1006-00007 · Client 1006 · Diligence

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

TO: Harrison Wexford, Partner, Calderwood & Harkness LLP Derek Amato, General Counsel, Crestline Packaging Solutions LLC

FROM: Ryan Kowalski, Lead Associate, and Megan Chu, Working Associate, Calderwood & Harkness LLP

DATE: October 28, 2022

RE: Summary of Key Legal Due Diligence Findings — Proposed Acquisition of ProShield Industrial Coatings Product Line from Voss Chemical Industries, Inc.

MATTER NO.: 1006-00007

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I. EXECUTIVE SUMMARY

Calderwood & Harkness LLP ("C&H") has been retained by Crestline Packaging Solutions LLC ("Crestline" or "CPS"), a Delaware limited liability company headquartered at 4100 Rockside Road, Suite 300, Independence, OH 44131, as buyer's counsel in connection with the proposed asset purchase of substantially all assets comprising the ProShield Industrial Coatings product line (the "ProShield Product Line" or the "Business") from Voss Chemical Industries, Inc. ("Voss" or "VCI"), a New York corporation headquartered at 790 Niagara Falls Boulevard, Tonawanda, NY 14150 (the "Transaction").

Crestline is a portfolio company of Kestrel Capital Partners Fund III, LP, a Delaware limited partnership (GP: Cobalt Ridge Partners Management III, LLC) with its principal office at 200 Clarendon Street, 48th Floor, Boston, MA 02116 ("Ashgrove Equity Partners" or the "Sponsor"). The acquisition of the ProShield Product Line is part of Crestline's broader growth strategy to expand its specialty industrial coatings capabilities and customer base in the packaging and industrial end-markets, and has been approved by the Ashgrove Equity Partners investment committee, subject to satisfactory completion of all legal, financial, tax, and environmental due diligence.

The Transaction contemplates a base purchase price of $18,000,000, comprising $14,500,000 in cash payable at Closing, a $2,000,000 indemnification escrow (to be held by Pinnacle Trust Company, N.A. pursuant to a separate Escrow Agreement), and a volume-based earnout of up to $3,500,000 over a twenty-four (24) month measurement period following the Closing Date. The maximum total consideration payable by Crestline in connection with the Transaction is $20,000,000, assuming full achievement of all earnout milestones.

Legal due diligence commenced on October 10, 2022, following the execution of a binding Letter of Intent between the parties dated October 3, 2022. VCI and its counsel, Langford, Crewe & Cascade Insurance Brokers, have made available a virtual data room (hosted on Thackeray Solutions, Project Name "Vulcan") containing approximately 2,400 documents organized into 14 primary folders. This memorandum summarizes the findings and observations of C&H's legal due diligence review through October 28, 2022. Additional documents and supplemental responses to our diligence request list remain outstanding, and our review is ongoing. This memorandum will be updated as additional materials are received and analyzed.

In parallel with our legal review, the following advisors have been engaged by Crestline to conduct their respective workstreams:

• Financial and Tax Due Diligence: Halcyon Chartered Accountants LLP (engagement partner Martin Szabo, CPA), 1301 East 9th Street, Suite 2400, Cleveland, OH 44114, is conducting financial quality-of-earnings and tax due diligence on the ProShield Product Line. Halcyon's preliminary findings have been shared with our legal team, and we are coordinating to ensure that financial observations are appropriately reflected in the representations, warranties, and disclosure schedules of the Asset Purchase Agreement.

• Environmental Due Diligence: Northbridge Environmental Consulting Group LLC (project manager Aaron Lindquist, P.E.) has been engaged by Crestline to conduct a Phase I environmental site assessment of the Tonawanda manufacturing facility at 790 Niagara Falls Boulevard, Tonawanda, NY 14150. The Phase I report is expected by approximately November 4, 2022, and will inform our final recommendations on environmental risk allocation in the APA.

We note that the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), does not require a pre-merger notification filing in connection with this Transaction. The total deal value of $18,000,000 (or $20,000,000 maximum with full earnout) falls below the applicable size-of-transaction reporting threshold currently in effect for calendar year 2022.

Overall Assessment. The ProShield Product Line presents a commercially attractive acquisition target for Crestline. The product line's revenue has grown consistently over the past three fiscal years (from $18.7M in FY2020 to an estimated $22.8M in FY2022), gross margins have improved from 38.2% to an estimated 40.0% over the same period, and the portfolio of 47 proprietary coating formulations provides meaningful competitive differentiation. However, our legal due diligence has identified several issues that require careful attention in APA drafting and negotiation, and which should inform the commercial terms of the Transaction. The key risk areas are as follows:

1. Customer Contract Assignability / Change-of-Control Consent Requirements. Seven (7) of the twenty-three (23) active supply agreements included in the Transferred Assets contain anti-assignment or change-of-control consent provisions. Three (3) of these are among the top five (5) customer accounts by revenue, creating meaningful execution risk.

2. Customer Concentration Risk. The top five (5) customer accounts represent approximately 58% of ProShield Product Line revenue, concentrating Crestline's post-Closing revenue base and, critically, the earnout measurement in a limited number of commercial relationships.

3. Environmental Conditions at the Tonawanda Facility. While preliminary database searches have not identified the facility on any federal or state priority remediation lists, VCI's historical use of volatile organic compounds and solvents, together with the 2018 underground storage tank removal, warrant thorough environmental review. Final assessment is pending receipt of the Northbridge Phase I report.

4. IP Chain-of-Title Completeness. Approximately eight (8) of the forty-seven (47) proprietary formulations were developed by former employees who signed only general employment agreements lacking specific invention assignment or work-for-hire clauses. Additionally, approximately five (5) formulations were co-developed with a raw material supplier under a joint development agreement that includes notice/consent requirements upon assignment or change of control.

5. Employee Transition Mechanics. As an asset purchase, there is no automatic transfer of employment. Crestline will need to extend offers to thirty-four (34) product line employees, address restrictive covenant assignment issues, and manage the transition of personnel from VCI's benefit plans to Crestline's plans, all while preserving continuity of manufacturing operations and customer relationships.

Each of these issues is discussed in detail in the sections that follow, together with our recommendations for addressing them through the APA, ancillary agreements, and closing conditions.

II. CORPORATE ORGANIZATION AND AUTHORITY OF SELLER

A. Entity Status and Good Standing

Voss Chemical Industries, Inc. is a New York business corporation that was originally incorporated under the laws of the State of New York in 1987 by the Voss family. VCI has been continuously in existence since its date of incorporation and, based on our preliminary review, has maintained its corporate status in good standing throughout the relevant period. VCI's registered agent for service of process is Voss Chemical Industries, Inc., c/o Frederick Voss, 790 Niagara Falls Boulevard, Tonawanda, NY 14150. VCI's Employer Identification Number (EIN) is 16-2847103.

We have conducted a preliminary check with the New York Department of State, Division of Corporations, which confirms that VCI is currently in "active" status. Our review of available franchise tax filing records indicates that VCI is current on its New York State franchise tax obligations. As a closing deliverable, we recommend that the APA require Seller to deliver a current certificate of good standing (or equivalent certificate of status) from the New York Secretary of State, dated within ten (10) business days of the Closing Date. We will verify VCI's status again promptly prior to Closing.

VCI does not appear to be qualified as a foreign corporation in any state other than New York, although we have requested confirmation from Seller's counsel as to whether VCI has operations, employees, or property in any other jurisdiction that would require foreign qualification. This inquiry remains outstanding as of the date of this memorandum.

B. Ownership and Capitalization

Based on our review of VCI's corporate records, including its Certificate of Incorporation (as amended), bylaws, and stock transfer ledger, 100% of VCI's issued and outstanding common stock is held by members of the Voss family, as follows:

VCI's Certificate of Incorporation authorizes the issuance of 5,000 shares of common stock, par value $1.00 per share. Of these, 1,000 shares are issued and outstanding, all of which are held by the Voss family as described above. No shares are held in treasury.

Our review has confirmed that there are no outstanding options, warrants, convertible securities, stock appreciation rights, phantom equity, or other instruments that would entitle any person to acquire or receive equity interests in VCI. There are no voting trusts, voting agreements, proxies, or other arrangements affecting the voting of VCI's capital stock. We have not identified any shareholder agreement, buy-sell agreement, right of first refusal, co-sale agreement, or other contractual restriction that would restrict or limit VCI's ability to sell assets or consummate the Transaction.

We note that Frederick G. Voss and Elena M. Voss appear to be the sole directors and officers of VCI, which simplifies the corporate governance analysis for purposes of transaction authorization. We have requested copies of VCI's complete minute book and will review minutes of all board and shareholder meetings for the preceding five (5) years to confirm that no inconsistent actions have been taken and that VCI's corporate formalities have been properly observed.

C. Authority to Consummate Transaction

As a New York business corporation, VCI requires authorization by its Board of Directors to consummate the sale of the ProShield Product Line assets. The relevant question under New York law is whether the proposed asset sale also requires shareholder approval.

Under Section 909 of the New York Business Corporation Law ("NY BCL § 909"), a sale, lease, exchange, or other disposition of all or substantially all of a corporation's assets requires authorization by the holders of two-thirds of the outstanding shares entitled to vote. The threshold question is whether the ProShield Product Line constitutes "all or substantially all" of VCI's assets. New York courts have generally applied both quantitative and qualitative tests in making this determination, considering factors such as the percentage of revenue, assets, and earnings attributable to the business being sold, as well as whether the disposition leaves the corporation without a significant continuing business activity. See, e.g., Katz v. Bregman, 431 A.2d 1274 (Del. Ch. 1981) (while a Delaware case, frequently cited by New York courts for its analytical framework); Hollinger Inc. v. Hollinger International, Inc., 858 A.2d 342 (Del. Ch. 2004).

Based on the financial data provided by VCI and subject to verification by Halcyon, the ProShield Product Line represents the following proportion of VCI's overall business:

• Revenue: Approximately $21.3 million of VCI's total consolidated revenue of approximately $64 million in FY2021, representing approximately 33% of total revenue.

• Assets: The Transferred Assets (equipment, inventory, IP, contracts) have an estimated aggregate value of approximately $18 million (based on the negotiated purchase price), against VCI's total asset base. VCI will retain its automotive coatings and architectural coatings product lines, together with associated assets.

• Employees: Thirty-four (34) of VCI's total workforce of approximately 120 employees are associated with the ProShield Product Line, representing approximately 28% of total headcount.

Since the ProShield Product Line represents only approximately one-third of VCI's consolidated revenue and VCI will continue to operate its remaining specialty coatings business lines (automotive coatings and architectural coatings), it is our view that the proposed Transaction does not constitute a sale of "all or substantially all" of VCI's assets within the meaning of NY BCL § 909, and accordingly, formal shareholder approval is not required under that provision. VCI will continue as an operating company following the Closing, with approximately two-thirds of its pre-Transaction revenue base intact and with meaningful continuing business activity across its remaining product lines.

Notwithstanding this analysis, any residual risk associated with the shareholder approval question is effectively mitigated by the fact that Frederick G. Voss (holding 62% of VCI's outstanding shares) and Elena M. Voss (holding 38% of VCI's outstanding shares) are the sole shareholders of VCI and will each personally sign the APA as "Seller Principals" for purposes of the indemnification, non-competition, non-solicitation, and other personal obligations contemplated by the Transaction. Their personal execution of the APA constitutes, in practical effect, the equivalent of unanimous shareholder consent to the Transaction.

We recommend that the following corporate governance deliverables be included as conditions to Closing:

(i) Certified copies of resolutions of VCI's Board of Directors authorizing the execution, delivery, and performance of the APA and all ancillary agreements, and the consummation of all transactions contemplated thereby;

(ii) A certificate of the Secretary (or Assistant Secretary) of VCI certifying the incumbency and specimen signatures of the officers executing the APA and ancillary documents on behalf of VCI; and

(iii) A certificate of good standing from the New York Secretary of State, dated within ten (10) business days of the Closing Date.

D. Seller's Counsel

Langford, Crewe & Cascade Insurance Brokers represents VCI in connection with the Transaction. The lead partner on the engagement is Patricia Okonkwo, Esq., with associate James T. Rinaldi, Esq. serving as the primary working-level contact. Langford, Crewe & Cascade Insurance Brokers's offices are located at 120 Delaware Avenue, Suite 900, Buffalo, NY 14202. We have been in regular communication with Ms. Okonkwo and Mr. Rinaldi throughout the due diligence process, and they have been generally responsive to our document requests and inquiries, although several items on our supplemental diligence request list remain outstanding.

VCI's tax advisor is Ridgeway & Associates, P.C. (principal Denise Ridgeway, CPA), located at 95 Franklin Street, Suite 400, Buffalo, NY 14202. Ridgeway & Associates has been VCI's outside tax advisor since approximately 2009 and has been coordinating with Halcyon Chartered Accountants LLP on the tax due diligence workstream.

III. INTELLECTUAL PROPERTY

The intellectual property assets of the ProShield Product Line represent a significant component of the Transaction's value proposition. Our review has focused on: (i) the ProShield trademark; (ii) the portfolio of forty-seven (47) proprietary coating formulations maintained as trade secrets; and (iii) the overall chain of title and freedom from encumbrances of the Transferred IP. The following summarizes our findings and recommendations.

A. ProShield Trademark

The "ProShield" trademark is registered with the United States Patent and Trademark Office ("USPTO") under U.S. Registration No. 2,876,411. The mark is registered in International Class 002 for industrial coatings, including polymer-modified epoxy coatings, acrylic latex coatings, and related specialty coating products. The mark is currently in active/live status on the USPTO register.

The trademark is registered in the name of Voss Chemical Industries, Inc. as the sole owner. We have reviewed the USPTO records for the mark and have confirmed the following:

• Renewal Status: The trademark appears current on all required maintenance filings, including the Section 8 Declaration of Continued Use and the Section 9 Renewal Application under the Lanham Act. Based on the registration date, the next renewal filing is not due until 2027.

• Oppositions and Cancellation Proceedings: No pending opposition or cancellation proceedings were identified in the USPTO Trademark Trial and Appeal Board (TTAB) records. No such proceedings have been identified in Seller's disclosure.

• Infringement Claims: VCI has represented in its due diligence responses that there are no pending or, to Seller's knowledge, threatened claims of trademark infringement, dilution, or unfair competition relating to the ProShield mark. We have not independently identified any such claims.

• Prior Assignments: No prior assignments of the ProShield mark have been recorded with the USPTO Assignment Recordation Branch.

We recommend that the APA include a specific trademark assignment, in the form of a standalone IP Assignment Agreement to be executed at Closing and recorded with the USPTO Assignment Recordation Branch promptly following the Closing Date. The trademark assignment should include the associated goodwill of the business, consistent with the requirements of Lanham Act § 10(a)(1), 15 U.S.C. § 1060(a)(1), to ensure the validity of the assignment. We further recommend that Seller provide comprehensive representations in the APA regarding the absence of infringement claims, sole ownership of the ProShield mark, the validity and enforceability of the registration, the absence of any license, sublicense, or covenant not to sue in favor of any third party, and the sufficiency of the mark for the operation of the ProShield Product Line as currently conducted.

B. Proprietary Formulations and Trade Secrets

The ProShield Product Line includes a portfolio of forty-seven (47) proprietary coating formulations, spanning a range of polymer-modified epoxy and acrylic latex coatings designed for industrial packaging, container, and protective coating applications. These formulations are the core technical foundation of the product line and represent significant competitive value. VCI maintains these formulations as trade secrets rather than pursuing patent protection, a strategy that is common in the specialty coatings industry and provides indefinite protection so long as adequate confidentiality measures are maintained.

We have reviewed VCI's trade secret protection practices, including the following measures:

(i) Restricted Access to Formulation Databases. VCI maintains its formulation data in a proprietary database system with role-based access controls. Access to specific formulations is limited to employees with a demonstrated need-to-know based on their job function. Database access logs are maintained for audit purposes.

(ii) Employee Confidentiality and Invention Assignment Agreements. VCI requires employees with access to formulation data to execute confidentiality and invention assignment agreements upon hiring. We have reviewed a sample of these agreements, as discussed further below.

(iii) Physical Security Measures. The Tonawanda R&D laboratory, where formulation development and testing activities are conducted, is secured with key-card access controls, security cameras, and visitor sign-in protocols. Formulation batch sheets and laboratory notebooks are maintained in locked cabinets within the laboratory.

(iv) Vendor and Customer Confidentiality. VCI requires raw material suppliers and customers who receive formulation-specific technical data to execute confidentiality agreements. We have reviewed a sample of these agreements and found them to be generally consistent with industry standards.

Issue Identified: Invention Assignment Documentation Gaps. While VCI's current trade secret protection program is generally consistent with industry standards, our review has identified an area of concern relating to the completeness of invention assignment documentation for certain formulations. Specifically, approximately eight (8) of the forty-seven (47) proprietary formulations were developed by former employees who signed only general employment agreements that did not contain specific invention assignment or work-for-hire clauses. These employees have since departed VCI, and in several cases, the employment files are incomplete.

Under New York common-law principles governing employer ownership of inventions, an employer generally owns inventions created by an employee within the scope of employment, using the employer's resources, and related to the employer's business, even in the absence of a written invention assignment agreement. See, e.g., United States v. Dubilier Condenser Corp., 289 U.S. 178 (1933); Restatement (Third) of Unfair Competition § 42. Accordingly, we believe that VCI has a strong basis for claiming ownership of these eight formulations, as they were developed by employees during their employment with VCI, using VCI's laboratory facilities and raw materials, and in furtherance of VCI's coating formulation business. However, the absence of explicit written assignments creates a potential vulnerability that could be exploited by a former employee or a third party in a dispute over ownership.

We note that the risk of a former employee coming forward to assert ownership claims appears to be low based on the information currently available. Several of these employees departed VCI more than five years ago, and VCI has represented that it is not aware of any claims or threats of claims by any former employee relating to formulation ownership. Nonetheless, the absence of clear written documentation creates an inherent uncertainty that should be addressed in the Transaction documents.

Recommendation: We recommend that the APA include: (i) a broad intellectual property representation from Seller warranting that VCI is the sole and exclusive owner of all Transferred IP, including all proprietary formulations, free and clear of all liens, claims, and encumbrances; (ii) a specific indemnification obligation covering any losses arising from IP ownership claims by former employees or third parties; and (iii) inclusion of the IP ownership representations within the category of Fundamental Representations entitled to the extended thirty-six (36) month survival period. Additionally, Buyer may wish to consider whether the buyer-side R&W insurance policy from Coventry Mutual Insurance Co. should be structured to specifically cover this identified risk.

Customer-Specific Formulation Libraries. The Transferred Assets also include customer-specific formulation libraries — i.e., proprietary formulations that have been developed or customized for specific ProShield customers over the course of the commercial relationship. These customer-specific formulations represent significant customer-retention value, as they create switching costs for customers who have qualified ProShield products in their manufacturing processes. We recommend that the APA clearly define the Transferred IP to include all customer-specific formulations and associated technical data, and that Seller represent that no customer has any ownership interest in or license to use any such formulation independent of its supply relationship with the ProShield Product Line.

C. IP Assignment Chain

We have reviewed the chain of title for the ProShield trademark and the formulation portfolio to identify any prior assignments, licenses, liens, or other encumbrances that could affect Buyer's post-Closing rights.

ProShield Trademark. As noted in Section III.A above, no prior assignments, licenses to third parties, or encumbrances have been identified on the ProShield trademark. The mark appears to have been registered by VCI at the time of initial application and has remained in VCI's name continuously since registration. No security interests or liens on the trademark have been recorded with the USPTO.

Joint Development Agreement — Co-Developed Formulations. Our review has identified that approximately five (5) of the forty-seven (47) proprietary formulations were co-developed with a raw material supplier pursuant to a Joint Development Agreement dated April 14, 2014 (the "JDA"). The co-development partner is a specialty chemical supplier whose identity is subject to confidentiality restrictions in the data room; for purposes of this memorandum, we refer to this party as the "JDA Partner."

Under the terms of the JDA, VCI was granted exclusive rights to use and commercialize the resulting formulations in the industrial coatings market, while the JDA Partner retained the right to supply the underlying specialty raw materials used in the formulations. The JDA contains the following provisions that are relevant to the Transaction:

(i) Assignment/Change of Control Notice. Section 8.3 of the JDA requires VCI to provide written notice to the JDA Partner not less than thirty (30) days prior to any assignment of VCI's rights under the JDA or any change of control of VCI. While the Transaction is structured as an asset purchase rather than a change of control of VCI, the assignment of the formulation rights and the JDA itself to Crestline would constitute an assignment within the meaning of Section 8.3.

(ii) Consent to Assignment. Section 8.4 of the JDA provides that the JDA Partner's consent to any such assignment "shall not be unreasonably withheld, conditioned, or delayed." This is a favorable provision, as it limits the JDA Partner's ability to block the assignment. However, the JDA Partner's consent must still be formally obtained.

(iii) Right of First Offer. Section 8.5 of the JDA grants the JDA Partner a right of first offer to acquire VCI's rights under the JDA in the event of a proposed assignment to a competitor of the JDA Partner. We do not believe that Crestline is a competitor of the JDA Partner, but this provision should be reviewed with the commercial team to confirm.

Recommendation: The JDA notice and consent requirement must be addressed as part of the Transaction. We recommend that: (i) the APA include a pre-Closing covenant requiring Seller to deliver the required notice to the JDA Partner and to use commercially reasonable efforts to obtain the JDA Partner's written consent to the assignment; (ii) receipt of the JDA Partner's consent be included as a condition precedent to Closing (or, alternatively, that a "parking" arrangement be established if consent is not obtained prior to Closing, under which Seller would hold the JDA rights for Buyer's benefit pending receipt of consent); and (iii) Seller represent and warrant that the co-developed formulations are included within VCI's exclusive commercialization rights under the JDA and that VCI is not in breach or default of any obligations under the JDA.

Third-Party Software. We have confirmed that no open-source software, third-party software, or embedded code is utilized in any formulation or manufacturing process control system in a manner that would create encumbrance issues, license obligations, or restrictions on transfer or use by Crestline post-Closing.

D. IP Representations for APA

Based on our diligence findings, we recommend that the APA include comprehensive intellectual property representations and warranties from Seller, covering at a minimum the following subjects:

(i) Seller's sole and exclusive ownership of all Transferred IP, free and clear of all liens, claims, encumbrances, and security interests;

(ii) No infringement, misappropriation, or other violation of any third party's intellectual property rights by the Transferred IP or by the operation of the ProShield Product Line as currently conducted;

(iii) No pending or, to Seller's knowledge, threatened claims, actions, or proceedings alleging infringement, misappropriation, or violation of any intellectual property rights by or against VCI with respect to the ProShield Product Line;

(iv) Sufficiency of the Transferred IP to operate the ProShield Product Line substantially as currently conducted, without reliance on any intellectual property retained by Seller or owned by any third party (other than commercially available, off-the-shelf software);

(v) Validity and enforceability of the ProShield trademark registration, and the absence of any pending or threatened challenges to the validity or enforceability of any Transferred IP;

(vi) Adequacy of VCI's trade secret protection measures, including that Seller has taken commercially reasonable steps to protect the confidentiality of all trade secrets included in the Transferred IP; and

(vii) Completeness and accuracy of the IP schedule to be attached to the APA, listing all Transferred IP.

We further recommend that the IP representations be classified as Fundamental Representations with the extended thirty-six (36) month survival period, given the central importance of the formulation portfolio to the value of the Transaction and the identified documentation gaps discussed in Section III.B above.

IV. CUSTOMER CONTRACTS

A. Overview of Assigned Contracts

The Transferred Assets include twenty-three (23) active supply agreements (the "Assigned Contracts") between VCI and customers of the ProShield Product Line. These agreements govern the sale and supply of ProShield-branded industrial coatings to customers operating in the packaging, container, industrial manufacturing, and food-processing industries.

We have obtained and reviewed copies of all twenty-three (23) Assigned Contracts from the data room. The contracts are generally structured as one- to three-year supply agreements with automatic renewal provisions (typically for successive one-year terms unless either party provides notice of non-renewal within a specified period, usually ninety (90) days prior to the expiration of the then-current term). Several of the larger contracts include annual volume commitments (either as binding minimum purchase obligations or as non-binding volume forecasts used for capacity planning purposes) and pricing formulae tied to published raw material indices (such as the ICIS Chemical Business or Purchasing Magazine indices for key resin and solvent inputs), with periodic price adjustment mechanisms.

The Assigned Contracts vary in sophistication and formality. The larger customer accounts are governed by multi-page negotiated supply agreements with detailed terms addressing pricing, volume, quality specifications, delivery, warranty, indemnification, limitation of liability, force majeure, and termination. Several of the smaller customer accounts are governed by simpler purchase order terms or letter agreements. We recommend that the APA include a schedule of Assigned Contracts with material terms summarized, and that Seller represent that the scheduled contracts constitute all contracts used in or related to the ProShield Product Line.

B. Customer Concentration

Our review has confirmed that the ProShield Product Line's revenue base is meaningfully concentrated among a limited number of customer accounts. Based on Seller's disclosures and FY2021 financial data provided to Halcyon, the top five (5) customer accounts represent approximately 58% of ProShield Product Line revenue, as follows:

Note: Customer names are redacted in this memorandum and are identified by letter designation. A separate key linking letter designations to customer names is maintained in the working files and will be provided to the deal team under separate cover.

This level of customer concentration presents meaningful commercial risk. The loss of any one of the top three customers — particularly Customer A, which alone represents 20% of product line revenue — could materially impair the economics of the acquisition, both in terms of ongoing revenue and in terms of the volume-based earnout measurement. We note that the earnout threshold of 2,400,000 gallons over the 24-month Earnout Period implies a run rate substantially consistent with FY2021 volumes; the loss of Customer A alone could reduce annual gallons shipped by approximately 300,000 gallons, potentially jeopardizing achievement of the earnout threshold.

Recommendation: We recommend the following measures to mitigate customer concentration risk:

(i) Customer Estoppel Certificates. Crestline should obtain customer estoppel certificates or written confirmations of intent to continue the business relationship post-Closing from at least the top five (5) customer accounts. These estoppel certificates should confirm the existence and good standing of the supply agreement, the absence of any material disputes or defaults, and the customer's expectation of continuing to purchase ProShield products following the Transaction.

(ii) Customer Introduction and Transition. At a minimum, Seller should be required under the Transition Services Agreement (and/or under a pre-Closing covenant in the APA) to facilitate personal introductions between Crestline management and key decision-makers at each of the top five (5) customer accounts during the transition period following Closing. Frederick G. Voss's personal relationships with several of these customers make his active participation in the customer transition process essential.

(iii) Earnout Protection. The earnout measurement provisions in the APA should be drafted with appropriate protections for both parties, including anti-diversion provisions (prohibiting Buyer from redirecting ProShield customer volumes to competing CPS product lines for the primary purpose of reducing earnout payments) and reasonable reporting and audit obligations. These are discussed further in Section XII.C below.

C. Assignability and Change-of-Control Provisions

Key Issue. Of the twenty-three (23) active supply agreements included in the Transferred Assets, seven (7) contain anti-assignment or change-of-control consent provisions that require the customer's prior written consent before VCI may assign its rights and obligations under the contract to a third party. This is a significant issue in the context of an asset purchase transaction.

Under New York law, which governs all but two of the Assigned Contracts, an asset purchase transaction in which the buyer assumes the seller's contracts constitutes an assignment by operation of law. Anti-assignment provisions are generally enforceable under New York law, and an assignment in violation of such a provision may give the non-assigning party grounds to terminate the contract or refuse to perform. See N.Y. Gen. Oblig. Law § 13-101; Macklowe v. 42nd Street Development Corp., 170 A.D.2d 388 (1st Dep't 1991). Accordingly, Crestline's assumption of these seven contracts without obtaining the required consents could expose Crestline to the risk that the customer could refuse to honor the contract, claim breach, or terminate the agreement.

Of the seven (7) contracts containing consent provisions, three (3) are among the top five (5) customer accounts by revenue (Customers A, C, and E in the table above), collectively representing approximately 36% of ProShield Product Line revenue. The remaining four (4) contracts with consent provisions are among the smaller accounts and collectively represent approximately 9% of product line revenue.

The specific consent provisions vary among the seven contracts:

• Customer A (20% of revenue): Section 14.2 of the Supply Agreement provides that "neither party may assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed." This is a relatively standard provision with a reasonableness qualifier.

• Customer C (11% of revenue): Section 9.1 of the Supply Agreement provides that "this Agreement may not be assigned by either party without the prior written consent of the other party." This is an unqualified consent requirement — the customer has no obligation to act reasonably in withholding consent.

• Customer E (5% of revenue): Section 12.4 of the Supply Agreement provides that "any assignment or transfer of this Agreement, whether by operation of law or otherwise, including any change of control of Supplier, shall require the prior written consent of Customer." This provision is notable because it explicitly covers assignments "by operation of law" and changes of control, leaving no ambiguity about its applicability to the Transaction.

• Customers 6–9 (smaller accounts, aggregate ~9% of revenue): Each contains a standard anti-assignment provision requiring prior written consent, without a reasonableness qualifier.

Recommendations:

(i) Closing Condition. We recommend that the APA include a condition precedent to Buyer's obligation to close requiring receipt of prior written consent to assignment from at least the three (3) top-five customer accounts with consent requirements (Customers A, C, and E). The aggregate revenue represented by these three accounts (approximately $7,668,000 or 36% of product line revenue) is sufficiently material that Crestline should not be obligated to close without these consents in hand.

(ii) Seller's Covenant to Obtain Consents. The APA should include a pre-Closing covenant requiring Seller to use commercially reasonable efforts to obtain written consent to assignment from all seven (7) customers with consent provisions, and to promptly deliver copies of all consent solicitation letters and responses to Buyer.

(iii) Parking/Delayed Assignment Mechanism. For any Assigned Contracts for which the required consent has not been obtained as of the Closing Date (assuming the closing condition described above has been satisfied with respect to the three critical accounts), the APA should include a "parking" or "delayed assignment" mechanism under which Seller would continue to hold the non-consented contract for Buyer's benefit, and Buyer would receive the economic benefits and bear the economic burdens of the contract, pending receipt of consent. This arrangement would be governed by a subcontracting or agency structure that, to the extent practicable, preserves the parties' rights without technically constituting an "assignment" under the contract.

(iv) Priority Action Item. As of the date of this memorandum, no consent solicitation letters have been sent to any of the seven affected customers. We have communicated to Langford, Crewe & Cascade Insurance Brokers that initiating the consent process is a priority item and have requested that Seller provide draft consent solicitation letters for our review within five (5) business days. Given the anticipated Closing Date of January 16, 2023, time is of the essence, particularly for Customer C's contract, which contains an unqualified consent requirement.

D. Contract Review Findings

In addition to the assignability issues discussed above, our review of the twenty-three (23) Assigned Contracts has identified several additional provisions that warrant attention in APA drafting and post-Closing operations:

Most-Favored-Nation (MFN) Pricing Clauses. Several customer contracts contain MFN pricing clauses requiring VCI (and, post-assignment, Crestline) to ensure that the customer receives pricing that is no less favorable than the pricing offered to any other customer for comparable products and volumes. Buyer should evaluate whether Crestline's existing pricing structure across its broader product line could trigger MFN obligations under these contracts. To the extent that Crestline currently offers comparable industrial coatings at lower price points through its existing product lines, the MFN provisions could require downward price adjustments for ProShield customers, potentially impacting post-Closing margins and earnout achievement.

Exclusivity Provisions. Two (2) of the Assigned Contracts contain exclusivity provisions requiring the ProShield Product Line to serve as the sole supplier of industrial coatings to the applicable customer in specified product categories. These exclusivity provisions create reciprocal obligations: the customer agrees to purchase exclusively from ProShield in the designated category, and ProShield agrees not to supply competing products to the customer's competitors in the same category. Buyer must confirm that these exclusivity obligations are consistent with Crestline's existing product line commitments and customer relationships to avoid conflicts of interest or potential breaches. We recommend that the commercial team review these provisions with the Crestline sales organization before Closing.

Termination for Convenience. One contract — with a national food-packaging distributor that is the fourth-largest customer account by revenue (Customer D, approximately $1,491,000 or 7% of FY2021 revenue) — contains a termination-for-convenience clause allowing the customer to terminate the agreement on sixty (60) days' prior written notice, without cause. This provision creates inherent uncertainty regarding the durability of this revenue stream post-Closing. We note that Customer D's contract does not contain a change-of-control consent provision, so assignment to Crestline does not require consent; however, the customer could exercise its termination-for-convenience right at any time, including following the Closing. This risk should be factored into the earnout projection model and discussed with the commercial team.

Warranty and Indemnification Provisions. Several of the larger customer contracts contain product warranty provisions that exceed VCI's standard product warranty (which provides for replacement of non-conforming product only). Two contracts include consequential damages carve-outs from VCI's standard limitation-of-liability clause, and one contract includes a broad indemnification obligation covering product liability claims arising from the use of ProShield coatings in food-contact applications. These enhanced warranty and indemnification obligations will be assumed by Crestline post-Closing and should be reviewed by Crestline's risk management and insurance teams.

V. EMPLOYEES AND EMPLOYMENT MATTERS

A. Transferred Employees

Thirty-four (34) employees are currently associated with the ProShield Product Line and are expected to be included in the Transaction as part of the workforce transition (the "Transferred Employees"). The Transferred Employees are categorized as follows:

Because the Transaction is structured as an asset purchase rather than a stock acquisition, there is no automatic transfer of employment relationships from VCI to Crestline. Each of the thirty-four (34) Transferred Employees is an employee of VCI, and their employment with VCI will terminate at or around the Closing. Crestline will extend offers of employment to all thirty-four (34) employees, with such offers to be made on terms and conditions (including base compensation and benefits) that are, in the aggregate, substantially comparable to the terms currently provided by VCI. The APA should include a covenant requiring Seller to cooperate with Buyer in facilitating the employment transition, including providing Buyer with reasonable access to the Transferred Employees during the pre-Closing period for introductions and onboarding preparation.

We have reviewed the available employee roster and, where provided, individual employment files for the Transferred Employees. Our findings are summarized below.

B. Employment Agreements and Restrictive Covenants

The majority of the production, quality control, and operations/logistics employees are employed on an at-will basis without written employment agreements, consistent with the general rule under New York law that employment is presumed to be at-will unless the parties have agreed otherwise. These employees received standard offer letters at the time of hire setting forth basic terms of employment (position, compensation, start date, and at-will acknowledgment) but did not execute separate employment agreements containing restrictive covenant provisions.

Six (6) of the Transferred Employees, primarily in the R&D/formulation chemistry and sales/account management functions, have executed written employment agreements with VCI that contain non-competition and/or non-solicitation provisions. We have reviewed these six agreements and summarize their key terms as follows:

• Non-Competition Provisions (6 of 6 agreements): Each agreement contains a post-termination non-competition covenant prohibiting the employee from engaging in a competing business (generally defined as the manufacture, sale, or distribution of industrial coatings) for a period of either twelve (12) or eighteen (18) months following termination of employment, within a geographic area of either New York State or a 150-mile radius of the Tonawanda facility.

• Non-Solicitation of Customers (4 of 6 agreements): Four of the six agreements contain post-termination non-solicitation provisions prohibiting the employee from soliciting or servicing customers of the ProShield Product Line for a period of twelve (12) months following termination.

• Non-Solicitation of Employees (3 of 6 agreements): Three of the six agreements contain post-termination non-solicitation provisions prohibiting the employee from soliciting or hiring other VCI employees for a period of twelve (12) months following termination.

• Invention Assignment (4 of 6 agreements): Four of the six agreements contain invention assignment provisions requiring the employee to assign to VCI all inventions, developments, and intellectual property created during the course of employment. The remaining two agreements contain confidentiality provisions but not explicit invention assignment clauses. As noted in Section III.B above, the absence of invention assignment provisions in certain employee agreements is a broader issue across the formulation development team.

Assignment of Employee Restrictive Covenants. The employee non-competition and non-solicitation provisions in these six agreements run in favor of VCI as the employer. Upon the transfer of these employees to Crestline, the question arises whether VCI's rights under these covenants can be effectively assigned to Buyer as part of the Transferred Assets.

Under New York law, the assignability of non-competition covenants in the employment context is a somewhat unsettled area. Courts have generally held that non-competition agreements are assignable in connection with the sale of a business as a going concern, particularly where the restrictive covenant is ancillary to the sale of goodwill. See, e.g., Purchasing Associates, Inc. v. Weitz, 13 N.Y.2d 267 (1963). However, some authority suggests that the enforceability of an assigned non-compete may depend on the specific terms of the agreement and whether the assignment is consistent with the employee's reasonable expectations at the time the covenant was executed.

Recommendation: To address this uncertainty, we recommend a two-track approach: (i) the APA should include a provision assigning to Buyer all of VCI's rights under the six employee employment agreements, including the restrictive covenant provisions; and (ii) Crestline should require each of the six affected employees to execute new employment agreements with Crestline at the time offers of employment are extended, containing updated restrictive covenant provisions that are consistent with Crestline's standard form and that are supported by adequate consideration (i.e., the offer of employment by Crestline and any related signing or retention bonuses). This belt-and-suspenders approach maximizes the likelihood that enforceable restrictive covenants will be in place post-Closing.

We also recommend that the APA include a covenant from Seller prohibiting VCI (and the Seller Principals personally) from soliciting or hiring back any Transferred Employee for a period of at least three (3) years following the Closing Date. Given Frederick G. Voss's and Elena M. Voss's ongoing involvement with VCI's remaining product lines, the risk of VCI re-recruiting key formulation chemists or sales personnel is not merely theoretical, and a robust anti-poaching covenant is essential to protect Crestline's investment.

C. Employee Benefits

VCI currently maintains the following employee benefit plans in which Transferred Employees participate:

• 401(k) Retirement Plan. VCI sponsors a 401(k) defined contribution plan for eligible employees. VCI provides a discretionary employer match of up to 3% of eligible compensation. There are no outstanding compliance issues identified with respect to the 401(k) plan.

• Group Health Insurance. VCI provides group health insurance coverage (medical, dental, and vision) to eligible employees through a fully insured group plan underwritten by a major commercial carrier. No self-funded or minimum premium arrangements are in place.

• Other Benefits. VCI provides standard employee benefits including life insurance, short-term and long-term disability insurance, paid time off, and paid holidays, all of which are governed by VCI's standard employee handbook and benefits policies.

Because the Transaction is structured as an asset purchase, employee benefit plan liabilities are excluded liabilities and will not be assumed by Crestline. Transferred Employees who accept offers of employment from Crestline will be enrolled in Crestline's existing benefit plans effective as of their start date with Crestline. We recommend that the APA include a covenant from Buyer providing that Crestline will recognize prior service with VCI for purposes of eligibility, vesting, and benefit accrual under Crestline's benefit plans (but not for purposes of benefit accrual under any defined benefit plan, as Crestline does not maintain such a plan).

We have confirmed that VCI does not maintain any defined benefit pension plan, retiree medical plan, or other post-employment benefit arrangement that could give rise to unfunded liabilities or withdrawal obligations. No multi-employer plan contributions have been identified.

Our review of the data room materials and Seller's due diligence responses has not identified any pending complaints or charges filed with the Equal Employment Opportunity Commission (EEOC), any pending or recent Occupational Safety and Health Administration (OSHA) citations or investigations at the Tonawanda facility, or any pending or threatened labor disputes, union organizing activities, or unfair labor practice charges. The Transferred Employees are not represented by a labor union and are not covered by any collective bargaining agreement.

D. WARN Act Considerations

The Worker Adjustment and Retraining Notification Act of 1990, as amended (the "WARN Act"), requires employers with 100 or more employees to provide at least sixty (60) days' advance written notice before a "plant closing" or "mass layoff" as defined under the statute. New York State has its own mini-WARN statute (N.Y. Lab. Law § 860-a et seq.), which applies to employers with fifty (50) or more employees and also requires ninety (90) days' advance notice.

The Transaction is not expected to trigger WARN Act or New York mini-WARN notice requirements because Crestline intends to offer employment to all thirty-four (34) Transferred Employees at Closing, and VCI will continue to operate its remaining product lines with its remaining workforce at the Tonawanda facility and other locations. However, if any significant number of Transferred Employees decline Crestline's offers of employment, or if VCI separately reduces headcount at the Tonawanda facility in connection with the Transaction, the parties should monitor the cumulative headcount reductions at the facility to assess WARN compliance. We recommend that the APA include mutual cooperation covenants regarding WARN compliance, and that Seller represent and warrant that VCI has not effectuated any plant closing or mass layoff within the ninety (90) day period preceding the anticipated Closing Date that, when aggregated with any employment losses resulting from the Transaction, could trigger WARN obligations.

E. Key Employee Risk

Two individuals present particular key-employee risk for the Transaction:

Frederick G. Voss. Mr. Voss has served as President and CEO of VCI since its founding in 1987 and has cultivated personal relationships with many of the ProShield Product Line's major customers over a period of more than thirty (30) years. Several of the top-five customer accounts were originated by Mr. Voss personally, and our discussions with the commercial team indicate that Mr. Voss remains the primary point of contact for these accounts. Mr. Voss's personal goodwill and customer relationships represent a significant component of the value being acquired in this Transaction, and the loss of these relationships post-Closing — whether through customer attrition or through Mr. Voss's active or passive competition — could materially impair Crestline's ability to retain key customers and achieve the earnout targets.

Elena M. Voss. Ms. Voss has served as Vice President of Operations since approximately 1995 and possesses deep operational and technical knowledge of the ProShield manufacturing process, quality control procedures, and formulation specifications. Her institutional knowledge is particularly important during the transition period, when Crestline's operations team will need to assume responsibility for the day-to-day manufacturing operations at the Tonawanda facility.

Recommendation: The non-competition and non-solicitation obligations of both Frederick G. Voss and Elena M. Voss are critical to protecting the value of the acquired business and ensuring achievement of the earnout milestones. We recommend the following terms, to be negotiated and included in the APA as obligations of the Seller Principals:

• Non-Competition Covenant: Four (4) year non-competition period covering the specialty industrial coatings market (including polymer-modified epoxy and acrylic latex coatings for packaging, container, and industrial applications) in the United States and Canada. The proposed scope is consistent with the geographic reach of the ProShield Product Line and the Voss principals' industry relationships.

• Non-Solicitation of Customers: Three (3) year non-solicitation period covering all customers and prospective customers of the ProShield Product Line as of the Closing Date and during the twenty-four (24) month period preceding the Closing Date.

• Non-Solicitation of Employees: Three (3) year non-solicitation period covering all Transferred Employees and all other employees of Crestline (or any of its affiliates) who become involved in the ProShield Product Line post-Closing.

• Enforceability: Under New York law, non-competition covenants entered into in connection with the sale of a business are subject to a more lenient standard of review than non-competes in the pure employment context. Courts will enforce such covenants so long as they are reasonable in scope, duration, and geographic reach and are necessary to protect the buyer's legitimate business interests in the acquired goodwill. See, e.g., Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276 (1981); Vane Kaplan CPAs LLP Seidman v. Hirshberg, 93 N.Y.2d 382 (1999). We believe the proposed terms are reasonable and enforceable under this standard, given the nationwide scope of the ProShield Product Line and the extended period needed to transition customer relationships.

• Structure: The restrictive covenants should be structured as standalone, affirmative obligations of the Seller Principals (not merely as representations or warranties) and should include provisions for injunctive relief, acknowledging that a breach of the restrictive covenants would cause irreparable harm to Buyer that cannot be adequately compensated by monetary damages alone.

VI. ENVIRONMENTAL MATTERS

A. Tonawanda Facility

The ProShield Product Line is manufactured at VCI's facility located at 790 Niagara Falls Boulevard, Tonawanda, NY 14150 (the "Facility" or the "Tonawanda Facility"). The Facility comprises approximately 42,000 square feet of manufacturing, laboratory, warehouse, and office space situated on a parcel of approximately 3.5 acres in an area zoned for industrial use.

The Facility is leased by VCI from Niagara Industrial Realty LLC ("NIR"), a New York limited liability company with its principal office at 1600 Genesee Street, Suite 100, Buffalo, NY 14211. VCI has occupied the Facility under its current lease since approximately 2005. As discussed in Section VII below, Crestline is negotiating a new direct lease with NIR rather than assuming VCI's existing lease.

Crestline has engaged Northbridge Environmental Consulting Group LLC ("Northbridge"), with Aaron Lindquist, P.E. serving as project manager, to conduct a Phase I environmental site assessment of the Tonawanda Facility in accordance with ASTM Standard E1527-21. The Phase I assessment commenced with a site visit on October 19, 2022, and the final Phase I report is expected to be delivered by approximately November 4, 2022. We are awaiting the Northbridge report before finalizing our environmental risk allocation recommendations.

B. Preliminary Environmental Findings

Pending receipt of the Northbridge Phase I report, we have conducted a preliminary review of publicly available environmental databases and regulatory records relating to the Tonawanda Facility, as well as VCI's environmental disclosures in the data room. Our preliminary findings are as follows:

Federal and State Database Searches. The Tonawanda Facility is not listed on the following federal and state environmental databases:

• National Priorities List (NPL / Superfund)

• CERCLIS (Comprehensive Environmental Response, Compensation, and Liability Information System)

• RCRA CORRACTS (Resource Conservation and Recovery Act Corrective Action) list

• New York State Inactive Hazardous Waste Disposal Site Registry (commonly referred to as the New York State Superfund list)

• New York State Brownfield Cleanup Program list

The absence of listings on these databases is a favorable indicator, as it suggests that the Facility has not been identified by federal or state environmental regulators as a site requiring investigation or remediation under the applicable hazardous waste or cleanup programs.

Historical Use of Hazardous Materials. VCI has disclosed that certain volatile organic compounds ("VOCs") and solvents are used in the coating manufacturing process at the Tonawanda Facility. VOCs and solvents are common inputs in industrial coating manufacturing and are subject to regulation under federal and state environmental laws, including the Clean Air Act (air emissions), the Clean Water Act and applicable state SPDES permitting requirements (wastewater discharge), and RCRA (hazardous waste generation and management). VCI has represented in its due diligence responses that its operations at the Tonawanda Facility are conducted in compliance with all applicable environmental laws and regulations, including the following permits:

• Air Emissions Permits: VCI holds air emissions permits issued by the New York State Department of Environmental Conservation ("NYSDEC") authorizing VOC emissions from the coating manufacturing process. VCI

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Harrison Wexford, Partner, Calderwood & Harkness LLP Derek Amato, General Counsel, Crestline Packaging Solutions LLC
FROM: Ryan Kowalski, Lead Associate, and Megan Chu, Working Associate, Calderwood & Harkness LLP
DATE: October 28, 2022
RE: Summary of Key Legal Due Diligence Findings — Proposed Acquisition of ProShield Industrial Coatings Product Line from Voss Chemical Industries, Inc.
MATTER NO.: 1006-00007
Right-click to update Table of Contents
I. EXECUTIVE SUMMARY
Calderwood & Harkness LLP ("C&H") has been retained by Crestline Packaging Solutions LLC ("Crestline" or "CPS"), a Delaware limited liability company headquartered at 4100 Rockside Road, Suite 300, Independence, OH 44131, as buyer's counsel in connection with the proposed asset purchase of substantially all assets comprising the ProShield Industrial Coatings product line (the "ProShield Product Line" or the "Business") from Voss Chemical Industries, Inc. ("Voss" or "VCI"), a New York corporation headquartered at 790 Niagara Falls Boulevard, Tonawanda, NY 14150 (the "Transaction").
Crestline is a portfolio company of Kestrel Capital Partners Fund III, LP, a Delaware limited partnership (GP: Cobalt Ridge Partners Management III, LLC) with its principal office at 200 Clarendon Street, 48th Floor, Boston, MA 02116 ("Ashgrove Equity Partners" or the "Sponsor"). The acquisition of the ProShield Product Line is part of Crestline's broader growth strategy to expand its specialty industrial coatings capabilities and customer base in the packaging and industrial end-markets, and has been approved by the Ashgrove Equity Partners investment committee, subject to satisfactory completion of all legal, financial, tax, and environmental due diligence.
The Transaction contemplates a base purchase price of $18,000,000, comprising $14,500,000 in cash payable at Closing, a $2,000,000 indemnification escrow (to be held by Pinnacle Trust Company, N.A. pursuant to a separate Escrow Agreement), and a volume-based earnout of up to $3,500,000 over a twenty-four (24) month measurement period following the Closing Date. The maximum total consideration payable by Crestline in connection with the Transaction is $20,000,000, assuming full achievement of all earnout milestones.
Legal due diligence commenced on October 10, 2022, following the execution of a binding Letter of Intent between the parties dated October 3, 2022. VCI and its counsel, Langford, Crewe & Cascade Insurance Brokers, have made available a virtual data room (hosted on Thackeray Solutions, Project Name "Vulcan") containing approximately 2,400 documents organized into 14 primary folders. This memorandum summarizes the findings and observations of C&H's legal due diligence review through October 28, 2022. Additional documents and supplemental responses to our diligence request list remain outstanding, and our review is ongoing. This memorandum will be updated as additional materials are received and analyzed.
In parallel with our legal review, the following advisors have been engaged by Crestline to conduct their respective workstreams:
• Financial and Tax Due Diligence: Halcyon Chartered Accountants LLP (engagement partner Martin Szabo, CPA), 1301 East 9th Street, Suite 2400, Cleveland, OH 44114, is conducting financial quality-of-earnings and tax due diligence on the ProShield Product Line. Halcyon's preliminary findings have been shared with our legal team, and we are coordinating to ensure that financial observations are appropriately reflected in the representations, warranties, and disclosure schedules of the Asset Purchase Agreement.
• Environmental Due Diligence: Northbridge Environmental Consulting Group LLC (project manager Aaron Lindquist, P.E.) has been engaged by Crestline to conduct a Phase I environmental site assessment of the Tonawanda manufacturing facility at 790 Niagara Falls Boulevard, Tonawanda, NY 14150. The Phase I report is expected by approximately November 4, 2022, and will inform our final recommendations on environmental risk allocation in the APA.
We note that the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), does not require a pre-merger notification filing in connection with this Transaction. The total deal value of $18,000,000 (or $20,000,000 maximum with full earnout) falls below the applicable size-of-transaction reporting threshold currently in effect for calendar year 2022.
Overall Assessment. The ProShield Product Line presents a commercially attractive acquisition target for Crestline. The product line's revenue has grown consistently over the past three fiscal years (from $18.7M in FY2020 to an estimated $22.8M in FY2022), gross margins have improved from 38.2% to an estimated 40.0% over the same period, and the portfolio of 47 proprietary coating formulations provides meaningful competitive differentiation. However, our legal due diligence has identified several issues that require careful attention in APA drafting and negotiation, and which should inform the commercial terms of the Transaction. The key risk areas are as follows:
1. Customer Contract Assignability / Change-of-Control Consent Requirements. Seven (7) of the twenty-three (23) active supply agreements included in the Transferred Assets contain anti-assignment or change-of-control consent provisions. Three (3) of these are among the top five (5) customer accounts by revenue, creating meaningful execution risk.
2. Customer Concentration Risk. The top five (5) customer accounts represent approximately 58% of ProShield Product Line revenue, concentrating Crestline's post-Closing revenue base and, critically, the earnout measurement in a limited number of commercial relationships.
3. Environmental Conditions at the Tonawanda Facility. While preliminary database searches have not identified the facility on any federal or state priority remediation lists, VCI's historical use of volatile organic compounds and solvents, together with the 2018 underground storage tank removal, warrant thorough environmental review. Final assessment is pending receipt of the Northbridge Phase I report.
4. IP Chain-of-Title Completeness. Approximately eight (8) of the forty-seven (47) proprietary formulations were developed by former employees who signed only general employment agreements lacking specific invention assignment or work-for-hire clauses. Additionally, approximately five (5) formulations were co-developed with a raw material supplier under a joint development agreement that includes notice/consent requirements upon assignment or change of control.
5. Employee Transition Mechanics. As an asset purchase, there is no automatic transfer of employment. Crestline will need to extend offers to thirty-four (34) product line employees, address restrictive covenant assignment issues, and manage the transition of personnel from VCI's benefit plans to Crestline's plans, all while preserving continuity of manufacturing operations and customer relationships.
Each of these issues is discussed in detail in the sections that follow, together with our recommendations for addressing them through the APA, ancillary agreements, and closing conditions.
II. CORPORATE ORGANIZATION AND AUTHORITY OF SELLER
A. Entity Status and Good Standing
Voss Chemical Industries, Inc. is a New York business corporation that was originally incorporated under the laws of the State of New York in 1987 by the Voss family. VCI has been continuously in existence since its date of incorporation and, based on our preliminary review, has maintained its corporate status in good standing throughout the relevant period. VCI's registered agent for service of process is Voss Chemical Industries, Inc., c/o Frederick Voss, 790 Niagara Falls Boulevard, Tonawanda, NY 14150. VCI's Employer Identification Number (EIN) is 16-2847103.
We have conducted a preliminary check with the New York Department of State, Division of Corporations, which confirms that VCI is currently in "active" status. Our review of available franchise tax filing records indicates that VCI is current on its New York State franchise tax obligations. As a closing deliverable, we recommend that the APA require Seller to deliver a current certificate of good standing (or equivalent certificate of status) from the New York Secretary of State, dated within ten (10) business days of the Closing Date. We will verify VCI's status again promptly prior to Closing.
VCI does not appear to be qualified as a foreign corporation in any state other than New York, although we have requested confirmation from Seller's counsel as to whether VCI has operations, employees, or property in any other jurisdiction that would require foreign qualification. This inquiry remains outstanding as of the date of this memorandum.
B. Ownership and Capitalization
Based on our review of VCI's corporate records, including its Certificate of Incorporation (as amended), bylaws, and stock transfer ledger, 100% of VCI's issued and outstanding common stock is held by members of the Voss family, as follows:
VCI's Certificate of Incorporation authorizes the issuance of 5,000 shares of common stock, par value $1.00 per share. Of these, 1,000 shares are issued and outstanding, all of which are held by the Voss family as described above. No shares are held in treasury.
Our review has confirmed that there are no outstanding options, warrants, convertible securities, stock appreciation rights, phantom equity, or other instruments that would entitle any person to acquire or receive equity interests in VCI. There are no voting trusts, voting agreements, proxies, or other arrangements affecting the voting of VCI's capital stock. We have not identified any shareholder agreement, buy-sell agreement, right of first refusal, co-sale agreement, or other contractual restriction that would restrict or limit VCI's ability to sell assets or consummate the Transaction.
We note that Frederick G. Voss and Elena M. Voss appear to be the sole directors and officers of VCI, which simplifies the corporate governance analysis for purposes of transaction authorization. We have requested copies of VCI's complete minute book and will review minutes of all board and shareholder meetings for the preceding five (5) years to confirm that no inconsistent actions have been taken and that VCI's corporate formalities have been properly observed.
C. Authority to Consummate Transaction
As a New York business corporation, VCI requires authorization by its Board of Directors to consummate the sale of the ProShield Product Line assets. The relevant question under New York law is whether the proposed asset sale also requires shareholder approval.
Under Section 909 of the New York Business Corporation Law ("NY BCL § 909"), a sale, lease, exchange, or other disposition of all or substantially all of a corporation's assets requires authorization by the holders of two-thirds of the outstanding shares entitled to vote. The threshold question is whether the ProShield Product Line constitutes "all or substantially all" of VCI's assets. New York courts have generally applied both quantitative and qualitative tests in making this determination, considering factors such as the percentage of revenue, assets, and earnings attributable to the business being sold, as well as whether the disposition leaves the corporation without a significant continuing business activity. See, e.g., Katz v. Bregman, 431 A.2d 1274 (Del. Ch. 1981) (while a Delaware case, frequently cited by New York courts for its analytical framework); Hollinger Inc. v. Hollinger International, Inc., 858 A.2d 342 (Del. Ch. 2004).
Based on the financial data provided by VCI and subject to verification by Halcyon, the ProShield Product Line represents the following proportion of VCI's overall business:
• Revenue: Approximately $21.3 million of VCI's total consolidated revenue of approximately $64 million in FY2021, representing approximately 33% of total revenue.
• Assets: The Transferred Assets (equipment, inventory, IP, contracts) have an estimated aggregate value of approximately $18 million (based on the negotiated purchase price), against VCI's total asset base. VCI will retain its automotive coatings and architectural coatings product lines, together with associated assets.
• Employees: Thirty-four (34) of VCI's total workforce of approximately 120 employees are associated with the ProShield Product Line, representing approximately 28% of total headcount.
Since the ProShield Product Line represents only approximately one-third of VCI's consolidated revenue and VCI will continue to operate its remaining specialty coatings business lines (automotive coatings and architectural coatings), it is our view that the proposed Transaction does not constitute a sale of "all or substantially all" of VCI's assets within the meaning of NY BCL § 909, and accordingly, formal shareholder approval is not required under that provision. VCI will continue as an operating company following the Closing, with approximately two-thirds of its pre-Transaction revenue base intact and with meaningful continuing business activity across its remaining product lines.
Notwithstanding this analysis, any residual risk associated with the shareholder approval question is effectively mitigated by the fact that Frederick G. Voss (holding 62% of VCI's outstanding shares) and Elena M. Voss (holding 38% of VCI's outstanding shares) are the sole shareholders of VCI and will each personally sign the APA as "Seller Principals" for purposes of the indemnification, non-competition, non-solicitation, and other personal obligations contemplated by the Transaction. Their personal execution of the APA constitutes, in practical effect, the equivalent of unanimous shareholder consent to the Transaction.
We recommend that the following corporate governance deliverables be included as conditions to Closing:
(i) Certified copies of resolutions of VCI's Board of Directors authorizing the execution, delivery, and performance of the APA and all ancillary agreements, and the consummation of all transactions contemplated thereby;
(ii) A certificate of the Secretary (or Assistant Secretary) of VCI certifying the incumbency and specimen signatures of the officers executing the APA and ancillary documents on behalf of VCI; and
(iii) A certificate of good standing from the New York Secretary of State, dated within ten (10) business days of the Closing Date.
D. Seller's Counsel
Langford, Crewe & Cascade Insurance Brokers represents VCI in connection with the Transaction. The lead partner on the engagement is Patricia Okonkwo, Esq., with associate James T. Rinaldi, Esq. serving as the primary working-level contact. Langford, Crewe & Cascade Insurance Brokers's offices are located at 120 Delaware Avenue, Suite 900, Buffalo, NY 14202. We have been in regular communication with Ms. Okonkwo and Mr. Rinaldi throughout the due diligence process, and they have been generally responsive to our document requests and inquiries, although several items on our supplemental diligence request list remain outstanding.
VCI's tax advisor is Ridgeway & Associates, P.C. (principal Denise Ridgeway, CPA), located at 95 Franklin Street, Suite 400, Buffalo, NY 14202. Ridgeway & Associates has been VCI's outside tax advisor since approximately 2009 and has been coordinating with Halcyon Chartered Accountants LLP on the tax due diligence workstream.
III. INTELLECTUAL PROPERTY
The intellectual property assets of the ProShield Product Line represent a significant component of the Transaction's value proposition. Our review has focused on: (i) the ProShield trademark; (ii) the portfolio of forty-seven (47) proprietary coating formulations maintained as trade secrets; and (iii) the overall chain of title and freedom from encumbrances of the Transferred IP. The following summarizes our findings and recommendations.
A. ProShield Trademark
The "ProShield" trademark is registered with the United States Patent and Trademark Office ("USPTO") under U.S. Registration No. 2,876,411. The mark is registered in International Class 002 for industrial coatings, including polymer-modified epoxy coatings, acrylic latex coatings, and related specialty coating products. The mark is currently in active/live status on the USPTO register.
The trademark is registered in the name of Voss Chemical Industries, Inc. as the sole owner. We have reviewed the USPTO records for the mark and have confirmed the following:
• Renewal Status: The trademark appears current on all required maintenance filings, including the Section 8 Declaration of Continued Use and the Section 9 Renewal Application under the Lanham Act. Based on the registration date, the next renewal filing is not due until 2027.
• Oppositions and Cancellation Proceedings: No pending opposition or cancellation proceedings were identified in the USPTO Trademark Trial and Appeal Board (TTAB) records. No such proceedings have been identified in Seller's disclosure.
• Infringement Claims: VCI has represented in its due diligence responses that there are no pending or, to Seller's knowledge, threatened claims of trademark infringement, dilution, or unfair competition relating to the ProShield mark. We have not independently identified any such claims.
• Prior Assignments: No prior assignments of the ProShield mark have been recorded with the USPTO Assignment Recordation Branch.
We recommend that the APA include a specific trademark assignment, in the form of a standalone IP Assignment Agreement to be executed at Closing and recorded with the USPTO Assignment Recordation Branch promptly following the Closing Date. The trademark assignment should include the associated goodwill of the business, consistent with the requirements of Lanham Act § 10(a)(1), 15 U.S.C. § 1060(a)(1), to ensure the validity of the assignment. We further recommend that Seller provide comprehensive representations in the APA regarding the absence of infringement claims, sole ownership of the ProShield mark, the validity and enforceability of the registration, the absence of any license, sublicense, or covenant not to sue in favor of any third party, and the sufficiency of the mark for the operation of the ProShield Product Line as currently conducted.
B. Proprietary Formulations and Trade Secrets
The ProShield Product Line includes a portfolio of forty-seven (47) proprietary coating formulations, spanning a range of polymer-modified epoxy and acrylic latex coatings designed for industrial packaging, container, and protective coating applications. These formulations are the core technical foundation of the product line and represent significant competitive value. VCI maintains these formulations as trade secrets rather than pursuing patent protection, a strategy that is common in the specialty coatings industry and provides indefinite protection so long as adequate confidentiality measures are maintained.
We have reviewed VCI's trade secret protection practices, including the following measures:
(i) Restricted Access to Formulation Databases. VCI maintains its formulation data in a proprietary database system with role-based access controls. Access to specific formulations is limited to employees with a demonstrated need-to-know based on their job function. Database access logs are maintained for audit purposes.
(ii) Employee Confidentiality and Invention Assignment Agreements. VCI requires employees with access to formulation data to execute confidentiality and invention assignment agreements upon hiring. We have reviewed a sample of these agreements, as discussed further below.
(iii) Physical Security Measures. The Tonawanda R&D laboratory, where formulation development and testing activities are conducted, is secured with key-card access controls, security cameras, and visitor sign-in protocols. Formulation batch sheets and laboratory notebooks are maintained in locked cabinets within the laboratory.
(iv) Vendor and Customer Confidentiality. VCI requires raw material suppliers and customers who receive formulation-specific technical data to execute confidentiality agreements. We have reviewed a sample of these agreements and found them to be generally consistent with industry standards.
Issue Identified: Invention Assignment Documentation Gaps. While VCI's current trade secret protection program is generally consistent with industry standards, our review has identified an area of concern relating to the completeness of invention assignment documentation for certain formulations. Specifically, approximately eight (8) of the forty-seven (47) proprietary formulations were developed by former employees who signed only general employment agreements that did not contain specific invention assignment or work-for-hire clauses. These employees have since departed VCI, and in several cases, the employment files are incomplete.
Under New York common-law principles governing employer ownership of inventions, an employer generally owns inventions created by an employee within the scope of employment, using the employer's resources, and related to the employer's business, even in the absence of a written invention assignment agreement. See, e.g., United States v. Dubilier Condenser Corp., 289 U.S. 178 (1933); Restatement (Third) of Unfair Competition § 42. Accordingly, we believe that VCI has a strong basis for claiming ownership of these eight formulations, as they were developed by employees during their employment with VCI, using VCI's laboratory facilities and raw materials, and in furtherance of VCI's coating formulation business. However, the absence of explicit written assignments creates a potential vulnerability that could be exploited by a former employee or a third party in a dispute over ownership.
We note that the risk of a former employee coming forward to assert ownership claims appears to be low based on the information currently available. Several of these employees departed VCI more than five years ago, and VCI has represented that it is not aware of any claims or threats of claims by any former employee relating to formulation ownership. Nonetheless, the absence of clear written documentation creates an inherent uncertainty that should be addressed in the Transaction documents.
Recommendation: We recommend that the APA include: (i) a broad intellectual property representation from Seller warranting that VCI is the sole and exclusive owner of all Transferred IP, including all proprietary formulations, free and clear of all liens, claims, and encumbrances; (ii) a specific indemnification obligation covering any losses arising from IP ownership claims by former employees or third parties; and (iii) inclusion of the IP ownership representations within the category of Fundamental Representations entitled to the extended thirty-six (36) month survival period. Additionally, Buyer may wish to consider whether the buyer-side R&W insurance policy from Coventry Mutual Insurance Co. should be structured to specifically cover this identified risk.
Customer-Specific Formulation Libraries. The Transferred Assets also include customer-specific formulation libraries — i.e., proprietary formulations that have been developed or customized for specific ProShield customers over the course of the commercial relationship. These customer-specific formulations represent significant customer-retention value, as they create switching costs for customers who have qualified ProShield products in their manufacturing processes. We recommend that the APA clearly define the Transferred IP to include all customer-specific formulations and associated technical data, and that Seller represent that no customer has any ownership interest in or license to use any such formulation independent of its supply relationship with the ProShield Product Line.
C. IP Assignment Chain
We have reviewed the chain of title for the ProShield trademark and the formulation portfolio to identify any prior assignments, licenses, liens, or other encumbrances that could affect Buyer's post-Closing rights.
ProShield Trademark. As noted in Section III.A above, no prior assignments, licenses to third parties, or encumbrances have been identified on the ProShield trademark. The mark appears to have been registered by VCI at the time of initial application and has remained in VCI's name continuously since registration. No security interests or liens on the trademark have been recorded with the USPTO.
Joint Development Agreement — Co-Developed Formulations. Our review has identified that approximately five (5) of the forty-seven (47) proprietary formulations were co-developed with a raw material supplier pursuant to a Joint Development Agreement dated April 14, 2014 (the "JDA"). The co-development partner is a specialty chemical supplier whose identity is subject to confidentiality restrictions in the data room; for purposes of this memorandum, we refer to this party as the "JDA Partner."
Under the terms of the JDA, VCI was granted exclusive rights to use and commercialize the resulting formulations in the industrial coatings market, while the JDA Partner retained the right to supply the underlying specialty raw materials used in the formulations. The JDA contains the following provisions that are relevant to the Transaction:
(i) Assignment/Change of Control Notice. Section 8.3 of the JDA requires VCI to provide written notice to the JDA Partner not less than thirty (30) days prior to any assignment of VCI's rights under the JDA or any change of control of VCI. While the Transaction is structured as an asset purchase rather than a change of control of VCI, the assignment of the formulation rights and the JDA itself to Crestline would constitute an assignment within the meaning of Section 8.3.
(ii) Consent to Assignment. Section 8.4 of the JDA provides that the JDA Partner's consent to any such assignment "shall not be unreasonably withheld, conditioned, or delayed." This is a favorable provision, as it limits the JDA Partner's ability to block the assignment. However, the JDA Partner's consent must still be formally obtained.
(iii) Right of First Offer. Section 8.5 of the JDA grants the JDA Partner a right of first offer to acquire VCI's rights under the JDA in the event of a proposed assignment to a competitor of the JDA Partner. We do not believe that Crestline is a competitor of the JDA Partner, but this provision should be reviewed with the commercial team to confirm.
Recommendation: The JDA notice and consent requirement must be addressed as part of the Transaction. We recommend that: (i) the APA include a pre-Closing covenant requiring Seller to deliver the required notice to the JDA Partner and to use commercially reasonable efforts to obtain the JDA Partner's written consent to the assignment; (ii) receipt of the JDA Partner's consent be included as a condition precedent to Closing (or, alternatively, that a "parking" arrangement be established if consent is not obtained prior to Closing, under which Seller would hold the JDA rights for Buyer's benefit pending receipt of consent); and (iii) Seller represent and warrant that the co-developed formulations are included within VCI's exclusive commercialization rights under the JDA and that VCI is not in breach or default of any obligations under the JDA.
Third-Party Software. We have confirmed that no open-source software, third-party software, or embedded code is utilized in any formulation or manufacturing process control system in a manner that would create encumbrance issues, license obligations, or restrictions on transfer or use by Crestline post-Closing.
D. IP Representations for APA
Based on our diligence findings, we recommend that the APA include comprehensive intellectual property representations and warranties from Seller, covering at a minimum the following subjects:
(i) Seller's sole and exclusive ownership of all Transferred IP, free and clear of all liens, claims, encumbrances, and security interests;
(ii) No infringement, misappropriation, or other violation of any third party's intellectual property rights by the Transferred IP or by the operation of the ProShield Product Line as currently conducted;
(iii) No pending or, to Seller's knowledge, threatened claims, actions, or proceedings alleging infringement, misappropriation, or violation of any intellectual property rights by or against VCI with respect to the ProShield Product Line;
(iv) Sufficiency of the Transferred IP to operate the ProShield Product Line substantially as currently conducted, without reliance on any intellectual property retained by Seller or owned by any third party (other than commercially available, off-the-shelf software);
(v) Validity and enforceability of the ProShield trademark registration, and the absence of any pending or threatened challenges to the validity or enforceability of any Transferred IP;
(vi) Adequacy of VCI's trade secret protection measures, including that Seller has taken commercially reasonable steps to protect the confidentiality of all trade secrets included in the Transferred IP; and
(vii) Completeness and accuracy of the IP schedule to be attached to the APA, listing all Transferred IP.
We further recommend that the IP representations be classified as Fundamental Representations with the extended thirty-six (36) month survival period, given the central importance of the formulation portfolio to the value of the Transaction and the identified documentation gaps discussed in Section III.B above.
IV. CUSTOMER CONTRACTS
A. Overview of Assigned Contracts
The Transferred Assets include twenty-three (23) active supply agreements (the "Assigned Contracts") between VCI and customers of the ProShield Product Line. These agreements govern the sale and supply of ProShield-branded industrial coatings to customers operating in the packaging, container, industrial manufacturing, and food-processing industries.
We have obtained and reviewed copies of all twenty-three (23) Assigned Contracts from the data room. The contracts are generally structured as one- to three-year supply agreements with automatic renewal provisions (typically for successive one-year terms unless either party provides notice of non-renewal within a specified period, usually ninety (90) days prior to the expiration of the then-current term). Several of the larger contracts include annual volume commitments (either as binding minimum purchase obligations or as non-binding volume forecasts used for capacity planning purposes) and pricing formulae tied to published raw material indices (such as the ICIS Chemical Business or Purchasing Magazine indices for key resin and solvent inputs), with periodic price adjustment mechanisms.
The Assigned Contracts vary in sophistication and formality. The larger customer accounts are governed by multi-page negotiated supply agreements with detailed terms addressing pricing, volume, quality specifications, delivery, warranty, indemnification, limitation of liability, force majeure, and termination. Several of the smaller customer accounts are governed by simpler purchase order terms or letter agreements. We recommend that the APA include a schedule of Assigned Contracts with material terms summarized, and that Seller represent that the scheduled contracts constitute all contracts used in or related to the ProShield Product Line.
B. Customer Concentration
Our review has confirmed that the ProShield Product Line's revenue base is meaningfully concentrated among a limited number of customer accounts. Based on Seller's disclosures and FY2021 financial data provided to Halcyon, the top five (5) customer accounts represent approximately 58% of ProShield Product Line revenue, as follows:
Note: Customer names are redacted in this memorandum and are identified by letter designation. A separate key linking letter designations to customer names is maintained in the working files and will be provided to the deal team under separate cover.
This level of customer concentration presents meaningful commercial risk. The loss of any one of the top three customers — particularly Customer A, which alone represents 20% of product line revenue — could materially impair the economics of the acquisition, both in terms of ongoing revenue and in terms of the volume-based earnout measurement. We note that the earnout threshold of 2,400,000 gallons over the 24-month Earnout Period implies a run rate substantially consistent with FY2021 volumes; the loss of Customer A alone could reduce annual gallons shipped by approximately 300,000 gallons, potentially jeopardizing achievement of the earnout threshold.
Recommendation: We recommend the following measures to mitigate customer concentration risk:
(i) Customer Estoppel Certificates. Crestline should obtain customer estoppel certificates or written confirmations of intent to continue the business relationship post-Closing from at least the top five (5) customer accounts. These estoppel certificates should confirm the existence and good standing of the supply agreement, the absence of any material disputes or defaults, and the customer's expectation of continuing to purchase ProShield products following the Transaction.
(ii) Customer Introduction and Transition. At a minimum, Seller should be required under the Transition Services Agreement (and/or under a pre-Closing covenant in the APA) to facilitate personal introductions between Crestline management and key decision-makers at each of the top five (5) customer accounts during the transition period following Closing. Frederick G. Voss's personal relationships with several of these customers make his active participation in the customer transition process essential.
(iii) Earnout Protection. The earnout measurement provisions in the APA should be drafted with appropriate protections for both parties, including anti-diversion provisions (prohibiting Buyer from redirecting ProShield customer volumes to competing CPS product lines for the primary purpose of reducing earnout payments) and reasonable reporting and audit obligations. These are discussed further in Section XII.C below.
C. Assignability and Change-of-Control Provisions
Key Issue. Of the twenty-three (23) active supply agreements included in the Transferred Assets, seven (7) contain anti-assignment or change-of-control consent provisions that require the customer's prior written consent before VCI may assign its rights and obligations under the contract to a third party. This is a significant issue in the context of an asset purchase transaction.
Under New York law, which governs all but two of the Assigned Contracts, an asset purchase transaction in which the buyer assumes the seller's contracts constitutes an assignment by operation of law. Anti-assignment provisions are generally enforceable under New York law, and an assignment in violation of such a provision may give the non-assigning party grounds to terminate the contract or refuse to perform. See N.Y. Gen. Oblig. Law § 13-101; Macklowe v. 42nd Street Development Corp., 170 A.D.2d 388 (1st Dep't 1991). Accordingly, Crestline's assumption of these seven contracts without obtaining the required consents could expose Crestline to the risk that the customer could refuse to honor the contract, claim breach, or terminate the agreement.
Of the seven (7) contracts containing consent provisions, three (3) are among the top five (5) customer accounts by revenue (Customers A, C, and E in the table above), collectively representing approximately 36% of ProShield Product Line revenue. The remaining four (4) contracts with consent provisions are among the smaller accounts and collectively represent approximately 9% of product line revenue.
The specific consent provisions vary among the seven contracts:
• Customer A (20% of revenue): Section 14.2 of the Supply Agreement provides that "neither party may assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed." This is a relatively standard provision with a reasonableness qualifier.
• Customer C (11% of revenue): Section 9.1 of the Supply Agreement provides that "this Agreement may not be assigned by either party without the prior written consent of the other party." This is an unqualified consent requirement — the customer has no obligation to act reasonably in withholding consent.
• Customer E (5% of revenue): Section 12.4 of the Supply Agreement provides that "any assignment or transfer of this Agreement, whether by operation of law or otherwise, including any change of control of Supplier, shall require the prior written consent of Customer." This provision is notable because it explicitly covers assignments "by operation of law" and changes of control, leaving no ambiguity about its applicability to the Transaction.
• Customers 6–9 (smaller accounts, aggregate ~9% of revenue): Each contains a standard anti-assignment provision requiring prior written consent, without a reasonableness qualifier.
Recommendations:
(i) Closing Condition. We recommend that the APA include a condition precedent to Buyer's obligation to close requiring receipt of prior written consent to assignment from at least the three (3) top-five customer accounts with consent requirements (Customers A, C, and E). The aggregate revenue represented by these three accounts (approximately $7,668,000 or 36% of product line revenue) is sufficiently material that Crestline should not be obligated to close without these consents in hand.
(ii) Seller's Covenant to Obtain Consents. The APA should include a pre-Closing covenant requiring Seller to use commercially reasonable efforts to obtain written consent to assignment from all seven (7) customers with consent provisions, and to promptly deliver copies of all consent solicitation letters and responses to Buyer.
(iii) Parking/Delayed Assignment Mechanism. For any Assigned Contracts for which the required consent has not been obtained as of the Closing Date (assuming the closing condition described above has been satisfied with respect to the three critical accounts), the APA should include a "parking" or "delayed assignment" mechanism under which Seller would continue to hold the non-consented contract for Buyer's benefit, and Buyer would receive the economic benefits and bear the economic burdens of the contract, pending receipt of consent. This arrangement would be governed by a subcontracting or agency structure that, to the extent practicable, preserves the parties' rights without technically constituting an "assignment" under the contract.
(iv) Priority Action Item. As of the date of this memorandum, no consent solicitation letters have been sent to any of the seven affected customers. We have communicated to Langford, Crewe & Cascade Insurance Brokers that initiating the consent process is a priority item and have requested that Seller provide draft consent solicitation letters for our review within five (5) business days. Given the anticipated Closing Date of January 16, 2023, time is of the essence, particularly for Customer C's contract, which contains an unqualified consent requirement.
D. Contract Review Findings
In addition to the assignability issues discussed above, our review of the twenty-three (23) Assigned Contracts has identified several additional provisions that warrant attention in APA drafting and post-Closing operations:
Most-Favored-Nation (MFN) Pricing Clauses. Several customer contracts contain MFN pricing clauses requiring VCI (and, post-assignment, Crestline) to ensure that the customer receives pricing that is no less favorable than the pricing offered to any other customer for comparable products and volumes. Buyer should evaluate whether Crestline's existing pricing structure across its broader product line could trigger MFN obligations under these contracts. To the extent that Crestline currently offers comparable industrial coatings at lower price points through its existing product lines, the MFN provisions could require downward price adjustments for ProShield customers, potentially impacting post-Closing margins and earnout achievement.
Exclusivity Provisions. Two (2) of the Assigned Contracts contain exclusivity provisions requiring the ProShield Product Line to serve as the sole supplier of industrial coatings to the applicable customer in specified product categories. These exclusivity provisions create reciprocal obligations: the customer agrees to purchase exclusively from ProShield in the designated category, and ProShield agrees not to supply competing products to the customer's competitors in the same category. Buyer must confirm that these exclusivity obligations are consistent with Crestline's existing product line commitments and customer relationships to avoid conflicts of interest or potential breaches. We recommend that the commercial team review these provisions with the Crestline sales organization before Closing.
Termination for Convenience. One contract — with a national food-packaging distributor that is the fourth-largest customer account by revenue (Customer D, approximately $1,491,000 or 7% of FY2021 revenue) — contains a termination-for-convenience clause allowing the customer to terminate the agreement on sixty (60) days' prior written notice, without cause. This provision creates inherent uncertainty regarding the durability of this revenue stream post-Closing. We note that Customer D's contract does not contain a change-of-control consent provision, so assignment to Crestline does not require consent; however, the customer could exercise its termination-for-convenience right at any time, including following the Closing. This risk should be factored into the earnout projection model and discussed with the commercial team.
Warranty and Indemnification Provisions. Several of the larger customer contracts contain product warranty provisions that exceed VCI's standard product warranty (which provides for replacement of non-conforming product only). Two contracts include consequential damages carve-outs from VCI's standard limitation-of-liability clause, and one contract includes a broad indemnification obligation covering product liability claims arising from the use of ProShield coatings in food-contact applications. These enhanced warranty and indemnification obligations will be assumed by Crestline post-Closing and should be reviewed by Crestline's risk management and insurance teams.
V. EMPLOYEES AND EMPLOYMENT MATTERS
A. Transferred Employees
Thirty-four (34) employees are currently associated with the ProShield Product Line and are expected to be included in the Transaction as part of the workforce transition (the "Transferred Employees"). The Transferred Employees are categorized as follows:
Because the Transaction is structured as an asset purchase rather than a stock acquisition, there is no automatic transfer of employment relationships from VCI to Crestline. Each of the thirty-four (34) Transferred Employees is an employee of VCI, and their employment with VCI will terminate at or around the Closing. Crestline will extend offers of employment to all thirty-four (34) employees, with such offers to be made on terms and conditions (including base compensation and benefits) that are, in the aggregate, substantially comparable to the terms currently provided by VCI. The APA should include a covenant requiring Seller to cooperate with Buyer in facilitating the employment transition, including providing Buyer with reasonable access to the Transferred Employees during the pre-Closing period for introductions and onboarding preparation.
We have reviewed the available employee roster and, where provided, individual employment files for the Transferred Employees. Our findings are summarized below.
B. Employment Agreements and Restrictive Covenants
The majority of the production, quality control, and operations/logistics employees are employed on an at-will basis without written employment agreements, consistent with the general rule under New York law that employment is presumed to be at-will unless the parties have agreed otherwise. These employees received standard offer letters at the time of hire setting forth basic terms of employment (position, compensation, start date, and at-will acknowledgment) but did not execute separate employment agreements containing restrictive covenant provisions.
Six (6) of the Transferred Employees, primarily in the R&D/formulation chemistry and sales/account management functions, have executed written employment agreements with VCI that contain non-competition and/or non-solicitation provisions. We have reviewed these six agreements and summarize their key terms as follows:
• Non-Competition Provisions (6 of 6 agreements): Each agreement contains a post-termination non-competition covenant prohibiting the employee from engaging in a competing business (generally defined as the manufacture, sale, or distribution of industrial coatings) for a period of either twelve (12) or eighteen (18) months following termination of employment, within a geographic area of either New York State or a 150-mile radius of the Tonawanda facility.
• Non-Solicitation of Customers (4 of 6 agreements): Four of the six agreements contain post-termination non-solicitation provisions prohibiting the employee from soliciting or servicing customers of the ProShield Product Line for a period of twelve (12) months following termination.
• Non-Solicitation of Employees (3 of 6 agreements): Three of the six agreements contain post-termination non-solicitation provisions prohibiting the employee from soliciting or hiring other VCI employees for a period of twelve (12) months following termination.
• Invention Assignment (4 of 6 agreements): Four of the six agreements contain invention assignment provisions requiring the employee to assign to VCI all inventions, developments, and intellectual property created during the course of employment. The remaining two agreements contain confidentiality provisions but not explicit invention assignment clauses. As noted in Section III.B above, the absence of invention assignment provisions in certain employee agreements is a broader issue across the formulation development team.
Assignment of Employee Restrictive Covenants. The employee non-competition and non-solicitation provisions in these six agreements run in favor of VCI as the employer. Upon the transfer of these employees to Crestline, the question arises whether VCI's rights under these covenants can be effectively assigned to Buyer as part of the Transferred Assets.
Under New York law, the assignability of non-competition covenants in the employment context is a somewhat unsettled area. Courts have generally held that non-competition agreements are assignable in connection with the sale of a business as a going concern, particularly where the restrictive covenant is ancillary to the sale of goodwill. See, e.g., Purchasing Associates, Inc. v. Weitz, 13 N.Y.2d 267 (1963). However, some authority suggests that the enforceability of an assigned non-compete may depend on the specific terms of the agreement and whether the assignment is consistent with the employee's reasonable expectations at the time the covenant was executed.
Recommendation: To address this uncertainty, we recommend a two-track approach: (i) the APA should include a provision assigning to Buyer all of VCI's rights under the six employee employment agreements, including the restrictive covenant provisions; and (ii) Crestline should require each of the six affected employees to execute new employment agreements with Crestline at the time offers of employment are extended, containing updated restrictive covenant provisions that are consistent with Crestline's standard form and that are supported by adequate consideration (i.e., the offer of employment by Crestline and any related signing or retention bonuses). This belt-and-suspenders approach maximizes the likelihood that enforceable restrictive covenants will be in place post-Closing.
We also recommend that the APA include a covenant from Seller prohibiting VCI (and the Seller Principals personally) from soliciting or hiring back any Transferred Employee for a period of at least three (3) years following the Closing Date. Given Frederick G. Voss's and Elena M. Voss's ongoing involvement with VCI's remaining product lines, the risk of VCI re-recruiting key formulation chemists or sales personnel is not merely theoretical, and a robust anti-poaching covenant is essential to protect Crestline's investment.
C. Employee Benefits
VCI currently maintains the following employee benefit plans in which Transferred Employees participate:
• 401(k) Retirement Plan. VCI sponsors a 401(k) defined contribution plan for eligible employees. VCI provides a discretionary employer match of up to 3% of eligible compensation. There are no outstanding compliance issues identified with respect to the 401(k) plan.
• Group Health Insurance. VCI provides group health insurance coverage (medical, dental, and vision) to eligible employees through a fully insured group plan underwritten by a major commercial carrier. No self-funded or minimum premium arrangements are in place.
• Other Benefits. VCI provides standard employee benefits including life insurance, short-term and long-term disability insurance, paid time off, and paid holidays, all of which are governed by VCI's standard employee handbook and benefits policies.
Because the Transaction is structured as an asset purchase, employee benefit plan liabilities are excluded liabilities and will not be assumed by Crestline. Transferred Employees who accept offers of employment from Crestline will be enrolled in Crestline's existing benefit plans effective as of their start date with Crestline. We recommend that the APA include a covenant from Buyer providing that Crestline will recognize prior service with VCI for purposes of eligibility, vesting, and benefit accrual under Crestline's benefit plans (but not for purposes of benefit accrual under any defined benefit plan, as Crestline does not maintain such a plan).
We have confirmed that VCI does not maintain any defined benefit pension plan, retiree medical plan, or other post-employment benefit arrangement that could give rise to unfunded liabilities or withdrawal obligations. No multi-employer plan contributions have been identified.
Our review of the data room materials and Seller's due diligence responses has not identified any pending complaints or charges filed with the Equal Employment Opportunity Commission (EEOC), any pending or recent Occupational Safety and Health Administration (OSHA) citations or investigations at the Tonawanda facility, or any pending or threatened labor disputes, union organizing activities, or unfair labor practice charges. The Transferred Employees are not represented by a labor union and are not covered by any collective bargaining agreement.
D. WARN Act Considerations
The Worker Adjustment and Retraining Notification Act of 1990, as amended (the "WARN Act"), requires employers with 100 or more employees to provide at least sixty (60) days' advance written notice before a "plant closing" or "mass layoff" as defined under the statute. New York State has its own mini-WARN statute (N.Y. Lab. Law § 860-a et seq.), which applies to employers with fifty (50) or more employees and also requires ninety (90) days' advance notice.
The Transaction is not expected to trigger WARN Act or New York mini-WARN notice requirements because Crestline intends to offer employment to all thirty-four (34) Transferred Employees at Closing, and VCI will continue to operate its remaining product lines with its remaining workforce at the Tonawanda facility and other locations. However, if any significant number of Transferred Employees decline Crestline's offers of employment, or if VCI separately reduces headcount at the Tonawanda facility in connection with the Transaction, the parties should monitor the cumulative headcount reductions at the facility to assess WARN compliance. We recommend that the APA include mutual cooperation covenants regarding WARN compliance, and that Seller represent and warrant that VCI has not effectuated any plant closing or mass layoff within the ninety (90) day period preceding the anticipated Closing Date that, when aggregated with any employment losses resulting from the Transaction, could trigger WARN obligations.
E. Key Employee Risk
Two individuals present particular key-employee risk for the Transaction:
Frederick G. Voss. Mr. Voss has served as President and CEO of VCI since its founding in 1987 and has cultivated personal relationships with many of the ProShield Product Line's major customers over a period of more than thirty (30) years. Several of the top-five customer accounts were originated by Mr. Voss personally, and our discussions with the commercial team indicate that Mr. Voss remains the primary point of contact for these accounts. Mr. Voss's personal goodwill and customer relationships represent a significant component of the value being acquired in this Transaction, and the loss of these relationships post-Closing — whether through customer attrition or through Mr. Voss's active or passive competition — could materially impair Crestline's ability to retain key customers and achieve the earnout targets.
Elena M. Voss. Ms. Voss has served as Vice President of Operations since approximately 1995 and possesses deep operational and technical knowledge of the ProShield manufacturing process, quality control procedures, and formulation specifications. Her institutional knowledge is particularly important during the transition period, when Crestline's operations team will need to assume responsibility for the day-to-day manufacturing operations at the Tonawanda facility.
Recommendation: The non-competition and non-solicitation obligations of both Frederick G. Voss and Elena M. Voss are critical to protecting the value of the acquired business and ensuring achievement of the earnout milestones. We recommend the following terms, to be negotiated and included in the APA as obligations of the Seller Principals:
• Non-Competition Covenant: Four (4) year non-competition period covering the specialty industrial coatings market (including polymer-modified epoxy and acrylic latex coatings for packaging, container, and industrial applications) in the United States and Canada. The proposed scope is consistent with the geographic reach of the ProShield Product Line and the Voss principals' industry relationships.
• Non-Solicitation of Customers: Three (3) year non-solicitation period covering all customers and prospective customers of the ProShield Product Line as of the Closing Date and during the twenty-four (24) month period preceding the Closing Date.
• Non-Solicitation of Employees: Three (3) year non-solicitation period covering all Transferred Employees and all other employees of Crestline (or any of its affiliates) who become involved in the ProShield Product Line post-Closing.
• Enforceability: Under New York law, non-competition covenants entered into in connection with the sale of a business are subject to a more lenient standard of review than non-competes in the pure employment context. Courts will enforce such covenants so long as they are reasonable in scope, duration, and geographic reach and are necessary to protect the buyer's legitimate business interests in the acquired goodwill. See, e.g., Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276 (1981); Vane Kaplan CPAs LLP Seidman v. Hirshberg, 93 N.Y.2d 382 (1999). We believe the proposed terms are reasonable and enforceable under this standard, given the nationwide scope of the ProShield Product Line and the extended period needed to transition customer relationships.
• Structure: The restrictive covenants should be structured as standalone, affirmative obligations of the Seller Principals (not merely as representations or warranties) and should include provisions for injunctive relief, acknowledging that a breach of the restrictive covenants would cause irreparable harm to Buyer that cannot be adequately compensated by monetary damages alone.
VI. ENVIRONMENTAL MATTERS
A. Tonawanda Facility
The ProShield Product Line is manufactured at VCI's facility located at 790 Niagara Falls Boulevard, Tonawanda, NY 14150 (the "Facility" or the "Tonawanda Facility"). The Facility comprises approximately 42,000 square feet of manufacturing, laboratory, warehouse, and office space situated on a parcel of approximately 3.5 acres in an area zoned for industrial use.
The Facility is leased by VCI from Niagara Industrial Realty LLC ("NIR"), a New York limited liability company with its principal office at 1600 Genesee Street, Suite 100, Buffalo, NY 14211. VCI has occupied the Facility under its current lease since approximately 2005. As discussed in Section VII below, Crestline is negotiating a new direct lease with NIR rather than assuming VCI's existing lease.
Crestline has engaged Northbridge Environmental Consulting Group LLC ("Northbridge"), with Aaron Lindquist, P.E. serving as project manager, to conduct a Phase I environmental site assessment of the Tonawanda Facility in accordance with ASTM Standard E1527-21. The Phase I assessment commenced with a site visit on October 19, 2022, and the final Phase I report is expected to be delivered by approximately November 4, 2022. We are awaiting the Northbridge report before finalizing our environmental risk allocation recommendations.
B. Preliminary Environmental Findings
Pending receipt of the Northbridge Phase I report, we have conducted a preliminary review of publicly available environmental databases and regulatory records relating to the Tonawanda Facility, as well as VCI's environmental disclosures in the data room. Our preliminary findings are as follows:
Federal and State Database Searches. The Tonawanda Facility is not listed on the following federal and state environmental databases:
• National Priorities List (NPL / Superfund)
• CERCLIS (Comprehensive Environmental Response, Compensation, and Liability Information System)
• RCRA CORRACTS (Resource Conservation and Recovery Act Corrective Action) list
• New York State Inactive Hazardous Waste Disposal Site Registry (commonly referred to as the New York State Superfund list)
• New York State Brownfield Cleanup Program list
The absence of listings on these databases is a favorable indicator, as it suggests that the Facility has not been identified by federal or state environmental regulators as a site requiring investigation or remediation under the applicable hazardous waste or cleanup programs.
Historical Use of Hazardous Materials. VCI has disclosed that certain volatile organic compounds ("VOCs") and solvents are used in the coating manufacturing process at the Tonawanda Facility. VOCs and solvents are common inputs in industrial coating manufacturing and are subject to regulation under federal and state environmental laws, including the Clean Air Act (air emissions), the Clean Water Act and applicable state SPDES permitting requirements (wastewater discharge), and RCRA (hazardous waste generation and management). VCI has represented in its due diligence responses that its operations at the Tonawanda Facility are conducted in compliance with all applicable environmental laws and regulations, including the following permits:
• Air Emissions Permits: VCI holds air emissions permits issued by the New York State Department of Environmental Conservation ("NYSDEC") authorizing VOC emissions from the coating manufacturing process. VCI

MEMORANDUM

MATTER NO.: 1006-00007

I. EXECUTIVE SUMMARY

II. CORPORATE ORGANIZATION AND AUTHORITY OF SELLER

III. INTELLECTUAL PROPERTY

IV. CUSTOMER CONTRACTS

V. EMPLOYEES AND EMPLOYMENT MATTERS

VI. ENVIRONMENTAL MATTERS

Record

Parties

Dates

Amounts