PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 125 Broad Street, New York, NY 10004
MEMORANDUM
TO: Theodore Langston, Responsible Partner, Capital Markets Vivienne St. Claire, Billing Partner, Capital Markets
FROM: Eric Johannsen, Lead Associate, Capital Markets Claire Dempsey, Working Associate, Capital Markets
DATE: February 8, 2024
RE: Arbor Health Technologies Inc. — D&O Insurance Program — IPO Tower Summary
MATTER NO.: 1010-00002
This memorandum is a confidential attorney work product prepared by Calderwood & Harkness LLP and is protected by the attorney-client privilege and the work product doctrine. This memorandum is intended solely for the use of the attorneys and professionals identified above in connection with the representation of Arbor Health Technologies Inc. It should not be disclosed to any third party without the prior written consent of the undersigned or the Responsible Partner.
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I. Executive Summary
The purpose of this memorandum is to summarize the directors and officers ("D&O") liability insurance program placed in connection with the initial public offering (the "IPO") of Arbor Health Technologies Inc. ("AHT" or the "Company") on the New York Stock Exchange (ticker: ARHT). This memorandum is intended to serve as a comprehensive reference document for the Calderwood & Harkness deal team and is supplemented by a separate, more detailed review letter addressed to Rachel Moynihan, General Counsel and Corporate Secretary of AHT, regarding the specific policy terms, conditions, exclusions, and endorsements applicable to the D&O program.
The D&O insurance program became effective on February 8, 2024, coinciding with the Securities and Exchange Commission's (the "SEC") declaration of effectiveness of the Company's Registration Statement on Form S-1 (File No. 333-276841) and the pricing of the IPO at $20.00 per share. The timing of the policy inception was coordinated to ensure that coverage was in force at the precise moment the Company's shares became publicly traded, thereby eliminating any gap in coverage during the critical period between pricing and closing.
The total D&O insurance tower provides aggregate limits of $100,000,000, structured across three layers: one primary layer and two excess layers. The program encompasses Side A coverage (non-indemnifiable loss), Side B coverage (corporate reimbursement for indemnification payments), and Side C coverage (entity securities claims coverage). This tri-partite coverage structure is consistent with market-standard D&O programs for newly public companies and is designed to protect the Company's directors and officers, as well as the Company itself with respect to securities claims, against the heightened litigation risks that accompany a transition from private to public company status.
The program was designed and placed to provide appropriate coverage levels for a newly public healthcare services and software-as-a-service ("SaaS") company with a post-IPO market capitalization of approximately $2,060,000,000, calculated on the basis of 103,000,000 shares of common stock outstanding multiplied by the IPO price of $20.00 per share. In structuring the program, consideration was given to the Company's industry sector, revenue profile, growth trajectory, geographic footprint, insider ownership concentration, regulatory exposure, and the size of the IPO offering itself, all of which bear on the risk profile as assessed by the underwriting carriers.
The D&O insurance program was reviewed in consultation with Rachel Moynihan, General Counsel and Corporate Secretary of AHT, who served as the Company's primary point of contact for the insurance placement process. The Company's insurance broker facilitated the placement and coordinated with the three participating carriers to finalize terms. Throughout the placement process, Calderwood & Harkness provided counsel to Ms. Moynihan and the Company regarding coverage adequacy, key policy terms, exclusion provisions, and the interplay between the D&O program and the Company's indemnification obligations under its charter, bylaws, and any individual indemnification agreements.
This memorandum addresses the following topics in detail: (i) background on the issuer and the IPO; (ii) the structure and composition of the D&O insurance tower; (iii) the terms and conditions of each layer; (iv) an analysis of Side A, Side B, and Side C coverage; (v) key exclusions and limitations; (vi) notice requirements; (vii) the relationship between the D&O program and the Company's indemnification provisions; (viii) an assessment of coverage adequacy; and (ix) our recommendations for the deal team and the Company.
II. Background
A. The Issuer
Arbor Health Technologies Inc. is a Delaware corporation headquartered at 275 Kendall Avenue, Suite 1400, Cambridge, Massachusetts 02142. The Company's Federal Employer Identification Number is 47-3891205. AHT was originally incorporated in Delaware in 2014 and has maintained its Delaware domicile continuously since that date.
The Company operates a cloud-based clinical decision support and population health management platform that is deployed across the United States healthcare delivery system. As of December 31, 2023, AHT's platform served over 1,200 hospital systems and physician groups spanning 42 states, providing real-time clinical analytics, evidence-based care pathway recommendations, and population health stratification tools. In addition to its core SaaS platform, the Company provides revenue cycle management outsourcing services and real-time analytics solutions designed to improve clinical outcomes, reduce unnecessary utilization, and optimize reimbursement for healthcare providers operating in value-based care arrangements.
The Company employed approximately 3,400 full-time employees as of December 31, 2023, with concentrations in its Cambridge, Massachusetts headquarters, as well as regional offices in Nashville, Tennessee; Austin, Texas; and Chicago, Illinois. The Company's engineering and product development teams account for approximately 45% of total headcount, reflecting the technology-intensive nature of its operations.
For the fiscal year ended December 31, 2023, AHT reported consolidated revenue of $612.4 million, representing year-over-year growth of approximately 28% from fiscal year 2022 revenue of $478.4 million. The Company reported Adjusted EBITDA of $138.7 million for fiscal year 2023, reflecting an Adjusted EBITDA margin of approximately 22.6%. Net income for fiscal year 2023 was $41.3 million, demonstrating the Company's transition to sustained profitability.
Prior to the IPO, the Company was primarily owned by its founders, management team, and two institutional private equity sponsors: Brindoval Trelvon Partners, L.P. and Ridgeline Growth Equity Fund III, L.P. The pre-IPO capitalization and ownership structure are relevant to the D&O insurance program insofar as they inform the risk profile of the Company, including derivative suit exposure and the potential for corporate governance disputes involving controlling stockholders and their board designees.
B. The IPO
On February 8, 2024, the Company priced its IPO of 20,000,000 shares of common stock at $20.00 per share, generating base gross proceeds of $400,000,000 before deducting underwriting discounts, commissions, and offering expenses. All shares offered in the IPO were primary shares sold by the Company; no shares were sold by existing stockholders in the offering, consistent with the objective of providing growth capital to the Company while preserving insider ownership positions.
The Underwriting Agreement, dated February 8, 2024, among the Company and the several underwriters named therein, granted the underwriters an option to purchase up to 3,000,000 additional shares of common stock (the "overallotment option") at the IPO price of $20.00 per share, solely to cover over-allotments, if any. The overallotment option was exercised in full on February 27, 2024, and the additional shares settled on March 1, 2024, bringing the total gross proceeds from the IPO to $460,000,000.
The underwriting syndicate was composed as follows:
• Lead Left Bookrunner: Whitfield Barrow & Co., LLC
• Joint Bookrunners: Calloway Pierce Securities LLC; Velthorn Capital Partners Inc.
• Co-Manager: Pemberton Wallis LLC
Following the completion of the IPO and the full exercise of the overallotment option, the Company had 103,000,000 shares of common stock outstanding, resulting in a post-IPO market capitalization of approximately $2,060,000,000 at the IPO price.
The closing of the IPO occurred on February 13, 2024, at which time the Company's shares commenced regular-way trading on the New York Stock Exchange under the ticker symbol "ARHT." The CUSIP number assigned to the Company's common stock is 039217105.
C. Insured Persons
The D&O insurance program is designed to cover all past, present, and future directors and officers of the Company and its subsidiaries, as defined in the respective policy documents. As of the policy inception date, the following individuals constituted the Company's Board of Directors and executive officer team:
Board of Directors:
1. Dr. Nathaniel Rourke — Chairman of the Board and Chief Executive Officer. Dr. Rourke is a co-founder of the Company and has served as Chief Executive Officer since its inception in 2014.
2. Margaret Tsujimoto — Director and Chief Technology Officer. Ms. Tsujimoto is a co-founder of the Company and has served as Chief Technology Officer since 2014.
3. Leonard marsh — Director, designated by Brindoval Trelvon Partners, L.P. pursuant to the Stockholders Agreement dated February 8, 2024.
4. Diana Coltrane — Director, designated by Brindoval Trelvon Partners, L.P. pursuant to the Stockholders Agreement dated February 8, 2024.
5. Howard Feng — Director, designated by Ridgeline Growth Equity Fund III, L.P. pursuant to the Stockholders Agreement dated February 8, 2024.
6. Carolyn Whittemore — Independent Director. Ms. Whittemore qualifies as an "independent director" under NYSE listing standards and applicable SEC rules.
7. Dr. Samuel Obadina — Independent Director. Dr. Obadina qualifies as an "independent director" under NYSE listing standards and applicable SEC rules.
Executive Officers:
1. Dr. Nathaniel Rourke — Chief Executive Officer
2. Margaret Tsujimoto — Chief Technology Officer
3. David Halderman — Chief Financial Officer
4. Rachel Moynihan — General Counsel and Corporate Secretary
5. Dr. Priya Subramanian — Chief Medical Officer
In addition to the specifically identified individuals above, the D&O policies extend coverage to all other persons who qualify as "insured persons" under the policy definitions, which typically encompass all persons who were, now are, or shall become directors or officers of the Company or any subsidiary during the policy period.
III. D&O Insurance Tower Structure — Overview
A. Summary Table
The following table summarizes the three-layer D&O insurance tower placed in connection with the IPO:
The tower is structured with a substantial primary layer of $50,000,000, representing half of the total available limits, underwritten by a single carrier (Northbridge Specialty). The two excess layers each provide $25,000,000 in additional coverage, bringing the total tower to $100,000,000 in aggregate limits. This structure ensures that the majority of anticipated claims — which, based on historical data for similarly situated companies, are unlikely to exceed the primary layer — will be handled by a single carrier, thereby reducing the administrative complexity and potential coverage disputes that can arise in multi-carrier programs. The excess layers provide catastrophic protection for larger claims or claim aggregations that might exceed the primary limits.
B. Effective Date and Policy Period
All three layers of the D&O insurance program became effective on February 8, 2024, which is the date on which the SEC declared the Registration Statement on Form S-1 (File No. 333-276841) effective and the date on which the IPO was priced at $20.00 per share. The coordination of the policy inception date with the SEC effectiveness date and pricing was intentional, as it ensures that coverage was in force at the earliest moment of public company liability exposure — namely, the moment the Registration Statement became effective and the Company's securities were offered to the public.
The policy period for all three layers is twelve (12) months, running from February 8, 2024 through February 8, 2025, subject to renewal. The policies are written on a claims-made basis, meaning that coverage is triggered when a claim is first made against an insured during the policy period and reported to the applicable carrier during the policy period or any applicable extended reporting period. The claims-made structure is standard for D&O insurance and distinguishes this coverage from occurrence-based policies (which are triggered by the date of the underlying wrongful act rather than the date the claim is asserted).
The claims-made nature of the policies has important implications for the Company's reporting obligations, as discussed in greater detail in Section IX of this memorandum. In particular, the Company and its insured persons must be diligent in identifying and reporting claims — and, where the policies permit, circumstances that may give rise to claims — within the applicable policy period to preserve coverage rights.
IV. Primary Layer — Northbridge Specialty Insurance Company
A. Carrier Information
The primary layer of the D&O insurance program is underwritten by Northbridge Specialty Insurance Company, a Connecticut stock insurance company with its principal office located at 100 Constitution Plaza, Hartford, Connecticut 06103. Northbridge Specialty is a well-established specialty insurance carrier with significant experience underwriting directors and officers liability insurance for publicly traded companies across a range of industry sectors, including healthcare services and technology.
The primary policy bears Policy Number NSI-IPO-2024-00473. As the primary carrier, Northbridge Specialty will serve as the first point of contact for claims administration, defense coordination, and coverage determinations with respect to covered claims against the Company and its insured persons.
B. Coverage Structure
The Northbridge Specialty primary policy provides three distinct insuring agreements, commonly referred to as Side A, Side B, and Side C:
Side A Coverage (Non-Indemnifiable Loss): Side A covers losses arising from claims made against insured persons (directors and officers) for wrongful acts in circumstances where the Company cannot or does not provide indemnification. This insuring agreement provides direct payment to the individual insured persons and is not subject to any retention or deductible. Side A coverage is the most critical component of the D&O program from the perspective of individual directors and officers, as it provides protection in situations where corporate indemnification is unavailable — for example, in derivative actions where Delaware law prohibits indemnification, in cases where the Company is financially unable to provide indemnification (such as in a bankruptcy or insolvency scenario), or in cases where the Company's board of directors determines not to provide indemnification.
Side B Coverage (Corporate Reimbursement): Side B reimburses the Company for indemnification payments the Company makes to its directors and officers pursuant to its indemnification obligations under the Amended and Restated Certificate of Incorporation, the Amended and Restated Bylaws, any individual indemnification agreements, or applicable law. Side B coverage is subject to a corporate retention (deductible), meaning that the Company must bear a specified amount of loss before the insurer's payment obligation is triggered. Side B coverage effectively transfers the economic cost of the Company's indemnification obligations from the Company's balance sheet to the insurer, thereby preserving the Company's financial resources and providing certainty of reimbursement for indemnification expenditures.
Side C Coverage (Entity Securities Claims): Side C covers the Company itself as a named insured for claims brought under federal or state securities laws alleging wrongful acts in connection with the purchase, sale, or offering of AHT common stock. This insuring agreement is specific to securities claims and does not extend to the Company's general commercial, contractual, or regulatory liabilities. Side C coverage is subject to the same corporate retention applicable to Side B claims. In the IPO context, Side C coverage is particularly significant because it provides protection to the Company against potential liability under Securities Act Section 11 (registration statement liability), Section 12(a)(2) (prospectus liability), and Exchange Act Section 10(b) (antifraud), among other provisions, where the Company itself may be named as a defendant alongside its directors and officers.
It should be noted that the inclusion of Side C coverage is consistent with standard public company D&O program design. Side C was introduced to D&O policies in the 1990s in response to the prevalence of securities class actions naming the corporate entity as a co-defendant alongside individual directors and officers. Without Side C, the entity's defense costs and settlement payments in securities litigation could be borne entirely by the Company, potentially depleting corporate resources and indirectly reducing the pool of assets available for indemnification of individual insured persons.
C. Limits. The Northbridge Specialty primary policy provides the following limits of liability:
• $50,000,000 per occurrence
• $50,000,000 in the aggregate (shared across all three insuring agreements — Side A, Side B, and Side C)
The per-occurrence and aggregate limits are coextensive, meaning that a single covered claim of sufficient magnitude could exhaust the entire primary layer. Conversely, multiple smaller claims during the policy period are subject to the same $50,000,000 aggregate cap. The shared-limit structure is standard in the D&O insurance market and reflects the principle that the three insuring agreements represent different aspects of the same underlying risk (wrongful acts by directors and officers), rather than independent risk categories warranting separate limits.
The shared-limit structure also underscores the importance of the priority-of-payments provision discussed below: in the event the aggregate limit is insufficient to cover all outstanding claims, the policy's priority-of-payments clause determines which insuring agreement takes precedence in the allocation of available limits.
D. Premium. The annual premium for the Northbridge Specialty primary layer is $1,875,000. The premium is fully earned upon inception and is non-refundable, meaning that the Company will not receive a pro rata or other refund of premium in the event the policy is cancelled or terminated during the policy period. The fully earned premium structure is typical for newly public company D&O placements, where the carrier's underwriting risk is concentrated at the inception of the policy (when the IPO itself generates the most significant litigation exposure) and the carrier cannot mitigate that risk through mid-term cancellation.
By way of context, the premium of $1,875,000 reflects the Company's profile as a newly public entity in the healthcare services and SaaS sector, with a post-IPO market capitalization of approximately $2.06 billion and total IPO gross proceeds of $460,000,000. Premium levels for newly public company D&O programs are influenced by a range of factors, including the Company's industry sector and associated litigation frequency, the size of the IPO and post-IPO market capitalization, the Company's financial condition and operating history, the quality of corporate governance and internal controls, and prevailing conditions in the D&O insurance market. The premium quoted for the Northbridge Specialty primary layer appears to be within the range of market rates for companies with comparable risk profiles based on available benchmarking data, though we defer to the Company's insurance broker for definitive market comparison analysis.
E. Retention / Deductible
The retention structure under the Northbridge Specialty primary policy is as follows:
• Side A: No retention applies. Side A provides first-dollar coverage to individual insured persons for non-indemnifiable losses, without any deductible or self-insured retention. This is a critical feature of the program, as it ensures that directors and officers are not required to bear any out-of-pocket costs for covered losses in situations where the Company is unable to provide indemnification.
• Side B / Side C: A corporate retention applies to all Side B and Side C claims. The specific retention amount is set forth in the policy schedule and should be confirmed with Ms. Moynihan and the insurance broker. For companies of AHT's size, industry profile, and market capitalization, corporate retentions typically range from $1,000,000 to $2,500,000 per claim. The retention operates as a deductible — the Company must bear the first dollars of loss up to the retention amount before the insurer's payment obligation is triggered for any given claim under Side B or Side C.
We recommend confirming the exact retention amount as set forth in the final policy schedule and endorsements prior to the closing date. The retention amount should be evaluated in light of the Company's financial resources, risk tolerance, and the nature of the claims most likely to be asserted in the post-IPO period.
F. Key Terms
The following key definitions and provisions of the Northbridge Specialty primary policy warrant particular attention:
Definition of "Insured Persons": The policy defines "Insured Persons" to include all past, present, and future directors and officers of AHT and its subsidiaries. This broad definition ensures that coverage extends to individuals who served as directors or officers prior to the IPO (and may have exposure for pre-IPO conduct), current directors and officers as of the policy inception date, and any individuals who join the board or executive team during the policy period. The definition is intentionally expansive and is designed to provide seamless coverage without the need for individual endorsements each time a director or officer joins or departs the Company.
Definition of "Wrongful Act": The policy defines "Wrongful Act" as any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty by an insured person in their capacity as a director or officer of the Company. This definition is broadly drafted and is intended to encompass the full range of conduct that could give rise to claims against directors and officers, including claims based on alleged mismanagement, breach of fiduciary duty, violations of securities laws, negligent oversight, and failure to maintain adequate internal controls.
Definition of "Securities Claim": The policy defines "Securities Claim" as any claim brought against the Company or an insured person alleging a violation of any federal or state securities law, rule, or regulation in connection with the purchase, sale, or offer of AHT securities. This definition is central to the operation of Side C coverage and should be confirmed to encompass claims under Securities Act Sections 11, 12(a)(2), and 15, as well as Exchange Act Sections 10(b), 14(a), and 20(a), among other applicable provisions.
Severability of Exclusions: The policy provides that the application of exclusions is determined individually for each insured person. This means that the conduct of one insured person that triggers an exclusion (such as the fraud exclusion) will not be imputed to other insured persons for purposes of determining coverage. Severability is a critical provision that protects innocent directors and officers from losing coverage due to the misconduct of a co-defendant.
Order of Payments Priority: The policy establishes that Side A claims have priority of payment over Side B and Side C claims in the event of policy exhaustion or potential exhaustion. This provision ensures that the coverage most directly protective of individual directors and officers — Side A coverage for non-indemnifiable losses — is not eroded by payments made on behalf of the corporate entity under Side B or Side C. The priority-of-payments provision is particularly important in large or multi-party claims where the aggregate policy limits may be insufficient to satisfy all outstanding claims simultaneously.
V. First Excess Layer — Pinnacle Re Assurance Ltd.
A. Carrier Information
The first excess layer of the D&O insurance tower is underwritten by Pinnacle Re Assurance Ltd., a Bermuda exempted company. As a Bermuda-domiciled insurance carrier, Pinnacle Re is subject to the regulatory framework of the Bermuda Monetary Authority rather than any U.S. state insurance regulatory authority.
The use of a Bermuda-domiciled carrier in the excess layers of a U.S. D&O insurance tower is not uncommon, particularly for larger programs where the capacity and pricing of the Bermuda market may be more favorable than that available from domestic U.S. carriers. However, the Bermuda domicile gives rise to several regulatory and practical considerations that should be noted:
(a) Surplus Lines Compliance: Depending on the state in which the policy is deemed placed, the Pinnacle Re excess policy may need to comply with applicable surplus lines filing and tax requirements. Surplus lines placements are subject to state-specific rules regarding broker licensing, policy filing, and premium tax remittance.
(b) Premium Withholding Tax: Premiums paid to non-U.S. insurers may be subject to a federal excise tax under Section 4371 of the Internal Revenue Code, currently imposed at a rate of 4% on premiums paid to foreign insurers for casualty insurance covering U.S. risks. The applicability and rate of this tax should be confirmed with the Company's tax advisors.
(c) Enforceability Considerations: In the event of a coverage dispute, the enforcement of judgments against a Bermuda-domiciled carrier may require additional procedural steps compared to enforcement against a U.S.-domiciled carrier. The excess policy should be reviewed to confirm the applicable dispute resolution mechanism (e.g., arbitration, choice of law, and choice of forum provisions).
(d) Insolvency Risk: While Pinnacle Re is regulated by the Bermuda Monetary Authority, U.S. state guaranty fund protections that apply to admitted U.S. carriers may not be available in the event of the insolvency of a Bermuda-domiciled carrier. This risk is mitigated by the excess position of the Pinnacle Re policy within the tower (i.e., the Pinnacle Re layer is unlikely to be called upon unless the primary layer is exhausted).
B. Coverage. The Pinnacle Re first excess layer provides the following coverage:
• Limit: $25,000,000
• Attachment Point: $50,000,000 (i.e., the Pinnacle Re layer attaches excess of, and only after exhaustion of, the $50,000,000 Northbridge Specialty primary layer)
• Coverage Structure: Follows form of the Northbridge Specialty primary policy, including Side A, Side B, and Side C coverage
The "follows form" structure means that the Pinnacle Re excess policy incorporates, by reference, the terms, conditions, definitions, and exclusions of the underlying Northbridge Specialty primary policy, except to the extent that the Pinnacle Re policy contains specific provisions that differ from the primary policy. The follows-form approach is the prevailing market convention for excess D&O policies and is designed to minimize the potential for gaps or inconsistencies in coverage between layers.
A critical feature to confirm in the Pinnacle Re excess policy is the drop-down provision. Specifically, the policy should be reviewed to determine whether the Pinnacle Re layer will drop down to cover claims that would otherwise fall within the primary layer in the event of exhaustion of the primary layer's aggregate limit or insolvency of Northbridge Specialty. Drop-down coverage is a significant protective feature for the insured, as it ensures continuity of coverage even if the primary carrier's capacity is depleted or the primary carrier becomes financially impaired. We recommend confirming the specific drop-down language in the policy and, if the policy does not contain an explicit drop-down provision, discussing with the broker whether such a provision can be obtained by endorsement.
C. Premium. The premium for the Pinnacle Re first excess layer is to be confirmed per broker confirmation. The premium information is noted in the separate, more detailed review letter addressed to Ms. Moynihan. We recommend that the deal team follow up with the broker to obtain final premium confirmation for inclusion in the project records and for purposes of confirming compliance with any premium-related covenants or obligations.
VI. Second Excess Layer — Atlas Guard Insurance Company
A. Carrier Information
The second (and final) excess layer of the D&O insurance tower is underwritten by Atlas Guard Insurance Company, an Illinois stock insurance company. As a U.S.-domiciled admitted carrier, Atlas Guard is subject to the regulatory oversight of the Illinois Department of Insurance and, in the event of insolvency, may be eligible for state guaranty fund protection (subject to applicable statutory limits and conditions). The domestic domicile of Atlas Guard provides an additional measure of regulatory and financial security for the top layer of the D&O tower.
B. Coverage. The Atlas Guard second excess layer provides the following coverage:
• Limit: $25,000,000
• Attachment Point: $75,000,000 (i.e., the Atlas Guard layer attaches excess of, and only after exhaustion of, the combined $50,000,000 Northbridge Specialty primary layer and $25,000,000 Pinnacle Re first excess layer)
• Coverage Structure: Follows form of the Northbridge Specialty primary policy, including Side A, Side B, and Side C coverage
As with the Pinnacle Re first excess layer, the Atlas Guard policy follows form to the Northbridge Specialty primary policy and should contain appropriate drop-down provisions to ensure continuity of coverage in the event of exhaustion or insolvency of the underlying layers. The drop-down language in the Atlas Guard policy should be reviewed and confirmed to address the following scenarios:
(a) Exhaustion of the Northbridge Specialty primary layer and the Pinnacle Re first excess layer through payment of covered claims;
(b) Insolvency or inability to pay of either the Northbridge Specialty primary carrier or the Pinnacle Re first excess carrier; and
(c) Any gap in coverage resulting from a dispute between the insured and an underlying carrier regarding the applicability of coverage to a particular claim.
C. Premium. The premium for the Atlas Guard second excess layer is to be confirmed per broker confirmation and is noted in the separate review letter addressed to Ms. Moynihan. As with the Pinnacle Re layer, we recommend that the deal team obtain final premium confirmation for the project records.
VII. Coverage Analysis — Side A, Side B, and Side C
This section provides a more detailed analysis of the three insuring agreements that comprise the D&O insurance program, with particular attention to the practical significance of each coverage type in the context of the AHT IPO.
A. Side A — Non-Indemnifiable Loss
Side A coverage is the cornerstone of D&O insurance from the perspective of individual directors and officers. It provides direct, first-dollar coverage to insured persons for losses arising from claims for wrongful acts in circumstances where the Company cannot or does not provide indemnification. The following scenarios illustrate the circumstances in which Side A coverage may be triggered:
(a) Derivative Actions: Under Delaware law, a corporation generally may not indemnify a director or officer against liability in connection with a derivative action if the individual is found liable to the corporation. See DGCL § 145(b). In such cases, Side A coverage provides the only source of protection for the individual's defense costs and any settlement or judgment amount.
(b) Insolvency of the Company: If the Company were to become insolvent or file for bankruptcy protection, it may lack the financial capacity to honor its indemnification obligations to directors and officers. Side A coverage provides a backstop in this scenario, ensuring that insured persons are not left unprotected due to the Company's financial distress. In a bankruptcy context, the Company's indemnification obligations may also be subject to the automatic stay or may be treated as pre-petition claims, further complicating the ability of insured persons to obtain timely indemnification.
(c) Refusal to Indemnify: In rare cases, the Company's board of directors may determine not to provide indemnification to a director or officer, either because the applicable legal standard has not been met (e.g., the individual did not act in good faith or in a manner reasonably believed to be in the best interests of the Company) or because of a conflict of interest within the board. Side A provides coverage in these circumstances as well.
No retention or deductible applies to Side A claims. This feature ensures that individual directors and officers are not required to incur any out-of-pocket expense before coverage attaches, which is essential to the attractiveness of board and executive positions and is a significant factor in director recruitment and retention.
The policy provides that Side A claims receive priority of payment in the event that the aggregate limit is insufficient to pay all outstanding claims. This means that, in a scenario where multiple claims are pending and the total amount of covered losses exceeds the $50,000,000 aggregate limit of the primary layer (or the $100,000,000 total tower), payments to individual directors and officers under Side A will be made before payments to the Company under Side B or Side C. The priority-of-payments provision is of particular importance to the Company's independent directors (Carolyn Whittemore and Dr. Samuel Obadina) and investor-designee directors (Leonard marsh, Diana Coltrane, and Howard Feng), who may not have access to separate entity-level indemnification from their nominating entities and who depend on the D&O program as their primary source of litigation protection in connection with their service on the AHT board.
B. Side B — Corporate Reimbursement
Side B coverage functions as a reimbursement mechanism, reimbursing the Company for indemnification payments the Company makes to its directors and officers pursuant to its legal obligations and contractual commitments. The Company's indemnification obligations arise from several sources:
(a) Amended and Restated Certificate of Incorporation: Filed with the Delaware Secretary of State on February 13, 2024, the Company's charter includes provisions mandating indemnification and advancement of expenses for directors and officers to the fullest extent permitted by law.
(b) Amended and Restated Bylaws: Adopted on February 8, 2024, the Company's bylaws similarly provide for mandatory indemnification and advancement of expenses for directors and officers to the fullest extent permitted by DGCL § 145.
(c) Individual Indemnification Agreements: The Company may enter into individual indemnification agreements with each director and officer, as recommended in Section XII of this memorandum, which would provide additional contractual assurance of the Company's indemnification obligations.
(d) Delaware General Corporation Law: DGCL § 145 provides a permissive framework for corporate indemnification and advancement. Under the statute, a corporation may (and, where its charter or bylaws so provide, must) indemnify directors and officers against expenses, judgments, fines, and settlement amounts incurred in connection with legal proceedings, provided that the individual acted in good faith and in a manner reasonably believed to be in the best interests of the corporation.
Side B coverage is subject to the corporate retention applicable under the policy schedule. The Company must bear the first dollars of loss (up to the retention amount) before the insurer's reimbursement obligation is triggered. Once the retention is satisfied, Side B operates to transfer the economic cost of indemnification from the Company to the insurer, thereby preserving the Company's balance sheet and operating capital.
C. Side C — Entity Securities Claims
Side C coverage protects AHT itself as an entity for claims arising under federal or state securities laws in connection with the purchase, sale, or offering of AHT common stock (CUSIP: 039217105, NYSE: ARHT). Side C is subject to the same corporate retention applicable to Side B claims.
Side C coverage is particularly relevant in the IPO context for several reasons:
(a) Registration Statement Liability: The filing of the Registration Statement on Form S-1 (File No. 333-276841) exposes the Company to potential liability under Securities Act Section 11 (which imposes strict liability for material misstatements or omissions in the registration statement) and Section 12(a)(2) (which imposes liability for material misstatements or omissions in connection with the offer or sale of securities by means of a prospectus or oral communication). In actions brought under these provisions, the Company is typically named as a defendant alongside its directors, signing officers, and the underwriters.
(b) Prospectus Disclosures: The prospectus included in the Registration Statement contains extensive disclosures regarding the Company's business, financial condition, risk factors, management, and use of proceeds. Any material misstatement or omission in these disclosures could form the basis of a securities class action against the Company and its directors and officers.
(c) Exchange Act Liability: Following the IPO, the Company will be subject to the periodic reporting requirements of the Securities Exchange Act of 1934, including the obligation to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Claims alleging material misstatements or omissions in these filings, or in the Company's other public statements, may be asserted against the Company and its directors and officers under Exchange Act Sections 10(b) and Rule 10b-5, Section 14(a) (proxy solicitation), and Section 20(a) (controlling person liability).
(d) IPO Gross Proceeds as Potential Damages Benchmark: The total gross proceeds from the IPO (including the overallotment) of $460,000,000 represent a potential benchmark for damages claims in Securities Act Section 11 litigation, as statutory damages under Section 11 are generally measured by reference to the difference between the offering price and the value of the securities at the time of suit (or, in some cases, the price at which the securities were disposed of before suit). The $100,000,000 D&O tower, while substantial, represents approximately 21.7% of the total gross proceeds, and the deal team should be aware that a significant securities class action could result in claims that exceed the available D&O limits.
It is important to note that Side C coverage is limited to securities claims and does not extend to general commercial liability, breach of contract claims, regulatory fines or penalties (unless otherwise specified), or other types of entity-level exposure. This limitation is by design and reflects the D&O insurance market's distinction between director and officer liability (which is the core risk insured under D&O policies) and general corporate liability (which is addressed by other types of insurance, such as general liability, errors and omissions, and cyber liability policies).
VIII. Key Exclusions and Limitations
A. Standard Exclusions (Applicable to All Layers)
The Northbridge Specialty primary policy — and, by extension, the follows-form excess policies — contains a number of standard exclusions that limit or eliminate coverage for certain categories of claims. The following exclusions are typical of public company D&O policies and are expected to apply to the AHT program:
1. Prior or Pending Litigation Exclusion. The policies exclude coverage for claims arising from litigation, proceedings, or investigations that were pending or threatened as of the policy inception date of February 8, 2024, or of which any insured person had knowledge as of that date. This exclusion is designed to prevent insureds from obtaining coverage for known or anticipated liabilities. In the context of the AHT IPO, it is important that the Company's application and warranty statements to the carriers accurately disclosed all pending and threatened litigation, regulatory proceedings, and demand letters as of the inception date.
2. Fraud and Personal Profit Exclusion. The policies exclude coverage for claims arising from deliberately dishonest, fraudulent, or criminal acts by an insured person, or from any insured person's receipt of illegal personal profit or remuneration to which they were not legally entitled. This exclusion typically contains a "final adjudication" qualifier, meaning that the exclusion does not apply unless and until a court or other adjudicative body has made a final, non-appealable determination that the insured person engaged in the excluded conduct. The final adjudication requirement is an important protection for insured persons, as it ensures that allegations of fraud or dishonesty — which are commonly asserted in securities class actions but are often not proven — do not result in the denial of coverage during the pendency of litigation.
3. Insured vs. Insured Exclusion. The policies exclude coverage for claims brought by one insured person against another insured person. This exclusion is intended to prevent collusive lawsuits and to ensure that the D&O policy is not used as a funding mechanism for internal corporate disputes. However, the insured vs. insured exclusion is subject to standard carve-outs (exceptions), which typically include:
(a) Derivative suits brought on behalf of the Company by a stockholder (where the insured person is a nominal defendant);
(b) Whistleblower claims or retaliation claims brought by an insured person against the Company or other insured persons; and
(c) Employment-related claims brought by an insured person in their individual capacity (as opposed to their capacity as a director or officer).
The scope and language of these carve-outs should be confirmed in the final policy documents, as variations in the insured vs. insured exclusion language can have significant practical implications.
4. Prior Acts / Retroactive Date. The policy should be reviewed to confirm whether it contains a retroactive date or, alternatively, provides full prior acts coverage. A retroactive date limits coverage to claims arising from wrongful acts that occurred on or after a specified date, whereas full prior acts coverage extends to wrongful acts that occurred at any time prior to the policy inception date, regardless of when the act occurred. Given that AHT was founded in 2014 and has ten years of pre-IPO operating history, full prior acts coverage is strongly preferred, as it would provide protection against claims arising from pre-IPO conduct that may not surface until after the Company becomes public.
5. Professional Services / Errors and Omissions Exclusion. The policies typically exclude coverage for claims arising from professional services rendered by the Company to third parties. This exclusion is relevant to AHT given its operation of a clinical decision support platform that provides healthcare-related analytical services to hospital systems and physician groups. Claims arising from the alleged failure or inadequacy of AHT's platform — for example, claims that a clinical decision support recommendation resulted in an adverse patient outcome — would likely fall within the scope of this exclusion and would need to be addressed by a separate professional liability or errors and omissions insurance policy.
6. ERISA Exclusion. The policies exclude coverage for claims arising under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). This exclusion is relevant given AHT's approximately 3,400 employees and the benefit plans the Company maintains for its workforce. Claims arising from the administration of employee benefit plans, including claims for breach of fiduciary duty in connection with 401(k) plans or health benefit plans, are typically addressed by separate fiduciary liability insurance rather than D&O insurance.
7. Pollution / Environmental Exclusion. The policies exclude coverage for claims arising from the actual, alleged, or threatened discharge, dispersal, release, or escape of pollutants or contaminants. While this exclusion is less likely to be implicated by AHT's business operations (which are primarily technology-based), it is noted for completeness.
8. Bodily Injury / Property Damage Exclusion. The policies exclude coverage for claims for bodily injury or property damage. These risks are addressed by general liability and other insurance coverages rather than D&O insurance.
B. IPO-Specific Considerations
In addition to the standard exclusions described above, the following IPO-specific coverage considerations should be confirmed in the final policy documents:
1. Absence of IPO Exclusion. It is critical to confirm that the policy does not contain an IPO exclusion or carve-back that would limit or eliminate coverage for claims arising specifically from the IPO process, including claims related to the S-1 Registration Statement, the prospectus, roadshow presentations, or other offering-related statements and materials. While IPO exclusions are not common in modern public company D&O policies, older or non-standard policy forms may contain such provisions, and their absence should be affirmatively verified.
2. Scope of "Securities Claim" Definition. The definition of "Securities Claim" should be confirmed to encompass claims under all of the following provisions, at a minimum:
(a) Securities Act of 1933: Sections 11 (registration statement liability), 12(a)(2) (prospectus liability), and 15 (controlling person liability);
(b) Securities Exchange Act of 1934: Sections 10(b) and Rule 10b-5 (antifraud), 14(a) (proxy solicitation), and 20(a) (controlling person liability); and
(c) Analogous state securities laws (blue sky laws) that may be invoked in connection with claims related to the IPO.
3. Lock-Up Period Coverage. The 180-day lock-up period applicable to approximately 80,000,000 shares of the Company's common stock expires on August 6, 2024. The expiration of the lock-up period may create a period of stock price volatility as previously restricted shares become eligible for sale. Claims arising from alleged insider trading, manipulation, or inadequate disclosure in connection with the lock-up period and any early release requests should be covered under the policy. The policy terms should be reviewed to confirm that coverage extends to these circumstances.
4. Overallotment Option. The overallotment option of 3,000,000 shares was exercised in full on February 27, 2024, and the additional shares settled on March 1, 2024. Coverage should be confirmed to extend to claims arising from the issuance and sale of the overallotment shares, including any claims that the exercise of the overallotment option or the registration and offering of the additional shares gave rise to liability under the securities laws.
IX. Notice Requirements
The D&O insurance program is written on a claims-made and reported basis. This means that two conditions must be satisfied for a claim to be covered:
(i) The claim must be first made against an insured person or the Company during the policy period (February 8, 2024 through February 8, 2025); and
(ii) The claim must be reported to Northbridge Specialty Insurance Company (and to the excess carriers as applicable) during the policy period or any applicable extended reporting period.
Both conditions must be met. A claim that is first made during the policy period but not reported during the policy period (or extended reporting period) may not be covered, even if the claim is otherwise within the scope of the insuring agreements. Conversely, a claim that is reported during the policy period but was first made prior to the inception of the policy is not covered unless the policy contains a retroactive date provision that extends back to the date of the claim.
Notice of a claim must be provided to the primary carrier, Northbridge Specialty, "as soon as practicable" after the Company or any insured person becomes aware of the claim. The "as soon as practicable" standard is a flexible but demanding requirement — it does not impose an absolute time limit, but it requires prompt action once knowledge of the claim is obtained. Courts interpreting "as soon as practicable" notice provisions have generally held that delays of several months or longer are unreasonable, particularly where the insured was aware of the claim but failed to act with appropriate urgency.
Notice should be directed to Northbridge Specialty at its principal office:
Northbridge Specialty Insurance Company 100 Constitution Plaza Hartford, CT 06103
Attention: Claims Department
Policy No. NSI-IPO-2024-00473
The specific notice procedures (including any requirements for written notice, email notification, or notice to specific individuals at the carrier) should be confirmed by reference to the policy's notice provision.
In addition to reporting actual claims, many D&O policies permit or require the insured to provide notice of "circumstances" that may give rise to a claim. The provision of timely circumstance notice can be valuable because it effectively "locks in" coverage under the current policy period for any claim that subsequently arises from the noticed circumstances, even if the claim itself is not formally asserted until a subsequent policy period. The availability and scope of circumstance notice under the Northbridge Specialty policy should be confirmed.
We strongly recommend that Rachel Moynihan, as General Counsel of AHT, establish internal protocols for tracking and reporting potential claims on an ongoing basis. These protocols should address the following categories of events, at a minimum:
(a) Securities class action lawsuits or threatened lawsuits;
(b) SEC or other regulatory enforcement inquiries, investigations, or proceedings (including informal inquiries, Wells notices, and formal orders of investigation);
(c) Stockholder demand letters, including demands under DGCL § 220 (books and records inspection) and pre-suit demands under Rule 23.1 of the Federal Rules of Civil Procedure;
(d) Derivative suit demands and any related board investigation or special litigation committee proceedings;
(e) Internal whistleblower complaints implicating conduct by directors or officers; and
(f) Any other threatened or anticipated claims against directors, officers, or the Company that could potentially fall within the scope of the D&O program.
Late notice may result in denial of coverage. Timely notice is a condition precedent to coverage under claims-made policies, and the failure to provide timely notice is one of the most common grounds on which D&O insurers deny claims. The deal team should emphasize to Ms. Moynihan and the Company's management team the critical importance of establishing and maintaining robust notice protocols from the outset of the Company's life as a public entity.
X. Relationship to Indemnification Provisions
The D&O insurance program is designed to work in concert with the Company's indemnification provisions, which are established through the Company's charter documents, bylaws, applicable law, and any individual indemnification agreements. The interplay between indemnification and insurance is fundamental to the overall protection framework for the Company's directors and officers.
Amended and Restated Certificate of Incorporation. AHT's Amended and Restated Certificate of Incorporation, filed with the Delaware Secretary of State on February 13, 2024, includes provisions eliminating director personal liability for monetary damages to the fullest extent permitted by DGCL § 102(b)(7). Section 102(b)(7) permits a Delaware corporation to include in its certificate of incorporation a provision eliminating or limiting the personal liability of directors for monetary damages for breach of fiduciary duty as a director, subject to certain exceptions (including liability for breach of the duty of loyalty, acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, liability under DGCL § 174 for unlawful dividends or stock repurchases, and transactions from which the director derived an improper personal benefit). The exculpation provision in the Company's charter reduces but does not eliminate the potential for personal liability of directors, and it does not affect liability arising under the federal securities laws, which is not subject to exculpation under Delaware law.
Amended and Restated Bylaws. AHT's Amended and Restated Bylaws, adopted on February 8, 2024, provide for mandatory indemnification and advancement of expenses for directors and officers to the fullest extent permitted by DGCL § 145. The mandatory nature of the indemnification provisions — as opposed to permissive indemnification, which would leave the decision to indemnify to the discretion of the board — provides directors and officers with contractual assurance that the Company will stand behind its indemnification obligations. The advancement provision is particularly important because it requires the Company to pay defense costs as they are incurred, rather than requiring the individual to fund their own defense and seek reimbursement after the conclusion of the proceeding.
Interplay with D&O Insurance. The D&O insurance program supplements the Company's indemnification obligations in the following manner:
(a) Side A coverage provides protection where indemnification is unavailable — whether due to legal prohibition (e.g., in derivative actions under DGCL § 145(b)), corporate insolvency, or board refusal to indemnify.
(b) Side B coverage reimburses the Company for indemnification payments that the Company does make, thereby transferring the economic cost of indemnification from the Company's balance sheet to the insurer.
(c) Together, Side A and Side B create a comprehensive safety net: if the Company indemnifies, the insurer reimburses the Company (Side B); if the Company cannot or does not indemnify, the insurer pays the individual directly (Side A).
Individual Indemnification Agreements. We recommend that AHT enter into individual indemnification agreements with each director and officer. While the mandatory indemnification provisions in the Company's bylaws provide substantial protection, individual indemnification agreements offer several additional benefits: (i) they create a direct contractual obligation that survives any future amendment of the bylaws; (ii) they may include more detailed procedural provisions regarding the determination of entitlement to indemnification, the selection of independent counsel, and the resolution of disputes; and (iii) they provide an additional layer of legal certainty that can be valuable in attracting and retaining qualified directors and officers.
XI. Adequacy of Coverage
A. Tower Sizing
The total D&O insurance tower of $100,000,000 is within the range of D&O coverage maintained by comparable newly public healthcare services and SaaS companies with post-IPO market capitalizations in the $1.5 billion to $3.0 billion range. Based on available market data and benchmarking studies, newly public companies in this size and sector range typically maintain D&O towers in the range of $75,000,000 to $150,000,000, with the specific tower size influenced by factors including industry risk profile, financial condition, corporate governance characteristics, and the cost of coverage.
The tower structure — a primary layer of $50,000,000 sitting beneath two excess layers of $25,000,000 each — provides layered protection with three separate carriers, which diversifies insurer credit risk and reduces the Company's exposure to the financial impairment of any single carrier. The use of multiple carriers also provides the benefit of competitive pricing dynamics, as excess carriers typically charge lower rates per unit of coverage than primary carriers, reflecting the lower probability that the excess layers will be called upon to respond to claims.
B. Market Capitalization Context
The adequacy of the D&O tower should be evaluated in the context of the Company's post-IPO market capitalization and the size of the IPO offering:
• Post-IPO market capitalization: $2,060,000,000 (103,000,000 shares × $20.00 per share)
• Total gross proceeds from the IPO (including overallotment): $460,000,000
• D&O tower as a percentage of market capitalization: approximately 4.85% ($100,000,000 / $2,060,000,000)