PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Martin G. Cross, General Counsel, Vantage Mobility Systems Corp.
FROM: Gabrielle Moss, Associate, Calderwood & Harkness LLP
REVIEWED BY: Bernard Crawford, Partner, Calderwood & Harkness LLP
DATE: September 12, 2023
RE: Fee Forfeiture Risk Analysis — Termination for Convenience Under Section 9.1 of the Master Embedded Software License and Services Agreement with Meridian Code Technologies, Inc.
MATTER NO.: C&H Matter No. 1007-00008
I. Executive Summary
The purpose of this memorandum is to analyze the risk that Vantage Mobility Systems Corp. ("VMS" or the "Company") forfeits all $12,320,000 in prepaid fees under the Master Embedded Software License and Services Agreement (the "MESLSA") with Meridian Code Technologies, Inc. ("MeridianCode") if VMS exercises its termination-for-convenience right under Section 9.1 prior to the 24-month anniversary of the Effective Date on June 21, 2024. This memorandum also identifies alternative strategies that would allow VMS to avoid or mitigate that forfeiture exposure while preserving the Company's strategic optionality.
Bottom-Line Conclusion. Termination for convenience before June 21, 2024 would trigger the Section 9.1 fee-forfeiture provision, resulting in the non-recovery of the full $12,320,000 in fees paid to date. This sum comprises the $8,000,000 upfront license fee paid at signing, the $2,400,000 Year 1 Maintenance and Support Fee paid in July 2022, and the $1,920,000 in integration services fees paid through the completion of Milestones 1 through 3. Under the plain language of Section 9.1, all such amounts would be retained by MeridianCode, with no credit, refund, or proration mechanism available to VMS. We assess the probability of successfully challenging this forfeiture provision under Michigan law as low to moderate, and we do not recommend relying on such a challenge as a primary strategy.
Recommended Alternative Strategy. We recommend that VMS maintain its current Dormancy Status under Section 9.4 through the 24-month anniversary of June 21, 2024, at which point the termination-for-convenience right under Section 9.1 no longer triggers the fee-forfeiture provision. Concurrently, VMS should pursue negotiated fee restructuring with MeridianCode through Redstone Whitaker LLP (contact: Alan M. Briscoe) to preserve reactivation optionality for the Argonaut-A and Argonaut-C platforms while seeking credits against future obligations for previously paid fees attributable to descoped platforms.
Interplay with Other Critical Deadlines. The fee-forfeiture analysis cannot be evaluated in isolation. Several overlapping deadlines create a compressed and interdependent window of obligations that must be navigated with precision:
• The Section 4.3 Use-It-or-Lose-It Deadline of December 21, 2023, which requires VMS to have commenced integration testing on at least two platforms within 18 months of the Effective Date;
• The 12-month dormancy cap under Section 9.4, which expires on August 3, 2024 and triggers either mandatory renegotiation or termination; and
• The 24-month anniversary on June 21, 2024, which is the critical safe-harbor date after which the fee-forfeiture provision ceases to apply.
The interrelationship among these deadlines is addressed in detail in Sections III through V of this memorandum.
II. Background and Factual Context
A. The MESLSA and Project Argonaut
The MESLSA was executed on June 21, 2022, between Vantage Mobility Systems Corp., a Michigan corporation, as licensee, and Meridian Code Technologies, Inc., a Delaware corporation, as licensor. The agreement governs the license, integration, support, and maintenance of MeridianCode's proprietary ATLAS-RT™ embedded real-time operating system, Version 4.2 (the "ATLAS-RT Software"), for integration into VMS's Project Argonaut next-generation adaptive vehicle platform program.
Project Argonaut was conceived as VMS's flagship initiative to develop a modular adaptive vehicle platform that would serve both internal-combustion-engine ("ICE") and electric-vehicle ("EV") drivetrain configurations. The project originally contemplated five distinct vehicle platform configurations, designated Argonaut-A through Argonaut-E, each requiring customized integration of the ATLAS-RT Software to manage real-time embedded control systems, sensor fusion, and adaptive interface modules.
The total deal value under the MESLSA is $20,000,000, encompassing upfront license fees, annual maintenance and support fees, milestone-based integration services fees, and per-unit runtime royalties. The agreement has a five-year term running from June 21, 2022 through June 20, 2027.
The MESLSA is governed by the laws of the State of Michigan, without regard to conflict-of-laws principles. Disputes are subject to binding arbitration under the Midwest Arbitration Institute ("MAI") rules, with the seat of arbitration in Detroit, Michigan. For disputes exceeding $1,000,000 in claimed damages or value, the arbitration is to be conducted before a three-arbitrator panel. This dispute resolution framework is relevant to the fee-forfeiture analysis because any challenge to the enforceability of the forfeiture clause, or any fee-recapture claim, would be adjudicated in this forum rather than in Michigan state or federal court.
B. Fee Structure and Payments Made
The MESLSA establishes a multi-component fee structure totaling $20,000,000 across the five-year term. The following is a detailed breakdown of each component and the payments made to date:
1. Upfront License Fee — $8,000,000. The upfront license fee was due and payable at signing. VMS paid this amount in full on June 21, 2022 via wire transfer. This fee grants VMS a non-exclusive, non-transferable license to use, copy, modify, and create derivative works of the ATLAS-RT Software solely for integration into the Project Argonaut platform configurations, subject to the terms and restrictions set forth in Article 3 of the MESLSA.
2. Annual Maintenance and Support Fees — $2,400,000 per year.
• Year 1 Maintenance and Support Fee ($2,400,000): Invoiced by MeridianCode on July 1, 2022 and paid by VMS on July 15, 2022. This fee covers MeridianCode's obligation to provide software updates, patches, bug fixes, technical support (24/7 priority response), and compatibility assurance for the ATLAS-RT Software during the first contract year.
• Year 2 Maintenance and Support Fee ($2,400,000): Invoiced by MeridianCode on July 1, 2023. VMS has disputed this invoice and deferred payment, asserting that maintenance obligations are substantially reduced during Dormancy Status and that the full Year 2 fee is not owed during a period in which support has been reduced to the critical-security-patch-only level specified in Section 9.4. This dispute is the subject of a separate Calderwood & Harkness memorandum. As of the date of this memorandum, this amount remains unpaid.
3. Integration Services Fees — $3,200,000 total. The integration services fees are payable on a milestone basis across five milestones, with each milestone representing 20% of the total integration services fee, or $640,000 per milestone. VMS has paid for Milestones 1 through 3, for a total of $1,920,000 ($640,000 × 3). The milestone schedule and payment history are as follows:
Milestones 4 and 5 have not been commenced, and no integration services fees are due for these milestones. The remaining integration services obligation is $1,280,000.
4. Per-Unit Runtime Royalties — $80/unit, $4,000,000 aggregate cap. The MESLSA provides for per-unit runtime royalties of $80 for each vehicle unit shipped by VMS incorporating the ATLAS-RT Software, subject to a cumulative cap of $4,000,000 (representing 50,000 units). As of the date of this memorandum, no units have been shipped and no runtime royalties have been incurred or paid.
Summary of Payments Made and Remaining Commitments:
C. Rescoping of Project Argonaut and Suspension of Integration
On March 14, 2023, the VMS Board of Directors adopted a resolution to rescope Project Argonaut from five vehicle platform configurations to two: Argonaut-A and Argonaut-C only. The electrification integration workstream (which would have supported the Argonaut-D and Argonaut-E EV platform configurations) was deferred to a potential Phase II of the project, with no firm timeline or commitment established.
The decision to rescope Project Argonaut was driven by several converging factors:
• Supply-chain disruptions in semiconductor procurement. VMS experienced significant delays in securing commitments from key semiconductor suppliers, particularly for the automotive-grade microcontroller units ("MCUs") required for the embedded control systems that interface with the ATLAS-RT Software. These delays materially affected the timeline for Milestones 4 and 5 across all platform configurations.
• Kestrel Capital Partners, LP capital expenditure reduction directive. Kestrel Capital Partners, LP ("Ashgrove Equity Partners"), VMS's majority equity sponsor, issued a portfolio-wide directive in Q1 2023 requiring all portfolio companies to reduce capital expenditures by a minimum of 15% for fiscal years 2023 and 2024. The Project Argonaut rescoping was one component of VMS's compliance with this directive.
• Strategic reprioritization of ICE-platform fleet vehicles over EV platforms. In light of evolving market conditions, VMS's executive leadership and board determined that near-term revenue opportunities were more robust for ICE-platform adaptive fleet vehicles (served by Argonaut-A) than for the EV platforms (Argonaut-D and Argonaut-E). Argonaut-C, which serves a hybrid drivetrain configuration, was retained due to existing fleet customer commitments.
At the time of the rescoping decision, integration work on the five platforms was at the following stages:
• Argonaut-A: Milestone 3 of 5 completed. Alpha integration testing was passed on February 28, 2023, with MeridianCode certifying completion of the Milestone 3 deliverables. This is the most advanced of the five platforms.
• Argonaut-B: Milestone 1 only. The requirements specification had been approved in October 2022, but no source-code customization or integration work had begun. Argonaut-B was among the platforms eliminated in the rescoping.
• Argonaut-C: Milestone 2 of 5 completed. MeridianCode delivered the customized source-code package for the Argonaut-C hybrid drivetrain configuration on January 15, 2023. Alpha integration testing (Milestone 3) had not yet commenced at the time of the rescoping.
• Argonaut-D and Argonaut-E: Not commenced. No milestone work had begun on either EV platform configuration. These platforms were deferred to Phase II.
VMS's internal engineering team had invested approximately 14,200 hours of work on Project Argonaut integration activities through the date of the rescoping. This investment represents a significant sunk cost that is not recoverable under any termination scenario but may be relevant to any future unjust enrichment or fee recapture arguments.
On March 22, 2023, VMS formally suspended all integration work on the ATLAS-RT Software across all platform configurations, including Argonaut-A and Argonaut-C. No integration activities have been conducted since that date.
D. Dormancy Status
Under Section 9.4 of the MESLSA, if a licensee suspends all integration and deployment activities for a continuous period of 120 days, the agreement enters "Dormancy Status" upon written notice from the licensee and acknowledgment by the licensor.
The 120-day trigger date, measured from the March 22, 2023 suspension of integration work, fell on July 20, 2023. VMS transmitted its formal Dormancy Status notice to MeridianCode on July 14, 2023 — six days before the 120-day trigger date — in order to ensure timely compliance. MeridianCode acknowledged VMS's entry into Dormancy Status by letter dated August 3, 2023.
The practical effects of Dormancy Status under Section 9.4 are as follows:
• MeridianCode's maintenance and support obligations are reduced to a critical-security-patch-only level. VMS is not entitled to general software updates, feature enhancements, compatibility assurance, or 24/7 priority technical support during dormancy.
• All milestone deadlines under the integration services schedule are tolled for the duration of the dormancy period.
• Dormancy may not exceed 12 consecutive months. If the dormancy period reaches 12 months without the licensee reactivating integration activities or the parties reaching a renegotiated agreement, Section 9.4 triggers a mandatory renegotiation period, and if renegotiation is not successful within 60 days thereafter, the MESLSA terminates automatically.
Based on MeridianCode's August 3, 2023 acknowledgment, the 12-month dormancy cap expires on August 3, 2024. This date is critical to the fee-forfeiture analysis, as discussed in detail below.
On August 10, 2023, VMS notified Pinnacle National Bank, N.A. ("Pinnacle"), in its capacity as administrative agent under VMS's $175,000,000 Senior Secured Revolving Credit Facility (the "Credit Facility"), of the MESLSA's entry into Dormancy Status. This notification was made pursuant to Section 6.12 of the Credit Facility agreement, which requires VMS to provide written notice to the administrative agent within 10 business days of any material contract modification, termination, or dispute involving commitments or potential liabilities exceeding $5,000,000. Given that the MESLSA has a total deal value of $20,000,000 and that VMS's existing payment obligations and potential forfeiture exposure exceed the $5,000,000 threshold, this notification was prudent and required.
III. Analysis of Section 9.1 — Termination for Convenience
A. Text and Operation of Section 9.1
Section 9.1 of the MESLSA establishes a bilateral termination-for-convenience right. Either party may terminate the MESLSA at any time during the term by providing 180 days' prior written notice to the other party. The notice must be delivered in accordance with the notice provisions of Section 14.2 (requiring delivery by overnight courier or certified mail to the addresses specified in the agreement) and must expressly identify Section 9.1 as the basis for termination.
Critically, Section 9.1 contains a fee-forfeiture clause applicable to licensee-initiated terminations occurring prior to a specified contractual milestone. The relevant operative language provides, in substance:
If the Licensee exercises its right to terminate this Agreement for convenience pursuant to this Section 9.1, and such termination occurs prior to the twenty-four (24) month anniversary of the Effective Date, all prepaid fees previously remitted by the Licensee to the Licensor shall be retained by the Licensor as fully earned and non-refundable, and the Licensee shall have no right to any refund, credit, proration, or offset with respect to such fees.
The term "all prepaid fees" is not expressly defined elsewhere in the MESLSA, but in context, it encompasses every fee payment that VMS has remitted to MeridianCode prior to the effective date of termination. Based on the payments made to date, the scope of "all prepaid fees" subject to forfeiture includes:
• The $8,000,000 upfront license fee;
• The $2,400,000 Year 1 Maintenance and Support Fee; and
• The $1,920,000 in integration services fees paid for Milestones 1 through 3.
The total forfeiture exposure under Section 9.1, if triggered, is therefore $12,320,000.
Several features of the forfeiture clause merit emphasis. First, the clause does not distinguish between partial and full prepayment; any termination for convenience prior to the 24-month anniversary triggers complete forfeiture of all amounts previously paid, regardless of the quantum of services received or the stage of integration achieved. Second, the clause does not provide for any credit, offset, or reduction based on MeridianCode's actual costs, damages, or ability to mitigate. Third, the clause characterizes the retained fees as "fully earned and non-refundable," which is language designed to insulate the retention right from challenge under restitutionary or unjust enrichment theories by framing the payments as compensation already earned rather than as a forfeiture or penalty.
B. The 24-Month Anniversary Date
The MESLSA's Effective Date is June 21, 2022. The 24-month anniversary of the Effective Date — the date after which the fee-forfeiture provision ceases to apply — is June 21, 2024.
After June 21, 2024, VMS may exercise its termination-for-convenience right under Section 9.1 without triggering the fee-forfeiture clause. Termination after that date is subject only to the 180-day notice requirement and the general wind-down provisions of Section 9.5 (governing return of materials, survival of certain provisions, and transition assistance obligations).
The interplay between the 24-month anniversary and the 180-day notice period raises an important question of contractual interpretation. If VMS wishes to terminate as soon as possible after the 24-month anniversary, the earliest termination notice could theoretically be sent on or after June 21, 2024. The 180-day notice period, measured from a June 21, 2024 notice, would result in a termination effective date of approximately December 18, 2024.
However, a more nuanced question arises: Does the fee-forfeiture clause apply based on the date the termination notice is sent, or the date the termination becomes effective?
This distinction is critical because VMS could, in theory, send a termination-for-convenience notice before June 21, 2024, while structuring the 180-day notice period such that the termination does not become effective until after June 21, 2024. For example, if VMS sent a termination notice on December 24, 2023, the 180-day notice period would result in a termination effective date of approximately June 22, 2024 — one day after the 24-month anniversary.
Analysis of the contractual language supports the interpretation that the effective date of termination, not the date the notice is sent, is the relevant trigger. The clause states that the forfeiture applies "if... such termination occurs prior to" the 24-month anniversary. The word "occurs" most naturally refers to the point at which the agreement actually terminates — i.e., the effective date — rather than the date on which a party delivers notice of its intent to terminate. This reading is consistent with the general principle under Michigan contract law that termination provisions should be construed to give effect to each operative word, and the use of "occurs" rather than "is initiated" or "notice is given" is significant.
Nevertheless, this interpretation carries meaningful risk. MeridianCode could argue that a notice of termination for convenience sent before the 24-month anniversary reflects the licensee's exercise of its termination right prior to the anniversary, even if the termination does not take effect until later. MeridianCode might further contend that the forfeiture clause was designed to deter early exit from the MESLSA and that permitting VMS to send a pre-anniversary notice with a post-anniversary effective date would frustrate that purpose. While we believe the textual argument favors VMS, the absence of Michigan case law directly on point with respect to this specific formulation means the outcome is uncertain.
Conservative Approach. In light of this uncertainty, we recommend that VMS not send any termination-for-convenience notice under Section 9.1 until on or after June 21, 2024. This approach eliminates the risk that MeridianCode could credibly argue that the fee-forfeiture clause was triggered by pre-anniversary notice.
C. Interaction with Dormancy Status Under Section 9.4
VMS entered Dormancy Status as of August 3, 2023, when MeridianCode acknowledged VMS's dormancy notice. This raises the question of whether the dormancy period should toll or extend the 24-month anniversary under Section 9.1.
Section 9.4 provides that, during Dormancy Status, "all milestone deadlines" are tolled. VMS could argue that the 24-month period in Section 9.1 functions as a form of milestone or contractual deadline and that dormancy should therefore extend the clock, effectively delaying the 24-month anniversary beyond June 21, 2024.
This argument has intuitive appeal. The purpose of the 24-month fee-forfeiture cliff in Section 9.1 is, in substance, to protect MeridianCode's front-loaded investment in deal setup, software customization, and resource allocation during the critical early phase of the engagement. During dormancy, MeridianCode is not performing substantial work, its obligations are reduced to critical-security-patch-only support, and no integration activity is occurring. One could argue that the clock should not run during a period in which neither party is actively performing.
However, the counter-arguments are substantially stronger:
• The 24-month period in Section 9.1 is measured from the "Effective Date," which is a fixed calendar date (June 21, 2022). It is not tied to the completion of any milestone or the performance of any integration activity. It is a purely time-based provision.
• Section 9.4's tolling language is expressly limited to "milestone deadlines." The 24-month anniversary in Section 9.1 is not framed as a "milestone" anywhere in the MESLSA. It is a temporal condition on the application of the fee-forfeiture clause.
• Michigan courts consistently apply the plain-language rule in the interpretation of commercial contracts between sophisticated parties. Rory v. Continental Ins. Co., 473 Mich. 457, 703 N.W.2d 23 (2005). If the parties had intended for dormancy to toll the Section 9.1 clock, they could have included express language to that effect. The absence of such language is likely dispositive.
• The MESLSA was negotiated at arm's length by sophisticated commercial parties represented by counsel. A court or arbitral panel would be reluctant to read implied tolling provisions into a clear, time-based contractual deadline.
Assessment. The tolling argument is weak absent express contractual language extending it to the Section 9.1 anniversary. We recommend that VMS plan its strategy around the fixed calendar date of June 21, 2024 as the operative safe-harbor date and not rely on any tolling theory to accelerate that date or to excuse pre-anniversary termination.
D. Enforceability of the Forfeiture Clause Under Michigan Law
Even if VMS were to terminate prior to June 21, 2024 and trigger the fee-forfeiture clause, the question arises whether the clause is enforceable under Michigan law. We analyze below the potential grounds for challenging enforceability and our assessment of the likelihood of success.
1. Michigan's General Approach to Contractual Forfeiture Provisions.
Michigan law generally enforces contractual forfeiture provisions and fee-retention clauses in commercial agreements between sophisticated parties, provided the provisions are not unconscionable and do not function as unenforceable penalties. The Michigan Supreme Court has consistently held that courts should enforce the plain terms of contracts freely and voluntarily entered into by parties with comparable bargaining power. See Wilkie v. Auto-Owners Ins. Co., 469 Mich. 41, 664 N.W.2d 776 (2003); Rory v. Continental Ins. Co., 473 Mich. 457, 703 N.W.2d 23 (2005).
2. Unconscionability.
VMS could argue that the forfeiture of $12,320,000 is substantively unconscionable — i.e., that the amount forfeited is so disproportionate to MeridianCode's actual losses as to "shock the conscience." However, this argument faces significant obstacles. VMS is a large, well-capitalized corporation backed by a sophisticated private equity sponsor (Kestrel Capital Partners, LP). The MESLSA was negotiated at arm's length by experienced commercial parties, each represented by outside counsel. The fee-forfeiture provision was included in the original agreement, not buried in fine print or imposed unilaterally. Michigan courts have consistently declined to find unconscionability in arms-length commercial transactions between sophisticated parties. See, e.g., Eastbrooke Med. Assocs., PLLC v. Michigan Assigned Claims Facility, No. 352009 (Mich. Ct. App. 2021) (declining to find unconscionability where both parties were commercially sophisticated and had opportunity to negotiate).
Assessment: The unconscionability defense is unlikely to succeed.
3. Penalty Doctrine.
Michigan law distinguishes between enforceable liquidated damages provisions and unenforceable penalties. A contractual provision that operates as a penalty — i.e., one that imposes a forfeiture or payment bearing no reasonable relationship to the anticipated or actual damages from breach — may be struck down as unenforceable. See Shuttleworth v. Consumers Power Co., 410 Mich. 229, 301 N.W.2d 502 (1981); Weyerhaeuser Co. v. Northpoint Casualty Group Life Ins. Co., 408 F.3d 335 (6th Cir. 2005) (applying Michigan law).
The fee-forfeiture clause in Section 9.1 is not expressly framed as a "liquidated damages" provision. It does not purport to estimate the damages that MeridianCode would suffer from early termination. Rather, it is framed as a retention right: fees previously paid are deemed "fully earned and non-refundable." VMS could argue that, regardless of how the clause is labeled, it functions as a penalty because:
• MeridianCode received the $8,000,000 upfront license fee and retains ownership of the ATLAS-RT Software (which can be relicensed to other customers);
• MeridianCode performed maintenance and support services for only one year (roughly commensurate with the $2,400,000 Year 1 fee paid);
• MeridianCode completed integration milestones 1 through 3 and was compensated $1,920,000 for that work, which represents fair value for the services rendered;
• MeridianCode's actual damages from VMS's early termination may be limited to lost future revenue (Year 2 and subsequent maintenance fees and runtime royalties) and the opportunity cost of dedicating resources to a project that was not completed — but the forfeiture does not approximate these damages;
• The forfeiture of $12,320,000 is disproportionate to any reasonable estimate of MeridianCode's anticipated losses from early termination.
Counter-arguments. MeridianCode would likely respond that:
• The clause is not a liquidated damages provision at all; it is a fee-retention right in which VMS agreed that payments would be non-refundable if termination occurred before the 24-month anniversary. The penalty doctrine applies to provisions that require the payment of additional sums upon breach, not to provisions that merely preclude refunds of amounts already paid.
• Even if the penalty doctrine applies, the forfeiture amount is not disproportionate given that MeridianCode front-loaded its investment in the deal (customizing the ATLAS-RT Software, dedicating engineering resources, foregoing other licensing opportunities) in reliance on VMS's five-year commitment.
• Michigan courts are generally reluctant to rewrite commercial bargains between sophisticated parties, and the forfeiture provision was a core economic term of the MESLSA that VMS voluntarily accepted.
Assessment. The penalty argument has some analytical merit. The disproportion between MeridianCode's likely actual damages and the $12,320,000 forfeiture amount is a legitimate basis for challenge, and an arbitral panel might find the forfeiture provision disproportionate, particularly with respect to the $8,000,000 upfront license fee, which was paid for a license that MeridianCode can effectively revoke upon termination while retaining both the fee and the software. However, Michigan courts are generally deferential to the contractual allocations of risk agreed upon by sophisticated commercial parties, and the trend in Michigan case law is toward enforcement rather than invalidation of such clauses. We assess this argument as uncertain at best and recommend that it be treated as a fallback position, not as a primary strategy. If VMS finds itself in a situation where the forfeiture clause has been triggered, the penalty argument should be preserved and developed, but VMS should not rely on it as a basis for affirmatively terminating before June 21, 2024.
4. Unjust Enrichment.
VMS could assert an unjust enrichment claim, arguing that MeridianCode would be unjustly enriched if it retains $12,320,000 in fees while simultaneously retaining full ownership of the ATLAS-RT Software and the ability to relicense it. However, unjust enrichment is an equitable remedy that is generally unavailable where an express contract governs the parties' relationship. See Belle Isle Grill Corp. v. City of Detroit, 256 Mich. App. 463, 666 N.W.2d 271 (2003). Because the MESLSA expressly addresses the treatment of prepaid fees upon termination, a tribunal would likely conclude that the contractual provision controls and that unjust enrichment is not available as an independent basis for recovery.
Assessment: The unjust enrichment theory is weak and should be considered only as a tertiary argument.
IV. Financial Exposure Scenarios
The following section presents four scenarios that capture the range of possible outcomes based on VMS's strategic choices. For each scenario, we assess the financial exposure, recoupment potential, and ancillary risks.
A. Scenario 1: Termination for Convenience Before June 21, 2024
If VMS exercises its termination-for-convenience right under Section 9.1 prior to the 24-month anniversary, the fee-forfeiture clause is triggered, and VMS forfeits all $12,320,000 in prepaid fees with no right to refund, credit, proration, or offset.
Financial Impact:
• Forfeiture: $12,320,000 in prepaid fees retained by MeridianCode.
• Elimination of future obligations: VMS would eliminate the remaining $7,680,000 in contractual commitments, consisting of the Year 2 Maintenance and Support Fee ($2,400,000), remaining integration services for Milestones 4 and 5 ($1,280,000), and runtime royalties (up to $4,000,000).
• Net financial loss: $12,320,000 with no recoupment. The "savings" from eliminating $7,680,000 in future obligations do not offset the forfeiture because those obligations would not have been incurred absent continued use of the ATLAS-RT Software.
Derivative Works Risk. VMS's engineering team has created three derivative works based on the ATLAS-RT Software, designated DW-001, DW-002, and DW-003, comprising approximately 47,000 lines of code with an estimated commercial value of $1,800,000 to $2,500,000 (as assessed by Hargrove Technical Consulting, LLC). Under Section 7.2 of the MESLSA, MeridianCode holds a perpetual, royalty-free license to all derivative works created by VMS during the term. Upon termination, VMS may lose leverage to renegotiate or narrow this license grant. Furthermore, Section 7.2's survival provisions, if triggered by an adversarial termination, may limit VMS's ability to exploit derivative works DW-001, DW-002, and DW-003 in future projects that do not use the ATLAS-RT Software.
Sunk Engineering Costs. VMS's approximately 14,200 hours of internal engineering investment represent a sunk cost under any termination scenario. These hours cannot be recovered but should be documented as they may support future fee recapture or unjust enrichment arguments if VMS pursues any such claims.
Credit Facility Implications. A $12,320,000 write-off could have material implications for VMS's financial covenants under the $175,000,000 Senior Secured Revolving Credit Facility with Pinnacle National Bank, N.A. As of July 2023, VMS had $92,000,000 outstanding under the Credit Facility. VMS should assess whether a fee write-off of this magnitude would trigger any financial covenant breach — in particular, the Consolidated Leverage Ratio covenant (Section 7.1(a)) and the Minimum Consolidated EBITDA covenant (Section 7.1(c)) — or require further notification to Pinnacle under Section 6.12 of the credit agreement. We recommend that VMS coordinate with Sandra M. Okafor (VMS CFO) and Ashford & Greer, P.C. (Patricia Noonan, engagement partner) to model the covenant impact before making any termination decision.
B. Scenario 2: Termination for Convenience After June 21, 2024
Under this scenario, VMS exercises its termination-for-convenience right on 180 days' notice on or after June 21, 2024. Because the termination would occur after the 24-month anniversary of the Effective Date, the fee-forfeiture clause in Section 9.1 would not be triggered.
Financial Impact:
• No fee forfeiture. VMS's $12,320,000 in prepaid fees is not subject to the Section 9.1 retention right. However, the MESLSA does not affirmatively provide a refund mechanism for post-anniversary terminations. VMS would need to assert contractual or equitable arguments to recoup any portion of previously paid fees.
• Recoupment arguments. VMS retains arguments for recapture of at least a portion of the $12,320,000 in prepaid fees. The strongest recoupment argument relates to the $1,920,000 in integration services fees paid for Milestones 1 through 3, a portion of which was performed on platforms (Argonaut-B, Argonaut-D, and Argonaut-E) that have now been descoped. To the extent that milestone work on descoped platforms conferred no lasting benefit on VMS, an equitable or contractual credit argument may be available. We note, however, that the milestone fee structure does not allocate fees by platform; each milestone payment covers work across all five platforms, making it difficult to isolate the portion attributable to any single platform.
• Elimination of future exposure. VMS eliminates the runtime royalty exposure ($4,000,000 cap) and remaining integration services fees ($1,280,000).
• Year 2 Maintenance Fee. If VMS successfully contests the $2,400,000 Year 2 Maintenance Fee during the dormancy period (a matter addressed in a separate C&H memorandum), the remaining commitment drops further. If VMS is unsuccessful in that contest and the Year 2 fee is ultimately determined to be owed, VMS may need to pay it before or in connection with termination, increasing total expenditures under the MESLSA to $14,720,000.
Key Timing Risk. The 12-month dormancy cap under Section 9.4 expires on August 3, 2024, only approximately six weeks after the June 21, 2024 safe-harbor date. VMS must coordinate the timing of its termination notice and dormancy renegotiation carefully to avoid a situation in which:
(a) VMS sends a termination-for-convenience notice on June 21, 2024, triggering a 180-day notice period running until approximately December 18, 2024; but
(b) the dormancy cap expires on August 3, 2024, triggering the mandatory renegotiation mechanism under Section 9.4 while the termination notice is pending.
The interaction between a pending Section 9.1 termination notice and a simultaneous Section 9.4 dormancy-cap expiration creates potential ambiguity regarding which provision controls the termination and its fee consequences. We address this interaction further in Scenario 4 below.
Termination Timeline. If VMS sends its termination-for-convenience notice on June 21, 2024, the termination would become effective approximately December 18, 2024. During the intervening 180-day period, VMS remains subject to all continuing obligations under the MESLSA, including any maintenance fee obligations and the derivative works license under Section 7.2.
C. Scenario 3: Maintain Dormancy and Negotiate Fee Restructuring
Under this scenario — which we recommend as the primary strategy — VMS maintains its current Dormancy Status through the 12-month dormancy cap expiration on August 3, 2024, at which point Section 9.4 triggers the mandatory renegotiation mechanism. Simultaneously, VMS pursues a negotiated fee restructuring with MeridianCode, using the approaching 24-month anniversary and the dormancy cap expiration as leverage points.
Proposed Restructuring Elements:
(i) Dormancy extension beyond August 3, 2024. An extension of the dormancy period by 6 to 12 months would provide VMS with additional time to reassess the viability of Argonaut-A and Argonaut-C before committing to either reactivation or termination.
(ii) Scope reduction from 5 to 2 platforms. A formal amendment to the MESLSA reflecting the rescoped Project Argonaut (Argonaut-A and Argonaut-C only), with corresponding adjustments to the integration services fee schedule and milestones.
(iii) Credit of Year 2 Maintenance Fee against future obligations. If VMS is determined to owe the $2,400,000 Year 2 Maintenance Fee, VMS should negotiate to credit this amount against future maintenance fees or integration services charges upon reactivation, rather than paying it as a standalone obligation during dormancy.
(iv) Reduced runtime royalty cap. A reduction of the $4,000,000 aggregate runtime royalty cap to reflect the reduced scope (2 platforms instead of 5), with a proportionate reduction in the per-unit royalty rate or the unit threshold.
(v) Derivative works ownership carve-out for DW-001, DW-002, and DW-003. Renegotiation of Section 7.2 to narrow or eliminate MeridianCode's perpetual royalty-free license to VMS's derivative works, or at minimum to carve out derivative works that are not dependent on the ATLAS-RT Software and can operate independently.
Financial Benefit. This approach preserves VMS's reactivation optionality for Argonaut-A and Argonaut-C while reducing financial exposure. If restructuring is successful, VMS avoids the forfeiture of $12,320,000 and repositions the MESLSA on terms that reflect the actual scope and pace of Project Argonaut.
Risk. If the mandatory renegotiation under Section 9.4 fails — i.e., if the parties are unable to reach agreement within the 60-day renegotiation window following August 3, 2024 — Section 9.4 triggers automatic termination of the MESLSA. However, at that point, the 24-month anniversary will have already passed (August 3, 2024 is after June 21, 2024), so the fee-forfeiture clause under Section 9.1 would no longer apply. This is a critical feature of the recommended strategy: even in the worst case (failed renegotiation leading to mandatory termination), VMS avoids the $12,320,000 forfeiture.
Negotiation Posture. Redstone Whitaker LLP (Alan M. Briscoe) has been engaged to conduct the restructuring negotiations. We recommend that the negotiation term sheet be structured to emphasize VMS's leverage: (a) after June 21, 2024, VMS can terminate without forfeiture, reducing MeridianCode's incentive to insist on the status quo; (b) MeridianCode has an economic interest in preserving the relationship and the remaining $7,680,000 in contracted revenue; and (c) the alternative to restructuring — mandatory termination under Section 9.4 — would result in MeridianCode losing a significant customer and potentially the runtime royalties that represent the ongoing revenue stream from the deal.
D. Scenario 4: Dormancy Expires Without Resolution — Forced Termination
Under this scenario, VMS takes no affirmative action and allows the 12-month dormancy period to expire on August 3, 2024 without either reactivating integration activities or reaching a renegotiated agreement with MeridianCode. In this event, Section 9.4 triggers mandatory termination of the MESLSA.
Fee Forfeiture Analysis. Because August 3, 2024 is after June 21, 2024, the Section 9.1 fee-forfeiture clause does not apply — but only if the forced termination under Section 9.4 is treated as a termination for convenience under Section 9.1 or is otherwise governed by the same fee-treatment provisions. This is not certain.
MeridianCode may argue that a forced termination under Section 9.4 is doctrinally distinct from a voluntary termination for convenience under Section 9.1 and that Section 9.1's fee provisions — including the fee-forfeiture clause and its 24-month safe harbor — do not govern the consequences of a Section 9.4 termination at all. If this argument prevails, the treatment of prepaid fees upon a Section 9.4 forced termination would be governed by whatever residual provisions of the MESLSA apply (if any) or by default principles of Michigan law. This could leave the fee treatment ambiguous and subject to dispute.
Loss of Reactivation Optionality. If the MESLSA terminates automatically under Section 9.4 without a restructured agreement, VMS permanently loses the right to reactivate integration on the ATLAS-RT Software for the Argonaut-A and Argonaut-C platforms. Reacquiring a license would require a new agreement with MeridianCode, likely on less favorable terms and potentially subject to relicensing fees.
Derivative Works Ownership Disputes. Without the MESLSA framework in place to govern the derivative works license under Section 7.2, disputes over VMS's right to use, modify, and exploit DW-001, DW-002, and DW-003 would need to be resolved through separate negotiation or litigation. The MESLSA's arbitration clause (Section 14.5) survives termination for purposes of resolving disputes arising under the agreement, so these disputes would still be subject to MAI arbitration, but the absence of a restructured agreement would leave the scope of the derivative works license uncertain and potentially contentious.
Assessment. This scenario is suboptimal and should be avoided. VMS should proactively pursue either a termination-for-convenience notice (Scenario 2) or a negotiated restructuring (Scenario 3), rather than allowing a forced termination to occur by inaction.
V. Interaction with Other Critical Deadlines
A. Section 4.3 Use-It-or-Lose-It Deadline (December 21, 2023)
Section 4.3 of the MESLSA requires VMS to "commence integration testing on at least two (2) Licensed Platform Configurations" within 18 months of the Effective Date. The 18-month period measured from June 21, 2022 expires on December 21, 2023.
VMS has completed Milestone 3 (alpha integration testing) on Argonaut-A, and Milestone 2 (source-code customization and delivery) on Argonaut-C. The threshold question under Section 4.3 is whether VMS's progress on these two platforms constitutes "commencement of integration testing" within the meaning of the clause. We note the following considerations:
• Argonaut-A has passed alpha integration testing (Milestone 3), which unambiguously constitutes "integration testing" and satisfies Section 4.3 with respect to at least one platform.
• Argonaut-C has reached Milestone 2 (source-code customization), but has not yet commenced Milestone 3 (alpha integration testing). Whether Milestone 2 work constitutes "commencement of integration testing" is debatable. MeridianCode could argue that source-code customization is a precursor to integration testing, not integration testing itself, and that Section 4.3's requirement has not been met with respect to the second platform.
Dormancy Tolling Argument. Section 9.4 tolls "all milestone deadlines" during Dormancy Status. VMS argues that the Section 4.3 deadline is, in substance, a milestone deadline — it requires the achievement of a specified contractual objective (commencement of integration testing on two platforms) by a specified date — and is therefore tolled during dormancy. If this argument prevails, the December 21, 2023 deadline would be extended by the duration of the dormancy period. MeridianCode may dispute this characterization, arguing that Section 4.3 is a licensee-use obligation, not a milestone deadline, and is therefore not subject to tolling.
Interaction with Fee Forfeiture. If Section 4.3 is not tolled and VMS fails to satisfy it by December 21, 2023, MeridianCode may have grounds to terminate the MESLSA for VMS's breach. A MeridianCode-initiated termination for cause would likely not trigger the Section 9.1 fee-forfeiture clause, which by its terms applies only to licensee-initiated termination for convenience. However, such a termination would raise separate damages issues: MeridianCode could seek damages for breach, and the treatment of prepaid fees would be governed by the termination-for-cause provisions of Section 9.2 rather than Section 9.1.
The Section 4.3 analysis is addressed in detail in a separate Calderwood & Harkness memorandum. For purposes of this fee-forfeiture analysis, VMS should account for the Section 4.3 deadline as a potential accelerant that could alter the termination landscape, particularly if MeridianCode uses a Section 4.3 breach as leverage in the fee restructuring negotiations.
B. 12-Month Dormancy Cap (August 3, 2024)
As discussed throughout this memorandum, the 12-month dormancy cap under Section 9.4 expires on August 3, 2024 — approximately six weeks after the June 21, 2024 safe-harbor date under Section 9.1. The proximity of these two dates is strategically significant. VMS can afford to let the dormancy period run its full 12-month course without incurring fee-forfeiture risk, because by the time the dormancy cap expires and triggers mandatory renegotiation or forced termination, the 24-month anniversary will have passed.
This timing dynamic provides VMS with meaningful negotiating leverage. MeridianCode knows that, after June 21, 2024, it can no longer rely on the fee-forfeiture clause to deter VMS from terminating. If MeridianCode wishes to preserve the MESLSA relationship and the remaining $7,680,000 in contracted revenue, it has an incentive to reach a restructured agreement that is acceptable to VMS before or during the mandatory renegotiation window following August 3, 2024.
C. MESLSA Expiration (June 20, 2027)
The MESLSA's five-year term runs through June 20, 2027. If VMS reactivates integration activities under a restructured MESLSA, it retains license rights to the ATLAS-RT Software through expiration — a period of approximately three additional years from the present date. The long-term optionality value of maintaining the MESLSA should be weighed against the near-term financial exposure.
Specifically, if Project Argonaut's commercial prospects improve — for example, if semiconductor supply-chain conditions stabilize or if Ashgrove Equity Partners revises its capital expenditure constraints — VMS may wish to resume integration on Argonaut-A and Argonaut-C and ultimately deploy the ATLAS-RT Software in production vehicles. The runtime royalty revenue generated by successful deployment could partially or fully offset VMS's prepaid fee investment. Conversely, if VMS terminates the MESLSA now, it forecloses this optionality and writes off the entire $12,320,000 investment with no path to recoupment through future commercial activity.
VI. Recommended Strategy
A. Primary Recommendation: Dormancy Through June 21, 2024 + Negotiated Restructuring
Based on the analysis set forth above, we make the following primary recommendation:
VMS should not exercise its termination-for-convenience right under Section 9.1 before June 21, 2024 under any circumstances. Doing so would trigger the fee-forfeiture clause, resulting in the loss of $12,320,000 in prepaid fees with no contractual right to recoupment.
Instead, VMS should pursue the following coordinated strategy:
1. Maintain Dormancy Status. VMS should continue in Dormancy Status under Section 9.4 through and beyond June 21, 2024. No affirmative action is required to maintain dormancy; VMS simply needs to refrain from reactivating integration activities and continue to comply with its dormancy-period obligations (which are minimal).
2. Continue Disputing the Year 2 Maintenance Fee. VMS should maintain its position that the $2,400,000 Year 2 Maintenance and Support Fee is not owed during dormancy, or at minimum should be substantially reduced to reflect the critical-security-patch-only support level. This dispute should be preserved as a negotiating chip in the restructuring discussions.
3. Pursue Negotiated Fee Restructuring. VMS should engage MeridianCode through Redstone Whitaker LLP (Alan M. Briscoe) to negotiate a comprehensive restructuring of the MESLSA. The restructuring should address the following elements:
(i) Extension of the dormancy period beyond August 3, 2024, to provide VMS with additional time to evaluate its options;
(ii) Formal scope reduction from five platform configurations to two (Argonaut-A and Argonaut-C), with corresponding fee adjustments;
(iii) Credit of the disputed Year 2 Maintenance Fee ($2,400,000) against future obligations upon reactivation;
(iv) Reduction of the runtime royalty cap from $4,000,000 to a level proportionate to the reduced scope (potentially $1,600,000, reflecting 2/5 of the original cap);
(v) Derivative works ownership carve-out for DW-001, DW-002, and DW-003, narrowing or eliminating MeridianCode's perpetual royalty-free license to these works.
4. Preserve Reactivation Optionality. The restructuring should preserve VMS's ability to reactivate integration on Argonaut-A and Argonaut-C consistent with the rescoped Project Argonaut program, maintaining the MESLSA framework and VMS's license rights through the June 20, 2027 expiration.
B. Fallback Position: Termination After June 21, 2024
If restructuring negotiations with MeridianCode are unsuccessful, VMS should issue a termination-for-convenience notice under Section 9.1 on or promptly after June 21, 2024. Concurrently, VMS should assert fee recapture arguments, focusing in particular on:
• Integration services fees ($1,920,000) paid for milestone work on platforms (Argonaut-B, Argonaut-D, Argonaut-E) that have been descoped and for which VMS received no lasting benefit;
• A proportional reduction of the upfront license fee attributable to the period of dormancy during which VMS was not utilizing the ATLAS-RT Software and MeridianCode's support obligations were minimal; and
• Any other equitable or contractual bases for reducing MeridianCode's retention of fees paid.
VMS should prepare for the possibility that MeridianCode will resist any fee recapture and that the dispute will proceed to binding arbitration before the Midwest Arbitration Institute in Detroit, Michigan, before a three-arbitrator panel. Calderwood & Harkness should begin identifying and vetting potential arbitrator candidates and developing the evidentiary record to support VMS's fee recapture arguments.
C. Risk Mitigation Steps in the Interim
In addition to the primary and fallback strategies described above, VMS should take the following risk mitigation steps in the near term:
1. Document Engineering Investment. VMS should compile and preserve detailed records of all integration work completed and internal engineering hours invested (approximately 14,200 hours through March 2023) to support any future fee recapture, unjust enrichment, or damages claims. This documentation should include time records, project logs, milestone deliverables, correspondence with MeridianCode, and internal technical reports.
2. Complete Derivative Works Assessment. VMS should continue its engagement with Hargrove Technical Consulting, LLC (Dr. Samuel Beecroft) to complete the independent technical assessment of derivative works DW-001, DW-002, and DW-003. The assessment should establish the scope, functionality, ATLAS-RT dependency (or independence), and estimated commercial value ($1,800,000 to $2,500,000) of each derivative work. This assessment will be critical to the derivative works ownership carve-out negotiations and to any future dispute over Section 7.2.
3. Coordinate on Accounting Treatment. VMS should coordinate with Sandra M. Okafor (VMS CFO) and Ashford & Greer, P.C. (Patricia Noonan, engagement partner) regarding the appropriate accounting treatment of the $12,320,000 in prepaid fees. Depending on VMS's assessment of the recoverability of these fees and the likelihood of reactivation, an impairment charge or write-down may be required under applicable accounting standards. The timing and magnitude of any such charge should be coordinated with the broader strategy to avoid premature disclosure or adverse financial covenant implications.
4. Coordinate with Pinnacle National Bank. VMS should coordinate with Pinnacle National Bank, N.A. (Howard Segal, relationship manager) regarding any further notification obligations under the Credit Facility and the potential covenant implications of a $12,320,000 fee write-off. Specifically, VMS should model whether a write-off of this magnitude would affect the Consolidated Leverage Ratio or Minimum Consolidated EBITDA covenants and, if so, whether a covenant waiver or amendment would be required. Given that VMS had $92,000,000 outstanding under the $175,000,000 facility as of July 2023, the Credit Facility dynamics should be factored into the timing and structure of any termination decision.
5. Evaluate Insurance Coverage. VMS should evaluate whether any portion of the fee-forfeiture exposure or related losses may be covered under Technology Errors & Omissions Policy No. TEO-2022-7891, issued by Commonwealth Surety & Insurance Co. The policy provides $10,000,000 per occurrence and $20,000,000 aggregate coverage, subject to a $500,000 retention. A separate Calderwood & Harkness memorandum addresses this insurance coverage analysis in detail. While we do not expect that a voluntary termination-for-convenience scenario would trigger coverage under the Technology E&O policy, certain related claims (e.g., MeridianCode counterclaims for breach, derivative works disputes) may fall within the policy's scope.
6. Keep Ashgrove Equity Partners Informed. VMS should keep Kestrel Capital Partners, LP (Katherine "Kate" Drummond, Partner, Portfolio Operations and VMS board observer; Victor Salerno, Managing Partner) informed of the financial exposure and the recommended strategy on an ongoing basis. Given the magnitude of the potential forfeiture ($12,320,000) and its relationship to Ashgrove Equity Partners's portfolio-wide capital expenditure directives, Ashgrove Equity Partners's continued alignment with VMS's approach is essential. We recommend a briefing call or memorandum to Ashgrove Equity Partners summarizing this analysis and the recommended strategy, subject to appropriate privilege protections.
VII. Conclusion
The fee-forfeiture risk under Section 9.1 of the MESLSA represents the single largest financial risk to VMS in the near term, with a total exposure of $12,320,000. A termination for convenience before June 21, 2024 is strongly inadvisable, as it would trigger the fee-forfeiture provision and eliminate any possibility of recouping the prepaid fees.
The recommended strategy — maintaining Dormancy Status through the 24-month anniversary while pursuing negotiated fee restructuring with MeridianCode — preserves VMS's financial position, maintains reactivation optionality for the Argonaut-A and Argonaut-C platforms, and positions VMS favorably for either a restructured MESLSA on more favorable terms or a post-anniversary termination without forfeiture. This approach also mitigates the risks associated with the overlapping critical deadlines identified in this memorandum, including the Section 4.3 Use-It-or-Lose-It deadline and the 12-month dormancy cap expiration.
Calderwood & Harkness will continue to develop the negotiation term sheet in coordination with Redstone Whitaker LLP, monitor all critical deadlines, and prepare companion memoranda on the related issues identified herein. We are available to discuss this analysis and the recommended strategy at your convenience.
This memorandum is a privileged and confidential attorney-client communication and attorney work product. It is intended solely for the use of the addressee and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. This memorandum does not constitute legal advice and is subject to further analysis as facts and circumstances develop.
VIII. Appendices and Attachments Referenced
Appendix A: Summary Timeline of Key Dates
Appendix B: Fee Payment and Exposure Summary