4.00 per share). We agreed to the threshold amounts referenced in clauses (i) — (iv) above based on a number of assumptions, including that our records were accurate as of the date of the merger agreement, that we had appropriately estimated and taken into account the number of shares of common stock, Options, Warrants and Restricted Stock Units that we would be obligated to issue or grant after the date of the merger agreement, and that the overall margin for error was adequate. Third party expenses are defined in the merger agreement as expenses incurred, or to be incurred through the effective time of the merger, by us in connection with the merger agreement or the transactions contemplated thereby, including, without limitation, all legal, accounting, investment banking, broker, financial advisory, consulting and all other fees and expenses of third parties. We agreed to the $7,800,000 threshold for third party expenses based on our judgment that the amount we had incurred in fees as of the date of the merger agreement, together with the amount we expected to incur prior to the closing of the merger (including the fee that will be payable to JPMorgan upon the closing of the merger), would not exceed $7,800,000. While the merger agreement also provides for a decrease in the merger consideration in the event that the aggregate principal amount of our 2025 Notes outstanding exceeds $22,400,000 or the conversion price thereof is less than $4.20, on June 10, 2010 we redeemed all of the outstanding $22,400,000 aggregate principal amount of our 2025 Notes at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest thereon up to, but excluding, the redemption date. The conversion price as of the redemption date was $4.20. Accordingly, the merger consideration will not be subject to a decrease based on the aggregate principal amount of the 2025 Notes or the conversion price thereof.

 

In the event that the number of outstanding shares of common stock, Options, Warrants or Restricted Stock Units reflected in our records is inaccurate, we issue shares of our common stock, Options, Warrants, or Restricted Stock Units in amounts exceeding the agreed-upon thresholds described above or we incur more than $7,800,000 in third party expenses in connection with the merger (plus any amounts incurred by us as a result of additional requests for information under certain antitrust laws), the $4.00 per share merger consideration payable to our shareholders will decrease only if the aggregate amount of such inaccuracy or inaccuracies cause the aggregate consideration payable by Medtronic to exceed $348,650,883 plus the aggregate exercise price of all in the money Options and Warrants outstanding as of the date of the merger agreement that are properly exercised between the date of the merger agreement and the effective time of the merger. In such event, the reduced per share merger consideration will be equal to:

 

 

The reduced per share consideration will be calculated and rounded to five decimal places, with the fifth decimal place rounded up if the sixth decimal place is 5 or more.

 

While we cannot guarantee that the merger consideration will be $4.00 per share and that such amount will not be decreased pursuant to the merger agreement provisions described above, as of the date of this proxy statement we do not anticipate that there will be any such decrease. With respect to the outstanding common stock, Options, Warrants and Restricted Stock Units reflected in our records, we were able to negotiate for reasonable margins for error such that we do not believe the actual numbers of outstanding common stock, Options, Warrants or Restricted Stock Units will fall outside the permitted margins, as explained in more detail below:

 

 

Because we do not intend to issue any additional shares of common stock prior to the effective time of the merger (other than as a result of the proper exercise of Options and Warrants and proper vesting of Restricted Stock Units), we believe it is unlikely that we will exceed the 79,010,969 share threshold (as adjusted to reflect proper exercises of Options and Warrants and proper vesting of Restricted Stock Units). Even if we

did exceed the threshold, the effect of any such excess would be distributed over all of the shares, Options, Warrants and Restricted Stock Units whose holders are entitled to receive merger consideration therefor. Based on the number of shares of common stock outstanding on June 30, 2010, and assuming the outstanding Options, Warrants and Restricted Stock Units as reflected in our records are accurate and that we do not exceed the permitted third party expenses threshold, there would have to be approximately 77,527 additional shares of common stock outstanding and not already reflected in our records in order for the merger consideration to decrease by $0.00001 per share (to $3.99999 per share), or approximately 307,000 additional shares of common stock outstanding and not already reflected in our records in order for the merger consideration to decrease by $0.01 per share (to $3.99 per share).

 

 

We believe our records are accurate, and accordingly we do not expect the exercise prices to change prior to the effective time of the merger. In addition, because we do not intend to issue any additional Options or Warrants prior to the effective time of the merger, we do not believe we will exceed the permitted threshold of 8,754,392 (as adjusted to reflect the proper exercise of Options and Warrants prior to the effective time of the merger). Even if we did exceed the threshold, the effect of any such excess would be distributed over all of the shares, Options, Warrants and Restricted Stock Units whose holders are entitled to receive merger consideration therefor. Based on the number of Options and Warrants outstanding on June 30, 2010 and the weighted average exercise price of in the money Options and Warrants as of that date, and assuming the outstanding shares of common stock and Restricted Stock Units as reflected in our records are accurate and that we do not exceed the permitted third party expenses threshold, there would have to be approximately 207,410 additional Options or Warrants outstanding and not already reflected in our records in order for the merger consideration to decrease by $0.00001 per share (to $3.99999 per share), or approximately 824,490 additional Options or Warrants outstanding and not already reflected in our records in order for the merger consideration to decrease by $0.01 per share (to $3.99 per share).

 

 

Because we do not expect to issue any additional Restricted Stock Units prior to the effective time of the merger, we do not believe we will exceed the 5,461,064 Restricted Stock Unit threshold (as adjusted to reflect the proper vesting of Restricted Stock Units prior to the effective time of the merger). Even if we did exceed the threshold, the effect of any such excess would be distributed over all of the shares, Options, Warrants and Restricted Stock Units whose holders are entitled to receive merger consideration therefor. Based on the number of Restricted Stock Units outstanding on June 30, 2010, and assuming the outstanding shares of common stock, Options and Warrants as reflected in our records are accurate and that we do not exceed the permitted third party expenses threshold, there would have to be approximately 77,527 additional Restricted Stock Units outstanding and not already reflected in our records in order for the merger consideration to decrease by $0.00001 per share (to $3.99999 per share), or approximately 307,000 additional Restricted Stock Units outstanding and not already reflected in our records in order for the merger consideration to decrease by $0.01 per share (to $3.99 per share).

 

In addition, with respect to third party expenses, absent unforeseen circumstances that require us to devote significant legal and accounting resources toward the merger in the future, we do not expect the amount of third party expenses incurred by us as of June 30, 2010, together with the amount of such expenses we expect to incur between June 30, 2010 and the closing of the merger, will exceed $7,800,000. Further, even if we did exceed the aforementioned cap, the effect of any such excess would be distributed over all of the shares, Options, Warrants and Restricted Stock Units whose holders are entitled to receive merger consideration therefor. Based on the number of shares of common stock, Options, Warrants and Restricted Stock Units outstanding on June 30, 2010 and assuming such numbers as reflected in our records are accurate, we would have to incur approximately $310,110 of third party expenses, in addition to the $7,800,000 of permitted third party expenses, in order for the merger consideration to decrease by $0.00001 per share (to $3.99999 per share), or approximately $1,224,500 of third party expenses, in addition to the $7,800,000 of permitted third party expenses, in order for the merger consideration to decrease by $0.01 per share (to $3.99 per share).

 

Shareholders of record will not receive the merger consideration until they surrender their stock certificates for certificated shares to the paying agent for exchange or comply with the procedures for lost certificates (each as described below), and otherwise comply with the procedures described in “The Merger Agreement — Procedures for Exchange of Certificates” beginning on page • .

 

Medtronic has represented to us under the merger agreement that it has, and will have as of the effective time of the merger, sufficient funds to complete the merger and pay all amounts it is required to pay under the merger agreement.

 

If we complete the merger, at the effective time of the merger:

 

 

Medtronic has represented to us under the merger agreement that it has, and will have as of the effective time of the merger, sufficient funds to complete the merger and pay all amounts it is required to pay under the merger agreement.

 

Dissenting Shares

 

Shares of our common stock issued and outstanding prior to the effective time of the merger and held by a holder who is entitled to demand, and who properly demands, appraisal of such shares pursuant to, and also complies in all material respects with, Sections 471 and 473 of the MBCA will not be converted into or represent the right to receive the merger consideration, but rather, such dissenting shareholder will only be entitled to payment of the fair value of such shares in accordance with Sections 471 and 473 of the MBCA (and, at the effective time of the merger, such shares will no longer be outstanding and will automatically be canceled and will cease to exist). If any dissenting shareholder effectively withdraws or loses such holder’s dissenters’ rights under Sections 471 and 473 of the MBCA, then such shares will automatically be converted into and will represent only the right to receive the merger consideration, without interest thereon and less any applicable withholding taxes.

 

Capital Stock of Merger Sub

 

Each share of common stock of Merger Sub issued and outstanding immediately prior to the effective time of the merger will be converted into and become one share of common stock of the surviving corporation.

 

Options

 

Each Option to purchase shares of our common stock that is outstanding immediately prior to the effective time of the merger will, at such time, be canceled in exchange for the right to receive an amount, payable in cash as soon as practicable following the effective time of the merger, equal to the product of:

 

 

Restricted Stock Units

 

Each Restricted Stock Unit that is outstanding immediately prior to the effective time of the merger will, at such time, be canceled in exchange for the right to receive an amount, payable in cash as soon as practicable following the effective time of the merger, equal to the product of:

 

 

Warrants

 

Each Warrant to purchase shares of our common stock outstanding immediately prior to the effective time of the merger will, at such time, be converted into the right to receive, upon exercise of a replacement Warrant required

to be delivered by the surviving corporation following the merger, an amount, payable in cash as soon as practicable following exercise of such replacement Warrants, equal to the product of:

 

 

Medtronic has appointed Wells Fargo Shareowner Services as paying agent to make payment of the merger consideration in exchange for the surrender of certificates representing shares of our common stock or non-certificated shares represented by book entry. Medtronic will deposit with the paying agent at or following the effective time of the merger a sufficient amount of cash in order to permit the payment of the merger consideration. As soon as reasonably practicable and in any event within five business days after the later of the effective time of the merger or the date on which our transfer agent has provided the paying agent with the requisite information regarding our shareholders as of immediately prior to the effective time of the merger, the paying agent will mail to each person who, as of the effective time of the merger, was the record holder of shares of our common stock whose shares were converted into the right to receive the merger consideration, a letter of transmittal and instructions explaining how to surrender stock certificates and book-entry shares to the paying agent. The paying agent will pay the merger consideration, without interest and less any applicable withholding taxes, to our shareholders promptly following the paying agent’s receipt of the stock certificates or book-entry shares, as applicable, and properly completed and executed transmittal documents. The merger consideration may be paid to a person other than the person in whose name the corresponding certificate or book-entry shares are registered if the certificate (or affidavit of loss) representing the cancelled shares is presented to the paying agent accompanied by all documents required to evidence and effect such transfer and by evidence satisfactory to the paying agent that any applicable stock transfer or other taxes have been paid.

 

You should not send your certificates or instruments representing our common stock to the paying agent until you have received the letter of transmittal from the paying agent. Do not return your stock certificates with the enclosed proxy, and do not forward your stock certificates to the paying agent without a letter of transmittal.

 

If you own shares of our common stock that are held in “street name” by your broker, nominee, fiduciary or other custodian, you will receive instructions from your broker, nominee, fiduciary or other custodian as to how to surrender your “street name” shares and receive cash for those shares.

 

At the effective time of the merger, our stock transfer books will be closed and no transfer of shares of our common stock thereafter will be made, and all shares of our common stock will cease to be outstanding and will automatically be canceled, retired and cease to exist, and each holder of a certificate formerly evidencing share(s) of our common stock will have no further rights with respect to such certificate, except the right to receive the merger consideration payable upon surrender of the certificate in accordance with the terms of the merger agreement. If, after the effective time of the merger, certificates representing shares of our common stock are presented to the surviving corporation for transfer, they shall be canceled and exchanged for the merger consideration.

 

If you have lost your stock certificate, or if it has been stolen or destroyed, you will be required to make an affidavit of that fact before you will be entitled to receive the merger consideration. In addition, if required by the surviving corporation in the merger, you will have to post a bond in customary amount and upon such terms as may be required by the paying agent or the surviving corporation as indemnity against any claims made against it with respect to the lost, stolen or destroyed certificate. Thereafter, the paying agent will pay the merger consideration to you in exchange for your lost, stolen or destroyed certificate.

 

Any portion of the funds deposited with the paying agent (including any investment proceeds) that remains undistributed to the holders of shares of our common stock one year after the effective time of the merger will be delivered, upon request, to the surviving corporation. Any of our former shareholders who have not surrendered their certificates or book-entry shares prior to the delivery of these funds to the surviving corporation may look only to the surviving corporation (subject to abandoned property, escheat and other similar laws) only as general creditors thereof with respect to any merger consideration that may be payable upon due surrender of the certificates, or book-entry shares, held by them. Notwithstanding the foregoing, neither Medtronic nor the surviving corporation will be liable to any of our shareholders for any merger consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

 

The merger agreement contains representations and warranties made by us to Medtronic and Merger Sub and by Medtronic and Merger Sub to us, and may be subject to important limitations and qualifications agreed to by the parties in connection with negotiating the terms of the merger agreement. The statements embodied in those representations and warranties are qualified by information in a confidential disclosure letter that we have exchanged in connection with signing the merger agreement, or as otherwise provided in the merger agreement. While we do not believe that the confidential disclosure letter contains information that securities laws require us to publicly disclose other than information that has already been so disclosed, the confidential disclosure letter does contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached merger agreement. In addition, the representations and warranties may have been included in the merger agreement for the purpose of allocating risk between Medtronic and ATS Medical, rather than to establish matters as facts. The confidential disclosure letter contains information that has been included in our general prior public disclosures, as well as potential additional non-public information. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the agreement, which subsequent information may or may not be fully reflected in ATS Medical’s or Medtronic’s public disclosures. For the foregoing reasons, you should not rely on the representations and warranties contained in the merger agreement as statements of factual information.

 

At the effective time of the merger, the representations and warranties contained in the merger agreement are only required to be true and correct subject to the materiality standards contained in the merger agreement, which may differ from what may be viewed as material by shareholders. The representations and warranties will not survive consummation of the merger and cannot be the basis for any claim under the merger agreement by any party thereto after consummation of the merger. The merger agreement should not be read alone, but should instead be read in conjunction with the other information regarding ATS Medical and the merger that is contained in this proxy statement as well as in the filings that ATS Medical makes and has made with the SEC.

 

The representations and warranties contained in the merger agreement may or may not have been accurate as of the date they were made and we make no assertion herein that they are accurate as of the date of this proxy statement.

 

ATS Medical has made representations and warranties to Medtronic and Merger Sub regarding, among other things:

 

 

 

Medtronic and Merger Sub made representations and warranties to us regarding, among other things:

 

 

 

It is a condition to Medtronic’s and Merger Sub’s obligation to complete the merger that our representations and warranties be true and correct. For purposes of this condition, most of our representations and warranties shall be deemed to be untrue or incorrect only if the fact, circumstance, change or event that resulted in such untruth or incorrectness, individually or when taken together with all other facts, circumstances, changes or events that result in such representation and warranty or any of our other representations or warranties being untrue or incorrect, has had or would be reasonably likely to have a material adverse effect on us. For purposes of this determination, materiality qualifications in representations and warranties are disregarded.

 

Our representation and warranty related to regulatory compliance and our representation and warranty related to illegal payments shall each be deemed to be untrue and incorrect only if it is untrue or incorrect in any respect that is material to ATS Medical and our subsidiaries taken as a whole.

 

Certain other representations and warranties shall be deemed to be untrue and incorrect only if they are untrue or incorrect in any material respect. These include representations and warranties relating to our organization and good standing, our authority to undertake the merger agreement, our capitalization, the fairness opinion we received from JPMorgan, the inapplicability of state takeover statutes and the fact that we do not have a shareholder rights plan.

 

Certain of our capitalization representations and warranties shall be deemed to be untrue and incorrect only if the aggregate number of shares set forth in them (including shares in respect of our existing Options, existing Warrants, and existing Restricted Stock Units) is more than one percent less than the correct number.

 

Our representation and warranty relating to the absence of any material adverse effect shall be deemed untrue and incorrect if it is untrue or incorrect in any respect.

 

A material adverse effect is defined in the agreement as occurrence, change, event, effect or circumstance that, individually or in the aggregate, (i) is or would be reasonably likely to be, materially adverse to the business, results of operations or financial condition of ATS Medical and our subsidiaries, taken as a whole, other than any occurrence, change, event, effect or circumstance to the extent relating to or resulting from (A) changes, after the date of the merger agreement, in general economic conditions or securities or financial markets in general, (B) changes, after the date of the merger agreement, in law or GAAP, (C) general changes, after the date of the merger agreement, in the medical device industry, (D) any outbreak or escalation of hostilities or war (whether declared or not declared) or act of terrorism, (E) the announcement or the existence of, or compliance with, the merger agreement and the transactions contemplated thereby (including any claim, litigation, cancellation of or delay in customer orders, reduction in revenues or income, disruption of business relationships or loss of employees), (F) any change in our stock price or trading volume, in and of itself (it being understood that the facts or occurrences giving rise to such change may be deemed to constitute, or be taken into account in determining, whether there has been, or will be, a material adverse effect), (G) our failure to meet projections of earnings, revenues or other financial measures (whether such projections were made by us or independent third parties), in and of itself (it being understood that the facts or occurrences giving rise or contributing to such failure may be deemed to constitute, or be taken into account in determining, whether there has been, or will be, a material adverse

effect), or (H) any action taken with the express written consent of Medtronic, which consent states explicitly that such consent excludes such action from the definition of material adverse effect hereunder; except in the case of clauses (A), (B), (C) or (D) to the extent such occurrence, change, event, effect or circumstance has a disproportionate effect on ATS Medical and our subsidiaries, taken as a whole, as compared with other companies in the medical device industry; or (ii) would, or would be reasonably likely to, prevent or materially delay or materially impair our ability or any of our subsidiaries to consummate the merger and the other transactions contemplated by the merger agreement.

 

From the date of the merger agreement through the effective time of the merger, we have agreed (and have agreed to cause each of our subsidiaries) to conduct our operations in the ordinary and usual course of business consistent with past practice and in compliance in all material respects with applicable laws, to use our commercially reasonable efforts to preserve intact our business organization, to maintain satisfactory business relationships with third parties, and to keep available the services of our present officers and employees. During the same period, we have also agreed that we will not, and will not allow our subsidiaries to, among other things, do any of the following without the prior written consent of Medtronic, subject to certain exceptions:

 

 

 

The merger agreement provides that we will not and will cause our subsidiaries not to, and will direct and use our reasonable best efforts to cause our and their respective officers, directors, employees, representatives, agents or affiliates not to, directly or indirectly:

 

 

Until such time as our shareholders approve the merger agreement, however, we may provide information to (so long as it has previously been, or is concurrently, made available to Medtronic or Merger Sub) or enter into discussions and negotiations with a third party that makes an unsolicited bona fide written acquisition proposal that did not result from our breach of our nonsolicitation obligations, so long as the third party has executed a

confidentiality agreement at least as restrictive in all material respects as the confidentiality agreement entered into by Medtronic, if:

 

 

We also have agreed to promptly (within one business day) notify and provide specified information to Medtronic if any information is requested or negotiations or discussions are sought to be initiated by a potential acquiror, provide copies of any written communications or other documents received from or sent to or on behalf of the potential acquiror describing the financial or other material terms of such acquisition proposal, and keep Medtronic and Merger Sub reasonably informed of the status of any such discussions or negotiations and, within 24 hours, notify Medtronic and Merger Sub of any modifications to the financial or other material terms of any such request or acquisition proposal.

 

The merger agreement provides that neither we nor our board of directors may do any of the following:

 

 

However, our board of directors may withdraw, modify or qualify, or publicly propose to withdraw, modify or qualify, in a manner adverse to Medtronic or Merger Sub, its recommendation that our shareholders approve the merger agreement as follows (and only as follows):

 

 

 

 

 

 

A competing “acquisition proposal” is defined under the merger agreement as any offer or proposal, or any indication of interest in making an offer or proposal, made by a person or group at any time which is structured to permit the person or group to acquire beneficial ownership of any material portion of the assets (other than inventory purchased in the ordinary course of business) of, or at least 15% of the capital stock, equity interest in, or businesses of, us and our subsidiaries, taken as a whole, pursuant to a merger, recapitalization, consolidation or other business combination, sale of share of capital stock or equity interests, sale of assets, tender offer or exchange offer or similar transaction, including any single or multi-step transaction or series of related transactions, in each case other than the proposed merger with Merger Sub.

 

A “superior proposal” is defined under the merger agreement as any unsolicited, bona fide acquisition proposal (except that references in the definition of acquisition proposal to 15% shall be replaced by 50%) made in writing, in respect of which our board has determined in good faith after consultation with its outside financial advisor and outside legal counsel and after taking into account the legal, financial, financing and other aspects of such unsolicited bona fide written acquisition proposal, would result in a transaction that is (i) more favorable, from a financial point of view, to our shareholders than the merger (after taking into account any modifications to the terms

of the merger agreement and the merger offered by Medtronic and Merger Sub) and (ii) reasonably likely to be consummated without unreasonable delay.

 

Nothing contained in the merger agreements prohibits us or our board of directors from taking and disclosing to our shareholders a position with respect to a tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a) promulgated under the Securities Exchange Act of 1934, as amended, if, in the good faith judgment of our board of directors (after consultation with outside legal counsel) failure to do so would constitute a breach of its fiduciary duties to shareholders under applicable law, or otherwise violate its obligations under applicable law; provided that no such action or disclosure shall to be a change of recommendation unless such change of recommendation complies with the merger agreement.

 

The merger agreement requires us, as promptly as reasonably practicable following the date of the merger agreement, to establish a record date for, duly call, give notice of, convene and hold a meeting of our shareholders for the purpose of obtaining the required shareholder approval of the proposal to approve the merger agreement and to use our reasonable best efforts to cause the meeting to occur as soon as reasonably practicable. Unless the merger agreement is earlier terminated in accordance with its terms (including by us in connection with our receipt and acceptance of a superior proposal), we are required to submit the merger agreement to our shareholders for approval even if our board of directors withdraws, modifies or qualifies or has publicly proposed to withdraw, modify or qualify in a manner adverse to Medtronic or Merger Sub its recommendation that our shareholders approve the merger agreement and approve the merger.

 

Except in the limited circumstances described above in “The Merger Agreement — No Solicitation of Alternative Transactions,” our board of directors is required to recommend that our shareholders vote in favor of the approval of the merger agreement and we must use our reasonable best efforts to obtain from our shareholders the vote in favor of the approval of the merger agreement.

 

ATS Medical, Medtronic and Merger Sub have agreed to use their reasonable best efforts to cause the merger and the other transactions contemplated by the merger agreement to be completed as promptly as reasonably practicable on the terms and subject to the conditions of the merger agreement. In particular, ATS Medical, Medtronic and Merger Sub have agreed to do the following:

 

 

 

Medtronic and Merger Sub have agreed that all rights to indemnification, exculpation and advancement of expenses existing in favor of our or our subsidiaries’ current or former directors, officers, and employees as provided in our and our subsidiaries’ articles of incorporation and bylaws and in various agreements disclosed to Medtronic before the date of the merger agreement, as in effect on the date of the merger agreement with respect to matters occurring at or prior to the effective time of the merger, will survive and continue in full force and effect for a period of not less than the applicable statute of limitations.

 

Prior to the effective time of the merger, we must obtain and pay for in full, in respect of acts or omissions occurring prior to or at the effective time of the merger (including such acts or omissions in connection with the merger agreement and the transactions contemplated by the merger agreement), policies of directors’ and officers’ liability insurance covering ATS Medical and other persons currently covered by our existing directors’ and officers’ liability insurance policies, for a period of six years after the effective time of the merger. If the aggregate premiums for such policies exceeds $250,000, we are required to first consult with Medtronic and can obtain and pay for such policies only on terms reasonably acceptable to Medtronic. From and after the effective time of the merger, the surviving corporation cannot take any action to cancel such policies.

 

The merger agreement provides that:

 

 

 

The merger agreement provides that:

 

 

The merger agreement provides that Medtronic and Merger Sub acknowledge and agree that as of the effective time of the merger, the surviving corporation will be responsible for, and shall be deemed to have assumed all of, the duties and obligations of ATS Medical pursuant to the 3F Agreement, including certain obligations relating to milestone payments, and will comply with certain provisions of the Warrants to Purchase Common Stock issued by us on October 7, 2005 for the purchase of 1,344,000 shares of our common stock, the Common Stock Purchase Warrants issued by us on March 15, 2007 for the purchase of 3,250,000 shares of common our stock and the Warrants issued by us on December 19, 2008 for the purchase of 1,553,192 shares of our common stock.

 

The merger agreement provides that prior to the effective time of the merger, we must cause all of our 2025 Notes to be redeemed as provided in the underlying indenture at a redemption price in cash equal to 100% of the principal amount of our 2025 Notes, together with accrued and unpaid interest thereon, if any, to but excluding the date of redemption (the “redemption price” ). On May 21, 2010, we called for redemption all of the outstanding 2025 Notes. The redemption date has been set for June 10, 2010. All 2025 Notes outstanding on the redemption date were redeemed on that date at the redemption price.

 

If our 2025 Notes had not been redeemed on June 10, 2010 as described above, the holders of such notes would have had the right, commencing in October 2010, to require us to repurchase their 2025 Notes. Prior to our entry into the merger agreement, our board had been exploring and evaluating different alternatives for securing debt financing necessary to redeem the 2025 Notes, including the Skokos Commitment Letter described above under “The Merger — Interests of our Directors and Executive Officers in the Merger — Expiration of Skokos Commitment Letter.” As discussed above, in light of the proposed merger with Medtronic and Medtronic’s agreement to provide us with bridge loan financing on terms we determined to be more favorable than those offered pursuant to the Skokos Commitment Letter, we allowed the Skokos Commitment Letter to expire. In the merger agreement, Medtronic covenanted to, within five business days after our written request, loan us and one or more of our subsidiaries advances in an aggregate amount not to exceed $30,000,000, on the terms set forth in loan document forms agreed to at the time the merger agreement was entered into. As provided in such forms, the proceeds of any advance received by us were to be used only to redeem our 2025 Notes, to repay outstanding borrowings under our term loan from Silicon Valley Bank, and/or to finance working capital or, if the merger agreement is terminated, for general corporate purposes in the ordinary course of business consistent with past practice.

As disclosed in a Form 8-K filed by us on May 21, 2010, we and our subsidiaries 3F and ATS Acquisition Corp. (which we refer to collectively as the “ Borrowers ”) executed and delivered the final loan documents on May 21, 2010 and on that date drew an advance in the maximum permitted amount of $30,000,000. In accordance with the terms of the promissory note, a portion of the proceeds of this advance was used on the same day to pay in full our outstanding obligations under our term loan from Silicon Valley Bank, and a portion was used to redeem all of our outstanding 2025 Notes on June 10, 2010 (which had an aggregate principal balance of $22,400,000 on the redemption date). We intend to use the remaining proceeds to finance working capital or, if the merger agreement is terminated, for general corporate purposes in the ordinary course of business consistent with past practice.

 

Advances under the loan bear interest at a rate of 10% per annum, payable monthly. All outstanding principal and interest will be due and payable in full 24 months following the termination of the merger agreement, and an additional payment equal to 6% of the original principal balance of the loan will be due upon final payment of the loan. In addition, if the merger agreement is terminated for any reason, we will be required to issue to Medtronic a seven-year warrant to purchase, at a per share exercise price of $2.61, a number of shares of our common stock equal to 4% of the quotient of $30.0 million divided by $2.61, provided that the maximum number of shares issuable pursuant to the warrant may not exceed that number of shares which is 19.90% of the total number of shares of our common stock outstanding on the date of issuance of such shares.

 

The promissory note providing for the loan contains certain covenants and restrictions on the Borrowers. Some of these, including a covenant prohibiting the Borrowers from granting liens (other than certain permitted liens) on their intellectual property, applied effective when we received the advance described above. Other covenants and restrictions will apply only if the merger agreement is terminated. These include restrictions on the Borrowers’ ability to incur indebtedness, merge (other than in compliance with the merger agreement) or make certain restricted payments, and a financial covenant requiring that the Borrowers have total revenue, as measured at the conclusion of each month, of not less than $14,000,000 for the three-month period ended on the last day of such month. The promissory note also contains events of default, and permits Medtronic to accelerate repayment of amounts outstanding under the promissory note if certain events of default occur. Under the promissory note, it is an event of default if (a) the Borrowers fail to pay Medtronic any principal or interest payment on the promissory note or any fee or other amount due to Medtronic under the loan documents, five days after the related due date, (b) any of the representations or warranties made by a Borrower to Medtronic proves to have been false or misleading in any material respect, (c) any Borrower fails to comply with its covenants under the loan documents and such failure continues for 30 days after notice from Medtronic; (d) certain bankruptcy and insolvency-related events occur with respect to a Borrower, (e) a judgment or judgments for the payment of money in excess of $100,000 in the aggregate are rendered against any Borrower and are not satisfied or provided for as described in the promissory note; (f) any property of any Borrower is garnished or attached in any proceeding and such garnishment or attachment remains undischarged for a period of 45 days during which execution is not effectively stayed; (g) any acquisition (as defined in the promissory note) of a Borrower occurs, other than pursuant to the merger agreement; or (h) any event of default occurs under the security agreement or any other loan document. If a bankruptcy or insolvency-related event of default described in paragraph (d) above occurs, the Borrowers’ obligations under the loan documents will automatically be accelerated. If any other event of default occurs and is continuing, Medtronic may accelerate repayment of all obligations under the loan documents by written notice to the Borrowers. The obligations of the Borrowers under the promissory note are secured by (i) a security interest in certain collateral of the Borrowers, and (ii) a security interest in the stock of certain foreign subsidiaries of ATS Medical.

 

The obligations of each of Medtronic and Merger Sub, on the one hand, and us, on the other hand, to complete the merger depend on the satisfaction or waiver, on or prior to the effective time of the merger, of a number of conditions, including:

 

 

 

The obligation of Medtronic and Merger Sub to complete the merger is subject to the following additional conditions:

 

 

The merger is not conditioned upon Medtronic or Merger Sub obtaining financing.

 

The merger agreement may be terminated and the merger may be abandoned at any time prior to the effective time of the merger, regardless of whether our shareholders have approved the merger agreement:

 

 

 

 

 

 

 

 

If the merger agreement is terminated, we are required to pay Medtronic a termination fee in the following circumstances:

 

 

 

For the purposes of the above termination fee discussion, “alternative transaction” means any transaction of the type referred to in the definition of a competing “acquisition proposal” except that references to “15%” in that definition shall be replaced by “50%.”

 

Expenses

 

Whether or not the merger is completed, the parties must pay their own costs and expenses incurred in connection with the merger, except that we must reimburse Medtronic for up to $1,500,000 of fees and expenses if we fail to obtain the requisite shareholder approval, as described under “The Merger Agreement — Termination Fee” above.

 

At any time prior to the completion of the merger, the merger agreement may be amended by mutual consent of the parties in writing. However, after the merger agreement has been approved by our shareholders, there may not be any amendment which decreases the merger consideration or adversely affects the rights of our shareholders without our shareholders’ further approval. At any time prior to the completion of the merger, each party may (i) extend the time for the performance of any of the obligations or acts of the other parties hereto, (ii) waive any inaccuracies in the representation sand warranties by any other applicable party, or (iii) waive compliance by any party with any of the agreement or conditions contained in the merger agreement. Any such extension or waiver by a party must be in writing signed on behalf of such party.

 

Concurrently with the execution and delivery of the merger agreement, Merger Sub entered into voting agreements with Alta, Essex and Mr. Skokos, each a significant shareholder of ATS Medical. As of the record date for the special meeting, an aggregate of • shares of our common stock, representing approximately 19.9% of the shares of our common stock outstanding on the record date were subject to these voting agreements. The voting agreements are attached as Annex B hereto.

 

If at the special meeting the votes present or represented and voting in favor of approval of the merger agreement is not sufficient to approve the merger agreement under Minnesota law, our management may move to adjourn the special meeting in order to enable our board of directors to continue to solicit additional proxies in favor of the approval of the merger agreement.

 

In this proposal, we are asking you to authorize the holder of any proxy solicited by our board of directors to vote in favor of adjourning the special meeting, and any later adjournments, to another time and place. If the ATS Medical shareholders approve the meeting adjournment proposal, we could adjourn the special meeting, and any adjourned session of the special meeting, to a later date and use the additional time to solicit additional proxies in favor of the merger proposal, including the solicitation of proxies from holders of ATS Medical capital stock that have previously voted against the merger proposal. Among other things, approval of the meeting adjournment proposal could mean that, even if we had received proxies representing a majority of votes against the merger proposal, we could adjourn the special meeting without a vote on the merger proposal and seek to convince the holders of those shares to change their votes to votes in favor of the approval of the merger agreement.

 

The ATS Medical board of directors believes that if the number of shares of ATS Medical’s capital stock present or represented at the special meeting and voting in favor of the merger proposal is not sufficient to approve the merger agreement, it is in the best interests of the holders of ATS Medical capital stock to enable the board, for a limited period of time, to continue to seek to obtain a sufficient number of additional votes to approve the merger agreement.

 

The ATS Medical board of directors recommends that you vote “FOR” the meeting adjournment proposal.

 

The following table sets forth security ownership information pertaining to persons known by us to beneficially own more than 5% of our common stock, our directors, our executive officers and all of our directors and executive officers as a group as of May 13, 2010. Unless otherwise noted, the shareholders listed in the table have sole voting and investment power with respect to the shares of common stock owned by them, and such shares are not subject to any pledge.

 

 

 

 

 

SHAREHOLDER PROPOSALS

 

Once the merger is completed, there will be no public participation in any future meetings of shareholders of ATS Medical. If the merger is not completed, our public shareholders will continue to be entitled to attend and participate in our shareholder meetings. Any proposal by a shareholder to be included in our proxy material and presented at the 2011 Annual Meeting of Shareholders must be received at our principal executive offices, 3905 Annapolis Lane, Suite 105, Minneapolis, Minnesota 55447, Attention: Corporate Secretary, no later than December 10, 2010. In addition, in connection with any matter to be proposed by a shareholder at the 2011 Annual Meeting, but not proposed for inclusion in our proxy materials, the proxy holders designated by us for that meeting may exercise their discretionary voting authority with respect to that shareholder proposal if appropriate notice of that proposal is not received by our Corporate Secretary at our principal executive office by February 23, 2011.

OTHER MATTERS

 

As of the date of this proxy statement, our board of directors knows of no matters that will be presented for consideration at the special meeting other than as described in this proxy statement.

 

The SEC rules allow a single copy of the proxy statement to be delivered to multiple shareholders sharing the same address and last name, or who we reasonably believe are members of the same family, and who consent to receive a single copy of these materials in a manner provided by these rules. This practice is referred to as “householding” and can result in significant savings of paper and mailing costs. Although we do not household for our registered shareholders,

some brokers household ATS Medical proxy statements, delivering a single copy of each to multiple shareholders sharing an address unless contrary instructions have been received from the affected shareholders. Once you have received notice from your broker that they will be householding materials to your address, householding will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate copy of our proxy statements, or if you are receiving multiple copies of proxy statements and wish to receive only one, please notify your broker. We will deliver promptly upon written or oral request a separate copy of our proxy statement to a shareholder at a shared address to which a single copy of the proxy statement was delivered. For copies of the proxy statement, shareholders should write to our Corporate Secretary at ATS Medical, Inc., 3905 Annapolis Lane, Suite 105, Minneapolis, Minnesota 55447, or call (763) 553-7736.

 

ATS Medical files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information that ATS Medical files with the SEC at the SEC’s public reference room at the following location:

 

Public Reference Room
100 F Street, N.E.
Washington, D.C. 20549

 

Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. These SEC filings are also available to the public from commercial document retrieval services and at the Internet World Wide Web site maintained by the SEC at “http://www.sec.gov.” Copies of our SEC filings are also available through our website (www.atsmedical.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the SEC.

 

We have supplied all information contained in this proxy statement relating to us, and Medtronic has supplied all information contained in this proxy statement relating to Medtronic.

 

If you have any questions about this proxy statement, the special meeting or the merger or need assistance with voting procedures, you should contact:

 

ATS Medical, Inc.
Attn: Chief Financial Officer
3905 Annapolis Lane North
Minneapolis, Minnesota 55447
Telephone: (763) 553-7736

 

Our shareholders should not send in their ATS Medical stock certificates until they receive the transmittal materials from the paying agent. Our shareholders of record who have further questions about their stock certificates or the exchange of our capital stock for cash should call the paying agent.

 

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED • , 2010. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE. NEITHER THE MAILING OF THIS PROXY STATEMENT TO SHAREHOLDERS NOR THE ISSUANCE OF CASH IN THE MERGER CREATES ANY IMPLICATION TO THE CONTRARY. THIS PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO OR FROM ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE A PROXY SOLICITATION.

 

Annex A

 

EXECUTION VERSION

 

 

AGREEMENT AND PLAN OF MERGER

 

AMONG

 

MEDTRONIC, INC.,

 

PILGRIM MERGER CORPORATION

 

and

 

ATS MEDICAL, INC.

 

Dated as of April 28, 2010

 

 

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