Templeton, which holds 10 per cent in Taro, had supported the promoters led by chairman Barrie Levitt over the last two-and-a-half-years since the stake sale agreement was signed.
A report in an Israeli online business daily Globes said Templeton decided to withdraw from Taro's appeal against Sun filed with the Israeli Supreme Court following doubts about corporate governance.
Globes reported Templeton's statement to the Supreme Court as saying, "Taro's condition continues to deteriorate in terms of proper corporate governance Under these circumstances, Templeton believes that it must act without delay to enable Taro to emerge from the situation in which it has found itself by removing the barriers for the transfer of control in Taro, for the good of all shareholders."
Templeton has complained that Taro has not been providing audited financial reports for several years. "The public must rely on press releases by Taro, which have already been shown to be unreliable," the report quoted Templeton statement.
In a separate report Globes also said Taro has fixed December 31 as a new date for its annual general shareholders meeting.
The company had postponed the previously scheduled meeting on September 13 after a Tel Aviv District Court issued an injunction at Sun Pharma's request.
Sun had raised a complaint similar to that of Templeton in its injunction petition saying that Taro's shareholders lacked the information they needed.
Tuesday's news caused Sun's stock price to gain the most in Bombay Stock Exchange's healthcare index today, closing Rs 81.85 up at Rs 1538.80.
Industry experts termed Templeton's support for Sun Pharma a major psychological boost but cautioned that it is unlikely to impact the Supreme Court judgment for which hearings have been completed.
In response to a questionnaire from Business Standard, a Sun Pharma spokesperson said the matter is sub-judice, so the company was "not in a position to offer any comments" on the development.
Sun Pharma agreed to buy Taro for $454 million in May 2007, an agreement Taro unilaterally terminated after a year after its fortunes turned around, and it posted profits. Sun Pharma currently holds 36 per cent in Taro, for which it paid $105 million.
Following this, Sun had sued Taro in Israel and the US for dishonouring the deal and launched a hostile open offer to acquire the remaining shares, invoking provisions of the merger agreement. The tender offer, which opened in June 2008, is pending based on an injunction issued by the Israeli Supreme Court preventing its closure till the court takes a decision.
The Supreme Court had even asked Sun and Taro to engage in direct talks, which did not succeed because Taro demanded $15 per share, in cash to effect a merger, while Sun's tender offer was at a price of $7.75 per share to acquire all outstanding shares of Taro, including the founders' shares.
Sun Pharma rejected that offer citing it was beyond the worth of Taro, which did not disclose audited results for three years and restated accounts. Sun's offer was a maximum of $9.50 per share with two options. With the discussions stalled, both parties had asked the Court to give a verdict.