PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
This memorandum is a privileged and confidential communication prepared by Calderwood & Harkness LLP at the request of, and for the exclusive use of, Ardent Capital Partners III LP and its affiliates. This memorandum is protected by the attorney-client privilege, the work product doctrine, and all other applicable privileges and protections. It is not intended for distribution to, or use by, any third party, and no portion of this memorandum may be disclosed, copied, or distributed without the prior written consent of Calderwood & Harkness LLP. Any inadvertent disclosure does not constitute a waiver of any applicable privilege or protection.
MEMORANDUM
FROM: Harrison Wexford, Partner, and Megan Chu, Associate — Calderwood & Harkness LLP, 1301 Avenue of the Americas, 40th Floor, New York, NY 10019
TO: Tomás Iglesias, Principal, and Julian Rask, Co-Founder & Managing Partner — Ardent Capital Partners III LP, 590 Madison Avenue, 38th Floor, New York, NY 10022
DATE: August 10, 2022
RE: Termination Rights, Fee Obligations, and Strategic Options Following Failed Stockholder Vote — Proposed Take-Private Acquisition of Coral Reef Hospitality Group, Inc. (Nasdaq: CRFH)
MATTER NO.: 1001-00005
I. Executive Summary
The purpose of this memorandum is to analyze the legal position of Ardent Capital Partners III LP ("Ardent" or the "Buyer") following the failure of the stockholder vote at the Special Meeting of Stockholders of Coral Reef Hospitality Group, Inc. ("Coral Reef," "CRFH," or the "Company") held on August 2, 2022, and to present strategic options for Ardent's consideration in light of that outcome. We have reviewed the operative transaction documents, public filings, vote tabulation data, and consulted with our colleagues in the firm's capital markets and securities enforcement groups in preparing this analysis.
Transaction Overview. The transaction at issue is a proposed take-private reverse triangular merger structured under Section 251 of the Delaware General Corporation Law (the "DGCL"), whereby CRFH Acquisition Sub, Inc. ("Merger Sub"), a wholly owned Delaware subsidiary of Ardent formed on March 4, 2022, would merge with and into Coral Reef, with Coral Reef surviving the merger as a wholly owned subsidiary of Ardent. The transaction contemplates all-cash merger consideration of $4.75 per share, resulting in an aggregate equity value of approximately $30,000,000 (based on 6,315,789 shares of common stock outstanding). The implied enterprise value of the transaction is approximately $38,200,000, comprised of $30,000,000 in equity value and approximately $8,200,000 in net debt. The offered price represents an approximately 47.5% premium to the unaffected closing price of $3.22 per share on February 10, 2022, the last trading day prior to the public disclosure of Ardent's interest.
The Merger Agreement was executed on April 25, 2022 (the "Merger Agreement"), among Ardent, Merger Sub, and Coral Reef. The Outside Date — the contractual deadline by which the closing of the merger (the "Closing") must occur — is currently set at October 25, 2022, which is 180 days from the date of signing.
The Vote Failure. The stockholder vote conducted at the August 2, 2022 Special Meeting fell short of the required approval threshold. A total of 3,145,263 shares (representing approximately 49.8% of the outstanding shares) were voted in favor of the merger proposal. This fell approximately 12,632 shares short of the 3,157,895 shares required to constitute the affirmative vote of the holders of a majority of the outstanding shares of CRFH common stock, as required by both the Merger Agreement and the DGCL.
Key Conclusions. Based on our analysis, we have reached the following key conclusions:
(a) Neither party currently has an unqualified right to terminate the Merger Agreement. The Special Meeting has been adjourned rather than concluded, and the Outside Date has not yet passed. Accordingly, no termination trigger has ripened under the Merger Agreement as of the date of this memorandum.
(b) No termination fees are presently triggered. Neither the Reverse Termination Fee of $1,200,000 (payable by Ardent) nor the Company Termination Fee of $900,000 (payable by Coral Reef) is currently payable, and neither will become payable absent the occurrence of additional specified events.
(c) Ardent has several viable strategic paths forward, each with distinct risk and benefit profiles. These options range from proceeding to the reconvened stockholder meeting without modification, to engaging directly with dissenting institutional shareholders, to increasing the merger consideration, to terminating the transaction entirely.
(d) The Outside Date of October 25, 2022 represents a critical deadline. Approximately 76 days remain until the Outside Date, and this timeline constrains Ardent's available options, particularly those requiring revised proxy materials or renegotiation of the Merger Agreement. Careful management of the Outside Date is essential to preserving Ardent's strategic flexibility.
We discuss each of these conclusions in detail below.
II. Background and Vote Results
A. Transaction Timeline Leading to the Vote
The following summarizes the key milestones in the transaction chronology from initial engagement through the stockholder vote:
• February 11, 2022: Ardent submitted a non-binding indication of interest to the Board of Directors of Coral Reef, proposing an all-cash take-private transaction at a price range of $4.50 to $5.00 per share. Calderwood & Harkness LLP was formally engaged as outside counsel to Ardent in connection with this potential transaction, and this matter was opened under Matter No. 1001-00005.
• February 14, 2022: The CRFH Board of Directors formed a Special Committee consisting of three independent directors to evaluate Ardent's proposal and any alternatives. The Special Committee members are Reginald Ashworth (Chair), Diane Kowalski, and Howard Tremaine. The Special Committee engaged Whitfield, Crane & Sato LLP (Catherine Osei, lead partner) as its legal advisor and Lantern Hill Advisory LLC as its financial advisor.
• February 22, 2022: A mutual confidentiality and non-disclosure agreement (the "NDA") was executed between Ardent and Coral Reef, containing customary standstill provisions with a fall-away upon entry into a definitive agreement.
• March 1, 2022: Ardent was granted access to the Company's Thackeray Solutions virtual data room, designated internally as "Project Trident." Over the ensuing weeks, Ardent conducted extensive business, legal, financial, and environmental due diligence on the Company and its subsidiaries, including on-site inspections of the Company's three principal resort properties in Destin, Florida; Harborline Enterprises Head Island, South Carolina; and Galveston, Texas.
• March 28, 2022: Following the completion of confirmatory due diligence, Ardent submitted a revised binding offer at a fixed price of $4.75 per share, which represented the midpoint of its original indication of interest. The offer was accompanied by a detailed markup of the draft Merger Agreement that had been circulated by Whitfield, Crane & Sato on behalf of the Special Committee.
• April 8, 2022: Pinnacle Commercial Lending Corp. ("Pinnacle") executed a debt commitment letter (Ref. No. PCL-2022-SF-0417) committing to provide a $10,000,000 senior secured term loan to Ardent or its designee in connection with the financing of the transaction. The term loan bears interest at SOFR plus 425 basis points, has a five-year maturity, and includes a 1.0% original issue discount. The commitment letter contains customary conditions to funding, including the absence of a material adverse effect and the execution of definitive credit documentation.
• April 22, 2022: Lantern Hill Advisory LLC delivered its fairness opinion to the Special Committee, concluding that, as of the date thereof and subject to the assumptions, limitations, and qualifications set forth therein, the merger consideration of $4.75 per share was fair, from a financial point of view, to the holders of CRFH common stock (other than Ardent and its affiliates).
• April 25, 2022: The Merger Agreement was executed by Ardent, Merger Sub, and Coral Reef, and the transaction was publicly announced via a joint press release issued before the opening of Nasdaq trading. Simultaneously, the Voting and Support Agreement with the Ellender Family Trust was executed, and the Limited Guarantee by Ardent Capital GP III LLC was delivered.
• April 25 – May 25, 2022: The Merger Agreement provided for a 30-day "go-shop" period during which the Company was permitted to actively solicit, evaluate, and negotiate alternative acquisition proposals. The Special Committee, with the assistance of Lantern Hill Advisory, conducted a market check during this period. No Superior Proposal (as defined in the Merger Agreement) was received, and no party submitted an alternative indication of interest during the go-shop period. The go-shop period expired on May 25, 2022, at which point the non-solicitation covenant became operative.
• May 10, 2022: Coral Reef filed a preliminary proxy statement on Schedule 14A with the Securities and Exchange Commission ("SEC") in connection with the Special Meeting (SEC File No. 001-38742).
• June 3, 2022: The SEC Staff issued a comment letter on the preliminary proxy statement, raising questions regarding the disclosure of Lantern Hill Advisory's valuation methodology, the background of the transaction, and the treatment of certain projections furnished by the Company's management.
• June 17, 2022: Coral Reef filed a revised preliminary proxy statement in response to the SEC Staff's comments, incorporating supplemental disclosure regarding the fairness opinion analysis, additional background regarding the negotiation process, and revised financial projections.
• June 24, 2022: The record date for the determination of stockholders entitled to notice of, and to vote at, the Special Meeting was established as June 24, 2022.
• July 8, 2022: The definitive proxy statement was filed with the SEC and mailing to stockholders of record commenced.
• August 2, 2022: The Special Meeting of Stockholders was held at the offices of Whitfield, Crane & Sato LLP, 900 Third Avenue, New York, New York. The vote was taken, and the merger proposal failed to receive the requisite stockholder approval, as described in detail below.
B. Vote Results in Detail
The Merger Agreement (Section 7.01(d)) and Section 251(c) of the DGCL require, as a condition to the consummation of the merger, the affirmative vote of the holders of a majority of the outstanding shares of CRFH common stock entitled to vote thereon. As of the record date, there were 6,315,789 shares of common stock outstanding and entitled to vote. The requisite majority therefore required the affirmative vote of at least 3,157,895 shares.
The results of the vote, as tabulated by Aldermere Health IT (the Company's independent inspector of elections), were as follows:
The shortfall was approximately 12,632 shares — representing less than 0.2% of the total outstanding shares. Under the majority-of-outstanding-shares approval standard, abstentions and broker non-votes have the same practical effect as votes against the proposal, because they are counted in the denominator (total outstanding shares) but not in the numerator (affirmative votes). This is a critical distinction from a majority-of-votes-cast standard, under which abstentions and broker non-votes would not count as negative votes.
The margin of defeat was exceptionally narrow. Had an additional 12,632 shares — a trivial fraction of the float — voted in favor, the requisite majority would have been achieved.
C. Key Shareholder Positions
Understanding the positions of the Company's principal stockholders is essential to evaluating Ardent's strategic options. Based on publicly available Schedule 13D and 13G filings and the vote tabulation data, the following positions and voting behavior are material:
Ellender Family Trust (Marcus Ellender, Trustee): The Ellender Family Trust holds 1,155,789 shares, representing approximately 18.3% of the outstanding shares. Marcus Ellender is the founder of Coral Reef and serves as Chairman Emeritus of the Board (a non-voting, honorary position). Pursuant to the Voting and Support Agreement dated April 25, 2022, the Ellender Family Trust irrevocably agreed to vote all of its shares in favor of the merger proposal. Consistent with this obligation, the Trust voted its full 1,155,789 shares in favor of the proposal at the August 2 meeting.
Tidewater Asset Management LLC: Tidewater holds 612,632 shares, representing approximately 9.7% of the outstanding shares. Tidewater publicly abstained from the vote, and its managing director, Francis Delacroix, issued a statement on August 3, 2022 indicating that Tidewater believed the $4.75 per share offer "materially undervalues Coral Reef's long-term earnings potential and the intrinsic value of its irreplaceable coastal resort portfolio." Tidewater did not specify the price at which it would support the transaction.
Broadleaf Institutional Partners LP: Broadleaf holds 448,421 shares, representing approximately 7.1% of the outstanding shares. Broadleaf similarly abstained, with a brief statement from its general partner, Broadleaf Capital Management LLC, citing "concerns regarding the adequacy of the proposed consideration in light of the Company's improving operational trajectory and favorable industry tailwinds in the post-pandemic hospitality recovery."
The combined holdings of Tidewater and Broadleaf total 1,061,053 shares, representing approximately 16.8% of the outstanding shares. Their combined abstentions were plainly dispositive of the outcome. Had either Tidewater alone (612,632 shares) or Broadleaf alone (448,421 shares) voted in favor, the 3,157,895-share threshold would have been met by a comfortable margin. The vote shortfall of approximately 12,632 shares is a negligible fraction of either Tidewater's or Broadleaf's individual holdings, which underscores both the narrow margin of the defeat and the potential leverage these two institutional holders possess in any reconvened vote.
Beyond Tidewater and Broadleaf, the remaining abstentions (approximately 132,384 shares) and broker non-votes (approximately 489,878 shares) reflect a combination of retail shareholders who did not return proxy cards, shares held in custodial accounts that did not receive voting instructions, and a small number of additional institutional holders whose positions and motivations are not publicly known.
D. Meeting Adjournment
On August 5, 2022, following consultations between counsel for the respective parties — Calderwood & Harkness on behalf of Ardent and Whitfield, Crane & Sato on behalf of the Company — the parties agreed to adjourn the Special Meeting rather than formally conclude it without the requisite approval. The reconvene date was initially set for August 30, 2022, providing an approximately four-week window for the parties to assess their options and pursue additional shareholder engagement.
As of the date of this memorandum, the reconvened meeting remains scheduled for August 30, 2022. However, the parties retain the ability to further postpone or adjourn the meeting, subject to the terms of the Merger Agreement and applicable Delaware and federal securities law requirements. The Merger Agreement provides that the Company shall, at Ardent's request, adjourn or postpone the Special Meeting to a date not more than 30 days from the scheduled meeting date for the purpose of soliciting additional proxies in favor of the merger proposal, provided that the Company shall not be required to adjourn or postpone the meeting beyond the Outside Date.
III. Analysis of Termination Rights Under the Merger Agreement
A. Overview of Termination Provisions
Article VIII of the Merger Agreement sets forth the exclusive mechanisms by which the Merger Agreement may be terminated prior to the Effective Time of the merger. Section 8.01 provides that the Merger Agreement may not be terminated except as expressly provided therein, and Section 8.02 enumerates the specific termination rights available to each party, as well as the circumstances under which mutual termination is permitted. No party may unilaterally terminate the Merger Agreement based on general equitable principles, frustration of purpose, impracticability, or any other basis not specifically enumerated in the agreement. This reflects the well-established Delaware principle that a merger agreement governs the parties' rights and remedies with respect to the proposed transaction, and that termination rights are to be strictly construed in accordance with their terms.
We analyze below each of the termination rights available to the Buyer and the Company, respectively, and assess whether any such right is currently exercisable.
B. Buyer's Termination Rights
1. Failure to Obtain Stockholder Approval (Post-Meeting Termination)
Section 8.02(d) of the Merger Agreement provides that either party may terminate the Merger Agreement if the Stockholder Approval (as defined therein) "has not been obtained at a duly convened meeting of the stockholders of the Company (including any adjournment or postponement thereof) at which a vote on the adoption of this Agreement was taken."
The critical interpretive question is whether the August 2, 2022 vote constitutes a final vote at a "duly convened meeting . . . at which a vote . . . was taken," given that the meeting has been adjourned rather than concluded. Under our reading of the provision, the parenthetical "including any adjournment or postponement thereof" indicates that the meeting is to be treated as a single proceeding that encompasses the original convening and any subsequent adjournments. Because the meeting was adjourned to August 30, 2022 — and has not been reconvened for a final vote or formally concluded without a vote — the meeting has not yet been finally concluded, and the termination trigger under Section 8.02(d) has not yet ripened.
This interpretation is consistent with Delaware case law recognizing that an adjourned meeting is a continuation of the original meeting, not a separate proceeding. See In re Appraisal of Vireo Holdings, 2015 WL 4313206, at *1 (Del. Ch. July 30, 2015) (treating adjourned meeting as part of a single proceeding for purposes of interpreting merger agreement provisions). If the reconvened meeting is held on August 30 (or any subsequent adjournment date) and the vote again fails to achieve the requisite majority, then the termination right under Section 8.02(d) would ripen and become exercisable by either party.
Conclusion: This termination right is not currently available to Ardent.
2. Outside Date Termination
Section 8.02(b) of the Merger Agreement permits either party to terminate the Merger Agreement if the Closing has not occurred on or before the Outside Date, which is currently set at October 25, 2022 (180 days from the April 25, 2022 signing date).
This termination right is subject to a critical limitation: a party may not exercise the Outside Date termination right if "such party's material breach of any representation, warranty, covenant or agreement set forth in this Agreement has been the principal cause of, or resulted in, the failure of the Closing to occur on or before the Outside Date." This is a causation-based exception designed to prevent a breaching party from benefiting from its own breach by using the resulting delay as a basis for termination.
As of the date of this memorandum, there is no indication that Ardent has breached any of its representations, warranties, covenants, or agreements under the Merger Agreement. Ardent has complied with its obligation to use reasonable best efforts to consummate the merger, has cooperated with the proxy solicitation process, and has maintained its financing commitments. Accordingly, if the Outside Date passes without the Closing having occurred, this termination right should be available to Ardent, provided Ardent continues to comply with its obligations under the Merger Agreement during the intervening period.
Timing Consideration: Approximately 76 days remain until the Outside Date. This timeline is sufficient to hold the reconvened meeting, engage with shareholders, and potentially negotiate a price increase, but would be insufficient to complete a full revised proxy process from scratch if material amendments to the Merger Agreement are made.
Conclusion: This termination right is not currently available (the Outside Date has not yet passed), but it will ripen on October 25, 2022 absent a Closing or an extension.
3. Material Adverse Effect / Breach by Company
Section 8.02(c) of the Merger Agreement permits the Buyer to terminate if (i) the Company experiences a "Material Adverse Effect" as defined in the Merger Agreement, or (ii) the Company has breached any representation, warranty, covenant, or agreement set forth in the Merger Agreement in a manner that would cause the conditions to Closing set forth in Section 7.02 not to be satisfied, and such breach is not cured within 30 days after written notice.
The Merger Agreement defines "Material Adverse Effect" with reference to, among other things, a decline in the Company's trailing-twelve-month EBITDA exceeding 20% from the FY2021 baseline. The Company's FY2021 EBITDA was $5,100,000. Accordingly, a Material Adverse Effect would require a decline of more than $1,020,000, resulting in trailing-twelve-month EBITDA falling below $4,080,000. Based on the Company's publicly reported Q1 2022 results and the preliminary Q2 2022 data available through the Thackeray Solutions data room, there is no indication that such a decline has occurred or is imminent. To the contrary, the Company's operational performance appears to have remained stable or modestly improved relative to FY2021 levels, consistent with the broader recovery in the hospitality sector.
Similarly, we are not aware of any material breach by the Company of its representations, warranties, or covenants under the Merger Agreement. The Company has cooperated with the proxy solicitation process, maintained its operations in the ordinary course, and complied with its non-solicitation obligations.
Conclusion: This termination right is not currently available to Ardent.
C. Company's Termination Rights
1. Failure to Obtain Stockholder Approval
The Company has the same mutual right to terminate under Section 8.02(d) upon the final failure to obtain Stockholder Approval. For the reasons discussed in Section III.B.1 above, this right has not yet ripened because the Special Meeting has been adjourned rather than concluded.
Conclusion: This termination right is not currently available to the Company.
2. Outside Date Termination
The Company has a mirror right to terminate under Section 8.02(b) upon the lapse of the Outside Date, subject to the same causation-based limitation. The Company would be precluded from exercising this right if the Company's own breach of the Merger Agreement was the principal cause of the failure to close by the Outside Date.
We note that the failure to obtain stockholder approval, standing alone, does not constitute a breach by the Company of the Merger Agreement. The Company's obligation under Section 6.02 is to convene the meeting, recommend the merger to its stockholders, and use its reasonable best efforts to solicit proxies in favor of the proposal. The Company is not a guarantor of the vote outcome. Accordingly, if the vote fails despite the Company's good-faith compliance with its solicitation obligations, the Company should not be deemed to have breached the Merger Agreement, and the Outside Date termination right would be available to either party.
Conclusion: This termination right is not currently available to the Company but will ripen on October 25, 2022.
3. Superior Proposal Termination
Section 8.02(e) of the Merger Agreement permits the Company to terminate the Merger Agreement in order to enter into a definitive agreement with respect to a Superior Proposal, subject to (i) payment of the Company Termination Fee of $900,000 (which represents 3.0% of the $30,000,000 aggregate equity value), (ii) compliance with the procedural requirements set forth in Section 6.03, including the obligation to provide Ardent with notice of the Superior Proposal and a five-business-day matching period during which Ardent may improve its offer, and (iii) the absence of any material breach by the Company of its non-solicitation obligations.
The go-shop period expired on May 25, 2022 without the receipt of any Superior Proposal or any alternative indication of interest. Since the expiration of the go-shop period, the non-solicitation covenant set forth in Section 6.03(a) has been in full force and effect, prohibiting the Company and its representatives from soliciting, initiating, or knowingly facilitating any Acquisition Proposal. The Company retains the ability to respond to unsolicited proposals under the "fiduciary out" provision in Section 6.03(b), but only if the Board determines in good faith (after consultation with its outside legal counsel and financial advisor) that such proposal constitutes or could reasonably be expected to lead to a Superior Proposal.
As of the date of this memorandum, we have no indication that the Company has received any unsolicited Acquisition Proposal or that the Company is engaging with any alternative bidder. However, the failure of the stockholder vote may attract opportunistic interest from other parties who perceive an opportunity to acquire the Company at a potentially lower price or who believe the vote failure weakens Ardent's negotiating position.
Conclusion: This termination right is not currently available to the Company.
4. Buyer Breach
Section 8.02(c) provides the Company with a mirror termination right in the event of an uncured material breach by Ardent of its representations, warranties, or covenants. As discussed above, there is no indication of any breach by Ardent.
Conclusion: This termination right is not currently available to the Company.
D. Mutual Termination
Section 8.02(a) of the Merger Agreement provides that the parties may terminate the agreement by mutual written consent at any time prior to the Effective Time. This right is available at all times and does not require any triggering event. A mutual termination would be memorialized in a written termination agreement signed by both parties, typically addressing the release of claims, the treatment of confidential information, and the disposition of expenses.
Conclusion: Mutual termination is available at any time, but would require the agreement of Coral Reef.
E. Current Status: No Termination Right Currently Exercisable by Either Party
Based on the foregoing analysis, we conclude that as of the date of this memorandum, neither Ardent nor Coral Reef has a present, exercisable unilateral right to terminate the Merger Agreement. The two principal termination triggers — final vote failure and Outside Date lapse — have not yet been activated. The adjournment of the Special Meeting preserves the possibility that the vote could still occur at the reconvened meeting on August 30, 2022 (or any subsequent adjournment thereof), and 76 days remain until the Outside Date.
The Merger Agreement remains in full force and effect. Both parties continue to be bound by their respective obligations thereunder, including Ardent's covenant to use reasonable best efforts to consummate the merger and the Company's obligations regarding the conduct of business in the ordinary course, maintenance of the Board's recommendation, and compliance with the non-solicitation covenant.
This status quo creates both opportunities and constraints. It preserves Ardent's optionality — Ardent may pursue any of the strategic options discussed in Section VI below without having triggered any termination fee or released the Company from its obligations. At the same time, Ardent's own obligations remain in effect, and Ardent must take care to avoid any action or inaction that could be characterized as a failure to use reasonable best efforts or a willful breach, as such conduct could expose Ardent to the Reverse Termination Fee and potentially bar Ardent from exercising the Outside Date termination right.
IV. Analysis of Fee Obligations
A. Reverse Termination Fee (Buyer)
The Merger Agreement provides for a Reverse Termination Fee (the "RTF") in the amount of $1,200,000, representing 4.0% of the $30,000,000 aggregate equity value of the transaction. The RTF is payable by Ardent to Coral Reef upon the occurrence of certain specified termination events attributable to the Buyer's conduct.
The RTF is triggered under Section 8.03(b) of the Merger Agreement if:
(i) The Merger Agreement is terminated because the Buyer fails to consummate the Closing at a time when all conditions to the Buyer's obligation to close (as set forth in Section 7.01 and Section 7.03) have been satisfied or waived, and such failure constitutes a willful and material breach of the Merger Agreement;
(ii) The Merger Agreement is terminated because of the Buyer's material breach of any representation, warranty, covenant, or agreement, and such breach was the proximate cause of the failure of the Closing to occur; or
(iii) The Merger Agreement is terminated following a financing failure (i.e., the Buyer's committed financing fails to fund at the Closing notwithstanding the satisfaction of all other conditions), except to the extent such financing failure was caused by the Company's breach.
The RTF payment obligation is backstopped by the Limited Guarantee dated April 25, 2022, executed by Ardent Capital GP III LLC (the general partner of the Ardent Capital Partners III LP fund) and signed by Julian Rask and Nadia Ferrante in their capacities as managing members of Ardent Capital GP III LLC. The Limited Guarantee guarantees Ardent's payment obligations under the Merger Agreement up to the RTF amount of $1,200,000. The Limited Guarantee remains in effect until the earliest of (x) the Closing, (y) the valid termination of the Merger Agreement in circumstances that do not give rise to the RTF, or (z) the payment in full of the RTF.
Analysis of Current Applicability: The current situation — the failure of the stockholder vote — is not attributable to Buyer conduct. Ardent complied with its obligation to cooperate in the proxy solicitation process, maintained its financing commitments, and did not take any action that caused or contributed to the vote failure. The vote failure resulted from the independent decision of institutional shareholders (principally Tidewater and Broadleaf) to abstain from voting. Accordingly, the RTF is not currently triggered, and no payment obligation has arisen.
Risk Scenario: If Ardent were to take actions constituting a willful and material breach of the Merger Agreement — for example, refusing to close if the stockholder vote were subsequently obtained, withdrawing its financing commitments in bad faith, or engaging in conduct designed to frustrate consummation of the merger — the RTF would become payable. Ardent should take care to avoid any conduct that could be characterized as a willful breach, including any communications (written or oral) that could be construed as expressing an intention to abandon or frustrate the transaction. We recommend that all communications with the Company, its advisors, and third parties regarding the status of the transaction be coordinated through Calderwood & Harkness.
B. Company Termination Fee (Target)
The Merger Agreement provides for a Company Termination Fee (the "CTF") in the amount of $900,000, representing 3.0% of the $30,000,000 aggregate equity value. The CTF is payable by Coral Reef to Ardent upon the occurrence of certain specified termination events, as set forth in Section 8.03(a) of the Merger Agreement.
The CTF is triggered if:
(i) The Company terminates the Merger Agreement pursuant to Section 8.02(e) in order to enter into a definitive agreement with respect to a Superior Proposal;
(ii) Ardent terminates the Merger Agreement pursuant to Section 8.02(f) following a Change of Recommendation by the CRFH Board of Directors (i.e., the Board withdraws, modifies, or qualifies its recommendation in favor of the merger in a manner adverse to Ardent, or recommends an alternative Acquisition Proposal); or
(iii) In certain "tail" scenarios: if (A) an Acquisition Proposal has been publicly announced or otherwise communicated to the Company prior to the termination of the Merger Agreement, (B) the Merger Agreement is subsequently terminated pursuant to Section 8.02(b) (Outside Date) or Section 8.02(d) (vote failure), and (C) within 12 months following such termination, the Company consummates a Competing Transaction (defined as any transaction involving the acquisition of 50% or more of the Company's equity or assets) with the party that made the Acquisition Proposal (or any affiliate thereof).
Analysis of Current Applicability: As of the date of this memorandum, no Superior Proposal has been received, no Change of Recommendation has occurred, and no Acquisition Proposal has been publicly announced or communicated to the Company. Accordingly, the CTF is not currently triggered, and the Company has no current payment obligation to Ardent.
Potential Future Trigger: If, following the failure of the stockholder vote, a third party were to approach the Company with an unsolicited Acquisition Proposal, and the Board were to determine (in accordance with its fiduciary duties and the procedural requirements of the Merger Agreement) that such proposal constitutes a Superior Proposal, the Company could terminate the Merger Agreement pursuant to Section 8.02(e) and the CTF of $900,000 would become payable. Alternatively, if the Board were to change its recommendation in favor of the merger — for example, in response to an unsolicited proposal or based on a reassessment of the fairness of the $4.75 per share price — Ardent could terminate pursuant to Section 8.02(f) and the CTF would become payable. Additionally, the tail provision described in clause (iii) above could result in the CTF becoming payable in certain post-termination scenarios, as discussed further in Section V.C below.
C. Expense Reimbursement
The Merger Agreement does not provide for the reimbursement of transaction expenses upon termination. Section 8.04 provides that, in the event of termination, "each party shall bear its own costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby," subject only to the termination fee provisions described above. This is consistent with market practice for take-private transactions of this size, where expense reimbursement provisions are less common than in larger transactions.
Ardent's incurred and committed transaction expenses to date are summarized as follows:
We note that Grayson Partners & Co.'s flat advisory fee of $250,000, as well as Lantern Hill Advisory LLC's advisory fee of $300,000 (payable by the Company), are both contingent upon the Closing and would not become payable in the event of termination. Calderwood & Harkness's fees will continue to accrue so long as the engagement remains active.
We also note the need to confirm the status of the representations and warranties insurance premium with Ironwood Specialty Insurance Co. If a premium has been paid (as opposed to a binder deposit), it may be partially or fully non-refundable. If only a binder has been executed, the premium would not be payable unless and until the policy is bound at Closing, and the binder may have an expiration date tied to the Outside Date. We will follow up with Ironwood to confirm the status and terms.
D. Impact of No Formal Termination
So long as no formal termination notice is delivered by either party pursuant to Article VIII of the Merger Agreement, neither the RTF nor the CTF is triggered, and the Merger Agreement remains in full force and effect. Both parties remain bound by their respective obligations, including:
• The Company's non-solicitation covenant (Section 6.03(a)), which prohibits the Company from soliciting alternative Acquisition Proposals;
• The Company's obligation to maintain the Board's recommendation in favor of the merger (Section 6.03(c));
• Ardent's covenant to use reasonable best efforts to consummate the merger (Section 6.05);
• The Company's obligation to conduct its business in the ordinary course consistent with past practice (Section 5.01); and
• The mutual information-sharing and cooperation obligations (Sections 6.01 and 6.04).
This creates a period of mutual obligation during which both parties have strong incentives to cooperate toward a resolution — whether that resolution involves consummation of the merger (potentially on modified terms) or a negotiated termination.
V. Analysis of the Outside Date
A. Current Outside Date: October 25, 2022
The Outside Date is defined in Section 8.02(b) of the Merger Agreement as the date that is 180 calendar days following the date of execution of the Merger Agreement. The Merger Agreement was executed on April 25, 2022, making the Outside Date October 25, 2022. As of the date of this memorandum, approximately 76 days remain until the Outside Date.
The Outside Date serves as the contractual "long stop" date — the deadline by which the Closing must occur in order for the Merger Agreement to remain in effect. If the Closing does not occur by the Outside Date, either party may terminate the Merger Agreement pursuant to Section 8.02(b), subject to the causation-based limitation discussed in Section III.B.2 above.
B. Extension Mechanics
The Merger Agreement permits extension of the Outside Date by mutual written consent of the parties. Section 8.02(b) expressly provides that "the Outside Date may be extended by mutual written agreement of [Ardent] and the Company." There are no automatic extension provisions and no unilateral extension rights. Any extension would therefore require the affirmative agreement of both Ardent and Coral Reef. On the Company's side, we expect that any decision to extend the Outside Date would require the approval of the Special Committee, acting in consultation with Whitfield, Crane & Sato and Lantern Hill Advisory, and potentially the approval of the full Board.
The absence of a unilateral extension right is significant. It means that Ardent cannot unilaterally preserve the transaction beyond October 25, 2022, and that Coral Reef has meaningful leverage in any extension negotiation. If the Company is reluctant to extend — whether because of management fatigue, strategic considerations, or the availability of alternative options — Ardent would need to offer appropriate inducements or concessions to secure the Company's agreement.
C. Strategic Significance
The Outside Date has several layers of strategic significance:
Termination Trigger. If neither a Closing nor a mutual extension occurs by October 25, 2022, either party may deliver a termination notice and the Merger Agreement will terminate. As discussed in Section IV above, termination on the Outside Date alone does not trigger either the Reverse Termination Fee or the Company Termination Fee. The RTF requires Buyer fault (willful breach or financing failure), and the CTF requires a Superior Proposal, a Change of Recommendation, or the tail-provision triggers described in Section IV.B above.
Tail Provision. If, prior to termination, an Acquisition Proposal has been publicly announced or communicated to the Company, and the Company consummates a Competing Transaction with the proposing party (or an affiliate) within 12 months following an Outside Date termination, the CTF of $900,000 would become payable to Ardent. This tail provision provides a degree of protection against a scenario in which the Company uses the vote failure as a pretext to pursue a competing bidder, but it does not compensate Ardent for its full sunk costs or opportunity costs.
Financing Expiration. As discussed below, the Pinnacle debt commitment letter has an expiration date tied to the Outside Date, and its lapse would create a financing gap that would need to be addressed before any revival of the transaction.
D. Pinnacle Commitment Letter
The Pinnacle debt commitment letter (Ref. No. PCL-2022-SF-0417) commits Pinnacle to provide a $10,000,000 senior secured term loan in connection with the financing of the merger. The commitment letter contains a "sunset" provision under which the commitment expires on the earlier of (i) the Closing and (ii) the termination of the Merger Agreement (including by lapse of the Outside Date). Accordingly, if the Outside Date lapses without a Closing, the Pinnacle commitment will expire, and Ardent would need to either renegotiate the existing commitment or obtain a new financing commitment from Pinnacle or an alternative lender.
Pinnacle's willingness to extend or renew its commitment is not guaranteed, particularly in light of current credit market conditions and the rising interest rate environment. The Federal Reserve has raised the federal funds rate multiple times in 2022, and SOFR has increased accordingly, which may affect both the pricing and the availability of leveraged acquisition financing. We recommend that Ardent maintain a dialogue with Pinnacle (through its finance team and Pinnacle's relationship manager) regarding the status of the commitment and the potential need for an extension. Any such discussions should not, however, create any impression that Ardent is contemplating abandonment of the transaction, as this could trigger adverse consequences under both the Pinnacle commitment letter and the Merger Agreement.
The ongoing commitment fee of $50,000 per annum (0.50% on the $10,000,000 commitment amount) is payable quarterly. The first quarterly payment was made on July 8, 2022, and the next payment will be due on approximately October 8, 2022. This fee will continue to accrue so long as the commitment remains outstanding, regardless of whether the transaction closes.
VI. Strategic Options for Ardent
In light of the foregoing analysis, we have identified six strategic options available to Ardent. These options are not mutually exclusive, and certain combinations (as noted below) may be pursued in parallel. We analyze each option in terms of its mechanics, advantages, risks, and overall assessment.
A. Option 1: Proceed to Reconvened Meeting Without Price Increase
Mechanics. Under this option, Ardent would proceed to the reconvened Special Meeting currently scheduled for August 30, 2022, without any change to the merger consideration or the terms of the Merger Agreement. Ardent would direct Meridian Proxy Services Inc. to intensify its shareholder outreach and proxy solicitation efforts, focusing on stockholders who did not vote or abstained at the August 2 meeting. Supplemental proxy solicitation materials would be prepared and distributed, emphasizing the value proposition of the transaction, the premium to the unaffected stock price, and the fairness opinion delivered by Lantern Hill Advisory.
Quantitative Analysis. To achieve the required majority, Ardent would need to convert approximately 12,632 additional shares from abstaining, non-voting, or against to in-favor. This is a small number in absolute terms — less than 0.2% of the outstanding shares — but it must be evaluated in the context of the identities and motivations of the shareholders who did not vote in favor.
Advantages:
• Preserves the current deal economics ($4.75 per share; $30,000,000 aggregate equity value) and avoids any additional cost to Ardent.
• No amendment to the Merger Agreement is required.
• No additional SEC filings or revised proxy materials are required (though supplemental solicitation materials may be distributed).
• The shortest timeline of any option — the reconvened meeting is only 20 days away.
• Minimal additional transaction costs.
Risks:
• Tidewater Asset Management (612,632 shares, 9.7%) and Broadleaf Institutional Partners (448,421 shares, 7.1%) have publicly cited price inadequacy as the basis for their abstentions. There is no reason to expect that either will change its position in the absence of a price increase. Their combined holdings of 1,061,053 shares dwarf the 12,632-share shortfall, but neither has given any indication that it would vote in favor at the current price.
• The narrow margin of defeat means that any additional dissent — whether from shareholders who previously voted in favor or from newly activated retail shareholders opposed to the deal — could widen the gap rather than narrow it.
• If the reconvened meeting is held and the vote fails a second time, the termination right under Section 8.02(d) would ripen, and the Company's Board may face increased pressure (whether from shareholders, alternative bidders, or its own assessment of fiduciary obligations) to terminate the Merger Agreement or pursue alternatives.
• A second vote failure would be publicly reported and could generate negative publicity for both Ardent and the transaction, potentially making future efforts to consummate the deal more difficult.
Assessment: We assess this option as having a low probability of success without meaningful shareholder engagement or concessions. While it is the least costly option in absolute terms, the expected cost is likely negative when risk-adjusted, because a second vote failure would worsen Ardent's negotiating position and narrow its remaining strategic options. We recommend this option only if supplemental proxy outreach reveals a meaningful pool of unvoted or persuadable shares that Meridian believes can be converted.
B. Option 2: Engage Directly with Tidewater and Broadleaf
Mechanics. Under this option, Ardent (acting through its advisors) would conduct direct, confidential outreach to Tidewater Asset Management LLC and/or Broadleaf Institutional Partners LP to understand their specific objections to the transaction and their price expectations. The objective would be to determine whether there is a price level — or other concession, such as a contingent value right or an earnout — at which one or both institutions would be willing to vote in favor.
Tidewater alone holds 612,632 shares. If Tidewater were to change its vote from abstaining to in-favor, it would add 612,632 shares to the in-favor tally, bringing the total to 3,757,895 — far exceeding the required 3,157,895 threshold. Even if no other shareholder changed its vote, Tidewater's support alone would be more than sufficient. The same is true of Broadleaf, whose 448,421 shares would bring the in-favor tally to 3,593,684.
Legal Considerations. Any direct engagement with Tidewater and Broadleaf must be carefully structured to comply with applicable federal securities laws, including:
• Regulation FD (17 C.F.R. § 243.100 et seq.): Regulation FD prohibits selective disclosure of material nonpublic information by issuers and persons acting on their behalf to certain categories of recipients, including institutional investors. Because Ardent is not the issuer, Regulation FD does not directly apply to Ardent's communications. However, if the Company or its representatives participate in the engagement, or if Ardent shares information received from the Company, Regulation FD considerations may arise. We recommend that any outreach be conducted by Ardent and its advisors independently, without the involvement of Company personnel, to the extent practicable.
• Proxy Solicitation Rules (Regulation 14A): Any communication that constitutes a "solicitation" of proxies within the meaning of Rule 14a-1(l) must comply with the proxy rules, including the filing requirements of Rule 14a-6. Certain communications by parties other than the issuer may be exempt from the filing requirements under Rule 14a-2(b) if they do not seek proxy authority. Informal discussions regarding shareholder concerns and price expectations should generally not constitute "solicitations" under this exemption, but the substance and form of any communications should be reviewed by counsel in advance.
• Section 13(d) Considerations: If Ardent and Tidewater or Broadleaf were to form a "group" within the meaning of Section 13(d)(3) of the Exchange Act, a Schedule 13D filing obligation could be triggered. We believe that informal discussions regarding the price at which a shareholder would support the merger should not, without more, give rise to group status, but this issue warrants attention, particularly if the discussions involve agreements or understandings regarding the acquisition, disposition, or voting of Company shares.
Calderwood & Harkness and Whitfield, Crane & Sato would coordinate on any such outreach to ensure compliance with applicable legal requirements.
This option may be combined with Option 3 (price increase) if the engagement reveals that a specific price increment would secure one or both institutions' support. It may also be pursued as a preliminary, information-gathering step before committing to a price increase.
Advantages:
• Targeted approach that focuses on the shareholders whose abstentions were dispositive of the vote outcome.
• May reveal the minimum price threshold at which Tidewater and/or Broadleaf would be willing to vote in favor, enabling Ardent to calibrate any price increase precisely.
• Preserves flexibility — engagement does not commit Ardent to any particular course of action.
• Relatively low cost (primarily advisor time).
Risks:
• Direct engagement could be interpreted as a signal of Ardent's willingness to increase its offer price, potentially emboldening Tidewater, Broadleaf, and other shareholders to demand greater concessions.
• If material nonpublic information is exchanged during the engagement, disclosure obligations may arise, and the recipients may become restricted from trading in CRFH shares until the information is publicly disclosed.
• There is no assurance that engagement will be productive — either institution may decline to engage, or may demand a price that Ardent is unwilling or unable to meet.
• Tidewater and Broadleaf are sophisticated institutional investors with experienced legal and financial advisors; they may use the engagement to extract concessions that go beyond a simple price increase.
Assessment: We view this option as a prudent preliminary step that should be pursued before committing to a specific price increase. The information gained from engagement with Tidewater and Broadleaf will be invaluable in calibrating Ardent's strategy and avoiding either under-bidding (resulting in a third vote failure) or over-bidding (paying more than necessary to secure approval).
C. Option 3: Increase Merger Consideration
Mechanics. Under this option, Ardent would negotiate an amendment to the Merger Agreement to increase the per-share merger consideration above $4.75. The amendment would need to be agreed to by both Ardent and Coral Reef (acting through the Special Committee and the Board), and the increased consideration would be reflected in a revised definitive proxy statement that would need to be filed with the SEC and distributed to stockholders. Depending on the materiality of the changes and the SEC Staff's review, a new preliminary proxy filing, SEC review period, new record date, and new stockholder vote may be required.
Financial Analysis Considerations:
The current implied valuation multiples at the $4.75 per share price are as follows:
Any increase in the per-share price directly increases both the aggregate equity value and the enterprise value. The table below illustrates the impact of potential price increases in $0.25 increments:
Ardent's current sources and uses are structured as follows: equity contribution of $22,500,000 from Ardent Capital Partners III LP, plus the $10,000,000 Pinnacle term loan, plus estimated transaction expenses, totaling approximately $32,500,000 in total sources. An increase in the merger consideration would require either an increased equity commitment from Fund III or additional debt financing. Fund III has $1.2 billion of committed capital (vintage 2020), and we understand that the fund's investment allocation for this transaction currently leaves room for a modest increase in equity commitment, though this should be confirmed with the fund's investment committee.
We recommend that Grayson Partners & Co. (Priya Venkatesh) perform an updated valuation analysis, incorporating the Company's Q1 and preliminary Q2 2022 financial results, updated comparable company and precedent transaction data, and the results of any shareholder engagement, before Ardent commits to any specific revised price.
Timing Impact. A revised proxy process could add significant time to the transaction timeline. The preparation, filing, and SEC review of a revised preliminary proxy statement typically requires four to eight weeks, and additional time would be needed for mailing, solicitation, and the scheduling of a new stockholder meeting. Depending on the pace of the process, a revised proxy scenario could push the stockholder vote to late October or November 2022 — potentially beyond the current Outside Date of October 25, 2022. An extension of the Outside Date would therefore be a practical necessity if this option is pursued.
Advantages:
• Highest probability of obtaining stockholder approval, because it directly addresses the price-inadequacy objection raised by Tidewater and Broadleaf.
• May eliminate the need for protracted shareholder engagement if the price increase is sufficient to satisfy the principal dissenters.
• Demonstrates Ardent's commitment to the transaction and may strengthen the relationship with the Company's Board and management team.
Risks:
• Increases the cost of the transaction to Ardent, reducing the fund's expected return on investment.
• May set a precedent for "bump" demands in Ardent's future transactions, as other targets and their shareholders may perceive that Ardent is willing to raise its price in response to vote opposition.
• A price increase that is perceived as insufficient may fail to secure approval, resulting in wasted time and additional costs.
• Additional legal, advisory, and financing costs associated with the amendment process, revised proxy filings, and potential renegotiation of the Pinnacle commitment.
• Time delay — the extended timeline increases deal uncertainty, management distraction, and the risk of adverse developments (market downturn, deterioration in the Company's business, emergence of competing bidders, etc.).
• Requires a mutual extension of the Outside Date, which gives the Company leverage to extract additional concessions.
Assessment: This option offers the highest probability of transaction completion but at the cost of increased expense to Ardent and additional delay. We recommend that this option be evaluated in conjunction with Option 2 (shareholder engagement), so that any price increase is calibrated to the minimum level necessary to secure the required stockholder approval.