Contract analysis

I. Executive Summary The purpose of this memorandum is to analyze the potential exposure of Dr. Marcus J. Elliston (the "Executive") and Arbor Health Technologies Inc. ("AHT" or the "Company") under Internal Revenue Code ("Code") Sections 280G and 4999 arising from the change in control severance provisions contained in the proposed Executive Employment Agreement (the "Employment Agreement") between AHT and the Execu

II. Background and Factual Assumptions A. The Parties and Transaction Context Arbor Health Technologies Inc. AHT is a Delaware corporation headquartered at 400 Brattle Commerce Park, Suite 1200, Cambridge, Massachusetts 02138. The Company operates a healthcare services and software-as-a-service ("SaaS") platform that provides cloud-based clinical workflow management and revenue cycle management solutions to hospital

1. Termination Without Cause / Resignation for Good Reason (No Change in Control) In the event of a termination of the Executive's employment by the Company without Cause or by the Executive for Good Reason, in either case occurring outside the twenty-four (24) month period following a Change in Control (a "Non-CIC Qualifying Termination"), the Employment Agreement provides for the following severance benefits, subje

2. Termination Without Cause / Resignation for Good Reason Within 24 Months Following a Change in Control (Double-Trigger) In the event of a termination of the Executive's employment by the Company without Cause or by the Executive for Good Reason, in either case occurring within the twenty-four (24) month period following a Change in Control (a "CIC Qualifying Termination"), the Employment Agreement provides for the

III. Legal Framework: Sections 280G and 4999 A. Overview of Section 280G

Section 280G of the Internal Revenue Code denies a federal income tax deduction to the payor corporation for any "excess parachute payment" made to or for the benefit of a "disqualified individual." The provision was enacted as part of the Deficit Reduction Act of 1984 (Pub. L. No. 98-369) in response to Congressional concern that corporations were providing excessive severance and change in control benefits to execu

Section 4999 of the Internal Revenue Code imposes a nondeductible excise tax of twenty percent (20%) on the amount of any "excess parachute payment" received by a disqualified individual. This excise tax is imposed on the individual recipient — not on the payor corporation — and is in addition to (not in lieu of) regular federal and state income taxes and employment taxes that would otherwise apply to the payment. Th

Section 280G applies only to payments made to "disqualified individuals" as defined in Section 280G(c). A disqualified individual is any individual who, with respect to the corporation, is (i) an employee or independent contractor who performs personal services for the corporation, and (ii) is a shareholder, officer, or highly compensated individual of the corporation during the period beginning twelve months before

IV. Base Amount Estimation and 3× Threshold Analysis A. Base Amount Calculation Challenges The "base amount" for purposes of Section 280G is calculated as the disqualified individual's average annualized includible compensation for the most recent five taxable years ending before the date on which the change in ownership or control occurs. In cases where the individual has been employed by the corporation for fewer t

V. Approaches to Addressing 280G Exposure There are three principal contractual approaches for addressing the Section 280G / Section 4999 exposure identified in this memorandum: (A) a tax gross-up provision, (B) a best-net cutback provision, and (C) the shareholder approval exemption. Each is discussed below. A. Tax Gross-Up Provision Description. Under a tax gross-up provision, the Company agrees to make an addition

VI. Best-Net Cutback Modeling A. Methodology To determine the optimal contractual approach and to illustrate the operation of the best-net cutback provision, we have performed detailed modeling comparing two outcomes at each payment level: (a) Full Payment with Excise Tax. The Executive receives the full, unreduced parachute payments and bears the Section 4999 excise tax (in addition to regular federal and state inco