NEITHER THIS
SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY
NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE
OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS
SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN SECURED BY SUCH SECURITIES.
COMMON STOCK PURCHASE
WARRANT
To Purchase 1,695,273 Shares of
Common Stock of
AVALON PHARMACEUTICALS,
INC.
THIS COMMON STOCK
PURCHASE WARRANT (the “ Warrant ”) certifies
that, for value received, Clinical Data, Inc., a Delaware
corporation, (the “ Holder ”) is entitled, upon
the terms and subject to the limitations on exercise and the
conditions hereinafter set forth, at any time six (6) months
after the date hereof (the “ Initial Exercise Date
”) and on or prior to the close of business on the fifth
(5th) year anniversary of the Initial Exercise Date (the “
Termination Date ”) but not thereafter, to subscribe
for and purchase from Avalon Pharmaceuticals, Inc., a Delaware
corporation (the “ Company ”), up to 1,695,273
shares (the “ Warrant Shares ”) of Common Stock,
par value $0.01 per share, of the Company (the “ Common
Stock ”). The purchase price of one share of Common Stock
under this Warrant shall be equal to the Exercise Price, as defined
in Section 2(b).
Section 1.
Definitions . Capitalized terms used and not otherwise
defined herein shall have the meanings set forth in that certain
Securities Purchase Agreement (the “ Purchase
Agreement ”), dated October 27, 2008, among the
Company and the Holder.
a) Exercise of
Warrant . Exercise of the purchase rights represented by this
Warrant may be made, in whole or in part, at any time or times on
or after the Initial Exercise Date and on or before the Termination
Date by delivery to the Company of a duly executed facsimile copy
of the Notice of Exercise Form annexed hereto (or such other office
or agency of the Company as it may designate by notice in writing
to the registered Holder at the address of such Holder appearing on
the books of the Company); provided , however ,
within five (5) Trading Days of the date said Notice of
Exercise is delivered to the Company, the Holder shall have
surrendered this Warrant to the Company and the Company shall have
received payment of the aggregate Exercise Price of the shares
thereby purchased in the manner described in clause (i) or
(ii) below:
(i)
Cash Exercise . Payment may be made in cash or by certified
or official bank check payable to the order of the
Company.
(ii)
Cashless Exercise . In lieu of payment of the Exercise Price
as provided in clause (i), the Holder may elect a cashless net
exercise. In the case of such cashless net exercise, the Holder
shall surrender this Warrant for cancellation and receive in
exchange therefore the full number of duly authorized, validly
issued, fully paid and nonassessable shares of Common Stock as is
computed using the following formula:
X=
the number of shares of Common Stock
to be issued to the Holder upon cashless exercise of this
Warrant
Y=
the total number of shares Common Stock covered by this Warrant
which the Holder has surrendered at such time for cashless exercise
(including both shares to be issued to the Holder upon cashless
exercise of this Warrant and shares to be cancelled as payment
therefore)
A=
the Current Market Value as of the
business day on which the Holder surrenders this Warrant to the
Company
B
= the Exercise Price then in effect
under this Warrant at the time at which the Holder surrenders this
Warrant to the Company
For purposes of
Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Common Stock issued in a
cashless exercise transaction shall be deemed to have been acquired
by the Holder, and the holding period for the Common Stock shall be
deemed to have commenced, on the date this Warrant was originally
issued.
For the purposes
of the foregoing, the term “ Current Market Value
” shall mean the fair market value of the shares of Common
Stock as determined as follows:
(x)
if the Common Stock is traded on a securities exchange or the
NASDAQ Stock Market, the value shall be deemed to be the average of
the closing prices of the Common Stock on such exchange or market
over the five (5) trading day period ending three
(3) days prior to the date of determination.
(y)
if the Common Stock is actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid over the five
(5) trading day period ending three (3) days prior to the date
of determination; or
(z)
if there is no active public market for the Common Stock, the value
shall be the fair market value thereof, as determined in good faith
by the Board of Directors of the Company.
b) Exercise
Price . The per share exercise price of the Common Stock under
this Warrant shall be $0.86 subject to adjustment hereunder (the
“ Exercise Price ”).
c) Mechanics of
Exercise .
(i)
Authorization of Warrant Shares . The Company covenants that
all Warrant Shares which may be issued upon the exercise of the
purchase rights represented by this Warrant will, upon exercise of
the purchase rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free
from all taxes, liens and charges imposed by the Company in respect
of the issue thereof (other than taxes in respect of any transfer
occurring contemporaneously with such issue).
(ii)
Delivery of Certificates Upon Exercise . Certificates for
shares purchased hereunder shall be transmitted by the transfer
agent of the Company to the Holder by crediting the account of the
Holder’s prime broker with the Depository Trust Company
through its Deposit Withdrawal Agent Commission (“
DWAC ”) system if the Company is a participant in such
system, and otherwise by physical delivery to the address specified
by the Holder in the Notice of Exercise within five
(5) Trading Days from the delivery to the Company of the
Notice of Exercise Form, surrender of this Warrant and payment of
the aggregate Exercise Price as set forth above (“ Warrant
Share Delivery Date ”). This Warrant shall be deemed to
have been exercised on the date
the Exercise
Price and completed Notice of Exercise are received by the Company.
The Warrant Shares shall be deemed to have been issued, and the
Holder or any other person so designated to be named therein shall
be deemed to have become a holder of record of such shares for all
purposes, as of the date the Warrant has been exercised by payment
to the Company of the Exercise Price and all taxes required to be
paid by the Holder, if any, pursuant to Section 2(c)(vi) prior
to the issuance of such shares, have been paid.
(iii)
Delivery of New Warrants Upon Exercise . If this Warrant
shall have been exercised in part, the Company shall, at the time
of delivery of the certificate or certificates representing Warrant
Shares, deliver to Holder a new Warrant evidencing the rights of
the Holder to purchase the unpurchased Warrant Shares called for by
this Warrant, which new Warrant shall in all other respects be
identical with this Warrant.
(iv)
Rescission Rights . If the Company fails to cause its
transfer agent to transmit to the Holder a certificate or
certificates representing the Warrant Shares pursuant to this
Section 2(c) by the Warrant Share Delivery Date, then the Holder
will have the right to rescind such exercise until such time as the
Company causes its transfer agent to transmit such certificate or
certificates.
(v)
No Fractional Shares or Scrip . No fractional shares or
scrip representing fractional shares shall be issued upon the
exercise of this Warrant. As to any fraction of a share which
Holder would otherwise be entitled to purchase upon such exercise,
the Company shall pay a cash adjustment in respect of such final
fraction in an amount equal to such fraction multiplied by the
Exercise Price.
(vi)
Charges, Taxes and Expenses . Issuance of certificates for
Warrant Shares shall be made without charge to the Holder for any
issue or transfer tax or other incidental expense in respect of the
issuance of such certificate, all of which taxes and expenses shall
be paid by the Company, and such certificates shall be issued in
the name of the Holder or in such name or names as may be directed
by the Holder; provided , however , that in the event
certificates for Warrant Shares are to be issued in a name other
than the name of the Holder, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached
hereto duly executed by the Holder; and the Company may require, as
a condition thereto, the payment of a sum sufficient to reimburse
it for any transfer tax incidental thereto.
(vii)
Closing of Books . The Company will not close its
stockholder books or records prior to the Termination Date in any
manner which prevents the timely exercise of this Warrant, pursuant
to the terms hereof.
(viii) In
addition to the rights specified in clause (iv) above, if by
the Warrant Share Delivery Date, the Company fails to deliver the
required number of Warrant Shares in the manner required pursuant
to this Section 2(c), and if after the Warrant Share Delivery
Date and prior to the receipt of such Warrant Shares, the Holder
purchases in a bona fide arm’s length transaction for fair
market value (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder of
the Warrant Shares which the Holder anticipated receiving upon such
exercise (a “ Buy-In ”), then the Company shall
pay in cash to the Holder the amount by which (x) the
Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased
exceeds (y) the amount obtained by multiplying (A) the
number of Warrant Shares that the Company was required to deliver
to the Holder in connection with the exercise at issue by
(B) the Exercise Price. The Holder shall provide the Company
written notice indicating the amounts payable to the Holder in
respect of the Buy-In.
d) Maximum
Exercise . Notwithstanding anything herein to the contrary, in
no event shall the Holder be entitled to exercise any portion of
this Warrant in excess of that number of Warrant Shares, which,
when added to the number of shares of Common Stock beneficially
owned by the Holder and its Affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership
of the unexercised portion of the Warrant or the unexercised or
unconverted portion of any other security of the Holder subject to
a limitation on conversion analogous to the limitations contained
herein), would result in beneficial ownership by the Holder and its
Affiliates of any amount of shares of Common Stock greater than
19.9% of the then outstanding shares of Common Stock (the “
Maximum Common Stock Issuance ”), unless the issuance
of Warrant Shares hereunder in excess of the Maximum Common
Stock
Issuance shall
first be approved by the Company’s stockholders; provided,
that, for this purpose only, the Holder agrees that it shall not be
entitled to vote any shares of Common Stock owned by the Holder,
and that such restriction on voting shall be interpreted to apply
to the fullest extent necessary to comply with the rules of the
NASDAQ Stock Market (and any published or written interpretations
thereof by the Nasdaq Stock Market or its staff). As used herein,
the term “Affiliate” means any person or entity that,
directly or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with a person or
entity, as such terms are used in and construed under Rule 144
under the Securities Act. For purposes of the second preceding
sentence, beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulations 13D-G thereunder, except as otherwise
provided in such sentence.
Section 3.
Certain Adjustments .
a) Stock
Dividends and Splits . If the Company, at any time while this
Warrant is outstanding: (A) pays a stock dividend or otherwise
make a distribution or distributions on shares of its Common Stock
or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not
include any shares of Common Stock issued by the Company pursuant
to this Warrant), (B) subdivides outstanding shares of Common
Stock into a larger number of shares, (C) combines (including
by way of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (D) issues by
reclassification of sha
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