Form S-4 Ashland, Inc.
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As filed with the Securities and Exchange Commission on August 8, 2008

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-4

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

ASHLAND INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Kentucky   5160   20-0865835

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

50 E. RiverCenter Boulevard

P.O. Box 391

Covington, Kentucky 41012-0391

(859) 815-3333

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

David L. Hausrath, Esq.

Senior Vice President and General Counsel

50 E. RiverCenter Boulevard

Covington, Kentucky 41012-0391

(859) 815-3333

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Jeffrey J. Margulies, Esq.

Squire, Sanders & Dempsey L.L.P.

4900 Key Tower

127 Public Square

Cleveland, Ohio 44114-1304

(216) 479-8500

 

David A. Katz, Esq.

Wachtell, Lipton, Rosen & Katz

51 West 52nd Street

New York, New York 10019

(212) 403-1000

 

Justin P. Klein, Esq.

Ballard Spahr Andrews & Lugersoll, LLP

1735 Market Street

Philadelphia, Pennsylvania 19103

(215) 864-8606

 

Richard G. Dahlen, Esq.

Chief Legal Officer

Hercules Incorporated

1313 North Market Street

Hercules Plaza

Wilmington, Delaware 19894-0001

(302) 594-5000

 

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this Registration Statement.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

     Accelerated filer  ¨

Non-accelerated filer  ¨

  (Do not check if a smaller reporting company)    Smaller Reporting Company  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  Amount to be
registered(1)
  Proposed maximum
offering price per
unit
  Proposed maximum
aggregate offering
price(2)
  Amount of
registration fee

Common stock, $0.01 par value

  10,730,000   N.A.   $171,876,917   $6,755
 
 

 

(1) Based upon the maximum number of shares of common stock that the Registrant may be required to issue in the merger transaction, calculated by multiplying the maximum number of shares of common stock of Hercules Incorporated, which we refer to as “Hercules,” estimated to be potentially outstanding at the time the merger transaction is consummated by the exchange ratio for conversion of shares of common stock of Hercules into shares of common stock of the Registrant, pursuant to the merger agreement.

 

(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, on the basis of the market value of the shares of Hercules common stock to be received by the Registrant in the merger transaction, in accordance with Rule 457(f)(1) and Rule 457(c). Pursuant to Rule 457(f)(3), the anticipated cash consideration to be paid by the Registrant to the holders of Hercules common stock in the merger has been deducted from the value of the Hercules common stock to be received by the Registrant in exchange for the merger consideration.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

 

 

 


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The information in the accompanying proxy statement/prospectus is not complete and may be changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. The accompanying proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

Subject to Completion, dated August 8, 2008

 

LOGO

[], 2008

To the Shareholders of Hercules Incorporated:

You are cordially invited to attend a special meeting of shareholders of Hercules Incorporated, which we refer to as “Hercules,” to be held on [], 2008, at [][].m., local time, at Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001.

The special meeting will be held for the following purposes:

 

  1. To consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of July 10, 2008, entered into by Hercules, Ashland Inc., which we refer to as “Ashland,” and Ashland Sub One, Inc., a wholly owned subsidiary of Ashland, which we refer to as “Merger Sub,” and such agreement, the “merger agreement.” The merger agreement provides that, upon effectiveness of the merger, Hercules will become a wholly owned subsidiary of Ashland and each outstanding share of Hercules common stock, other than shares held by Ashland, any subsidiary of Ashland or Merger Sub and other than treasury shares and shares with respect to which a Hercules shareholder has validly demanded and perfected appraisal rights under Delaware law, will be converted into the right to receive:

 

   

0.0930 of a share of Ashland common stock; and

 

   

$18.60 in cash.

 

  2. To consider and vote upon a proposal to authorize the proxy holders to vote to adjourn the special meeting, in their sole discretion, to solicit additional proxies if there are not sufficient votes in favor of proposal 1.

 

  3. To transact any other business as may properly come before the special meeting or any adjournments of the special meeting for reasons other than those provided in proposal 2.

The items of business are described in the attached proxy statement/prospectus. Only Hercules shareholders of record at the close of business on [], 2008, the record date for the special meeting, are entitled to notice of and to vote at the special meeting and any adjournments of the special meeting.

The board of directors of Hercules has approved the merger agreement and the transactions contemplated by the merger agreement, including the merger, and has determined that the merger agreement, and the transactions contemplated thereby, are advisable for, and fair to, and in the best interests of, Hercules and its shareholders. The board of directors of Hercules unanimously recommends that you vote “FOR” the adoption of the merger agreement at the special meeting.

The receipt of shares of Ashland common stock and cash pursuant to the merger agreement will be a taxable transaction for U.S. federal income tax purposes. In general, a Hercules shareholder will recognize gain or loss equal to the difference between (i) the sum of the fair market value of the shares of Ashland common stock on the date of the merger and the amount of cash received in the merger and (ii) such shareholder’s adjusted tax basis in the shares of Hercules common stock exchanged in the merger. For a more detailed description of certain material U.S. federal income tax consequences of the merger, see “The Merger—Material U.S. Federal Income Tax Consequences” beginning on page 54 of the accompanying proxy statement/prospectus.

Shares of Hercules common stock are listed on the New York Stock Exchange, which we refer to as the “NYSE,” under the symbol “HPC” and shares of Ashland common stock are listed on the NYSE under the symbol “ASH.” On [], 2008, the most recent practicable trading day prior to the printing of the accompanying proxy statement/prospectus, the last sale price of Hercules common stock was $[] per share and the last sale price of Ashland common stock was $[] per share.


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We cannot complete the merger unless the merger agreement is adopted by the affirmative vote of two-thirds of the shares of Hercules common stock outstanding as of the record date. A failure to vote is the same as voting against the merger. We therefore encourage you to read carefully the accompanying proxy statement/prospectus, which includes important information about Hercules, Ashland and the proposed merger, and return the enclosed proxy card as promptly as possible. In particular, please see the section titled “Risk Factors” beginning on page 15 of the accompanying proxy statement/prospectus, which describes risks that you should consider in evaluating the merger.

Sincerely,

John K. Wulff

Chairman of the Board

Craig A. Rogerson

President and Chief Executive Officer

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the securities to be issued in the merger or determined if the accompanying proxy statement/prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The accompanying proxy statement/prospectus is dated [], 2008, and is being first mailed to shareholders of Hercules on or about [], 2008.


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References to Additional Information

The accompanying proxy statement/prospectus incorporates by reference important business and financial information about Ashland and Hercules from documents that are not delivered with the proxy statement/prospectus. This information is available to you without charge upon your written or oral request. You can obtain the documents incorporated by reference in the accompanying proxy statement/prospectus by requesting them in writing or by telephone from the appropriate company at the following addresses and telephone numbers:

 

Ashland Inc.

50 E. RiverCenter Boulevard

P.O. Box 391

Covington, Kentucky 41012-0391

Attention: Corporate Secretary

Telephone: (859) 815-4454

  

Hercules Incorporated

Hercules Plaza

1313 North Market Street

Wilmington, Delaware 19894-0001

Attention: Corporate Secretary

Telephone: (800) 441-9247

In addition, if you have questions about the merger or the special meeting, need additional copies of this document or need to obtain proxy cards or other information related to the proxy solicitation, you may contact the proxy solicitor listed below. You will not be charged for any of these documents that you request.

MacKenzie Partners, Inc.

105 Madison Avenue

New York, New York 10016

(212) 929-5500 (call collect)

or

(800) 322-2885 (toll-free)

proxy@mackenziepartners.com (e-mail address)

If you would like to request documents, please do so by [], 2008 in order to receive them before the special meeting.

See “Where You Can Find More Information” or “Incorporation by Reference” on pages 112 and 113, respectively, of the accompanying proxy statement/prospectus for more information about the documents referred to in the proxy statement/prospectus.

You should rely only on the information which is contained in the accompanying proxy statement/prospectus or to which we have referred in the proxy statement/prospectus. We have not authorized anyone to provide you with different information. You should not assume that the information contained in or incorporated by reference into the accompanying proxy statement/prospectus is accurate as of any date other than the date of the proxy statement/prospectus or the date of the document that is incorporated by reference.

The accompanying proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.


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Hercules Incorporated

Hercules Plaza

1313 North Market Street

Wilmington, Delaware 19894-0001

(800) 441-9247

Notice of Special Meeting of Shareholders

To Be Held on [], 2008

 

 

 

To:

   Shareholders of Hercules Incorporated

Subject:

   Notice of Special Meeting to Vote Upon a Proposal to Adopt an Agreement and Plan of Merger

NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Hercules Incorporated, a Delaware corporation, which we refer to as “Hercules,” will be held on [], 2008, at []:00 [].m., local time, at Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001. The purposes of the special meeting are:

 

  1. To consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of July 10, 2008, entered into by Hercules, Ashland Inc., which we refer to as “Ashland,” Ashland Sub One, Inc., a wholly owned subsidiary of Ashland, which we refer to as “Merger Sub,” and such agreement, the “merger agreement.” The merger agreement provides that, upon effectiveness of the merger, Hercules will become a wholly owned subsidiary of Ashland and each outstanding share of Hercules common stock, other than shares held by Ashland, any subsidiary of Ashland or Merger Sub and other than treasury shares and shares with respect to which a Hercules shareholder has validly demanded and perfected appraisal rights under Delaware law, will be converted into the right to receive:

 

   

0.0930 of a share of Ashland common stock; and

 

   

$18.60 in cash.

 

  2. To consider and vote upon a proposal to authorize the proxy holders to vote to adjourn the special meeting, in their sole discretion, to solicit additional proxies if there are not sufficient votes in favor of proposal 1.

 

  3. To transact any other business as may properly come before the special meeting or any adjournments of the special meeting for reasons other than those provided in proposal 2.

Shareholders of record as of the close of business on [], 2008 will be entitled to vote at the special meeting. We encourage you, whether or not you plan to attend the special meeting, to vote by proxy card, telephone or Internet in advance of the special meeting. You may attend the special meeting and change your vote at that time if you wish to do so.

If you are a shareholder of record and plan to attend the special meeting, please bring with you valid government-issued photo identification (such as a driver’s license or passport) in order to gain admission to the special meeting. If your shares are held in the name of a bank, broker or nominee, you will have to bring evidence of your ownership of Hercules shares as of the record date, in addition to valid government-issued photo identification, if you wish to attend the special meeting. Examples of proof of ownership include the following:

 

   

a letter from your bank, broker or nominee stating that you owned your shares as of the record date;

 

   

an account statement from your bank, broker or nominee indicating that you owned your shares as of the record date; or

 

   

a copy of the voting instruction card provided by your bank, broker or nominee indicating that you owned your shares as of the record date.


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If you are a proxy holder for a Hercules shareholder, to gain entry to the special meeting you must bring:

 

   

a validly executed proxy naming you as the proxy holder, signed by a Hercules shareholder who owned Hercules stock as of the record date;

 

   

valid government-issued photo identification (such as a driver’s license or passport); and

 

   

if the shareholder whose proxy you hold was not a record holder of Hercules shares as of the record date, proof of the shareholder’s ownership of Hercules shares as of the record date, in the form of a letter or statement from a bank, broker or nominee or the voting instruction card provided by the bank, broker or nominee in each case, indicating that the shareholder owned those shares as of the record date.

By Order of the Board of Directors,

 

Wilmington, Delaware

   Israel J. Floyd

[], 2008

  

Corporate Secretary and General Counsel

Hercules Incorporated

Your vote is important. Please vote as soon as possible, whether or not you expect to attend the special meeting in person. You may vote by telephone, through the Internet or by completing, dating and signing the enclosed proxy card and returning it in the enclosed postage prepaid envelope. You may change your vote at any time before the special meeting or by attending the special meeting and voting in person. A failure to vote is the same as voting against the merger. Please do not send your common stock certificates at this time. If the merger is completed, you will be sent instructions regarding the surrender of your certificates.

IMPORTANT NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS

FOR THE SPECIAL MEETING TO BE HELD ON [], 2008

The accompanying proxy statement/prospectus for the special meeting to be held on [], 2008, Hercules’ annual report to its shareholders on Form 10-K for the year ended December 31, 2007 and Hercules’ other filings with the Securities and Exchange Commission are available to Hercules shareholders, free of charge, at www.herc.com/shareholderinfo.


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PROXY STATEMENT/PROSPECTUS

Hercules is providing this proxy statement/prospectus and accompanying proxy card to you in connection with the solicitation by the Hercules board of directors of proxies to be voted at a special meeting of shareholders and at any adjournment of the special meeting. This proxy statement/prospectus also constitutes a prospectus of Ashland for the shares of Ashland common stock to be issued to shareholders of Hercules pursuant to the merger of a wholly owned subsidiary of Ashland with and into Hercules.

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Questions and Answers About the Merger and the Special Meeting of Shareholders

   1

Summary

   5

Risk Factors

   15

Risks Relating to the Merger

   15

Risks Relating to Ashland and Hercules

   19

Forward-Looking Statements

   20

Selected Historical Financial and Other Data of Ashland

   21

Selected Historical Financial and Other Data of Hercules

   22

Selected Unaudited Pro Forma Combined Condensed Financial Information of Ashland

   23

Comparative Per Share Data

   24

Comparative Stock Prices and Dividends

   25

The Special Meeting of Shareholders of Hercules Incorporated

   26

Time, Place and Purpose of the Special Meeting

   26

Record Date; Voting Information; Required Vote

   26

Voting in Person

   27

Voting by Proxy

   27

Revocation of Proxies

   27

Effects of Abstentions and Broker Non-Votes

   28

Hercules Incorporated Savings and Investment Plan

   28

Share Ownership of Management and Certain Shareholders

   28

Solicitation of Proxies

   28

Assistance

   29

The Merger

   29

General

   29

Background of the Merger

   29

Recommendation of the Hercules Board of Directors; Reasons for the Merger

   36

Opinion of Credit Suisse Securities (USA) LLC

   39

Hercules Analyses

   42

Ashland Analyses

   44

Ashland’s Reasons for the Merger

   46

Interests of Hercules Directors and Executive Officers in the Merger

   47

Manner and Procedure for Exchanging Shares of Hercules Common Stock; No Fractional Shares

   52

Treatment of Warrants

   52

Treatment of Convertible Debentures

   52

Governmental and Regulatory Approvals

   52

Merger Expenses, Fees and Costs

   53

Accounting Treatment

   53

Termination of Exchange Fund

   54

No Liability

   54

Material U.S. Federal Income Tax Consequences

   54

Appraisal Rights

   56

Stock Exchange Listing

   58

 

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Delisting and Deregistration of Hercules Common Stock

   58

Dividends

   58

Employee Matters

   58

Adjournment of the Hercules Special Meeting

   59

Financing Commitments

   59

The Merger Agreement

   63

Form of the Merger

   63

Merger Consideration

   63

Closing

   64

Effective Time

   64

Treatment of Stock Options

   64

Treatment of Warrants and Convertible Debentures

   65

Treatment of Restricted Stock

   65

Treatment of Restricted Stock Units

   65

Representations and Warranties

   66

Covenants and Agreements

   68

Conditions to the Merger

   76

Termination

   77

Effect of Termination

   78

Termination Fees and Expenses

   78

Public Announcements

   79

Stock Exchange Listing

   79

Section 16 Matters

   80

Certain Tax Matters

   80

Shareholder Meeting

   80

Management of Hercules After the Merger

   80

Amendment and Waiver

   80

Comparative Rights of Ashland Shareholders and Hercules Shareholders

   81

Capitalization

   81

Voting Rights of Shareholders

   81

Size of the Board of Directors

   82

Classification of the Board

   82

Vacancies on the Board

   82

Removal of Directors

   83

Notice of Shareholders’ Meetings

   83

Ability to Call Special Meetings of Shareholders

   84

Action by Written Consent of Shareholders

   84

Shareholder Proposals

   85

Director Nominations by Shareholders

   85

Dividends

   86

Amendment to Charter Documents

   87

Amendment to By-laws

   88

Mergers and Share Exchanges

   89

Appraisal Rights

   90

Anti-takeover Statutes and Charter Provisions

   91

Duties of Directors

   93

Limitations on Liability of Directors and Officers

   93

Indemnification of Directors and Officers

   94

 

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Description of Ashland’s Capital Stock

   96

Preferred stock

   96

Common stock

   96

Anti-takeover effects

   97

Unaudited Pro Forma Combined Condensed Financial Information

   99

Experts

   111

Legal Matters

   111

Shareholder Proposals

   111

Householding of Proxy Materials

   111

Where You Can Find More Information

   112

Incorporation by Reference

   113

 

Annexes:   

Annex A

   Agreement and Plan of Merger

Annex B

   Section 262 of the General Corporation Law of the State of Delaware

Annex C

   Opinion of Credit Suisse Securities (USA) LLC

 

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Questions and Answers About the Merger and the Special Meeting of Shareholders

What is the proposed transaction upon which I am being asked to vote?

You are being asked to vote to adopt a merger agreement entered into by Hercules with Ashland and a subsidiary of Ashland. In the merger, Merger Sub, a newly formed, wholly owned subsidiary of Ashland, will be merged with and into Hercules, which we refer to as the “merger.” When the merger is completed, Hercules will be a wholly owned subsidiary of Ashland. The terms and conditions of the merger are described in detail in this proxy statement/prospectus.

Why are Hercules and Ashland proposing the merger?

Ashland’s acquisition of Hercules is an important step towards Ashland’s goal of becoming a leading specialty chemicals company. The companies each have a proud history of nearly 100 years of innovation, dedication and service. The merger would create a defined business core composed of three specialty chemical businesses with very good market positions and promising global growth potential: specialty additives and ingredients, paper and water technologies and specialty resins. Ashland expects its financial profile to be enhanced significantly through reduced earnings volatility, improved profitability and greater cash flow generation. For Hercules’ part, its shareholders will receive a significant premium (as of the last trading day prior to the public announcement of the merger) over the trading price for their shares and, through their ownership of Ashland shares, the opportunity to participate in the upside potential of the combined company.

What will Hercules shareholders receive in the merger?

Each share of Hercules common stock outstanding at the effective time of the merger other than shares held by Ashland, any subsidiary of Ashland or Merger Sub and other than treasury shares and shares with respect to which a Hercules shareholder has validly demanded and perfected appraisal rights under Delaware law will be exchanged for (i) 0.0930, which we refer to as the “exchange ratio,” of a share of Ashland stock and (ii) $18.60 in cash. Holders of Hercules common stock will receive cash in lieu of any fractional shares of Ashland common stock they otherwise would receive pursuant to the exchange ratio.

Can Hercules shareholders elect the type of consideration that they will receive in the merger for their shares of Hercules common stock?

No.

What vote is required for adoption?

The merger agreement must be adopted by holders of two-thirds of the outstanding shares of Hercules common stock entitled to vote at the special meeting. You are entitled to vote on the merger agreement if you held Hercules common stock at the close of business on the record date, which is [], 2008. On that date, [] shares of Hercules common stock were outstanding and entitled to vote.

When and where will the Hercules special meeting of shareholders take place?

The special meeting of shareholders of Hercules will be held on [], 2008, at [][].m., local time, at Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001. Directions to Hercules Plaza are available at http://www.herc.com.

If my shares are held in “street name” by my broker, will my broker vote my shares for me?

You should instruct your broker to vote your shares, following the directions your broker provides to you. If you do not instruct your broker, your broker generally will not have the discretion to vote your shares. Because

 

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the adoption of the merger agreement requires an affirmative vote of holders of two-thirds of the outstanding shares of Hercules common stock, these so-called “broker non-votes” have the same effect as votes cast against the merger agreement.

What do I need to do now?

After carefully reading and considering the information contained in this proxy statement/prospectus, please fill out and sign the proxy card, and then mail your signed proxy card in the enclosed prepaid envelope as soon as possible so that your shares may be voted at the special meeting. Your signed proxy card will instruct the persons named on the card to vote your shares at the special meeting as you direct on the card. If you sign and send in your proxy card and do not indicate how you want to vote, your proxy will be voted “FOR” the adoption of the merger agreement. You may also vote by telephone or through the Internet by following the instructions furnished with your proxy card. THE HERCULES BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HERCULES SHAREHOLDERS VOTE “FOR” ADOPTION OF THE MERGER AGREEMENT AND “FOR” THE ADJOURNMENT OF THE SPECIAL MEETING, IF NECESSARY, TO PERMIT SOLICITATION OF ADDITIONAL PROXIES IN FAVOR OF THE ABOVE PROPOSAL.

Why is my vote important?

If you do not return your proxy card, submit your proxy by telephone or through the Internet or vote in person at the special meeting, it will be more difficult for Hercules to obtain the necessary quorum to hold the special meeting and the shareholder approval necessary to consummate the merger.

If I do not favor the adoption of the merger agreement, what are my rights?

Under Delaware law, Hercules shareholders of record who do not vote in favor of the merger agreement have the right to exercise appraisal rights in connection with the merger and, if the merger is completed, obtain payment in cash of the fair value of their shares of common stock as determined by the Delaware Chancery Court, rather than the merger consideration. To exercise your appraisal rights, you must strictly follow the procedures prescribed by Delaware law. These procedures are summarized in this proxy statement/prospectus. In addition, the text of the applicable provisions of Delaware law is included as Annex B to this proxy statement/prospectus.

May I change my vote after I have mailed my signed proxy card or voted by telephone or through the Internet?

Yes. You can change your vote in one of the following ways:

 

   

You can send a written notice stating that you want to revoke your proxy by mail or facsimile to:

Hercules Incorporated

Hercules Plaza

1313 North Market Street

Wilmington, Delaware 19894-0001

Attn: Corporate Secretary

Facsimile: (302) 594-7315

Such notice must be received no later than the beginning of voting at the special meeting.

 

   

You can complete and submit a new, later-dated proxy card no later than the beginning of voting at the special meeting.

 

   

You can vote by telephone or through the Internet at a later time, but not later than 11:59 p.m. (Eastern Time) on [], 2008, or the day before the meeting date if the special meeting is adjourned or postponed.

 

   

You can attend the special meeting and vote in person. Simply attending the meeting, however, will not revoke your prior proxy, as you must vote at the meeting to do so.

 

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If you have instructed a broker to vote your shares, you must follow directions received from your broker to change your vote.

Should I send in my stock certificates now?

No. If and when the merger is completed, you will receive written instructions for surrendering your stock certificates. If you hold Hercules shares in book-entry form, you will also receive instructions for exchanging your shares after we complete the transaction.

Is the transaction expected to be taxable to Hercules shareholders?

Generally, yes. The receipt of shares of Ashland common stock and cash in exchange for your shares of Hercules common stock pursuant to the transaction will be a taxable transaction for U.S. federal income tax purposes. In general, you will recognize gain or loss equal to the difference, if any, between (i) the sum of the fair market value of the shares of Ashland common stock on the date of the merger and the cash received in the transaction and (ii) your adjusted tax basis in the shares of Hercules common stock that you exchange in the transaction. That gain or loss will be capital gain or loss (assuming you hold your Hercules common stock as a capital asset) and the capital gain or loss will be long term if, as of that time, you have held the Hercules common stock for more than one year.

Tax matters are complicated, and the tax consequences of the transaction to each Hercules shareholder will depend on the facts of each shareholder’s situation. You are encouraged to read carefully the discussion in the section entitled “The Merger—Material U.S. Federal Income Tax Consequences” beginning on page 54 and to consult your own tax advisors for a full understanding of the particular tax consequences of the transaction to you.

When do you expect the merger to be completed?

We expect to complete the merger promptly after the Hercules shareholders adopt the merger agreement at the special meeting and after we receive all necessary regulatory approvals. We currently anticipate completing the merger in the fourth calendar quarter of 2008.

Where will my Ashland common shares be listed?

Ashland will apply to have the shares of Ashland common stock that will be issued to the Hercules shareholders in the merger approved for listing on the New York Stock Exchange, or NYSE. Ashland common stock currently trades on the NYSE under the symbol “ASH.”

How do I vote my shares if I am a participant in the Hercules Incorporated Savings and Investment Plan?

You will receive a separate package of information about how to provide voting instructions to the trustee of the Hercules Incorporated Savings and Investment Plan, which we refer to as the “SIP.” The SIP trustee will vote the Hercules shares that are allocable to your account under the SIP in accordance with your instructions unless the SIP trustee determines that it is legally obligated to do otherwise. If you do not provide the SIP trustee with instructions, the SIP trustee will vote your Hercules shares in proportion to the manner in which it votes the shares allocable to other SIP participants who provided instructions unless the SIP trustee determines that it is legally obligated to do otherwise.

 

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Who can help answer my questions?

If you have any questions about the special meeting or if you need additional copies of this proxy statement/prospectus or the enclosed proxy card, please contact Hercules’ proxy solicitor:

MacKenzie Partners, Inc.

105 Madison Avenue

New York, New York 10016

(212) 929-5500 (call collect)

or

(800) 322-2885 (toll-free)

proxy@mackenziepartners.com (e-mail address)

 

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SUMMARY

This summary highlights selected information from this proxy statement/prospectus. It does not contain all of the information that may be important to you. You should read carefully this entire document and its annexes and all other documents to which this proxy statement/prospectus refers before you decide how to vote your shares of common stock. To obtain more information, see “Where You Can Find More Information” on page 112. In this proxy statement/prospectus, the term “Hercules” refers to Hercules Incorporated, a Delaware corporation, and its subsidiaries, and the term “Ashland” refers to Ashland Inc., a Kentucky corporation, and its subsidiaries except for Ashland Sub One, Inc., which is referred to as “Merger Sub,” unless otherwise stated or indicated by the context. Page references are included in this summary to direct you to a more complete description of topics discussed in this proxy statement/prospectus.

The Merger (Page 29)

On July 10, 2008, Ashland, Hercules and Merger Sub, a wholly owned subsidiary of Ashland formed solely for the purpose of effecting this merger, entered into the merger agreement, which is the legal document governing the proposed merger. Subject to the terms and conditions of the merger agreement, Merger Sub will be merged with and into Hercules, with Hercules continuing as the surviving corporation. Upon the completion of the merger, Hercules will be a wholly owned subsidiary of Ashland and Hercules common stock will no longer be publicly traded.

The merger agreement is attached to this proxy statement/prospectus as Annex A and is incorporated in this proxy statement/prospectus by reference. You are encouraged to read the merger agreement carefully.

What Hercules shareholders will receive in the merger (Page 63)

Holders of Hercules Common Stock

If you are a Hercules shareholder, other than a shareholder who has validly demanded and perfected appraisal rights under Delaware law, each share of your Hercules common stock outstanding at the effective time of the merger will be exchanged for (i) 0.0930 (which we refer to as the “exchange ratio”) of a share of Ashland common stock (which we refer to as the “stock consideration”) and (ii) $18.60 in cash, without interest (which we refer to as the “cash consideration”). We refer to the stock and cash consideration to be paid to the Hercules shareholders by Ashland as the “merger consideration.” Holders of Hercules common stock will receive cash in lieu of any fractional shares of Ashland common stock they otherwise would receive pursuant to the exchange ratio. The exchange ratio relating to the shares of Ashland common stock to be issued in the merger is a fixed ratio, which means that it will not change because of any fluctuation in the trading price of Ashland common stock prior to the time the merger is completed. Therefore, the market value of the Ashland common stock received by Hercules shareholders in the merger will depend on the market price of Ashland common stock at the time the merger is completed.

Holders of Hercules Stock Options

Each holder of Hercules stock options (whether vested or unvested) that are outstanding as of the closing of the merger (other than certain executive officers who have elected to receive cash for their Hercules stock options, subject to limited exceptions), will be given a choice of receiving (i) converted stock options to purchase Ashland common stock, subject to pro rata reduction if the conversion election is oversubscribed, or (ii) a cash payment in exchange for cancellation of each outstanding Hercules stock option (less applicable tax withholdings). The conversion into options to purchase Ashland common stock pursuant to (i) above or the amount of the cash payment to be received pursuant to (ii) above will be calculated as described in “The Merger Agreement— Treatment of Stock Options” beginning on page 64. Any option holders that do not make an

 

 

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election will have their options converted into options to purchase Ashland common stock, subject to pro rata reduction if the conversion election is oversubscribed.

Holders of Restricted Stock

Each award of restricted Hercules common stock will vest in full immediately prior to the closing of the merger and will be converted into the right to receive the merger consideration.

Holders of Restricted Stock Units

Upon completion of the merger, each restricted stock unit, which we refer to as an “RSU,” with respect to shares of Hercules common stock that is outstanding immediately prior to the completion of the merger will be converted into a vested right to receive cash with a value equal to the product of (i) the cash out amount (as described in “The Merger—Interests of Hercules Directors and Executive Officers in the Merger—Stock Options, Restricted Stock and Restricted Stock Units Held by Directors and Executive Officers” beginning on page 48) and (ii) the number of shares of Hercules common stock underlying the RSUs.

Holders of Hercules Convertible Debentures

Hercules convertible debentures outstanding at the effective time of the merger will become convertible into the right to receive the merger consideration of Ashland common stock and cash, in accordance with the Indenture between Hercules and Bankers Trust Company, as trustee, dated as of August 15, 1985 governing Hercules’ 8% Convertible Subordinated Debentures due 2010.

Holders of Hercules Warrants

Hercules warrants outstanding at the effective time of the merger will be converted into the right to receive, upon the exercise of such warrants, the merger consideration of Ashland common stock and cash, in accordance with the terms of the Warrant Agreement, dated as of July 27, 1999, between Hercules and The Chase Manhattan Bank, as warrant agent, governing the Hercules warrants.

Special meeting of Hercules shareholders (Page 26)

When and Where. The special meeting will be held on [], 2008, at [][].m., local time, at Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001. Directions to Hercules Plaza are available at http://www.herc.com.

Purposes of the Special Meeting. At the special meeting, you will be asked to consider and vote upon a proposal to adopt the merger agreement. You also will be asked to consider and vote upon any procedural matters incident to the conduct of the special meeting, such as adjournment of the special meeting, including an adjournment for the purposes of soliciting additional proxies.

Record Date; Voting Power. Holders of Hercules common stock as of the close of business on [], 2008, the record date, are entitled to vote at the special meeting or any adjournment thereof. Each share of Hercules common stock is entitled to one vote. As of the record date, [] shares of Hercules common stock were outstanding.

Vote Required. The affirmative vote of Hercules shareholders holding two-thirds of the shares of Hercules common stock outstanding as of the record date is required to adopt the merger agreement. Acting upon any procedural matters incident to the conduct of the special meeting, including adjournment, will require the affirmative vote of a majority of all votes cast with respect to such matter by the holders of shares of Hercules common stock present in person or represented by proxy.

 

 

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Recommendation of the Hercules board of directors (Page 36)

On July 10, 2008, the Hercules board of directors, by a unanimous vote of all present:

 

   

determined the merger agreement to be advisable for, and fair to, and in the best interests of, Hercules and its shareholders;

 

   

approved the merger agreement; and

 

   

resolved to recommend that Hercules shareholders vote in favor of adoption of the merger agreement.

Two directors, Burton M. Joyce and Joe B. Wyatt, were not present at the July 10, 2008 Hercules board of directors meeting. Messrs. Joyce and Wyatt participated in other board meetings at which the transaction was discussed and subsequently affirmed their support of the merger agreement and the transactions contemplated by the merger agreement. The Hercules board of directors unanimously recommends a vote “FOR” adoption of the merger agreement.

Opinion of Credit Suisse Securities (USA) LLC (Page 39)

Credit Suisse Securities (USA) LLC, which we refer to as “Credit Suisse,” delivered its written opinion to the Hercules board of directors to the effect that, as of July 10, 2008 and based upon and subject to the assumptions and qualifications set forth in the opinion, the per share consideration (consisting of $18.60 in cash and 0.0930 of a share of Ashland common stock) to be received by the holders of Hercules common stock in the merger was fair from a financial point of view to such shareholders.

The full text of the written opinion of Credit Suisse, dated July 10, 2008, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex C to this proxy statement/prospectus and is incorporated herein by reference. Credit Suisse provided its opinion for the information of the Hercules board of directors in connection with the consideration of the merger and does not address any other aspect or implication of the merger. The Credit Suisse opinion does not constitute advice or a recommendation to any holder of Hercules common stock as to how such holder should vote or act on any matter relating to the proposed merger or otherwise.

Interests of Hercules directors and executive officers in the merger (Page 47)

When considering the recommendation by the Hercules board of directors to vote “FOR” adoption of the merger agreement, you should be aware that certain directors and executive officers of Hercules have interests in the merger that are different from, or in addition to, your interests as shareholders of Hercules. At the close of business on the record date, directors and executive officers of Hercules and their affiliates beneficially owned and were entitled to vote approximately [] shares of Hercules common stock, collectively representing []% of the shares of Hercules common stock outstanding on the record date. Other such interests and arrangements include:

 

   

continued employment by Ashland of both Mr. Paul C. Raymond III, President of the Paper, Technologies and Ventures Group of Hercules, and Mr. John E. Panichella, President of the Aqualon Division of Hercules, following the merger, pursuant to three-year employment agreements with Ashland dated July 9, 2008 and July 8, 2008, respectively, the effectiveness of which is in each case contingent upon the closing of the merger;

 

   

anticipated continued employment of certain other Hercules officers by Ashland, although the specific individuals are still being determined;

 

   

receipt by directors and executive officers of Hercules of certain benefits upon completion of the merger, including accelerated vesting of stock options, restricted stock and restricted stock units;

 

 

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change of control and severance agreements with Hercules’ current executive officers that provide for payment of incentive compensation accrued as of the change of control date, as well as severance benefits in the event of certain qualifying terminations of employment in connection with or following the merger and pension benefits for certain executive officers; and

 

   

continued indemnification and insurance coverage as required under the merger agreement.

Certain governmental and regulatory approvals must be obtained (Page 52)

Under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the rules and regulations promulgated thereunder, which we refer to as the HSR Act, the merger may not be consummated unless certain waiting period requirements have expired or been terminated. Ashland and Hercules filed the required notification and report forms pursuant to the HSR Act regarding the merger on July 24, 2008, and early termination of the statutory waiting period under the HSR Act was granted on August 8, 2008. In addition, an application with the EU Commission, which must issue a decision under the EC Merger Regulation, No.139/2004 of January 2004, declaring the merger compatible with the common market, will be filed in the near future, and all other necessary foreign antitrust filings have been or will be made by the parties.

The parties also must receive all waivers, consents, licenses, permits, authorizations, orders and approvals from, and make all registrations, filings, notices and notifications pursuant to, all other antitrust laws applicable to the merger, except for any such waivers, consents, licenses, permits, authorizations, orders, approvals, registrations, filings, notices, and notifications that the failure of which to obtain or make would not materially affect the business of Ashland or Hercules in an adverse way.

The obligations of Ashland and Hercules to complete the merger are subject to a number of conditions (Page 76)

Ashland and Hercules are obligated to complete the merger only after the satisfaction or waiver of several conditions, including the following:

 

   

the merger agreement shall have been adopted by holders of two-thirds of the shares of Hercules common stock outstanding and entitled to vote at the Hercules special meeting;

 

   

the shares of Ashland common stock to be issued to Hercules shareholders pursuant to and in accordance with the merger agreement shall have been approved for listing on the NYSE, subject to official notice of issuance;

 

   

the waiting period (and any extension thereof) applicable to the merger under the HSR Act shall have expired or been terminated and the European Commission shall have issued a decision under the EC Merger Regulation declaring the merger compatible with the common market;

 

   

all waivers, consents, licenses, permits, authorizations, orders and approvals from, and all registrations, filings, notices and notifications with, governmental entities under all other U.S. antitrust laws or any foreign antitrust law applicable to the merger have been obtained or made, except for such waivers, consents, licenses, permits, authorizations, orders and approvals, the failure of which to obtain, and such registrations, filings, notices and notifications, the failure of which to make, would not materially affect the business of Ashland or Hercules in an adverse way;

 

   

the absence of any effective temporary restraining order, preliminary or permanent injunction, judgment or comparable judicial action that prohibits the completion of the merger;

 

   

the accuracy and correctness of representations and warranties of the other party contained in the merger agreement, subject to certain qualifications described in the merger agreement;

 

 

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the registration statement on Form S-4, of which this proxy statement/prospectus forms a part, shall have been declared effective by the Securities and Exchange Commission, which we refer to as the “SEC,” and shall not be the subject of any stop order or proceedings seeking a stop order; and

 

   

the other party shall have performed in all material respects its obligations required under the merger agreement and provided a certification both to this effect and that the representations and warranties are true and correct subject to the materiality standards contained in the merger agreement.

In addition, Ashland is obligated to complete the merger only if Hercules has not experienced any event that, individually or in the aggregate, is having or would reasonably be expected to have a material adverse effect on Hercules. Unless otherwise qualified, the term “material adverse effect” shall have the meaning assigned to that term in the merger agreement.

In addition, Hercules is obligated to complete the merger only if Ashland has deposited with the exchange agent, at or prior to closing, certificates representing the shares of Ashland common stock and cash in an amount to pay the merger consideration.

Each of Ashland, Merger Sub and Hercules may waive the conditions to the performance of its obligations under the merger agreement and complete the merger even though one or more of these conditions has not been met. Neither Ashland nor Hercules can give any assurance that all of the conditions to the merger will be either satisfied or waived or that the merger will occur.

Financing Commitments (Page 59)

Ashland has entered into a commitment letter, which is referred to as the “financing commitment letter,” with Banc of America Securities LLC, Banc of America Bridge LLC, and Bank of America, N.A., which we refer to collectively as “Bank of America,” and The Bank of Nova Scotia, which we refer to as “Scotiabank.” Subject to the terms and conditions of the financing commitment letter, Bank of America and Scotiabank have committed to a $1.950 billion senior secured credit facility, which includes a $500.0 million revolving credit facility, and a $750.0 million senior unsecured bridge loan facility. The loans contemplated by the financing commitment letter will refinance Ashland’s existing senior credit facilities, refinance certain amounts outstanding under the credit facilities of Hercules and fund the merger and fees and expenses related thereto and to the financing. Only $12.0 million (plus additional amounts used to fund upfront fees and original issue discount) of the $500.0 million revolving credit facility may be used to consummate the merger on the closing date. The financing commitment letter also includes customary conditions to funding, including, without limitation, satisfaction of the conditions to closing of the merger as set forth in the merger agreement, the absence of any material adverse effect on Hercules or its subsidiaries, taken as a whole, the obtaining of credit ratings of the debt contemplated by the financing commitment letter, the accuracy of certain representations and warranties of the parties, negotiation and execution of customary legal documentation, and repayment of certain of Hercules’ and Ashland’s existing credit facilities (except for the indebtedness to remain outstanding as provided in the financing commitment letter).

Hercules has agreed not to solicit third-party acquisition proposals (Page 71)

Subject to certain exceptions, the merger agreement provides that none of Hercules, any of its subsidiaries, any of its and their respective directors or officers, nor any advisor shall, directly or indirectly, solicit, initiate or encourage, facilitate, or participate in any discussions regarding any takeover proposal as described in the merger agreement.

 

 

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Under certain circumstances, Ashland and Hercules may terminate the merger agreement (Page 77)

Ashland and Hercules may mutually agree in writing, by action of their respective boards of directors, to terminate the merger agreement at any time without completing the merger, even after the Hercules shareholders have voted to adopt the merger agreement. The merger agreement may also be terminated at any time prior to the effective time of the merger in other specified circumstances, including:

 

   

by either Ashland or Hercules if:

 

   

the merger has not been completed on or before March 31, 2009, unless the failure to so consummate the merger by that date results from a willful breach or failure to perform a covenant under the merger agreement by the party seeking to terminate the merger agreement;

 

   

any governmental entity prohibits the merger, or a temporary restraining order, or preliminary or permanent injunction or other order enjoins or prohibits the merger, and such order becomes final and non-appealable;

 

   

the Hercules shareholders fail to adopt the merger agreement at the special meeting or any postponement or adjournment of the special meeting; or

 

   

the other party breaches or fails to perform in any material respect certain representations, warranties, covenants or agreements in the merger agreement which breach or failure to perform would give rise to the failure of a closing condition and cannot be cured by the breaching party within 30 calendar days after the giving of written notice by the other party; or

 

   

by Ashland if, prior to the adoption of the merger agreement by Hercules shareholders, the Hercules board of directors recommends, adopts or approves a third-party takeover proposal or has withdrawn, modified or qualified in a manner adverse to Ashland its recommendation of the merger and failed to publicly reaffirm its recommendation of the merger agreement within 10 calendar days following the written request to do so by Ashland.

 

   

by Hercules if:

 

   

all conditions to closing are satisfied or waived (or would be satisfied as of an immediate closing of the merger), notice of such has been provided to Ashland, and Ashland cannot proceed to close the transaction, including the payment of the cash consideration, within five business days or such other number of days as set forth in the merger agreement;

 

   

Ashland breaches or fails to perform in any material respect certain of its representations and warranties or its covenants regarding financing and the breach or failure to perform would give rise to the failure of a closing condition and cannot be cured by Ashland within 30 calendar days after the giving of written notice by Hercules;

 

   

after Hercules’ shareholder approval is obtained, Ashland cannot deliver a certificate stating that Ashland has not experienced an event that constitutes a material adverse effect;

 

   

after Hercules’ shareholder approval, both the average Ashland closing stock price declines by more than 20% for any five-trading-day period compared to the Ashland closing stock price on the day prior to the Hercules shareholder meeting and the average Ashland closing stock price during the same five-trading-day period also declines by 20% or more than Standard & Poor’s 500 Index; or

 

   

prior to receiving Hercules’ shareholder approval, Hercules receives an unsolicited bona fide written acquisition proposal for an alternative business combination transaction that the Hercules board of directors considers a superior proposal, and the Hercules board of directors approves such superior proposal and concurrently authorizes Hercules to enter into a definitive agreement regarding such an alternative transaction.

 

 

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Termination Fees (Page 78)

In connection with the termination of the merger agreement in certain circumstances involving a competitive takeover proposal by a third party or a change in the Hercules board of director’s recommendation of the merger to Hercules’ shareholders, Hercules will be required to pay Ashland a termination fee of $77.5 million. In connection with the termination of the merger agreement due to Ashland’s inability to obtain the necessary financing for the transaction or a breach of Ashland’s covenants related to financing, Ashland will be obligated to pay a termination fee to Hercules in the amount of $77.5 million. Hercules agreed in the merger agreement that, if such termination fee is paid, in no event will Hercules seek to recover any other money damages or seek any other remedy (including specific performance) from Ashland, Merger Sub or their respective affiliates, or Bank of America or Scotiabank, with respect to the merger, regardless of whether such monetary damages or other remedies are based on a claim in law or equity, and all such claims were waived by Hercules in the merger agreement.

Shareholder Tax Consequences (Page 54)

The receipt of shares of Ashland common stock and cash in exchange for your shares of Hercules common stock pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. In general, you will recognize gain or loss equal to the difference, if any, between (i) the sum of the fair market value of the shares of Ashland common stock on the date of the merger and the cash received in the transaction and (ii) your adjusted tax basis in the shares of Hercules common stock that you exchange in the transaction. That gain or loss will be capital gain or loss (assuming you hold your Hercules common stock as a capital asset) and the capital gain or loss will be long term if, as of that time, you have held the Hercules common stock for more than one year.

Tax matters are complicated, and the tax consequences of the transaction to each Hercules shareholder will depend on the facts of each shareholder’s situation. You are encouraged to read carefully the discussion in the section entitled “The Merger—Material U.S. Federal Income Tax Consequences” beginning on page 54 and to consult your own tax advisors for a full understanding of the particular tax consequences of the transaction to you.

Differences between the rights of Ashland shareholders and Hercules shareholders (Page 81)

As a result of the merger, the holders of Hercules common stock will become holders of Ashland common stock. Following the merger, Hercules shareholders will have the same rights as holders of Ashland common stock; however, due to differences between the laws of the states of incorporation of Ashland and Hercules (which states are Kentucky and Delaware, respectively) and the different provisions of the governing documents of Ashland and Hercules, the rights of former Hercules shareholders as Ashland shareholders will be different from the rights they had as shareholders of Hercules.

Comparative market prices and dividend information (Page 25)

Shares of both Ashland and Hercules common stock are listed on the NYSE. The following table presents the last reported sale prices of Ashland common stock and Hercules common stock, as reported on the NYSE Composite Tape on:

 

   

July 10, 2008, the last full trading day prior to the public announcement of the merger agreement; and

 

   

[], 2008, the last full trading day prior to the date of this proxy statement/prospectus.

The table also presents the equivalent value of the merger consideration per share of Hercules common stock on those dates.

    

Ashland

Common Stock

  

Hercules

Common Stock

  

Equivalent Merger

Price Per Share of

Hercules

Common Stock(1)

July 10, 2008

   $47.41    $16.66    $23.01

[], 2008

   $    []    $    []    $    []

 

 

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(1) Calculated by adding (a) the cash portion of the merger consideration, or $18.60, and (b) the Ashland closing per share stock price multiplied by 0.0930.

The prices of Ashland and Hercules common stock will fluctuate prior to the closing date of the merger, and Hercules shareholders are encouraged to obtain current market quotations prior to making any decision with respect to the merger.

Ashland currently pays a quarterly dividend on its common stock and last paid dividends on June 15, 2008 of $0.275 per share. Ashland anticipates continuing to pay dividends on its common stock in the future and has announced that its next dividend of $0.275 per share will be payable on September 15, 2008 to shareholders of record at the close of business on August 20, 2008. The merger agreement contains certain restrictions on Ashland’s payment of dividends during the period before the closing of the merger, including that Ashland cannot pay any dividends except its current quarterly cash dividend, which is not to exceed $0.275 per share.

Hercules currently pays a quarterly dividend on its common stock, and last paid dividends on July 25, 2008 in the amount of $0.05 per share. The merger agreement contains certain restrictions on Hercules’ payment of dividends during the period before the closing of the merger, including that Hercules cannot pay any dividends except its current quarterly cash dividend, which is not to exceed $0.06 per share. After completion of the merger, former Hercules shareholders will receive whatever dividends are declared and paid on Ashland common stock.

Accounting Treatment (Page 53)

Ashland will account for the merger using the purchase method of accounting for business combinations under United States generally accepted accounting principles, which is referred to as “GAAP.”

Risk Factors (Page 15)

In evaluating the merger and merger agreement, you should carefully read this proxy statement/prospectus and especially consider the factors discussed in the section entitled “Risk Factors” on page 15, including the risk that Ashland may not realize all of the anticipated benefits of the merger.

Hercules shareholders will be entitled to demand appraisal rights if the merger is completed (Page 56)

Under Delaware law, Hercules shareholders of record who do not vote in favor of the merger will be entitled to seek appraisal rights and obtain payment in cash for the judicially determined fair value of their shares of Hercules common stock in connection with the merger, if the merger is completed. This value could be more than, less than or the same as the merger consideration for Hercules common stock. The relevant provisions of the General Corporation Law of the State of Delaware, which we refer to as the DGCL, are included as Annex B to this proxy statement/prospectus. We encourage you to read these provisions carefully and in their entirety. Moreover, due to the complexity of the procedures for exercising the right to seek appraisal, Hercules shareholders who are considering exercising such rights are encouraged to seek the advice of legal counsel. Failure to strictly comply with these provisions will result in a loss of the right of appraisal.

Merely not voting for the merger will not preserve the right of Hercules shareholders to appraisal of their shares of Hercules common stock under Delaware law. Also, because a submitted proxy not marked “against” or “abstain” will be voted “FOR” the proposal to adopt the merger agreement and “FOR” any necessary proposal to authorize the adjournment of the Hercules special meeting, the submission of a proxy not marked “against” or “abstain” will result in the waiver of appraisal rights. Hercules shareholders who wish to exercise their appraisal rights and hold shares in the name of a broker or other nominee must instruct their nominees to take the steps necessary to enable them to demand appraisal for their shares.

 

 

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Listing of Ashland Common Stock and Delisting and Deregistration of Hercules Common Stock (Page 58)

Application will be made to have the shares of Ashland common stock to be issued in the merger approved for listing on the NYSE, where Ashland common stock currently is traded under the symbol “ASH.” If the merger is completed, Hercules common stock will no longer be listed on the NYSE and will be deregistered under the Securities Exchange Act of 1934, as amended, which is referred to as the “Exchange Act,” and Hercules will no longer file periodic reports with the SEC.

Fees and Expenses (Page 53)

Generally, all fees and expenses incurred in connection with the merger agreement and the transactions contemplated by the merger agreement will be paid by the party incurring those expenses, subject to the specific exceptions discussed in this proxy statement/prospectus.

The Parties

Ashland Inc.

50 East RiverCenter Boulevard

P.O. Box 391

Covington, Kentucky 41012-0391

(859) 815-3333

Ashland’s businesses consist of four wholly owned segments: Ashland Performance Materials, Ashland Distribution, Valvoline and Ashland Water Technologies.

Ashland Performance Materials is a worldwide manufacturer and supplier of specialty chemicals and customized services to the building and construction, packaging and converting, transportation, marine and metal casting industries. It is a technology leader in metal casting consumables and design services, unsaturated polyester and vinyl ester resins and gelcoats, and high-performance adhesives and specialty resins.

Ashland Distribution distributes chemicals, plastics and resins in North America and plastics in Europe. Ashland Distribution also provides environmental services. Suppliers to Ashland Distribution include many of the world’s leading chemical, composite and plastics manufacturers. Ashland Distribution specializes in providing material transfer and packaging services and mixed truckloads and less-than-truckload quantities to customers in a wide range of industries.

Valvoline is a producer and marketer of premium packaged automotive lubricants, chemicals, appearance products, antifreeze and filters. In addition, Valvoline is engaged in the “fast oil change” business through outlets operating under the Valvoline Instant Oil Change® name.

Ashland Water Technologies is a supplier of chemical and non-chemical water treatment solutions for industrial, municipal and commercial facilities. It provides industrial, commercial and institutional water treatments, wastewater treatment and paint and coating additives. In addition, it also provides boiler and cooling water treatments; fuel treatments; welding, refrigerant and sealing products; and fire fighting, safety and rescue products and services for the merchant marine industry.

 

 

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Ashland Sub One, Inc.

50 East RiverCenter Boulevard

P.O. Box 391

Covington, Kentucky 41012-0391

(859) 815-3333

Ashland Sub One, Inc., which we refer to as “Merger Sub,” is a Delaware corporation and a wholly owned subsidiary of Ashland. Merger Sub was organized on June 25, 2008 solely for the purpose of effecting the merger with Hercules. It has not carried on any activities other than in connection with the merger agreement.

Hercules Incorporated

Hercules Plaza

1313 North Market Street

Wilmington, Delaware 19894

(302) 594-5000

Hercules is a leading manufacturer and marketer of specialty chemicals and related services for a broad range of business, consumer and industrial applications. Hercules’ principal products are functional and process chemicals used by the paper industry to increase paper and paperboard performance and enhance the manufacturing process, water-soluble polymers, and specialty resins. These products impart such qualities as durability, water-resistance and improved aesthetics for everyday consumer goods in a variety of end-use applications. The primary markets Hercules serves include pulp and paper, paints and adhesives, construction materials, food, pharmaceutical and personal care, and industrial specialties, including oilfield and general industrial.

While Hercules’ products comprise a relatively minor component of its end customers’ total product cost, they frequently possess characteristics important to the functionality and aesthetics of the finished product or the efficient operation of the manufacturing process. Examples of Hercules’ products in consumer end-uses include strength additives for tissue and toweling, sizing agents for milk and juice cartons, thickeners in products such as toothpaste, shampoos and water-based paints, and water control additives for building products such as tile cements, grouts, stuccos, plasters and joint compounds. Hercules also offers products and related services that improve and reduce the cost of the paper manufacturing processes, including water management programs that are designed to protect and maintain equipment and reduce operating costs. Other product offerings include process aids for oil well drilling and similar applications.

 

 

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RISK FACTORS

In addition to the other information included or incorporated by reference in this proxy statement/prospectus, you should carefully consider the matters described below in evaluating whether to adopt the merger agreement.

Risks Relating to the Merger

Ashland may not realize all of the anticipated benefits of the transaction.

The combined company’s ability to realize the anticipated benefits of the merger will depend, in part, on the ability of Ashland to integrate the businesses of Hercules successfully and efficiently with Ashland. The combination of two independent companies is a complex, costly and time-consuming process. As a result, the combined company will be required to devote significant management attention and resources to integrating the diverse business practices and operations of Ashland and Hercules. The integration process may disrupt the business of either or both of the companies and, if implemented ineffectively, preclude realization of the full benefits expected by Ashland and Hercules. The failure of the combined company to meet the challenges involved in integrating the operations of Ashland and Hercules or otherwise to realize any of the anticipated benefits of the transaction could cause an interruption of, or a loss of momentum in, the activities of the combined company and could seriously harm its results of operations. In addition, the overall integration of the two companies may result in unanticipated problems, expenses, liabilities, competitive responses, loss of customer and other relationships, and diversion of management’s attention, and may cause Ashland’s stock price to decline. The difficulties of combining the operations of the companies include, among others:

 

   

coordinating marketing functions;

 

   

unanticipated issues in integrating information, communications and other systems;

 

   

unanticipated incompatibility of logistics, marketing and administration methods;

 

   

maintaining employee morale and retaining key employees;

 

   

integrating the business cultures of both companies;

 

   

preserving important strategic and customer relationships;

 

   

consolidating corporate and administrative infrastructures and eliminating duplicative operations;

 

   

the diversion of management’s attention from other ongoing business concerns; and

 

   

coordinating geographically separate organizations.

In addition, even if the operations of Ashland and Hercules are integrated successfully, the combined company may not realize the full benefits of the transaction, including the synergies, cost savings, or sales or growth opportunities that are expected. Such benefits may not be achieved within the anticipated time frame, or at all. Further, because the businesses of Ashland and Hercules differ, the results of operations of the combined company and the market price of Ashland common stock may be affected after the transaction by factors different from those affecting the shares of Ashland and Hercules currently, and may suffer as a result of the transaction. As a result, Ashland and Hercules cannot assure you that the combination of Hercules with Ashland will result in the realization of the full benefits anticipated from the transaction.

Because the market price of Ashland common stock will fluctuate, you cannot be sure of the market value of the shares of Ashland common stock that you will receive.

The number of shares of Ashland common stock to be received by holders of Hercules common stock in the merger as part of the merger consideration is fixed at 0.0930 of a share of Ashland common stock for each share of Hercules common stock. That number will not be adjusted in the event of any increase or decrease in the price

 

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of either Ashland common stock or Hercules common stock. The price of Ashland common stock may vary at the effective time of the merger from its price at the date of this proxy statement/prospectus and at the date of the special meeting of Hercules shareholders. That variation may be the result of changes in the business, operations or prospects of Ashland or Hercules, market assessments of the likelihood that the merger will be completed and the timing of the merger, regulatory considerations, general market and economic conditions and other factors. In addition to the approval of Hercules shareholders, completion of the merger is subject to the issuance by the European Commission of a decision under the EC Merger Regulation declaring the merger compatible with the common market, and the satisfaction of other conditions that may not occur until some time after the special meeting. Therefore, at the time of the special meeting, you will not know the precise dollar value of the merger consideration you will be entitled to receive upon completion of the merger. Hercules shareholders are encouraged to obtain current market quotations for Ashland common stock and Hercules common stock.

Obtaining required approvals and satisfying closing conditions may delay or prevent completion of the merger.

Completion of the merger is conditioned upon the receipt of certain governmental authorizations, consents, orders and approvals, including the issuance by the European Commission of a decision under the EC Merger Regulation declaring the merger compatible with the common market. These consents, orders and approvals may impose conditions on, or require divestitures relating to, the divisions, operations or assets of Ashland or Hercules. These conditions or divestitures may jeopardize or delay completion of the merger or may reduce the anticipated benefits of the merger. Further, no assurance can be given that the required consents and approvals will be obtained or that the required conditions to closing will be satisfied, and, if all required consents and approvals are obtained and the conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the consents and approvals.

If Ashland is unable to finance the merger, the merger will not be completed.

Ashland intends to finance the merger with debt financing, existing cash balances, Ashland stock and cash flow from operations. To this end, and to provide for ongoing working capital for general corporate purposes after the merger, Ashland has received commitments from lenders to provide an aggregate of up to $2.7 billion in financing for the transaction. Although Ashland has entered into the financing commitment letter with Bank of America and Scotiabank, the financing commitment letter includes customary conditions to funding, including, without limitation, satisfaction of the conditions to closing of the merger as set forth in the merger agreement, the absence of any material adverse effect on Hercules or its subsidiaries, taken as a whole, the obtaining of credit ratings, the accuracy of certain representations and warranties of the parties, negotiation of customary legal documentation, and repayment of certain of Hercules’ and Ashland’s existing credit facilities. In the event that the financing described in the financing commitment letter is not available on the terms set forth in the financing commitment letter, other financing may not be available on acceptable terms, in a timely manner or at all. If other financing becomes necessary and Ashland is unable to secure such additional financing, the merger will not be completed. In the event of a termination of the merger agreement due to Ashland’s inability to obtain the necessary financing for the transaction or a breach of Ashland’s covenants related to financing, Ashland will be obligated to pay a termination fee to Hercules in the amount of $77.5 million. Hercules agreed in the merger agreement that, if such termination fee is paid, in no event will Hercules seek to recover any other money damages or seek any other remedy (including specific performance) from Ashland, Merger Sub or their respective affiliates, or Bank of America or Scotiabank, with respect to the merger, regardless of whether such monetary damages or other remedies are based on a claim in law or equity, and all such claims were waived by Hercules in the merger agreement.

 

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The combined company will depend on its senior management team and other key employees and the loss of any of these employees could adversely affect the combined company’s business.

The success of the combined company after the transaction will depend in part upon the ability of the combined company to retain senior management and other key employees. Competition for qualified personnel can be intense. In addition, senior management and key employees may depart because of issues relating to the uncertainty or difficulty associated with the integration of the companies or a desire not to remain with the combined company. Accordingly, no assurance can be given that Ashland or Hercules will be able to retain senior management and key employees to the same extent that they have been able to do so in the past.

Resales of shares of Ashland common stock following the transaction may cause the market price of shares of Ashland common stock to decline.

As of June 30, 2008, Ashland had approximately 63.0 million shares of common stock outstanding, and approximately 1.7 million shares issuable upon the exercise of outstanding stock options and equity-based awards. Ashland has registered approximately 10.7 million shares of common stock in connection with the transaction. The issuance of these new shares and additional shares that may become issuable from time to time upon the exercise of options (including converted Hercules options, for those Hercules option holders who elect not to receive cash) could negatively affect the market price for shares of Ashland common stock. Also, shareholders of Hercules stock may decide to sell rather than hold the additional shares of Ashland common stock they would receive in the transaction. The sale of those shares also could negatively affect the market price for shares of Ashland common stock.

The market price for Ashland common stock may be affected by factors different from those affecting Hercules common stock.

Upon completion of the merger, holders of Hercules common stock will become holders of Ashland common stock. Ashland’s businesses differ from those of Hercules, and accordingly the results of operations of the combined company will be affected by factors different from those currently affecting the results of operations of Hercules. For a discussion of the businesses of Ashland and Hercules and of certain factors to consider in connection with those businesses, see the documents incorporated by reference in this proxy statement/prospectus and referred to under “Incorporation by Reference” beginning on page 113.

Some directors and executive officers of Hercules have interests in the merger that may differ from the interests of Hercules shareholders.

When considering the recommendation by the Hercules board of directors to vote “FOR” adoption of the merger agreement, you should be aware that certain directors and executive officers of Hercules have interests in the merger agreement that are different from, or in addition to, your interests as shareholders of Hercules. These interests are described in more detail in the section of this proxy statement/prospectus titled “Interests of Hercules Directors and Executive Officers in the Merger” beginning on page 47.

The shares of Ashland common stock to be received by Hercules shareholders as a result of the merger will have different rights from the shares of Hercules common stock.

Following completion of the merger, Hercules shareholders will no longer be shareholders of Hercules, a Delaware corporation, but will instead be shareholders of Ashland, a Kentucky corporation. There will be important differences between your current rights as a Hercules shareholder and the rights to which you will be entitled as a shareholder of Ashland. See “Comparative Rights of Ashland and Hercules Shareholders” beginning on page 81 for a discussion of the different rights associated with Ashland common stock.

 

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The pro forma financial statements are presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations following the completion of the merger.

The pro forma financial statements contained in this proxy statement/prospectus are presented for illustrative purposes only and may not be an indication of the combined company’s financial condition or results of operations following the merger for several reasons. The pro forma financial statements have been derived from the historical financial statements of Ashland and Hercules and adjustments and assumptions have been made regarding the combined company after giving effect to the transaction. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with accuracy.

The assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect the combined company’s financial condition or results of operations following the transaction. Any decline or potential decline in the combined company’s financial condition or results of operations may cause significant variations in the stock price of the combined company. See “Unaudited Pro Forma Combined Condensed Financial Statements” beginning on page 99.

Some of the conditions to the merger may be waived by Ashland or Hercules without resoliciting shareholder approval of the merger agreement.

Some of the conditions set forth in the merger agreement may be waived by Ashland or Hercules, subject to the agreement of the other party in specific cases. See “The Merger Agreement—Conditions to the Merger” on page 76. If any conditions are waived, Ashland and Hercules will evaluate whether amendment of this proxy statement/prospectus and resolicitation of proxies is warranted.

Provisions of the merger agreement may deter alternative business combinations and could negatively impact the stock prices of Ashland and Hercules if the merger agreement is terminated in certain circumstances.

The merger agreement precludes Hercules from, directly or indirectly, soliciting, initiating, or knowingly encouraging the submission of any takeover proposal or participating in any discussions or negotiations regarding, or furnishing to any person any information in connection with, or otherwise cooperating in any way that could reasonably lead to, any takeover proposal. In connection with the termination of the merger agreement in certain circumstances involving a competitive takeover proposal by a third party or a change in Hercules’ board of directors’ recommendation of the merger to Hercules’ shareholders, Hercules will be required to pay Ashland a termination fee of $77.5 million. These restrictions could discourage a potential third-party acquirer from considering or proposing a transaction, or could reduce the price that a potential third-party acquirer would be willing to pay, because of the added cost of the termination fee. In the event the merger is terminated by Ashland or Hercules in circumstances that obligate either party to pay the termination fee to the other party, including where Ashland terminates the merger agreement because Hercules’ board of directors withdraws its support of the merger, the trading price of Ashland’s and/or Hercules’ stock may decline.

Failure to complete the merger with Ashland could materially and adversely affect Hercules.

The merger is conditioned upon, among other things, the approval of Hercules’ shareholders, the receipt of regulatory approvals and other customary closing conditions. There can be no assurance that these conditions will be met or waived, that the necessary approvals will be obtained, or that Hercules will be able to consummate the merger as currently contemplated under the merger agreement or at all. If the merger is not completed, Hercules will not realize the potential benefits of the merger, including any synergies that could result from combining Hercules with Ashland and, under certain circumstances, Hercules may have to pay a termination fee to Ashland in the amount of $77.5 million.

 

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Ashland and Hercules will be required to expend significant resources in order to satisfy the conditions to closing.

Ashland and Hercules will incur significant transaction costs, including legal, accounting, financial advisory and other costs relating to the merger. In addition, the attention of Ashland’s and Hercules’ management and employees may be diverted from day-to-day operations.

The pending merger may disrupt Hercules’ normal business operations and the merger agreement imposes certain restrictions on the activities of Hercules until the closing.

Hercules’ customers, suppliers or distributors may seek to modify or terminate existing agreements, and prospective customers may delay entering into new agreements or purchasing Hercules’ products as a result of the announcement of the merger. Hercules’ ability to attract new employees and retain its existing employees may be harmed by uncertainties associated with the merger. In addition, the merger agreement limits certain activities of Hercules that are considered as other than in the ordinary course of business, including the declaration of common stock dividends inconsistent with Hercules’ past practice, the issuance and repurchase of shares of common stock, changes to Hercules’ charter and bylaws, capital expenditures, acquisitions and investments, the ability to incur additional indebtedness and the settlement of certain claims, among others.

Ashland will take on substantial additional indebtedness to finance the merger, which will decrease Ashland’s business flexibility and increase its borrowing costs.

Upon completion of the merger, Ashland will increase its indebtedness by approximately $2.5 billion, and will have indebtedness that will be substantially greater than its indebtedness prior to the merger. The covenants in such indebtedness and the increased indebtedness and higher debt-to-equity ratio of Ashland in comparison to that of Ashland on a recent historical basis will have the effect, among other things, of reducing the flexibility of Ashland to respond to changing business and economic conditions and increasing borrowing costs. For more information on the financial impact of Ashland’s increased indebtedness (see “Financial Summary—Selected Unaudited Pro Forma Combined Condensed Financial Information of Ashland” on page 23).

Risks Relating to Ashland and Hercules

Ashland and Hercules are, and will continue to be, subject to the risks described in (i) Part I, Item 1A in Ashland’s annual report on Form 10-K for the year ended September 30, 2007, (ii) Part I, Item 1A in Hercules’ annual report on Form 10-K for the year ended December 31, 2007, (iii) Part II, Item 1A of Ashland’s quarterly reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008, and (iv) Part II, Item 1A of Hercules’ quarterly report on Form 10-Q for the quarter ended June 30, 2008, in each case as filed with the SEC and incorporated by reference into this proxy statement/prospectus. See “Incorporation by Reference” beginning on page 113 for the location of information incorporated by reference into this proxy statement/prospectus.

 

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FORWARD-LOOKING STATEMENTS

Some of the statements contained or incorporated by reference in this proxy statement/prospectus, including those relating to Ashland’s and Hercules’ strategies and other statements that are predictive in nature, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements include the information concerning possible or assumed future results of operations of Ashland and Hercules as set forth elsewhere in this proxy statement/prospectus or in the documents incorporated by reference. These statements are not historical facts, but instead represent only Ashland’s and Hercules’ expectations, estimates and projections regarding future events. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, which may include the risk factors set forth above and other market, business, legal and operational uncertainties discussed elsewhere in this proxy statement/prospectus and the documents that are incorporated by reference. Those uncertainties include, but are not limited to:

 

   

the risks that the businesses of Ashland and Hercules will not be successfully integrated;

 

   

the ability to obtain requisite governmental approvals for the merger on the proposed terms and schedule;

 

   

the ability of Ashland to receive financing to fund the merger consideration;

 

   

the failure of the Hercules shareholders to adopt the merger agreement; and

 

   

disruption from the merger, including lost business opportunities and difficulty maintaining relationships with employees, customers and suppliers.

Ashland’s and Hercules’ actual results and financial conditions may differ, perhaps materially, from the anticipated results and financial conditions in any forward-looking statements, and readers are cautioned not to place undue reliance on such statements.

For more information concerning factors that could affect Ashland’s and Hercules’ future results and financial conditions, see “Management’s Discussion and Analysis” and “Risk Factors” in each of (i) Ashland’s annual report on Form 10-K for the year ended September 30, 2007, (ii) Hercules’ annual report on Form 10-K for the year ended December 31, 2007, (iii) Ashland’s and Hercules’ interim quarterly reports on Form 10-Q, and (iv) Hercules’ current report on Form 8-K dated July 30, 2008, which are in each case incorporated by reference. Ashland and Hercules undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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SELECTED HISTORICAL FINANCIAL AND OTHER DATA OF ASHLAND

The following table sets forth selected historical consolidated financial information and other data of Ashland for the periods presented. The selected financial information, as of and for each of the years in the five fiscal-year period ended September 30, 2007, has been derived from Ashland’s consolidated financial statements. The selected financial data as of, and for the nine months ended, June 30, 2007 and 2008, has been derived from Ashland’s unaudited condensed consolidated financial statements which include, in the opinion of Ashland’s management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results of operations and financial position of Ashland for the periods and dates presented. The results of operations for any interim period are not necessarily indicative of results for the full year or any other interim period. This financial information and other data should be read in conjunction with the respective audited and unaudited consolidated financial statements of Ashland, including the notes thereto, incorporated in this proxy statement/prospectus by reference. See “Incorporation by Reference” beginning on page 113.

 

     Year Ended September 30,     Nine Months
Ended June 30,
 

(In millions except per share data)

   2007     2006     2005     2004     2003     2008     2007  

Summary of operations

              

Sales and operating revenues

   $ 7,785     $ 7,233     $ 6,731     $ 5,776     $ 5,165     $ 6,166     $ 5,700  

Costs and expenses

              

Cost of sales and operating expenses

     6,447       6,030       5,545       4,721       4,189       5,158       4,707  

Selling, general and administrative expenses

     1,171       1,077       1,079       968       1,031       856       834  
                                                        
     7,618       7,107       6,624       5,689       5,220       6,014       5,541  

Equity and other income(1)

     49       44       564       438       338       33       31  
                                                        

Operating income

     216       170       671       525       283       185       190  

(Loss) gain on the MAP Transaction(2)

     (3 )     (5 )     1,284       —         —         23       (3 )

Loss on early retirement of debt

     —         —         (145 )     —         —         —         —    

Net interest and other financing income (costs)

     46       47       (82 )     (114 )     (128 )     26       34  
                                                        

Income for continuing operations before income taxes

     259       212       1,728       411       155       234       221  

Income tax (expense) benefit

     (58 )     (29 )     230       (100 )     (52 )     (58 )     (52 )
                                                        

Income from continuing operations

   $ 201     $ 183     $ 1,958     $ 311     $ 103     $ 176     $ 169  
                                                        

Common stock information

              

Income from continuing operations

              

Basic earnings per share

   $ 3.20     $ 2.57     $ 26.85     $ 4.44     $ 1.51     $ 2.80     $ 2.68  

Diluted earnings per share

     3.15       2.53       26.23       4.36       1.50       2.77       2.64  

Regular cash dividends per share

     1.10       1.10       1.10       1.10       1.10       0.825       0.825  

Special cash dividend per share

     10.20       —         —         —         —         —         —    

Balance sheet information (end of period)

              

Current assets

   $ 3,276     $ 4,250     $ 3,757     $ 2,302     $ 2,085     $ 3,100     $ 3,192  

Noncurrent assets

     2,410       2,340       3,058       5,200       4,921       2,744       2,420  
                                                        

Total assets

   $ 5,686     $ 6,590     $ 6,815     $ 7,502     $ 7,006     $ 5,844     $ 5,612  
                                                        

Current liabilities (including current portion of long-term debt)

   $ 1,152     $ 2,041     $ 1,545     $ 1,815     $ 1,484     $ 1,204     $ 1,147  

Long-term debt (less current portion)

     64       70       82       1,109       1,512       45       65  

Asbestos litigation reserve (noncurrent portion)

     560       585       521       568       560       530       567  

Other noncurrent liabilities

     756       798       928       1,304       1,197       707       795  

Shareholders’ equity

     3,154       3,096       3,739       2,706       2,253       3,358       3,038  
                                                        

Total liabilities and shareholders’ equity

   $ 5,686     $ 6,590     $ 6,815     $ 7,502     $ 7,006     $ 5,844     $ 5,612  
                                                        

 

(1) Includes income of $517 million, $405 million and $285 million in 2005, 2004 and 2003, respectively, related to Ashland’s former interest in Marathon Ashland Petroleum LLC.
(2) “MAP Transaction” refers to the June 30, 2005 transfer of Ashland’s 38% interest in Marathon Ashland Petroleum LLC and two other businesses to Marathon Oil Corporation.

 

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SELECTED HISTORICAL FINANCIAL AND OTHER DATA OF HERCULES

The following table sets forth selected historical consolidated financial information and other data of Hercules for the periods presented. The selected financial information, as of and for each of the years in the five fiscal-year period ended December 31, 2007, has been derived from Hercules’ consolidated financial statements. The selected financial data as of, and for the six months ended, June 30, 2007 and 2008, has been derived from Hercules’ unaudited condensed consolidated financial statements which include, in the opinion of Hercules’ management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results of operations and financial position of Hercules for the periods and dates presented. The results of operations for any interim period are not necessarily indicative of results for the full year or any other interim period. This financial information and other data should be read in conjunction with the respective audited and unaudited consolidated financial statements of Hercules, including the notes thereto, incorporated in this proxy statement/prospectus by reference. See “Incorporation by Reference” beginning on page 113.

 

    Year Ended December 31,     Six Months
Ended June 30,

(In millions except per share data)

  2007   2006   2005     2004     2003     2008   2007

Summary of Operations

             

Net sales

  $ 2,136   $ 2,035   $ 2,055     $ 1,985     $ 1,836     $ 1,171   $ 1,051

Cost of sales

    1,406     1,343     1,391       1,292       1,156       795     682
                                               

Gross profit

    730     692     664       693       680       376     369

Research and development

    44     39     41       43       39       23     21

Profit (loss) from operations(1)

    306     191     164       263       (6 )     143     155

Net income (loss) from continuing operations before discontinued operations and cumulative(1) effect of changes in accounting principle

    198     153     (16 )     50       (97 )     67     122

Net income (loss) from discontinued operations, net of tax

    8     47     (7 )     (2 )     3       26     —  

Cumulative effect of changes in accounting principle, net of tax

    —       1     (3 )     —         (33 )     —       —  
                                               

Net income (loss)(1)

  $ 206   $ 201   $ (26 )   $ 48     $ (127 )   $ 93   $ 122
                                               

Common stock information

             

Basic earnings (loss) per share(1)

             

Continuing operations

  $ 1.73   $ 1.38   $ (0.15 )   $ 0.47     $ (0.91 )   $ 0.61   $ 1.06

Discontinued operations

    0.07     0.42     (0.06 )     (0.02 )     0.03       0.23     —  

Cumulative effect of changes in accounting principal

    —       0.01     (0.02 )     —         (0.31 )     —       —  
                                               

Net income (loss)

  $ 1.80   $ 1.81   $ (0.23 )   $ 0.45     $ (1.19 )   $ 0.84   $ 1.06
                                               

Diluted earnings (loss) per share(1)

             

Continuing operations

  $ 1.72   $ 1.37   $ (0.15 )   $ 0.46     $ (0.91 )   $ 0.60   $ 1.06

Discontinued operations

    0.07     0.42     (0.06 )     (0.02 )     0.03       0.23     —  

Cumulative effect of changes in accounting principal

    —       0.01     (0.02 )     —         (0.31 )     —       —  
                                               

Net income (loss)

  $ 1.79   $ 1.80   $ (0.23 )   $ 0.44     $ (1.19 )   $ 0.83   $ 1.06
                                               

Dividends declared per share

  $ 0.10     —       —         —         —       $ 0.10     —  

Balance sheet information (end of period)

             

Current assets

  $ 814   $ 985   $ 843     $ 782     $ 839     $ 892   $ 969

Noncurrent assets

    1,864     1,824     1,726       1,938       1,883       1,899     1,805
                                               

Total assets

  $ 2,678   $ 2,809   $ 2,569     $ 2,720     $ 2,722     $ 2,791   $ 2,774
                                               

Current liabilities (including current portion of long-term debt)

  $ 534   $ 630   $ 512     $ 476     $ 453     $ 566   $ 598

Long-term debt (less current portion)

    762     960     1,092       1,210       1,326       762     833

Asbestos litigation reserve (noncurrent portion)

    227     233     234       213       176       216     232

Other noncurrent liabilities

    655     730     754       709       742       667     693

Minority interests

    22     13     1       —         —         21     14

Shareholders’ equity

    478     243     (24 )     112       25       559     404
                                               

Total liabilities and shareholders’ equity

  $ 2,678   $ 2,809   $ 2,569     $ 2,720     $ 2,722     $ 2,791   $ 2,774
                                               

 

(1) Data for the years 2003 through 2007 and for the six months ended June 30, 2007 have been adjusted on a retrospective basis for the change in method of accounting for the Company’s U.S. and U.K. defined-benefit plans. For further information on this adjustment, refer to the related Form 8-K filing on July 30, 2008.

 

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SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF ASHLAND

The following table below sets forth selected unaudited pro forma combined condensed financial data of Ashland as of June 30, 2008 and for the nine months ended June 30, 2008 and the fiscal year ended September 30, 2007. The pro forma amounts in the table below are based on the historical consolidated financial statements and the notes thereto of Ashland and Hercules and have been prepared to give effect to the merger as if the merger had occurred at the balance sheet date and at the beginning of the fiscal year ending September 30, 2007. Because the fiscal years of Ashland and Hercules are different, Hercules’ unaudited condensed balance sheet as of June 30, 2008 and its unaudited pro forma combined condensed income statement for the nine months ended June 30, 2008 and the fiscal year ended December 31, 2007 have been used in preparing the unaudited pro forma combined condensed financial statements.

The unaudited pro forma financial data in the table below should be read in conjunction with the historical financial statements and accompanying disclosures of Ashland and Hercules, which are incorporated by reference in this proxy statement/prospectus, and the unaudited pro forma combined condensed financial statements and accompanying disclosures beginning on page 99. The unaudited pro forma combined condensed financial statements are provided for informational purposes only and do not purport to represent what Ashland’s financial position or results of operations would actually have been had the merger occurred on those dates or to project Ashland’s results of operations or financial position for any future period. See the “Unaudited Pro Forma Combined Condensed Financial Information” beginning on page 99.

 

     Fiscal Year Ended
September 30,
2007
   Nine Months Ended
June 30,

2008
 
     (In millions)  

Statement of Income Data

     

Revenues

   $ 9,921    $ 7,878  

Cost of sales and operating expenses

     7,884      6,339  

Selling, general and administrative expenses

     1,696      1,271  

Operating income

     402      305  

Net interest and other financing costs

     136      110  

Income from continuing operations before income taxes, minority interest and equity loss

     217      199  

Income tax (expense) benefit

     31      (39 )

Income from continuing operations

     247      159  

Balance Sheet Data (end of period)

     

Current assets

     N/A      3,296  

Noncurrent assets

     N/A      7,030  

Total assets

     N/A      10,326  

Current liabilities

     N/A      1,764  

Long term debt (less current portion)

     N/A      2,448  

Asbestos litigation reserve (noncurrent portion)

     N/A      841  

Shareholders’ equity

     N/A      3,813  

Total liabilities and shareholders’ equity

     N/A      10,326  

 

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COMPARATIVE PER SHARE DATA

The following table presents certain per share data of Ashland and Hercules on a historical basis and on an unaudited pro forma basis after giving effect to the merger as if the merger had occurred at the balance sheet date and at the beginning of the fiscal year ended September 30, 2007. The following information should be read in conjunction with the audited consolidated financial statements of Ashland and Hercules, which are incorporated by reference into this proxy statement/prospectus, and the unaudited pro forma combined condensed financial statements beginning on page 99. The pro forma information below is presented for informational purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the merger had been completed as of the beginning of the periods presented, nor is it necessarily indicative of the future operating results or financial position of the combined company. Hercules equivalent per share amounts were calculated by multiplying the unaudited pro forma combined per share amounts by the exchange ratio of 0.0930.

 

     Year Ended
September 30,
2007
   Nine Months Ended
June 30,
2008

Basic earnings per common share:(1)

     

Ashland

   $ 3.20    $ 2.80

Hercules

   $ 1.73    $ 0.86

Consolidated pro forma

   $ 3.37    $ 2.17

Hercules pro forma equivalent

   $ 0.31    $ 0.20

Diluted earnings per common share:(1)

     

Ashland

   $ 3.15    $ 2.77

Hercules

   $ 1.72    $ 0.85

Consolidated pro forma

   $ 3.31    $ 2.14

Hercules pro forma equivalent

   $ 0.31    $ 0.20

Cash dividends per common share:

     

Ashland

   $ 1.10    $ 0.825

Hercules

   $ 0.10    $ 0.15

Consolidated pro forma(2)

   $ 1.10    $ 0.825

Hercules pro forma equivalent

   $ 0.10    $ 0.08

Book value per common share (end of period):

     

Ashland

   $ 50.16    $ 53.30

Hercules

   $ 4.19    $ 4.97

Consolidated pro forma

     n/a    $ 51.88

Hercules pro forma equivalent(2)

     n/a    $ 4.82

 

(1) Each income statement metric is calculated using income from continuing operations.
(2) Pro forma cash dividends declared per share represent historical cash dividends declared by Ashland.

 

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COMPARATIVE STOCK PRICES AND DIVIDENDS

Ashland common stock is listed and traded on the NYSE under the symbol “ASH.” Hercules common stock is listed and traded on the NYSE under the symbol “HPC.” The following table sets forth, for the calendar quarters indicated, the high and low sale prices per share of Ashland common stock and Hercules common stock as reported on the NYSE Composite Tape. The table also sets forth the quarterly cash dividends per share declared by Hercules and Ashland with respect to its common stock.

 

     Ashland Common Stock     Hercules Common Stock
     High    Low    Dividends     High    Low    Dividends

2006

                

Quarter Ended March 31

   $ 71.30    $ 57.96    $ 0.275     $ 14.34    $ 10.98    $ —  

Quarter Ended June 30

   $ 75.17    $ 57.39    $ 0.275     $ 16.19    $ 13.51    $ —  

Quarter Ended September 30

   $ 68.59    $ 60.15    $ 0.275     $ 16.10    $ 13.35    $ —  

Quarter Ended December 31

   $ 71.04    $ 57.25    $ 10.475 (1)   $ 19.87    $ 15.50    $ —  

2007

                

Quarter Ended March 31

   $ 70.20    $ 61.66    $ 0.275     $ 21.40    $ 18.28    $ —  

Quarter Ended June 30

   $ 66.03    $ 58.44    $ 0.275     $ 20.15    $ 17.49    $ —  

Quarter Ended September 30

   $ 66.77    $ 50.23    $ 0.275     $ 22.48    $ 18.28    $ 0.05

Quarter Ended December 31

   $ 68.99    $ 45.79    $ 0.275     $ 22.14    $ 17.49    $ 0.05

2008

                

Quarter Ended March 31

   $ 49.88    $ 39.82    $ 0.275     $ 19.94    $ 14.90    $ 0.05

Quarter Ended June 30

   $ 58.58    $ 47.01    $ 0.275     $ 22.00    $ 16.85    $ 0.05

 

(1) This amount includes a regular cash dividend of $0.275, plus an additional dividend paid in October 2006 of $10.20 per share as part of the use of proceeds from the divestiture of Ashland’s wholly owned subsidiary, Ashland Paving and Construction, Inc., which we refer to as “APAC.”

On July 10, 2008, the last trading day prior to the announcement of the execution of the merger agreement, the last sale price of Hercules common stock was $16.66 per share and the last sale price of Ashland common stock was $47.41 per share. On [], 2008, the trading day prior to the date of this proxy statement/prospectus, the last sale price of Hercules common stock was $[] per share and the last sale price of Ashland common stock was $[] per share. All stock price information is as reported on the NYSE Composite Tape. The market prices of shares of Hercules common stock and Ashland common stock are subject to fluctuation. As a result, Hercules shareholders are encouraged to obtain current market quotations.

 

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THE SPECIAL MEETING OF SHAREHOLDERS OF HERCULES INCORPORATED

Time, Place and Purpose of the Special Meeting

This proxy statement/prospectus is being provided to Hercules shareholders in connection with the solicitation of proxies by the Hercules board of directors for use at the special meeting of shareholders to be held on [], 2008 at [][].m., local time, at the Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001, including any adjournments of the special meeting.

The purposes of the special meeting are to consider and vote upon the adoption of the Agreement and Plan of Merger, dated as of July 10, 2008, among Ashland, Merger Sub, a direct wholly owned subsidiary of Ashland, and Hercules, and to consider and vote upon any procedural matters incident to the conduct of the special meeting, such as adjournment of the special meeting, including any adjournment for the purpose of soliciting additional proxies.

THE HERCULES BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER AGREEMENT IS ADVISABLE FOR, AND FAIR TO, AND IN THE BEST INTERESTS OF, HERCULES AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT HERCULES SHAREHOLDERS VOTE “FOR” THE PROPOSAL TO ADOPT THE MERGER AGREEMENT.

Record Date; Voting Information; Required Vote

The Hercules board of directors has fixed the close of business on [], 2008 as the record date for determining the holders of Hercules common stock entitled to notice of, and to vote at, the special meeting. Only holders of record of Hercules common stock at the close of business on the record date will be entitled to notice of, and to vote at, the special meeting or any adjournment or postponement of the special meeting.

As of the record date, [] shares of Hercules common stock were issued and outstanding and entitled to vote at the special meeting and there were approximately [] holders of record of Hercules common stock. Each share of Hercules common stock entitles the holder to one vote on each matter to be considered at the special meeting. If you are a record holder of Hercules common stock, you may vote your shares of Hercules common stock in person at the special meeting or by proxy as described below under “—Voting by Proxy.”

The presence in person or by proxy at the special meeting of the holders of at least a majority of the outstanding shares of Hercules common stock entitled to vote at the meeting will constitute a quorum for the special meeting. Properly signed proxies that are marked “abstain” are known as abstentions. Properly signed proxies that are held by brokers in street name on behalf of customers who have not provided their broker with specific voting instructions on non-routine matters such as the proposal to adopt the merger agreement are known as broker non-votes. Abstentions and broker non-votes will be counted for the purposes of determining whether a quorum exists at the special meeting but will have the same effect as a vote against the proposal to adopt the merger agreement.

The affirmative vote of Hercules shareholders holding two-thirds of the shares of Hercules common stock outstanding as of the record date is required to adopt the merger agreement. Acting upon any procedural matters incident to the conduct of the special meeting, including adjournment, will require the affirmative vote of a majority of all votes cast with respect to such matter by the holders of shares of Hercules common stock present in person or represented by proxy and entitled to vote on such matter at the special meeting.

Hercules does not expect that any matter other than the proposals listed above will be brought before the special meeting. If, however, other matters are properly brought before the special meeting, or any adjournment of the special meeting, the persons named as proxies will vote in accordance with their judgment.

 

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Voting in Person

If you plan to attend the special meeting and wish to vote in person, you will be given a ballot at the special meeting. Please note, however, that if your shares are held in “street name,” which means your shares are held of record by a broker, bank or other nominee, and you wish to vote in person at the special meeting, you must bring to the special meeting a proxy from the record holder of the shares authorizing you to vote at the special meeting.

Voting by Proxy

Your vote is very important. Accordingly, please complete, sign and return the enclosed proxy card in the self-addressed, postage prepaid envelope whether or not you plan to attend the special meeting in person. You should vote your proxy even if you plan to attend the special meeting. You can always change your vote at the special meeting. Alternatively, you can vote by telephone or through the internet. Voting instructions are included on your proxy card. If you properly give your proxy and submit it to Hercules in time to vote, one of the individuals named as your proxy will vote your shares as you have directed. In each case, this will ensure that your vote is counted at the special meeting, or at any adjournment or postponement of the special meeting, regardless of whether you plan to attend the special meeting.

 

   

To vote your proxy by mail, mark your selection on, and date, the enclosed proxy card, sign your name exactly as it appears on your proxy card, and return your proxy card in the enclosed envelope.

 

   

To vote by telephone, please dial 1-866-540-5760, have your proxy card in hand when you call and follow the voice prompts.

 

   

To vote by Internet, please log on to the Internet at http://www.proxyvoting.com/hpc and have your proxy card in hand when you access the website.

If your Hercules shares are held in the name of a bank, broker or nominee (e.g., custodians, fiduciaries or trustees), then only your bank, broker or nominee can sign a proxy card with respect to your shares and only upon specific instructions from you. Therefore, if your bank, broker or nominee has not sent you a proxy card and requested your instructions, then please contact your bank, broker or nominee. You should provide instructions to your bank, broker or nominee for a proxy card to be signed representing your shares.

Revocation of Proxies

You can change your vote at any time before the vote is taken at the special meeting. If you have not voted through your broker or other nominee, you may change your vote by:

 

   

delivering a written notice of revocation of your vote, dated later than the date of your initial proxy card, to the Hercules Corporate Secretary;

 

   

submitting an executed proxy card bearing a later date than the initial proxy card;

 

   

voting by telephone or through the Internet at a later time, but not later than 11:59 p.m. (Eastern Time) on [], 2008, or the day before the meeting date if the special meeting is adjourned or postponed; or

 

   

voting in person at the special meeting; however, simply attending the special meeting without voting will not revoke an earlier vote.

A written revocation must be received by Hercules Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001, Attention: Corporate Secretary, by mail or by facsimile at (302) 594-7315, no later than the beginning of voting at the special meeting.

If your shares of Hercules common stock are held in street name, you should follow the instructions of your broker or nominee regarding changing your vote. If your broker or nominee allows you to give voting instructions by telephone or through the Internet, you may be able to change your vote by submitting new instructions by telephone or through the Internet.

 

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All shares voted by submission of an executed proxy card will be voted in accordance with your instructions on the proxy card, unless revoked. If you vote by telephone or through the Internet, your shares will be voted at the special meeting as instructed.

If you make no specification on your proxy card as to how you want your shares voted before signing and returning it, your shares will be voted “FOR” adoption of the merger agreement. We intend, with respect to proxy cards that make no specification as to, or those that vote in favor of, the proposal with respect to any procedural matters incident to the conduct of the special meeting, such as adjournment of the special meeting, including for the purpose of soliciting additional proxies, that the shares represented by properly submitted proxy cards will be voted, or not voted, by and at the discretion of the persons named as proxies on the proxy card. However, if you indicate a vote “against” adoption of the merger agreement but do not indicate a vote on the proposal with respect to procedural matters incident to the conduct of the special meeting, your shares will not be voted in favor of any adjournment of the special meeting for the purpose of soliciting additional votes in favor of the adoption of the merger agreement.

You should NOT send stock certificates with your proxy cards. If the merger is completed, shareholders will be mailed a transmittal form promptly following the completion of the merger with instructions on how to exchange Hercules common stock certificates.

Effects of Abstentions and Broker Non-Votes

Absent specific instructions from the beneficial owner of shares, brokers may not vote shares of Hercules common stock with respect to the adoption of the merger agreement, any other matters that may properly come before the special meeting or any adjournment of the special meeting. For purposes of determining adoption of the merger agreement, abstentions and broker non-votes will have the same effect as a vote against the merger agreement. For purposes of acting upon any procedural matters incident to the conduct of the meeting (other than adjournment), abstentions and broker non-votes will have no effect on the outcome of the action. For purposes of acting upon any adjournment for the purpose of soliciting additional proxies, abstentions and broker non-votes will have the effect of a vote against the matter.

Hercules Incorporated Savings and Investment Plan

If you are a participant in the Hercules Incorporated Savings and Investment Plan, which we refer to as “SIP,” you will receive a separate package of information about how to provide voting instructions to the SIP trustee. The SIP trustee will vote the Hercules shares that are allocable to your account under the SIP in accordance with your instructions unless the SIP trustee determines that it is legally obligated to do otherwise. If you do not provide the SIP trustee with instructions, the SIP trustee will vote your Hercules shares in proportion to the manner in which it votes the shares allocable to other SIP participants who provided instructions unless the SIP trustee determines that it is legally obligated to do otherwise.

Share Ownership of Management and Certain Shareholders

At the close of business on the record date, Hercules’ directors and executive officers as a group owned and were entitled to vote [] shares of Hercules common stock (including options exercisable within 60 days), representing approximately []% of the outstanding shares of Hercules common stock. All of the directors and executive officers of Hercules that are entitled to vote at the special meeting have indicated that they currently intend to vote their shares of Hercules common stock in favor of adoption of the merger agreement.

Solicitation of Proxies

Hercules will bear the costs of soliciting proxies from its shareholders. In addition to soliciting proxies by mail, directors, officers and employees of Hercules, without receiving additional compensation therefor, may solicit proxies by telephone, by facsimile or in person. Arrangements may also be made with brokerage firms and

 

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other custodians, nominees and fiduciaries to forward solicitation materials to the beneficial owners of shares held of record by those persons, and Hercules will reimburse those brokerage firms, custodians, nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them in connection with those actions. In addition, MacKenzie Partners, Inc., which we refer to as “MacKenzie,” has been retained by Hercules to assist in the solicitation of proxies. MacKenzie may contact holders of shares of Hercules common stock by mail, telephone, facsimile, e-mail or personal interviews and may request brokers, dealers and other nominee shareholders to forward materials to beneficial owners of shares of Hercules common stock. MacKenzie will receive reasonable and customary compensation for its services (estimated at $30,000) and will be reimbursed for certain reasonable out-of-pocket expenses and other customary costs.

Assistance

If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact MacKenzie at (800) 322-2885 (toll-free) or (212) 929-5500 (collect) or via e-mail to proxy@mackenziepartners.com. Alternatively, you may contact Hercules Corporate Stockholder Services at (800) 441-9274 or write to Hercules Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894.

THE MERGER

General

On July 10, 2008, the Hercules board of directors and the Ashland board of directors each approved the merger agreement, which provides for the acquisition by Ashland of Hercules through the merger of Merger Sub, a newly formed and wholly owned subsidiary of Ashland, with and into Hercules. After the merger, Hercules will be the surviving corporation and will be a wholly owned subsidiary of Ashland. Upon completion of the merger, each share of Hercules common stock (other than shares held by Ashland, any subsidiary of Ashland or Merger Sub and other than shares with respect to which a Hercules shareholder has validly demanded and perfected appraisal rights under Delaware law) will be converted into the right to receive (i) 0.0930 (which we refer to as the “exchange ratio”) of a share of Ashland common stock, par value $0.01 per share, and (ii) $18.60 in cash, without interest.

Background of the Merger

The management and board of directors of Ashland continually review Ashland’s results of operations and competitive position in the industries in which it operates, as well as its strategic alternatives. In connection with these reviews, Ashland from time-to-time has evaluated potential transactions that would further its strategic objectives.

Similarly, Hercules’ management periodically explores and evaluates, and discusses with the Hercules board of directors on a regular basis, the strategic alternatives available to Hercules, including potential strategic business combination transactions, transactions where Hercules would be the acquiror and transactions where Hercules, or significant parts of Hercules, would be acquired. These discussions have focused on, among other things, the business conditions facing chemical firms generally and Hercules in particular and the potential for further consolidation within the industry. In furtherance of these discussions, Hercules’ management has from time-to-time received and solicited proposals for potential strategic business combination transactions, including acquisitions and joint ventures.

In early November 2006, Hercules’ Chief Financial Officer and Ashland’s Chief Financial Officer discussed the possibility of Ashland acquiring Hercules’ paper chemicals business in a negotiated transaction. Ashland’s board of directors met on November 15, 2006, and discussed with Ashland’s management, among other items,

 

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Ashland’s strategic alternatives and growth opportunities, which included a review of Hercules’ businesses. On November 22, 2006, Hercules and Ashland entered into a confidentiality agreement to facilitate Ashland’s due diligence of Hercules’ paper chemicals business, and thereafter representatives of Hercules and Ashland met to discuss a potential sale of Hercules’ paper chemicals business. On December 14, 2006, at a regularly scheduled meeting attended by Hercules’ management and a representative of Wachtell, Lipton, Rosen & Katz, which we refer to as “Wachtell Lipton,” outside counsel to the board of directors and Hercules, Craig Rogerson, Hercules’ Chief Executive Officer and President, updated the Hercules board on Hercules’ discussions with Ashland.

At an Ashland board of directors meeting on January 25, 2007, Ashland’s management provided a preliminary overview of Hercules’ businesses and its legacy cost and liability issues. Following discussions and due diligence, Ashland expressed an interest in acquiring all of Hercules and, on January 31, 2007, Ashland and Hercules entered into an amended confidentiality agreement to facilitate the further consideration of such a transaction. Between February and April 2007, the management teams of Ashland and Hercules engaged in mutual due diligence.

At a March 15, 2007 meeting of Ashland’s board of directors, Ashland’s management discussed the strategic rationale for a possible acquisition of Hercules, and provided a financial overview of a possible transaction with Hercules, including a review of estimated legacy costs and liabilities. Ashland’s management also discussed various strategic alternatives with the board, with the participation of Ashland’s financial advisor, Citigroup Global Markets Inc. After discussion, the board instructed management to focus on the acquisition of the paper chemicals business of Hercules.

On April 4, 2007, James J. O’Brien, Ashland Chairman and Chief Executive Officer, and Marvin Quin, then Ashland’s Senior Vice President and Chief Financial Officer, met with Mr. Rogerson and Allen Spizzo, Hercules’ Vice President and Chief Financial Officer. At this meeting, the participants further discussed the possibility of Ashland acquiring Hercules’ paper chemicals business.

In April 2007, at a regularly scheduled meeting attended by Wachtell Lipton, Mr. Rogerson updated the Hercules board of directors on Hercules’ discussions with Ashland, informing the board of Ashland’s conclusion that it was only interested in purchasing Hercules’ paper chemicals business. After discussions in which Hercules’ management and Wachtell Lipton participated, the Hercules board determined not to pursue the sale of Hercules’ paper chemicals business as proposed by Ashland. Following the board meeting, Mr. Rogerson informed Mr. O’Brien that Hercules was not interested in pursuing the proposed transaction, and Ashland and Hercules terminated their discussions regarding such transaction.

At a May 17, 2007 meeting of Ashland’s board of directors, Mr. O’Brien reviewed Ashland’s strategic goal of transitioning from a portfolio of businesses to a company with a specialty chemicals core and related adjacencies. Ashland’s management then updated the board on various strategic alternatives and acquisition candidates, concluding with a recommendation that Ashland seek to grow through acquisition. The board concurred with this recommendation.

In June 2007, representatives of Ashland and Hercules discussed the possibility of resuming discussions regarding a potential negotiated transaction between the two companies, including a potential acquisition of Hercules by Ashland in a negotiated transaction. On June 21, 2007, Mr. O’Brien called Mr. Rogerson to discuss the possibility of Ashland acquiring Hercules in a transaction involving the payment of a premium. In late June 2007, the Hercules board of directors received an update on these discussions.

Throughout July, members of Ashland’s and Hercules’ senior management discussed the potential acquisition of Hercules by Ashland in a negotiated transaction without reaching agreement on any potential terms of the acquisition. Due diligence activities among the management teams of Ashland and Hercules resumed in late July, and continued throughout August, September, October and November.

 

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On August 16, 2007, Hercules’ board of directors convened for a regularly scheduled meeting, which was attended by representatives of Wachtell Lipton and Hercules’ management. Among the other matters discussed, Hercules’ management updated the board of directors on its discussions with Ashland, and discussed the potential benefits of pursuing a business combination with Ashland, as well as other potential alternative transactions that might be available to Hercules.

Further discussions between Hercules’ management and Ashland’s management were held from August through October 2007. On September 12 and 13, 2007, Ashland’s board of directors convened a regularly scheduled meeting. Among other things discussed at the meeting, Ashland’s management updated the board on the status of its discussions with Hercules. On September 24, 2007, Ashland and Hercules entered into an amended confidentiality agreement in order to facilitate the further exchange of information.

On October 18, 2007, Hercules’ board of directors convened for a regularly scheduled meeting, which was attended by representatives of Wachtell Lipton, Credit Suisse, Hercules’ investment banking firm (who joined for a portion of the meeting), and Hercules’ management. At the meeting, Hercules’ management updated the board of directors on its discussions to date with Ashland and representatives of Credit Suisse reviewed with the Hercules board its preliminary financial analysis regarding the proposed transaction. Wachtell Lipton and Hercules’ internal legal team also updated the Hercules board on certain legal matters relating to a potential transaction with Ashland.

On October 31, 2007, Ashland’s board held a special meeting focused largely on the results of Ashland’s additional legal and environmental due diligence of Hercules. At the meeting, members of Ashland’s management, assisted by external legal and environmental experts, presented the results of their due diligence investigation to the board. During this meeting, updated assessments of legal and environmental costs and liabilities were provided to the board. The board also received a review of its fiduciary duties from outside legal counsel and an update on financial aspects of the transaction from Ashland’s management and financial advisor. Mr. O’Brien reviewed management’s recommendation to continue to negotiate the acquisition. After discussion, the board directed management to continue to pursue a possible transaction with Hercules.

On November 12, 2007, Mr. O’Brien sent a letter to Mr. Rogerson proposing that Ashland acquire all of Hercules’ outstanding common stock for $23.75 per share, with 50% being paid in cash and the remainder being paid in Ashland common stock, subject to a collar. The letter included certain terms and conditions, including approval by the boards of directors and shareholders of each company, and further explained that Ashland intended to finance the transaction with available cash balances and fully committed financing facilities to be obtained prior to the signing of a definitive merger agreement.

Later in the day on November 12, 2007, Hercules’ board of directors held a special meeting by teleconference, together with representatives of Wachtell Lipton, Credit Suisse (who joined for a portion of the meeting) and Hercules’ management, to further consider the proposed Ashland transaction and to discuss the proposal received from Ashland. At the meeting, Mr. Rogerson explained the terms of the proposal received from Ashland earlier in the day and updated the board on management’s discussions with Ashland. The board then discussed, with the input of Wachtell Lipton, Credit Suisse and Hercules’ management, the terms of Ashland’s proposal, the strategic rationale of the proposed transaction and the anticipated market reaction to the proposed transaction. Following the meeting, Mr. Rogerson contacted Mr. O’Brien and indicated that while the proposed purchase price Ashland had indicated might not be sufficient to have a transaction approved by the Hercules board, Hercules was prepared to have further discussions with Ashland in the interest of determining if a mutually acceptable transaction to both Hercules and Ashland could be pursued. Subsequent to this meeting, outside counsel to Ashland provided Wachtell Lipton with a proposed form of merger agreement.

Between November 12, 2007 and November 26, 2007, Messrs. Rogerson and O’Brien had several conversations to discuss a proposed transaction, as well as the weakening credit markets and recent declines in

 

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the price of Ashland’s common stock. In addition, Wachtell Lipton held preliminary discussions with Ashland’s outside counsel regarding the draft merger agreement that had been provided to Wachtell Lipton.

On November 16, 2007, Ashland’s board of directors met to further consider the proposed transaction. At the meeting, an extensive review of the transaction took place, including a review of the current status of negotiations, a due diligence update focused on international sites, a financial update, a review of all of Ashland’s strategic alternatives, and a review of the terms and conditions of the proposed transaction. The Board also discussed the recent decline in the price of Ashland’s common stock and the weakening credit markets and the impact on the transaction value to Ashland.

On November 18, 2007, Hercules’ board of directors held a special meeting by teleconference, together with representatives of Wachtell Lipton and Hercules’ management, to further consider the proposed transaction. At the meeting, Hercules’ management updated the board on the status of their discussions with Ashland and, together with Wachtell Lipton, discussed the terms and conditions of the proposed transaction. The board also discussed the recent decline in the price of Ashland’s common stock and the impact of such decline on the proposed transaction.

On November 26, 2007, Mr. O’Brien informed Mr. Rogerson that Ashland was no longer interested in pursuing a transaction given the recent decline in the price of Ashland’s common stock. Mr. Rogerson subsequently sent an e-mail to the Hercules board of directors informing them that transaction discussions had terminated.

At the regularly scheduled meeting of the Hercules board held on December 11, 2007, attended by Wachtell Lipton and Hercules’ management, Hercules management further updated the board on the terminated discussions with Ashland.

In May 2008, representatives of Credit Suisse, the financial advisor to Hercules, discussed with Ashland’s financial advisor whether Ashland might have an interest in resuming discussions with Hercules regarding engaging in a negotiated transaction. At a regularly scheduled meeting of the Ashland board of directors held on May 15, 2008, the board reviewed recent developments regarding the possible transaction with Hercules.

On May 23, 2008, Mr. O’Brien and Mr. Rogerson discussed the possibility of Ashland acquiring Hercules in a negotiated transaction. Subsequent to this discussion, Mr. Rogerson contacted the members of the Hercules board to advise them of Ashland’s renewed interest in a potential transaction.

On May 27, 2008, Mr. O’Brien and Mr. Rogerson met to further discuss the possibility of Ashland acquiring Hercules in a negotiated transaction. Mr. O’Brien indicated to Mr. Rogerson that Ashland was willing to consider increasing the amount of cash that it was prepared to offer to Hercules shareholders in a possible transaction, although he did not believe that Ashland was willing to increase the value of the transaction it was prepared to propose. At this meeting, Mr. Rogerson updated Mr. O’Brien on Hercules’ business performance, recommended that Ashland make an offer to the Hercules board prior to the board’s June 18, 2008 meeting, and indicated his belief that the greater the portion of cash that could be offered to Hercules shareholders, the more attractive the transaction would be to the Hercules board. Mr. Rogerson also indicated that he believed that Ashland would have to offer a price in the mid $20s per share range to attract the interest of the Hercules board. During this meeting, it was agreed that Hercules and Ashland should resume due diligence, and members of the management of Ashland and Hercules met the following day to discuss the logistics of conducting due diligence. An updated confidentiality agreement was executed by the parties on May 29, 2008. Beginning May 28 and continuing through July 2008, the management teams of Ashland and Hercules engaged in mutual due diligence.

On May 29, 2008, Hercules’ board of directors held a special meeting by teleconference, together with representatives of Wachtell Lipton and Hercules’ management. At the meeting, Hercules’ management updated

 

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the board on the status of their discussions with Ashland. Wachtell Lipton and Hercules’ internal legal team also updated the Hercules board on certain matters relating to a potential transaction with Ashland.

In June 2008, Hercules was contacted by a third party expressing potential interest in exploring a transaction that could result in the acquisition of Hercules. No price or other specific terms were proposed by the third party, which indicated its desire to undertake a due diligence investigation of Hercules. In response, Hercules provided the third party with a form of confidentiality agreement, but a confidentiality agreement was never executed.

On June 14, 2008, the Ashland board of directors held a meeting by teleconference to discuss various aspects of a merger transaction with Hercules with management and representatives of Ashland’s outside legal counsel, Squire, Sanders & Dempsey L.L.P., which we refer to as “Squire Sanders,” and Ashland’s financial advisor. The meeting included a discussion and review of the strategic rationale for the transaction and structural considerations, an update on due diligence, a financial update, a review of the discussions with the banks and credit rating agencies relating to the financing of the transaction, a discussion and review of Ashland’s other strategic alternatives, and a preliminary integration plan. Following this discussion, the board of directors approved moving forward with merger discussions.

On June 16, 2008, Mr. O’Brien sent a letter to Mr. Rogerson proposing that Ashland acquire all of Hercules’ outstanding common stock for $23.25 per share, with 75-80% of the value to be offered being paid in cash and the remainder being paid in Ashland common stock based on a fixed exchange ratio. The letter further explained that Ashland intended to finance the transaction with available cash balances and fully committed financing facilities to be obtained prior to the signing of a definitive merger agreement. Later that day, Mr. O’Brien contacted Mr. Rogerson to discuss the proposal sent to Hercules, and Mr. Rogerson indicated that he would be reviewing the Ashland proposal with the Hercules board, but that any such transaction could not be conditioned on financing. Later on June 16, 2008, Squire Sanders distributed a draft merger agreement to Hercules and Wachtell Lipton. The draft merger agreement included, among other terms, a financing condition that would allow Ashland to terminate the Merger Agreement without paying a termination fee if the proceeds of its financing were unavailable on terms substantially consistent with the terms set forth in Ashland’s commitment letter and, to the extent that any terms and conditions were not set forth in the commitment letter, on terms and conditions reasonably satisfactory to Ashland. The draft merger agreement also indicated that Ashland would need to enter into acceptable employment arrangements with certain members of Hercules management as a condition to entering into a merger agreement with Hercules.

On June 19, 2008, Hercules’ board of directors convened for a regularly scheduled meeting, which was attended by representatives of Wachtell Lipton, Credit Suisse (who joined for a portion of the meeting) and Hercules’ management. Among the other matters discussed, the Hercules board considered Ashland’s June 16 proposal. Hercules’ management updated the board of directors on its discussions with Ashland, the potential strategic fit and benefits of potentially pursuing a business combination with Ashland. In addition, Hercules management updated the board on its diligence work performed in contemplation of the proposed transaction. Representatives of Wachtell Lipton then reviewed the terms of the proposed merger agreement and discussed other legal matters pertaining to the proposed transaction, including matters related to Ashland’s financing of the proposed transaction. Representatives of Credit Suisse then reviewed with the board their preliminary financial analysis regarding the proposed Ashland transaction. Following the meeting, Mr. Rogerson contacted Mr. O’Brien and indicated that, among other matters, Ashland should increase its proposed purchase price and remove its financing contingency in order to have a transaction acceptable to the Hercules board. On this basis, Mr. Rogerson indicated that Hercules was prepared to have further discussions with Ashland to determine if a mutually acceptable transaction to both Hercules and Ashland could be pursued.

During the period from June 19, 2008 through July 10, 2008, Hercules and Wachtell Lipton negotiated the provisions of the proposed merger agreement with Ashland and Squire Sanders. The negotiations, among other things, addressed the price and structure for the transaction, the nature of the representations and warranties to be made by Hercules and Ashland, the limitations on the conduct of business by both Hercules and Ashland

 

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between signing and closing, the conditions to closing, the parties’ respective rights and obligations in the event a third party sought to make a takeover proposal for Hercules, and various provisions relating to termination fees and expense reimbursements. During this same timeframe, Ashland also continued to negotiate the terms of its financing commitments with Bank of America and Scotiabank. Ashland shared an initial draft of the commitment letter with Hercules, Wachtell Lipton and Credit Suisse on July 1, 2008 and a revised draft on July 7, 2008.

On June 29, 2008, Hercules’ board of directors held a special meeting by teleconference, together with representatives of Wachtell Lipton and Hercules’ management, to further consider the proposed transaction. At the meeting, Hercules’ management updated the board on the status of their discussions with Ashland and representatives of Wachtell Lipton reviewed the terms of the proposed merger agreement and discussed other legal matters pertaining to the proposed transaction.

On July 2, 2008, Ashland’s board of directors held a special telephonic meeting to review the status of the proposed transaction. At the meeting, Ashland’s management and advisors updated the board on the status of the merger agreement negotiations and the financing negotiations, and financial and legal aspects of the merger were discussed.

Following the July 2, 2008 meeting, Messrs. O’Brien and Rogerson discussed pricing and financing terms. Mr. O’Brien noted that since the date of the offer letter, Ashland’s and Hercules’ stock prices had both declined significantly. Mr. O’Brien reiterated Ashland’s previous offer price of $23.25 per share, but with the Ashland stock component determined using a fixed exchange ratio based on an assumed Ashland stock price of $50.00 per share.

On July 3, 2008, Hercules’ board of directors held a special meeting by teleconference, together with representatives of Wachtell Lipton and Hercules’ management, to further consider the proposed transaction. At the meeting, Hercules’ management updated the board on the status of their discussions with Ashland, and representatives of Wachtell Lipton updated the board on the terms of the proposed merger agreement and discussed the terms of Ashland’s financing commitments. An executive session of the board was then held with Wachtell Lipton, and members of Hercules’ management were excused from the meeting. In the executive session, Hercules’ independent directors, with the assistance of Wachtell Lipton, further discussed the proposed transaction. Following this meeting, Mr. Rogerson contacted Mr. O’Brien to emphasize the importance of removing the financing contingency from the proposed merger agreement and to discuss several other matters.

On July 7, 2008, Hercules’ board of directors held a special meeting by teleconference, together with representatives of Wachtell Lipton and Hercules’ management, to further consider the proposed transaction. At the meeting, Hercules’ management updated the board on the status of their discussions with Ashland and representatives of Wachtell Lipton reviewed the terms of the proposed merger agreement and discussed other legal matters pertaining to the proposed transaction. An executive session of the board was then held with Wachtell Lipton, and members of management were excused from the meeting. In the executive session, Hercules’ independent directors, with the assistance of Wachtell Lipton, further discussed the proposed transaction, including Ashland’s continued insistence on a financing condition in the proposed form of draft merger agreement. At the conclusion of this meeting, the Hercules board expressed its support for Hercules’ management’s continuing to pursue the proposed transaction with Ashland.

From July 7, 2008 through July 10, 2008, representatives of Hercules, Wachtell Lipton, Ashland and Squire Sanders met at the offices of Wachtell Lipton in New York City to further negotiate the terms of the merger agreement, the party’s respective disclosure schedules, Ashland’s financing commitment letter and other documents related to the proposed transaction.

On July 9, 2008, Hercules’ board of directors held a special meeting by teleconference, together with representatives of Wachtell Lipton, Credit Suisse (who joined for a portion of the meeting) and Hercules’ management, to further consider the proposed transaction. At the meeting, Hercules’ management provided a

 

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review of the terms and diligence work performed in contemplation of the proposed transaction and the strategic rationale for and anticipated market reaction to the proposed transaction. Representatives of Wachtell Lipton updated the board on the terms of the proposed merger agreement and discussed other legal matters pertaining to the proposed transaction. Wachtell Lipton explained that Ashland had agreed to remove its proposed financing condition from the merger agreement and had agreed to pay a reverse termination fee equal to 3% of the transaction value if Ashland was unable to obtain financing. Ashland had required, however, that if the reverse termination fee was paid, Ashland’s liability to Hercules for failure to obtain the financing would be limited to payment of the reverse termination fee. Representatives of Credit Suisse then presented financial analyses regarding the merger consideration to be received by holders of shares of Hercules common stock. An executive session of the board was then held with Wachtell Lipton, and members of management were excused from the meeting. In the executive session, Hercules’ independent directors, with the assistance of Wachtell Lipton, further discussed the proposed transaction.

Following the conclusion of the Hercules board meeting, representatives of Hercules, Wachtell Lipton, Ashland and Squire Sanders continued to meet at the offices of Wachtell Lipton (through July 11, 2008) to finalize the merger agreement, the party’s respective disclosure schedules, Ashland’s financing commitment letter and other documents related to the proposed transaction.

On July 10, 2008, Dow Chemical Company and Rohm and Haas Company announced a definitive agreement under which Dow would acquire all the outstanding shares of Rohm and Haas for $78.00 per share, a 74% premium over Rohm and Haas’ closing stock price on July 9, 2008. Following the announcement, Mr. Rogerson contacted Mr. O’Brien. During their discussions, Mr. Rogerson requested that Ashland increase the purchase price above the price then currently contemplated by the draft merger agreement. Mr. O’Brien responded that the Ashland board of directors was unwilling to increase the proposed purchase price and was only willing to proceed with the proposed transaction on the terms that had been negotiated.

On July 10, 2008, Ashland’s board of directors held a special meeting by teleconference at which Ashland’s management and representatives of Ashland’s legal and financial advisors were present. At this meeting, the board of directors reviewed, among other things, the final terms and conditions of the commitment letter with the banks, and the final terms of the merger agreement. Following discussion and deliberations, Ashland’s board of directors unanimously approved and declared advisable the merger agreement and the transactions that it contemplates. A representative of Ashland then contacted a representative of Wachtell Lipton and informed him of the outcome of the Ashland board meeting.

Following the completion of Ashland’s board meeting, Hercules’ board of directors held a special meeting by teleconference, together with representatives of Wachtell Lipton, Credit Suisse and Hercules’ management, to further consider the proposed transaction. At the meeting, Wachtell Lipton informed the Hercules board of the outcome of the Ashland board meeting, described the terms of the proposed merger agreement, discussed considerations relating to Ashland’s proposed financing and discussed various other issues related to the proposed transaction. Representatives of Credit Suisse then reported on the recently announced acquisition of Rohm and Haas by Dow and compared that transaction with the proposed Ashland transaction. Mr. Rogerson informed the board that he had contacted Mr. O’Brien and requested that Ashland raise their purchase price but that Mr. O’Brien had responded that the Ashland board of directors would be unwilling to do so. Representatives of Credit Suisse then delivered Credit Suisse’s oral opinion, which was subsequently confirmed in writing, to the effect that, as of July 10, 2008 and based upon and subject to the assumptions and qualifications set forth in the opinion, the merger consideration of $23.01 (based on the closing prices on the NYSE of Hercules and Ashland common stock on July 10, 2008 (the last trading day prior to the execution and announcement of the merger agreement, and consisting of $18.60 in cash and 0.0930 of a share of Ashland common stock)) to be received by the holders of Hercules common stock in the merger was fair from a financial point of view to such shareholders. (See “Comparative Stock Prices and Dividends” on page 25) Wachtell Lipton separately advised the Hercules board of directors regarding certain legal matters relating to the proposed transaction with Ashland.

 

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After consideration and deliberation in which representatives of Wachtell Lipton and Credit Suisse participated, and taking into consideration the factors described under “— Recommendation of the Hercules Board of Directors; Reasons for the Merger,” the Hercules board of directors by a unanimous vote of all present determined the merger agreement to be advisable for, and fair to, and in the best interests of, Hercules and its shareholders; approved the merger agreement; and resolved to recommend that Hercules shareholders vote in favor of adoption of the merger agreement. The two directors not present, Mr. Burton M. Joyce and Mr. Joe B. Wyatt, had participated in other board meetings at which the transaction was discussed and subsequently affirmed their support of the merger agreement and the transactions contemplated by the merger agreement. Following the conclusion of the board meeting, Mr. Rogerson contacted Mr. O’Brien to inform him of the outcome of the meeting.

Following the completion of the two board meetings, representatives of Hercules, Wachtell Lipton, Ashland and Squire Sanders negotiated the final terms of the definitive merger agreement, including the disclosure schedules and, when the final terms were fully negotiated, Ashland, Hercules and Merger Sub executed the definitive merger agreement. On July 11, 2008, before the opening of trading on the NYSE, Hercules and Ashland issued a joint press release announcing the execution of the definitive merger agreement. The terms of the definitive merger agreement are described below under “The Merger Agreement” beginning on page 63.

Recommendation of the Hercules Board of Directors; Reasons for the Merger

By a unanimous vote of all directors present, the Hercules board of directors, at a meeting held on July 10, 2008, determined the merger agreement to be advisable for, and fair to, and in the best interests of, Hercules and its shareholders; approved the merger agreement; and resolved to recommend that Hercules shareholders vote in favor of adoption of the merger agreement. The two directors not present at the July 10, 2008 board meeting, Mr. Joyce and Mr. Wyatt, participated in other board meetings at which the transaction was discussed and subsequently affirmed their support of the merger agreement and the transactions contemplated by the merger agreement. The Hercules board of directors therefore unanimously recommends that Hercules’ shareholders vote FOR adoption of the merger agreement at the Hercules special meeting.

In reaching this decision, the Hercules board of directors consulted with Hercules’ management and its legal and financial advisors and considered a variety of factors, including the following material factors, among others:

 

   

its belief that the merger would further enhance Hercules’ leading role as a manufacturer and marketer of specialty chemicals and related services, with the benefits of the increased scale, diversity and resources of the combined company;

 

   

the potential strategic and other benefits of the merger identified by Hercules’ management and Ashland’s management, including the complementary nature of the businesses of Hercules and Ashland and the opportunity for cost savings as a combined company;

 

   

presentations by Hercules’ management concerning the operations, financial condition and prospects of Hercules and the Hercules board of directors’ belief, based in part on such presentations, that a merger with Ashland would likely improve Hercules’ prospects for long-term growth;

 

   

the potential for further consolidation in the specialty chemicals industry, and its belief that a combination with Ashland would likely improve Hercules’ ability to perform in an increasingly competitive industry;

 

   

the fact that Ashland was willing to proceed with the acquisition of Hercules despite certain legacy contingencies affecting Hercules, including asbestos-related matters, and whether another acquiror would be prepared to accept such contingencies;

 

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its review of other potential strategic transactions, and its belief as a result of such review that the transaction presented a unique opportunity to combine with Ashland’s complementary business, which was expected to enhance and expand Hercules’ present business and future growth;

 

   

its assessment of the likelihood that the merger would be completed in a timely manner and that the management team of the combined company would be able to successfully integrate and operate the businesses of the combined company after the merger;

 

   

the financial analyses presented by Credit Suisse to the Hercules board of directors, and the opinion of Credit Suisse dated as of July 10, 2008 to the effect that, as of that date, and subject to and based upon the factors and assumptions set forth in such opinion, the merger consideration to be received by holders of Hercules common stock in the merger was fair from a financial point of view to such shareholders;

 

   

the financial terms of the merger, including the right of Hercules shareholders to receive, for each share of Hercules common stock held by them, $18.60 in cash and 0.0930 of a share of Ashland common stock, which represented $23.01 per share in total consideration and a premium of approximately 38% based on the closing prices on the NYSE of Hercules and Ashland common stock on July 10, 2008 (the last trading day prior to the execution and announcement of the merger agreement) (see “Comparative Stock Prices and Dividends” on page 25);

 

   

the belief that the fixed exchange ratio provides certainty as to the number of shares of Ashland common stock to be issued to Hercules shareholders and the percentage of the total shares of Ashland common stock that current Hercules shareholders will own after the merger and the fact that no vote would be required of the Ashland shareholders to approve the proposed transaction;

 

   

the fact that Hercules and its legal and financial representatives had extensive, arms’-length negotiations with Ashland, which, among other things, resulted in an increase in the cash portion of the merger consideration from 50% to over 80% of the total merger consideration, based on Ashland’s July 10 closing stock price, and the elimination of Ashland’s proposed financing condition and the addition of a reverse termination fee to deal with circumstances where Ashland could not obtain financing;

 

   

the expectation that Hercules shareholders will have the opportunity to share in the future growth and expected synergies of the combined company through the continued ownership of shares of Ashland common stock, while retaining the flexibility of selling all or a portion of those shares for cash into a very liquid market at any time;

 

   

its view, based in part on the advice of Wachtell Lipton and Credit Suisse, that the terms of the merger agreement, including the low termination fee (equivalent to approximately $0.69 per share of Hercules based on the number of Hercules shares outstanding as of July 8, 2008), would not likely preclude a proposal for an alternative transaction involving Hercules (see “The Merger Agreement—Termination Fees and Expenses” on page 78);

 

   

the requirement that Ashland pay a termination fee of $77.5 million to Hercules under certain circumstances (see “The Merger Agreement—Termination Fees and Expenses” on page 78);

 

   

the agreement by Ashland to assume certain regulatory approval risks for the proposed merger;

 

   

the delivery by Ashland of financing commitments from reputable and financially sound lenders that, together with the equity commitments received, are sufficient to pay the merger consideration, and that such financing commitments were subject to acceptable conditions to the obligations of such institutions to fund such commitments, each as described under the caption “The Merger—Financing Commitments” on page 59;

 

   

the fact that if the proceeds of Ashland’s committed financing are unavailable for any reason, Ashland would be required to seek an alternate source of financing on terms and conditions, taken as a whole, that are no less favorable to Ashland than those of the committed financing;

 

   

the regulatory and other approvals required in connection with the merger and the likelihood such approvals would be received in a timely manner and without unacceptable conditions;

 

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the fact that holders of Hercules common stock that do not vote in favor of the adoption of the merger agreement and approval of the merger or otherwise waive their appraisal rights will have the opportunity to demand appraisal of the fair value of their shares under Delaware law; and

 

   

the fact that the transaction will be subject to the approval of Hercules’ shareholders.

The Hercules board of directors was also aware of and considered the following potentially adverse factors associated with the proposed merger, among others:

 

   

the fact that Hercules did not undertake an affirmative auction prior to entering into the merger agreement, although the Hercules board of directors was satisfied that the merger agreement provides the board with an adequate opportunity to consider unsolicited proposals and to terminate the merger agreement and accept a superior proposal prior to Hercules shareholder adoption of the merger agreement and approval of the merger, subject to the payment of a low break-up fee;

 

   

the risk that the expected synergies and other benefits of the merger might not be fully achieved or may not be achieved within the time frames expected;

 

   

the risks of the type and nature described under “Risk Factors” on page 15;

 

   

the possibility that regulatory or governmental authorities might seek to impose conditions on or otherwise prevent or delay the merger (and that the merger may not be completed as a result of conditions imposed by regulatory authorities or otherwise) balanced by the fact that Ashland had agreed to assume certain regulatory approval risks for the proposed transaction;

 

   

the risk that Ashland’s financing may not be available on the terms set forth in the financing commitments, that an alternate source of financing may not be available, and that under such circumstances, the merger agreement limits Hercules’ remedy upon Ashland’s payment to Hercules of a termination fee of $77.5 million (See “The Merger—Financing Commitments” on page 59);

 

   

the requirement that Hercules pay a termination fee of $77.5 million to Ashland under certain circumstances (see “The Merger Agreement—Termination Fees and Expenses” on page 78);

 

   

the fact that some of Hercules’ directors and executive officers may have interests in the merger and arrangements that are different from, or in addition to, those of Hercules shareholders generally, including as a result of employment and compensation arrangements with Hercules and the manner in which they would be affected by the merger (see “—Interests of Hercules Directors and Executive Officers in the Merger” on page 47);

 

   

that Hercules will incur significant transaction costs, including legal, accounting, financial advisory and other costs relating to the merger;

 

   

that Hercules’ customers, suppliers or distributors may seek to modify or terminate existing agreements, and prospective customers may delay entering into new agreements or purchasing Hercules’ products as a result of the announcement of the merger;

 

   

that a significant portion of Credit Suisse’s fee is contingent upon the closing of the merger and, had Credit Suisse not rendered its opinion to the effect that the consideration to be received by holders of Hercules common stock in the merger was fair from a financial point of view to such shareholders, it is unlikely that the Hercules board would have approved the merger, making it unlikely that Credit Suisse would have received the contingent portion of its fee;

 

   

that Hercules’ ability to attract new employees and retain its existing employees may be harmed by uncertainties associated with the merger; and

 

   

the risks that the merger might not be completed, the potential impact of the restrictions under the merger agreement on Hercules’ ability to take certain actions during the period prior to the consummation of the merger (which may delay or prevent Hercules from undertaking business opportunities that may arise pending completion of the merger), the potential for diversion of management and employee attention and for increased employee attrition during that period and the potential effect of these on Hercules’ business and relations with customers and service providers.

 

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The foregoing discussion of the factors considered by the Hercules board of directors is not intended to be exhaustive, but, rather, includes material factors considered by the Hercules board of directors. In reaching its decision to approve the merger agreement, the merger and the other transactions contemplated by the merger agreement, the Hercules board of directors did not quantify or assign any relative weights to the factors considered, and individual directors may have given different weights to different factors. The Hercules board of directors considered all of these factors as a whole, including discussions with, and questioning of, Hercules management and Hercules’ financial and legal advisors, and overall considered the factors to be favorable to, and to support, its determination. The Hercules board of directors also considered the experience of Credit Suisse, its financial advisor, for analyses of the financial terms of the merger and for its opinion as to the fairness of the consideration in the merger to Hercules’ shareholders.

For the reasons set forth above, the Hercules board of directors unanimously determined that the merger, the merger agreement and the transactions contemplated by the merger agreement are advisable for, fair to and in the best interests of Hercules and its shareholders, and approved and adopted the merger agreement and the transactions contemplated by the merger agreement. The Hercules board of directors unanimously recommends that Hercules’ shareholders vote FOR adoption of the merger agreement at the Hercules special meeting.

Opinion of Credit Suisse Securities (USA) LLC

Hercules retained Credit Suisse to act as its exclusive financial advisor in connection with the merger. In connection with its review of the proposed merger, the Hercules board of directors requested that Credit Suisse advise it with respect to the fairness, from a financial point of view, of the $18.60 in cash consideration and the 0.0930 of a share of Ashland common stock (which together we refer to as the “merger consideration”) to be received by the holders of Hercules common stock in the merger. On July 10, 2008, the Hercules board of directors met to review the proposed merger and the terms of the proposed merger agreement. During this meeting, Credit Suisse reviewed with the Hercules board of directors certain financial analyses with respect to the proposed merger. Credit Suisse subsequently delivered its written opinion to the Hercules board of directors to the effect that, as of July 10, 2008 and based upon and subject to the factors and assumptions set forth in the opinion, the merger consideration to be received by the holders of Hercules common stock in the merger was fair from a financial point of view to such shareholders.

The full text of Credit Suisse’s written opinion, dated July 10, 2008, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex C to this proxy statement/prospectus and is incorporated herein by reference. Holders of Hercules common stock are encouraged to read the opinion carefully in its entirety. Credit Suisse provided its opinion for the information of the Hercules board of directors in connection with its consideration of the merger and Credit Suisse’s opinion does not constitute advice or a recommendation to any holder of Hercules common stock as to how such holder should vote or act on any matter relating to the proposed merger or otherwise. Credit Suisse’s opinion addresses only the fairness, from a financial point of view, to the holders of Hercules common stock of the merger consideration to be received and does not address any other aspect or implication of the merger, or any other agreement, arrangement or understanding entered into in connection with the merger or otherwise. The following is a summary of Credit Suisse’s opinion and is qualified by reference to the full text of the opinion attached as Annex C to this proxy statement/prospectus.

In arriving at its opinion, Credit Suisse, among other things:

 

   

reviewed the merger agreement;

 

   

reviewed certain publicly available business and financial information relating to Hercules and Ashland;

 

   

reviewed certain other information relating to Hercules and Ashland, including financial forecasts relating to Hercules and Ashland, provided to or discussed with Credit Suisse by Hercules and Ashland;

 

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met with the managements of Hercules and Ashland to discuss the business and prospects of Hercules and Ashland;

 

   

considered certain financial and stock market data of Hercules and Ashland, and compared that data with similar data for other publicly held companies in businesses Credit Suisse deemed similar to those of Hercules and Ashland;

 

   

considered, to the extent publicly available, the financial terms of certain other business combinations and other transactions which had been effected or announced; and

 

   

considered such other information, financial studies, analyses and investigations and financial, economic and market criteria which Credit Suisse deemed relevant.

In connection with its review, Credit Suisse did not independently verify any of the foregoing information and assumed and relied on such information being complete and accurate in all material respects. With respect to the financial forecasts for Hercules that Credit Suisse used in its analysis, the management of Hercules advised Credit Suisse, and Credit Suisse assumed, that such forecasts were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Hercules as to the future financial performance of Hercules. With respect to the financial forecasts relating to Ashland (including extrapolations thereto prepared by the management of Hercules) that Credit Suisse used in its analyses, the management of Ashland advised Credit Suisse with respect to its financial forecasts and the management of Hercules advised Credit Suisse on the extrapolations thereto, and Credit Suisse assumed that such forecasts and extrapolations were reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of Ashland and Hercules, as the case may be, as to the future financial performance of Ashland. Credit Suisse assumed, with Hercules’ consent, that, in the course of obtaining any regulatory or third party consents, approvals or agreements in connection with the merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on Hercules, Ashland or the contemplated benefits of the merger and that the merger will be consummated in accordance with the terms of the merger agreement without waiver, modification or amendment of any material term, condition or agreement thereof. In addition, Hercules’ management did not request that Credit Suisse make, and Credit Suisse has not made, an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Hercules. Credit Suisse also relied, without independent verification, upon the assessment of the management of Hercules and its independent consultant as to its anticipated future payments in respect of its potential asbestos liability and upon the assessment of the management of Hercules as to its anticipated future receipts from insurance policies in respect of such liability. With respect to these assessments, Credit Suisse assumed (and it expressed no view as to the reasonableness thereof) that such assessments have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Hercules and its independent consultant as to such matters (including the amount and timing of such payments and receipts).

Credit Suisse’s opinion addressed only the fairness, from a financial point of view, to the holders of Hercules common stock of the merger consideration to be received and did not address any other aspect or implication of the merger or any other agreement, arrangement or understanding entered into in connection with the merger or otherwise including, without limitation, the fairness of the amount or nature of, or any other aspect relating to, any compensation to any officers, directors or employees of any party to the merger, or class of such persons, relative to the consideration to be received by Hercules shareholders in the merger or otherwise. The issuance of Credit Suisse’s opinion was approved by its authorized internal committee.

Credit Suisse’s opinion was necessarily based upon information made available to it as of the date of the opinion and financial, economic, market and other conditions as they existed and could be evaluated on such date. Credit Suisse did not express any opinion as to what the value of Ashland’s common stock actually will be when issued to the holders of Hercules common stock pursuant to the merger or the prices at which Ashland’s common stock will trade at any time. Credit Suisse’s opinion did not address the relative merits of the merger as compared to alternative transactions or strategies that may be available to Hercules, nor did it address Hercules’

 

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underlying business decision to proceed with the merger. In connection with the proposed merger, Credit Suisse was not requested to, and did not, solicit third party indications of interest in acquiring all or any part of Hercules.

In preparing its opinion to the Hercules board of directors, Credit Suisse performed a variety of financial and comparative analyses, including those described below. The summary of the analyses described below is not a complete description of the analyses underlying Credit Suisse’s opinion. The preparation of a fairness opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytic methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. As a consequence, neither a fairness opinion nor its underlying analyses are readily susceptible to partial analysis or summary description. Credit Suisse arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, analytic method or factor. Accordingly, Credit Suisse believes that its analyses must be considered as a whole and that selecting portions of its analyses, analytic methods and factors, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion.

In performing its analyses, Credit Suisse considered business, financial, economic, industry, market and other conditions as they existed on, and could be evaluated as of, July 10, 2008. No company, transaction or business used in Credit Suisse’s analyses for comparative purposes is identical to Hercules, Ashland or the proposed merger. An evaluation of the results of Credit Suisse’s analyses is not entirely mathematical. Rather, Credit Suisse’s analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, transactions or businesses analyzed. The results of each analysis were taken into account in reaching its overall conclusion with respect to fairness and Credit Suisse did not make separate quantifiable judgments regarding individual analyses. The estimates contained in Credit Suisse’s analyses and the implied reference ranges indicated by Credit Suisse’s analyses are illustrative and not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond the control of Hercules, Ashland and Credit Suisse. Much of the information used in, and accordingly the results of, Credit Suisse’s analyses are inherently subject to substantial uncertainty.

Credit Suisse’s opinion and analyses were provided to the Hercules board of directors in connection with its consideration of the proposed merger and were among many factors considered by the Hercules board of directors in evaluating the proposed merger. Neither Credit Suisse’s opinion nor its analyses were determinative of the consideration or of the views of the Hercules board of directors or management with respect to the merger or the merger consideration to be received by Hercules shareholders.

The following is a summary of the material financial analyses performed by Credit Suisse in connection with the preparation of its opinion and reviewed with the Hercules board of directors at a meeting held on July 9, 2008. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying and the assumptions, qualifications and limitations affecting each analysis, could create a misleading or incomplete view of Credit Suisse’s analyses.

For purposes of its analyses, Credit Suisse reviewed a number of financial metrics including:

 

   

Enterprise Value—generally the value as of a specified date of the relevant company’s outstanding equity securities (taking into account its exercisable options, warrants and convertible securities) plus the value of its net debt (the value of its outstanding indebtedness and capital lease obligations less the amount of cash on its balance sheet), preferred stock and minority interests as of that date.

 

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EBITDA—generally the amount of the relevant company’s earnings before interest, taxes, depreciation, and amortization for a specified time period.

Unless the context indicates otherwise, enterprise and per share equity values used in the selected companies analysis described below were calculated using the closing price of Hercules and Ashland common stock and the common stock of the selected companies in the chemical industry listed below as of July 3, 2008, and the enterprise and per share equity values for the target companies used in the selected transactions analysis described below were calculated as of the announcement date of the relevant transaction based on the purchase prices paid in the selected transactions. Additionally, the nominal value of the per share consideration to be received by Hercules shareholders in the merger was based on the $18.60 in cash consideration plus the value of 0.0930 of a share of Ashland common stock (approximately $4.35) based on the closing price of Ashland common stock on July 3, 2008 ($46.77).

Hercules Analyses

Hercules Selected Companies Analysis

Credit Suisse reviewed certain financial data, multiples and ratios for the following publicly traded companies in the chemical industry:

 

   

Albemarle Corporation

 

   

Arch Chemicals, Inc.

 

   

Chemtura Corporation

 

   

Cytec Industries Inc.

 

   

Ferro Corporation

 

   

FMC Corporation

 

   

The Lubrizol Corporation

 

   

Nalco Holding Company

 

   

Rockwood Holdings, Inc.

 

   

Rohm and Haas Company

Although none of the selected companies are directly comparable to Hercules, the companies included were selected because they are publicly traded companies with operations that, for purposes of analysis, may be considered similar to certain operations of Hercules.

 

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Credit Suisse calculated the multiples and ratios for the selected companies using closing stock prices as of July 3, 2008, and information it obtained from public filings, publicly available research analyst estimates and other publicly available information. With respect to the selected companies, Credit Suisse compared enterprise values as multiples of calendar years 2008 and 2009 estimated EBITDA based on Wall Street research. Credit Suisse then applied reference ranges of selected multiples described above for the selected companies to corresponding financial data for Hercules, using EBITDA estimates provided by Hercules’ management. Based on these analyses, and after making certain adjustments to reflect certain asbestos liability and after tax foreign exchange swap liability of Hercules, Credit Suisse derived the following implied per share reference range for Hercules common stock, as compared to the implied value of the merger consideration to be received by Hercules shareholders:

 

Implied Per Share
Reference Range for Hercules

  

Implied Value of Per Share
Consideration (as of July 3, 2008)

$15.15 – $22.51

   $22.95

Hercules Selected Transactions Analysis

Credit Suisse reviewed certain transaction multiples in the following selected publicly announced transactions, which involved companies with businesses in the chemical industry.

 

Acquiror

  

Target

The Blackstone Group, Apollo Management, L.P.,
GS Capital Partners 2000, L.P. and Goldman Sachs Group, Merchant Banking Division

   ONDEO Nalco Company (nka: Nalco Holding Co.)

Texas Pacific Group

   Kraton Polymers LLC

The Lubrizol Corporation

   Noveon International, Inc.

Rockwood Specialties Group, Inc.

   Four divisions of Dynamit Nobel AG

Bain Capital

   North American specialty phosphates business of Rhodia

Apollo Management, LP

   Borden Chemical, Inc.

Royal DSM N.V.

   NeoResins business of Avecia Group Plc

J.P. Morgan Partners, LLC

   PQ Corporation

Crompton Corporation (d/b/a Chemtura Corporation)

   Great Lakes Chemical Corporation

Texas Pacific Group

   British Vita plc

PAI Partners

   Food Ingredients Business of Chr. Hansen Holding AS

BASF Corporation

   Engelhard Corporation

BASF Corporation

   Degussa Construction Chemicals, Inc., the construction chemicals business of Degussa AG

BASF Corporation

   Johnson Polymer, LLC

Croda International PLC

   Uniqema, the oleochemicals and surfactants business of Imperial Chemical Industries PLC

Kemira Oyj

   Water Treatment Chemicals and Acrylamide Product Lines of Cytec Industries Inc.

Apollo Management, L.P.

   GE Advanced Materials, a division of General Electric Company

 

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Acquiror

  

Target

The Dow Chemical Co.

   Wolff Walsrode AG, part of the Bayer Group

The Carlyle Group

   PQ Corporation

Israel Chemicals Ltd.

   Supresta, LLC

Hexion Specialty Chemicals, Inc.

   Huntsman Corporation

OM Group, Inc.

   Electronic Business of Rockwood Specialties Group, Inc.

While none of the companies that participated in the selected transactions are directly comparable to Hercules, the companies that participated in the selected transactions are companies with operations that, for the purposes of analysis, may be considered similar to certain operations of Hercules.

Credit Suisse calculated multiples for the selected transactions based on publicly available financial information with respect to the target companies and the selected transactions. For each of the selected transactions, Credit Suisse compared enterprise value as a multiple of the target company’s EBITDA over the latest 12 months preceding the announcement of the transaction, which we refer to as “LTM.” Credit Suisse then applied a reference range of selected multiples described above for the selected transactions to corresponding actual LTM EBITDA for Hercules as of March 31, 2008, using financial information provided by Hercules management. Based on these analyses, and after making certain adjustments to reflect certain asbestos liability and after tax foreign exchange swap liability of Hercules, Credit Suisse derived the following implied per share reference range for Hercules common stock, as compared to the implied value of the merger consideration to be received by Hercules shareholders:

 

Implied Per Share
Reference Range for Hercules

  

Implied Value of Per Share
Consideration (as of July 3, 2008)

$22.13 – $27.39

   $22.95

Hercules Discounted Cash Flow Analysis

Credit Suisse performed a discounted cash flow analysis to calculate the estimated present value of the unlevered, free cash flow of Hercules. The financial forecast was based on internal estimates provided by Hercules management. Credit Suisse calculated estimated terminal values ranging from 6.5x to 8.0x of 2012 estimated EBITDA. The present value of cash flows and terminal values were estimated using discount rates ranging from 9.5% to 12.5% based on Hercules’ estimated weighted average cost of capital. Based on these analyses, and after making certain adjustments, including certain asbestos liability and after tax foreign exchange swap liability of Hercules, Credit Suisse derived the following implied per share reference range for a share of Hercules common stock, as compared to the implied value of the merger consideration to be received by Hercules shareholders:

 

Implied Per Share
Reference Range for Hercules

  

Implied Value of Per Share
Consideration (as of July 3, 2008)

$20.44 – $28.93

   $22.95

Ashland Analyses

Ashland Selected Companies Analysis

Credit Suisse reviewed certain financial data, multiples and ratios for the following publicly traded companies in the chemical and auto service and distribution industries, respectively:

Chemical

 

   

Arch Chemicals, Inc.

 

   

Chemtura Corporation

 

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Cytec Industries Inc.

 

   

Ferro Corporation

 

   

H.B. Fuller Company

 

   

The Lubrizol Corporation

 

   

Nalco Holding Company

 

   

PolyOne Corporation

 

   

Rockwood Holdings, Inc.

 

   

Rohm and Haas Company

Auto Service and Distribution

 

   

Midas, Inc.

 

   

Monro Muffler Brake, Inc.

 

   

The Pep Boys—Manny, Moe & Jack

Although none of the selected companies are directly comparable to Ashland, the companies included were chosen because they are publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of Ashland.

Credit Suisse calculated the multiples and ratios of the selected companies using closing stock prices as of July 3, 2008, and information it obtained from public filings, publicly available research analyst estimates and other publicly available information. With respect to the selected companies, Credit Suisse compared enterprise values as multiples of calendar years 2008 and 2009 estimated EBITDA based on Wall Street research. Credit Suisse also compared the ratio of price to forward earnings per share, based on calendar years 2008 and 2009 estimates. Credit Suisse then applied reference ranges of selected multiples described above for the selected companies to corresponding financial data for Ashland, using EBITDA estimates provided by Ashland management. Based on these analyses, Credit Suisse derived the following implied per share reference range for Ashland common stock, as compared to the closing price per share of Ashland common stock on July 3, 2008 of $46.77 per share:

 

Implied Per Share

Reference Range for Ashland

  

Ashland Closing Price July 3, 2008

$36.28 – $60.04

   $46.77

Ashland Discounted Cash Flow Analysis

Credit Suisse performed a discounted cash flow analysis to calculate the estimated present value of the unlevered, free cash flow of Ashland. The financial forecast through 2010 was based on internal estimates provided by Ashland management and the financial forecast from 2011 through 2013 was based on an extrapolation from the Ashland estimates provided by Hercules management. Credit Suisse calculated ranges of estimated terminal values ranging from 5.5x to 7.0x of fiscal year 2013 estimated EBITDA. The present value of cash flows and terminal values were estimated using discount rates ranging from 10.0% to 14.0% based on Ashland’s estimated weighted average cost of capital. Based on these analyses, Credit Suisse derived the following implied per share reference range for a share of Ashland common stock, as compared to the closing price per share of Ashland common stock on July 3, 2008 of $46.77 per share:

 

Implied Per Share

Reference Range for Ashland

  

Ashland Closing Price July 3, 2008

$49.49 – $62.51

   $46.77

 

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Miscellaneous

Hercules engaged Credit Suisse to act as its exclusive financial advisor in connection with the proposed merger. Hercules selected Credit Suisse based on Credit Suisse’s qualifications, experience and reputation, and its familiarity with Hercules and its business. Credit Suisse is an internationally recognized investment banking firm and is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Pursuant to Hercules’ engagement letter with Credit Suisse, Hercules has agreed to pay Credit Suisse a customary transaction fee for its services in connection with the merger, a significant portion of which is contingent upon the closing of the merger. Credit Suisse also became entitled to a fee upon the delivery of its fairness opinion, which fee is fully creditable against the transaction fee. Hercules has also agreed to reimburse Credit Suisse for its reasonable out-of-pocket expenses, including the reasonable expenses of legal counsel, and to indemnify Credit Suisse and related parties against liabilities, including liabilities under the federal securities laws, arising out of or related to Credit Suisse’ engagement.

Credit Suisse and its affiliates have in the past provided and are currently providing investment banking and other financial services to Hercules and its affiliates, for which Credit Suisse and its affiliates have received and would expect to receive compensation. During the past two years, these services include having acted as lead arranger, administrative agent and lender in connection with Hercules’ credit facility and as a counterparty to a derivative swap transaction with Hercules. Credit Suisse and its affiliates also have in the past provided and are currently providing investment banking and other financial services to Ashland and its affiliates, for which Credit Suisse and its affiliates have received and would expect to receive compensation. During the past two years, these services include having acted as financial advisor to Ashland in connection with the sale of its wholly owned subsidiary, APAC, and as a lender in connection with Ashland’s revolving credit facility. Credit Suisse and its affiliates may have provided other financial advice and services and may in the future provide financial advice and services, to Hercules, Ashland and their respective affiliates for which Credit Suisse and its affiliates have received, and would expect to receive, compensation. Credit Suisse is a full service securities firm engaged in securities trading and brokerage activities, as well as providing investment banking and other financial services. In the ordinary course of business, Credit Suisse and its affiliates may acquire, hold or sell, for its and its affiliates own accounts and the accounts of customers, equity, debt and other securities and financial instruments (including bank loans and other obligations) of Hercules, Ashland and any other company that may be involved in the merger, as well as provide investment banking and other financial services to such companies.

Ashland’s Reasons for the Merger

One of Ashland’s strategic objectives is to become a leading specialty chemicals company. The merger with Hercules is an important step towards achieving that goal. The merger will create a defined core for Ashland comprised of three specialty chemical businesses with strong market positions and promising global growth potential: specialty additives and ingredients, paper and water technologies and specialty resins. The merger will increase Ashland’s revenues outside North America from $2.3 billion to approximately $3.5 billion and also will increase revenues within North America. In addition, Ashland believes the merger will place it in a leadership position in renewable and sustainable chemistries.

Ashland’s board of directors believes that the merger is in the best interest of Ashland and its shareholders. It approved the merger agreement after Ashland’s senior management discussed with the board of directors a broad range of factors and alternatives, including the business, assets, liabilities, results of operations, financial performance, strategic direction and prospects of Hercules, Hercules’ history of growth and the experience of Hercules’ management team.

 

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In view of the wide variety of factors considered in connection with its evaluation of the merger, Ashland’s board of directors did not consider it practicable and did not attempt to quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination, although individual directors may have given different weights to various information and factors. Rather, Ashland’s board of directors views its determination as being based on all of the information and the factors considered by it during the evaluation process.

Interests of Hercules Directors and Executive Officers in the Merger

Some of the directors and executive officers of Hercules have interests in the merger as described below that are different from, or in addition to, the interests of Hercules shareholders generally. The Hercules board of directors was aware of these interests and considered them in approving the merger agreement and the merger.

Existing Change of Control Agreements

Hercules has previously entered into change of control agreements with Messrs. Aanonsen, Carrington, Dahlen, Floyd, Rogerson, Shears and Spizzo. Each of these change of control agreements provides that, if the executive’s employment with Hercules is terminated by Hercules without cause or by the executive due to constructive termination during the three-year period following a change of control (or, in the case of Messrs. Carrington and Dahlen, upon their resignation after the 180-day period following a change of control), the executive will be entitled to receive the following severance payments and benefits: a lump sum severance payment equal to any earned but unpaid compensation through the date of termination, plus a pro rata bonus based on the greater of the executive’s target bonus and the annual bonus most recently received by the executive (reduced by any change of control bonus paid to such executive under the Hercules Management Incentive Compensation Plan) and reflecting the portion of the bonus year worked prior to the date of termination, plus three times (two times, in the case of Messrs. Dahlen and Carrington) the sum of the executive’s base salary in effect prior to the change of control and an annual bonus equal to the greater of the executive’s bonus target in effect as of the date of termination or the most recent bonus actually paid to the executive. Messrs. Floyd, Rogerson, Shears and Spizzo will also receive credit for three additional years of service and age under the Employee Pension Restoration Plan. In addition, the executives will be entitled to continued medical, welfare and fringe benefits during the three-year period (two years, in the case of Messrs. Dahlen and Carrington), and outplacement services. Under the change of control agreements, if any payments or distributions to the executives (whether payable pursuant to the change of control agreements or otherwise) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, then the executive will receive an additional payment such that he is placed in the same after-tax position as if no excise tax had been imposed. The completion of the merger will constitute a change of control for purposes of the change of control agreements. As of the date of this proxy statement/prospectus, none of these executive officers of Hercules has been offered continued employment arrangements with Ashland, and it is anticipated that the employment of each of these executive officers will terminate upon completion of the merger. If the merger is completed on November 28, 2008, and the employment of each of the executives is terminated on such date in a manner that would entitle the executive to the change of control severance described above, it is currently estimated that the executives would be entitled to cash severance payments of approximately the following amounts:

 

Executive

   Estimated Severance Payment

Fred G. Aanonsen

   $ 1,495,224

Edward V. Carrington

     940,816

Richard G. Dahlen

     1,075,208

Israel J. Floyd

     1,250,859

Craig A. Rogerson

     6,682,500

Stuart C. Shears

     1,105,500

Allen A. Spizzo

     2,604,024
      

Total

   $ 15,154,059
      

 

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Existing Letter Agreements

Hercules has previously entered into letter agreements with Anne Schumann, Vice President, Human Resources and Information Technology, and Vincenzo M. Romano, Vice President, Tax, dated August 29, 2000 and June 2, 2006, respectively, pursuant to which, if either executive’s employment is terminated other than for “cause” or, for Mr. Romano, as a result of a reduction in compensation that is disproportionately greater than the reduction imposed on similarly situated employees of Hercules or, in the case of Ms. Schumann, a reduction in compensation, authority or duty, or a relocation, in either case following a change of control of Hercules, the executive would be entitled to a severance payment equal to one times (in the case of Mr. Romano) or one and one half times (in the case of Ms. Schumann) the sum of one year of their annual base salary in effect on the date of termination of employment, plus the executive’s target bonus in effect on the date of termination (or, in the case of Mr. Romano, the actual bonus received during the previous year, if greater). The completion of the merger will constitute a change of control for purposes of the letter agreements. The approximate amount of the severance payment described above, assuming both executives’ employment were terminated immediately after the completion of the merger on November 28, 2008, would be $343,548 in the case of Mr. Romano and $585,000 in the case of Ms. Schumann.

Stock Options, Restricted Stock and Restricted Stock Units held by Directors and Executive Officers

The directors and executive officers of Hercules hold options, restricted stock and RSUs under the Amended and Restated Long Term Incentive Compensation Plan, the Omnibus Equity Compensation Plan for Non-Employee Directors and the Nonemployee Director Stock Accumulation Plan. The parties have agreed that all outstanding stock options, restricted shares and RSUs will vest and be treated in the manner described below. Hercules has entered into letter agreements with certain executive officers, who have elected to receive cash for their Hercules stock options, subject to limited exceptions.

Election to Convert or Cash Out Hercules Stock Options

Each holder (other than certain executive officers who have elected to receive cash for their Hercules stock options, subject to limited exceptions) of a Hercules stock option outstanding immediately prior to the merger will be given a choice of receiving a converted option to acquire Ashland common stock or having such Hercules option cancelled in exchange for a cash payment equal to the product of the number of Hercules shares subject to the option and the amount by which the exercise price of the Hercules option is exceeded by the sum of $18.60 and the amount calculated by multiplying 0.0930 by the average closing price of Ashland common stock on the NYSE for the 10 trading days preceding the completion of the merger (which we refer to as the “Ashland closing price”). If the Hercules option holder elects to have his or her Hercules options converted into options to purchase Ashland common stock, each such option will be converted into an option to buy a number of shares of Ashland common stock equal to the product of the number of Hercules shares subject to the Hercules option and the special exchange ratio, as defined below. Each such converted option will have an exercise price per share equal to the quotient of the exercise price per share of the Hercules option divided by the special exchange ratio. The converted Hercules options will otherwise generally remain subject to the terms and conditions of the equity plan and award agreement under which they were granted. Any Hercules option holders who do not make an election prior to the fifth business day before closing of the merger will be deemed to have elected to receive a converted option. For purposes of the adjustments described in this paragraph, “special exchange ratio” means the sum of (1) 0.0930 plus (2) the quotient of $18.60 divided by the Ashland closing price.

In the event that the number of shares of Ashland common stock issuable upon the exercise of converted stock options, when taken together with the shares of Ashland common stock to be issued pursuant to the merger agreement and issuable upon the exercise of outstanding Hercules warrants or upon the conversion of outstanding Hercules convertible debentures, would cause Ashland to potentially be obligated to issue Ashland shares in a number or having voting power equal to or in excess of 20% of the outstanding shares of Ashland common stock immediately prior to the effective time of the merger, then in-the-money Hercules stock options that otherwise would be converted into options to purchase Ashland shares will be subject to pro rata reduction to the extent necessary to ensure that Ashland does not exceed that 20% standard. Any in-the-money Hercules stock options that are subject to such reduction will be cancelled in exchange for a cash payment in the amount described above.

 

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As of the date of this proxy statement/prospectus, the directors and executive officers of Hercules held in the aggregate outstanding options to purchase approximately 1,719,842 shares of Hercules common stock of which options to purchase 515,050 shares of Hercules common stock were unvested as of the record date and will vest in full upon completion of the merger.

The table below shows the number of Hercules shares covered by stock options held by the directors and executive officers of Hercules as of the date of this proxy statement/prospectus.

 

Directors and Executive Officers

   Hercules Shares
Covered by
Hercules

Stock Options

Fred G. Aanonsen

   85,500

Edward V. Carrington

   16,938

Anna C. Catalano

   9,000

Allan H. Cohen

   —  

Richard G. Dahlen

   67,779

Israel J. Floyd

   171,035

Thomas P. Gerrity

   15,000

John C. Hunter

   15,000

Burton M. Joyce

   9,000

Robert D. Kennedy

   21,000

Jeffrey M. Lipton

   21,000

John E. Panichella

   —  

Paul C. Raymond, III

   42,960

Craig A. Rogerson

   1,061,325

Vincenzo M. Romano

   —  

Anne T. Schumann

   29,475

Stuart C. Shears

   42,000

Allen A. Spizzo

   76,830

John K. Wulff

   15,000

Joe B. Wyatt

   21,000
    

Total

   1,719,842
    

Vesting of Restricted Stock

All outstanding shares of restricted Hercules common stock held by the directors and executive officers of Hercules that were granted under Hercules’ Amended and Restated Long Term Incentive Plan and Omnibus Equity Compensation Plan for Non-Employee Directors will, immediately prior to the closing of the merger, become free of all restrictions and fully vested and will be converted into the right to receive the merger consideration of Ashland common stock and cash. The table below shows the number of shares of restricted Hercules common stock held by the directors and executive officers of Hercules as of the date of this proxy statement/prospectus.

 

Directors and Executive Officers

   Hercules Restricted Stock that will Vest
and Become Unrestricted Upon
Completion of the Merger

Fred G. Aanonsen

   60,623

Edward V. Carrington

   117,532

Anna C. Catalano

   2,250

Allan H. Cohen

   —  

Richard G. Dahlen

   67,602

Israel J. Floyd

   17,295

Thomas P. Gerrity

   7,477

John C. Hunter

   9,107

Burton M. Joyce

   19,481

Robert D. Kennedy

   11,551

Jeffrey M. Lipton

   35,454

John E. Panichella

   67,130

 

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Directors and Executive Officers

   Hercules Restricted Stock that will Vest
and Become Unrestricted Upon
Completion of the Merger

Paul C. Raymond, III

   83,839

Craig A. Rogerson

   298,454

Vincenzo M. Romano

   20,171

Anne T. Schumann

   23,813

Stuart C. Shears

   39,331

Allen A. Spizzo

   97,708

John K. Wulff

   25,951

Joe B. Wyatt

   18,986
    

Total

   1,023,755
    

Based on an implied value of $23.01 per share (calculated using the closing trading price of Ashland common stock on July 10, 2008, the last trading day prior to the announcement of the merger), the aggregate implied value of the outstanding shares of restricted stock held by the directors and executive officers of Hercules that will vest upon completion of the merger is approximately $23.56 million.

Vesting of Restricted Stock Units

Each RSU with respect to Hercules common stock that is outstanding immediately prior to the completion of the merger will be converted into a vested right to receive cash in an amount equal to the product of the cash-out amount and the number of shares of Hercules common stock underlying such restricted stock units. The “cash out amount” means the sum of (1) $18.60 and (2) the product of 0.0930 and the Ashland closing price.

Management Incentive Compensation Plan

Certain benefits are payable under the Management Incentive Compensation Plan sponsored by Hercules (which we refer to as the “MICP”) for the executive officers listed below. The MICP provides that participants therein are entitled, upon the occurrence of a change of control of Hercules, to receive a bonus payment under the plan that is equal to the participant’s target bonus. The completion of the merger will constitute a change of control for purposes of the MICP. Assuming that the merger is completed in 2008, Hercules’ executive officers would be entitled to receive target bonuses under the plan in the approximate amounts set forth in the table below. The executives, other than Messrs. Raymond, Panichella and Romano and Ms. Schumann, are also entitled to certain MICP-related payments pursuant to the terms of their change of control agreements with Hercules, as described above under “—Existing Change of Control Agreements.”

 

Executive

   MICP
Target

Fred G. Aanonsen

   $ 140,000

Edward V. Carrington

     70,000

Richard G. Dahlen

     162,500

Israel J. Floyd

     90,000

John E. Panichella

     228,000

Paul C. Raymond, III

     228,000

Craig A. Rogerson

     810,000

Vincenzo M. Romano

     65,000

Anne Schumann

     130,000

Stuart C. Shears

     90,000

Allen A. Spizzo

     247,000
      

Total

   $ 2,260,500
      

 

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Grantor Trusts

Prior to the completion of the merger, the projected obligations under the Hercules Incorporated Non-Qualified Pension Restoration Plan, the Hercules Incorporated Deferred Compensation Plan and certain individual change of control agreements may be funded into the Hercules Incorporated Compensation Benefit Grantor Trust Agreement for Management Employees and the Hercules Incorporated Compensation Benefit Grantor Trust Agreement for Non-Employee Directors.

Indemnification and directors’ and officers’ liability insurance

For a period of six years following the merger and subject to compliance with applicable state and federal laws, Ashland will indemnify each person who served as a director or officer of Hercules before the completion of the merger to the fullest extent permitted under Hercules’ governing documents and Delaware law from and against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement in connection with any threatened, pending or completed action, suit or proceeding by reason of the fact that the person served as an officer or director of Hercules.

Employment Agreements

Both Mr. Paul C. Raymond, III, President of the Hercules Paper Technologies and Ventures Group, and Mr. John E. Panichella, President of the Hercules Aqualon Division, will be employed by Ashland following the merger and have entered into employment agreements with Ashland executed on July 9, 2008 and July 8, 2008, respectively, contingent on the closing of the merger. Mr. Raymond will serve as the President of Paper and Water Technologies and Ventures and as a Vice President of Ashland. Mr. Panichella will serve as the President of Aqualon and as a Vice President of Ashland. Both agreements are for a three-year term commencing at the effective time of the merger. The terms of both agreements are substantively the same, and each of Messrs. Raymond and Panichella is entitled to the following: (i) an initial base salary of $360,000 per annum, (ii) a retention bonus of $360,000, with one-third of such bonus paid on each anniversary of his date of hire for the three-year term, and (iii) a restricted stock award grant to be awarded within 90 days of his employment commencement date, equivalent in value to 1.5 times his base compensation, which will vest in full 48 months from his employment commencement date; provided, however, that (a) in the event the employee’s employment is terminated less than 48 months from the commencement date by either Ashland without cause or by employee’s death or disability, then the employee will receive accelerated pro rata vesting of the award, based on the number of months of completed employment, or (b) if employee voluntarily elects to terminate his employment or Ashland terminates his employment for cause less than 48 months from the commencement date, then the restricted stock award will not vest and will be forfeited in its entirety.

The agreements include a change of control provision, pursuant to which each of Messrs. Raymond and Panichella would receive a minimum of two years’ base compensation, payment of his annual incentive pay target and the immediate vesting of all of his unvested equity compensation in the event of a change of control and termination of employment within two years. The employment agreements also provide for a non-compete under the terms of a service agreement, with which each of Messrs. Raymond and Panichella agrees to abide for the greater of three years from the date of the execution of his agreement or eighteen months from the end of his employment with Ashland. In the event of termination for cause, Ashland will not owe either Mr. Raymond or Mr. Panichella any further compensation. In the event of death or disability, the employment agreements will automatically terminate and Messrs. Raymond and Panichella (or their estates, in the event of death) will receive only their restricted stock award and retention bonus. For termination without cause, each is entitled to the following: (i) the greater of the balance of his base compensation for the remainder of his employment term, or the amount of severance pay payable to employees in his salary band whose employment is terminated without cause under normal severance pay policies; (ii) payment of amounts he is otherwise entitled to under the Ashland annual incentive compensation and long-term incentive compensation plans, pro rated through his last day of active employment; (iii) pro rata vesting of his restricted stock award; and (iv) payment of the balance of the retention bonus.

 

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Ashland also anticipates continued employment of certain other Hercules officers in addition to Messrs. Raymond and Panichella, although the individuals and the terms of employment are still being finalized.

Manner and Procedure for Exchanging Shares of Hercules Common Stock; No Fractional Shares

The conversion of Hercules common stock into the right to receive the merger consideration will occur automatically at the effective time of the merger. As soon as reasonably practicable after the effective time of the merger, Ashland’s exchange agent will send a letter of transmittal to each former holder of record of shares of Hercules common stock. The transmittal letter will contain instructions for obtaining the merger consideration, including the shares of Ashland common stock, the cash portion of the merger consideration and cash in lieu of any fractional shares of Ashland common stock, in exchange for shares of Hercules common stock. Hercules shareholders should not return stock certificates with the enclosed proxy card.

After the effective time of the merger, shares of Hercules common stock will no longer be outstanding, will be automatically canceled, will cease to exist and certificates that previously represented shares of Hercules common stock will represent only the right to receive the merger consideration as described above.

Until holders of certificates previously representing Hercules common stock have surrendered those certificates to the exchange agent for exchange, those holders will not receive dividends or distributions with respect to Ashland common stock with a record date after the effective time of the merger and will not receive cash in lieu of any fractional shares of Ashland common stock. When holders surrender those certificates, they will receive any dividends on Ashland common stock with a record date after the effective time of the merger and a payment date on or prior to the date of surrender and any cash in lieu of fractional shares of Ashland common stock, in each case without interest.

Hercules shareholders will not receive any fractional shares of Ashland common stock pursuant to the merger. Instead of any fractional shares, shareholders will be paid an amount in cash representing such shareholder’s proportionate fractional interest in the proceeds from the sale by an exchange agent of the excess shares of Ashland common stock delivered to the exchange agent by Ashland. Such excess shares represent the difference between the number of whole shares of Ashland common stock to be distributed to certificate holders and the aggregate number of shares of Ashland common stock delivered to the exchange agent for merger consideration purposes. The exchange agent will sell, for the benefit of the holders of the certificates representing Ashland common stock, the excess shares as soon as practicable after the effective time of the merger at then-prevailing prices on the NYSE.

Treatment of Warrants

Each warrant to acquire shares of Hercules common stock outstanding immediately prior to the effective time of the merger will be converted into the right to receive, upon the exercise of such warrants, the merger consideration of Ashland common stock and cash, in accordance with the Warrant Agreement, dated as of July 27, 1999, between Hercules and The Chase Manhattan Bank, as warrant agent.

Treatment of Convertible Debentures

Hercules convertible debentures outstanding at the effective time of the merger will become convertible into the right to receive the merger consideration of Ashland common stock and cash, in accordance with the Indenture between Hercules and Bankers Trust Company, as trustee, dated as of August 15, 1985 governing Hercules’ 8% Convertible Subordinated Debentures due 2010.

Governmental and Regulatory Approvals

U.S. Antitrust Filing. Under the HSR Act and related regulations, the merger may not be completed unless the parties to the transaction file all required Premerger Notification and Report forms with the U.S. Department of Justice and the Federal Trade Commission and the applicable waiting period has either expired or been early

 

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terminated. Ashland and Hercules filed the required notification and report forms pursuant to the HSR Act regarding the merger on July 24, 2008, and early termination of the statutory waiting period under the HSR Act was granted on August 8, 2008.

EC and Other Foreign Antitrust Filings. Pursuant to the EC Merger Regulation, the merger may not be completed unless the European Commission issues a decision declaring the merger compatible with the common market. Ashland and Hercules anticipate filing the required application under the EC Merger Regulation in the near future. Like the U.S. antitrust filing, there can be no assurance that a challenge to the merger on European antitrust grounds will not be made or, if such a challenge is made, that it would not be successful. All other necessary foreign antitrust filings have been or will be made by the parties.

Other Regulatory Approvals. Ashland and Hercules must receive all waivers, consents, licenses, permits, authorizations, orders and approvals from, and make all registrations, filings, notices and notifications pursuant to, all other antitrust laws as applicable to the merger, except for any such waivers, consents, licenses, permits, authorizations, orders, approvals, registrations, filings, notices and notifications that the failure of which to obtain or make would not materially affect the business of Ashland or Hercules in an adverse way. If the parties discover that other notifications, approvals or waiting periods are necessary, they will seek to make, obtain or observe them. If additional approval or action is needed, however, Ashland and Hercules may not be able to obtain all necessary approvals. Even if the parties can obtain all necessary approvals, and the merger agreement is adopted by Hercules shareholders, conditions may be placed on the merger that could cause Ashland to abandon it.

General. It is possible that any of the governmental entities with which filings have been made may seek additional regulatory concessions or impose additional conditions, or States or private parties may commence litigation to prevent the completion of the merger. There can be no assurance that:

 

   

Ashland or Hercules will be able to satisfy or comply with any conditions imposed;

 

   

compliance or non-compliance will not have adverse consequences on Ashland after completion of the merger; or

 

   

litigation, if any, will be resolved favorably by Ashland and Hercules.

Merger Expenses, Fees and Costs

All expenses incurred in connection with the merger agreement and the related transactions will be paid by the party bearing those expenses, whether or not the merger is completed. Upon a termination of the merger agreement as a result of certain alternative business combination situations or a Hercules board recommendation adverse to the merger, Hercules will be obligated to pay a termination fee to Ashland in the amount of $77.5 million, whereas upon a termination of the merger agreement due to Ashland’s inability to receive the necessary financing for the transaction or a breach of Ashland’s covenants relating to financing, Ashland will be obligated to pay a termination fee to Hercules in the amount of $77.5 million. See “The Merger Agreement—Termination Fees and Expenses” beginning on page 78.

Accounting Treatment

The merger will be accounted for by Ashland using the “purchase” method of accounting. Under this method of accounting, the purchase price paid by Ashland, together with the direct costs of the merger, will be allocated in accordance with generally accepted accounting principles to Hercules’ tangible and intangible assets and liabilities based on their fair market values, with any excess being treated as goodwill. The assets, liabilities and results of operations of Hercules will be consolidated into the assets, liabilities and results of operations of Ashland as of the closing date of the merger.

 

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Termination of Exchange Fund

Twelve months after the effective time of the merger, Ashland may require the exchange agent to deliver to Ashland all cash and shares of Ashland common stock remaining in the exchange fund. Thereafter, Hercules shareholders would be required to look only to Ashland for payment of the merger consideration on their shares of Hercules common stock.

No Liability

None of Ashland, Hercules or Merger Sub will be liable to any holder of a certificate representing shares of Hercules common stock for any merger consideration delivered to a public official pursuant to any abandoned property laws. Any cash or shares of Ashland common stock remaining unclaimed by holders of shares of Hercules common stock immediately prior to such time as such amounts would otherwise escheat to, or become the property of, any governmental authority will, to the extent permitted by applicable law, become the property of Ashland.

Material U.S. Federal Income Tax Consequences

The following is a general discussion of certain material U.S. federal income tax consequences to Hercules shareholders who exchange their shares of Hercules common stock for shares of Ashland common stock and cash pursuant to the merger. This discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended (which we refer to as the “Code”), existing and proposed U.S. Treasury regulations thereunder and current administrative rulings and court decisions, all as in effect on the date hereof. All of the foregoing authorities are subject to change, possibly on a retroactive basis, and any such change could affect the continuing validity of this discussion.

This discussion is limited to Hercules shareholders who hold their shares of Hercules common stock as capital assets for U.S. federal income tax purposes. This discussion does not consider the specific facts or circumstances that may be relevant to a particular Hercules shareholder, nor does this discussion consider any state, local or foreign tax consequences of the merger or any U.S. federal tax consequences other than U.S. federal income tax consequences. This discussion does not address U.S. federal income tax consequences to a Hercules shareholder who, for U.S. federal income tax purposes, is a non-resident alien individual, a foreign corporation, a foreign partnership, or a foreign trust or estate. Moreover, this discussion does not address U.S. federal income tax consequences to Hercules shareholders who may be subject to special treatment, including, without limitation:

 

   

tax-exempt entities, dealers in securities or currencies, banks, other financial institutions or “financial services entities,” insurance companies, regulated investment companies, real estate investment trusts, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, certain expatriates or former long-term residents of the United States, or corporations that accumulate earnings to avoid U.S. federal income tax;

 

   

persons whose functional currency is not the U.S. dollar, and persons who acquired Hercules common stock through the exercise of employee stock options, through a tax qualified retirement plan or otherwise as compensation;

 

   

Hercules shareholders who receive cash for their shares of Hercules common stock pursuant to the exercise of appraisal rights;

 

   

persons holding Hercules common stock as a part of a hedging, integrated, constructive sale or conversion transaction or a straddle or other risk-reduction transaction; and

 

   

partnerships or other pass-through entities (or persons who hold Hercules shares through a partnership or other pass-through entity).

 

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If a partnership or other entity treated as a partnership for U.S. federal income tax purposes holds Hercules common stock, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Such partners are encouraged to consult their tax advisors regarding the specific tax consequences to them of the merger.

Hercules shareholders should consult their own tax advisors regarding the specific tax consequences to them of the merger, including the applicability and effect of U.S. federal, state, local, and foreign income and other tax laws in their particular circumstances.

Tax Consequences of the Merger Generally. The receipt of Ashland common stock and cash in exchange for Hercules common stock pursuant to the merger will generally be a taxable transaction for U.S. federal income tax purposes. As a result, a Hercules shareholder will generally recognize capital gain or loss equal to the difference, if any, between (i) the sum of the fair market value of Ashland common stock (on the date of the merger) and the amount of cash received in the merger and (ii) such shareholder’s adjusted tax basis in the Hercules common stock exchanged for the Ashland common stock and cash. Capital gain or loss will be calculated separately for each block of shares of Hercules common stock (i.e., shares of Hercules common stock acquired at the same cost in a single transaction). Any capital gain or loss will be long-term capital gain or loss if the Hercules shareholder’s holding period for the Hercules common stock exchanged exceeds one year on the date of the merger. Certain non-corporate U.S. holders (including individuals) are eligible for preferential rates of U.S. income taxation in respect of long-term capital gains. The deductibility of capital losses for U.S. federal income tax purposes is limited. Hercules shareholders who recognize a loss on the exchange of their Hercules common stock pursuant to the merger should consult their tax advisors regarding allowance of this loss. Your U.S. federal income tax basis in the Ashland common stock received in the merger will generally be equal to the fair market value of such common stock on the date of the merger. The holding period of the Ashland common stock received in the merger will commence on the day following the date of the merger.

Backup Withholding. Payments made in connection with the merger may be subject to backup withholding at a rate of 28% unless a Hercules shareholder holding Hercules common stock:

 

   

timely provides Hercules (or its depository) with a correct taxpayer identification number (which, for an individual Hercules shareholder is the shareholder’s social security number), certifies under penalties of perjury that such Hercules shareholder is not subject to backup withholding by completing the substitute Form W-9 included in the letter of transmittal, and otherwise complies with applicable requirements of the backup withholding rules; or

 

   

is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, and otherwise complies with applicable requirements of the backup withholding rules.

A Hercules shareholder who does not provide a correct taxpayer identification number may be subject to penalties administered by the Internal Revenue Service. Hercules shareholders should consult their own tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining the exemption.

Backup withholding is not an additional tax. Any amount withheld from a Hercules shareholder under the backup withholding rules described above will generally be allowed as a refund or a credit against such shareholder’s U.S. federal income tax liability, provided that timely filings are made with the Internal Revenue Service.

The foregoing discussion is intended as a general summary only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax consequences of the merger. Because the tax consequences to a particular Hercules shareholder may differ based on that shareholder’s particular circumstances, each shareholder should consult his, her or its own tax advisor regarding the U.S. federal, state, local and foreign tax consequences of the merger.

 

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Appraisal Rights

In connection with the merger, record holders of Hercules common stock who comply with the procedures summarized below will be entitled to appraisal rights if the merger is completed. Under Section 262 of the General Corporation Law of the State of Delaware (which we refer to as Section 262), holders of shares of Hercules common stock with respect to which appraisal rights are properly demanded and perfected and not withdrawn or lost are entitled, in lieu of receiving the merger consideration, to have the “fair value” of their shares at the effective time of the merger (exclusive of any element of value arising from the accomplishment or expectation of the merger) judicially determined and paid to them in cash. Hercules is required to send a notice to that effect to each shareholder not less than 20 days prior to the special meeting. This proxy statement/prospectus constitutes that notice to you.

The following is a brief summary of Section 262, which sets forth the procedures for demanding statutory appraisal rights. This summary is qualified in its entirety by reference to Section 262, the text of which is attached to this proxy statement/prospectus as Annex B.

Shareholders of record who desire to exercise their appraisal rights must satisfy all of the following conditions.

A shareholder who desires to exercise appraisal rights must (a) not vote in favor of the merger and (b) deliver a written demand for appraisal of the shareholder’s shares to the Corporate Secretary of Hercules before the vote on the merger at the special meeting. The failure to vote against the merger will not operate as a waiver of appraisal rights.

A demand for appraisal must be executed by or for the shareholder of record, fully and correctly, as the shareholder’s name appears on the certificates representing shares. If shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, such demand must be executed by the fiduciary. If shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand must be executed by all joint owners. An authorized agent, including an agent of two or more joint owners, may execute the demand for appraisal for a shareholder of record; however, the agent must identify the record owner and expressly disclose that, in exercising the demand, the agent is acting as agent for the record owner. In addition, the shareholder must continuously hold the shares of record from the date of making the demand through the effective time of the merger.

A record owner, such as a broker, who holds shares as a nominee for others may exercise appraisal rights with respect to the shares held for all or less than all beneficial owners of shares as to which the holder is the record owner. In that case, the written demand must set forth the number of shares covered by the demand. Where the number of shares is not expressly stated, the demand will be presumed to cover all shares outstanding in the name of the record owner.

Beneficial owners who are not record owners and who intend to exercise appraisal rights should instruct the record owner to comply strictly with the statutory requirements with respect to the exercise of appraisal rights before the vote on the adoption of the merger agreement at the special meeting. A beneficial owner of shares held in “street name” who desires appraisal rights with respect to those shares should take such actions as may be necessary to ensure that a timely and proper demand for appraisal is made by the record owner of the shares. Shares held through brokerage firms, banks and other financial institutions are frequently deposited with and held of record in the name of a nominee of a central security depositary, such as Cede & Co., The Depository Trust Company’s nominee. Any beneficial owner of shares desiring appraisal rights with respect to such shares should instruct such firm, bank or institution that the demand for appraisal must be made by the record holder of the shares, which might be the nominee of a central security depositary if the shares have been so deposited.

As required by Section 262, a demand for appraisal must be in writing and must reasonably inform Hercules of the identity of the record holder (which might be a nominee as described above) and of such holder’s intention to seek appraisal of such shares.

 

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Shareholders of record who elect to demand appraisal of their shares must mail or deliver their written demand to: Hercules Incorporated, Hercules Plaza, 1313 North Market Street, Wilmington, Delaware 19894-0001, Attention: Corporate Secretary or by facsimile at (302) 594-7315. The written demand for appraisal should specify the shareholder’s name and mailing address, the number of shares owned, and that the shareholder is demanding appraisal of his, her or its shares. The written demand must be received by Hercules prior to the special meeting. Neither voting (in person or by proxy) against, abstaining from voting on or failing to vote on the proposal to adopt the merger agreement will alone suffice to constitute a written demand for appraisal within the meaning of Section 262.

In addition, a shareholder demanding appraisal must not vote its shares of common stock in favor of adoption of the merger agreement. Because a signed proxy card that does not contain voting instructions will, unless revoked, be voted in favor of adoption of the merger agreement, a shareholder who votes by proxy and who wishes to exercise appraisal rights must vote against the merger agreement or abstain from voting on the merger agreement.

Within 120 days after the effective time of the merger, either the surviving corporation in the merger or any shareholder who has timely and properly demanded appraisal of such shareholder’s shares and who has complied with the required conditions of Section 262 and is otherwise entitled to appraisal rights may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares of all shareholders who have properly demanded appraisal. If a petition for an appraisal is timely filed, after a hearing on such petition, the Delaware Court of Chancery will determine which shareholders are entitled to appraisal rights and thereafter will appraise the shares owned by those shareholders, determining the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest to be paid, if any, upon the amount determined to be the fair value. In determining fair value, the Delaware Court of Chancery is to take into account all relevant factors. In Weinberger v. UOP, Inc., et al., the Delaware Supreme Court discussed the considerations that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered and that “[f]air price obviously requires consideration of all relevant factors involving the value of a company.” The Delaware Supreme Court stated that in making this determination of fair value, the court must consider “market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts which were known or which could be ascertained as of the date of merger which throw any light on future prospects of the merged corporation.” The Delaware Supreme Court construed Section 262 to mean that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.” However, the Delaware Supreme Court noted that Section 262 provides that fair value is to be determined “exclusive of any element of value arising from the accomplishment or expectation of the merger.”

Shareholders considering seeking appraisal should bear in mind that the fair value of their shares determined under Section 262 could be more than, the same as, or less than the merger consideration they are entitled to receive pursuant to the merger agreement if they do not seek appraisal of their shares, and that opinions of investment banking firms as to fairness from a financial point of view are not necessarily opinions as to fair value under Section 262.

The cost of the appraisal proceeding may be determined by the Delaware Court of Chancery and taxed upon the parties as the Delaware Court of Chancery deems equitable in the circumstances. Upon application of a shareholder seeking appraisal rights, the Delaware Court of Chancery may order that all or a portion of the expenses incurred by such shareholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, be charged pro rata against the value of all shares entitled to appraisal. In the absence of such a determination of assessment, each party bears its own expenses.

Except as explained in the last sentence of this paragraph, at any time within 60 days after the effective time of the merger, any shareholder who has demanded appraisal shall have the right to withdraw such shareholder’s

 

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demand for appraisal and to accept the cash and shares of Ashland common stock to which the shareholder is entitled pursuant to the merger. After this period, the shareholder may withdraw such shareholder’s demand for appraisal only with the consent of the surviving corporation in the merger. If no petition for appraisal is filed with the Delaware Court of Chancery within 120 days after the effective time of the merger, shareholders’ rights to appraisal shall cease and all shareholders shall be entitled only to receive the cash and shares of Ashland common stock as provided for in the merger agreement. Inasmuch as the parties to the merger agreement have no obligation to file such a petition, and have no present intention to do so, any shareholder who desires that such petition be filed is advised to file it on a timely basis. No petition timely filed in the Delaware Court of Chancery demanding appraisal shall be dismissed as to any shareholders without the approval of the Delaware Court of Chancery, and that approval may be conditioned upon such terms as the Delaware Court of Chancery deems just.

The foregoing is a brief summary of Section 262 that sets forth the procedures for demanding statutory appraisal rights. This summary is qualified in its entirety by reference to Section 262, the text of which is attached hereto as Annex B. Failure to comply with all the procedures set forth in Section 262 will result in the loss of a shareholder’s statutory appraisal rights.

Stock Exchange Listing

Ashland has agreed to use its reasonable best efforts to cause the shares of Ashland common stock to be issued pursuant to the merger, and shares of Ashland common stock to be issuable upon the exercise of converted stock options to purchase Ashland shares and upon the exercise of outstanding Hercules warrants, as well as upon the conversion of outstanding Hercules convertible debentures, to be approved for listing on the NYSE. It is a condition to the completion of the merger that such shares be approved for listing on the NYSE, subject to the official notice of issuance. Following the merger, the shares of Ashland common stock will continue to trade on the NYSE under the symbol “ASH.”

Delisting and Deregistration of Hercules Common Stock

If the merger is completed, Hercules common stock will be delisted from the NYSE and will no longer be registered under the Exchange Act.

Dividends

Pursuant to the terms of the merger agreement, Hercules is not permitted to make, declare, pay or set aside for payment any dividend to Hercules shareholders, except for the Hercules regular quarterly cash dividends not in excess of $0.06 per share, with usual declaration, record and payment dates in accordance with Hercules’ current dividend policy. If the closing occurs before any of these declaration, record and payment dates for Hercules dividends, then Hercules shareholders will not be entitled to a Hercules dividend for the relevant period but may be entitled to receive an Ashland dividend for such period on the shares of Ashland common stock received in the merger.

Employee Matters

The merger agreement provides that, until January 1, 2011, employees of Hercules who become employees of Ashland or one of its subsidiaries as a result of the merger will be provided compensation and benefits that, taken in the aggregate, are substantially comparable to the compensation and benefits received by such employees prior to the date of the merger. Specifically, until January 1, 2011, Ashland will pay Hercules employees, on an individual basis, base salaries and base wages that are at least equal to the base salaries and base wages payable to such employees prior to the date of the merger. Employees of Hercules will receive credit for their years of service with Hercules for all purposes under the applicable Ashland employee benefit plans (other than benefit accrual under any Ashland defined benefit pension plan). However, under Ashland’s retiree medical, dental and group life plans, prior service credit shall only count towards meeting the five years of

 

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service eligibility component for such plans and such employees will otherwise be treated as newly hired employees. In addition, to the extent employees of Hercules participate in an Ashland health plan, Ashland will waive all restrictions and limitations for pre-existing conditions under the Ashland health plan. Ashland will continue the Hercules retiree welfare programs, including retiree medical, prescription drugs, and life insurance plans, through December 31, 2011, generally on terms and conditions no less favorable than those in effect at the time of the merger. Following December 31, 2011, Ashland will provide to all individuals who, immediately prior to the merger effective time, were receiving benefits under the Hercules retiree welfare programs and Hercules employees retiring on or prior to December 31, 2013 retiree welfare programs on terms and conditions no less favorable than the lesser of (i) those in effect for Ashland retirees eligible to receive subsidized retiree welfare benefits as they existed prior to July 1, 2003 and (ii) those in effect under the Hercules retiree welfare programs in effect at the effective time of the merger with maximum employer costs capped at current levels. Through December 31, 2010, Hercules employees will continue to participate and accrue benefits under the Hercules pension plan and, as applicable, Hercules’ excess benefit plan, in accordance with the terms of such plans both as in effect on the date of the merger agreement. For Hercules employees whose employment terminates prior to January 1, 2011, Ashland will provide severance benefits at least as favorable as those in effect immediately prior to the merger.

Adjournment of the Hercules Special Meeting

In the event there are not sufficient votes to adopt the merger agreement and to approve the transactions contemplated thereby at the time of the Hercules special meeting, the Hercules shareholders will not be able to adopt the merger agreement and approve the transactions contemplated thereby unless the Hercules special meeting is adjourned to a later date or dates in order to permit the solicitation of additional proxies. Pursuant to Delaware law, no notice of an adjourned meeting need be given if the time and place to which the meeting is adjourned are fixed and announced at the meeting.

In order to permit proxies that have been received by Hercules at the time of the Hercules special meeting to be voted for an adjournment, if necessary, Hercules has submitted the proposal to adjourn the special meeting to the Hercules shareholders as a separate matter for their consideration. The proposal to adjourn the special meeting must be approved by the holders of a majority of the Hercules common stock present, in person or by proxy, at the special meeting.

The Hercules board of directors recommends that you vote “FOR” the proposal to adjourn the special meeting, if necessary.

Financing Commitments

In connection with the proposed merger, Ashland entered into a financing commitment letter, dated July 10, 2008, with Banc of America Securities LLC, Banc of America Bridge LLC and Bank of America, N.A., which we refer to collectively as “Bank of America,” and The Bank of Nova Scotia, which we refer to as “Scotiabank.” Subject to the terms and conditions of the financing commitment letter, Bank of America and Scotiabank have each committed to provide to Ashland 50% of a senior secured financing of up to an aggregate of $1.950 billion, and 50% of a senior unsecured bridge financing of up to an aggregate of $750.0 million in the event that Ashland is unable to sell debt securities for gross proceeds of $750.0 million.

Senior Secured Credit Facilities

The senior secured credit facilities will consist of: (a) two tranches of term loans aggregating $1.450 billion; and (b) a revolving credit facility of up to $500.0 million. The Term A and Term B loan facilities will initially aggregate up to $600.0 million and $850.0 million, respectively; however, such allocation between the Term A facility and Term B facility is subject to change, in consultation with Ashland. Up to $100.0 million of each of the Term A and the Term B facilities may be replaced by or repaid with an accounts receivable securitization facility. The Term A and Term B facilities have terms of five years and seven years, respectively.

 

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The $500.0 million revolving credit facility shall be available from time to time for a five-year period beginning on the closing date and includes a sublimit for issuances of standby and commercial letters of credit and swingline loans. At the closing date of the merger, up to $12.0 million (plus additional amounts in order to fund upfront fees and original issue discount) of the revolving credit facility may be used to consummate the merger.

The senior secured credit facilities will be used to fund in part Ashland’s payment of the cash portion of the merger consideration, pay fees and expenses incurred in connection with the merger and the financing, refinance Ashland’s and Hercules’ existing senior credit facilities and certain of Hercules’ other debt and, with respect to the revolving credit facility, provide ongoing working capital for general corporate purposes.

Interest Rate

Loans under the senior secured credit facilities are expected to bear interest, at Ashland’s option, at a rate equal to the adjusted London interbank offer rate or an alternate base rate, in each case plus a spread.

Guarantors

All obligations under the senior secured credit facilities and under any treasury management, interest rate protection or other hedging arrangement entered into with a senior lender or any of its affiliates will be guaranteed by, subject to certain agreed upon exceptions, each of the existing and future direct and indirect material domestic subsidiaries of Ashland (the “Guarantors”).

Security

The obligations of Ashland and each Guarantor under the senior secured credit facilities, and under any treasury management, interest rate protection or other hedging arrangement entered into with a senior lender or any of its affiliates, will be secured, subject to permitted liens and other agreed upon exceptions, by all present and future shares of subsidiary capital stock (limited, in the case of foreign subsidiaries, to 65% of the capital stock of such subsidiaries and excluding the stock of certain domestic holding companies for foreign subsidiary stock), all present and future intercompany debt owed to Ashland and each Guarantor, all present and future personal property and owned real property of the Borrower and each Guarantor, subject to certain agreed upon exceptions, and all proceeds and products of such property and assets.

Other Terms

The senior secured credit facilities will contain customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, investments, sales of assets, mergers and consolidations, capital expenditures, liens, dividends and other distributions. The senior secured credit facilities will also include maximum leverage ratio and minimum fixed charge coverage ratio covenants and customary events of default, including a change of control, to be defined.

Senior Unsecured Bridge Loan Facility

Banc of America Bridge LLC and Scotiabank have committed to provide Ashland with a $750.0 million senior unsecured bridge loan, which we refer to as the “bridge loan.” The bridge loan would be used for the same funding purposes as the senior secured credit facilities, except that it would not be used to provide working capital for general corporate purposes. In lieu of obtaining the bridge loan, Ashland may fund up to $750 million of its cash needs related to the merger through the issuance of debt securities, depending on market conditions.

Interest Rate

Initially, the bridge loan would bear interest at a rate equal to the greatest of a specified rate, a rate based on the U.S. Treasury security with a similar maturity to the bridge loan or the adjusted London interbank offer

 

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rate in each case plus a spread that will increase over time. At the first year anniversary of the closing of the merger, the bridge loan would, to the extent not repaid, convert into a senior unsecured term loan. After conversion to a senior unsecured term loan, an applicable lender may choose to exchange such loan for loans evidenced by senior unsecured exchange notes, which will be entitled to registration rights. The bridge loan and unsecured term loan would be subject to a maximum rate of interest. Any senior unsecured term loan or loan evidenced by an exchange note would mature on the eighth anniversary of the closing date of the merger.

Guarantors

All obligations under the senior unsecured bridge loan facility would be guaranteed by the Guarantors.

Other Terms

The senior unsecured bridge loan facility would contain customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, investments, sales of assets, mergers and consolidations, capital expenditures, liens, dividends and other distributions. The senior unsecured bridge loan facility would also include customary events of default. The lenders would have the right to require Ashland to prepay the bridge loan plus a fee in the event of a change of control, to be defined.

Conditions Precedent and Expiration

The financing commitment letter also includes customary conditions to funding, including, without limitation:

 

   

the consummation of the merger in accordance with the merger agreement, including the satisfaction of the conditions to closing of the merger as set forth in the merger agreement,

 

   

the absence of any material adverse effect (as such term is defined in the merger agreement) on Hercules or its subsidiaries, taken as a whole,

 

   

the obtaining of credit ratings of the debt contemplated by the financing commitment letter,

 

   

the accuracy of certain representations and warranties of the parties,

 

   

no default (of the type specified in the financing commitment letter) or event of default under the senior secured credit facilities or the senior unsecured bridge loan facility shall have occurred and be continuing, subject to certain agreed upon exceptions,

 

   

the negotiation, execution and delivery of definitive documentation consistent with the terms and conditions in the financing commitment letter and otherwise reasonably satisfactory to Bank of America, Scotiabank and the other lenders under the facilities,

 

   

the absence of Bank of America or Scotiabank becoming aware of any information, or any event, development or change relating to Ashland or Hercules after the date of the financing commitment letter, that is inconsistent in a material and adverse manner with any other information or other matter disclosed to Bank of America or Scotiabank by Ashland prior to such date,

 

   

the payment of all reasonable and invoiced fees and expenses,

 

   

the receipt of customary opinions, documents and certificates and granting and perfecting security interests in certain collateral, and

 

   

the repayment of certain of Hercules’ and Ashland’s existing indebtedness (except for the indebtedness permitted to remain outstanding as provided in the financing commitment letter).

The description of the financing commitments contained above is based upon the terms set forth in the financing commitment letter which terms are subject to modification by Bank of America, Scotiabank and

 

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Ashland, and further subject to negotiation and execution of the definitive credit agreement satisfactory to Bank of America, Scotiabank, the syndicate of financial institutions arranged by them and Ashland. As a result, the final terms of the definitive senior secured credit agreement and definitive bridge loan agreement (if any) may vary from those described above.

The financing commitment letter expires at the earliest of (i) December 31, 2008, unless the closing date occurs on or prior to December 31, 2008, (ii) the consummation of the merger (a) in the case of the senior secured credit facilities, without the use of the senior secured credit facilities, or (b) in the case of the bridge loan, without the use of the bridge loan, (iii) the acceptance by any of Ashland, Hercules or any of their affiliates of an offer for all or any substantial part of the capital stock or property and assets of Ashland and Hercules other than as part of the merger and (iv) if any event occurs or information becomes available that, in the reasonable and good faith judgment of Bank of America, results or is reasonably likely to result in the failure to satisfy any condition precedent required under the financing commitment letter. Bank of America and Scotiabank will receive compensation in connection with the financing commitment letter and related financing.

 

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THE MERGER AGREEMENT

The following is a summary of the material provisions of the merger agreement. This summary is qualified in its entirety by reference to the merger agreement, which is attached to this proxy statement/prospectus as Annex A. We encourage you to read the merger agreement in its entirety because it is the legal document that governs the merger.

The merger agreement is included in this proxy statement/prospectus in order to provide you with information regarding its terms. It is not in any way intended to provide you with factual information about the current state of affairs of either Ashland or Hercules. Such information can be found elsewhere in this proxy statement/prospectus (including the other attached annexes) and in the other public filings that Ashland and Hercules make with the SEC, which are available without charge at www.sec.gov.

The merger agreement contains representations, warranties, covenants and other agreements, each as of specific dates. These representations, warranties, covenants and other agreements are qualified by information contained in confidential disclosure schedules that the parties exchanged in connection with the execution of the merger agreement. The disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations, warranties, covenants and other agreements set forth in the merger agreement. Some of the information contained in the disclosure schedules may be non-public and Ashland and Hercules do not believe that this information is required to be publicly disclosed under the federal securities laws (although any specific material facts that qualify the representations and warranties in the merger agreement have been disclosed in this proxy statement/prospectus). Moreover, some of these representations, warranties, covenants and/or other agreements may not be accurate or complete as of a specific date because they are subject to a contractual standard of materiality that may be different from the standard generally applied under the federal securities laws and/or were used for the purpose of allocating risk between Ashland and Hercules rather than establishing matters as facts. Finally, information concerning the subject matter of these representations, warranties, covenants and other agreements may have changed since the date of the merger agreement, which may or may not be fully reflected in Ashland’s and Hercules’ public disclosures. Accordingly, you should not rely on these representations, warranties, covenants and other agreements as statements of fact.

Form of the Merger

If the holders of Hercules common stock adopt the merger agreement and all other conditions to the merger are satisfied or waived, Merger Sub (a newly formed and wholly owned subsidiary of Ashland established to facilitate the acquisition of Hercules) will be merged with and into Hercules, and will cease to exist. Hercules will survive the merger as a wholly owned subsidiary of Ashland and will continue its corporate existence under Delaware law under the name “Hercules Incorporated.”

Merger Consideration

Upon completion of the merger, each share of Merger Sub will convert into a share of the surviving corporation. Each share of Hercules common stock outstanding immediately prior to the effective time of the merger, other than those shares held directly or indirectly by Ashland and Merger Sub or by Hercules as treasury stock and other than shares with respect to which a Hercules shareholder has validly demanded and perfected appraisal rights under Delaware law, will be cancelled and extinguished, and converted into the right to receive merger consideration consisting of (i) 0.0930, which we refer to as the exchange ratio, of a share of Ashland common stock, par value $0.01 per share, and (ii) $18.60 in cash, without interest. Hercules shareholders will not receive any fractional shares of Ashland common stock pursuant to the merger. Instead of any fractional shares, shareholders will be paid, by an exchange agent, an amount in cash representing such shareholder’s proportionate fractional interest in the proceeds from the sale of the excess shares of Ashland common stock delivered to the exchange agent by Ashland. Such excess shares represent the difference between the number of whole shares of Ashland common stock to be distributed to certificate holders and the aggregate number of shares of Ashland

 

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common stock delivered to the exchange agent for merger consideration purposes. The exchange agent will sell, for the benefit of Hercules shareholders who would otherwise be entitled to fractional shares of Ashland common stock, the excess shares as soon as practicable after the effective time of the merger at then-prevailing prices on the NYSE.

Upon completion of the merger, each share of Hercules common stock owned directly or indirectly by Ashland or Merger Sub immediately prior to the effective time of the merger or held in treasury of Hercules will be automatically cancelled and retired, and none of Ashland, Merger Sub or Hercules will receive any securities of Ashland or other consideration in exchange for those shares.

Shares of Hercules common stock held by any Hercules shareholder that properly demands payment for its shares and perfects such demand in compliance with the appraisal rights under Section 262 of the DGCL will not be converted into the right to receive the merger consideration. Hercules shareholders properly exercising and perfecting appraisal rights will, at the effective time of the merger, have their shares cancelled and extinguished, and be entitled to payment based on their appraisal value solely from the surviving corporation. However, if any Hercules shareholder fails to perfect or otherwise waives, withdraws or loses the right to receive payment under Section 262 of the DGCL, then that Hercules shareholder will not be paid in accordance with Section 262 of the DGCL, and the shares of Hercules common stock held by such Hercules shareholder will be exchangeable solely for the merger consideration.

Closing

Unless the parties agree otherwise, the closing will occur on a date to be specified by the parties which will be no later than the fifth business day after the satisfaction or waiver of all closing conditions. If, however, Hercules shareholder approval is obtained between December 19, 2008 and January 19, 2009, the closing will occur by January 26, 2009.

The proposed transaction is currently targeted to close in the fourth quarter of 2008; however, because completion of the merger is subject to customary conditions, we cannot predict the actual timing.

Effective Time

On the closing date, the parties will file with the Secretary of State of the State of Delaware a certificate of merger. The merger will become effective upon the filing of the certificate of merger with the Secretary of State of the State of Delaware, or at such later time as the parties agree and specify in the certificate of merger.

At the effective time of the merger, Hercules’ certificate of incorporation and bylaws shall be amended and restated to read in their entirety as set forth in Exhibits A and B, respectively, to the merger agreement.

Treatment of Stock Options

Each option to acquire shares of Hercules common stock held by employees and directors of Hercules and outstanding immediately prior to the effective time of the merger, which we refer to as Hercules options, will become immediately exercisable and vested. Such Hercules options may either be converted into an option to acquire shares of Ashland common stock or cancelled in exchange for a cash payment. Any Hercules option holder that does not make an election with respect to his or her options prior to the fifth business day preceding the close of the merger will receive options for Ashland common stock subject to the pro rata reduction described below.

If the Hercules option holder elects to have his or her options become converted options, then the terms and conditions of the converted options will remain the same as those of the Hercules options, except for the number of shares underlying the option and the exercise price. The number of shares of Ashland common stock underlying the option will be determined by multiplying

 

   

the number of shares of Hercules common stock subject to the Hercules option, times

 

   

the special exchange ratio referred to below,

and rounding the result down to the nearest whole share.

 

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The per share exercise price of these converted options will be determined by dividing

 

   

the per share exercise price of the Hercules option by

 

   

the special exchange ratio,

and rounding the result up to the nearest whole cent.

The “special exchange ratio” is the sum of (i) 0.0930 plus (ii) the quotient of (x) $18.60 divided by (y) the average, rounded to the nearest cent, of the closing sale prices of Ashland common stock on the NYSE as reported by The Wall Street Journal for the ten trading days prior to the effective time of the merger, also referred to as the Parent Closing Price.

If a Hercules option holder elects to receive cash, the cash payment will be equal to the product of

 

   

the number of shares of Hercules common stock subject to such Hercules stock option immediately prior to the merger, and

 

   

the excess (if any) of the cash out amount (where the cash out amount equals the sum of (i) $18.60 and (2) the product of 0.0930 and the Parent Closing Price) over the exercise price per share of the Hercules stock option.

In the event that the number of shares of Ashland common stock issuable upon the exercise of converted stock options, when taken together with the shares of Ashland common stock to be issued pursuant to the merger agreement and issuable upon the exercise of outstanding Hercules warrants or upon the conversion of outstanding Hercules convertible debentures, would cause Ashland to potentially be obligated to issue Ashland shares in a number or having voting power equal to or in excess of 20% of the outstanding shares of Ashland common stock immediately prior to the effective time of the merger, then in-the-money Hercules stock options that otherwise would convert into stock options to purchase Ashland shares are subject to pro rata reduction to the extent necessary to ensure that Ashland does not exceed that 20% standard. Any in-the-money Hercules stock options that are so reduced will be cancelled in exchange for a cash payment in the amount described above. Cash payments for those Hercules option holders electing to receive cash will be made by Ashland within seven business days following the close of the merger if the pro ration does not apply, and within ten business days following the close of the merger if the pro ration does apply.

Treatment of Warrants and Convertible Debentures

The treatment of the outstanding Hercules convertible debentures and warrants is discussed under “The Merger—Treatment of Warrants” and “The Merger—Treatment of Convertible Debentures.”

Treatment of Restricted Stock

Each share of Hercules restricted stock outstanding immediately prior to the close of the merger shall vest in full and be converted into the right to receive the merger consideration.

Treatment of Restricted Stock Units

Each Hercules RSU that is outstanding immediately prior to the close of the merger will be converted into a vested obligation to receive cash with a value equal to the product of

 

   

the cash-out amount (which is the sum of $18.60 and the product of 0.0930 and the Parent Closing Price); and

 

   

the number of shares of Hercules common stock underlying such restricted stock units.

Such payments will be made by Ashland within five business days following the merger closing.

 

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Representations and Warranties

The merger agreement contains representations and warranties by Hercules, subject in some cases to specified exceptions and qualifications, relating to a number of matters, including the following:

 

   

the organization, valid existence, good standing and qualification to do business of Hercules and its subsidiaries;

 

   

Hercules’ interests in its subsidiaries;

 

   

capital structure of Hercules;

 

   

corporate authorization, execution and delivery, enforceability and validity of the merger agreement;

 

   

the approval of the Hercules board of directors of the merger agreement and the transactions contemplated by the merger agreement;

 

   

the absence of any conflicts with Hercules’ organizational documents, applicable laws or certain agreements as a result of entering into the merger agreement and completing the merger;

 

   

required consents and filings with both domestic and foreign governmental entities in connection with the transactions contemplated by the merger agreement;

 

   

proper filings of documents with the SEC and the accuracy of information contained in those documents;

 

   

the conformity with generally accepted accounting principles of Hercules’ financial statements filed with the SEC and the absence of undisclosed liabilities;

 

   

the accuracy of information supplied by Hercules in connection with this proxy statement/prospectus and the registration statement of which it is a part;

 

   

the absence of an event that is having or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on Hercules since January 1, 2008;

 

   

the absence of litigation or investigations;

 

   

the existence of and compliance with material contracts;

 

   

Hercules’ compliance with applicable laws, including environmental laws;

 

   

the absence of environmental claims pending or threatened against Hercules;

 

   

employment and labor matters affecting Hercules;

 

   

tax matters;

 

   

real property, personal property and intellectual property;

 

   

required two-thirds vote by Hercules’ shareholders to complete the merger;

 

   

the absence of transactions, agreements, arrangements or understandings between Hercules and any affiliate;

 

   

brokers’ fees and expenses related to the merger;

 

   

receipt of the opinion from Credit Suisse, dated July 10, 2008, as to the fairness of the merger consideration to the Hercules shareholders from a financial point of view; and

 

   

insurance matters.

The merger agreement contains representations and warranties by Ashland and Merger Sub, subject in some cases to specified exceptions and qualifications, relating to a number of matters, including the following:

 

   

the organization, valid existence, good standing and qualification to do business of Ashland, Merger Sub and Ashland’s subsidiaries;

 

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capital structure of Ashland and Merger Sub;

 

   

corporate authorization and validity of the merger agreement;

 

   

the absence of any conflicts with Ashland’s or Merger Sub’s organization documents, applicable laws or certain agreements as a result of entering into the merger agreement and completing the merger;

 

   

required consents and filings with governmental entities in connection with the transactions contemplated by the merger agreement;

 

   

proper filings of documents with the SEC and the accuracy of information contained in those documents;

 

   

the conformity with generally accepted accounting principles of Ashland’s financial statements filed with the SEC and the absence of undisclosed liabilities;

 

   

the accuracy of information supplied by Ashland and Merger Sub in connection with this proxy statement/prospectus and the registration statement of which it is a part;

 

   

capitalization of Merger Sub;

 

   

brokers’ fees and expenses related to the merger;

 

   

the existence of and compliance with material contracts;

 

   

the absence of an event that is having or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on Ashland since October 1, 2007;

 

   

compliance with all applicable laws;

 

   

the absence of litigation and investigations;

 

   

the absence of a required Ashland shareholder approval of the merger and related transactions; and

 

   

commitment for financing to consummate the merger transactions.

Certain of the representations and warranties made by the parties are qualified as to “materiality” or “material adverse effect.” For purposes of the merger agreement, “material adverse effect” means with respect to Hercules or Ashland, as the case may be, any change, effect, event, occurrence, state of facts or development that materially adversely affects the business, financial condition or annual results of operations of the party, in each case taken as a whole. However, in determining whether there is or would reasonably be expected to be a material adverse effect, there will be excluded any effect that directly or indirectly results from:

 

   

changes or conditions generally affecting the businesses or industries in which Hercules and Ashland operate, to the extent such changes or conditions do not materially and disproportionately impact Hercules or Ashland, as applicable, taken as a whole;

 

   

changes or conditions in U.S., European, Asian or Latin American or global, international, or general economic, regulatory, or political conditions (including calamities, the outbreak or escalation of hostilities or acts of war or terrorism), to the extent such conditions do not materially and disproportionately impact Ashland or Hercules, taken as a whole;

 

   

changes or conditions generally affecting the financial, securities or credit markets;

 

   

any failure by Ashland or Hercules to meet any projections, forecasts, revenue or earnings estimates for any period ending on or after the date of the merger agreement;

 

   

the public announcement, pendency, execution, delivery or existence of the merger agreement and the impact of the merger agreement on the relationships of Ashland or Hercules with its employees, independent contractors, customers, suppliers, licensors, licensees, distributors, governmental entities and other third party businesses;

 

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changes in GAAP, applicable law or accounting standards (or interpretations thereof) or accounting estimates of existing contingent liabilities under GAAP;

 

   

changes in the market price or trading volumes of Hercules or Ashland common stock, as the case may be;

 

   

litigation arising from allegations of a breach of fiduciary duty relating to the merger agreement, the merger and other merger-related transactions; and

 

   

changes in any analyst’s recommendations, any corporate default or equivalent credit ratings or any other recommendations or ratings as to Hercules or Ashland, as the case may be, or their respective subsidiaries.

The representations and warranties of each of the parties to the merger agreement will expire upon the effective time of the merger.

Covenants and Agreements

Conduct of Business by Hercules. Hercules has agreed that, subject to certain exceptions and unless Ashland gives its prior written consent, between July 10, 2008 and the completion of the merger:

 

   

Hercules and its subsidiaries will conduct business in the ordinary course consistent with past practice;

 

   

Hercules and its subsidiaries will use commercially reasonable efforts to preserve intact its current business organization, keep available the services of its current employees and preserve relationships with customers, suppliers, licensors, licensees, distributors, governmental entities, and others with whom it has business dealings; and

 

   

Hercules agrees not to issue any new equity compensation awards, except as explicitly provided for in the merger agreement, as outlined below.

Hercules has also agreed that during the same time period, and again subject to certain exceptions or unless Ashland gives its prior written consent (which consent will not be unreasonably withheld, delayed or conditioned), Hercules and its subsidiaries will not:

 

   

declare, set aside or pay dividends on, or make other distributions in respect of, its capital stock, other than quarterly cash dividends in respect of Hercules common stock not exceeding $0.06 per share and dividends or distributions by Hercules to wholly owned subsidiaries or by wholly owned subsidiaries;

 

   

split, combine, subdivide or reclassify any capital stock or other equity interests;

 

   

repurchase, redeem or otherwise acquire any of its capital stock or other securities thereof;

 

   

issue, deliver, sell, grant, pledge or otherwise encumber or subject to any lien any shares of capital stock or other voting securities, except for the following: (i) shares of Hercules common stock issued pursuant to the exercise of Hercules stock options or the settlement of restricted stock units outstanding as of the date of the merger agreement and upon the exercise of Hercules warrants or the conversion of convertible debentures, (ii) grants of equity compensation awards with respect to up to 50,000 shares of Hercules common stock in the aggregate in connection with new hires consistent with past practice (provided that if such share amount is exhausted, Hercules may substitute non-equity awards of equivalent value); (iii) the sale of shares pursuant to the exercise of Hercules stock options if necessary to effectuate an optionee direction upon exercise or for withholding of taxes; or (iv) the acquisition of Hercules common stock from a holder of Hercules restricted stock, stock options or restricted stock units in satisfaction of withholding obligations or in payment of the exercise price;

 

   

amend the organizational documents of Hercules or its subsidiaries;

 

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(i) grant to any current or former director, officer, employee or consultant of Hercules any increase in compensation, bonus or fringe or other benefits, or grant any type of compensation or benefit to a person not previously receiving or entitled to receive such compensation, except for normal increases in the ordinary course of business; (ii) grant any increase in severance, change in control or termination compensation or benefits, except as required under the Hercules benefit plans as in effect on July 10, 2008; (iii) enter into, adopt, or amend in any manner that would increase costs or benefits under a Hercules benefit plan other than in connection with (a) hiring or retaining an employee if the base salary and target bonus of such employee will not exceed $150,000 per year or (b) an employment agreement terminable on less than 30 days’ notice without penalty; or (iv) take any action to accelerate or fund any rights or benefits, except to the extent required under the Hercules benefit plans;

 

   

make any change in financial accounting methods, principles or practices, except to the extent required by applicable law, SEC rule or policy, or a change in GAAP;

 

   

except in the ordinary course of business, make or change any tax election (except as consistent with past practice), adopt any change to Hercules’ or any of its subsidiaries’ method of accounting for tax purposes, settle or compromise any tax liability or refund, amend any tax return, agree to waive or extend any tax statute of limitations relating to any tax return, or fail to notify Ashland of any income tax audit, investigation or proceeding initiated by a tax authority after July 10, 2008 with respect to Hercules or any of its subsidiaries, in each case, to the extent such action (or failure to act) is reasonably likely to result in an increase to a tax liability, which increase is material to Hercules and its subsidiaries taken as a whole;

 

   

enter into new lines of business outside of their existing business and reasonable extensions of the existing business;

 

   

merge or consolidate with any person;

 

   

except for transactions with or among its wholly owned subsidiaries, directly or indirectly acquire or agree to acquire any equity interest or business or properties or assets that are material to Hercules, except inventory purchases in the ordinary course of business consistent with past practice and acquisitions at or below fair market value for consideration not to exceed $5.0 million individually or $15.0 million in the aggregate;

 

   

except for transactions with or among its wholly owned subsidiaries, sell, lease, license, mortgage, sell and leaseback or otherwise encumber or subject to any lien or dispose of any properties or assets, except for sales of inventory and excess or obsolete property or assets in the ordinary course of business consistent with past practice, transfers of property at not less than fair market value for consideration not greater than $5.0 million individually and $20.0 million in the aggregate;

 

   

except for transactions with or among its wholly owned subsidiaries, enter into, modify or amend any lease of property, except for such modifications or amendments that are not materially adverse to Hercules;

 

   

except for transactions with or among its wholly owned subsidiaries, incur any indebtedness except for short-term borrowings not in excess of $25.0 million incurred in the ordinary course of business or make any loans, advances or capital contributions to, or investments in, any other person;

 

   

make or agree to make any capital expenditure that is individually in excess of $1.0 million or in the aggregate in excess of $15.0 million;

 

   

enter into any contract that would conflict with the merger agreement, or offer to purchase any indebtedness or the loss of a benefit under, or result in the creation of any lien upon properties or assets of Hercules;

 

   

enter into any material contract to the extent consummation of the merger agreement and related transactions or compliance by Hercules with the provisions of the merger agreement would adversely affect Hercules’ or Ashland’s rights or enhance the rights of any third party;

 

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enter into any material contract containing a termination right that is triggered upon consummation of the merger;

 

   

forgive any indebtedness of a substantial value owed to Hercules or its subsidiaries from any third party, unless given consideration of equivalent value;

 

   

enter into any interest rate swap agreement, cross-currency interest rate swap agreement or similar agreement, except in the ordinary course of business, any collar, options or similar agreement for the purpose of maintaining or controlling the cost of Hercules’ raw materials or foreign currency forward contracts other than to match foreign currency positions;

 

   

except in the ordinary course of business consistent with past practice, enter into, terminate, renew, extend, amend or modify in any material respect any material contract;

 

   

pay, discharge, settle or satisfy any claims, liabilities, obligations or litigation to the extent reserved for in Hercules’ documents filed with the SEC, in excess of $2.0 million; or

 

   

agree to or authorize any of its subsidiaries to take any of the foregoing actions.

Conduct of Business by Ashland. Ashland has agreed that, subject to certain exceptions and unless Hercules gives its prior written consent, between July 10, 2008 and the completion of the merger:

 

   

Ashland and its subsidiaries will conduct business in the ordinary course consistent with past practice; and

 

   

Ashland and its subsidiaries will use commercially reasonable efforts to preserve intact its current business organization, keep available the services of its current employees and preserve relationships with customers, suppliers and others with whom it has business dealings.

Ashland has also agreed that during the same time period, and again subject to certain exceptions or unless Hercules gives its prior written consent (which consent will not be unreasonably withheld, delayed or conditioned), Ashland and its subsidiaries will not:

 

   

amend the organizational documents of Ashland in a manner that is adverse to the rights of holders of Ashland common stock;

 

   

declare or pay dividends or make distributions in respect of capital stock, other than regularly quarterly cash dividends in respect of Ashland common stock not exceeding $0.275 per share and dividends or distributions by Ashland to wholly owned subsidiaries or by wholly owned subsidiaries;

 

   

issue, deliver, sell, grant, pledge or otherwise encumber or subject to any lien any shares of capital stock, voting parent debt or any securities convertible into such Ashland shares, or any stock appreciation, “phantom” stock, profit participation or dividend equivalent rights, other than the issuance of Ashland common stock under Ashland’s stock plans, upon exercise of Ashland stock options, or Ashland stock appreciation rights or pursuant to Ashland stock equivalent awards, as outstanding on January 1, 2008;

 

   

acquire or offer to acquire any shares of its own capital stock or related securities, or that of any subsidiary, except in accordance with its stock incentive plans in the ordinary course of business consistent with past practice;

 

   

acquire for cash a material amount of assets or capital stock of any other person valued at more than $100.0 million in the aggregate, provided that Ashland shall not make any acquisition if it would adversely impact the ability to satisfy the antitrust regulatory requirements;

 

   

incur any indebtedness that would adversely impact Ashland’s ability to obtain the financing for the merger and related transactions; or

 

   

agree to or authorize any of its subsidiaries to take any of the foregoing actions.

 

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No Solicitation. The merger agreement provides that Hercules shall not, nor shall it authorize, give permission to or direct any of its subsidiaries or any of their or its respective directors, officers or employees or any investment banker, accountant, attorney or other advisor, agent or representative, to directly or indirectly:

 

   

solicit, initiate, or knowingly encourage the submission of any takeover proposal; or

 

   

participate in any discussions or negotiations regarding, or furnish to any person any information in connection with, or otherwise cooperate in any way that could reasonably lead to, any takeover proposal.

Hercules is obligated to terminate, or cause the company subsidiaries to immediately terminate, all existing discussions or negotiations with any third party with respect to any takeover proposal and request the prompt return or destruction of all confidential information previously furnished.

For purposes of the merger agreement, “takeover proposal” means any contract, proposal or offer (whether or not in writing) with respect to any:

 

   

merger, reorganization, consolidation, business combination or similar transaction involving Hercules or its subsidiaries (which collectively represent 20% or more of the consolidated revenues, net income or assets of Hercules and its subsidiaries);

 

   

sale, lease or other disposition directly or indirectly by merger, consolidation, business combination, share exchange, joint venture or otherwise of any business or assets of Hercules or its subsidiaries representing 20% or more of consolidated revenues, net income or assets of Hercules and its subsidiaries;

 

   

issuance, sale or other disposition of securities representing 20% or more of the voting power of Hercules;

 

   

transaction in which any person shall acquire beneficial ownership, or the right to acquire beneficial ownership, or any group shall have been formed which beneficially owns or has the right to acquire beneficial ownership, of 20% or more of Hercules common stock; or

 

   

any combination of the above; and

in each case, other than the transactions contemplated by the merger agreement.

The merger agreement provides further that, notwithstanding the restrictions described above, if, at any time prior to the time Hercules shareholders have adopted the merger agreement:

 

   

Hercules receives a bona fide written takeover proposal that the Hercules board of directors determines in good faith (after consultation with its outside legal advisors and its financial advisors) would reasonably be expected to constitute a superior proposal, as described below; and

 

   

that takeover proposal was not solicited after July 10, 2008 and did not otherwise result from a breach by Hercules of the no solicitation provisions described above;

then Hercules may, if it is in compliance with its obligations described in the section entitled “—No Solicitation” and its obligation not to change its recommendation except as described in “Hercules Shareholder Meeting and Duty to Recommend”:

 

   

furnish information about Hercules and its subsidiaries to the person making the takeover proposal pursuant to a customary confidentiality agreement not less restrictive to that person than the provisions of the confidentiality agreement between Hercules and Ashland, provided that such confidentiality agreement shall not limit the ability of such person to make proposals to the Hercules board of directors, and provided further that all of the information to be furnished has previously been provided to Ashland or is provided to Ashland prior to or substantially concurrent with the time it is provided to such person; and

 

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participate in discussions or negotiations regarding the takeover proposal.

The merger agreement provides that the term “superior proposal” means any bona fide “takeover proposal” (except that references in such definition to 20% shall be replaced with 50%) made by any person other than a party to the merger agreement, which the Hercules board of directors reasonably determines in good faith (after consultation with its outside legal advisors and financial advisors) is:

 

   

on terms that are more favorable to Hercules and its shareholders than the merger, taking into account all the terms and conditions of such proposal and the merger agreement (including any proposal by Ashland to amend the terms of the merger); and

 

   

reasonably likely to be completed, taking into account all financial, regulatory, legal and other aspects of such proposal that the Hercules board of directors considers appropriate.

The merger agreement provides that Hercules must promptly advise Ashland orally and in writing of any takeover proposal, the material terms and conditions of any takeover proposal and the identity of the person making any takeover proposal. Hercules must keep Ashland fully informed of the status and details of any such takeover proposal or inquiry, and provide to Ashland as soon as practicable after receipt with copies of all correspondence and other written material sent or provided directly or indirectly to Hercules from any person that describes any of the terms or conditions of any takeover proposal. However, Hercules does not need to provide Ashland with any analysis or other information developed by a Hercules representative in the context of any takeover proposal.

Hercules Shareholder Meeting and Duty to Recommend. The merger agreement requires Hercules to call and hold a special meeting of its shareholders for the purpose of voting on the adoption of the merger agreement. The Hercules board of directors has agreed to recommend that Hercules’ shareholders vote in favor of adoption of the merger agreement. Additionally, the Hercules board may not:

 

   

withdraw, modify or publicly propose to withdraw that recommendation or make any public statement in connection with that recommendation or the special meeting or in reference to a takeover proposal, that is inconsistent with that recommendation; or

 

   

adopt or approve or publicly propose to recommend, adopt or approve, or allow Hercules or any of its subsidiaries to execute or enter into, any agreement (other than a confidentiality agreement under the circumstances described above) or any tender offer with respect to any takeover proposal.

Notwithstanding the above, at any time prior to the time Hercules shareholders have adopted the merger agreement, the Hercules board of directors may, in response to a takeover proposal that the Hercules board of directors determines in good faith (after consultation with outside legal advisors and financial advisors) constitutes a superior proposal and that was unsolicited and made after July 10, 2008, withdraw, modify or qualify its recommendation to shareholders to adopt the merger agreement, or make any public statement in connection with its recommendation or the special meeting or in reference to a takeover proposal, that is inconsistent with its recommendation, if:

 

   

the Hercules board of directors has concluded in good faith, after consultation with, its outside legal and financial advisors, in light of such superior proposal that the failure to do so would result in a breach of its fiduciary duties under applicable law;

 

   

in the case of a change in recommendation in light of a superior proposal, Hercules has complied in all material respects with the no-solicitation provisions in the merger agreement;

 

   

Hercules has, in the case of a superior proposal, provided to Ashland all materials and information delivered or made available to the person or group of persons making any superior proposal;

 

   

Hercules has provided to Ashland five business days’ prior written notice advising Ashland that the Hercules board of directors intends to take that action and specifying the terms and conditions of such superior proposal and the identity of the person making the proposal;

 

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during such five-business-day period, if requested by Ashland, Hercules has engaged in good faith negotiations with Ashland to amend the merger agreement in such a manner that any takeover proposal which was determined to constitute a superior proposal no longer is a superior proposal; and

 

   

in the case of a superior proposal, at the end of such five-business-day period, that takeover proposal has not been withdrawn and continues to constitute a superior proposal (taking into account any changes to the financial terms of the merger agreement proposed by Ashland following a notice of superior proposal, as a result of the negotiations required by the above clause or otherwise).

The merger agreement provides that the above-described no-solicitation provisions do not prohibit the Hercules board of directors from taking and disclosing to Hercules shareholders a position contemplated by Section 14d-9 and Section 14e-2 under the Exchange Act or making any disclosure to Hercules shareholders if, in the good faith judgment of Hercules board, failure to so disclose would be inconsistent with its obligations under applicable law, except that compliance with such rules will not limit or modify the effect that any such action pursuant to such rules has under the merger agreement.

Reasonable Best Efforts. Ashland and Hercules have agreed to use their reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all actions necessary, proper or advisable under applicable law to complete the merger and the other transactions contemplated by the merger agreement.

Access to Information; Confidentiality. Until the earliest of the effective time of the merger and the termination date of the merger agreement, and subject to the restrictions imposed by any applicable laws, including the HSR Act or other U.S. antitrust laws and foreign antitrust laws, and the confidentiality agreement dated May 26, 2008 between Ashland and Hercules, Ashland and Hercules are required to (a) give the other party, its counsel, financial advisors, auditors and other authorized representatives reasonable access during normal business hours, to the properties, books, contracts, commitments, personnel and records of such granting party, (b) furnish to the other party any documents filed during such period under federal or state securities laws, and such financial and operating data and other information as such persons may reasonably request.

However, either party may withhold (i) any document or information that is subject to the terms of a confidentiality agreement with a third party or subject to any attorney-client privilege or (ii) such portions of documents or information relating to pricing or other matters that are highly sensitive if the exchange of such documents (or portions thereof) or information, as determined by such party’s counsel, might reasonably result in antitrust difficulties for such party or reasonably result in antitrust difficulties for such party (or any of its affiliates). If any material is withheld by such party pursuant to the proviso to the preceding sentence, such party shall inform the other party as to the general nature of the information that is being withheld.

Each party shall have the right to access any information that the other party would be required to provide to shareholders under DGCL Section 220, on the inspection of books and records. Hercules shall also provide information described in Rule 14a-7(a)(2)(ii) under the Exchange Act, concerning access to lists of shareholders.

Governmental Approvals. Ashland and Merger Sub, on the one hand, and Hercules, on the other hand, have agreed to:

 

   

file required forms under the HSR Act and any foreign antitrust laws, including the EC Merger Regulation, provide all additional material requested, and attempt to obtain such regulatory approvals as soon as practicable;

 

   

take all other actions necessary, proper or advisable to cause the expiration or termination of the applicable waiting periods under the HSR Act or to obtain consents, approvals or authorizations under foreign antitrust laws as soon as practicable, including the request of early termination of the waiting period provided for in the HSR Act;

 

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if any objections are asserted by any governmental entity with respect to the merger under any antitrust laws that would hinder or prevent its consummation, or if any action is instituted by any governmental entity or any private party challenging any of the transactions as violative of antitrust laws, or an order is issued enjoining the merger, to use their reasonable best efforts to resolve any such objections or suits so as to permit the consummation of the merger, including, if an administrative or judicial action or proceeding is instituted or threatened to be instituted, using reasonable best efforts to contest and resist any such action or proceeding;

 

   

keep each other apprised of the status of any communications with, and any inquiries or requests for additional information from, any governmental entity in connection with the HSR Act or foreign antitrust laws, and comply with any such inquiry or request as promptly as practicable; and

 

   

Ashland and Hercules have agreed to use reasonable best efforts to take any action necessary to avoid and eliminate impediments under the antitrust laws to enable the consummation of the transactions as soon as reasonably possible, including:

 

   

proposing, negotiating, committing to and effecting, by consent decree, hold separate order, mitigation agreement or otherwise, the sale, divestiture or disposition of their respective businesses, product lines or assets;

 

   

otherwise using reasonable best efforts to take or commit to take actions that after consummation of the transactions would limit Ashland’s freedom of action with respect to, or its ability to retain, one or more of the businesses, product lines or assets of any of the parties, as may be required in order to avoid or end any injunction, temporary restraining order, or other order in any suit or proceeding, which would otherwise have the effect of preventing or materially delaying the consummation of the transactions, and Ashland and Hercules shall agree to take such actions, provided that any such action is conditioned upon the consummation of the transactions contemplated by the merger agreement; and

 

   

Ashland shall not be obligated to take or proffer to take any of the foregoing actions if such actions would be reasonably likely in the aggregate to have a material adverse effect on Ashland and its subsidiaries (including the surviving corporation), taken as whole, or would be prohibited by the financing commitment letter.

Employee Benefits. The merger agreement provides that, until January 1, 2011, employees of Hercules who become employees of Ashland or one of its subsidiaries as a result of the merger will be provided compensation and benefits that, taken in the aggregate, are substantially comparable to the compensation and benefits received by such employees prior to the date of the merger. Specifically:

 

   

Until January 1, 2011, Ashland will provide Hercules employees, on an individual basis, base salaries and base wages that are at least equal to the base salaries and base wages payable to such employees prior to the date of the merger.

 

   

Employees of Hercules will receive credit for their years of service with Hercules for all purposes under the applicable Ashland employee benefit plans (other than benefit accrual under any Ashland defined benefit pension plan). However, under Ashland’s retiree medical, dental and group life plans, prior service credit will only count towards meeting the five years of service eligibility component for such plans, and such employees will otherwise be treated as newly hired employees.

 

   

To the extent employees of Hercules participate in an Ashland health plan, Ashland will waive all restrictions and limitations for pre-existing conditions under the Ashland health plan.

 

   

Ashland will continue the Hercules retiree welfare programs, including retiree medical, prescription drugs, and retiree life insurance, through December 31, 2011, generally on terms and conditions no less favorable than those in effect at the time of the merger.

 

   

Following December 31, 2011, Ashland will provide to Hercules employees retiring on or prior to December 31, 2013 such welfare programs on terms and conditions no less favorable than the lesser of (i) those in effect for Ashland retirees eligible to receive subsidized retiree welfare benefits as they

 

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existed prior to July 1, 2003 and (ii) those in effect under the Hercules retiree welfare programs in effect at the effective time of the merger with maximum employer costs capped at current levels.

 

   

Through December 31, 2010, Hercules employees will continue to participate and accrue benefits under the Hercules pension plan and, as applicable, Hercules’ excess benefit plan in accordance with the terms of such plans, both as in effect on the date of the merger agreement.

 

   

For Hercules employees whose employment terminates prior to January 1, 2011, Ashland will provide severance benefits at least as favorable as those in effect immediately prior to the merger.

The provisions of this section of the merger agreement are for the sole benefit of Hercules and Ashland and can be modified or waived by them. No employee or any other person has any right to enforce this provision of the merger agreement.

Notification. Hercules and Ashland have agreed to promptly advise the other party of:

 

   

any representation or warranty made by it contained in the merger agreement that is qualified as to materiality or “material adverse effect” becoming untrue or inaccurate in any respect or any such representation or warranty that is not so qualified becoming untrue or inaccurate in any material respect; or

 

   

the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under the merger agreement.

Such notifications shall not affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under the merger agreement.

Financing. Ashland must use its reasonable best efforts to obtain the financing required for the transactions contemplated by the merger agreement on the terms and conditions described in the financing commitment letter that Ashland entered into with Bank of America and Scotiabank. The financing commitment letter provides terms and conditions for a $1.950 billion senior secured credit facility and a $750 million senior unsecured bridge loan facility. In connection with the financing, each of Ashland and Merger Sub have agreed to use reasonable best efforts to:

 

   

negotiate definitive agreements as provided in the financing commitment letter;

 

   

satisfy (or obtain the waiver of) all conditions on a timely basis with respect to obtaining the financing that are within its control;

 

   

comply in all material respects with its obligations under the financing commitment letter (or obtain a waiver thereof); and

 

   

enforce its rights under the financing commitment letter.

Ashland has further agreed to:

 

   

give Hercules prompt notice upon becoming aware of any material breach of the financing commitment letter;

 

   

keep Hercules informed on a reasonable basis of its efforts to arrange the financing;

 

   

prevent any modification to any material provision or remedy that (i) reduces the amount of financing, (ii) makes conditions for the drawdown of the financing less likely to be satisfied, (iii) can reasonably be expected to delay the consummation of the merger and the related transactions to be completed, or (iv) is otherwise adverse to Hercules;

 

   

in the event that Ashland becomes aware of an event or circumstance that would make obtaining any portion of the financing unlikely, use its reasonable best efforts to arrange any such portion from alternative sources on terms and conditions, taken as a whole, no less favorable to Ashland and Merger Sub; and

 

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utilize the proceeds from the bridge loan facility in lieu of proceeds from the senior notes if the proceeds from the senior notes are not available, the closing conditions under the merger documents are otherwise satisfied or waived, and a bridge loan facility is available.

Hercules has agreed to use its reasonable best efforts to provide cooperation, subject to restrictions, in connection with the arrangement of any financing, including reasonable participation in meetings and road shows, the provision of information listed in the agreement and any others reasonably requested by Ashland and reasonable assistance in the preparation of all agreements.

Conditions to the Merger

Conditions to Ashland’s and Hercules’ Obligations to Complete the Merger. Each party’s obligation to complete the merger is subject to the satisfaction or waiver of various conditions that include the following:

 

   

the merger agreement has been adopted by the affirmative vote of shareholders of Hercules representing two-thirds of the shares of Hercules common stock outstanding and entitled to vote at the special meeting;

 

   

the shares of Ashland common stock issuable pursuant to the merger, as well as the shares of Ashland common stock issuable upon exercise of converted stock options, upon exercise of the Hercules warrants and upon convertibility of Hercules’ convertible debentures, have been approved for listing on the NYSE, subject to official notice of issuance;

 

   

no temporary restraining order, preliminary or permanent injunction or other order or comparable judicial action in any significant jurisdiction prevents or prohibits the completion of the merger;

 

   

the waiting period applicable to the merger under the HSR Act has expired or been terminated, and the European Commission will have issued a decision under the EC Merger Regulation declaring the merger compatible with the common market;

 

   

all waivers, consents, licenses, permits, authorizations, orders and approvals from, and all registrations, filings, notices and notifications with, governmental entities under all other U.S. antitrust laws or all other foreign antitrust laws applicable to the merger have been obtained or made, except for such waivers, consents, licenses, permits, authorizations, orders and approvals, the failure of which to obtain, and such registrations, filings, notices and notifications, the failure of which to make, prior to the closing of the merger, would reasonably be expected to result in materially affecting the business of Ashland or Hercules in an adverse manner; and

 

   

the registration statement on Form S-4, of which this proxy statement/prospectus forms a part, has been declared effective by the SEC and is not the subject of any stop order or proceedings seeking a stop order.

Conditions to Ashland’s and Merger Sub’s Obligations to Complete the Merger. Ashland’s and Merger Sub’s obligations to complete the merger are further subject to satisfaction or waiver of the following additional conditions:

 

   

with certain exceptions, the representations and warranties of Hercules made in the merger agreement must be true and correct as of the date of the merger agreement and as of the closing date of the merger as though made on the closing date, subject to the materiality standards contained in the merger agreement;

 

   

Hercules must have performed in all material respects all obligations required to be performed by it and complied in all material respects with each covenant to be complied with it under the merger agreement on or prior to the date on which the merger is to be completed;

 

   

there has not been any event that, individually or in the aggregate, has had or would reasonably be expected to have, a material adverse effect on Hercules; and

 

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Hercules will have delivered to Ashland a certificate duly executed by Hercules’ chief executive officer and chief financial officer on behalf of Hercules to the effect that the representations, warranties and obligations of Hercules are satisfied in all respects.

Conditions to Hercules’ Obligation to Complete the Merger. Hercules’ obligation to complete the merger is further subject to satisfaction or waiver of the following additional conditions:

 

   

with certain exceptions, the representations and warranties of Ashland and Merger Sub made in the merger agreement must be true and correct as of the date of the merger agreement and as of the closing date of the merger as though made on the closing date, subject to the materiality standards contained in the merger agreement;

 

   

Ashland and Merger Sub must have performed in all material respects all obligations required to be performed by them and complied in all material respects with each covenant to be complied with under the merger;

 

   

Ashland shall have deposited with the exchange agent, at or prior to the closing of the merger, certificates representing the shares of Ashland common stock and cash in an aggregate amount sufficient to pay the merger consideration in respect of all Hercules common stock; and

 

   

Ashland will have delivered to Hercules a certificate duly executed by Ashland’s chief executive officer and chief financial officer on behalf of Ashland to the effect that the representations, warranties and obligations of Ashland are satisfied in all respects.

Termination

The merger agreement may be terminated and the merger may be abandoned at any time prior to the effective time of the merger:

 

   

by mutual consent of Ashland, Merger Sub and Hercules, in writing by action of their boards of directors;

 

   

by either Ashland or Hercules if:

 

   

the merger has not been completed on or before March 31, 2009, unless the principal cause of the failure of the effective time of merger to occur by that date is a failure to perform any covenant or obligation or whose willful breach of the merger agreement by the party seeking to terminate the merger agreement;

 

   

a temporary restraining order or preliminary or permanent injunction or other order enjoins or prohibits the merger, and such order becomes final and non-appealable, except that the party seeking to terminate the merger agreement must have used its reasonable best efforts to remove the prohibition; or

 

   

the Hercules shareholders fail to adopt the merger agreement at the special meeting or any adjournment of the special meeting;

 

   

by Ashland or Hercules if the other party has breached or failed to perform certain of its representations, warranties, covenants or agreements in the merger agreement which breach or failure to perform (a) would give rise to the failure of a condition regarding representations, warranties and performance of obligations, and (b) cannot be or has not been cured by the breaching party within 30 calendar days after the giving of written notice by the other party; or

 

   

by Ashland if, prior to the adoption of the merger agreement by Hercules shareholders, the Hercules board of directors has (a) recommended, adopted or approved or publicly proposed to recommend, adopt or approve a takeover proposal, or (b) withdrawn, modified or qualified in a manner adverse to Ashland its recommendation of the merger or failed to publicly reaffirm its adoption and recommendation of the merger agreement within ten calendar days following the written request to do so by Ashland; or

 

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by Hercules if:

 

   

at any time following Hercules shareholder approval, (a) the percentage decline in the average of the closing prices of Ashland common stock, as reported on the NYSE Composite Tape, for any five-trading-day period is greater than 20% as measured against the Ashland common stock closing price on the day preceding the Hercules shareholder meeting and (b) the percentage decline during the same five-trading-day period of the Ashland common stock closing price is 20% or more than the percentage decline of Standard & Poor’s 500 Index (e.g., if Standard & Poor’s 500 Index declines by 10% during a five-trading-day period, then the Ashland common stock closing price must decline by at least 30% during that same time frame);

 

   

prior to the receipt of Hercules shareholder approval, the Hercules board receives a superior takeover proposal and in light of such proposal, the Hercules board determines in good faith, after consultation with outside counsel, that the failure to withdraw or modify the merger agreement would be inconsistent with the board’s fiduciary duties and the Hercules board concurrently approves and Hercules concurrently enters into, a definitive agreement providing for the implementation of such superior takeover proposal;

 

   

the conditions to closing are otherwise satisfied, and Ashland does not satisfy its condition to deposit certificates and cash with the exchange agent in an amount sufficient to pay the merger consideration within five business days after notice by Hercules to Ashland that certain other conditions are satisfied;

 

   

if Ashland breaches or fails to perform in any material respect its representations and warranties in relation to financing that would give rise to the failure of a closing condition and has not been cured within 30 calendar days after giving written notice to Ashland of such breach or failure; or

 

   

after the Hercules shareholder approval is obtained, Ashland advises Hercules that it cannot deliver its officers’ certificate because, since the date of the merger agreement, there has been an event that is having or would be expected to have a material adverse effect on Ashland.

Effect of Termination

If the merger agreement is terminated as described in “—Termination” above, the agreement will be void, and there will be no liability or obligation of any party except that:

 

   

each party will remain liable for its willful or intentional breach of any of the representations, warranties or covenants of the merger agreement (subject to the express limitations set forth in the agreement), and any action for fraud; and

 

   

designated provisions of the merger agreement, including the confidential treatment of information and the allocation of fees and expenses, including, if applicable, the termination fees described below, will survive termination.

Termination Fees and Expenses

A termination fee of $77.5 million may be paid by Hercules or Ashland to the other party in certain termination situations. Hercules will pay Ashland $77.5 million in termination fees, by wire transfer on the fifth business day following the date of termination of the merger agreement, if:

 

   

Ashland terminates the merger agreement prior to the receipt of Hercules shareholder approval and either the Hercules board of directors has (a) recommended, adopted or approved or publicly proposed to recommend, adopt or approve a takeover proposal, or (b) withdrawn, modified or qualified in a manner adverse to Ashland its recommendation of the merger or failed to publicly reaffirm its adoption and recommendation of the merger agreement within ten calendar days following the written request to do so by Ashland;

 

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prior to the Hercules shareholder meeting, (a) any person makes a takeover proposal that is not withdrawn, (b) the merger agreement is terminated because the merger was not completed by March 31, 2009, Hercules shareholder approval is not obtained at the meeting or Hercules breaches or fails to perform in any material respect its merger agreement representations, warranties or covenants, and (c) within 18 months of such termination, Hercules enters into a definitive agreement to consummate the takeover proposal; or

 

   

Hercules terminates the merger agreement because, prior to the receipt of Hercules shareholder approval, the Hercules board receives a superior takeover proposal and in light of such proposal, the Hercules board determines in good faith, after consultation with outside counsel, that the failure to withdraw or modify the merger agreement would be inconsistent with the board’s fiduciary duties and the Hercules board concurrently approves and Hercules concurrently enters into, a definitive agreement providing for the implementation of such superior takeover proposal.

Such termination fee to be paid by Hercules will be paid on the date of the first to occur of the events referred to in the second bullet above. Further, if both subparts (a) and (b) of the second bullet occur, regardless of the occurrence of subpart (c), then Hercules will pay Ashland all documented fees and expenses of Ashland incurred in connection with the preparation and performance of the merger agreement and related transactions and financing, including fees and expenses of financial advisors, outside legal counsel, accountants, experts and consultants, up to a maximum of $12.5 million, paid by wire transfer on the fifth business day following the receipt of invoice. If subsequent to such payment by Hercules of Ashland expenses, Hercules enters into a definitive agreement to consummate a takeover proposal, then Hercules will pay to Ashland the excess of the termination fee minus such expenses. For purposes of determining whether the remainder of the termination fee is payable under the circumstances described in the previous sentence, the term takeover proposal has the meaning described under “—No Solicitation,” except that the references to “20%” in the definition of takeover proposal will be deemed to be references to “50%.”

Conversely, Ashland will pay Hercules a $77.5 million termination fee (which we refer to as the “Financing Failure Fee”) if specified conditions to closing are met or waived and Ashland is unable to effect the merger closing due to a failure to receive the financing proceeds or any alternate financing, or the merger agreement is terminated because Ashland breaches or fails to perform in any material respect its representations and warranties or covenants (and fails to cure such representations, warranties or covenants upon notice) with respect to financing. Such fee will be paid in immediately available funds within five business days after the termination of the merger agreement. Hercules is entitled to receive the Financing Failure Fee only if Hercules has not breached its obligations to assist Ashland in obtaining the financing and the mutual conditions to closing have been otherwise waived or satisfied. Hercules agreed in the merger agreement that, if the Financing Failure Fee is paid, in no event will Hercules seek to recover any other money damages or seek any other remedy (including specific performance) from Ashland, Merger Sub or their respective affiliates, or Bank of America or Scotiabank, with respect to the merger, regardless of whether such monetary damages or other remedies are based on a claim in law or equity, and all such claims were waived by Hercules in the merger agreement.

Public Announcements

Ashland and Hercules have agreed to consult with each other before issuing, and provide each other reasonable opportunity to review and comment upon, any press release or other public statements with respect to the merger and the other transactions contemplated by the merger agreement and have also agreed not to issue any such press release or make any public statement prior to such consultation, except as may be required by applicable law or by obligations pursuant to any listing agreement with any national securities exchange.

Stock Exchange Listing

Ashland has agreed to use its reasonable best efforts to cause the shares of Ashland common stock to be issued in the merger to be approved for listing on the NYSE, subject to official notice of issuance, prior to the closing of the merger.

 

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Section 16 Matters

Ashland and Hercules have agreed to cause, prior to the closing of the merger, any dispositions of Hercules common stock or acquisitions of Ashland common stock resulting from the merger by each individual who is subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to Hercules to be exempt under Rule 16b-3 promulgated under the Exchange Act.

Certain Tax Matters

Hercules and Ashland shall cooperate in the preparation, execution and filing of all tax returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, and transfer, recording, registration and other fees and similar taxes which become payable in connection with the merger that are required or permitted to be filed on or before the consummation of the merger. Each of Hercules and Ashland shall pay, without deduction from any amount payable to holders of Hercules common stock and without reimbursement from the other party, any such taxes or fees imposed on it by any governmental entity, which becomes payable in connection with the merger.

Shareholder Meeting

Hercules is required, as promptly as practicable after this registration statement on Form S-4 is declared effective under the Securities Act, to duly call, give notice of, and hold a shareholder meeting to consider the merger agreement.

Management of Hercules After the Merger

At the effective time, the directors and officers of Merger Sub will become, respectively, the directors and officers of Hercules.

Amendment and Waiver

Amendment. The merger agreement may be amended solely by an instrument in writing signed on behalf of the parties, either before or after the Hercules shareholders have adopted the merger agreement. However, following such adoption of the merger agreement by the Hercules shareholders, no amendment may be made that by law requires further approval of Hercules shareholders, unless the required approval is obtained.

No amendments may be made after the effective time of the merger.

Waiver. At any time prior to the effective time of the merger, the parties to the merger may:

 

   

extend the time of performance of any of the obligations or other acts of the other parties;

 

   

to the extent permitted by law, waive any inaccuracies in the representations and warranties contained in the merger agreement or in any document delivered pursuant to the merger agreement; or

 

   

to the extent permitted by law, waive compliance with any of the agreements or conditions contained in the merger agreement.

Any agreement on the part of either party to any extension or waiver is valid only if it is set forth in an instrument in writing signed by that party. The failure of any party to the merger agreement to assert any of its rights under the merger agreement or otherwise does not constitute a waiver of those rights.

 

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COMPARATIVE RIGHTS OF ASHLAND SHAREHOLDERS AND HERCULES SHAREHOLDERS

The rights of Ashland shareholders are currently governed by the Kentucky Business Corporation Act, or the KBCA, and the third restated articles of incorporation and the amended and restated by-laws of Ashland, which we refer to as the articles of incorporation and by-laws of Ashland. The rights of Hercules shareholders are currently governed by the Delaware General Corporation Law, or the DGCL, and the restated certificate of incorporation and amended and restated by-laws of Hercules, which we refer to as the certificate of incorporation and by-laws of Hercules.

This section of the proxy statement/prospectus describes the material differences between the rights of Ashland shareholders and Hercules shareholders.

This section does not include a complete description of all differences between the rights of Ashland shareholders and Hercules shareholders, nor does it include a complete description of the specific rights of these shareholders. Furthermore, the identification of some of the differences in the rights of these shareholders as material is not intended to indicate that other differences that may be equally important do not exist.

You are encouraged to read carefully the relevant provisions of the KBCA and the DGCL, as well as the articles of incorporation and by-laws of Ashland and the certificate of incorporation and by-laws of Hercules. Copies of the articles of incorporation and by-laws of Ashland and the certificate of incorporation and by-laws of Hercules are filed as exhibits to the reports of Ashland and Hercules incorporated by reference in this proxy statement/prospectus. See “Incorporation by Reference” beginning on page 113.

 

Capitalization

 
Ashland   Hercules
The authorized capital stock of Ashland currently consists of 200,000,000 shares of common stock, par value $0.01 per share, and 30,000,000 shares of cumulative preferred stock, no par value, which can be issued, from time to time, in one or more series, by resolution of the board of directors.   The authorized capital stock of Hercules currently consists of 300,000,000 shares of common stock, of no par value, and 2,000,000 shares of preferred stock, of no par value. All of the Hercules preferred shares are available for future issuance in one or more series to be designated by the board of directors.
Voting Rights of Shareholders  
Ashland   Hercules

Unless otherwise provided in a resolution by the board of directors, the holders of preferred stock are entitled to one vote for each share of preferred stock held by them on all matters properly presented to shareholders, the holders of common stock and the holders of all series of preferred stock voting together as one class.

 

Each outstanding share of Ashland common stock is entitled to one vote on each matter properly presented to shareholders.

  Unless otherwise provided in a resolution by the board of directors, each outstanding share of Hercules common and preferred stock is entitled to one vote on all matters submitted to a vote of shareholders.

 

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Size of the Board of Directors  
Ashland   Hercules
The board of directors must have at least one director. Ashland’s by-laws state that the exact number of directors is to be determined by a resolution adopted by a majority of the board of directors. A vote of the shareholders is required to increase or decrease by more than 30% the number of directors from that number last fixed by shareholders. The current size of the Ashland board of directors is eleven.   Hercules’ certificate of incorporation and by-laws provide for a minimum of seven and a maximum of 18 directors, with the number of directors within this range determined by the Hercules board of directors from time to time. The current size of the Hercules board of directors is ten.
Classification of the Board  
Ashland   Hercules
Ashland’s articles of incorporation divide the board of directors into three classes of directors, with each class consisting, as nearly as possible, of one-third of the total number of the directors and serving a three-year term. The term of office of one class expires each year. If the number of directors is changed, the Ashland board of directors apportions any newly created directorships or any decrease in directorships among the classes in order to make all classes as nearly equal in number as possible.  

In 2007, Hercules shareholders approved amendments to its certificate of incorporation and by-laws for a three-year process to declassify its board from three classes to one class, beginning in 2008.

 

Accordingly, at the Hercules 2008 Annual Meeting of Shareholders, the successors of the directors whose terms expired at the meeting were elected for a term expiring at the 2009 Annual Meeting of Shareholders; at the 2009 Annual Meeting of Shareholders, the successors of the directors whose terms expire at that meeting shall be elected for a term expiring at the 2010 Annual Meeting of Shareholders; and at each annual meeting of shareholders thereafter, all directors shall be elected for terms expiring at the next annual meeting of shareholders.

Vacancies on the Board  
Ashland   Hercules

Ashland’s articles of incorporation and by-laws provide that, subject to the rights of any preferred stock then outstanding, any vacancy occurring on the board of directors (including a vacancy resulting from an increase in the number of directors or the removal of a director) may be filled only by the affirmative vote of a majority of the directors then in office, whether or not a quorum, or by a sole remaining director. This vacancy-filling director holds office for the remainder of the full term of the class of directors in which the vacancy occurred and until the director’s successor is elected and qualified.

 

Under the KBCA, a vacancy may, in the case of a resignation, be filled before the vacancy occurs. However, the director may not take office until the vacancy occurs.

 

Hercules’ certificate of incorporation and by-laws provide that, subject to the rights of any preferred stock then outstanding, any vacancy occurring on the board of directors for any reason (including any newly created directorships resulting from any increase in the authorized number of directors) may be filled by the board of directors, acting by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Any directors so chosen will hold office for the remainder of the full term of the class of directors in which the vacancy occurred and until their respective successors are duly elected and qualified or until their earlier resignation or removal.

 

In addition, under the DGCL, if, at the time of the filling of any vacancy or newly created directorship,

 

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  the directors in office constitute less than a majority of the whole board of directors (as constituted immediately before any such increase), the Delaware Court of Chancery may, upon application of any shareholder or shareholders holding at least ten percent of the total number of outstanding shares entitled to vote for such directors, summarily order an election to fill any such vacancy or newly created directorship, or replace the directors chosen by the directors then in office.
Removal of Directors  
Ashland   Hercules

Under the KBCA, a director may be removed with or without cause (unless the articles of incorporation provide that directors may be removed only with cause) if the number of votes cast to remove the director exceeds the number of votes cast not to remove the director.

 

Ashland’s articles of incorporation increase the vote required to remove a director without “cause.” Removal of a director without cause requires the affirmative vote of the holders of at least 80% of the voting power of the then outstanding voting stock of Ashland, voting together as a single class. Ashland’s articles of incorporation and by-laws define “cause” as the willful and continuous failure of a director to substantially perform such director’s duties to Ashland (other than any failure resulting from incapacity due to physical or mental illness) or the willful engagement by a director in gross misconduct materially and demonstrably injurious to Ashland.

 

Additionally, the KBCA provides that a director may be removed by the shareholders only at a meeting called for that purpose. The meeting notice must state that removal is the purpose, or one of the purposes, of the meeting.

 

Generally under the DGCL, a director may be removed with or without cause by the affirmative vote of holders of a majority of the shares then entitled to vote at an election of directors.

 

Hercules’ by-laws state that, subject to the rights of any preferred stock outstanding, any director may be removed only for cause and only by the affirmative vote of the holders of record of 80% of the combined voting power of the then issued and outstanding shares of the stock entitled to vote generally in the election of directors, voting together as a single class.

Notice of Shareholders’ Meetings  
Ashland   Hercules

Both the KBCA and Ashland’s by-laws require notice to shareholders of the date, time, and place of each annual and special shareholders’ meeting at least ten days, but no more than 60 days, before the meeting date. Notice of a special meeting must also state the purpose for which the meeting is being called.

 

Unless the KBCA or the articles of incorporation require otherwise, a Kentucky corporation is required to give notice only to shareholders entitled to vote at the meeting.

  The DGCL requires notice to shareholders of the place (if any), date, and hour, and means of remote communication, if any, of each annual and special shareholders’ meeting at least 10 days, but no more than 60 days, before the meeting date. In the case of a special meeting, the notice must also state the purpose or purposes for which the meeting is called. However, notice of a shareholders’ meeting to vote upon a merger or a sale of all or substantially all of the corporation’s assets, must be delivered at least 20 days before the meeting date.

 

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  Hercules’ by-laws provide that, unless otherwise provided under a statute, written notice of the place, date, hour and means of remote communication, if any and, in the case of a special meeting, purposes of a meeting of shareholders must be given not less than ten nor more than 50 days before the date of the meeting, either personally or by mail, to each shareholder of record entitled to vote at the meeting. Moreover, this notice may be sent electronically.
Ability to Call Special Meetings of Shareholders  
Ashland   Hercules
Under the KBCA, a special meeting of shareholders may be called by a majority of the members of the board of directors, any person or persons authorized to do so by the corporation’s articles of incorporation or by-laws or by written request to the secretary by holders of not less than 33 1/3% of all the shares entitled to vote at such meeting. Such written request should include the following: (i) the action to be taken and the reasons for it; (ii) the name and address of the holders to propose the action; (iii) a representation that each is a holder of record of Ashland stock entitled to vote at such meeting and intends to appear in person or by proxy at such meeting to propose the action; (iv) any material interest of any shareholder in such action; and (v) if the action includes a proposal to amend the articles of incorporation or by-laws, such amendment language. In addition, Ashland’s by-laws state that the chairman of the board and the president may also call a special meeting.  

Under the DGCL, a special meeting of shareholders may be called by the board of directors or by any person or persons authorized by the certificate of incorporation or the by-laws.

 

Hercules’ by-laws provide that special meetings of the shareholders, for any purpose or purposes, may be called by the chairman of the board, the chief executive officer, the president or a majority of the board of directors.

Action by Written Consent of Shareholders  
Ashland   Hercules
Under the KBCA, any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting, and without prior notice (except as noted below), if one or more written consents describing the action taken is signed by all of the shareholders entitled to vote on the action. If the KBCA requires that notice of the proposed action be given to nonvoting shareholders and the action is to be taken by consent of voting shareholders, the corporation must give its nonvoting shareholders written notice of the proposed action at least 10 days before the action is taken.   Hercules’ certificate of incorporation and by-laws expressly limit action by written consent of shareholders by stating that, except as otherwise provided in the certificate of incorporation, any action required or permitted to be taken by the shareholders of Hercules must be effected at a duly called annual or special meeting of such shareholders and may not be effected by any consent in writing by such holders. The certificate of incorporation states that, with the written assent of two-thirds of its outstanding stock (or pursuant to the affirmative vote at any meeting) the board of directors may (i) sell, convey, assign, transfer or otherwise dispose of, the property, assets, rights and privileges of Hercules, as an entirety, for such consideration and on such terms as they may determine and (ii) increase the common stock outstanding.

 

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Shareholder Proposals  
Ashland   Hercules

Ashland’s by-laws state that, in order for business to be brought before an annual meeting by a shareholder, the shareholder must give written notice to the secretary of the proposed matter no later than 90 days in advance of such meeting; provided, however, if the annual meeting of the shareholders is held earlier than the last Thursday in January, the notice must be given within ten days after the first public disclosure of the date of the annual meeting.

 

The notice must set forth the following:

 

•     a brief description of the business to be brought before the meeting and the reasons for such business at the meeting and in the event that such business includes a proposal to amend either the articles of incorporation or the by-laws, the language of the proposed amendment,

  Hercules’ by-laws and certificate of incorporation and the DGCL are silent regarding shareholder proposals.

 

•     the name and address of the shareholder proposing such business,

 

•     a representation that the shareholder is a holder of record of Ashland stock entitled to vote at the meeting and intends to appear in person or by proxy at the meeting,

 

•     any material interest of the shareholder in such business, and

 

•     a representation as to whether or not the shareholder will solicit proxies in support of the proposal.

 
Director Nominations by Shareholders  

Ashland

 

 

Hercules

 

Ashland’s by-laws provide that any shareholder entitled to vote for the election of directors may nominate a director. In order for a shareholder to nominate a director for election, the shareholder must give timely written notice to the secretary of Ashland.

 

The notice must be delivered to, or mailed and received at, Ashland’s principal office:

 

•     with respect to an annual meeting, no later than 90 days in advance of such meeting (provided that if the annual meeting of the shareholders is held earlier than the last Thursday in January, the notice must be given within 10 days after the first public disclosure of the date of the annual meeting), and

  Both the DGCL and Hercules’ by-laws are silent as to a shareholder’s ability to nominate a director. In its proxy statement for its 2008 annual meeting of shareholders, Hercules provided that a shareholder may recommend any person as a nominee for director for consideration by the Governance Committee by submitting the name and supporting information in writing to the Governance Committee. The documentation should include the following: (i) the name, residence and business address of the nominating shareholder; (ii) a representation that the shareholder is a record holder of Hercules stock and the number of shares held; (iii) information regarding each nominee which would be required to be disclosed in the proxy; (iv) a description of any arrangements or understandings between the shareholder and nominee; and (v) the written consent of each nominee to serve as director, if elected.

 

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•     with respect to a special meeting, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders.

 
The notice must set forth the following information:  

 

•     the name and address of the shareholder who intends to make the nomination and of the person to be nominated,

 

•     a representation that the nominating shareholder is a shareholder of record of Ashland entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person specified in the notice,

 

•     a description of all arrangements or understandings between the shareholder and each nominee and any other named person or persons pursuant to which the nomination is to be made by the shareholder,

 

•     such other information regarding each nominee proposed by such shareholder as would have been required to be included in Ashland’s proxy statement had each nominee been nominated, or intended to be nominated by the board,

 

•     the consent of each nominee to serve as director of Ashland if so elected, and

 

•     a representation as to whether or not the shareholder will solicit proxies in support of the shareholder’s nominee(s).

 
Dividends  

Ashland

 

 

Hercules

 

The KBCA permits a corporation to declare and pay dividends and make other distributions to shareholders, unless after giving effect to the distribution:

 

•     the corporation would be unable to pay its debts as they became due in the usual course of business, or

 

•     the corporation’s total assets would be less than the sum of its total liabilities plus, unless the articles of incorporation permit otherwise, the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

  Subject to any restrictions in the certificate of incorporation, the DGCL permits a corporation to declare and pay dividends out of “surplus” or, if there is no “surplus,” out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. “Surplus” is defined as the excess of the net assets of the corporation over the amount determined to be the capital of the corporation by the board of directors. The capital of the corporation cannot be less than the aggregate par value of all issued shares of capital stock. Net assets equals total assets minus total liabilities. The DGCL also provides that dividends may not be paid out of net profits if, after the payment of the dividend, capital is less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets.

 

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Accordingly, Ashland’s articles of incorporation state that subject to the preferential rights of preferred shareholders, such dividends (either in cash, shares of common stock, shares of preferred stock or otherwise) as may be determined by the board of directors may be declared and paid on common stock from time to time, in accordance with the KBCA.   Hercules’ certificate of incorporation gives directors authority over the dividend rate, conditions, dates upon which such dividends shall be payable, whether such dividends shall be cumulative or non-cumulative, and preferences on which dividends may be issued, and the method of payment, whether cash or property, used to pay the dividend.
Amendment to Charter Documents  
Ashland   Hercules

The KBCA provides that unless the articles of incorporation provide otherwise, a corporation’s board of directors may adopt the following amendments to its articles of incorporation without shareholder action:

 

(1)    to extend the duration of the corporation;

 

(2)    to delete the names and addresses of the initial directors;

 

(3)    to delete the name and address of the initial registered agent or registered office;

 

(4)    to delete the mailing address of the corporation’s initial principal office;

 

(5)    to change each issued and unissued authorized share of an outstanding class into a greater number of whole shares if the corporation has only shares of that class outstanding; or

 

(6)    to change the corporate name by substituting the word “corporation,” “incorporated,” “company,” “limited,” or the abbreviation “corp.,” “inc.,” “co.,” or “ltd.,” for a similar word or abbreviation in the name, or by adding, deleting, or changing a geographical attribution for the name.

 

The DGCL provides that amendments to the certificate of incorporation require an affirmative vote of a majority of the voting power of the outstanding stock entitled to vote thereon and a majority of the voting power of the outstanding stock of each class entitled to vote thereon separately as a class. However, a corporation’s certificate of incorporation may provide for a greater vote.

 

Hercules’ certificate of incorporation calls for an affirmative vote of holders of at least 80% of the voting power of all shares of capital stock entitled to vote generally in the election of directors, voting together as a single class, to alter, amend, repeal or adopt any provision inconsistent with the structure of the board of directors (number, election, term, removal or vacancy) or regarding business combinations.

The KBCA also states that the board of directors may propose one or more amendments for shareholder approval and may condition its submission of a proposed amendment to the shareholders of the corporation on any basis. Unless the articles of incorporation or the board of directors requires a greater vote, generally an amendment will be adopted if it is approved by a majority of the votes cast by each voting group entitled to vote on the amendment and, if the amendment will create dissenters’ rights with respect to a voting group, by a majority of the votes entitled to be cast by the voting group.  
Ashland’s articles of incorporation impose increased voting requirements for certain types of amendments.  

 

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If any shares of preferred stock are outstanding, the affirmative vote or consent of the holders of at least 66 2/3% of the number of shares of preferred stock outstanding at the time, voting as a class without regard to series, is required to (i) create any class of stock ranking prior to the preferred stock as to dividends or liquidation or increase the authorized number of shares of such class; (ii) alter or change any of the provisions of the articles in a way that adversely affects the relative rights and preferences of the preferred stock (this is also true of any series of preferred stock, in which case the holders vote separately as a series); or (iii) increase the authorized number of shares of preferred stock.  
The affirmative vote of holders of shares representing not less than 80% of the votes entitled to be cast by the voting stock is required to alter, amend or adopt any provision inconsistent with or repeal the provisions regarding (i) this 80% voting requirement, (ii) the board size, vacancies and the terms of office and removal of directors, and (iii) the procedures for adopting, amending, altering or repealing the by-laws.  
The affirmative vote of holders of shares representing (1) not less than 80% of the votes entitled to be cast by the voting stock voting together as a single class and (2) not less than 66 2/3% of the votes entitled to be cast by the voting stock not beneficially owned, directly or indirectly, by any interested shareholder voting together as a single class is required to amend, repeal, or adopt any provisions inconsistent with the provisions restricting certain business combinations with interested shareholders.  
Amendment to By-laws  
Ashland   Hercules

Under the KBCA, a corporation’s board of directors may amend or repeal by-laws, except to the extent that the articles of incorporation or the KBCA reserve the power exclusively to the shareholders. Under the KBCA, a bylaw provision originally adopted by the shareholders that fixes a greater quorum or voting requirement for the board of directors may only be amended or repealed by the shareholders.

 

Ashland’s articles of incorporation authorize the board of directors to adopt by-laws concerning the conduct of the affairs of the corporation and the conduct of, and matters considered at, meetings of shareholders, including special meetings. The board may also alter, amend or repeal the by-laws, except the by-laws may not be amended by a committee of the board.

 

Under the DGCL, the power to adopt, alter and repeal by-laws is vested in the shareholders, except to the extent that a corporation’s certificate of incorporation vests concurrent power in the board of directors.

 

Hercules’ certificate of incorporation states that the by-laws of Hercules may be altered, amended or repealed by the board of directors (except so far as the by-laws provide otherwise). Hercules’ by-laws state that the by-laws may be adopted, amended or repealed by a vote of the holders of a majority of the Hercules common stock or by the board of directors, unless provided otherwise by the certificate of incorporation or the by-laws. Any by-laws adopted or amended by the board of directors may be amended or repealed by the directors or shareholders entitled to vote.

 

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Ashland’s articles of incorporation require the affirmative vote of the holders of at least 80% of the voting power of Ashland’s then outstanding voting stock, voting as a single class, to amend, alter or repeal any provision of the bylaws.   Notwithstanding the foregoing, Sections 2 (special meetings) and 11 (shareholder action) of Article I and Sections 1 (number of board of directors) and 2 (election and term of board of directors) of Article II of the by-laws shall not be altered, amended or repealed and no provision inconsistent therewith shall be adopted without the affirmative vote of the holders of at least 80% of the voting power of all the shares of Hercules entitled to vote generally in the election of directors, voting together as a single class.
Mergers and Share Exchanges  
Ashland   Hercules

Under the KBCA, specified actions such as mergers, share exchanges and sales of all or substantially all of a corporation’s assets not in the ordinary course of business, must be proposed by the board of directors and, unless the KBCA, the corporation’s articles of incorporation or the board of directors requires a greater vote, approved by each voting group entitled to vote separately on the transaction by a majority of the votes entitled to be cast on the transaction by that voting group.

 

However, the KBCA generally does not require that a merger be approved by the shareholders of the corporation surviving the merger if (i) the articles of incorporation of the surviving corporation will not differ from its articles before the merger; (ii) each shareholder of the surviving corporation will hold the same number of shares after the merger as before; and (iii) the number of voting and participating shares outstanding immediately after the merger, plus the number of shares issuable as a result of the merger will not exceed by more than 20% the total number of voting and participating shares of the surviving corporation outstanding immediately prior to the merger. Both the KBCA and Ashland’s articles of incorporation impose additional requirements in connection with certain business combinations with an interested shareholder (one holding 10% or more of the voting power of Ashland), as described in this chart below under “Anti-Takeover Statutes and Charter Provisions.”

 

Under the DGCL, a merger, consolidation or sale of all or substantially all of a corporation’s assets must be approved by the board of directors and by a majority of the outstanding stock of the corporation entitled to vote thereon. However, no vote of shareholders of a constituent corporation surviving a merger is required, unless the corporation provides otherwise in its certificate of incorporation, if:

 

•     the merger agreement does not amend the certificate of incorporation of the constituent corporation,

 

•     each share of stock of the constituent corporation outstanding before the merger is an identical outstanding or treasury share of the surviving corporation after the merger, and

 

•     either no shares of common stock of the surviving corporation are to be issued or delivered pursuant to the merger or the authorized unissued shares or treasury shares of the surviving corporation to be issued do not exceed 20% of the shares of common stock of such constituent corporation outstanding immediately prior to the effective time of the merger.

 

The certificate of incorporation of Hercules requires an 80% shareholder vote for certain business combinations, including (i) any merger or consolidation of Hercules with an interested shareholder (one who owns 10% or more of the voting power of Hercules); (ii) any sale, lease, exchange or other disposition to or with any interested shareholder having an aggregate fair market value of $100 million or more; (iii) the issuance or transfer by Hercules of any securities to any interested shareholder in exchange for cash,

 

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  securities or other property having an aggregate fair value of $100 million or more; (iv) the adoption of any plan or proposal for the liquidation or dissolution of Hercules proposed by an interested shareholder; or (v) any reclassification of securities or recapitalization, or merger or consolidation or other transaction that has the effect of increasing the proportionate share of the outstanding shares of any class of equity security owned by an interested shareholder.
Appraisal Rights  
Ashland   Hercules

Under the KBCA, a shareholder is entitled to dissent from, and obtain payment of the fair value of his or her shares in the event of consummation of a plan of merger, plan of share exchange, a sale of all or substantially all of the corporation’s assets, a plan of conversion, an amendment to the articles of incorporation that materially and adversely affects the shareholder’s rights, certain business combinations, or any action which results in the entitlement to dissenter’s rights pursuant to the articles of incorporation, by-laws or board resolution.

 

A shareholder entitled to dissent and obtain payment for his or her shares under the KBCA shall not challenge the corporate action creating his or her entitlement unless the action is unlawful or fraudulent with respect to the shareholder or the corporation.

 

If proposed corporate action creating dissenters’ rights is submitted to a vote at a shareholders’ meeting, the meeting notice must state that shareholders are or may be entitled to assert dissenters’ rights and the corporation must undertake to provide a copy of the statutes governing the shareholder’s dissenter rights to any shareholder entitled to vote at the shareholders’ meeting upon request of that shareholder. Before the vote is taken, a shareholder who wishes to assert dissenters’ rights must deliver to the corporation a written notice of intent to demand payment for his or her shares if the action is effectuated and the shareholder must not vote the shareholder’s shares in favor of the proposed action.

 

If corporate action creating dissenters’ rights is taken without a vote of shareholders, the corporation must notify in writing all shareholders entitled to assert dissenters’ rights that the action was taken and send them the dissenters’ notice no later than ten days after the proposed action was authorized.

 

The DGCL provides shareholders of a corporation involved in a merger the right to demand and receive payment in cash of the fair value of their stock in certain mergers if the shareholder continuously holds such shares through the effective date of the merger and has neither voted in favor of the merger nor consented thereto in writing. As a general matter, appraisal rights are not available with respect to shares:

 

•     listed on a national securities exchange, or

 

•     held of record by more than 2,000 shareholders,

 

unless holders of shares are required to accept in the merger anything other than any combination of:

 

•     shares of stock of the surviving corporation in the merger or depository receipts in respect thereof,

 

•     shares of stock (or depository receipts in respect thereof) of another corporation that, at the effective date of the merger, will be:

 

•     listed on a national securities exchange, or

 

•     held of record by more than 2,000 holders,

 

•     cash instead of fractional shares of stock or fractional depository receipts received, and

 

•     any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing paragraphs.

 

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The shareholder then has a duty to demand payment within the requisite time stated in the dissenters’ notice. The shareholder who demands payment and deposits his, her or its share certificates shall retain all other rights of a shareholder until these rights are canceled or modified by the taking of the proposed corporate action.  

Under the DGCL, appraisal rights may be perfected by the following methods:

 

(i) if the proposed merger is submitted to a shareholder meeting for approval, then the company must notify each applicable shareholder that appraisal rights are available at least 20 days prior to the meeting. Each shareholder electing to demand appraisal shall deliver a written demand prior to the merger vote; or

 

(ii) if the proposed merger does not go to a shareholder meeting, then either the constituent corporation before the merger or the surviving corporation within 10 days thereafter will notify each shareholder of his or her appraisal rights. Each shareholder may then demand appraisal in writing within 20 days.

Anti-takeover Statutes and Charter Provisions  
Ashland   Hercules

The KBCA generally prohibits certain business combinations by a corporation or a subsidiary with an interested shareholder (generally defined as a beneficial owner of 10% or more of the voting power of the corporation’s outstanding voting shares) for a period of five years after the date the interested shareholder becomes an interested shareholder, unless the business combination was approved by a majority of the independent members of the board of directors of the corporation before the date the interested shareholder became an interested shareholder. In addition, the KBCA requires that, absent an exemption, certain business combinations by a corporation or a subsidiary with an interested shareholder must either be approved by a majority of the independent members of the board of directors of the corporation or by the affirmative vote of at least (1) 80% of the votes entitled to be cast by the corporation’s voting stock and (2) 66 2/3% of the votes entitled to be cast by holders of such voting stock other than voting stock owned by the interested shareholder, its affiliates and associates.

 

The shareholder transactions constituting a “business combination” and subject to these special requirements generally include (i) mergers or consolidations by a corporation or a subsidiary with an interested shareholder, or with any other corporation which is, or after the merger or consolidation will be, an affiliate of the interested shareholder; (ii) any sale, lease, transfer or other disposition or issuance or transfer of equity

 

Section 203 of the DGCL generally prohibits certain “business combinations,” including mergers, sales and leases of assets, issuances of securities and similar transactions by a corporation or a subsidiary with an interested shareholder who beneficially owns 15% or more of a corporation’s voting stock, within three years after the person or entity becomes an interested shareholder, unless:

 

•     the board of directors of the corporation has approved, before the acquisition time, either the business combination or the transaction that resulted in the person becoming an interested shareholder,

 

•     upon consummation of the transaction that resulted in the person becoming an interested shareholder, the person owns at least 85% of the corporation’s voting stock (excluding shares owned by directors who are officers and shares owned by employee stock plans in which participants do not have the right to determine confidentially whether shares will be tendered in a tender or exchange offer), or

 

•     after the person or entity becomes an interested shareholder, the business combination is approved by the board of directors and authorized by the vote of at least two-thirds of the outstanding voting stock not owned by the interested shareholder.

 

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securities within 12 months by a corporation or a subsidiary to an interested shareholder that represents an aggregate book value of 5% or more of the total market value of the outstanding stock of the corporation; (iii) adoption of any plan or proposal for liquidation or dissolution by a corporation or a subsidiary in which an interested shareholder will receive anything other than cash; or (iv) any reclassification, merger or consolidation of a corporation with any subsidiary, which has the effect of increasing by 5% or more the proportionate amount of the outstanding shares of any class of the corporation’s or a subsidiary’s equity securities owned by an interested shareholder.

 

Ashland’s articles of incorporation also require that such business combinations must be approved by at least (1) 80% of the votes entitled to be cast by Ashland’s voting stock and (2) 66 2/3% of the votes entitled to be cast by holders of such voting stock other than voting stock owned by the interested shareholder, its affiliates and associates unless:

 

•     a majority of Ashland’s directors who are not affiliates or associates of the interested shareholder and who were in office before the interested shareholder became an interested shareholder (or were recommended or elected by a majority of such directors) approve the transaction; or

 

•     the shareholders of Ashland receive in the business combination a “fair price” based on market value and/or prices previously paid by the interested shareholder, as measured on certain designated dates; there has been no reduction in or failure to pay dividends to Ashland’s shareholders after the interested shareholder became an interested shareholder and prior to the business combination; and after becoming an interested shareholder, the interested shareholder did not receive the benefit of any loans or other financial assistance from Ashland.

 

These restrictions on interested shareholders do not apply under some circumstances, including if the corporation’s original certificate of incorporation contains a provision expressly electing not to be governed by the Delaware statute regulating business combinations, or if the corporation, by action of its shareholders, adopts an amendment to its certificate of incorporation or by-laws expressly electing not to be governed by these provisions of the DGCL (and such amendment is duly approved by the shareholders entitled to vote thereon).

 

Section 203 of the DGCL is applicable to Hercules to the extent not modified by the certificate of incorporation. Article Ninth of Hercules’ certificate of incorporation deviates from some of the requirements of Section 203 by permitting certain business combinations upon the affirmative vote of at least 80% of the voting power of the then-outstanding shares of capital stock entitled to vote generally in the election of directors, voting together as a single class to approve certain “business combinations,” including mergers, sales and leases of assets, issuances of securities and similar transactions by a corporation or a subsidiary with an interested shareholder who beneficially owns 10% or more of a corporation’s voting stock, within two years after the person or entity becomes an interested shareholder. These supermajority provisions do not apply if:

 

•     a majority of the directors who are unaffiliated with the interested shareholder and who were in office before the interested shareholder became an interested shareholder (or were recommended or elected by a majority of such directors) approve the transaction; or

 

•     the shareholders in the business combination receive a “fair price” based on market value and/or prices previously paid by the interested shareholder, as measured on certain designated dates; there has been no failure to pay or reduction in dividends after such interested shareholder became an interested shareholder; after such interested shareholder became an interested shareholder, he or she has not received the benefit of any loans or other financial assistance from Hercules; and a proxy statement describing the proposed business combination has been mailed to shareholders at least 30 days prior to the business combination.

 

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Duties of Directors  
Ashland   Hercules

The KBCA requires a director to discharge such director’s duties as a director, including such director’s duties as a member of a committee, in good faith, on an informed basis and in a manner in which the director honestly believes is in the best interests of the corporation. A director is considered to discharge his or her duties on an informed basis if he or she makes, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, inquiry into the business and affairs of the corporation, or into a particular action to be taken or decision to be made. In performing the director’s duties, unless a director has knowledge concerning the matter in question that makes reliance unwarranted, a director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by:

 

•     one or more officers or employees of the corporation whom the director honestly believes to be reliable and competent in the matters presented,

 

•     legal counsel, public accountants or other persons as to matters that the director believes are within the professional or expert competence of that person, or

 

•     a committee of the board of which the director is not a member, which committee the director honestly believes to merit confidence.

 

There is no corresponding provision in the DGCL.

 

The Delaware standards of conduct for directors have developed through written opinions of the Delaware courts. Generally, directors of Delaware corporations are subject to a duty of loyalty and a duty of care. The duty of loyalty has been said to require directors to refrain from self-dealing. According to the Delaware Supreme Court, the duty of care requires “directors . . . in managing the corporate affairs .. . . to use that amount of care which ordinarily careful and prudent men would use in similar circumstances.” Later case law has established “gross negligence” as the test for breach of the standard for the duty of care in the process of decision-making by directors of Delaware corporations.

Limitations on Liability of Directors and Officers  
Ashland   Hercules

The KBCA states that any action taken as a director, or failure to take an action, shall not be a basis for monetary damages or injunctive relief unless the director breaches or fails to perform the duties of a director as required by the KBCA and, in the case of monetary damages, breach or failure to perform constitutes willful misconduct or wanton or reckless disregard for the best interests of the corporation and shareholders. A person bringing an action for monetary damages against a director for a violation of the standards of a director’s conduct must prove the violation by clear and convincing evidence.

 

The articles of incorporation of Ashland include provisions eliminating the personal liability to Ashland and its shareholders of directors for monetary damages for any breach of their duties as directors to the extent permitted under Kentucky law.

 

The DGCL provides that a corporation may include in its certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. However, the provision may not eliminate or limit the liability of a director for:

 

•     breach of the duty of loyalty,

 

•     acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law,

 

•     unlawful payments of dividends, certain stock repurchases or redemptions, or

 

•     any transaction from which the director derived an improper personal benefit.

 

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  Hercules’ certificate of incorporation states that, to the fullest extent authorized or permitted by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended, a director of Hercules shall not be liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director.
Indemnification of Directors and Officers  
Ashland   Hercules

The KBCA provides that, unless limited by the articles of incorporation, a corporation shall indemnify any director or officer who is wholly successful in the defense of any proceeding to which the individual was a party because he or she is or was a director or officer of the corporation against reasonable expenses incurred in connection with the proceeding. The term “proceeding” includes any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal.

 

The KBCA permits a corporation to indemnify an individual who is made a party to a proceeding because the individual is or was a director or officer of the corporation as long as the individual:

 

•     conducted himself or herself in good faith,

 

•     reasonably believed, in the case of conduct in his or her official capacity with the corporation, that the conduct was in the best interest of the corporation or, in all other cases, was at least not opposed to its best interest, and

 

•     in a criminal proceeding, had no reasonable cause to believe that the conduct was unlawful.

 

The KBCA does not, however, permit indemnification in connection with a proceeding by or in the right of the corporation in which the director is held liable to the corporation or in connection with any other proceeding where the director or officer is adjudged to have received an improper personal benefit.

 

A determination that indemnification is permitted by the terms of the KBCA must first be made before a director or officer can be indemnified. This determination can be made:

 

•     by majority vote of a quorum of disinterested directors or, if a quorum cannot be obtained, by majority vote of a committee made up solely of two or more disinterested directors,

 

The DGCL provides that a corporation may indemnify any person who is made a party to any third-party action, suit or proceeding on account of being a director, officer, employee or agent of the corporation (or was serving at the request of the corporation in such capacity for another corporation, partnership, joint venture, trust or other enterprise) against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action, suit or proceeding through, among other things, a majority vote of a quorum consisting of directors who were not parties to the suit or proceeding or by a committee of such directors designated by majority vote of such directors, even though less than a quorum, if the person:

 

•     acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and

 

•     in a criminal proceeding, had reasonable cause to believe his or her conduct was lawful.

 

The DGCL also permits indemnification by a corporation under similar circumstances for expenses (including attorneys’ fees) actually and reasonably incurred by such persons in connection with the defense or settlement of a derivative action or suit, except that no indemnification may be made in respect of any claim, issue or matter as to which the person is adjudged to be liable to the corporation unless the Delaware Court of Chancery or the court in which the action or suit was brought determines upon application that the person is fairly and reasonably entitled to indemnity for the expenses which the court deems to be proper.

 

To the extent a director, officer, employee or agent is successful in the defense of such an action, suit or proceeding, the corporation is required by the DGCL to indemnify such person for reasonable expenses incurred thereby. Expenses (including attorneys’ fees)

 

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•     by special legal counsel selected by the majority vote of a quorum of disinterested directors or by majority vote of a committee made up solely of two or more disinterested directors. If there are not two disinterested directors, then legal counsel can be selected by a majority vote of the full board of directors, or

 

•     by the shareholders, but shares owned by any director who is a party to the proceeding cannot be voted on the determination.

 

The indemnification and advancement of expenses provided in the KBCA are not exclusive of any rights provided in the corporation’s articles of incorporation or by-laws. In general, Ashland’s articles of incorporation permit, and its by-laws require, indemnification of any individual who was or is a party to any threatened, pending or completed claim, action, suit or proceeding by reason of his or her status as a director, officer or employee of Ashland or of another entity at Ashland’s request against any reasonable costs and expenses, judgments, fines or settlements paid by or imposed against the individual if the individual:

 

•     has been successful on the merits or otherwise with respect to such claim, action, suit or proceeding; or

 

•     acted in good faith, in what the person reasonably believed to be the best interests of Ashland or such other entity, as the case may be, and in addition, in any criminal action or proceeding, had no reasonable cause to believe that the person’s conduct was unlawful (as determined in accordance with the by-laws).

 

Ashland is required by the by-laws to advance expenses to a director, officer or employee, but the individual is obligated to repay the advances if it is ultimately determined that the individual is not entitled to indemnification; provided, however, that this obligation is subject to conditions. Ashland may require the director, officer or employee to sign a written instrument acknowledging the obligation to repay expenses as a condition to the advancement of the expenses. Ashland may also refuse to advance expenses or discontinue advancing expenses if it is determined by Ashland, in its sole and exclusive discretion, not to be in the best interest of Ashland.

 

incurred by such persons in defending any action, suit or proceeding may be paid in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of that person to repay the amount if it is ultimately determined that that person is not entitled to be so indemnified.

 

Hercules’ certificate of incorporation requires Hercules to indemnify and hold harmless any person who is or was made, or threatened to be made, a party to any threatened, pending or completed action, suit or proceeding, by reason of the fact that such person is or was a director, officer or employee of Hercules, or at the request of Hercules, is or was serving as a director, officer or employee of any other corporation, or in a capacity with comparable authority or responsibilities for any partnership, joint venture, trust, employee benefit plan or other enterprise, against any and all expense, liability and loss, arising from judgments, fines, penalties, ERISA excise taxes, amounts paid in settlement and costs, charges and expenses reasonably incurred (including attorneys’ fees and disbursements).

 

Hercules’ certificate of incorporation also requires Hercules to reimburse or advance to any director or officer or other person entitled to indemnification the necessary funds for payment of expenses, including attorneys’ fees and disbursements, incurred in connection with any proceeding, in advance of the final disposition of such proceeding. Such expenses can only be paid in advance if the director, officer or other person makes an undertaking to Hercules to repay any advanced expenses if it is determined by final judicial decision with no right of appeal that the director, officer or person is not entitled to be indemnified for the expenses. The rights conferred upon indemnitees are considered contract rights that vest at the time of such person’s service to or at the request of Hercules and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee, trustee or agent and will inure to the benefit of such indemnitee’s heirs.

A person is not entitled to indemnification under Ashland’s by-laws in respect of any claim, action, suit or proceeding, initiated by such person or such person’s representative, or which involved the voluntary solicitation or intervention of such person or such person’s representative.  

 

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DESCRIPTION OF ASHLAND’S CAPITAL STOCK

The following description of Ashland’s capital stock is a summary and is qualified in its entirety by reference to Ashland’s articles of incorporation and by-laws, which are filed as exhibits to the reports of Ashland incorporated by reference in this proxy statement/prospectus, and by applicable law.

Ashland’s authorized capital consists of 200,000,000 common shares, $0.01 par value, and 30,000,000 shares of cumulative preferred stock, no par value, in one or more series. At June 30, 2008, 63,005,458 common shares were outstanding. At that date, no preferred shares of stock were outstanding.

Preferred stock

The Ashland board of directors can, without the approval of shareholders, issue one or more series of preferred shares. The board can also determine the rights, preferences and limitations of each series including the maximum number of shares in the series, voting rights, conversion rights, redemption rights, dividend rights, liquidation rights, any preferences over the common stock with respect to dividend or liquidation distributions, and the terms and conditions of issue.

Common stock

Ashland’s outstanding shares of common stock are listed on the NYSE under the symbol “ASH.” Ashland’s transfer agent and registrar for common stock is National City Bank.

Common shareholders receive dividends only when declared by the board of directors. If declared, dividends may be paid in cash, stock or other forms. If and when Ashland issues preferred stock, common shareholders may not receive dividends until Ashland has satisfied its obligations to the preferred shareholders.

All outstanding shares of common stock are fully paid and non-assessable. Any additional shares of common stock issued in connection with the merger would also be fully paid and non-assessable. There are no preemptive or other subscription rights, conversion rights or redemption or sinking fund provisions with respect to the shares of common stock.

Each share of common stock is entitled to one vote in the election of directors and other matters. Directors are currently elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. However, on July 16, 2008, the Ashland board of directors voted to recommend to Ashland shareholders at the upcoming Ashland shareholders’ meeting in January 2009 that Ashland’s articles of incorporation be amended to require majority voting in the election of directors, rather than a plurality. The majority voting provision endorsed by Ashland’s directors would only apply in uncontested elections, and the plurality standard would still apply in contested elections. To be approved by Ashland shareholders at the January 2009 annual meeting, more votes must be cast in favor of the majority voting amendment to Ashland’s articles of incorporation than against it.

Common shareholders are not entitled to cumulative voting rights. Members of the Ashland board of directors serve three-year terms and such elections are staggered. Directors may be removed from office only for cause by the vote of at least 80% of the outstanding shares entitled to vote.

The quorum required at a shareholders’ meeting for consideration of any matter is a majority of the shares entitled to vote on that matter, represented in person or by proxy. If a quorum is present, action on a matter is approved if the votes cast in favor of the action exceed the votes cast against the action, except for the election of directors as described above. However, approval is required by 80% of the voting power of the outstanding common stock of Ashland, and 66 2/3% of the voting power other than voting stock beneficially owned by an interested shareholder who is a party to a business combination, in the case of major corporate actions such as:

 

   

the issuance or transfer of any equity securities which have an aggregate market value of 5% or more of the total market value of the outstanding stock of Ashland;

 

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adoption of any plan for liquidation or dissolution, in which anything other than cash will be received by an interested shareholder;

 

   

any reclassification of securities, including any reverse stock split, recapitalization, merger or consolidation; or

 

   

the sale, lease, exchange or other disposition of all or substantially all of Ashland’s property, other than in the usual and regular course of business.

Anti-takeover effects

Certain provisions of the KBCA and Ashland’s articles of incorporation and by-laws could make it more difficult for shareholders to change the composition of the board of directors and may also have the effect of discouraging a change of control transaction or limiting the price that certain investors might be willing to pay in the future for Ashland’s common stock. These provisions include:

 

 

 

a provision found in Article IV of Ashland’s articles of incorporation allowing the board of directors to issue preferred shares and to determine the rights and preferences of the preferred stock without any vote or action by the holders of common stock. In some cases, the issuance of preferred shares could delay a change in control of Ashland and make it harder to remove present management. Moreover, Article IV(b)(7) of Ashland’s articles of incorporation requires the affirmative vote of at least 66 2/3% of the holders of preferred stock, voting separately as a class, to (i) create any class of stock ranking prior to the preferred stock as to dividends or upon liquidation or increase the authorized number of shares of any such class of stock; (ii) alter or change any provision of the articles of incorporation that adversely affects the relative rights and preferences of the preferred stock; or (iii) increase the authorized number of shares of preferred stock;

 

   

provisions found in Article VI of Ashland’s articles of incorporation and Article II of Ashland’s by-laws, dividing the board of directors into three classes which means that only approximately one-third of the directors are elected each year;

 

   

provisions found in Article VI of Ashland’s articles of incorporation and Article II of Ashland’s by-laws, allowing the removal of directors at a meeting of shareholders called expressly for that purpose. The removal of a director without cause requires the affirmative vote of the holders of at least 80% of the voting power of the then outstanding voting stock of Ashland, voting together as a single class. These provisions narrowly define “cause” as the willful and continuous failure of a director to substantially perform such director’s duties to Ashland (other than any failure resulting from incapacity due to physical or mental illness) or the willful engagement by a director in gross misconduct materially and demonstrably injurious to Ashland. Additionally, Section 271B.8-080(4) of the KBCA also provides that a director may be removed by the shareholders only at a meeting called for that purpose. The meeting notice must state that removal is the purpose, or one of the purposes, of the meeting;

 

 

 

provisions found in Articles VIII and IX of Ashland’s articles of incorporation, requiring the affirmative vote of shares representing not less than 80% of the votes entitled to be cast by the voting stock to alter, amend, repeal or adopt any provision inconsistent with or repeal the provisions regarding (i) this 80% voting requirement (Article IX), (ii) the board size, vacancies and the terms of office and the removal of directors (Article VI) and (iii) the procedures for adopting, amending, altering or repealing the by-laws (Article VII); and requiring the affirmative vote of shares representing (1) not less than 80% of the votes entitled to be cast by the voting stock voting together as a single class and (2) not less than 66 2/3% of the votes entitled to be cast by the voting stock not beneficially owned, directly or indirectly, by any interested shareholder to amend, repeal, or adopt any provisions inconsistent with the provisions restricting certain business combinations with interested shareholders (Article VIII);

 

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provisions found in Article VII of Ashland’s articles of incorporation and Article IX of Ashland’s by-laws, authorizing the board of directors (i) to adopt by-laws concerning the conduct of the affairs of the company and the conduct of, and matters considered at, meetings of shareholders, including special meetings and (ii) to alter, amend or repeal the by-laws; and requiring the affirmative vote of the holders of at least 80% of the voting power of Ashland’s then outstanding voting stock, voting as a single class for shareholders to alter, amend or repeal the by-laws;

 

   

Section 271B.11-030 of the KBCA requiring a majority vote of all votes entitled to be cast for a merger or share exchange transaction by each voting group entitled to vote separately on that transaction, unless the KBCA, articles of incorporation or the board of directors require a greater vote;

 

   

provisions set forth in Articles I and II of Ashland’s by-laws, requiring that shareholders provide advance written notice when nominating directors or submitting other shareholder proposals;

 

   

a provision in Article I, Section 3 of Ashland’s by-laws limiting the people who can call a special shareholders’ meeting to the chairman of the board, the president, a majority of the board of directors or, by written request to the secretary, holders of not less than one-third of all the shares entitled to vote at such meeting; and

 

   

Sections 271B.12-200 to 271B.12-230 of the KBCA governing “business combinations,” which generally (i) prohibit Ashland and its subsidiaries from entering into certain business combinations with an interested shareholder who beneficially owns 10% or more of the outstanding voting stock for a period of five years after the 10% or greater owner first reached that level of stock ownership, unless approved by the independent members of the board of directors prior to the date the 10% ownership threshold was reached, and (ii) thereafter restrict such business combinations, unless certain conditions are met. Notably, under the restrictions applicable after the initial five-year prohibition, such business combinations must either (i) be approved by a majority of continuing independent members of the board of directors, or (ii) be approved by the affirmative vote of at least 80% of the votes entitled to be cast by all outstanding shares of voting stock and two-thirds of the votes entitled to be cast by holders of voting stock other than those beneficially owned by the interested shareholder who is (or whose affiliate is) a party to the transaction, or by an affiliate or associate of such interested shareholder. Further, Article VIII of Ashland’s articles of incorporation expressly provide that such Sections 271B.12-200 through 271B.12-230 of the KBCA shall apply to any Ashland business combination.

Article VIII of Ashland’s articles of incorporation also requires that certain business combinations involving an interested shareholder (including, among others, mergers and consolidations with an interested shareholder, or with any other corporation, whether or not itself an interested shareholder, which is, or after a merger or consolidation would be, an affiliate of an interested shareholder who was an interested shareholder prior to the transaction, and sales, leases and transfers of at least 5% of Ashland’s total market value), must be recommended by the board of directors, and approved by at least (1) 80% of the voting power of the then outstanding voting stock and (2) two-thirds of the voting power of the then outstanding voting stock other than voting stock owned by the interested shareholder, its affiliates or associates. These supermajority voting provisions do not apply (and thus, only a majority vote is required) if: (i) a majority of the directors who are not affiliates or associates of the interested shareholder and who were in office before the interested shareholder became an interested shareholder (or were recommended or elected by a majority of such directors) approve the transaction; or (ii) the shareholders in the business combination receive a “fair price” based on market value and/or prices previously paid by the interested shareholder, as measured on certain designated dates; there has been no reduction in or failure to pay dividends after the interested shareholder became an interested shareholder and prior to the business combination; and after becoming an interested shareholder, such shareholder did not receive the benefit of any loans or other financial assistance from Ashland.

 

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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION

The unaudited pro forma combined condensed balance sheet as of June 30, 2008 gives effect to the merger as if it had been consummated on June 30, 2008 and includes adjustments that give effect to events that are directly attributable to the transaction and that are factually supportable. The unaudited pro forma combined condensed statements of income for the year ended September 30, 2007 and for the nine months ended June 30, 2008 give effect to the merger as if it had been consummated on October 1, 2006 and include adjustments that give effect to events that are directly attributable to the transaction, are expected to have a continuing impact, and that are factually supportable. The notes to the unaudited pro forma combined condensed financial information describe the pro forma amounts and adjustments presented below.

The pro forma adjustments reflecting the completion of the merger are based upon the purchase method of accounting in accordance with GAAP and upon the assumptions set forth in the notes included in this section. The unaudited pro forma combined condensed balance sheet has been adjusted to reflect the preliminary allocation of the estimated purchase price to identifiable net assets acquired and of the excess purchase price to goodwill. The allocation of the purchase price is preliminary and is dependent upon certain valuations and other studies that have not progressed to a stage where there is sufficient information to make a definitive allocation. In addition, the estimated purchase price itself is preliminary and will be adjusted based upon the total Hercules outstanding common stock on the date of closing and final transaction costs. Accordingly, the final purchase accounting adjustments may be materially different from the preliminary pro forma adjustments included in this section. Certain fees associated with the merger that will be incurred by Hercules, such as fees for legal and financial services and amounts payable in connection with change in control provisions for applicable employees, are not reflected in these unaudited pro forma combined condensed financial statements. This unaudited pro forma combined condensed financial information should be read in conjunction with the accompanying notes, the financial information appearing under “Selected Historical Financial and Other Data of Ashland” and “Selected Historical Financial and Other Data of Hercules” and the historical financial statements of Ashland and Hercules included elsewhere and incorporated by reference into this proxy statement/prospectus.

The unaudited pro forma combined condensed financial statements are presented for informational purposes only and do not reflect future events that may occur after the Hercules acquisition, or any operating efficiencies or inefficiencies that may result from the transaction. Therefore, the unaudited pro forma combined condensed financial information is not necessarily indicative of results that would have been achieved had the businesses been combined during the periods presented or the results that Ashland will experience after the merger is consummated. In addition, the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are preliminary and have been made solely for purposes of developing this unaudited pro forma combined condensed financial information. Actual results could differ, perhaps materially, from these estimates and assumptions.

 

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Ashland Inc. and Consolidated Subsidiaries

Unaudited Pro Forma Combined Condensed Balance Sheet

As of June 30, 2008

(In millions)

 

      Ashland
Historical
   Hercules
Historical
   Pro Forma
Adjustments
           Pro
Forma

Assets

             

Current assets

             

Cash and cash equivalents

   $ 853    $ 107    $ 2,200     (a )    $ 266
           (2,095 )   (a )   
           (527 )   (a )   
           (4 )   (a )   
           (13 )   (a )   
           (23 )   (a )   
           (71 )   (a )   
           (161 )   (k )   

Accounts receivable

     1,548      436      —            1,984

Inventories

     538      245      59     (b )      842

Deferred income taxes

     75      34      (61 )   (t )      48

Other current assets

     86      45      25     (c )      156

Income taxes receivable

     —        25      (25 )   (c )      —  
                               
     3,100      892      (696 )        3,296

Investments and other assets

             

Auction rate securities

     267      —        —            267

Intangibles

     114      158      1,979     (e )      2,251

Goodwill

     308      552      (1,614 )   (r )      1,273
           2,586     (r )   
           (559 )   (r )   

Asbestos insurance receivable (noncurrent portion)

     438      9      35     (f )      482

Deferred income taxes

     132      371      (503 )   (t )      —  

Other noncurrent assets

     403      110      71     (g )      584

Property, plant and equipment, net

     1,082      699      392     (d )      2,173
                               
   $ 5,844    $ 2,791    $ 1,691        $ 10,326
                               

Liabilities and shareholders’ equity