MEMORANDUM

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Bernard Crawford, Partner, Labor & Employment
FROM: Devon Archer, Associate, Labor & Employment
DATE: July 28, 2022
RE: Change in Control Provisions — Design and Market Analysis for Dr. Marcus J. Elliston Executive Employment Agreement
CLIENT: Arbor Health Technologies Inc. (Client No. 81-30294)
MATTER: 1010-00004
CC: Renata Vasquez (Billing Partner); Nadia Petrov (Working Associate); Sandra Okafor (Counsel, Corporate/M&A)
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I. Purpose and Summary
This memorandum analyzes the design options for the change in control ("CIC") provisions to be included in the proposed Executive Employment Agreement (the "Employment Agreement") between Arbor Health Technologies Inc. ("AHT" or the "Company") and Dr. Marcus J. Elliston (the "Executive"), who will serve as Chief Operating Officer of the Company, reporting directly to Chief Executive Officer Priya Chandrasekaran. The purpose of this memorandum is to present a comprehensive analysis of the relevant design choices, market benchmarking data, and legal considerations so that the team may incorporate a well-reasoned set of CIC provisions into the first draft of the Employment Agreement, which is currently scheduled for circulation on August 5, 2022.
This memorandum addresses four principal issues:
1.  The definition of "change in control" — including the appropriate definitional prongs, the treatment of the Company's majority private equity sponsor (Ridgeline Capital Partners, LP), and the relationship between the employment agreement definition and the definition contained in the AHT 2020 Equity Incentive Plan (as amended May 2021);
2.  The choice between single-trigger and double-trigger acceleration of equity awards and severance payments, including the appropriate length of the post-CIC qualifying termination window and the definition of "Good Reason" in the CIC context;
3.  The appropriate CIC severance multiples for a COO-level executive, informed by peer-group market data and the Company's internal precedent agreements; and
4.  The interaction of the CIC provisions with the existing Ridgeline Capital Partners, LP Stockholders' Agreement, including the drag-along provisions applicable to management equity holders, the Helix Ventures Fund III, LP consent rights, and the AHT 2020 Equity Incentive Plan.
The analysis set forth in this memorandum is informed by several key sources: (a) the internal term sheet circulated by AHT management on July 18, 2022 (the "Internal Term Sheet"); (b) the Broadleaf Compensation Advisors LLC peer benchmarking report completed in June 2022 (the "Broadleaf Report"), which analyzed executive compensation practices at a peer group of comparable healthcare services and SaaS companies; (c) background documents provided by Wentworth & Gage LLP (Richard D. Gage, lead partner), AHT's regular outside corporate counsel, including the existing employment agreements for the CEO and CFO and the Ridgeline Capital Partners Stockholders' Agreement; and (d) consultations with Sandra Okafor of our Corporate/M&A group regarding the corporate governance and transactional implications of the CIC provisions.
Key Recommendation: Based on the analysis below, I recommend that the Employment Agreement adopt a double-trigger CIC structure providing the following upon a qualifying termination (i.e., termination without Cause or resignation for Good Reason within 24 months following a change in control):
•  Cash severance: 2× base salary ($1,150,000) plus 2× target annual bonus ($862,500);
•  COBRA continuation: 18 months of employer-paid COBRA premiums ($38,700);
•  Equity acceleration: 100% of unvested stock options and RSUs vest immediately upon the qualifying termination;
•  Total estimated CIC severance value (excluding equity): $2,051,200;
•  A carefully tailored definition of "change in control" that carves out transactions by Ridgeline Capital Partners, LP and its affiliates (while including acquisitions by Helix Ventures Fund III, LP and other non-sponsor parties);
•  A best-net Section 280G cutback provision (no excise tax gross-up); and
•  Full coordination with the AHT 2020 Equity Incentive Plan and the Ridgeline Capital Partners Stockholders' Agreement.
These terms are at approximately the median-to-75th percentile of the peer group for a COO-level executive at a PE-backed healthcare technology company, and are appropriate given AHT's competitive recruiting position and the need to attract a candidate of Dr. Elliston's caliber.
II. Background
A. AHT Ownership Structure
Arbor Health Technologies Inc. is a Delaware corporation headquartered at 400 Brattle Commerce Park, Suite 1200, Cambridge, Massachusetts 02138. The Company provides cloud-based clinical workflow management and data analytics solutions to mid-size and large health systems, physician practice groups, and post-acute care facilities across the United States. As described in greater detail below, AHT's ownership structure is characteristic of a sponsor-backed portfolio company, with a controlling private equity investor, a significant minority venture investor, and a management equity pool.
Ridgeline Capital Partners, LP. Ridgeline Capital Partners, LP ("Ridgeline"), a Delaware limited partnership with principal offices at 200 Clarendon Street, 42nd Floor, Boston, Massachusetts 02116, is the majority private equity sponsor and currently owns approximately 68% of AHT's outstanding equity interests. Ridgeline acquired AHT in a take-private transaction that closed in December 2019 at an enterprise value of approximately $340 million. The acquisition was made through Ridgeline Capital Partners Fund IV, LP, a $2.8 billion fund focused on growth-stage healthcare, technology, and business services investments. Ridgeline has been actively involved in AHT's strategic direction since the take-private, including the recruitment of the current CEO, Priya Chandrasekaran, who joined AHT in March 2020.
AHT's Board Chair is Thomas R. Glenwood, who concurrently serves as the Managing Partner of Ridgeline Capital Partners. The AHT Board of Directors currently consists of seven members, of which three are Ridgeline designees (including Mr. Glenwood), two are Helix Ventures designees, and two are independent directors. The Board's compensation committee is chaired by one of the independent directors but includes two Ridgeline designees, which gives Ridgeline effective influence over executive compensation decisions.
Helix Ventures Fund III, LP. Helix Ventures Fund III, LP ("Helix Ventures"), a Delaware limited partnership, holds approximately 14% of AHT's outstanding equity interests. Helix Ventures was an early-stage investor in AHT prior to the Ridgeline take-private and retained its stake in connection with the 2019 transaction, rolling over its existing equity into the post-acquisition capital structure. Helix Ventures has consent rights on certain equity issuances and other protective provisions under the Ridgeline Capital Partners Stockholders' Agreement (discussed in Section VI below).
Management and Other Holders. Management and other individual holders collectively own approximately 18% of AHT's outstanding equity interests. This includes equity held by CEO Chandrasekaran, CFO Derek Solano, and other members of the senior leadership team, as well as equity reserved under the AHT 2020 Equity Incentive Plan (as amended May 2021) for future grants to employees, directors, and consultants. The management equity pool is subject to the terms and conditions of the Ridgeline Capital Partners Stockholders' Agreement, including drag-along, tag-along, and transfer restriction provisions.
Key Financial Metrics. For fiscal year 2021, AHT reported annual revenue of approximately $127.4 million, representing year-over-year growth of approximately 23% from fiscal year 2020. The Company currently employs approximately 620 individuals across its Cambridge headquarters, satellite offices in Austin, Texas and Portland, Oregon, and a distributed remote workforce. AHT is currently on a growth trajectory that Ridgeline and management anticipate will position the Company for a potential exit transaction (whether through a strategic sale, secondary buyout, or initial public offering) within the next three to five years.
B. Proposed Executive Compensation Overview
Dr. Marcus J. Elliston is a highly regarded healthcare technology executive who most recently served as Senior Vice President, Operations and Product Development at MedBridge Solutions, Inc., a publicly traded healthcare IT company. AHT has been actively recruiting Dr. Elliston since April 2022, and the parties have reached agreement in principle on the material terms of an executive employment arrangement, as reflected in the Internal Term Sheet circulated by AHT on July 18, 2022.
The key terms of the proposed Executive compensation package are as follows:
•  Title and Reporting: Chief Operating Officer, reporting directly to CEO Priya Chandrasekaran.
•  Start Date: November 1, 2022.
•  Term: Three-year initial term, with automatic one-year renewals thereafter unless either party provides 90 days' written notice of non-renewal prior to the expiration of the then-current term.
•  Base Salary: $575,000 per annum, subject to annual review by the Board compensation committee.
•  Annual Bonus Target: 75% of base salary ($431,250 at target); maximum bonus opportunity of 150% of target ($646,875). Bonus to be determined based on a combination of Company financial metrics and individual performance objectives established by the CEO and the Board compensation committee.
•  Signing Bonus: $250,000, payable within 30 days of the start date, subject to a 24-month repayment clawback if the Executive voluntarily terminates employment without Good Reason or is terminated for Cause within 24 months of the start date.
•  Equity Awards:
•  Stock Options: Nonqualified stock options to purchase a number of shares of AHT common stock equal to 1.25% of the Company's fully diluted equity, vesting over four years with a 25% cliff at the first anniversary of the grant date and monthly vesting thereafter, at an exercise price equal to the fair market value of AHT common stock on the date of grant, as determined by the Board in accordance with the AHT 2020 Equity Incentive Plan.
•  Restricted Stock Units (RSUs): RSUs covering a number of shares of AHT common stock equal to 0.50% of the Company's fully diluted equity, vesting over three years in equal annual installments of 33.33% on each anniversary of the grant date.
•  Both awards will be granted under the AHT 2020 Equity Incentive Plan (as amended May 2021) and will be subject to the terms and conditions of individual Stock Option Award Agreement and RSU Award Agreement, respectively.
•  First-Year Total Cash Compensation at Target: $1,256,250, consisting of base salary ($575,000) plus target annual bonus ($431,250) plus signing bonus ($250,000).
The CIC provisions discussed in this memorandum are a critical component of the overall compensation package and have been identified by Dr. Elliston's counsel, Fielding & Rowe LLP, as a priority negotiation item.
C. Existing Precedent Agreements
Wentworth & Gage LLP (Richard D. Gage, lead partner), AHT's regular outside corporate counsel, has provided our team with copies of the existing employment agreements for CEO Priya Chandrasekaran (executed March 2020, as amended February 2021) and CFO Derek Solano (executed June 2021) to serve as drafting precedents for the Elliston Employment Agreement.
Both existing agreements contain change in control provisions, though they differ in certain material respects. The Chandrasekaran CEO agreement uses a broader definition of "change in control" and provides a more generous severance multiple (3× base salary plus 2× target bonus, with a 24-month post-CIC window and 100% equity acceleration). The Solano CFO agreement uses a somewhat narrower definition and provides a lower severance multiple (1.5× base salary plus 1× target bonus, with an 18-month post-CIC window and 75% equity acceleration). Both agreements employ a double-trigger structure.
The Elliston CIC terms should be calibrated between these two precedents, reflecting Dr. Elliston's COO-level seniority — above the CFO but below the CEO. As discussed in Section V below, the recommended 2× base salary plus 2× target bonus multiple, combined with a 24-month post-CIC window and 100% equity acceleration, achieves this calibration while remaining consistent with peer-group market data.
III. Definition of "Change in Control"
The definition of "change in control" is a foundational element of the CIC provisions and must be drafted with precision, particularly given AHT's PE-backed ownership structure. An overly broad definition could be triggered by routine transactions involving the incumbent sponsor, creating unintended obligations for the Company. An overly narrow definition could fail to provide meaningful protection for the Executive in the event of a genuine change in ownership. This section analyzes the standard definitional framework, the critical Ridgeline carve-out, the treatment of Helix Ventures, and certain definitional variations.
A. Standard Definitional Framework
The definition of "change in control" in executive employment agreements customarily includes four prongs, any one of which, if satisfied, would constitute a change in control for purposes of the agreement. These prongs are designed to capture the principal transaction structures through which a change in the ownership or effective control of a company may occur. Each is discussed below in the context of AHT's specific circumstances.
1. Acquisition of Voting Securities. The first prong is triggered upon the acquisition by any person or group (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the combined voting power of AHT's then-outstanding voting securities. This prong captures hostile and friendly acquisitions of voting control through stock purchases, tender offers, and similar transactions.
The 50% threshold is the most common standard in PE-backed company agreements, as opposed to the lower thresholds (e.g., 20% or 30%) that are more typical in public company agreements. The higher threshold is appropriate here because AHT is a private company with a concentrated ownership structure, and the purpose of the CIC definition is to capture a genuine change in the identity of the controlling stockholder, not merely a shift in minority positions.
Critical note: This threshold must be carefully coordinated with Ridgeline's existing approximately 68% ownership stake. As discussed in Section III.B below, the definition of "person" or "group" must explicitly exclude Ridgeline and its affiliates to avoid the perverse result of treating the incumbent sponsor's existing or increased ownership as a change in control.
2. Merger, Consolidation, or Asset Sale. The second prong is triggered upon the consummation of a merger, consolidation, reorganization, or similar business combination involving AHT, or a sale, transfer, or other disposition of all or substantially all of AHT's assets, in any case where the stockholders of AHT immediately prior to such transaction do not, immediately following such transaction, own (directly or indirectly) more than 50% of the combined voting power of the outstanding voting securities of the surviving, resulting, or acquiring entity (or its ultimate parent entity). This prong captures merger and acquisition transactions that result in a change of effective control, even if structured as a merger of equals or a reverse merger.
The "substantially all assets" formulation should be defined or interpreted by reference to the Delaware case law standard (i.e., a sale of assets that is quantitatively and qualitatively vital to the operation of the enterprise), as AHT is a Delaware corporation. In practice, this prong would be triggered by a whole-company sale, whether structured as a stock purchase, a merger, or an asset acquisition.
3. Liquidation or Dissolution. The third prong is triggered upon the approval by AHT's stockholders (or the Board of Directors, if stockholder approval is not required) of a plan of complete liquidation or dissolution of the Company. This prong is included as a protective measure and is relatively straightforward. In the event of a liquidation, the Executive would lose his or her position, and the CIC protections should apply.
4. Board Composition Change. The fourth prong is triggered upon a change in the composition of the Board of Directors such that the individuals who constituted the Board as of the date of the Employment Agreement (the "Incumbent Directors"), together with any new directors whose election or nomination was approved by a vote of at least a majority of the Incumbent Directors then in office (each, an "Approved Director"), cease to constitute a majority of the Board. This is sometimes referred to as the "continuing directors" formulation.
This prong is designed to capture "creeping" changes in control that occur through proxy contests, Board reconstitution, or other mechanisms that do not involve a traditional acquisition of voting securities or a merger transaction. In the PE-backed context, this prong has less practical significance because Board composition is typically governed by contractual designation rights under the Stockholders' Agreement. However, it serves as a useful backstop in the event of a fundamental restructuring of Board governance outside the scope of the other prongs.
B. The Ridgeline Capital Partners Carve-Out
This is the single most critical design issue in drafting the CIC definition for Dr. Elliston's Employment Agreement. Because Ridgeline already owns approximately 68% of AHT's voting securities, the voting securities acquisition prong (Prong 1 above) would, absent a carve-out, have anomalous and unintended consequences. Any third-party acquisition of a controlling position would only be meaningful if Ridgeline's existing ownership is excluded from the calculus, and any increase in Ridgeline's own ownership position should not itself trigger a change in control.
Recommendation: The definition of "change in control" must explicitly exclude from the definition of "person" or "group" the following entities and their respective affiliates, successors, and assigns:
(a) Ridgeline Capital Partners, LP;
(b) Ridgeline Capital Partners Fund IV, LP;
(c) Any other investment fund, vehicle, or account managed, advised, or controlled by Ridgeline Capital Partners, LP or its general partner or any affiliate thereof (including any successor fund or parallel fund); and
(d) Any portfolio company of any of the foregoing, and any officer, director, partner, member, or employee of any of the foregoing acting in their capacity as such.
The rationale for this carve-out is straightforward: Ridgeline is the incumbent sponsor. It was the controlling stockholder at the time of AHT's take-private in December 2019, and it will be the controlling stockholder at the time of Dr. Elliston's hire in November 2022. The CIC protections are designed to protect the Executive against a change in the identity of the controlling party, not against routine transactions by the existing sponsor. If Ridgeline increases its ownership from 68% to, for example, 85% or 90% through a management buyout, squeeze-out, or secondary purchase of minority positions, this should not constitute a change in control for purposes of Dr. Elliston's agreement. The Executive's employment relationship is being established with full knowledge of Ridgeline's controlling position, and the relevant risk being addressed is the transition to new ownership.
Edge Case — Ridgeline Sale of Its Entire Stake. It is important that the carve-out be drafted to address the scenario in which Ridgeline sells or otherwise transfers its entire equity stake in AHT to a third party. In that scenario, the acquirer of Ridgeline's stake would be a non-excluded person or group, and if such acquirer thereby obtains beneficial ownership of more than 50% of AHT's voting securities, the transaction should constitute a change in control. The carve-out should be drafted to ensure that the exclusion applies only to the acquisition of securities by Ridgeline and its affiliates, not to the disposition of securities by Ridgeline to a non-excluded third party. In other words, the focus of the carve-out is on the identity of the acquiring party, not the identity of the selling party.
Cross-Reference to Stockholders' Agreement. The Ridgeline Capital Partners Stockholders' Agreement contains provisions governing permitted transfers and affiliate transfers by Ridgeline and its affiliated funds. The carve-out in the Employment Agreement should be drafted to be consistent with the Stockholders' Agreement's definition of "Permitted Transferees" and "Affiliated Funds" to the extent practicable, while preserving the Employment Agreement's independent operative force. Sandra Okafor has reviewed the relevant Stockholders' Agreement provisions and confirmed that the proposed carve-out language is consistent with the existing transfer restriction framework.
C. Treatment of Helix Ventures Fund III, LP
Helix Ventures Fund III, LP holds approximately 14% of AHT's outstanding equity and has certain consent rights on equity issuances and other protective provisions under the Stockholders' Agreement. The question arises whether Helix Ventures should also be carved out of the CIC definition, similar to the Ridgeline carve-out.
Recommendation: Helix Ventures should not be carved out of the change in control definition. While Helix Ventures is an existing investor in AHT, it is a minority investor without a controlling position, and an acquisition by Helix Ventures (or a Helix Ventures affiliate) of a controlling position in AHT would represent a meaningful change in the identity of the controlling stockholder. Such a transaction would alter the fundamental governance dynamics of the Company and the Executive's employment relationship, and the CIC protections should therefore apply.
As a practical matter, an acquisition of a controlling position by Helix Ventures is unlikely given Helix Ventures' current minority position, the nature of its fund structure (which is a venture capital fund with a defined investment period and fund life), and Ridgeline's controlling position. However, the definition should be drafted to provide comprehensive protection, and excluding Helix Ventures would create an unnecessary gap in coverage.
Moreover, if Helix Ventures were to acquire a controlling position, it would likely do so in connection with a broader transaction (such as a negotiated purchase of Ridgeline's stake), and the dynamics of such a transaction would closely resemble the kind of change in ownership that CIC provisions are designed to address.
D. Definition Variations to Consider
"Company Transaction" vs. "Change in Control." Some executive employment agreements and equity plans use the defined term "Company Transaction" or "Sale of the Company" rather than "Change in Control." In the interest of consistency with the existing AHT agreements (both the Chandrasekaran and Solano agreements use the phrase "Change in Control") and with the AHT 2020 Equity Incentive Plan (which also defines "Change in Control"), I recommend using the exact phrase "Change in Control" as the operative defined term in the Elliston Employment Agreement.
Alignment with the AHT 2020 Equity Incentive Plan. The AHT 2020 Equity Incentive Plan (as amended May 2021) contains its own definition of "Change in Control" that governs the treatment of awards granted under the Plan in the event of a corporate transaction. An important drafting consideration is whether the Employment Agreement's definition should be drafted to align exactly with the Plan definition, or whether it should be a separately tailored definition that may differ in certain respects.
I recommend that the Employment Agreement definition be substantially aligned with the Plan definition for administrative simplicity and to avoid confusion, with the Ridgeline carve-out layered on top as an additional limitation. This approach ensures that a single transaction either will or will not constitute a "Change in Control" for purposes of both the Employment Agreement and the equity awards, while preserving the sponsor-specific carve-out that is uniquely relevant to the employment context.
To the extent that the Plan definition differs from the formulation set forth in Section III.A above (for example, if the Plan uses different ownership thresholds or includes additional prongs), those differences should be identified and reconciled during the drafting process. Sandra Okafor has agreed to provide a markup comparing the Plan definition with the proposed Employment Agreement definition by August 8, 2022.
IV. Single-Trigger vs. Double-Trigger Acceleration
A. Overview of Approaches
The choice between single-trigger and double-trigger acceleration is one of the most consequential design decisions in any CIC provision. The terms "single-trigger" and "double-trigger" refer to the number of events that must occur before the Executive becomes entitled to CIC severance and/or equity acceleration benefits. This section describes the three principal approaches and explains the basis for the recommendation that follows.
Single-Trigger. Under a single-trigger structure, the Executive's equity acceleration and/or cash severance payments are triggered solely by the occurrence of a change in control, regardless of whether the Executive's employment is subsequently terminated. The change in control event itself is the only "trigger." Upon the closing of the CIC transaction, the Executive's unvested equity awards accelerate in full, and the Executive becomes entitled to receive the specified cash severance amount, irrespective of whether the Executive continues in employment with the surviving or acquiring entity.
The principal advantage of a single-trigger structure from the Executive's perspective is that it provides maximum protection: the Executive receives the full economic benefit of the CIC provisions without any risk that the acquirer will retain the Executive in a diminished role while the CIC window expires. The principal disadvantage, from the Company's and the acquirer's perspective, is that it creates a potential windfall for the Executive who continues in employment under new ownership and suffers no disruption whatsoever. Single-trigger provisions are also disfavored by acquirers because they increase the aggregate deal cost and reduce the acquirer's ability to retain key talent through the transition period. Institutional investors and proxy advisory firms (including ISS and Tarrant Partners LLC) have increasingly criticized single-trigger provisions as inconsistent with sound governance practices.
Double-Trigger. Under a double-trigger structure, the Executive's equity acceleration and cash severance are triggered only if two events occur: (1) a change in control, and (2) a qualifying termination of the Executive's employment within a specified period following the change in control. The qualifying termination events are typically (a) termination by the Company (or the successor entity) without Cause, and (b) resignation by the Executive for Good Reason. The change in control alone, without a subsequent qualifying termination, does not entitle the Executive to any CIC-specific benefits (although the Executive's equity awards would continue to vest on their original schedule, and the Executive would retain all non-CIC rights under the Employment Agreement).
The principal advantage of a double-trigger structure is that it aligns incentives appropriately: the Executive receives enhanced CIC benefits only if the change in ownership actually results in the loss of the Executive's position (either through termination or constructive termination). This avoids the windfall problem inherent in single-trigger provisions and is consistent with the fundamental purpose of CIC protections, which is to compensate the Executive for the employment disruption caused by a change in ownership, not to reward the Executive for the mere occurrence of a corporate transaction. Double-trigger provisions are strongly preferred by private equity sponsors, institutional investors, and governance advisors.
The principal disadvantage of a double-trigger structure from the Executive's perspective is that the Executive bears the risk of being marginalized or constructively demoted without technically being terminated during the CIC window. This risk can be mitigated through a carefully drafted "Good Reason" definition that captures meaningful adverse changes in the Executive's role, compensation, and working conditions (see Section IV.D below).
Modified Single-Trigger (Hybrid). Under a modified single-trigger or hybrid structure, the equity acceleration and cash severance components are treated differently. Typically, equity awards accelerate on a single-trigger basis upon the occurrence of the change in control (i.e., unvested equity vests immediately upon closing of the CIC transaction), while cash severance is provided on a double-trigger basis (i.e., only upon a qualifying termination within the CIC window). This hybrid approach is occasionally used for option-heavy compensation packages where there is a practical concern that the acquirer may cancel outstanding options at closing (converting them to merger consideration) and the acceleration must therefore occur pre-closing to preserve value. However, this approach has become less common as most well-drafted merger agreements and equity plan provisions adequately address the treatment of outstanding equity awards at closing.
B. Recommendation: Double-Trigger Structure
I recommend that the Employment Agreement adopt a double-trigger structure for both equity acceleration and cash severance. This recommendation is based on the following considerations:
Market Practice. The Broadleaf Compensation Advisors benchmarking report (June 2022, Diane K. Holbrook, lead consultant) analyzed CIC acceleration structures at a peer group of 18 to 22 comparable healthcare services and SaaS companies, with a focus on COO-level and equivalent senior operating executive positions. The Broadleaf Report found that approximately 75% to 80% of the peer-group companies employ double-trigger structures at the COO level, with single-trigger structures accounting for approximately 10% to 15% of the peer group (primarily at companies that were publicly traded or in the process of preparing for an IPO). The remaining 5% to 10% used modified single-trigger or hybrid approaches. The strong market trend toward double-trigger structures supports the recommendation here.
Ridgeline Capital Partners' Expected Preference. As the majority PE sponsor, Ridgeline's perspective on CIC provisions is a critical consideration. Private equity sponsors almost universally oppose single-trigger provisions in portfolio company executive agreements because single-trigger provisions increase aggregate deal costs at exit, create a retention disincentive for key executives during the transition period, and complicate deal negotiations with potential acquirers. Based on our prior experience with Ridgeline's approach to executive compensation at other portfolio companies and our understanding of general PE market practice, we expect Ridgeline to have a strong preference for a double-trigger structure. This expectation should be confirmed with Aaron Whitfield, AHT's General Counsel, and/or Thomas R. Glenwood prior to circulating the first draft of the Employment Agreement.
Governance Best Practices. Thackeray Health IT (ISS), Tarrant Partners LLC, and other proxy advisory firms have consistently identified single-trigger acceleration as a problematic governance practice. While these advisory frameworks are principally directed at publicly traded companies, they reflect broader market norms and expectations that are increasingly influential in the PE-backed context, particularly for companies that may contemplate an IPO within the medium-term investment horizon. Adopting a double-trigger structure now will avoid the need to renegotiate the CIC provisions in connection with a potential future IPO.
Internal Precedent. Both the Chandrasekaran CEO agreement and the Solano CFO agreement employ double-trigger structures. Adopting a double-trigger structure for the Elliston agreement maintains internal consistency across AHT's C-suite employment agreements.
C. Double-Trigger Window
The qualifying termination must occur within a defined period following the change in control in order to constitute a CIC-related termination event. This period is referred to as the "CIC window" or "protection period." The market range for the CIC window is 12 to 24 months following the consummation of the change in control.
Recommendation: 24-Month Post-CIC Window. I recommend a 24-month post-CIC window, providing the Executive with a full two-year protection period. While 18 months is also within the range of market practice, a 24-month window is appropriate here for several reasons:
Seniority. As COO, Dr. Elliston will be among the most senior executives at AHT. The COO role is particularly susceptible to post-CIC restructuring, as acquirers frequently consolidate operational leadership or eliminate the COO position entirely in favor of their own operational management structure. A 24-month window provides appropriate protection against the risk that the acquirer will restructure the COO function gradually, rather than immediately at closing.
Gradual Restructuring Risk. In many change-in-control scenarios, the acquiring entity does not immediately terminate senior executives. Instead, the acquirer may gradually diminish the Executive's responsibilities, authority, or reporting relationships over a period of months. A 12-month window may be insufficient to capture this pattern of gradual constructive termination, whereas a 24-month window provides a more realistic timeframe.
Internal Consistency. The Chandrasekaran CEO agreement provides a 24-month post-CIC window. While the Solano CFO agreement provides an 18-month window, the COO is senior to the CFO in the organizational hierarchy, and it would be anomalous for the COO to have a shorter protection period than the CEO. Adopting a 24-month window for the COO is consistent with the principle that the CIC window should correspond to seniority.
The qualifying termination events within the 24-month window are: (i) termination of the Executive's employment by the Company (or the successor entity) without Cause; and (ii) resignation by the Executive for Good Reason. In either case, the qualifying termination must occur on or after the date of consummation of the change in control and on or before the second anniversary of the date of consummation of the change in control.
D. Definition of "Good Reason" in CIC Context
The definition of "Good Reason" is a critical element of any double-trigger structure. If the definition is too narrow, the Executive is exposed to the risk that the acquirer will constructively demote or marginalize the Executive without technically triggering a Good Reason event. If the definition is too broad, the Executive may have the ability to resign and claim CIC severance based on trivial or immaterial changes in employment conditions.
Recommended Good Reason Triggers. The following events or conditions should constitute "Good Reason" for purposes of the CIC provisions:
1.  Material Diminution in Title, Duties, Authority, or Responsibilities. A material diminution in the Executive's title, duties, authority, or responsibilities, including without limitation any change that results in the Executive no longer serving as Chief Operating Officer of the Company (or the surviving or acquiring entity) or no longer reporting directly to the Chief Executive Officer. This trigger is designed to capture scenarios in which the acquirer retains the Executive in a nominally equivalent role but strips the role of meaningful authority or scope.
2.  Reduction in Base Salary or Target Bonus Opportunity. Any reduction in the Executive's base salary below $575,000 per annum or any reduction in the Executive's target annual bonus opportunity below 75% of base salary. This trigger protects against economic diminution of the Executive's compensation package following a change in control.
3.  Material Change in Principal Work Location. A material change in the geographic location of the Executive's principal place of employment, defined as a relocation of the Executive's principal workplace to a location more than 50 miles from the Company's current headquarters at 400 Brattle Commerce Park, Cambridge, Massachusetts 02138 (or, if the Executive's principal workplace has been relocated prior to the change in control, more than 50 miles from the Executive's then-current principal workplace). This trigger protects against forced relocation in connection with or following a change in control.
4.  Material Breach of the Employment Agreement. Any material breach by the Company (or the successor entity) of any provision of the Employment Agreement that is not cured within the applicable cure period. This is a broad catch-all trigger designed to capture material contractual violations that do not fall within the specific triggers enumerated above.
5.  Failure of Successor to Assume the Employment Agreement. The failure of any successor entity to expressly assume and agree to be bound by all of the terms and conditions of the Employment Agreement, whether by operation of law, merger agreement, assignment agreement, or otherwise. This trigger ensures that the CIC protections survive the transaction and are enforceable against the successor entity.
Anticipated Negotiation Dynamics. Fielding & Rowe LLP (Catherine A. Fielding, lead partner, and Jonathan M. Pryce), who represent Dr. Elliston in connection with the negotiation of the Employment Agreement, are expected to push for an expanded Good Reason definition. Based on our review of publicly available agreements involving senior executives represented by Fielding & Rowe, we anticipate that they may seek to add additional triggers such as:
•  A change in the Executive's reporting structure (e.g., requiring the Executive to report to someone other than the CEO, or requiring the Executive to report through an intermediary);
•  Removal of the Executive from the Board of Directors, if applicable (note: it is not currently contemplated that Dr. Elliston will serve on the AHT Board, but this may be raised as a negotiation point);
•  A material reduction in the Executive's overall benefits package; and
•  A material change in the Executive's duties or responsibilities that is inconsistent with the Executive's professional standing and experience.
This memorandum is being prepared in advance of the first draft circulation (scheduled for August 5, 2022), and the initial draft should include the five triggers enumerated above. Additional triggers can be evaluated and, if appropriate, conceded during the negotiation process, depending on the overall balance of the Employment Agreement terms.
Notice-and-Cure Mechanism. I recommend including a standard notice-and-cure mechanism in the Good Reason definition. Under this mechanism:
(a) The Executive must provide the Company with written notice specifying in reasonable detail the condition or event constituting Good Reason within 30 days after the Executive first becomes aware of the occurrence of such condition or event;
(b) The Company shall have a period of 30 days following receipt of such notice (the "Cure Period") to cure the condition or event;
(c) If the Company fails to cure the condition or event within the Cure Period, the Executive's resignation for Good Reason must be effective within 30 days after the expiration of the Cure Period; and
(d) If the Executive fails to provide notice within the 30-day notice period, or fails to resign within the 30-day post-cure period, the Executive shall be deemed to have waived the right to resign for Good Reason with respect to such condition or event (provided that the Executive shall retain the right to resign for Good Reason with respect to any subsequent occurrence of a Good Reason condition or event).
This notice-and-cure mechanism is standard market practice and serves the dual purpose of giving the Company a meaningful opportunity to remedy the situation before the Executive resigns and ensuring that the Executive acts promptly rather than stockpiling Good Reason events for strategic advantage.
V. CIC Severance Multiples — Market Data and Recommendations
A. Market Data Overview
Broadleaf Compensation Advisors LLC (Diane K. Holbrook, lead consultant) prepared a comprehensive peer benchmarking report in June 2022 analyzing executive compensation practices at a peer group of comparable companies. The peer group was selected based on industry (healthcare services, healthcare technology, and health IT SaaS), ownership structure (PE-backed or recently PE-backed), revenue range ($75 million to $250 million), and employee count (400 to 1,200). The peer group consisted of 18 to 22 comparable companies (the range reflects that certain data points were available for only a subset of the peer group), and the analysis focused on COO-level and equivalent senior operating executive positions.
The Broadleaf Report's key findings regarding CIC severance multiples at the COO level are summarized below:
For comparison, the Broadleaf Report found the following ranges for CEO-level and CFO-level CIC severance at the same peer group:
CEO-Level CIC Severance (Peer Group):
CFO-Level CIC Severance (Peer Group):
The data confirms a clear hierarchy in CIC severance generosity corresponding to C-suite seniority: CEO > COO > CFO. The recommended terms for Dr. Elliston are designed to position him appropriately within this hierarchy.
B. Recommended CIC Severance Package
Based on the market data set forth above, AHT's internal precedent agreements, and the Executive's seniority as COO, I recommend the following CIC severance package for Dr. Elliston, payable upon a qualifying double-trigger termination (i.e., termination without Cause or resignation for Good Reason within 24 months following a change in control):
Cash Severance. Twenty-four (24) months of base salary, calculated as follows:
$575,000 (annual base salary) × 2 = $1,150,000
Bonus Severance. Two times (2×) the Executive's target annual bonus, calculated as follows:
$431,250 (target annual bonus at 75% of base salary) × 2 = $862,500
COBRA Continuation. Eighteen (18) months of employer-paid COBRA premiums at the Company's then-current contribution rate for the Executive's elected level of group health plan coverage, estimated as follows based on current AHT plan costs:
$2,150 per month × 18 months = $38,700
Equity Acceleration. One hundred percent (100%) of all unvested stock options and RSUs held by the Executive shall vest in full immediately upon the date of the qualifying termination. All stock options shall remain exercisable for a period of 90 days following the date of the qualifying termination (or such longer period as may be specified in the applicable Stock Option Award Agreement), but in no event beyond the original expiration date of the option.
Total Estimated CIC Severance Value (Excluding Equity):
This package places Dr. Elliston at approximately the median-to-75th percentile of the Broadleaf peer group for COO-level CIC severance. The base salary multiple of 2× is at the peer-group median, the target bonus multiple of 2× is at the 75th percentile, the COBRA continuation period of 18 months is at the median, and the 100% equity acceleration is at the median-to-75th percentile. This positioning is appropriate for several reasons:
Competitive Recruiting. Dr. Elliston is being recruited from a senior position at a publicly traded company, and AHT must offer a competitive package to attract a candidate of his caliber. Positioning the CIC severance at the median-to-75th percentile reflects the Company's need to compete for top talent in a tight market for experienced healthcare technology COOs.
Internal Calibration. The recommended package is below the CEO (Chandrasekaran) level (3× base salary + 2× target bonus) and above the CFO (Solano) level (1.5× base salary + 1× target bonus), which is appropriate for the COO position within the C-suite hierarchy.
Growth Trajectory. AHT is on a growth trajectory with a potential exit transaction within three to five years. The risk of a CIC event is therefore real and foreseeable, and the CIC provisions serve a genuine protective purpose for the Executive.
C. Comparison to Non-CIC Severance
For context, the proposed non-CIC severance — that is, the severance payable upon termination without Cause or resignation for Good Reason outside the CIC window — is significantly lower than the CIC severance described above. The Internal Term Sheet contemplates the following non-CIC severance package:
Note: Non-CIC estimated total assumes pro-rata bonus at target for a mid-year termination and is provided for illustrative purposes only. Actual non-CIC bonus severance would depend on the timing of termination and actual Company performance.
The CIC enhancement — approximately 3.4× the non-CIC severance value, excluding equity acceleration — reflects the heightened risk and disruption associated with a change in ownership. The CIC severance is designed to compensate the Executive not only for the loss of employment, but also for the unique disruption, uncertainty, and reputational risk that accompany a change-in-control transaction. This level of enhancement is consistent with market norms and the Broadleaf peer-group data.
D. Form of Payment
All CIC cash severance (i.e., the base salary severance and bonus severance components) should be payable in a single lump-sum payment within 60 days following the date of the qualifying termination, subject to the Executive's execution, delivery, and non-revocation of a general release of claims in a form prescribed by the Company (the "Release"). The form of the Release should be attached as Schedule B to the Employment Agreement and should include a release of all claims against the Company, its officers, directors, stockholders, affiliates, and successors arising out of or related to the Executive's employment and termination, subject to customary carve-outs for accrued obligations, indemnification rights, and D&O insurance coverage.
The 60-day payment window is designed to accommodate the statutory revocation period for age discrimination claims under the Older Workers Benefit Protection Act (OWBPA), which provides a 21-day consideration period (or 45 days in the case of a group termination) and a 7-day revocation period. In all cases, payment should be made on the first payroll date occurring after the 60th day following the date of the qualifying termination, or such earlier date as is consistent with the Release becoming effective and irrevocable.
Section 409A Compliance. The lump-sum payment structure described above must comply with Section 409A of the Internal Revenue Code ("Section 409A"), which governs the timing of payments under nonqualified deferred compensation plans. Section 409A compliance for the CIC severance payments will be addressed in a separate coordination memorandum being prepared by Gregory Tan (Partner, Tax), which is expected by mid-August 2022. In particular, the following Section 409A issues must be analyzed:
(a) Whether the CIC severance payments qualify for the "short-term deferral" exception under Treasury Regulation § 1.409A-1(b)(4), which would exempt the payments from Section 409A entirely if they are paid within the applicable 2½-month short-term deferral period;
(b) Whether the CIC severance payments qualify for the "separation pay" exception under Treasury Regulation § 1.409A-1(b)(9)(iii), which exempts certain involuntary separation pay arrangements from Section 409A up to the lesser of two times the Executive's annual compensation or two times the Section 401(a)(17) limit ($305,000 for 2022); and
(c) Whether Dr. Elliston may be a "specified employee" within the meaning of Section 409A (relevant only if AHT becomes a publicly traded company), which would require a six-month delay in certain post-separation payments.
The first draft of the Employment Agreement will include standard Section 409A savings language and a six-month delay provision (applicable only if the Executive is a specified employee at the time of separation from service), pending the finalization of Gregory Tan's analysis.
VI. Interaction with Ridgeline Capital Partners Stockholders' Agreement
A. Drag-Along Provisions
The Ridgeline Capital Partners Stockholders' Agreement, dated December 16, 2019 (the "Stockholders' Agreement"), contains drag-along provisions that are a standard feature of PE-backed portfolio company governance. The drag-along provisions permit Ridgeline, as the majority stockholder (holding approximately 68% of AHT equity), to compel all other stockholders — including management equity holders such as Dr. Elliston — to sell their shares in connection with a qualifying sale of the Company, on the same terms and conditions (including price per share) as Ridgeline.
The interaction between the drag-along provisions and Dr. Elliston's CIC severance and equity acceleration rights raises several important drafting considerations.
Independence of CIC Provisions. The Employment Agreement must be drafted so that the CIC provisions operate independently of and are not overridden or superseded by the drag-along mechanism. The drag-along provisions require management holders to sell their equity at the same price and on the same terms as Ridgeline, but they do not (and should not) eliminate or reduce the Executive's separate contractual rights to CIC severance and equity acceleration under the Employment Agreement. The Employment Agreement should make clear, through an express provision, that:
The Executive's rights to CIC severance and equity acceleration under this Agreement are in addition to, and not in lieu of, any proceeds, merger consideration, or other amounts received by the Executive in connection with a sale of the Company or the exercise of drag-along rights under the Stockholders' Agreement or otherwise. The exercise of drag-along rights or any similar compulsory sale mechanism shall not diminish, offset, or modify the Executive's rights under this Section [CIC Severance Section].
This language is important because, absent such a provision, the Company or its successor might argue that the drag-along sale proceeds constitute the exclusive consideration payable to the Executive in connection with the CIC transaction, thereby displacing the Employment Agreement's severance and acceleration provisions.
Timing of Equity Acceleration. A related drafting issue concerns the timing of equity acceleration in the context of a drag-along sale. If the drag-along sale is structured as a merger, the merger agreement will typically provide that all outstanding equity awards (including unvested options and RSUs) are cancelled at closing in exchange for the per-share merger consideration (minus, in the case of options, the exercise price). If the Employment Agreement provides for 100% equity acceleration upon a qualifying double-trigger termination after the change in control, but the equity awards have already been cancelled at closing, there may be no equity to accelerate.
To address this issue, the Employment Agreement and the individual award agreements should provide that, in the event of a change in control in which outstanding equity awards are cancelled in exchange for merger consideration:
(a) The unvested portion of such awards shall be converted into a right to receive the per-share merger consideration (minus the exercise price, in the case of options) that would have been payable in respect of such unvested shares had they been vested immediately prior to the closing of the CIC transaction (the "CIC Award Value"); and
(b) The CIC Award Value shall be paid to the Executive upon the occurrence of a qualifying double-trigger termination within the 24-month CIC window, subject to the same vesting schedule that would have applied to the original awards but for the CIC transaction (or, alternatively, in a lump sum upon the qualifying termination, consistent with the approach recommended for the cash severance).
Alternatively, if the Employment Agreement provides for acceleration immediately prior to the closing of the CIC transaction (rather than upon a subsequent qualifying termination), the acceleration would need to be structured as a single-trigger mechanism with respect to equity, which is inconsistent with the double-trigger recommendation. The preferred approach is therefore to convert unvested equity into a deferred payment right that vests on a double-trigger basis.
This is a technical drafting issue that will require close coordination with Sandra Okafor and Wentworth & Gage LLP to ensure that the Employment Agreement, the individual award agreements, the merger agreement (if applicable), and the Stockholders' Agreement are all consistent. I recommend flagging this issue in the first draft and addressing it in the negotiation process.
B. Consent Rights and Approval Authority
Ridgeline's governance rights under the Stockholders' Agreement have direct implications for the process of approving and executing the Elliston Employment Agreement.
Board and Compensation Committee Approval. Ridgeline, through its Board designees (including Board Chair Thomas R. Glenwood), has approval authority over all C-suite employment terms and equity grants. The AHT Board compensation committee, which includes two Ridgeline designees, must approve Dr. Elliston's Employment Agreement, including the CIC provisions. As a practical matter, this means that the CIC terms must be acceptable to Ridgeline before the Employment Agreement can be executed.
Given this approval dynamic, it is advisable to solicit Ridgeline's preliminary views on the CIC structure early in the drafting process — ideally before the first draft is circulated to Dr. Elliston's counsel. Aaron Whitfield (AHT General Counsel) and/or Thomas R. Glenwood should be consulted to confirm Ridgeline's preference for a double-trigger structure and its comfort with the proposed severance multiples and equity acceleration terms. If Ridgeline has concerns about any aspect of the CIC provisions, it is far more efficient to address those concerns before the first draft is finalized than to renegotiate after the Executive and his counsel have reviewed and formed expectations based on the initial proposal.
Helix Ventures Consent Rights. Helix Ventures Fund III, LP has consent rights on certain equity issuances under the Stockholders' Agreement. The proposed grants to Dr. Elliston — nonqualified stock options for 1.25% of fully diluted AHT equity plus RSUs for 0.50% of fully diluted AHT equity, totaling 1.75% of fully diluted equity — may require Helix Ventures' consent depending on the anti-dilution thresholds and equity issuance consent provisions in the Stockholders' Agreement.
Sandra Okafor is reviewing this issue in a separate equity structuring memorandum (expected August 10, 2022). If Helix consent is required, the timeline for executing the Employment Agreement and granting the equity awards may be affected, and we should plan accordingly. In the event that Helix Ventures withholds consent or conditions its consent on modifications to the equity grant terms, the resulting changes could also affect the CIC equity acceleration provisions discussed in this memorandum.
C. Equity Plan Coordination
The AHT 2020 Equity Incentive Plan (as amended May 2021) (the "Plan") contains its own definition of "Change in Control" and its own default provisions governing the treatment of awards granted under the Plan in the event of a CIC transaction. The individual Stock Option Award Agreement and RSU Award Agreement to be granted to Dr. Elliston will be issued under the Plan and will therefore be subject to the Plan's terms and conditions, except to the extent that the individual award agreements specify different or additional terms.
The key coordination issue is as follows: to the extent the Plan's default CIC treatment differs from the individually negotiated terms in the Employment Agreement (for example, if the Plan provides single-trigger acceleration as a default, or if the Plan provides for a different level of acceleration or a different CIC window), the individual award agreements must explicitly override the Plan default, to the extent that the Plan administrator has the authority to do so.
Most well-drafted equity incentive plans provide the Plan administrator (typically the Board of Directors or the compensation committee) with broad discretion to specify non-default terms in individual award agreements, including CIC acceleration terms that differ from the Plan's general provisions. However, some plans contain mandatory CIC provisions that cannot be overridden by individual award agreements without a formal plan amendment.
I recommend confirming with Sandra Okafor that the Plan administrator has the requisite discretion to specify the double-trigger acceleration terms in the individual award agreements, and that no formal plan amendment is required. If a plan amendment is necessary, it should be prepared and approved by the Board (and, if applicable, the stockholders) in advance of or concurrently with the execution of the Employment Agreement.
Additionally, to the extent that the Plan's definition of "Change in Control" differs from the definition in the Employment Agreement (particularly with respect to the Ridgeline carve-out), the individual award agreements should specify that the Employment Agreement's definition governs for purposes of the CIC acceleration provisions. This can be accomplished through a cross-reference in the award agreements to the Employment Agreement's CIC definition, coupled with a statement that, in the event of any conflict between the Plan's definition and the Employment Agreement's definition, the Employment Agreement's definition shall control.
VII. Section 280G Considerations (Preliminary)
The CIC severance package described in Section V above, combined with the equity acceleration, may constitute "parachute payments" within the meaning of Internal Revenue Code Section 280G ("Section 280G"). Section 280G imposes adverse tax consequences on both the recipient and the payor of "excess parachute payments" made in connection with a change in the ownership or effective control of a corporation. Specifically:
•  Under Section 280G, the recipient of excess parachute payments is subject to a 20% excise tax under Section 4999 of the Internal Revenue Code ("Section 4999"), in addition to regular income and employment taxes.
•  Under Section 280G, the payor corporation loses the ability to deduct the excess parachute payments for federal income tax purposes.
A "parachute payment" is any payment in the nature of compensation that is made to a "disqualified individual" (generally, officers, directors, and highly compensated employees) and that is contingent on a change in the ownership or effective control of the corporation, if the ag