Contract analysis

From: Harrison Wexford <hwexford@calderwoodharkness.com> To: Catherine Answorth <cansworth@ridgewayphelps.com> Cc: Tiffany Rosenthal <trosenthal@calderwoodharkness.com> Date: Sun, 07 Jan 2024 06:42:00 -0000 Subject: Re: Project Stratos — Response to Comments on MAE Definition and Indemnification Provisions

Thank you for the thorough mark-up of the Merger Agreement that your team circulated on December 18. We have reviewed the revised draft carefully, and I wanted to follow up specifically on two areas that we view as critical to bridging the remaining gap between the parties: (1) the definition of "material adverse effect" in Article I and (2) the indemnification and escrow provisions in Article IX.

As you know, we circulated our Second Revised Draft of the full agreement on January 4, which reflects Solara's revised positions across all open provisions. The attached letter is intended to supplement that draft by setting out in detail the rationale behind our positions on the MAE definition and indemnification mechanics — areas where we believe a more fulsome explanation will be productive in narrowing the open

I would welcome the opportunity to walk through these points by phone with you and Alistair at your convenience later this week. My sense is that we are not far apart on several of the MAE carveout issues, and a focused conversation could go a long way toward getting us to a clean execution draft on the timeline we have discussed.

Please do not hesitate to reach out if you would like to discuss in advance of a more formal call.

Harrison Wexford Partner Calderwood & Harkness LLP 599 Lexington Avenue New York, NY 10022 T: (212) 506-7100 hwexford@calderwoodharkness.com

**Attachment: Project Stratos — C&H Response Letter re MAE and Indemnification (January 7, 2024).pdf**

CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, NY 10022 T: (212) 506-7100 F: (212) 506-7200

Catherine Answorth, Esq. Ridgeway Phelps & Sato LLP 375 Park Avenue New York, NY 10152

> Re: Agreement and Plan of Merger — Cloudium Technologies plc / Solara Digital Infrastructure Fund VI LP / Stratos Merger Sub Inc. — Response to Target's Comments on "Material Adverse Effect" Definition and Indemnification Provisions > Matter No. 1041-00003

We write on behalf of our client, Solara Digital Infrastructure Fund VI LP ("Solara" or the "Buyer"), in connection with the Agreement and Plan of Merger (the "Merger Agreement") among Cloudium Technologies plc ("Cloudium" or the "Company"), Stratos Merger Sub Inc. ("Merger Sub"), and Solara. This letter responds to the comments set forth in the revised draft (mark-up) of the Merger Agreement received from Ridgeway P

Solara's revised positions on these matters are reflected in the Second Revised Draft of the Merger Agreement circulated on January 4, 2024. This letter provides the context and rationale underlying those positions with the aim of facilitating a productive resolution of the remaining open points.

**PART A: "MATERIAL ADVERSE EFFECT" DEFINITION**

**1. General Standard / Materiality Qualifier**

We acknowledge your request to revise the operative standard in the MAE definition from "has had or would have" to "has had or would reasonably be expected to have" a Material Adverse Effect. The Second Revised Draft accepts this change. We agree that the "would reasonably be expected to" formulation is consistent with Delaware market practice in large-cap take-private transactions and appropriately introduces an obj

As set forth below, however, the definition of "Material Adverse Effect" remains a heavily negotiated provision, and we set out the Buyer's positions on the enumerated carveouts and related matters in detail.

**2. Carveouts — Pandemics, War, Changes in Law**

The Buyer's draft includes, and continues to include, carveouts for:

(i) pandemics, epidemics, and public health emergencies (including any COVID-19-related measures);

(ii) hostilities, acts of war, sabotage, terrorism, or military action (whether or not declared); and

(iii) changes in law, regulation, or authoritative interpretation thereof (including changes in GAAP or other applicable accounting standards).

These three carveouts are standard and the Buyer has agreed to retain them in the Second Revised Draft. We note, however, that each of these carveouts remains subject to the "disproportionate impact" exception — that is, the relevant matter is carved out from the MAE definition only to the extent it does not disproportionately affect Cloudium and its subsidiaries, taken as a whole, relative to other companies operati

**3. Target's Proposed Additional Carveouts — Buyer's Response**

Your December 18 mark-up proposed several additional carveouts beyond those described above. We address each in turn:

**(a) Industry-Wide Conditions / General Economic Conditions.** The Company proposed broad carveouts for (x) general economic and financial market conditions and (y) conditions generally affecting the "cloud software / SaaS industry or the broader technology sector." The Buyer accepts a carveout for general economic and financial market conditions, subject to the disproportionate-impact exception. With respect to ind

**(b) Seasonality.** The Company requested a carveout for seasonal fluctuations consistent with past practice. The Buyer accepts this carveout, provided that it is expressly tied to historical seasonal patterns as disclosed in Cloudium's filings with the U.S. Securities and Exchange Commission (Cloudium is listed on the Nasdaq Global Select Market under the ticker symbol "CLDM"). We have revised the language accordin

**(c) Customer/Supplier Reactions to Announcement of the Merger.** The Company proposed carving out any adverse effects arising from the announcement or pendency of the transactions contemplated by the Merger Agreement, including the loss of, or adverse change in the relationship with, any customers, suppliers, employees, or other business partners. The Buyer agrees to include this carveout for purposes of the Materi

**(d) Failure to Meet Projections.** The Company proposed carving out any failure by Cloudium to meet internal projections, forecasts, budgets, or estimates of revenue, earnings, or other financial metrics. The Buyer accepts that the mere failure to meet projections does not, in and of itself, constitute a Material Adverse Effect. However, the Buyer reserves the right to examine and rely upon the underlying facts, ev

**4. Buyer's Requested Inclusions / Exclusions from Carveouts**

The Buyer requires that the following matters remain expressly outside the scope of any carveout (i.e., they are capable of constituting or contributing to a Material Adverse Effect notwithstanding the existence of any carveout):

(i) any material breach of the Merger Agreement by the Company;

(ii) any event, circumstance, or condition relating to fraud or willful misconduct by the Company or any of its officers or directors; and

(iii) any material adverse change in the Company's relationships with its top 20 customers measured by annual recurring revenue ("ARR") (the Company's aggregate ARR as of December 31, 2023 is approximately $1,740,000,000) or with any individual customer representing more than 3% of ARR. For the avoidance of doubt, this would include the Company's Master SaaS Agreement with Aegis Federal Solutions Inc. (approximately

We note that the change-of-control provisions in certain key contracts — including the agreements with Aegis Federal Solutions Inc. and Helix Data Systems GmbH — have been identified during the due diligence process, and the workstream to obtain the requisite third-party consents is being addressed separately by the transaction teams.

**5. "Material Adverse Effect" — Forward-Looking Scope**

Your December 18 mark-up proposed limiting the temporal scope of the MAE definition such that it would apply only to effects measured as of a specified date. The Buyer does not accept this limitation. The MAE definition should encompass effects on the business, assets, liabilities, financial condition, or results of operations of the Company and its subsidiaries, taken as a whole. The Company's global subsidiary stru

**PART B: INDEMNIFICATION AND ESCROW PROVISIONS**

Your draft proposed reducing the general indemnification cap from 15% to 10% of the aggregate deal value. The Buyer's position is that the cap must remain at 15% of the $6,800,000,000 deal value, i.e., $1,020,000,000.

A 15% cap is appropriate in light of the scale and complexity of this transaction, including the cross-border nature of Cloudium's operations across the United Kingdom, India, Germany, and the United States, the approximately 6,800-person global workforce, and the extensive contract portfolio containing change-of-control and consent provisions. A 15% cap is within the market range for transactions of this size and pr

Importantly, the availability of the representation and warranty insurance policy — with a $680,000,000 policy limit (10% of deal value) issued by Northfield Assurance — provides Solara with recourse above the escrow amount without imposing additional economic burden on the selling stockholders beyond the escrow. The R&W insurance retention is set at $544,000,000 (equal to the escrow amount), which means that from th

Your draft proposed reducing the escrow from 8% to 5% of the aggregate deal value. The Buyer's position is that the escrow must remain at 8% of $6,800,000,000, i.e., $544,000,000.

The escrow serves as the primary source of recovery for post-closing indemnification claims and, critically, constitutes the retention under the R&W insurance policy with Northfield Assurance. Reducing the escrow amount would require a renegotiation of the R&W policy terms — a process we have discussed with both Peregrine Advisory Group LLC (our R&W insurance broker; contact Timothy Gallagher) and Northfield Assuranc

Your draft proposed a single release of the entire escrow fund 12 months after the Closing Date. The Buyer's position is that the escrow should be released in two tranches, as follows:

- **First Release:** 50% of the escrow ($272,000,000) to be released on the date that is 12 months after the Closing Date (i.e., July 9, 2025, assuming a July 9, 2024 closing), less any amounts subject to then-pending or unresolved claims.

- **Second Release:** The remaining 50% of the escrow ($272,000,000) to be released on the date that is 18 months after the Closing Date (i.e., January 9, 2026), less any amounts subject to then-pending or unresolved claims.

This two-tranche structure aligns with the 18-month survival period for representations and warranties (discussed below) and with the R&W insurance retention drop-down mechanics. The escrow agent for these purposes is Cobalt Trust Company (contact: Laura Ng, Vice President, Escrow Services), and Douglas Pemberton will serve as the Stockholder Representative in connection with escrow claims and related indemnification

Your draft proposed reducing the survival period for representations and warranties from 18 months to 12 months post-closing. The Buyer's position is that the survival period must remain at 18 months post-closing.

An 18-month survival period is necessary to allow adequate time for post-closing integration activities, during which potential breaches — particularly in areas such as intellectual property, tax compliance, and government contracts — may first come to light. A 12-month period would, in our experience, be insufficient for a transaction of this complexity. The 18-month period also aligns with both the escrow release s

Your draft proposed converting the 0.75% basket from a tipping basket (first-dollar recovery once the threshold is exceeded) to a true deductible. The Buyer's position is that the basket must remain a tipping basket at 0.75% of the aggregate deal value, i.e., $51,000,000.

Under the tipping-basket structure, once aggregate indemnifiable losses exceed $51,000,000, Solara is entitled to recover from the first dollar of loss — not merely the amount in excess of $51,000,000. This mechanism is appropriate given the overall buyer-favorable indemnification structure and the availability of R&W insurance above the escrow. We note that the Buyer has accepted the de minimis threshold of $500,000

The Buyer's position is that the following categories of indemnification obligations must remain uncapped and outside the scope of the general indemnification framework described above:

(i) losses arising from or relating to fraud;

(ii) losses arising from or relating to willful breach;

(iii) tax indemnities (the terms of which are being coordinated with Leonard Cross on our side); and

(iv) certain specified litigation matters to be identified and set forth in the disclosure schedules.

We understand that your December 18 mark-up objected to the breadth of the "willful breach" carve-out. The Buyer is willing to define "Willful Breach" as a breach that is the consequence of an act or omission undertaken by the breaching party with actual knowledge that the taking of such act or failure to take such act would constitute or result in a breach of the Merger Agreement. However, claims arising from Willfu

For clarity, the layered recovery structure available to Solara under the Merger Agreement and the R&W insurance policy is as follows:

- **First Recourse:** The escrow fund ($544,000,000), held by Cobalt Trust Company, plus direct indemnification from the rollover participants (Jonathan Hargrove and Pinnacle Growth Ventures LLC) up to the 15% cap ($1,020,000,000).

- **Second Recourse:** The R&W insurance policy issued by Northfield Assurance Ltd. (Policy No. NFA-TRI-2024-00487), with a $680,000,000 policy limit, for covered losses in excess of the $544,000,000 retention.

- **Theoretical Maximum Recovery:** $1,020,000,000 (indemnity cap) plus $680,000,000 (R&W excess coverage) = $1,700,000,000, although practical recovery will depend on the nature, amount, and coverage of specific claims.