MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
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: June 15, 2022
RE: Preliminary Review of Draft Master Embedded Software License and Services Agreement with Meridian Code Technologies, Inc.
Matter No.: 1007-00008
I. Executive Summary
Calderwood & Harkness LLP ("C&H") has been engaged by Vantage Mobility Systems Corp. ("VMS" or "Vantage") to review and advise on the draft Master Embedded Software License and Services Agreement (the "MESLSA" or the "Agreement") proposed to be entered into between VMS, as licensee, and Meridian Code Technologies, Inc. ("MeridianCode" or "MCT"), as licensor. The draft MESLSA carries a proposed effective date of June 21, 2022. This memorandum sets forth our preliminary analysis of the draft Agreement and identifies certain provisions that, in our view, present elevated risk to VMS and warrant focused negotiation prior to execution.
The MESLSA governs the licensing of MeridianCode's proprietary ATLAS-RT™ embedded real-time operating system, Version 4.2 (and subsequent minor updates thereto), for integration into VMS's next-generation adaptive vehicle platform program, internally designated "Project Argonaut." Project Argonaut is a cornerstone initiative for VMS, intended to establish a unified embedded-software architecture across five vehicle platform configurations. The ATLAS-RT system will serve as the core real-time operating system ("RTOS") layer upon which VMS's platform-specific application software will operate.
The total deal value of the MESLSA is approximately $20,000,000 over a five-year term commencing June 21, 2022 and expiring June 20, 2027. The fee structure comprises the following components:
(i) an upfront license fee of $8,000,000, payable at signing;
(ii) annual maintenance and support fees totaling $2,400,000 per year (aggregate of approximately $4,800,000 over the relevant two-year specified period, with additional years contemplated);
(iii) milestone-based integration services fees of $3,200,000, payable across five defined milestones in connection with Statement of Work No. 1; and
(iv) per-unit runtime royalties at a rate of $80 per unit, subject to an aggregate cap of $4,000,000 over the five-year term (representing up to 50,000 units at $80 per unit).
Based on our review, this memorandum identifies several provisions of the draft MESLSA that present elevated risk to VMS. In particular, we flag the following sections for priority attention:
• Section 4.3 — the "Use-It-or-Lose-It" clause, which imposes an aggressive 18-month deadline for commencement of integration testing on a minimum number of licensed platforms;
• Section 9.1 — the termination-for-convenience provision, which subjects VMS to complete forfeiture of all prepaid fees if VMS terminates the Agreement within the first 24 months;
• Section 7.2 — the derivative works ownership and license-back provision, which creates a joint-ownership regime over VMS-originated modifications and grants MeridianCode a perpetual, royalty-free license to such works;
• Section 9.4 — the dormancy mechanics, which allow MeridianCode to convert the license to reduced-support status upon extended integration suspension, with ambiguous interactions with other key provisions; and
• Section 12.6 — the change-of-control consent requirement, which could complicate a future exit transaction by VMS's private equity sponsor, Kestrel Capital Partners, LP.
For each risk provision, this memorandum provides a detailed summary, risk assessment, and recommended negotiation position intended to mitigate VMS's exposure. We have organized our recommended negotiation positions into a prioritized list in Section VI below, which we believe will serve as a useful framework for discussions with MeridianCode's counsel at Redstone Whitaker LLP.
We recommend that VMS not proceed to execution of the MESLSA in its current draft form. The provisions identified herein require meaningful revision to bring VMS's risk profile within acceptable parameters for a transaction of this magnitude and strategic importance.
II. Background
A. The Parties
Vantage Mobility Systems Corp. ("VMS"). VMS is a corporation organized under the laws of the State of Delaware, with its principal offices located at 4100 Industrial Parkway, Sterling Heights, Michigan 48312. VMS specializes in the design, manufacture, and distribution of adaptive mobility vehicles, including wheelchair-accessible vans and modified commercial fleet vehicles. For the fiscal year ending December 31, 2021 ("FY2022" references herein reflect trailing-twelve-month data and projections), VMS reported revenue of approximately $485 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $61 million. VMS employs approximately 2,200 individuals across its manufacturing, engineering, sales, and corporate operations.
VMS is a portfolio company of Kestrel Capital Partners, LP ("Ashgrove Equity Partners"), a Delaware limited partnership with approximately $4.8 billion in assets under management. Ashgrove Equity Partners acquired VMS in 2019 for an enterprise value of approximately $380 million. The general partner of Ashgrove Equity Partners is Cobalt Ridge Partners GP, LLC. Katherine "Kate" Drummond of Ashgrove Equity Partners serves as a board observer on the VMS board of directors and participates in strategic investment reviews. The Ashgrove Equity Partners ownership structure is relevant to several provisions of the MESLSA discussed in this memorandum, particularly the change-of-control provision analyzed in Section IV.E below.
Key VMS personnel relevant to this transaction include:
• Thomas R. Keating — Chief Executive Officer
• Sandra M. Okafor — Chief Financial Officer
• Dennis J. Whitfield — Chief Technology Officer and Project Argonaut Executive Sponsor
• Rachel A. Huang — Vice President, Procurement & Strategic Sourcing
• Martin G. Cross — General Counsel
• Lena Petrova — Director, Software Integration Engineering
Meridian Code Technologies, Inc. ("MeridianCode" or "MCT"). MeridianCode is a corporation organized under the laws of the State of California, with its principal offices located at 2750 Orchard Blvd., Suite 400, Santa Clara, California 95054. MeridianCode is publicly traded on the Nasdaq Stock Market under the ticker symbol "MCDT." The company specializes in embedded software solutions and real-time operating systems for the automotive, aerospace, and industrial applications sectors. For fiscal year 2022, MeridianCode reported revenue of approximately $310 million and employs approximately 1,400 individuals.
Key MeridianCode personnel relevant to this transaction include:
• Jeffrey N. Castellano — Chief Executive Officer
• Priya Ramaswamy — General Counsel & Corporate Secretary
• Gregory L. Fisk — Senior Vice President, Automotive & Mobility Licensing
• Diana Cho — Director, Enterprise License Management
MeridianCode is represented in the MESLSA negotiation by the law firm of Redstone Whitaker LLP, headquartered at 555 Mission Street, Suite 2800, San Francisco, California 94105. The Redstone Whitaker engagement team is led by Alan M. Briscoe (Lead Partner) and Natasha C. Ferraro (Senior Associate). All correspondence and markup exchanges with MeridianCode's counsel should be directed through the Redstone Whitaker team.
B. Project Argonaut Overview
Project Argonaut is a multi-year strategic initiative sponsored by CTO Dennis J. Whitfield, with the objective of developing a unified embedded-software architecture for VMS's next-generation adaptive vehicle platforms. The program envisions the integration of the ATLAS-RT real-time operating system as the foundational RTOS layer, upon which VMS will build proprietary application-level software controlling adaptive mobility functions including but not limited to wheelchair ramp deployment, seat positioning, drive-by-wire modifications, and fleet telematics.
The original scope of Project Argonaut encompasses five vehicle platform configurations, internally designated Argonaut-A through Argonaut-E. Each platform corresponds to a distinct vehicle type or market segment within VMS's product portfolio. The MESLSA is the primary contractual vehicle enabling this program, as ATLAS-RT provides the core operating system functionality upon which all platform-specific software modules depend.
Integration services under the MESLSA are described in Statement of Work No. 1 ("SOW No. 1"), which is appended to the Agreement as Exhibit B. SOW No. 1 contemplates five sequential milestones:
• Milestone 1 (M1): Requirements specification approval — formal sign-off by both parties on the functional and non-functional requirements for the ATLAS-RT integration.
• Milestone 2 (M2): Source-code customization delivery — delivery by MeridianCode of customized ATLAS-RT source code incorporating VMS platform-specific modifications.
• Milestone 3 (M3): Alpha integration testing pass — successful completion of alpha-level integration testing demonstrating core RTOS functionality within the target platform environment.
• Milestone 4 (M4): System integration validation — comprehensive system-level testing validating ATLAS-RT interoperability with VMS application software, hardware interfaces, and safety-critical subsystems.
• Milestone 5 (M5): Production release — final release of the integrated software build for production deployment.
The milestone structure is directly relevant to several provisions analyzed in this memorandum, particularly the Use-It-or-Lose-It clause (Section 4.3), the fee forfeiture provision (Section 9.1), and the dormancy mechanics (Section 9.4).
C. VMS's Existing Financial Commitments
In evaluating the MESLSA, it is important to consider VMS's existing financial obligations and related contractual requirements that may be implicated by execution of the Agreement.
Senior Secured Revolving Credit Facility. VMS maintains a $175,000,000 Senior Secured Revolving Credit Facility (the "Credit Facility") dated September 12, 2019, with Pinnacle National Bank, N.A. serving as administrative agent. The relationship manager for the Credit Facility is Howard Segal. As of the date of this memorandum, outstanding borrowings under the Credit Facility are expected to be approximately $92,000,000. Section 6.12 of the Credit Facility agreement requires VMS to notify the administrative agent of any material contract modification, termination, or dispute involving commitments exceeding $5,000,000. The MESLSA, with a total deal value of $20,000,000, clearly exceeds this materiality threshold. Accordingly, VMS will need to provide notification to Pinnacle National Bank promptly following execution, as discussed further in Section V.B below.
Audit Relationship. VMS's independent auditors are Ashford & Greer, P.C., headquartered at 1 Woodward Avenue, Suite 1500, Detroit, Michigan 48226. The engagement partner is Patricia Noonan, CPA. The accounting treatment of the upfront license fee, milestone payments, and per-unit royalties under the MESLSA will require coordination with Ashford & Greer, as discussed further in Section V.D below.
Technology Errors & Omissions Insurance. VMS maintains a Technology Errors & Omissions Policy, Policy No. TEO-2022-7891, issued by Commonwealth Surety & Insurance Co. The policy provides coverage limits of $10,000,000 per occurrence and $20,000,000 in the aggregate, with a self-insured retention of $500,000. This policy may be relevant to losses arising from intellectual property disputes related to the integration and derivative works contemplated by the MESLSA, as discussed further in Section V.C below.
III. Summary of Key Commercial Terms
This section provides a high-level summary of the principal commercial terms of the draft MESLSA for reference. A comprehensive term sheet or deal-point summary will be provided separately if requested.
A. Licensed Product and Scope
The licensed product under the MESLSA is the ATLAS-RT™ embedded real-time operating system, Version 4.2, together with all subsequent minor updates (i.e., updates within the 4.x version series) released by MeridianCode during the term of the Agreement. The license grant is structured as a perpetual license, subject to and limited by the five-year term of the Agreement. In practical terms, VMS's right to use ATLAS-RT Version 4.2 is perpetual in concept but is functionally bounded by the term of the Agreement; upon expiration or termination of the MESLSA, the perpetual license survives only as to production units deployed prior to termination, subject to certain post-termination provisions that we have not yet fully analyzed.
The license authorizes VMS to integrate ATLAS-RT into up to five (5) designated vehicle platform configurations under Project Argonaut (Argonaut-A through Argonaut-E). The platforms are identified by designation in Exhibit A to the Agreement. The license is granted on a worldwide territorial basis, without geographic restriction.
We note that the license scope is limited to the five designated platforms; any expansion to additional vehicle platforms beyond Argonaut-A through Argonaut-E would require a license amendment or supplemental agreement. This limitation should be borne in mind as VMS's product roadmap evolves over the five-year term.
B. Fee Structure
The total financial commitment under the MESLSA is approximately $20,000,000 over the five-year term. The fee structure is composed of four distinct components:
Upfront License Fee: $8,000,000. This amount is payable upon execution of the Agreement on or about June 21, 2022. The upfront license fee represents the single largest cash outlay under the MESLSA and constitutes the primary at-risk amount under the fee forfeiture provision of Section 9.1.
Annual Maintenance and Support Fee: $2,400,000 per year. The Year 1 maintenance and support fee is due on July 15, 2022 — approximately 24 days after the anticipated signing date. The annual maintenance fee covers standard support services including software updates, bug fixes, technical assistance, and access to MeridianCode's support engineering team during business hours. Over the contemplated five-year term, total maintenance and support fees could aggregate to approximately $12,000,000 if the fee remains constant at $2,400,000 per year, though the stated total deal value of $20,000,000 appears to contemplate only two full years of maintenance at $2,400,000 per year (aggregating $4,800,000). We will need to confirm with VMS finance whether the total deal value figure accounts for all five years of maintenance or reflects anticipated early ramp-up of royalty payments offsetting later-year maintenance obligations.
Integration Services Fee: $3,200,000. This fee is structured across the five milestones defined in SOW No. 1. If allocated evenly, each milestone payment would be $640,000. However, the actual milestone weighting may vary as specified in the SOW, and we have not yet reviewed the detailed allocation schedule in SOW No. 1. Milestone payments correspond to:
*Assumes even allocation. Actual milestone weighting to be confirmed per SOW No. 1.
Per-Unit Runtime Royalties: $80 per unit, aggregate cap of $4,000,000. VMS will pay MeridianCode a royalty of $80 for each production unit in which ATLAS-RT is embedded and deployed. The aggregate royalty obligation is capped at $4,000,000 over the five-year term, which corresponds to a maximum of 50,000 units (50,000 × $80 = $4,000,000). Royalties are payable quarterly in arrears based on VMS's production reports.
Total Deal Value Reconciliation. The stated total deal value of $20,000,000 reconciles as follows:
We note that this reconciliation accounts for only two years of maintenance fees at $2,400,000 per year. If maintenance fees continue at the same rate for Years 3 through 5, the actual total expenditure could be substantially higher. We will seek clarification from VMS's finance team and from MeridianCode as to the intended total deal value calculation.
C. Term and Governing Law
The MESLSA has a five-year term commencing on June 21, 2022 and expiring on June 20, 2027. The Agreement does not appear to include an automatic renewal provision, though we will confirm this upon further review.
The Agreement is governed by the laws of the State of Michigan, without regard to conflict-of-laws principles. Given that VMS is headquartered in Michigan and the arbitration is seated in Michigan, the Michigan governing law selection is favorable to VMS.
Dispute Resolution. The draft MESLSA provides for binding arbitration under the rules of the Midwest Arbitration Institute ("MAI"), with the arbitration seated in Detroit, Michigan. For disputes with an amount in controversy exceeding $1,000,000, the arbitration is to be conducted before a three-arbitrator panel. For disputes at or below the $1,000,000 threshold, the Agreement presumably provides for a single arbitrator, though the specific provision should be confirmed. We address certain observations regarding the arbitration clause in Section V.A below.
IV. Analysis of Key Risk Provisions
This section provides our detailed analysis of the five provisions of the draft MESLSA that we have identified as presenting elevated risk to VMS. For each provision, we set forth a summary of the contractual language, an assessment of the risks presented, and our recommended negotiation position.
A. Section 4.3 — "Use-It-or-Lose-It" Clause
1. Provision Summary
Section 4.3 of the draft MESLSA imposes a requirement that VMS commence integration testing on at least two (2) of the five (5) designated vehicle platform configurations within eighteen (18) months of the Effective Date. Based on the proposed Effective Date of June 21, 2022, this requirement would need to be satisfied by December 21, 2023.
The provision is structured as a condition subsequent to the continuation of VMS's full license rights. Although the precise remedial language requires further analysis, the clear implication of Section 4.3 is that failure to satisfy the integration testing commencement requirement within the 18-month window could jeopardize VMS's rights under the license — potentially resulting in a reduction of the licensed platform scope or, in a worst-case interpretation, termination of the license in its entirety.
2. Risk Assessment
We have identified several significant risk factors associated with Section 4.3 as currently drafted.
Aggressive Timeline. The 18-month deadline is aggressive in the context of an enterprise-scale embedded RTOS integration program spanning five distinct vehicle platform configurations. Automotive embedded software development cycles are notoriously subject to delay, particularly in programs of this complexity. Based on our experience with comparable transactions, a more typical timeline for commencement of integration testing on multiple platforms would be 24 to 30 months, accounting for the inherently sequential nature of requirements specification, source-code customization, and test environment provisioning.
Definitional Ambiguity. The draft MESLSA does not precisely define what constitutes "commenc[ing] integration testing." This creates material ambiguity. The phrase could be interpreted to require commencement of formal alpha integration testing at the Milestone 3 level — a rigorous standard that presupposes completion of both requirements specification (M1) and source-code customization (M2) for the relevant platforms. Alternatively, it could be interpreted more broadly to encompass initial code integration activities at the Milestone 2 level or even preliminary testing activities preceding formal milestone-level events. The lack of definitional clarity creates the risk that MeridianCode could adopt the more restrictive interpretation to VMS's disadvantage.
Supply-Chain Dependencies. Commencement of integration testing necessarily depends on the availability of target hardware for the relevant vehicle platforms. The ongoing global semiconductor supply-chain disruptions, which have materially impacted the automotive industry since 2020, create a risk that hardware components necessary for integration testing on certain Argonaut platforms may be delayed beyond VMS's control. Section 4.3 does not contain any force majeure carve-out or supply-chain exception that would protect VMS in these circumstances.
Financial Exposure. If VMS fails to meet the December 21, 2023 deadline, and MeridianCode successfully argues that VMS's license rights are diminished or terminated as to the platforms on which testing has not commenced, VMS would face a significant loss of license value. The upfront license fee of $8,000,000 was predicated on a five-platform scope; a reduction to two or three platforms without a corresponding fee adjustment would result in a dramatic overpayment. Moreover, any milestone payments and maintenance fees already paid would represent sunk costs with diminished returns.
Interaction with Section 9.4 (Dormancy). As discussed in Section IV.D below, the dormancy provisions of Section 9.4 allow MeridianCode to convert the license to dormancy status if VMS suspends active integration for more than 120 consecutive days. The interaction between the dormancy provision and the Use-It-or-Lose-It clause is not explicitly addressed in the draft. It is unclear whether a period of dormancy would toll the 18-month deadline under Section 4.3, or whether the deadline would continue to run during dormancy. This ambiguity could produce an unjust result if VMS enters dormancy — potentially at MeridianCode's initiative — only to find that the Section 4.3 clock continued to run.
3. Recommended Negotiation Position
We recommend VMS pursue the following negotiation objectives with respect to Section 4.3:
Broaden the Definition of "Commence Integration Testing." VMS should negotiate for a clearer and broader definition of the triggering activity. We recommend proposing language specifying that VMS shall be deemed to have "commenced integration testing" upon the earlier of: (a) commencement of formal alpha integration testing (Milestone 3 activities); (b) delivery and acceptance of source-code customization (Milestone 2 completion); or (c) commencement of any substantive code integration or test-environment provisioning activities documented in VMS's internal project records. This broader definition would provide VMS with significantly more flexibility to satisfy the requirement without compromising MeridianCode's legitimate interest in ensuring that VMS is actively pursuing the integration.
Extend the Deadline. VMS should seek extension of the commencement deadline from 18 months to 24 months (i.e., from December 21, 2023 to June 21, 2024). A 24-month timeline is more consistent with industry norms for multi-platform embedded software integration programs and would provide VMS with a meaningful buffer against unforeseen delays. If MeridianCode resists a full six-month extension, a compromise at 21 months (March 21, 2024) may be acceptable.
Cure Period. In the alternative, or in addition to the extended deadline, VMS should negotiate a cure period of at least 90 days following written notice from MeridianCode of VMS's failure to satisfy the Section 4.3 requirement. During the cure period, VMS would have the opportunity to commence testing on the required number of platforms before any rights are affected. The cure period provides a safety valve that protects VMS against inadvertent non-compliance while still preserving MeridianCode's ability to enforce the provision after a reasonable grace period.
Dormancy Tolling. VMS should request express contractual language confirming that any period of dormancy under Section 9.4 tolls the Section 4.3 deadline on a day-for-day basis. This addresses the interaction ambiguity discussed above and prevents the anomalous result of VMS losing platform rights during a period when integration activities are suspended with MeridianCode's knowledge or acquiescence.
Proportional Remedy. VMS should seek a provision expressly limiting MeridianCode's remedy for Section 4.3 non-compliance to license scope reduction — that is, the loss of VMS's license rights only as to the specific untested platforms on which integration has not commenced. The provision should expressly disclaim any right of MeridianCode to terminate the entire license or to recapture previously tested and deployed platforms as a consequence of Section 4.3 non-compliance. Additionally, VMS should seek a corresponding fee adjustment mechanism that reduces future maintenance fees and royalty obligations proportionally to any reduction in platform scope.
B. Section 9.1 — Termination for Convenience and Fee Forfeiture
1. Provision Summary
Section 9.1 of the draft MESLSA provides that either party may terminate the Agreement for convenience upon 180 days' prior written notice to the other party. This mutual termination-for-convenience right is, in isolation, a standard provision in enterprise software licensing agreements.
However, Section 9.1 includes a significant qualification: if the licensee (VMS) terminates the Agreement for convenience prior to the 24-month anniversary of the Effective Date (i.e., prior to June 21, 2024), VMS forfeits all prepaid fees. The forfeiture provision is unilateral — it applies only to licensee-initiated terminations for convenience, not to licensor-initiated terminations.
2. Risk Assessment
Section 9.1 represents the most significant financial risk provision in the draft MESLSA. The consequences of this provision merit careful consideration.
Magnitude of Exposure. As of the signing date, VMS will have paid the $8,000,000 upfront license fee. This amount would be immediately at risk of forfeiture if VMS were to terminate for convenience at any point during the first 24 months. Within approximately 24 days of signing (by the July 15, 2022 due date), VMS will also have paid the Year 1 maintenance and support fee of $2,400,000, bringing the total at-risk amount to $10,400,000.
As the integration services milestones are completed and corresponding payments are made, the at-risk exposure continues to grow. If, for example, Milestones 1 through 3 are completed and paid prior to the 24-month anniversary — a reasonable assumption given the project timeline — VMS's total at-risk exposure could reach:
This represents a substantial financial exposure — more than 60% of the total deal value — that would be forfeited entirely if VMS terminates for convenience within the forfeiture window.
Project Risk Exposure. The forfeiture provision creates significant risk in the context of VMS's business environment. Project Argonaut, while strategically important, is subject to numerous uncertainties common to large-scale automotive development programs. These include changes in market conditions, regulatory developments (such as evolving FMVSS or NHTSA requirements for adaptive vehicles), competitive dynamics, and internal capital allocation decisions. If Project Argonaut is delayed, rescoped, or abandoned for any reason within the first 24 months — whether due to technical challenges, budget constraints, or strategic reprioritization — VMS would face a total loss of prepaid fees with no recourse.
Perverse Incentive Structure. The all-or-nothing nature of the forfeiture provision creates a perverse incentive for VMS to continue funding a potentially uneconomic program simply to avoid triggering the forfeiture. This misalignment of incentives is contrary to sound capital allocation principles and could cause VMS to continue investing in a program that no longer meets its strategic or financial return thresholds. This dynamic is particularly concerning in a private equity-sponsored context, where portfolio management decisions must be responsive to evolving market conditions and investor expectations.
PE Sponsor Considerations. Kestrel Capital Partners, as VMS's private equity sponsor, may issue portfolio-wide capital expenditure directives or strategic repositioning instructions that could necessitate rescoping or termination of Project Argonaut. Such directives are a normal and foreseeable incident of PE ownership. The forfeiture provision does not distinguish between VMS-initiated terminations driven by VMS's own business judgment and those compelled by the PE sponsor's portfolio management decisions. This creates a risk that Ashgrove Equity Partners's legitimate exercise of governance rights could trigger a multi-million-dollar fee forfeiture.
Interaction with Other Provisions. The Section 9.1 forfeiture provision must also be considered in conjunction with the dormancy mechanics of Section 9.4. If VMS enters dormancy within the first 24 months, and the dormancy period subsequently expires without reactivation — triggering mandatory renegotiation or termination under Section 9.4 — it is unclear whether such a termination would be treated as a termination "for convenience" triggering fee forfeiture under Section 9.1. This ambiguity could produce a result where VMS enters dormancy in good faith, is unable to reactivate within the 12-month dormancy cap, and loses all prepaid fees through the combined operation of Sections 9.4 and 9.1.
3. Recommended Negotiation Position
We recommend VMS pursue the following negotiation objectives with respect to Section 9.1:
Proportional Fee Recovery. The primary objective should be to replace the all-or-nothing forfeiture mechanism with a proportional recovery structure. Under this approach, the amount of prepaid fees subject to forfeiture would decrease ratably over the 24-month period. For example, if VMS terminates for convenience after 12 months, VMS would recover 50% of prepaid fees; after 18 months, VMS would recover 75%. This approach balances MeridianCode's legitimate interest in recouping its upfront costs (including engineering resources committed to the integration) with VMS's interest in avoiding catastrophic forfeiture.
Alternative: Termination Fee Structure. If MeridianCode rejects proportional recovery, VMS should propose a "no-fault" early termination fee structure as an alternative to outright forfeiture. Under this approach, VMS would pay a specified termination fee — for example, 25% of the remaining unpaid contract value — in lieu of forfeiting all prepaid fees. The termination fee provides MeridianCode with certainty of recovery while eliminating VMS's exposure to total loss of its investment.
Shortened Forfeiture Window. VMS should negotiate a reduction of the forfeiture window from 24 months to 12 months. A 12-month window provides MeridianCode with reasonable protection during the initial phase of the engagement while limiting VMS's exposure to a more manageable timeframe. By the 12-month mark, VMS will have had sufficient time to assess the viability of the integration and the broader Project Argonaut program.
Material Breach Carve-Out. If MeridianCode insists on retaining a forfeiture provision, VMS should insist on an express carve-out for terminations triggered by material breach by MeridianCode. Specifically, if VMS terminates the Agreement for convenience but the termination is occasioned by or substantially related to MeridianCode's failure to perform its obligations — for example, failure to deliver timely milestone deliverables, persistent service-level failures, or breach of representations and warranties — the forfeiture should not apply. This carve-out prevents the anomalous result of VMS losing its prepaid fees when the termination is, in substance, a response to the licensor's own non-performance.
Scope of Forfeiture. VMS should seek clarification that the forfeiture, if retained, applies only to the upfront license fee and does not extend to milestone-based integration services fees paid for services that have been rendered and accepted. Once VMS has accepted a milestone deliverable, the corresponding milestone payment represents compensation for work product already delivered and accepted by VMS. Forfeiture of payments for completed and accepted work would be commercially unreasonable and potentially unenforceable as a penalty under Michigan law.
C. Section 7.2 — Derivative Works Ownership and License-Back
1. Provision Summary
Section 7.2 of the draft MESLSA addresses the ownership and licensing of derivative works created during the course of the ATLAS-RT integration. As currently drafted, the provision establishes the following framework:
(a) Any modifications, adaptations, or extensions to the ATLAS-RT source code created by VMS engineers during the integration process become jointly owned by VMS and MeridianCode.
(b) MeridianCode retains a perpetual, royalty-free, fully paid-up, worldwide, non-exclusive license to use, reproduce, modify, distribute, sublicense, and otherwise exploit such derivative works for any purpose.
(c) The identification, documentation, and disclosure procedures for derivative works are set forth in Exhibit C to the Agreement.
2. Risk Assessment
Section 7.2 is, in our assessment, a highly disadvantageous provision for VMS and warrants aggressive negotiation. Our concerns are as follows.
Substantial VMS Investment at Risk. VMS's engineering team, under the direction of Lena Petrova (Director, Software Integration Engineering), will invest thousands of person-hours and substantial intellectual capital in creating derivative works during the ATLAS-RT integration. Based on preliminary estimates from VMS's engineering leadership, the expected internal engineering investment for Project Argonaut is approximately 14,200 person-hours across internal software, systems, and test engineering teams. This does not include management oversight, documentation, or quality assurance hours. At fully loaded engineering labor rates, this investment represents millions of dollars in VMS-funded development effort.
MeridianCode's Right to Exploit VMS Work Product. Under the current joint-ownership framework, MeridianCode would have an unrestricted right to exploit derivative works created primarily through VMS's engineering effort and investment. This includes the right to license VMS-originated code to VMS's competitors in the adaptive mobility and accessible vehicle markets. There is no restriction in the current draft preventing MeridianCode from incorporating VMS-created modifications into future versions of ATLAS-RT and licensing those enhanced versions to other automotive licensees — including companies that compete directly with VMS.
Perpetual, Royalty-Free License-Back. The license-back granted to MeridianCode under Section 7.2(b) is extraordinarily broad. It is perpetual (surviving termination of the MESLSA), royalty-free, worldwide, and encompasses the right to sublicense. In practical terms, this means that MeridianCode would retain unlimited use rights in VMS-created derivative works indefinitely, regardless of whether the MESLSA remains in effect. VMS would receive no ongoing compensation for MeridianCode's exploitation of code that VMS funded, designed, and built.
Overbroad Definition of "Derivative Works." The current draft defines derivative works to encompass any "modifications, adaptations, or extensions" to the ATLAS-RT source code. This definition is problematically broad. It could capture independent VMS-originated code modules that merely interface with ATLAS-RT through standard application programming interfaces (APIs) but do not contain, incorporate, or modify any ATLAS-RT source code. Interface code — code that communicates with ATLAS-RT but is independently developed and functions independently of the ATLAS-RT code base — should not, in our view, be subject to the joint-ownership regime. The failure to distinguish between true derivative works (which incorporate or modify ATLAS-RT code) and independent interface modules (which merely interact with ATLAS-RT) creates a significant risk of over-capture.
Impact on Exit Transactions. The joint-ownership regime could materially complicate any future sale, recapitalization, or change-of-control transaction involving VMS or the Project Argonaut intellectual property portfolio. A potential acquirer of VMS would inherit shared ownership of critical integration code, with MeridianCode retaining a perpetual, unrestricted license to that same code. This shared-ownership structure reduces VMS's bargaining leverage in an exit process and could negatively impact VMS's enterprise value. From Ashgrove Equity Partners's perspective, this is a significant concern given the probability of an exit transaction within the MESLSA term.
Potential Commercial Value. While a precise valuation of the derivative works cannot be determined at this stage without an independent technical assessment, the code modifications, optimizations, and platform-specific adaptations that VMS's engineering team will create have the potential to be commercially significant. These works will embody VMS's proprietary knowledge of adaptive vehicle control systems, safety-critical real-time processing requirements, and user-interface integration — domain expertise that differentiates VMS in its market. The potential commercial value of these derivative works could range into the millions of dollars.
3. Recommended Negotiation Position
We recommend VMS pursue the following negotiation objectives with respect to Section 7.2, in order of priority:
Primary Position: Sole VMS Ownership. VMS's preferred position should be that VMS retains sole ownership of all code created by VMS engineers during the integration process. Under this structure, VMS would grant MeridianCode a limited, non-exclusive license to use VMS-created derivative works solely for the purpose of supporting the MESLSA engagement and providing maintenance services. The license-back would be restricted to: (a) non-automotive or non-competing applications only — MeridianCode would be prohibited from using VMS derivative works in any automotive or mobility application that competes with VMS's products; and (b) internal development purposes only — MeridianCode could use VMS derivative works to improve future versions of ATLAS-RT, but could not distribute, sublicense, or otherwise commercially exploit VMS derivative works as standalone products or components.
Alternative Position: Restricted Joint Ownership. If MeridianCode rejects sole VMS ownership, VMS should accept joint ownership only with the following material restrictions:
(a) Non-Competition Restriction. MeridianCode shall be prohibited from licensing, distributing, or otherwise making available any VMS-created derivative works (or any code substantially derived therefrom) to any person or entity that is a direct competitor of VMS in the adaptive mobility, accessible vehicle, or modified commercial fleet vehicle markets. VMS should define the restricted market segment with reasonable specificity.
(b) Revenue Sharing. MeridianCode shall pay VMS a royalty of not less than 50% of any revenue derived from MeridianCode's commercial exploitation of jointly owned derivative works, net of direct costs of distribution. Royalty payments would be made quarterly with supporting documentation.
(c) Post-Termination Limitations. MeridianCode's license-back should terminate or convert to a more restrictive form upon termination or expiration of the MESLSA. At minimum, the sublicensing right should terminate, and MeridianCode's use should be limited to internal development and existing licensee support.
Narrowed Derivative Works Definition. Regardless of whether sole ownership or restricted joint ownership is achieved, VMS should negotiate a narrowed definition of "derivative work" that expressly excludes:
(i) Code modules that are developed independently by VMS personnel without access to or reference to ATLAS-RT source code;
(ii) Code modules that do not contain, incorporate, or modify any portion of ATLAS-RT source code; and
(iii) Code modules that merely interface with ATLAS-RT through published APIs, even if such modules are designed for use in conjunction with ATLAS-RT.
This narrowed definition would ensure that only true derivative works — those that actually incorporate or modify ATLAS-RT code — are subject to the joint-ownership or license-back regime, while preserving VMS's sole ownership of independent interface code.
VMS Proprietary Works Designation. VMS should negotiate a mechanism allowing VMS to designate certain code as "VMS Proprietary Works" that are excluded from the joint-ownership regime entirely. The designation process should be conducted in good faith, with VMS providing MeridianCode reasonable documentation supporting the independent nature of the designated code. Disputes over designation should be resolved through a streamlined technical review process (e.g., a neutral software engineering expert) rather than formal arbitration.
Post-Termination License-Back Limitations. VMS should negotiate an express provision confirming that MeridianCode's license-back to VMS-created derivative works terminates or becomes materially restricted upon termination or expiration of the MESLSA. At minimum, MeridianCode's right to sublicense derivative works should cease upon termination, and MeridianCode's ongoing use should be limited to internal development and support of existing deployments.
D. Section 9.4 — Dormancy Provisions
1. Provision Summary
Section 9.4 of the draft MESLSA establishes a "dormancy" mechanism addressing situations where VMS suspends active integration work. The key elements of the provision are as follows:
(a) If VMS suspends active integration activities for more than 120 consecutive days without providing prior written notice to MeridianCode, MeridianCode may elect to convert the license to "Dormancy Status."
(b) During Dormancy Status, MeridianCode's support obligations are reduced to a critical-security-patch-only level. All other support services — including non-critical bug fixes, technical assistance, and update distribution — are suspended.
(c) All milestone deadlines under SOW No. 1 are tolled during any period of dormancy.
(d) Dormancy Status may not exceed 12 months in duration before triggering a mandatory renegotiation or termination of the Agreement.
2. Risk Assessment
The dormancy provisions of Section 9.4 present several risks and ambiguities that warrant careful attention.
Short Trigger Period. The 120-day consecutive suspension trigger is relatively short in the context of an enterprise-scale automotive software integration program. Integration projects of this nature routinely experience periods of reduced activity or suspension lasting 120 days or more due to range factors, including hardware procurement delays, engineering resource reallocation, regulatory review cycles, and seasonal production scheduling. A 120-day threshold could result in dormancy being triggered by a routine project pause that does not reflect any intent by VMS to abandon or materially delay the integration.
Notice Requirement. The dormancy trigger includes a "without prior written notice" qualifier, which implies that VMS can avoid dormancy by providing advance notice of a planned suspension. However, the provision does not specify the form, timing, or required content of such notice, creating the risk that informal communications (e.g., emails to MeridianCode's project team) may not be treated as sufficient written notice. Moreover, project suspensions are not always planned in advance — VMS may not realize that a cumulative series of delays has resulted in 120 consecutive days of inactivity until after the threshold has been crossed.
Reduced Support. The reduction of support to critical-security-patch-only during dormancy is a significant concern. If VMS has already created derivative works or partially integrated ATLAS-RT into one or more platforms, the code base will require ongoing support to remain viable. Non-critical bug fixes and technical assistance may be essential to maintaining code integrity, even during a period of suspended active integration. The reduction in support could result in code degradation that makes reactivation more costly and time-consuming.
12-Month Dormancy Cap. The 12-month dormancy cap creates a hard deadline for resolution. If VMS cannot reactivate the integration or negotiate a satisfactory path forward within 12 months of entering dormancy, the Agreement is subject to mandatory renegotiation or termination. This creates a scenario where VMS could be forced into a termination that — if it occurs within the 24-month window under Section 9.1 — would trigger complete fee forfeiture. The combined operation of Sections 9.4 and 9.1 could thus produce a devastating financial outcome for VMS: involuntary dormancy followed by mandatory termination followed by forfeiture of up to $12,320,000 in prepaid fees.
Interaction with Section 4.3 (Use-It-or-Lose-It). As noted in Section IV.A above, the interaction between the dormancy provision and the Use-It-or-Lose-It clause is not explicitly addressed in the draft. It is unclear whether a period of dormancy tolls the 18-month deadline for commencement of integration testing under Section 4.3. If the Section 4.3 clock continues to run during dormancy, VMS could find itself in the impossible position of being required to commence integration testing on additional platforms while the license is in dormancy status with reduced support.
Interaction with Maintenance Fee Obligations. The draft is ambiguous as to whether full annual maintenance fees remain due during dormancy. If VMS is required to continue paying $2,400,000 per year in maintenance fees while receiving only critical-security-patch support, the fee-to-value ratio becomes significantly unfavorable. This issue should be addressed expressly in the agreement.
3. Recommended Negotiation Position
We recommend VMS pursue the following negotiation objectives with respect to Section 9.4:
Extended Trigger Period. VMS should negotiate an extension of the dormancy trigger from 120 days to 180 days. This aligns the dormancy trigger with the 180-day notice period for termination for convenience under Section 9.1, creating internal consistency within the Agreement. A 180-day threshold provides VMS with a more realistic window before dormancy is triggered and reduces the likelihood of inadvertent dormancy resulting from routine project delays.
Express Deadline Tolling. VMS should negotiate express contractual language confirming that any period of dormancy tolls all performance deadlines under the Agreement, including but not limited to: (a) the Section 4.3 Use-It-or-Lose-It deadline; (b) all milestone deadlines under SOW No. 1 (this is already partially addressed in the current draft); and (c) any other contractual deadlines tied to VMS's integration or deployment activities. The tolling provision should operate on a day-for-day basis, such that VMS receives a full extension of each tolled deadline equal to the duration of the dormancy period.
Maintenance Fee Abatement. VMS should negotiate express language providing for abatement or pro-rata reduction of annual maintenance fees during any period of dormancy. Given that support is reduced to critical-security-patch-only during dormancy, VMS should not be required to pay full maintenance fees for a substantially diminished service level. A reasonable structure would be to reduce the maintenance fee to 25% of the annual rate during dormancy (i.e., from $2,400,000 to $600,000 per year), reflecting the limited scope of support being provided.
Extended Dormancy Cap. VMS should negotiate an extension of the 12-month dormancy cap to 18 or 24 months, or alternatively, negotiate one or more optional extensions of the dormancy period (e.g., two additional six-month extensions at VMS's election). The extended cap provides VMS with additional flexibility to navigate project delays without being forced into a premature termination or renegotiation.
VMS Control over Dormancy Entry and Exit. VMS should ensure that the decision to enter and exit dormancy rests with VMS, not MeridianCode. The current provision allows MeridianCode to unilaterally "convert" the license to dormancy status, giving the licensor control over a significant contractual state change. VMS should negotiate language providing that: (a) VMS may elect to enter dormancy upon written notice to MeridianCode at any time; (b) VMS may exit dormancy upon 30 days' written notice to MeridianCode; and (c) MeridianCode's acknowledgment of dormancy entry and exit is ministerial (i.e., non-discretionary) rather than requiring MeridianCode's consent or approval.
Derivative Works Access During Dormancy. VMS should add provisions expressly preserving VMS's access to and ability to work with derivative works code during dormancy at full support levels, regardless of the general reduction in ATLAS-RT support. This is critical because VMS's derivative works represent VMS-funded intellectual property that should not be subject to support degradation merely because the ATLAS-RT integration is temporarily suspended.
E. Section 12.6 — Change of Control
1. Provision Summary
Section 12.6 of the draft MESLSA provides that the assignment of the Agreement in connection with a change of control of VMS requires MeridianCode's prior written consent, such consent not to be unreasonably withheld. The provision does not define "change of control," though we expect this term to be defined elsewhere in the Agreement (likely in the definitions section or an exhibit). We will confirm the precise definition upon further review.
2. Risk Assessment
The change-of-control consent requirement is significant for VMS given its ownership structure and the probability of a future exit transaction during the MESLSA term.
PE Sponsor Exit. VMS is a portfolio company of Kestrel Capital Partners, which acquired VMS in 2019 for approximately $380 million. Private equity sponsors typically target hold periods of three to seven years, with exit strategies including strategic sale, secondary buyout, or initial public offering. Based on Ashgrove Equity Partners's 2019 acquisition date, a potential exit transaction within the five-year MESLSA term (June 2022 – June 2027) is highly probable. Any such exit transaction would likely constitute a "change of control" under the MESLSA and would trigger the consent requirement.
Leverage Risk. The consent requirement creates an opportunity for MeridianCode to extract concessions from VMS at the most inopportune moment — during a sale process when VMS's negotiating leverage is diminished and time pressure is acute. MeridianCode could condition its consent on fee increases, expanded license-back rights, modified derivative works provisions, or other commercially unfavorable terms. While the "not to be unreasonably withheld" standard provides some protection, the exercise of that standard in a contested situation is fact-intensive and uncertain.
Litigation Risk. If MeridianCode withholds consent and VMS contends that the withholding is unreasonable, the dispute would need to be resolved through arbitration (under the MAI rules). The time, cost, and uncertainty of arbitration proceedings — particularly in the context of an active M&A process with timeline constraints — could be prohibitive. The prospect of an MAI arbitration over consent reasonableness could chill buyer interest and depress VMS's enterprise value.
Enterprise Value Impact. The consent requirement may cause potential acquirers to discount their valuation of VMS to account for the risk that MeridianCode could withhold consent or extract adverse concessions. This "consent overhang" could reduce competitive tension in a sale process and ultimately reduce proceeds to Ashgrove Equity Partners and VMS stakeholders.
3. Recommended Negotiation Position
We recommend VMS pursue the following negotiation objectives with respect to Section 12.6:
Notice-Only Obligation. VMS's primary position should be to eliminate the consent requirement entirely and replace it with a simple notice obligation. Under this approach, VMS would be required to notify MeridianCode of any change-of-control transaction within a specified period (e.g., 30 days) following consummation of the transaction. The acquiring party would be required to assume all of VMS's obligations under the MESLSA. No MeridianCode consent would be required.
Bright-Line Reasonableness Criteria. If MeridianCode insists on retaining a consent right, VMS should negotiate specific, objective criteria defining the circumstances under which MeridianCode's withholding of consent is deemed unreasonable. For example, consent may not be withheld if the acquiring party:
(a) has a consolidated net worth or total assets exceeding a specified threshold (e.g., $100,000,000);
(b) is not a direct competitor of MeridianCode in the embedded RTOS or embedded software markets;
(c) assumes in writing all of VMS's obligations under the MESLSA; and
(d) is not subject to sanctions, export control restrictions, or other regulatory disqualifications that would impair its ability to perform under the Agreement.
If all criteria are satisfied, consent shall be deemed granted regardless of whether MeridianCode has affirmatively responded.
Deemed-Consent Mechanism. VMS should negotiate a deemed-consent provision specifying that if MeridianCode fails to respond to a written consent request within 30 days of receipt, MeridianCode's consent is deemed irrevocably granted. This mechanism prevents MeridianCode from stalling a transaction through delay or non-responsiveness.
Intra-Group and Sponsor-Directed Transfers. VMS should negotiate express carve-outs from the consent requirement for: (a) transfers of VMS equity among entities within the Strathmore Equity Partners (including transfers to successor funds, parallel funds, or co-investment vehicles); (b) PE sponsor-directed internal restructurings, including changes in intermediate holding company structures; and (c) any transaction that does not result in a change in the ultimate controlling person or fund sponsor. These carve-outs reflect the reality that PE portfolio company structures undergo frequent reorganizations that should not trigger third-party consent requirements.
V. Additional Observations
In addition to the five priority risk provisions analyzed above, we offer the following additional observations for VMS's consideration.
A. Dispute Resolution — MAI Arbitration
The binding arbitration clause, providing for arbitration under the rules of the Midwest Arbitration Institute seated in Detroit, Michigan, with a three-arbitrator panel for disputes exceeding $1,000,000 in controversy, is generally acceptable and provides a neutral Michigan forum that is favorable to VMS as a Michigan-headquartered company.
However, we note two areas where the dispute resolution provision could be improved:
Three-Arbitrator Panel Threshold. The cost of a three-arbitrator panel is significantly greater than a single-arbitrator proceeding. MAI panel fees, combined with the arbitrators' hourly rates and administrative costs, can make a three-arbitrator proceeding prohibitively expensive for mid-range disputes. VMS should consider negotiating an increase in the three-arbitrator threshold from $1,000,000 to $2,500,000, or alternatively, providing for a single arbitrator for disputes with amounts in controversy between $1,000,000 and $5,000,000, with a three-arbitrator panel reserved for disputes exceeding $5,000,000. This structure would preserve the benefits of a multi-arbitrator panel for the most significant disputes while reducing costs for smaller matters.
Emergency and Interim Relief. VMS should confirm that the arbitration clause expressly preserves the parties' right to seek emergency or interim relief — including injunctive relief for intellectual property matters — from a court of competent jurisdiction notwithstanding the arbitration agreement. This is particularly important given the derivative works ownership issues identified in Section IV.C above; in the event of an IP dispute, VMS may need immediate injunctive relief that cannot wait for the constitution of an arbitral tribunal. Standard MAI rules may address emergency relief procedures, but an express contractual carve-out provides additional certainty.
B. Credit Facility Notification
As noted in Section II.C above, VMS's entry into the MESLSA will likely trigger the notification obligation under Section 6.12 of VMS's Senior Secured Revolving Credit Facility with Pinnacle National Bank, N.A. The MESLSA's total deal value of $20,000,000 substantially exceeds the $5,000,000 materiality threshold specified in Section 6.12.
We recommend that VMS prepare a notification letter to Howard Segal, Relationship Manager at Pinnacle National Bank, promptly following execution of the MESLSA. The notification should describe the material terms of the Agreement, including the total deal value, payment schedule, and term. We can prepare a draft notification letter upon VMS's instruction. Failure to provide timely notification could constitute a technical default under the Credit Facility, which should be avoided.
C. Insurance Considerations
VMS's Technology Errors & Omissions Policy, Policy No. TEO-2022-7891, issued by Commonwealth Surety & Insurance Co., with coverage limits of $10,000,000 per occurrence and $20,000,000 in the aggregate and a $500,000 self-insured retention, may provide coverage for certain losses arising from intellectual property disputes related to the ATLAS-RT integration and derivative works. In particular, claims arising from disputes over derivative works ownership, code provenance, or infringement allegations in connection with jointly owned code could potentially fall within the scope of the Tech E&O policy.
We recommend two precautionary steps:
(a) Precautionary Notice. VMS should provide notice to Commonwealth Surety & Insurance Co. upon execution of the MESLSA, advising the insurer of the Agreement and the derivative works provisions. This precautionary notice preserves VMS's coverage rights in the event a claim arises and prevents the insurer from asserting a late-notice defense.