This summary highlights selected information from this joint proxy statement/information statement and prospectus. It does not contain all of the information that may be important to you. Clean Diesel and CSI encourage you to carefully read this entire joint proxy statement/information statement and prospectus, including annexes, and the other documents to which this joint proxy statement/information statement and prospectus refers, to fully understand the proposals to be considered at the Clean Diesel annual meeting and the CSI special meeting.

 

Information About Clean Diesel and CSI and Merger Sub

 

Clean Diesel Technologies, Inc.

 

Clean Diesel develops, designs, markets and licenses patented technologies and solutions that reduce harmful emissions from internal combustion engines while improving fuel economy and engine power. It is a Delaware corporation formed in 1994 as a wholly-owned subsidiary of Fuel Tech, Inc., a Delaware corporation (formerly known as Fuel-Tech N.V., a Netherlands Antilles limited liability company) (“Fuel Tech”). Clean Diesel was spun-off by Fuel Tech in a rights offering in December 1995. Since inception, Clean Diesel has developed a substantial portfolio of patents and related proprietary rights and extensive technological know-how.

 

Catalytic Solutions, Inc.

 

Catalytic Solutions, Inc. is a global manufacturer and distributor of emissions control systems and products, focused in the heavy duty diesel and light duty vehicle markets. Since being founded in 1996, CSI has grown from not only a provider of unique catalysts to the automotive industry (gasoline and diesel engines) but also to a provider of both catalysts and systems in growing clean technology markets, including heavy duty diesel systems and catalysts for energy systems. CSI’s emissions control systems and products are designed to deliver high value to its customers while benefiting the global environment through air quality improvement, sustainability and energy efficiency.

 

Merger Sub

 

CDTI Merger Sub, Inc. is a California corporation and wholly-owned subsidiary of Clean Diesel. Merger Sub was formed solely for the purposes of carrying out the Merger and it has not conducted any business operations.

 

The Merger Agreement (see page 96)

 

Clean Diesel, CSI and CDTI Merger Sub, Inc. are parties to an Agreement and Plan of Merger dated May 13, 2010, as such may be amended from time to time. The Merger Agreement contains the terms and conditions of the proposed combination of the businesses of Clean Diesel and CSI. A copy of the Merger Agreement is included as Annex A hereto and you are encouraged to read it carefully.

 

The Merger (see page 60)

 

Through a merger, CSI will become a wholly-owned subsidiary of Clean Diesel. The business of CSI and Clean Diesel will be combined and Merger Sub will merge with and into CSI, with CSI as the surviving corporation. The board of directors of Clean Diesel has determined that the Merger and the related transactions are in the best interests of Clean Diesel and its stockholders in part because it presents a compelling strategic opportunity for Clean Diesel to strengthen its position in the emissions control industry, expand its product offerings and customer base, and increase its operational scale, among other reasons. The board of directors of CSI has determined that the Merger and the related transactions are in the best interests of CSI and its shareholders in part because it allows CSI to access the cash available to Clean Diesel to support its operations and to refinance its outstanding long-term debt, allows CSI shareholders to gain access to an equity interest in Clean Diesel and to participate both in the future performance not only of CSI but of Clean Diesel, and positions the combined company to pursue a combined strategy. For a complete discussion of Clean Diesel’s and CSI’s reasons for the Merger, see the sections entitled “The Merger — Clean Diesel’s Reasons for the

Merger; Recommendation of Clean Diesel’s Board of Directors” and “The Merger — CSI’s Reasons for the Merger” in this joint proxy statement/information statement and prospectus.

 

Capital Raises

 

Both CSI and Clean Diesel intend to issue additional securities prior to the Merger in order that they can finance current operations.

 

On June 2, 2010, CSI entered into agreements with a group of accredited investors providing for the sale of an aggregate $4,000,000 of secured convertible notes ($2,000,000 of which has already been issued, and the remaining $2,000,000 of which is to be issued after CSI shareholder approval of the Merger and after other necessary approvals under CSI’s articles of incorporation, but prior to the effective time of the Merger). See “CSI Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments — Capital Raise” for more information regarding CSI’s capital raise. If necessary approvals are received from CSI’s shareholders, an aggregate of approximately 150,434,943 shares of CSI common stock (which will be a new class of CSI common stock, to be designated “Class B” common stock) is expected to be issued upon conversion of these notes.

 

Clean Diesel’s capital raise will take the form of a sale of approximately 654,118 shares of its common stock and warrants to purchase up to 1,000,000 shares of its common stock in a Regulation S offering to raise approximately $1,000,000.

 

Reverse Stock Split

 

The reverse stock split is the combination of the outstanding shares of Clean Diesel common stock into a lesser number of shares that will occur immediately prior to the effective time of the Merger. If the reverse stock split is approved by Clean Diesel’s stockholders, Clean Diesel will exchange one new share for a number of outstanding shares to be determined when Clean Diesel’s board of directors selects from among the proposed reverse split ratios of between 1-for-3 to 1-for-8. When the reverse stock split becomes effective, the number of Clean Diesel’s outstanding shares will be reduced by the selected split ratio, but the value of each share should be proportionately increased by that same ratio, although the price of Clean Diesel’s common stock may move up or down once the reverse stock split is effective. Clean Diesel will not issue any fractional shares. Stockholders who would otherwise hold fractional shares as a result of the reverse stock split will be entitled to receive cash (without interest or deduction) in lieu of such fractional shares from Clean Diesel’s transfer agent, upon receipt by Clean Diesel’s transfer agent of a properly completed and duly executed transmittal letter, in an amount equal to the proceeds attributable to the sale of such fractional shares following the aggregation and sale by Clean Diesel’s transfer agent of all fractional shares otherwise issuable. The reverse stock split is not expected to impact the market value of Clean Diesel as a whole, although the market value of Clean Diesel’s common stock may move up or down once the reverse stock split is effective. The reverse stock split is necessary to adjust the trading range of shares owned by Clean Diesel stockholders so that the shares to be issued in connection with the Merger can be listed on the NASDAQ Stock Market. Listing requires a minimum bid price of Clean Diesel common stock of $4 per share. If the reverse stock split is not completed, Clean Diesel will not satisfy the minimum per share bid price requirement for listing on the NASDAQ.

 

In selecting the final reverse stock split ratio, the Clean Diesel board of directors will be guided primarily by satisfying the NASDAQ listing requirement. It is not expected that the board will select a split ratio significantly greater than necessary, but it may take into account trading volatility, administrative convenience and simplicity in selecting a ratio that would result in a trading range above $4 per share. The board could select a split ratio that is not an integer, such as 1 for 4.5, unless reasons of administrative convenience and simplicity dictate otherwise. It is not expected that the board will select a split ratio that did not meet the necessary minimum trading range. Any views expressed by the NASD would also be taken into account.

 

On September 10, 2010, the closing sale price of Clean Diesel common stock was $0.93. If immediately prior to the effective time of the merger, this was the closing sale price of Clean Diesel common stock, then a split ratio of at least one for 4.3 would be required to meeting the $4 minimum trading range. The board of directors may choose a higher ratio, such as 1 for 5, if required in order to be approved for listing or for reasons of administrative convenience and simplicity. Approval of the reverse stock split is being sought for a

maximum ratio of 1-for-8, which would accommodate a bid price as low as $0.50. If the shares of Clean Diesel common stock traded below this level, then the maximum ratio would be insufficient, and Clean Diesel would be required to resolicit proxies for a greater ratio, if it chose to proceed on that basis.

 

If Clean Diesel’s Board of Directors selects a 1-for-3 reverse stock split, as a result of the proposed reverse stock split, immediately prior to the effective time of the Merger, a holder of 100 shares of Clean Diesel common stock would be reduced to 33 shares of common stock of the combined company, and such holder would receive a cash payment in lieu of 1/3 of a share. If Clean Diesel’s Board of Directors selects a 1-for-8 ratio, the 100 shares would be reduced to 12 shares of common stock of the combined company, and the holder would receive a cash payment in lieu of 1/2 of a share. If Clean Diesel’s Board of Directors selects a different ratio, the 100 shares of Clean Diesel common stock would be reduced accordingly.

 

Treatment of Fractional Shares

 

No fractional shares will be issued in the reverse stock split or in the Merger. In lieu of fractional shares, record stockholders of Clean Diesel or shareholders of CSI, as appropriate, will receive a cash payment.

 

No fractional warrants will be issued in the Merger, and each warrant issued will be rounded down to the nearest whole number of warrants.

 

Reverse Stock Split

 

Record stockholders of Clean Diesel who would otherwise hold fractional shares because the number of shares of common stock they hold before the reverse stock split is not evenly divisible by the split ratio ultimately selected by Clean Diesel’s board of directors will be entitled to receive cash (without interest or deduction) in lieu of such fractional shares from Clean Diesel’s transfer agent, upon receipt by Clean Diesel’s transfer agent of a properly completed and duly executed transmittal letter, in an amount equal to the proceeds attributable to the sale of such fractional shares following the aggregation and sale by Clean Diesel’s transfer agent of all fractional shares otherwise issuable. The ownership of a fractional share interest will not give the holder any voting, dividend or other rights, except the right to receive the above-described cash payment. Clean Diesel will be responsible for any brokerage fees or commissions related to the transfer agent’s selling in the open market shares that would otherwise be fractional shares.

 

Merger

 

Record shareholders of CSI who would otherwise hold fractional shares because of the exchange of shares in the Merger will be entitled to receive cash (without interest or deduction) in lieu of such fractional shares from Clean Diesel’s transfer agent, upon receipt by Clean Diesel’s transfer agent of a properly completed and duly executed transmittal letter, in an amount equal to the proceeds attributable to the sale of such fractional shares following the aggregation and sale by Clean Diesel’s transfer agent of all fractional shares otherwise issuable. The ownership of a fractional share interest will not give the holder any voting, dividend or other rights, except the right to receive the above-described cash payment. Clean Diesel will be responsible for any brokerage fees or commissions related to the transfer agent’s selling in the open market shares that would otherwise be fractional shares.

 

Warrants

 

Each warrant is initially exercisable for one share of Clean Diesel common stock. Adjustments in the shares issuable is possible in connection with antidilution adjustments. Fractional shares may not be purchased upon exercise of any warrants. In lieu of fractional shares, each share issued will be rounded down to the nearest whole number of shares.

 

Escheat Laws

 

Under the escheat laws of various jurisdictions, sums due for fractional interests that are not timely claimed after the effective time may be required to be paid to the designated agent for each such jurisdiction, unless correspondence has been received by Clean Diesel or its transfer agent concerning ownership of such funds within the time permitted in such jurisdiction. Thereafter, if applicable, stockholders who are otherwise entitled to receive such funds, but who do not receive them due to, for example, their failure to timely comply

with Clean Diesel’s transfer agent’s instructions, will have to seek to obtain such funds directly from the state to which they were paid.

 

Reasons for the Merger (see page 67)

 

Clean Diesel’s Reasons for the Merger

 

In reaching its unanimous decision to approve the Merger, the Clean Diesel board of directors considered a number of factors including, among other factors:

 

 

 

For more information regarding Clean Diesel’s reasons for approving the Merger, see the section entitled “The Merger — Clean Diesel’s Reasons for the Merger; Recommendation of Clean Diesel’s Board of Directors.”

 

CSI’s Reasons for the Merger

 

In reaching its unanimous decision to approve the Merger, the CSI board of directors considered a number of factors including, among other factors:

 

 

For a complete list of CSI’s reasons for approving the Merger, see the section entitled “The Merger — CSI’s Reasons for the Merger.”

 

Both Clean Diesel and CSI believe that the Merger will be in the best interests of their respective stockholders and shareholders. However, achieving these anticipated benefits of the Merger is subject to risk and uncertainty, including those risks discussed in the section entitled “Risk Factors.”

 

Risk Factors (see page 19)

 

Clean Diesel and CSI are subject to numerous risks associated with their businesses and their industries. In addition, the Merger, including the possibility that the closing of the Merger may be delayed or not be completed at all, poses a number of unique risks to both Clean Diesel stockholders and the CSI shareholders, including the following risks:

 

 

 

 

 

These risks and other risks are discussed in greater detail in the section entitled “Risk Factors” in this joint proxy statement/information statement and prospectus. Clean Diesel and CSI encourage Clean Diesel stockholders and CSI shareholders to read and consider all of these risks carefully.

 

Market Price And Dividend Information (see page 58)

 

The closing sale price per share of Clean Diesel common stock as reported on the NASDAQ Stock Market on May 13, 2010, the last full trading day prior to the public announcement of entry into the Merger Agreement, was $1.57, and the closing sale price per share of Clean Diesel common stock on August 25, 2010 (the last practicable date before the date of this joint proxy statement/information statement and prospectus) as reported on the NASDAQ Stock Market was $1.05 per share. Following the consummation of the Merger, Clean Diesel’s common stock, including the shares of Clean Diesel common stock issued in connection with

the Merger, are expected to continue to trade on the NASDAQ Stock Market under the symbol “CDTI.D,” for the first 20 days and then revert to the symbol “CDTI.”

 

Clean Diesel has never declared nor paid cash dividends on its capital stock. Clean Diesel currently intends to retain earnings, if any, to finance the growth and development of its business, and does not expect to pay any cash dividends to its stockholders in the foreseeable future.

 

CSI’s stock trades in pence sterling (GBX), a subdivision of pounds sterling (GBP), and trades under two symbols: the symbol “CTS,” in a restricted manner as permitted by Regulation S of the Securities Act and the symbol “CTSU,” in an unrestricted manner under an available exemption provided under the Securities Act. The closing price per share of CSI common stock as reported on the AIM of the London Stock Exchange on May 13, 2010, the last full trading day prior to the public announcement of entry into the Merger Agreement, was GBX 1.0 (U.S. $0.01) for symbol CTS and GBX 1.63 (U.S. $0.02) for symbol CTSU, and the closing price per share of CSI common stock on          , 2010 (the last practicable date before the filing of this joint proxy statement/information statement and prospectus), as reported on AIM was GBX (U.S. $ ) for symbol CTS and GBX (U.S. $ ) for symbol CTSU. The exchange rate at the close of business on May 13, 2010 and          , 2010 was GBX 1.00=U.S. $0.014894 and          , respectively. At the effective time of the Merger, CSI will cease trading on AIM. CSI has never declared or paid any cash dividends on its capital stock, nor does it intend to do so in the foreseeable future.

 

For more information, see the section entitled “Market Price and Dividend Information.”

 

Opinion of the Financial Advisor to the Board of Directors of Clean Diesel (see page 78)

 

In deciding to recommend the Merger, Clean Diesel’s board of directors considered an opinion from its financial advisor, Ardour Capital Investments, LLC, or Ardour Capital. Ardour Capital rendered its opinion to Clean Diesel’s board of directors that, as of May 11, 2010, based upon and subject to the qualifications, limitations and assumptions stated in its opinion, the merger consideration to be paid to the shareholders of CSI was fair, from a financial point of view, to the Clean Diesel stockholders.

 

The full text of the written opinion of Ardour Capital, dated May 11, 2010, 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 joint proxy/information statement and prospectus. Ardour Capital provided its opinion for the information and assistance of Clean Diesel’s board of directors in connection with its consideration of the Merger. The Ardour Capital opinion is not a recommendation as to how any holder of Clean Diesel common stock should vote with respect to the adoption of the Merger Agreement or any other matter.

 

Pursuant to a letter agreement dated March 8, 2010, Clean Diesel engaged Ardour Capital to render an opinion to the Clean Diesel board of directors as to the fairness, from a financial point of view, of the consideration to be paid to the CSI common shareholders in connection with the Merger. As compensation for its services in connection with the Merger, Clean Diesel paid Ardour Capital $85,000 upon the delivery of Ardour Capital’s fairness opinion. In addition, Clean Diesel has agreed to reimburse Ardour Capital for reasonable out-of-pocket expenses, including attorneys’ fees and disbursement, and to indemnify Ardour Capital and related persons against various liabilities.

 

Innovator Capital provided strategic advice, financial advisory services and investment banking services to Clean Diesel in connection with the Merger and the Regulation S offering, but was not engaged to give an opinion as to the fairness of the merger consideration. Please see note 2 to “Notes to Unaudited Pro Forma Condensed Combined Financial Data” below with regard to the consideration for such services.

 

Opinion of the Financial Advisor to the Board of Directors of CSI (see page 82)

 

In deciding to recommend the Merger, CSI’s board of directors considered an opinion from one of its financial advisors, Marshall & Stevens, Inc., or Marshall & Stevens. Marshall & Stevens rendered its opinion to CSI’s board of directors that, as of May 11, 2010, based upon and subject to the qualifications, limitations and assumptions stated in its opinion, the merger consideration to be paid to the shareholders of CSI was fair, from a financial point of view, to the CSI shareholders. The full text of the written opinion of Marshall & Stevens, dated May 11, 2010, which sets forth assumptions made, procedures followed, matters considered and

limitations on the review undertaken in connection with the opinion, is attached as Annex D to this joint proxy/information statement and prospectus. Marshall & Stevens provided its opinion for the information and assistance of CSI’s board of directors in connection with its consideration of the Merger. The Marshall & Stevens opinion is not a recommendation as to how any holder of CSI common stock should vote with respect to the adoption of the Merger Agreement or any other matter.

 

Pursuant to a letter agreement dated March 11, 2010, and a May 5, 2010 addendum to such letter, CSI engaged Marshall & Stevens to render an opinion to the CSI board of directors as to the fairness, from a financial point of view, of the consideration to be paid to the CSI common shareholders in connection with the Merger. As compensation for its services in connection with the Merger, CSI agreed to pay Marshall & Stevens a fee of $74,500, of which $22,000 was payable upon execution of the letter agreement, $9,500 upon execution of the addendum, $22,000 upon the delivery of Marshall & Stevens’ fairness opinion and $21,000 on June 30, 2010 or any earlier date on which the Merger may occur, plus negotiated fees for services beyond those contemplated. To date, Marshall & Stevens has not provided any services beyond those contemplated, and accordingly, no such fees have been paid. In addition, CSI has agreed to reimburse Marshall & Stevens for reasonable out-of-pocket expenses, including attorneys’ fees and disbursement, and to indemnify Marshall & Stevens and related persons against various liabilities.

 

Merger Consideration

 

The Merger Agreement provides a formula for the issuance, at the effective time of the Merger, of shares of Clean Diesel common stock and warrants to purchase Clean Diesel common stock and for the allocation of such shares and warrants. As detailed below, the number of shares of Clean Diesel common stock is determined primarily by reference to the number of shares of Clean Diesel common stock that are deemed to be outstanding immediately prior to the Merger, which is then multiplied by 1.5 to determine the number of shares of Clean Diesel common stock to be issued in order to provide for the agreed upon 60/40 equity split. The number of warrants is fixed at 4,000,000 (on a pre-split basis).

 

Allocation of Merger Consideration

 

Of the aggregate number of shares of Clean Diesel common stock to be issued in the Merger, (a) 66.0066% will be allocated to the holders of CSI’s Class B common stock (into which the secured convertible notes will have been converted), (b) 1,000,000 shares (on a pre-split basis) are to be used as payment of fees owed to CSI’s financial advisor, Allen & Company, LLC, and (c) the balance of such shares will be allocated to holders of CSI existing common stock (to be designated as “Class A” common stock) and the holder of the CSI “in-the-money” warrant. Of the 4,000,000 warrants (on a pre-split basis), 1,000,000 warrants are to be used as payment of fees owed to CSI’s financial advisor, Allen & Company, LLC, and the balance of 3,000,000 warrants will be allocated to the holders of CSI existing common stock (to be designated as “Class A” common stock) and the holder of the CSI “in-the-money” warrant. Holders of CSI’s Class B common (into which the secured convertible notes will have been converted) will not receive any such warrants.

 

Share Portion of Merger Consideration

 

Under the Merger Agreement, the aggregate number of shares of Clean Diesel common stock to be issued to CSI’s shareholders, (including the holder of the CSI “in-the-money” warrant) and to CSI’s financial advisor Allen & Company, LLC is determined according to the following formula (all of which is on a pre-split basis):

 

(60/40 × “Outstanding Clean Diesel”)

 

“Outstanding Clean Diesel” for purposes of the Merger Agreement is expected to be 9,151,772 shares (on a pre-split basis) of Clean Diesel common stock. This is based on an assumed 8,213,988 shares currently issued and outstanding, plus 654,118 shares expected to be issued in Clean Diesel’s Regulation S offering, plus both 194,486 shares to be issued and 89,180 shares issuable upon the exercise of warrants to be issued to Clean Diesel’s financial advisor Innovator Capital as payment for fees (all such numbers being on a pre-split basis).

 

Thus, the number of shares of Clean Diesel common stock issuable to CSI’s shareholders (including the holder of the CSI “in-the-money” warrant) and Allen & Company as the Clean Diesel common stock portion of the merger consideration is expected to be 13,727,658 shares of Clean Diesel common stock, allocable among such holders and Allen & Co. as follows (all such numbers being on a pre-split basis):

 

 

Warrant Portion of Merger Consideration

 

Under the Merger Agreement, the number of warrants to purchase Clean Diesel common stock to be issued to CSI’s shareholders, to the holder of the CSI “in-the-money” warrant and to CSI’s financial advisor Allen & Company, LLC is fixed at 4,000,000 (on a pre-split basis). Of these, warrants to purchase 3,000,000 shares of Clean Diesel common stock (on a pre-split basis) are to be issued (or reserved for issuance) to the holders of CSI’s Class A common stock and the CSI “in-the-money” warrant, and warrants to purchase 1,000,000 shares of Clean Diesel common stock (on a pre-split basis) are to be issued to Allen & Company, LLC.

 

Each of these warrants to purchase shares of Clean Diesel common stock will have an exercise price determined by dividing $30,000,000 by the number of shares of Clean Diesel common stock outstanding immediately after the effective time of the Merger. This price is currently expected to be approximately $1.320 per share (on a pre-split basis). The exercise price per share of the warrant and the number of shares of Clean Diesel common stock issuable upon exercise of the warrant will be proportionally adjusted if, in addition to the merger, Clean Diesel effects a reclassification, split or subdivision of its common stock.

 

All of the warrants to purchase shares of Clean Diesel common stock issued as part of the merger consideration will expire on the earlier of (i) the third anniversary of the effective time of the Merger and (ii) that date which is thirty (30) days after Clean Diesel gives notice to the warrant holder that the market value of one share of Clean Diesel common stock has exceeded 130% of the exercise price of the warrant for 10 consecutive days.

 

CSI Shareholders

 

CSI currently only has one authorized class of common stock. Only holders of this class of common stock on the record date will vote to approve the Merger (among other items) at the special meeting of CSI’s shareholders. If the necessary shareholder approvals are received at the meeting, prior to the effective time of the Merger, CSI will amend its articles of incorporation to create two classes of common stock: “Class A” common stock and “Class B” common stock. All shares of CSI common stock issued and outstanding at the time of filing the amendment to CSI’s articles of incorporation will be designated as “Class A” common stock. Subsequent to the amendment of its articles of incorporation but prior to the effective time of the Merger, holders of CSI’s secured convertible notes issued in its capital raise will convert into the newly created “Class B” common stock. No shares of “Class B” common stock will be outstanding or entitled to vote as at the record date.

 

Only holders of CSI’s “Class A” common stock (excluding shares to be issued to CSI’s non-employee directors for accrued fees immediately prior to the Merger) will receive shares of Clean Diesel common stock and warrants to purchase Clean Diesel common stock in the Merger that will have been registered under the registration statement on Form S-4 of which this joint proxy statement/information statement and prospectus forms a part. Shares of Clean Diesel common stock issued to holders of CSI’s Class B common stock (into which the secured convertible notes will have been converted prior the merger) and shares of Clean Diesel common stock and warrants to purchase Clean Diesel common stock issued to CSI’s financial advisor Allen & Company have not been registered under such registration statement. CSI has two of its warrants outstanding

that, if exercised post-Merger, obligate CSI to deliver the same merger consideration that a holder of CSI Class A common stock would have received in the Merger. Only the Clean Diesel securities issuable upon exercise of the CSI warrant that is “in-the-money” are included in this registration statement. If the other “out-of-the-money” CSI warrant were to be exercised, any Clean Diesel securities that would be issued would be restricted securities unless another exemption from registration is then available.

 

Merger Consideration per Class A Share

 

Under the Merger Agreement, the number of shares of Clean Diesel common stock and warrants to purchase Clean Diesel common stock to be issued for each share of CSI Class A common stock outstanding at the time of the Merger will be determined by a formula that divides (a) the number of shares of Clean Diesel common stock and warrants to purchase Clean Diesel common stock to be allocated to CSI Class A common stock as described above under “— Share Portion of Merger Consideration” and “— Warrant Portion of Merger Consideration” by (b) the number of shares of CSI Class A common stock that are deemed to be outstanding immediately prior to the effective time of the Merger, which is referred to in the Merger Agreement as “CSI’s Outstanding Common Stock”.

 

For purposes of the Merger Agreement, “CSI’s Outstanding Common Stock” is expected to be 77,473,996 shares of CSI Class A common stock. This is based on an assumed 69,761,902 shares currently issued and outstanding, plus 1,250,000 shares issuable upon the exercise of its “in-the-money” warrant and 6,462,094 shares expected to be issued to its non-employee Directors for accrued fees. Accordingly, on a pre-split basis, dividing (a) the anticipated 3,666,498 shares of Clean Diesel common stock and the 3,000,000 warrants to purchase Clean Diesel common stock to be allocated in the aggregate to the Class A common stock and the CSI “in-the-money” warrant by (b) the anticipated 77,473,996 shares of CSI common stock that would be deemed to be outstanding immediately prior to the effective time of the Merger, each share of CSI Class A common stock would be expected to convert into 0.04732553 shares of Clean Diesel Common stock and warrants to purchase 0.03872267 shares of Clean Diesel common stock.

 

Merger Consideration per Class B Share

 

Under the Merger Agreement, the number of shares of Clean Diesel common stock to be issued for each share of CSI Class B common stock outstanding at the time of the Merger will be determined by a formula that divides (a) the number of shares of Clean Diesel common stock to be allocated to CSI Class B common stock as described above under “— Share Portion of Merger Consideration”, which is expected to be 9,061,160 shares (on a pre-split basis) by (b) the number of shares of CSI Class B common stock that are outstanding immediately prior to the effective time of the Merger, which is expected to be 150,434,943 shares. Accordingly, on a pre-split basis each share of CSI Class B common stock would be expected to convert into 0.06023308 shares of Clean Diesel Common stock. Holders of CSI’s Class B common stock do not have the right to receive warrants to purchase Clean Diesel common stock under the Merger Agreement.

Effects of Clean Diesel’s Reverse Stock Split on Merger Consideration

 

The following table illustrates the effects that Clean Diesel’s proposed reverse stock split may have on the number of shares of Clean Diesel common stock and warrants to purchase Clean Diesel common stock that holders of CSI “Class A” common stock, “Class B” common stock and CSI’s financial advisor, Allen & Company, are expected to receive in the Merger. The table assumes that Clean Diesel will have issued and outstanding an aggregate 9,062,592 shares (on a pre-split basis) immediately prior to the Merger, that Clean Diesel will issue an aggregate 13,727,658 shares (on a pre-split basis) and warrants to purchase 4,000,000 shares of Clean Diesel (on a pre-split basis) at $1.320 per share (e.g., $30,000,000/22,731,093) in the Merger, and that CSI will have issued and outstanding an aggregate 76,223,996 shares of “Class A” common stock, one “in-the-money” warrant to acquire 1,250,000 shares of “Class A” common stock and 150,434,943 shares of “Class B” common stock at the effective time of the Merger. The exact number of shares to be issued in the Merger, the exact exercise price for the warrants, and the actual reverse stock split ratio may not be determined until immediately prior to the Merger.

 

 

 

 

CSI’s Existing Stock Options

 

All issued and outstanding options to purchase CSI common stock are currently out-of-the-money (e.g., the exercise price exceeds the current trading price of shares of CSI common stock). Prior to the effective time of the Merger, each option to purchase shares of CSI common stock issued under CSI’s 1997 Stock Option Plan, in accordance with the terms of such Plan, will be given a window of time in which to exercise following which any options issued under the 1997 Stock Option Plan that remain outstanding will terminate at the effective time

of the Merger. The terms of outstanding options issued under CSI’s 2006 Equity Compensation Plan differ from the 1997 Stock Option Plan, and as such, will not terminate at the effective time of the Merger but will continue to be exercisable for shares of the surviving subsidiary. However, CSI has undertaken in the Merger Agreement to obtain the consent of each of CSI’s directors and executive officers who has options outstanding under CSI’s 2006 Equity Compensation Plan and to use commercially reasonable efforts to obtain the consent of the other holders of any options, grant or other awards granted under CSI’s 2006 Equity Compensation to terminate such awards at the effective time of the Merger, and to terminate its 2006 Equity Compensation Plan.

 

CSI’s Existing Warrants

 

At the effective time, warrants to purchase shares of CSI common stock outstanding and not terminated or exercised immediately prior to the effective time of the Merger are expected to be assumed by Clean Diesel in accordance with their terms and thus become exercisable for that number of shares of Clean Diesel common stock and warrants to purchase Clean Diesel common stock calculated according to the conversion ratio as defined in the Merger Agreement. One of these warrants is “in-the-money” and the other is “out-of-the-money.” The merger consideration includes shares of Clean Diesel common stock and warrants to purchase Clean Diesel common stock that will be reserved for issuance upon exercise of this “in-the-money” warrant. The merger consideration does not include shares of Clean Diesel common stock and warrants to purchase Clean Diesel common stock for issuance upon exercise of the “out-of-the-money” warrant. As such, if this “out-of-the-money” warrant is exercised, it will result in the issuance of an additional 147,519 shares of Clean Diesel common stock and warrants to purchase an additional 120,703 shares of Clean Diesel common stock at the estimated $1.320 per share exercise price (all on a pre-split basis).

 

General

 

For a more complete description of the merger consideration, including how the amount of shares and warrants and allocation among Class A and Class B common stock is calculated, see the section entitled “The Merger Agreement — Merger Consideration” in this joint proxy statement/information statement and prospectus.

 

The merger consideration will be appropriately and proportionately adjusted to reflect any stock dividend, subdivision, reclassification, recapitalization, split, combination, or exchange of shares with respect to CSI common stock and Clean Diesel common stock between the date of the Merger Agreement and the effective time of the Merger.

 

Ownership of the Combined Company

 

The Merger Agreement contains provisions regarding an adjustment to the merger consideration based on a closing cash adjustment depending on whether each company meets certain cash targets determined at June 30, 2010. Each of CSI and Clean Diesel met such cash targets at June 30, 2010, and therefore no cash adjustment was necessary. Accordingly, CSI shareholders (including investors in CSI’s capital raise) and its financial advisor will receive such numbers of Clean Diesel common stock so that after the Merger they will collectively own approximately 60% of the outstanding shares of Clean Diesel common stock, with current Clean Diesel shareholders (including investors in its capital raise) owning the remaining 40%. CSI’s shareholders and its financial advisor will also hold warrants to purchase an additional 4,000,000 shares (on a pre-split basis) of Clean Diesel’s common stock and investors in Clean Diesel’s Regulation S offering will also hold warrants to purchase an additional 1,000,000 shares (on a pre-split basis) of Clean Diesel’s common stock. Accordingly, assuming each of CSI and Clean Diesel completes its capital raise on the terms described above under “— Capital Raises,” after the effective time of the Merger, and ownership of Clean Diesel outstanding common stock would be distributed approximately as follows:

 

 

 

 

 

 

Acquisition Proposals

 

CSI and Clean Diesel agreed that immediately following the execution and delivery of the Merger Agreement, each of Clean Diesel and CSI will not and, will cause its subsidiaries not to and will use commercially reasonable efforts to cause its representatives not to, directly or indirectly:

 

 

For a more complete discussion of the restrictions described above, see the section entitled “The Merger Agreement — Certain Covenants of both Clean Diesel and CSI.”

 

Conditions to Completion of the Merger

 

In addition to the requirement of obtaining Clean Diesel stockholder approval and CSI shareholder approval, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived by the appropriate party. Neither Clean Diesel nor CSI has any current plans to waive any conditions to Closing. These closing conditions include each party having at least a $1.0 million cash position at closing, obtaining any necessary consents, absence of any material adverse change, refinancing or further forbearance with respect to CSI’s outstanding bank debt, continued accuracy of the representations and warranties of each company, delisting of CSI common stock from AIM, and appointments and resignations of certain officers and directors of Clean Diesel. For a summary of the conditions that need to be satisfied to consummate the Merger, see the section entitled “The Merger Agreement — Conditions to Each Party’s Obligation to Effect the Merger” in this joint proxy statement/information statement and prospectus.

 

Termination of the Merger Agreement

 

It is possible that the Merger and the other transactions contemplated by the Merger Agreement will not be completed. This might happen if, for example, Clean Diesel’s stockholders do not approve the issuance of

the Clean Diesel shares and warrants in connection with the Merger, or if CSI’s shareholders do not approve the Merger or if other conditions to the Merger are not satisfied. Should that occur, neither Clean Diesel nor CSI will be under any obligation to make or consider any alternative proposal regarding the combination of Clean Diesel and CSI. For a more complete discussion of the manners in which the Merger Agreement may terminate, see the section entitled “The Merger Agreement — Termination” in this joint proxy statement/information statement and prospectus.

 

Termination Fee

 

In certain circumstances, Clean Diesel or CSI may be obligated to pay the other party a termination fee of $300,000, plus an amount equal to all out-of-pocket expenses (excluding the cost of employee time), up to a maximum of $350,000, incurred by the recipient party in connection with the Merger Agreement, the ancillary agreements, and the transactions contemplated thereby. For a more complete discussion of the termination fee, see the section entitled “The Merger Agreement — Termination Fees” in this joint proxy statement/information statement and prospectus.

 

Interests of Directors, Executive Officers and Affiliates of CSI & Clean Diesel (see page 86)

 

CSI

 

Certain directors and executive officers of CSI have interests in the Merger that differ from, or are in addition to, their interests as CSI stockholders. Specifically:

 

 

As of the record date for the CSI special shareholder meeting, the directors and executive officers of CSI, together with their affiliates, owned in the aggregate approximately [          ] shares of CSI common stock, entitling them to exercise approximately [     ]% of the voting power of the CSI common stock at the CSI special meeting.

 

If CSI’s shareholders approve the proposals at CSI’s special meeting to increase CSI’s authorized share capital and disapply pre-emptive rights and approve the Merger, the investors in CSI’s capital raise will receive shares of CSI “Class B” common stock upon conversion of their secured convertible notes. These shares of Class B common stock will convert into approximately 66% of the shares of Clean Diesel common stock to be issued in the merger (and represent approximately 40% of the outstanding shares of the combined company). As of the record date for the CSI special shareholder meeting, these investors, together with their affiliates, owned in the aggregate approximately [     ] shares of CSI common stock, entitling them to exercise approximately [     ]% of the voting power of the CSI common stock at the CSI special meeting.

 

Clean Diesel

 

Certain directors and executive officers of Clean Diesel have interests in the Merger that differ from, or are in addition to, their interests as Clean Diesel stockholders. Specifically:

 

 

 

 

As of the record date for the Clean Diesel annual meeting, the directors and executive officers of Clean Diesel, together with their affiliates, owned in the aggregate approximately [          ] shares of Clean Diesel common stock, entitling them to exercise approximately [     ]% of the voting power of the Clean Diesel common stock at the Clean Diesel annual meeting. Clean Diesel cannot complete the Merger unless the issuance of the shares of Clean Diesel common stock and warrants to purchase shares of Clean Diesel common stock in connection with the Merger is approved by the affirmative vote of the holders of a majority of the shares of Clean Diesel common stock voting at the Clean Diesel annual meeting.

 

Material U.S. Federal Income Tax Consequences of the Merger (see page 93)

 

Clean Diesel and CSI have structured the Merger with the intent that it qualify as a reorganization under Section 368 of the Internal Revenue Code of 1986 (the “Code”). As a reorganization under Section 368(a), CSI shareholders who exchange CSI common shares for shares of Clean Diesel common stock and warrants to purchase shares of Clean Diesel common stock pursuant to the Merger will not recognize gain or loss in respect of the shares of Clean Diesel common stock and warrants to purchase shares of Clean Diesel common stock received in the exchange (but may recognize an immaterial gain in the amount of any cash received in respect of fractional shares). As a Merger that qualifies as a reorganization under Section 368(a), CSI warrant holders will not be subject to tax as a result of the Merger. The qualification of the Merger as a reorganization depends on numerous factors including whether CSI shareholders will receive a sufficient amount of Clean Diesel common stock to satisfy the “continuity of interest” and “control” tests applicable to reorganizations under Section 368(a)(2)(E) of the Code and whether CSI and Clean Diesel will have assets at the effective time of the Merger with a fair value in excess of their respective liabilities (the “net value test”). Based on an estimated valuation, the Merger will satisfy the continuity of interest and control tests. CSI and Clean Diesel have each concluded that they will also satisfy their respective net value test. See the sections entitled “Risk Factors — Risk Factors Relating to the Underlying Business of CSI” and “Risk Factors — Risks Related to Clean Diesel’s Financial Condition.” If for any reason the Merger failed to qualify as a reorganization, the Merger would be a fully taxable transaction to CSI shareholders and warrant holders. In such case, CSI shareholders and warrant holders would recognize gain or loss measured by the difference between the value of all consideration received by them in the Merger and their tax basis in the shares of CSI common stock and the warrants to purchase CSI common stock, as the case may be, surrendered in the Merger. For additional discussion of the tax treatment of the Merger, see the section entitled “Material United States Federal Income Tax Consequences of the Merger” in this joint proxy statement/information statement and prospectus.

 

CSI reported that it had approximately $89.8 million and $70.5 million of federal and state income tax net operating loss carry forwards at December 31, 2009, respectively and Clean Diesel reported that it had approximately $53.7 million and $39.9 million of federal and state income tax net operating loss carry forwards at December 31, 2009, respectively.

 

Future utilization of the net operating losses and credit carry forwards are subject to a substantial annual limitation due to ownership change limitations as required by Sections 382 and 383 of the Code, as well as similar state limitations. Due to previous share ownership changes and the substantial change in capitalization and share ownership caused by this Merger, both companies are expected to be subjected to such limitations. As such, tax loss carryforwards will be limited if the Merger is completed.

 

Tax matters are very complicated, and the tax consequences of the Merger to a particular CSI shareholder or warrant holder will depend in part on such shareholder’s or warrant holder’s circumstances and jurisdiction. Accordingly, CSI shareholders and warrant holders should consult their tax advisors for a full understanding of the tax consequences of the Merger, including the applicability and effect of federal, state, local and foreign income and other tax laws. For additional discussion of the tax treatment of the Merger, see the section

entitled “Material United States Federal Income Tax Consequences of the Merger” in this joint proxy statement/information statement and prospectus.

 

NASDAQ Stock Market Listing (see page 90)

 

Prior to consummation of the Merger, Clean Diesel intends to cause all shares of Clean Diesel common stock to be issued in connection with the Merger and all shares of Clean Diesel common stock to be issued upon exercise of the warrants to purchase shares of Clean Diesel common stock to be approved for listing (subject to notice of issuance) on the NASDAQ Stock Market as of the effective time of the Merger, including filing any required additional listing applications or notices with the NASDAQ Stock Market pursuant to NASDAQ Stock Market LLC rules.

 

Anticipated Accounting Treatment (see page 92)

 

For accounting purposes, CSI will be acquiring Clean Diesel, which means that the assets and liabilities of Clean Diesel will be recorded at their fair value and the results of operations of Clean Diesel will be included in CSI’s results from the effective date of the Merger in accordance with Statement of Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 805, Business Combinations.

 

Appraisal Rights and Dissenters’ Rights (see page 88)

 

Clean Diesel stockholders are not entitled to appraisal rights in connection with the Merger under Delaware General Corporation Law. CSI shareholders are entitled to appraisal rights in connection with the Merger under California law. For more information about such rights, see the provisions of Sections 1300 through 1313 of Chapter 13 of the California Corporations Code, attached hereto as Annex E, and the section entitled “The Merger — Appraisal Rights and Dissenters’ Rights” in this joint proxy statement/information statement and prospectus.

 

Failure to follow precisely any of the statutory procedures set forth in Annex E may result in the loss or waiver of dissenters’ rights under California law.

 

Directors and Executive Officers (see page 182)

 

Clean Diesel currently anticipates that immediately following the effective time of the Merger, the board of directors of Clean Diesel will be composed of the following members:

 

 

For a complete discussion of the expected board of directors and compensation of directors following the Merger, see the section entitled “Management Following the Merger.”

 

Executive Officers

 

Clean Diesel currently anticipates that immediately following the effective time of the Merger, the executive officers of Clean Diesel will be as follows:

 

 

For a complete discussion of the expected executive officers, and compensation of executives following the Merger, see the section entitled “Management Following the Merger.”

 

Comparison of Stockholder Rights (see page 211)

 

The rights of CSI shareholders are currently governed by the California Corporations Code, CSI’s articles of incorporation, as amended, and the bylaws of CSI. The rights of Clean Diesel stockholders are currently governed by the Delaware General Corporation Law, the restated certificate of incorporation of Clean Diesel, as amended, and the bylaws of Clean Diesel. If the Merger is completed, CSI shareholders will become stockholders of Clean Diesel, and their rights will be governed by the Delaware General Corporation Law, and the restated certificate of incorporation, as amended, of Clean Diesel and bylaws of Clean Diesel. The rights of CSI shareholders contained in the articles of incorporation and bylaws of CSI differ from the rights of Clean Diesel stockholders under the certificate of incorporation of Clean Diesel and bylaws of Clean Diesel, as more fully described under the section entitled “Comparison of Clean Diesel Stockholders and CSI Shareholders Rights and Corporate Governance Matters” in this joint proxy statement/information statement and prospectus.

 

The Clean Diesel Annual Meeting Of Stockholders (see page 219)

 

The Clean Diesel annual meeting will be held at          , London, England, at [          ], local time, on [          ], 2010. Only holders of record of Clean Diesel common stock at the close of business on [          ], 2010 (the “Clean Diesel record date”) are entitled to notice of, attendance at and to vote at, the Clean Diesel annual meeting. As of the record date for the Clean Diesel annual meeting, there were [          ] shares of Clean Diesel common stock outstanding and entitled to vote at the Clean Diesel annual meeting, held by approximately [          ] holders of record. Each holder of Clean Diesel common stock is entitled to one vote for each share of Clean Diesel common stock owned as of the Clean Diesel record date.

 

Clean Diesel stockholders will vote on five proposals at the Clean Diesel annual meeting. The first proposal at the Clean Diesel annual meeting is a proposal to elect seven directors. These directors will be the directors of Clean Diesel in the event the Merger does not become effective. If the Merger is effective, five of these directors are expected to resign and will be replaced by four former directors of CSI. The second proposal is to ratify the selection of EisnerAmper LLP to be Clean Diesel’s independent public accountants for 2010. The third proposal is to effect a reverse split of the issued and outstanding shares of Clean Diesel common stock, to occur immediately before the closing of the proposed Merger, in a ratio ranging from 1-for-3 to 1-for-8, the final ratio to be determined within the discretion of the Clean Diesel Board of Directors. The fourth proposal is to approve the issuance of new shares of Clean Diesel common stock, par value $0.01 per share, and warrants to purchase shares of Clean Diesel common stock to securityholders of CSI and its financial advisor, in connection with the Merger. The fifth proposal at the Clean Diesel annual meeting is a proposal to consider and vote upon an adjournment of the Clean Diesel annual meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the proposals described immediately above. Please note that Proposal No. 3 and Proposal No. 4 are each conditioned on each other. Therefore, if Proposal No. 3 is not approved by the stockholders, Proposal No. 4 will automatically be deemed to have not been approved by the stockholders, regardless of the number of shares actually voted “FOR” Proposal No. 4. If you are a Clean Diesel stockholder and fail to return your proxy card or otherwise provide proxy instructions or vote your shares in person will result in your shares not being counted for purposes of determining whether a quorum is present at the Clean Diesel annual meeting. In the event that a quorum is not reached or the necessary votes are not received, the Clean Diesel annual meeting will have to be adjourned and recalled to obtain a quorum and the necessary votes.

 

The CSI Special Meeting Of Shareholders (see page 230)

 

The CSI special meeting will be held at CSI’s Oxnard facility located at 1621 Fiske Place, Oxnard, CA 93003, at [          ], local time, on [          ], 2010. Only holders of record of CSI stock at the close of business on [          ], 2010 are entitled to notice of, attendance at and to vote at the CSI special meeting. As of the record date for the CSI special meeting, there were [          ] shares of CSI stock outstanding and entitled to vote at the CSI special meeting, held by approximately [          ] holders of record. Each holder of CSI stock is entitled to one vote for each share of CSI stock owned as of the CSI record date.

 

There are four proposals at the CSI special meeting. The first proposal at the CSI special meeting is a proposal to adopt the Merger Agreement. The second proposal at the CSI special meeting is a proposal to approve an amendment to CSI’s articles of incorporation to designate CSI’s current outstanding shares of

common stock as “Class A” common stock, to create a new class of common stock to be designated as “Class B” common stock, and to increase its authorized share capital. The third proposal at the CSI special meeting is a proposal to disapply the pre-emptive rights provided in CSI’s articles of incorporation. The fourth proposal at the CSI special meeting is a proposal to consider and vote upon an adjournment of the CSI special meeting, if necessary, if a quorum is present, to solicit additional proxies if there are not sufficient votes in favor of the proposals described immediately above to satisfy each of the conditions to closing concerning the vote set forth in the Merger Agreement. If you are a CSI shareholder, the failure to return your proxy or otherwise provide proxy instructions or vote your shares in person will have the same effect as voting against CSI Proposals No. 1, No. 2 and No. 3 and your shares will not be counted for purposes of determining whether a quorum is present at the CSI special meeting. In the event that a quorum is not reached or the necessary votes are not received, the CSI special meeting will have to be adjourned and recalled for another vote.