PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 125 Broad Street New York, New York 10004
MEMORANDUM
To: Theodore Langston, Vivienne St. Claire
From: Eric Johannsen
CC: Claire Dempsey, Sylvia Hartwell
Date: February 9, 2024
Re: Arbor Health Technologies Inc. — Underwriting Agreement Key Terms Summary and Negotiation Points (Matter No. 1010-00002)
Client: Arbor Health Technologies Inc. ("AHT" or the "Company")
Transaction: Initial Public Offering of Common Stock — NYSE: ARHT
Document Reviewed: Underwriting Agreement dated February 8, 2024 (the "Underwriting Agreement"), among Arbor Health Technologies Inc., Whitfield Barrow & Co., LLC, as Representative of the several underwriters, Calloway Pierce Securities LLC, Velthorn Capital Partners Inc., and Pemberton Wallis LLC
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I. Executive Summary
The purpose of this internal memorandum is to summarize the material terms of the executed Underwriting Agreement and to document the key negotiation outcomes achieved by Calderwood & Harkness LLP ("C&H") on behalf of the Company as compared to the initial draft circulated by Whitfield Barrow & Co., LLC ("Whitfield Barrow" or the "Representative"). This memorandum is intended to serve as a reference document for the C&H deal team and is protected by the attorney-client privilege and the work product doctrine.
The Underwriting Agreement was executed on February 8, 2024 (the "Signing Date"), following (i) the Securities and Exchange Commission's (the "SEC") declaration of effectiveness of the Registration Statement on Form S-1 (File No. 333-276841) and (ii) the pricing of the offering at $20.00 per share, which represented the top of the revised price range of $18.00 to $20.00 per share and was above the original price range of $17.00 to $19.00 per share. The Underwriting Agreement is governed by the laws of the State of New York, without regard to conflict-of-laws principles.
The initial draft of the Underwriting Agreement was prepared by Meridian Hale & Quivorn LLP ("Meridian Hale"), counsel to the underwriters. C&H negotiated on behalf of AHT over a period of approximately two weeks, with the principal negotiation mark-up transmitted by the undersigned to Graham Neville at Meridian Hale on January 25, 2024. Multiple telephonic negotiation sessions followed, culminating in the finalization of the agreement on the evening of February 8, 2024, immediately following pricing.
This memorandum is organized into the following sections for ease of reference: (1) Offering Terms, (2) Representations and Warranties, (3) Indemnification, (4) Conditions Precedent, (5) Lock-Up Requirements, (6) MNPI Representations, (7) Termination Rights, and (8) Key Negotiation Outcomes. An additional discussion of overallotment closing considerations, open items, and post-closing obligations follows.
II. Offering Terms
A. Shares and Pricing
The offering involves the issuance and sale by the Company of shares of its common stock, par value $0.001 per share (CUSIP 039217105), in an initial public offering registered under the Securities Act of 1933, as amended (the "Securities Act"). All shares offered are primary shares to be issued by the Company. There are no secondary sales by selling stockholders in this offering. The key pricing and economic terms are as follows:
• Base Offering Size: 20,000,000 shares of common stock.
• Public Offering Price: $20.00 per share (the top of the revised marketing range of $18.00 to $20.00 per share, which was itself an upward revision from the original range of $17.00 to $19.00 per share filed in the initial prospectus).
• Underwriting discount: $1.20 per share, representing 6.0% of the public offering price. This discount is consistent with market practice for IPOs of this size and falls within the customary range for healthcare services and SaaS company initial public offerings.
• Purchase Price to Underwriters: $18.80 per share (computed as the public offering price of $20.00 minus the underwriting discount of $1.20).
• Base Gross Proceeds: $400,000,000 (20,000,000 shares multiplied by the public offering price of $20.00 per share).
• Base Underwriting discount (Aggregate): $24,000,000 (20,000,000 shares multiplied by $1.20 per share).
• Net Proceeds to Company (Base, Before Expenses): $376,000,000 (base gross proceeds of $400,000,000 minus the aggregate base underwriting discount of $24,000,000).
B. Overallotment Option
Pursuant to Section 2(b) of the Underwriting Agreement, the Company granted the Representative, acting on behalf of the several underwriters, an option to purchase up to 3,000,000 additional shares of common stock (representing 15% of the base offering) at the purchase price of $18.80 per share (net of the underwriting discount). The overallotment option is exercisable, in whole or in part, for a period of 30 days following the date of the final prospectus (i.e., through March 9, 2024).
We note for the record that the overallotment option was exercised in full on February 27, 2024, and settlement of the 3,000,000 overallotment shares was scheduled for and completed on March 1, 2024. The economic terms of the overallotment exercise are as follows:
• Overallotment Gross Proceeds: $60,000,000 (3,000,000 shares multiplied by the public offering price of $20.00 per share).
• Overallotment Underwriting discount (Aggregate): $3,600,000 (3,000,000 shares multiplied by $1.20 per share).
• Total Gross Proceeds (Including Overallotment): $460,000,000.
• Total Aggregate Underwriting discount (Including Overallotment): $27,600,000.
C. Underwriter Allocation
The shares in the base offering are allocated among the several underwriters as set forth in Schedule I to the Underwriting Agreement. The allocation is as follows:
The overallotment shares are allocated among the underwriters on a pro rata basis based on their respective base offering allocations, unless otherwise agreed among the underwriters pursuant to the Agreement Among Underwriters.
D. Underwriting discount Allocation (Per Agreement Among Underwriters)
Although the internal economics among the underwriters are governed by the separate Agreement Among Underwriters and not by the Underwriting Agreement itself, we note for completeness the customary three-part allocation of the underwriting discount, which is as follows:
• Management Fee: 20% of the total underwriting discount ($5,520,000 based on the full exercise of the overallotment option).
• Selling Concession: 60% of the total underwriting discount ($16,560,000 based on the full exercise of the overallotment option).
• Underwriting Fee: 20% of the total underwriting discount ($5,520,000 based on the full exercise of the overallotment option).
The management fee is shared among the bookrunners (Whitfield Barrow as lead and Calloway Pierce as joint), the selling concession is allocated based on actual sales by each syndicate member, and the underwriting fee is divided among all underwriters based on their underwriting commitments. These internal allocations do not affect the Company's obligations under the Underwriting Agreement.
E. Closing
The closing of the base offering (the "Closing") is scheduled for February 13, 2024, reflecting T+3 settlement from the pricing date of February 8, 2024. At the Closing, delivery of the shares will be effected through the facilities of The Depository Trust Company ("DTC") against payment by the several underwriters of the aggregate purchase price via federal funds wire transfer to the account of the Company designated in writing prior to the Closing. A cross-receipt is to be exchanged between the Company and the Representative at the Closing to memorialize the delivery of shares against payment. The closing procedures are governed by Section 4 of the Underwriting Agreement and are subject to the satisfaction or waiver of the conditions precedent discussed in Section VI below.
III. Representations and Warranties of the Company
A. Overview
The Underwriting Agreement contains comprehensive representations and warranties made by AHT to the several underwriters. These representations and warranties are organized into approximately 32 categories in the executed agreement and cover the range of standard matters customarily addressed in an IPO underwriting agreement for a healthcare technology company. The representations and warranties are made as of the date of the Underwriting Agreement and, subject to the bring-down condition, as of the closing date. Set forth below is a summary of the most significant representations, followed by a discussion of the key negotiation points on which C&H achieved improvements to the initial Whitfield Barrow draft.
B. Key Representations
The following is a summary of the material representations and warranties of the Company contained in Section 1 of the Underwriting Agreement:
Organization and Standing. The Company is validly existing and in good standing under the laws of the State of Delaware, with the corporate power and authority to own its properties and conduct its business as described in the Registration Statement and the Prospectus. The Company is duly qualified to do business as a foreign corporation and is in good standing in the Commonwealth of Massachusetts and in all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to so qualify would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Corporate Power and Authority. The Company has all requisite corporate power and authority to execute and deliver the Underwriting Agreement, to issue and sell the shares to be sold by it thereunder, and to consummate the transactions contemplated thereby. The execution, delivery, and performance by the Company of the Underwriting Agreement, and the issuance and sale of the shares, have been duly authorized by all necessary corporate action on the part of the Company.
Authorization and Validity of Shares. All corporate action necessary for the authorization, issuance, and sale of the shares has been duly taken. The shares, when issued and delivered by the Company against payment therefor as contemplated by the Underwriting Agreement, will be validly issued, fully paid, and non-assessable, free and clear of all liens, encumbrances, equities, and claims, and will not be subject to any preemptive rights, rights of first refusal, or similar rights.
Registration Statement and Prospectus. The Registration Statement on Form S-1 (File No. 333-276841) has been filed with the SEC and declared effective on February 8, 2024. The Registration Statement, as of its effective date, and the Prospectus, as of its date, comply in all material respects with the Securities Act and the applicable rules and regulations promulgated thereunder. Neither the Registration Statement, as of its effective date, nor any amendment thereto, nor the Prospectus, as of its date, nor any amendment or supplement thereto, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
Financial Statements. The audited financial statements (including the related notes and schedules) included in the Registration Statement and the Prospectus have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") applied on a consistent basis during the periods involved, except as otherwise noted therein, and present fairly in all material respects the financial position of the Company as of the dates indicated and the results of its operations and cash flows for the periods specified. The financial statements have been audited by Kellerman & Associates LLP, an independent registered public accounting firm as required by the Securities Act and the rules and regulations promulgated thereunder.
No Material Adverse Change. Since the date of the most recent financial statements included in the Registration Statement (i.e., since December 31, 2023), there has not been any material adverse change in the condition (financial or otherwise), business, results of operations, properties, or prospects of the Company, whether or not arising in the ordinary course of business, except as set forth in or contemplated by the Registration Statement and the Prospectus.
Compliance with Laws. The Company has been and is in compliance with all applicable federal, state, local, and foreign laws, rules, and regulations, except where the failure to be in compliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company possesses all material licenses, permits, certificates, and approvals required to conduct its business as described in the Registration Statement and the Prospectus.
intellectual Property. The Company owns or has valid rights to use all patents, patent applications, trademarks, service marks, trade names, copyrights, trade secrets, and other intellectual property rights necessary for the conduct of its business as currently conducted and as proposed to be conducted as described in the Registration Statement and the Prospectus, including without limitation the proprietary healthcare analytics and workflow management platform known as the "Arbor Platform." The Company has not received written notice of any claim of infringement, misappropriation, or other violation of any intellectual property rights of third parties that would reasonably be expected to have a Material Adverse Effect.
Tax Matters. The Company is treated as a C-corporation for U.S. federal income tax purposes (federal Employer Identification Number 47-3891205). The Company has filed all federal, state, local, and foreign tax returns required to be filed and has paid all taxes due and owing (whether or not shown on such returns), except where the failure to file or pay would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
No Undisclosed Litigation. There are no legal or governmental proceedings pending to which the Company is a party or of which any property of the Company is the subject, and, to the knowledge of the Company, no such proceedings have been threatened against the Company, in each case that are required to be disclosed in the Registration Statement and the Prospectus and are not so disclosed.
ERISA and Employee Benefit Plans. Each employee benefit plan maintained or contributed to by the Company has been established, maintained, and administered in compliance with its terms and in compliance with ERISA and the Internal Revenue Code, except where the failure to so comply would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Cybersecurity and Data Privacy. The Company has implemented and maintains commercially reasonable technical and organizational measures to protect the security, integrity, and confidentiality of all personal data and protected health information collected, used, or processed by the Company. The Company is in compliance in all material respects with all applicable data privacy and cybersecurity laws, regulations, and contractual obligations.
Insurance. The Company maintains insurance, including directors' and officers' liability insurance, of the types and in the amounts customarily carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Company operates.
Related Party Transactions. Except as disclosed in the Registration Statement and the Prospectus, there are no transactions, relationships, or arrangements between the Company and any of its affiliates, directors, officers, or stockholders that are required to be disclosed pursuant to the Securities Act or the rules and regulations of the SEC.
NYSE Listing. The shares have been approved for listing on the New York Stock Exchange under the ticker symbol "ARHT," subject only to official notice of issuance.
C. Negotiation Notes on Representations
The following summarizes the principal negotiation outcomes achieved by C&H with respect to the representations and warranties:
Materiality Qualifiers. C&H successfully negotiated the insertion of materiality and "Material Adverse Effect" qualifiers on several representations that were unqualified in Whitfield Barrow's initial draft. Specifically, C&H obtained materiality or MAE qualifiers on the following representations: (i) compliance with laws (qualified by "except where the failure to be in compliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect"), (ii) intellectual property (qualified so that infringement claims are limited to those "that would reasonably be expected to have a Material Adverse Effect"), (iii) cybersecurity and data privacy (qualified by "in all material respects"), and (iv) tax matters (similarly qualified by an MAE exception). These qualifiers are consistent with market practice for comparable IPOs and were ultimately accepted by Meridian Hale after telephonic negotiation on January 31, 2024.
Knowledge Qualifiers. C&H obtained "to the knowledge of the Company" qualifiers on representations regarding (a) third-party intellectual property claims not yet asserted in writing and (b) pending or threatened litigation that has not yet been served on the Company. These knowledge qualifiers were appropriate given that the Company cannot be expected to have actual knowledge of claims that have not yet been formally brought to its attention.
Definition of "Material Adverse Effect" (MAE). The definition of "Material Adverse Effect" was a significant negotiation point. Whitfield Barrow's initial draft contained a relatively narrow MAE definition with limited carve-outs. C&H negotiated to include the full suite of customary carve-outs, as follows: (i) changes in general economic conditions in the United States or global markets, (ii) changes affecting the healthcare services industry or the software-as-a-service (SaaS) industry generally, (iii) changes in applicable law or in GAAP or the interpretation thereof, (iv) acts of war, armed hostilities, terrorism, or sabotage, (v) epidemics, pandemics, or other public health emergencies, and (vi) changes resulting from the public announcement or pendency of the offering itself. Each of these carve-outs is subject to a "disproportionate impact" exception — that is, the carve-out does not apply to the extent that the relevant change disproportionately affects the Company relative to other companies operating in the same industry and of comparable size.
Financial Statement Representation. Whitfield Barrow initially sought a "no restatement" representation extending to all historical periods for which financial statements have been prepared. C&H narrowed this representation so that it is limited to the financial statements included in the Registration Statement and the Prospectus. This narrowing was appropriate because the Company has undergone significant growth and structural changes since its inception, and it would be inappropriate to make an unqualified no-restatement representation with respect to financial statements for periods not included in the offering documents.
IV. Representations and Warranties of the Underwriters
Section 3 of the Underwriting Agreement contains the representations and warranties of the several underwriters. Each underwriter represents and warrants, severally (and not jointly), as follows:
Securities Act Compliance. Each underwriter represents that it will not offer or sell the shares except in compliance with the Securities Act, the rules and regulations promulgated thereunder, and any applicable state securities or "blue sky" laws. Each underwriter further represents that it has not made and will not make any offer relating to the shares that would constitute an "issuer free writing prospectus" as defined in Rule 433 under the Securities Act without the prior written consent of the Company.
FINRA Compliance. Each underwriter represents that it is a member in good standing of the Financial Industry Regulatory Authority, Inc. ("FINRA") and that it will comply with all applicable FINRA rules and regulations in connection with the offering, including without limitation FINRA Rules 5110, 5121, and 5131, as applicable. For the record, the FINRA Central Registration Depository ("CRD") number for Whitfield Barrow & Co., LLC is 7924.
Directed Share Programs. The underwriters represent that no directed share program or reserved share program is being conducted in connection with this offering.
Several Liability. Consistent with market practice, the representations, warranties, and agreements of the underwriters are several in nature, and not joint. No underwriter shall be responsible for the default or failure of any other underwriter. This several liability structure extends to the indemnification obligations discussed in Section V below and to the obligation of each underwriter to purchase its respective allocation of shares at the Closing.
V. Indemnification Provisions
A. Indemnification by the Company (Section 9(a))
Pursuant to Section 9(a) of the Underwriting Agreement, the Company agrees to indemnify, defend, and hold harmless each underwriter, its respective directors, officers, employees, and agents, and each person, if any, who controls any underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any and all losses, claims, damages, or liabilities (including the reasonable costs of investigation and litigation, including reasonable attorneys' fees and expenses) (collectively, "Losses"), joint or several, to which such indemnified person may become subject under the Securities Act, the Exchange Act, or any other federal or state statutory law or regulation, at common law, or otherwise, insofar as such Losses arise out of or are based upon:
(i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including any amendment thereto), the Prospectus (including any preliminary prospectus, any amended or supplemented prospectus, and any "issuer free writing prospectus" as defined in Rule 433 under the Securities Act), or any written "road show" materials, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or
(ii) any breach of any representation, warranty, or agreement of the Company contained in the Underwriting Agreement.
The Company's indemnification obligation does not extend to any Losses to the extent that such Losses arise out of or are based upon any untrue statement or omission made in reliance upon and in conformity with information furnished in writing by or on behalf of any underwriter through the Representative specifically for use in the Registration Statement or the Prospectus (the "Underwriter Information"). The parties have agreed that the Underwriter Information consists solely of the following information: (a) the names, addresses, and share allocations of the underwriters set forth in the underwriter table in the Prospectus, (b) the concession and reallowance figures set forth in the section of the Prospectus captioned "Underwriting," (c) the paragraph in the Prospectus relating to stabilization transactions, and (d) the paragraph in the Prospectus relating to electronic prospectus delivery.
B. Indemnification by the Underwriters (Section 9(b))
Pursuant to Section 9(b) of the Underwriting Agreement, each underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any and all Losses to which such indemnified person may become subject, insofar as such Losses arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in, or any omission or alleged omission to state a material fact required to be stated in or necessary in order to make the statements not misleading in, the Registration Statement or the Prospectus, but only to the extent that such untrue statement or omission was made in reliance upon and in conformity with Underwriter Information furnished in writing by such underwriter through the Representative specifically for use therein.
Each underwriter's indemnification liability under Section 9(b) is capped at the amount of the underwriting discount received by such underwriter in connection with the offering (i.e., each underwriter's proportionate share of the total underwriting discount of $27,600,000, calculated based on such underwriter's allocation of shares).
C. Contribution (Section 9(c))
If the indemnification provided for in Sections 9(a) and 9(b) is unavailable or insufficient to hold harmless an indemnified party in respect of any Losses, the Underwriting Agreement provides for contribution among the parties in proportion to the relative benefits received by the Company and the underwriters from the offering (with the Company being deemed to have received the net proceeds and the underwriters being deemed to have received the aggregate underwriting discount) and the relative fault of the Company and the underwriters in connection with the statements or omissions that resulted in such Losses.
No underwriter is required to contribute any amount in excess of the underwriting discount received by such underwriter. Moreover, no person who has been found guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the Securities Act is entitled to contribution from any person who has not been found guilty of such fraudulent misrepresentation.
D. Negotiation Notes on Indemnification
The indemnification provisions were the subject of significant negotiation between C&H and Meridian Hale. The following summarizes the key negotiation outcomes:
Scope of Company Indemnification. Whitfield Barrow's initial draft included an expansive indemnification trigger that covered "any and all claims" without expressly limiting the Company's indemnification obligation to Securities Act–related claims. C&H objected to this formulation and successfully narrowed the scope of the Company's indemnification obligation to claims arising out of or based upon (i) material misstatements or omissions in the offering documents (Registration Statement, Prospectus, written road show materials, and issuer free writing prospectuses) and (ii) breaches of the Company's representations, warranties, and agreements contained in the Underwriting Agreement. This narrowing ensures that the Company is not exposed to open-ended indemnification exposure for claims unrelated to the securities offering.
Underwriter Information Carve-Out. C&H confirmed that the scope of "Underwriter Information" is narrowly defined and limited to the four specific categories of information identified above. This is consistent with market practice and ensures that the Company's indemnification obligation does not extend to misstatements or omissions in the portions of the offering documents that were provided by the underwriters themselves.
Road Show Materials and Issuer Free Writing Prospectuses. Whitfield Barrow's initial draft sought to include within the scope of the Company's indemnification obligation "any oral statements made at the road show." C&H strongly objected to this formulation, as it would expose the Company to indemnification liability for extemporaneous oral statements made by Company management during investor meetings, which are inherently difficult to verify and document. C&H negotiated this down to cover only written "road show" materials (as defined in Rule 433(h) under the Securities Act) and issuer free writing prospectuses that have been filed or are required to be filed with the SEC under Rule 433. This is a meaningful limitation that confines the Company's indemnification obligation to documented materials.
Settlement Provisions. C&H inserted language in Section 9(d) of the Underwriting Agreement requiring that no settlement of any indemnifiable claim be effected without the prior written consent of the indemnified party, such consent not to be unreasonably withheld, conditioned, or delayed. This provision was absent from the initial Whitfield Barrow draft and is an important procedural protection for both parties, ensuring that neither the Company nor any underwriter may unilaterally settle a claim in a manner that prejudices the rights of the indemnified party.
Notice Provisions. The executed agreement contains standard prompt written notice provisions. Failure by an indemnified party to give timely notice does not relieve the indemnifying party of its obligations except to the extent that the indemnifying party is materially prejudiced by such failure. This is consistent with prevailing market practice.
VI. Conditions Precedent to Closing
A. Conditions to the Underwriters' Obligations (Section 7)
Section 7 of the Underwriting Agreement sets forth in detail the conditions that must be satisfied or waived by the Representative at or prior to the Closing on February 13, 2024. These conditions are customary for an IPO underwriting agreement and are summarized below:
1. Effectiveness of Registration Statement. The Registration Statement on Form S-1 (File No. 333-276841) shall have been declared effective by the SEC, and no stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC, and no proceedings for that purpose shall have been initiated or threatened by the SEC. This condition was satisfied upon the SEC's declaration of effectiveness on February 8, 2024.
2. Filing of Final Prospectus. The final prospectus shall have been filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act within the required time period. The final prospectus was filed on February 9, 2024 via EDGAR.
3. Officers' Certificate. A certificate executed by Dr. Nathaniel Rourke, Chief Executive Officer of the Company, and David Halderman, Chief Financial Officer of the Company, pursuant to Section 7(d) of the Underwriting Agreement, certifying as to (a) the accuracy of the Company's representations and warranties contained in the Underwriting Agreement as of the Closing, (b) the Company's compliance with all covenants and agreements to be performed prior to the Closing, (c) the absence of any Material Adverse Effect since the date of the most recent financial statements included in the Prospectus, and (d) confirmation that no stop order has been issued and no proceedings for that purpose have been initiated or threatened.
4. Secretary's Certificate. A certificate executed by Rachel Moynihan, General Counsel and Corporate Secretary of the Company, attaching certified copies of (a) the Amended and Restated Certificate of Incorporation of the Company (as filed with the Delaware Secretary of State), (b) the Amended and Restated Bylaws of the Company, and (c) all resolutions of the Board of Directors and, to the extent applicable, the stockholders of the Company authorizing the execution and delivery of the Underwriting Agreement, the issuance and sale of the shares, and the consummation of the transactions contemplated thereby.
5. Company Counsel Opinion and Negative Assurance Letter. An opinion of Calderwood & Harkness LLP (to be executed by Theodore Langston), addressed to the several underwriters, covering the following matters: (a) validity of the shares (validly issued, fully paid, and non-assessable under the Delaware General Corporation Law), (b) corporate existence and good standing of the Company under the laws of the State of Delaware, (c) due authorization and execution of the Underwriting Agreement by the Company, (d) no conflicts between the Underwriting Agreement and the Company's organizational documents or material agreements, and (e) compliance with the Securities Act registration requirements. In addition, C&H will deliver a negative assurance (10b-5) letter confirming that nothing has come to the attention of attorneys at the firm who participated in the preparation of the Registration Statement and the Prospectus that causes them to believe that the Registration Statement, as of its effective date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date or the Closing date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
6. Tax Opinion. A tax opinion of Calderwood & Harkness LLP (to be executed by Sylvia Hartwell), addressed to the Company and the several underwriters, regarding certain United States federal income tax consequences of the offering as discussed in the section of the Prospectus captioned "Material U.S. Federal Income Tax Consequences."
7. Underwriters' Counsel Opinion. An opinion of Meridian Hale & Quivorn LLP (Graham Neville), addressed to the several underwriters, regarding certain legal matters relating to the offering.
8. Comfort Letters. (a) A comfort letter from Kellerman & Associates LLP, the Company's independent registered public accounting firm, dated the pricing date (February 8, 2024), addressed to the several underwriters, in form and substance satisfactory to the Representative, containing statements and information of the type ordinarily included in accountants' comfort letters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; and (b) a bring-down comfort letter from Kellerman & Associates LLP, dated the Closing date (February 13, 2024), addressed to the several underwriters, confirming no material changes in specified financial items through the bring-down cut-off date (five business days prior to the date of such letter). Both comfort letters are to be in form and substance satisfactory to the Representative.
9. Good Standing Certificates. Certificates of good standing (or equivalent certificates) from (i) the Secretary of State of the State of Delaware and (ii) the Secretary of the Commonwealth of Massachusetts, each dated within five (5) business days of the Closing date.
10. Lock-Up Agreements. Executed lock-up agreements, in the form attached as Exhibit A to the Underwriting Agreement, from all directors, officers, and holders of 1% or more of pre-IPO shares of common stock of the Company (approximately 45 signatories covering approximately 80,000,000 shares) shall have been delivered to the Representative and shall be in full force and effect as of the Closing date. A detailed discussion of the lock-up agreements is set forth in Section VII below.
11. FINRA No-Objections. Receipt of confirmation from the FINRA Corporate Financing Department that it has reviewed the underwriting terms and arrangements and has no objection thereto. This confirmation was received on approximately January 30, 2024, well in advance of the Closing date.
12. NYSE Listing. Approval of the listing of the shares of common stock (including the base offering shares and the overallotment shares) on the New York Stock Exchange under the ticker symbol "ARHT," subject only to official notice of issuance.
13. DTC Eligibility. Confirmation from Continental Share Services, Inc. (the Company's transfer agent and registrar) that the shares of common stock are eligible for deposit and book-entry transfer through the facilities of The Depository Trust Company (CUSIP 039217105).
14. D&O Insurance. Evidence satisfactory to the Representative that directors' and officers' liability insurance is in full force and effect with coverage reasonably satisfactory to the Representative. The Company has put in place a D&O insurance tower with aggregate coverage of $100,000,000, structured as follows:
• Northbridge Specialty Insurance Company: $50,000,000 primary layer.
• Pinnacle Reinsurance Company: $25,000,000 first excess layer ($25M excess of $50M).
• Atlas Guard Insurance Ltd.: $25,000,000 second excess layer ($25M excess of $75M).
• Total Tower: $100,000,000.
15. No Material Adverse Change. There shall not have occurred any material adverse change in the condition (financial or otherwise), business, results of operations, properties, or prospects of the Company since the date of the most recent financial statements included in the Prospectus (i.e., since December 31, 2023).
16. Transfer Agent Appointment. Continental Share Services, Inc. shall have been duly appointed as transfer agent and registrar for the shares of common stock and shall be acting in such capacity as of the Closing date.
B. Negotiation Notes on Conditions Precedent
D&O Insurance Condition. Whitfield Barrow's initial draft of the D&O insurance condition required the Company to provide evidence of "coverage satisfactory to the Representative in its sole discretion." C&H objected to this formulation on the ground that it granted the Representative an unreasonably broad standard that could potentially be used as a pretext for termination. C&H successfully negotiated the standard to "coverage reasonably satisfactory to the Representative," which is a more balanced formulation and is consistent with the $100,000,000 D&O insurance tower already in place.
FINRA No-Objections Timing. The initial Whitfield Barrow draft conditioned the Closing on receipt of the FINRA no-objections letter no later than two (2) business days prior to the Closing date. C&H confirmed that the FINRA no-objections letter was received on approximately January 30, 2024, well in advance of the Closing date, rendering this timing condition moot as a practical matter. The condition was retained in the final agreement as drafted.
Bring-Down Comfort Letter. Kellerman & Associates LLP confirmed its willingness to deliver both the pricing-date comfort letter and the Closing-date bring-down comfort letter in form and substance satisfactory to the Representative. No substantive negotiation was required with respect to the scope of the circle-up procedures, as the parties were in agreement on the relevant financial line items and the applicable change periods.
VII. Lock-Up Requirements
A. Lock-Up Terms (Section 5 and Exhibit A)
The Underwriting Agreement incorporates by reference the form of lock-up agreement attached as Exhibit A thereto. The material terms of the lock-up arrangements are as follows:
Lock-Up Period. The lock-up period is 180 days from the date of the final prospectus (February 8, 2024), expiring on August 6, 2024.
Lock-Up Parties. The lock-up obligations apply to all directors, executive officers, holders of 1% or more of the Company's pre-IPO outstanding shares of common stock, and certain other stockholders identified by the Representative. Approximately 45 individuals and entities have executed lock-up agreements.
Shares Subject to Lock-Up. Approximately 80,000,000 shares of common stock, representing 100% of the pre-IPO outstanding shares, are subject to the lock-up.
Beneficiary. Each lock-up agreement is signed in favor of Whitfield Barrow & Co., LLC, acting in its capacity as Representative of the several underwriters.
Key Signatories and Share Counts. The following table summarizes the share counts for the principal lock-up signatories:
B. Lock-Up Exceptions
The lock-up agreements contain customary exceptions permitting the following transfers during the lock-up period without the prior written consent of the Representative:
(i) Transfers for bona fide estate planning purposes, including transfers to trusts, family limited partnerships, or other vehicles for the benefit of the lock-up party or his, her, or its immediate family members, provided that each donee or transferee executes a lock-up agreement on substantially the same terms as the original lock-up agreement prior to or simultaneously with such transfer.
(ii) Transfers or sales of shares of common stock pursuant to pre-existing Rule 10b5-1 trading plans that were in effect as of the pricing date and have been disclosed in the Registration Statement on Form S-1. Whitfield Barrow has provided a side letter confirming the specific parameters for the pre-existing 10b5-1 plans of Dr. Nathaniel Rourke and Margaret Tsujimoto.
(iii) Transfers or dispositions of shares of common stock acquired by the lock-up party in the open market after the completion of the IPO. For the avoidance of doubt, this exception applies only to shares acquired after the IPO closing and does not apply to pre-IPO shares.
(iv) Transfers of up to 10% of a lock-up party's locked-up shares to the Company for purposes of satisfying tax withholding obligations in connection with the vesting of restricted stock units ("RSUs") during the lock-up period.
C. Early Release
The Representative (Whitfield Barrow) has the sole discretion to release any party from the lock-up obligations prior to the expiration of the 180-day lock-up period. There is no obligation on the part of the Representative to grant any early release, and the Representative may impose conditions on any such release.
In accordance with FINRA Rule 5131(d)(2), any early release of a lock-up applicable to an officer or director of the Company must be announced by the Company via press release or Form 8-K at least two (2) business days prior to the effective date of such release. The announcement of an early release triggers a research publication blackout for the managing underwriters.
C&H has provided a separate letter to Rachel Moynihan, the Company's General Counsel and Corporate Secretary, outlining the internal procedures to be followed in the event that any lock-up party requests an early release, including the notification obligations and the process for coordinating with the Representative.
D. Negotiation Notes on Lock-Up
Lock-Up Duration. The 180-day lock-up period is market standard for healthcare technology and SaaS IPOs and is consistent with recent precedent transactions of comparable size. There was no push from the underwriters for a longer lock-up period, and C&H did not seek a shorter period given market expectations.
RSU Tax Withholding Exception. C&H negotiated the inclusion of the 10% cap exception for tax-withholding transfers on vesting RSUs, which was not present in Whitfield Barrow's initial draft. This exception was added to accommodate employees with upcoming RSU vesting events under the Company's 2014 Stock Incentive Plan during the 180-day lock-up period. Without this exception, employees whose RSUs vest during the lock-up period would be unable to satisfy their resulting tax obligations through net share settlement, which could create significant hardship. The 10% cap was negotiated as a compromise; Meridian Hale initially proposed a 5% cap, but C&H obtained the 10% figure after demonstrating that the expected RSU vesting schedule would require withholding at approximately that level for several employees.
10b5-1 Plan Exception. Whitfield Barrow initially proposed that all sales of shares pursuant to Rule 10b5-1 trading plans during the lock-up period require the prior written consent of the Representative. C&H objected to this formulation and negotiated an automatic carve-out for pre-existing 10b5-1 plans that were (a) in effect as of the pricing date and (b) disclosed in the Registration Statement. This automatic carve-out was confirmed by a side letter from Whitfield Barrow addressed to C&H. The automatic carve-out avoids the need for Dr. Rourke and Ms. Tsujimoto, each of whom has a pre-existing 10b5-1 plan in place, to seek case-by-case consent from the Representative for each planned sale, which could create uncertainty and interfere with the orderly operation of their respective trading plans.
Open Market Acquisitions. The exception for shares acquired in the open market after the IPO is a standard carve-out and was accepted without substantive negotiation.
VIII. MNPI Representations and Covenants
A. Representations Regarding Material Non-Public Information
Section 1(pp) of the Underwriting Agreement contains the Company's representations regarding material non-public information ("MNPI"). Specifically, the Company represents that:
(i) As of the date of the Underwriting Agreement, all material information regarding the Company, its business, financial condition, results of operations, and prospects has been publicly disclosed in the Registration Statement and the Prospectus.
(ii) Neither the Company nor any person acting on its behalf has provided to any underwriter or prospective investor in the offering any material non-public information that is not included in the Registration Statement or the Prospectus.
(iii) The Company covenants that it will not disclose material non-public information to any underwriter following the date of the Underwriting Agreement without the prior written consent of the Representative, except as may be required by applicable law, regulation, or legal process.
B. Regulation FD Compliance
The Underwriting Agreement references the Company's compliance with Regulation FD (Fair Disclosure) under the Exchange Act during the roadshow period (January 29, 2024 through February 7, 2024) and thereafter. All road show presentations were reviewed and approved by C&H and Company management prior to their use, and C&H confirms that no material information was disclosed at the road show that was not included in the preliminary prospectus or the Registration Statement.
The Company's Regulation FD compliance was monitored by C&H throughout the roadshow period, including review of all written investor presentations, Q&A guidance documents, and investor communication protocols. No Regulation FD issues were identified.
C. Quiet Period / Post-Effective Prospectus Delivery
The Underwriting Agreement addresses the standard prospectus delivery obligations arising under Section 4(a)(3) of the Securities Act. The underwriters are obligated to deliver a prospectus (or make available a prospectus pursuant to Rule 172) in connection with any sale of the shares during the 25-day period following the effective date of the Registration Statement (i.e., through March 4, 2024).
The Company has covenanted to promptly notify the Representative of the occurrence of any event during the prospectus delivery period that would require the filing of an amendment or supplement to the Prospectus in order to correct any untrue statement of a material fact or to supplement the Prospectus to include any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. During any period in which such an amendment or supplement is being prepared, the Company has agreed to promptly advise the Representative to suspend the use of the Prospectus.
D. Negotiation Notes on MNPI
Scope of MNPI Representation. Whitfield Barrow's initial draft included a representation that the Company had not communicated any MNPI to "any person," without limitation. C&H objected to this overly broad formulation, which would have required the Company to represent as to information communicated to all third parties in all contexts, including communications that are entirely unrelated to the securities offering and may be subject to separate confidentiality arrangements. C&H successfully narrowed the representation to information provided to underwriters and prospective investors in the context of the offering, which is consistent with the scope of Regulation FD and the purpose of the MNPI representations in an underwriting agreement.
Reciprocal Underwriter Representation. C&H added a reciprocal representation from the underwriters to the effect that they have not communicated any MNPI received from the Company to any person other than in connection with the offering and in compliance with applicable law. This reciprocal representation was accepted by Meridian Hale and is included in the final executed agreement. The inclusion of a reciprocal MNPI representation from the underwriters provides the Company with a contractual basis for addressing any unauthorized disclosure of Company MNPI by the underwriters.
IX. Covenants of the Company
A. Key Affirmative Covenants
Section 5 of the Underwriting Agreement contains a number of affirmative covenants of the Company, the most significant of which are summarized below:
Final Prospectus Filing. The Company covenants to file the final prospectus with the SEC pursuant to Rule 424(b) under the Securities Act within the required time period. The final prospectus was filed on February 9, 2024 via Rule 424(b)(4).
Notice of SEC Actions and Events. The Company covenants to promptly notify the Representative of (i) any request by the SEC for any amendment to the Registration Statement or any supplement to the Prospectus, or for additional information, (ii) the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceedings for that purpose, and (iii) the occurrence of any event that, in the judgment of the Company, makes any statement of a material fact in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading.
Furnishing of Documents. The Company covenants to furnish to the Representative, without charge, copies of the Registration Statement (including all exhibits thereto and all amendments and post-effective amendments thereto) and the Prospectus (including all amendments and supplements thereto), in such quantities as the Representative may reasonably request.
Use of Proceeds. The Company covenants to apply the net proceeds from the offering as described in the section of the Prospectus captioned "Use of Proceeds." As set forth therein, the Company intends to use the net proceeds as follows:
• Repayment of approximately $65,000,000 of outstanding borrowings under the Keypoint revolving credit facility;
• Product development and research and development investment of approximately $120,000,000;
• Potential acquisitions and strategic investments of approximately $100,000,000; and
• General corporate purposes and working capital.
NYSE Listing. The Company covenants to use commercially reasonable efforts to maintain the listing of the shares of common stock on the New York Stock Exchange under the ticker symbol "ARHT" for as long as the shares are outstanding.
Exchange Act Reporting. The Company covenants to file on a timely basis all reports required to be filed under the Exchange Act following the Closing, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.
B. Key Negative Covenants
The Underwriting Agreement also contains certain negative covenants of the Company, including the following:
Company Standstill. For a period of 180 days following the date of the final prospectus (i.e., through August 6, 2024), the Company will not, without the prior written consent of the Representative, (i) offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale, or otherwise dispose of any shares of common stock or any securities convertible into or exchangeable for or that represent the right to receive shares of common stock, or (ii) file any registration statement with the SEC relating to the offering of any shares of common stock or any securities convertible into or exchangeable for shares of common stock, in each case subject to certain exceptions, including:
• Grants of equity awards under the Company's 2024 Equity Incentive Plan (as described in the Prospectus);
• Issuances of shares pursuant to the Company's Employee Stock Purchase Plan ("ESPP"); and
• Issuances of shares of common stock upon the exercise of outstanding stock options under the Company's 2014 Stock Incentive Plan that are outstanding as of the Closing date.
Prospectus Amendments. The Company will not amend or supplement the Registration Statement or the Prospectus without the prior written consent of the Representative (such consent not to be unreasonably withheld, conditioned, or delayed), except as may be required by applicable law or the rules and regulations of the SEC.
X. Termination Rights
A. Termination by the Representative (Section 11)
Pursuant to Section 11 of the Underwriting Agreement, the Representative may terminate the Underwriting Agreement, in its sole discretion, at any time prior to the Closing date (February 13, 2024) upon the occurrence of any of the following events:
1. Market-Out Clause. The Representative may terminate if:
(a) trading in securities generally on the New York Stock Exchange or the Nasdaq Stock Market shall have been suspended or materially limited, or minimum or maximum prices or maximum ranges for prices shall have been established on either of such exchanges by the SEC, by such exchange, or by any other regulatory body or governmental authority;
(b) a general moratorium on commercial banking activities shall have been declared by federal or New York State authorities; or
(c) there shall have occurred any outbreak or escalation of hostilities, declaration of a national emergency, or any other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Representative, materially impracticable or inadvisable to proceed with the public offering or the delivery of the shares on the terms and in the manner contemplated by the Prospectus.
2. Material Adverse Change. The Representative may terminate if there shall have occurred any material adverse change in the condition (financial or otherwise), business, results of operations, properties, or prospects of the Company, whether or not arising in the ordinary course of business, that makes it, in the judgment of the Representative, impracticable or inadvisable to proceed with the public offering or the delivery of the shares on the terms and in the manner contemplated by the Prospectus.
3. Ratings Downgrade / Credit Event. The Underwriting Agreement includes a standard clause referencing any downgrade in the rating of any debt securities of the Company or any announcement by a nationally recognized statistical rating organization that it has placed any debt securities of the Company under surveillance or review with possible negative implications. As AHT is currently unrated and has no rated debt outstanding, this clause is not directly applicable; however, it has been retained in the agreement in standard form.
4. Failure of Conditions. The Representative may terminate if any condition to the obligations of the underwriters set forth in Section 7 of the Underwriting Agreement shall not have been fulfilled or waived as of the Closing date.
B. Termination by the Company
The Company has a limited right to terminate the Underwriting Agreement prior to pricing if the Registration Statement has not been declared effective by the SEC. Following pricing, the Company's termination right is limited to circumstances involving a material breach by the underwriters of their obligations under the Underwriting Agreement.
C. Effect of Termination
In the event of a termination of the Underwriting Agreement, whether by the Representative or the Company, neither party shall have any liability to the other, except that (i) the provisions regarding accrued expenses (Section 6) shall remain in effect, and (ii) the indemnification and contribution provisions of Section 9 shall survive any termination and remain in full force and effect.
D. Negotiation Notes on Termination
Market-Out Scope. C&H sought to narrow the market-out clause by requiring that any market disruption be "of such a character" that it materially impairs the ability to market or deliver the shares. Whitfield Barrow resisted this proposed limitation, and the final language retains the "in the judgment of the Representative" standard, which is consistent with market practice and reflects the well-established principle that the market-out clause is intended to provide the underwriters with a unilateral termination right in the event of severe market disruption. However, C&H obtained a meaningful concession: the addition of the word "materially" before "impracticable or inadvisable" in the hostilities and calamity trigger (clause (c) above), which slightly raises the threshold for the Representative's exercise of the termination right in the event of a geopolitical or natural disaster event.
Force Majeure Events. The initial Whitfield Barrow draft included a broad force majeure trigger that separately enumerated COVID-19 and related pandemic measures as a standalone termination event. C&H objected to this provision on the ground that, as of the date of the Underwriting Agreement, COVID-19 and related pandemic conditions are well-established and have been priced into the market. C&H successfully negotiated to remove the standalone COVID-19/pandemic trigger, limiting the force majeure provisions to circumstances involving a material escalation of pandemic or public health conditions beyond those existing as of the Signing Date.
Survival of Indemnification. The parties confirmed that the indemnification and contribution provisions of Section 9 survive any termination of the Underwriting Agreement, whether by expiration, by the exercise of a termination right, or otherwise. This is an important protection for both parties and ensures that the indemnification framework remains in place regardless of the ultimate disposition of the offering.
XI. Offering Expenses