cover-letter-second-draft-apa.docx

1011-00005 · Meridian Consumer Brands LLC · Correspondence

cover-letter-second-draft-apa.docx DOCUMENT Finance & Banking

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CALDERWOOD & HARKNESS LLP Attorneys at Law 599 Lexington Avenue, 36th Floor New York, New York 10022 Telephone: (212) 554-7000 Facsimile: (212) 554-7001 www.calderwoodharkness.com

September 15, 2022

VIA EMAIL AND OVERNIGHT COURIER

Rachel Underwood, Esq. Caldwell, Pruitt & Shaw LLP 41 South High Street, Suite 2800 Columbus, OH 43215

Re: Asset Purchase Agreement by and between Meridian Consumer Brands LLC and Briarwood Home Essentials, Inc. — Second Draft Calderwood & Harkness LLP Matter No. 1011-00005

Dear Rachel:

On behalf of our client, Meridian Consumer Brands LLC ("Buyer"), enclosed please find the second draft of the Asset Purchase Agreement (the "APA") by and between Meridian Consumer Brands LLC and Briarwood Home Essentials, Inc. ("Seller"), together with revised forms of the ancillary agreements described in further detail below and Buyer's initial draft of the schedules to the APA. This revised draft reflects our careful review and consideration of the markup returned by your firm on behalf of Briarwood on August 22, 2022, and we have endeavored to address the comments and concerns raised therein in a manner that we believe is balanced and commercially reasonable.

For your convenience, the second draft of the APA is provided in both clean and blackline format, with the blackline redlined against the first draft circulated by this office on July 19, 2022. We trust that the blackline will facilitate your review and enable you to identify the specific changes made in response to Seller's comments, as well as certain additional revisions initiated by Buyer that we discuss in this letter.

Also enclosed with this transmittal is Buyer's initial draft of the Schedules to the APA, including the following: (i) the Schedule of Acquired Assets; (ii) the Schedule of Assumed Liabilities; (iii) the Schedule of Assigned Contracts; (iv) the Schedule of Permitted Encumbrances; (v) the Schedule of Transferred Employees; and (vi) the Schedule of Excluded Assets. We recognize that these schedules will require coordination with Seller's disclosure schedules once they are delivered, and we look forward to working together to ensure consistency between the respective schedules.

By way of this letter, we wish to provide a summary of Buyer's approach to the second draft and to identify the principal areas where the parties have reached agreement or compromise, as well as the items that remain open and require further discussion. We note at the outset that Buyer has endeavored to address many of Seller's comments, and a number of compromises have been reached as outlined below. At the same time, certain positions have been maintained where Buyer believes they are consistent with market practice for asset purchase transactions of this nature and size — in this case, an aggregate purchase price of $95,000,000 — and where Buyer considers such provisions necessary to appropriately allocate risk. This letter summarizes: (i) items on which the parties have reached agreement or compromise; and (ii) items that remain open and require further discussion between the parties.

I. Items Where Compromise Was Reached

The following is a summary of the principal areas in which Buyer has accepted or partially accepted Seller's proposed revisions, or where the parties have otherwise reached a mutually acceptable position in the second draft.

A. Definition of Acquired Assets

Buyer has accepted certain narrowing revisions to the definition of "Acquired Assets" proposed by Seller in its August 22 markup. In particular, Buyer has agreed to more precisely delineate the carve-outs applicable to the Retained Business, which encompasses Briarwood's Commercial Janitorial Services Division. The revised definition now includes additional specificity regarding the assets, rights, and properties associated exclusively with the Commercial Janitorial Services Division that are not being transferred to Buyer in connection with the transaction.

Correspondingly, the definition of "Excluded Assets" has been clarified to expressly enumerate the following items, among others, that are being retained by Seller and are not included in the Acquired Assets: (a) Briarwood's corporate headquarters lease at 1175 Creekside Drive, Columbus, Ohio, including all leasehold improvements and fixtures located at such premises; (b) all cash, cash equivalents, and short-term investments of Briarwood as of the Closing Date; and (c) all tax refunds and credits attributable to pre-Closing tax periods, regardless of when received. We believe these clarifications are consistent with the commercial understanding between the parties and should resolve the ambiguities identified by Seller in its prior markup.

B. Knowledge Qualifiers

In response to Seller's request for the inclusion of knowledge qualifiers on certain of Seller's representations and warranties, Buyer has agreed to expand certain knowledge qualifiers on select representations to include a "should have known after reasonable inquiry" standard. Specifically, this expanded knowledge qualifier has been applied to the environmental compliance representations in Section 4.17 and the intellectual property non-infringement representations in Section 4.14. Buyer believes that this formulation addresses Seller's request for a knowledge limitation while preserving the meaningful scope of these representations — the "should have known after reasonable inquiry" standard imposes a constructive knowledge obligation on Seller that avoids creating a safe harbor for willful ignorance while recognizing that Seller should not be held strictly liable for matters entirely outside its awareness.

We note, however, that the fundamental representations — including those pertaining to organization, authorization, title to assets, and capitalization — remain unqualified by knowledge, which is consistent with market practice and with the parties' prior discussions on this point.

C. Definition Scope — Assigned Contracts

Buyer has accepted Seller's proposed clarification regarding the scope of the contracts to be assigned to Buyer at Closing. The second draft now provides that only the twenty-three (23) customer contracts specifically listed on the Schedule of Assigned Contracts, together with the related supply agreements identified therein, shall constitute "Assigned Contracts" for purposes of the APA. This replaces the broader formulation in the first draft, which defined Assigned Contracts to include all contracts "primarily related to" the consumer products product line. Buyer acknowledges that Seller's proposed approach provides greater clarity and certainty for both parties regarding which contractual relationships are being transferred.

We note that seven (7) of the twenty-three (23) Assigned Contracts contain change-of-control or assignment consent provisions that require the consent of the counterparty to such contract prior to assignment. Buyer has separately begun the consent solicitation process with respect to these contracts, and we address the allocation of responsibility and consequences of failure to obtain such consents in Section II.I below.

D. Transition Services Agreement

Buyer has accepted Seller's proposed revisions to the service descriptions and pricing methodology set forth in the Transition Services Agreement ("TSA"). As revised, the TSA contemplates that Seller will provide the following categories of transitional services to Buyer for a period of up to twelve (12) months following the Closing Date: information technology services (including access to Seller's ERP system and data migration support), accounting and financial reporting services, warehousing and distribution services at Seller's existing distribution facilities, and customer service support. The pricing methodology has been revised to reflect Seller's proposed cost-plus structure, with an administrative markup of fifteen percent (15%) over Seller's direct costs of providing such services.

We note, however, that certain differences remain between the parties with respect to the termination for convenience provisions of the TSA, which are addressed as an open item in Section II.J below.

E. Non-Competition Agreement — Geographic Scope

Buyer has agreed to narrow the geographic limitation in the Non-Competition and Non-Solicitation Agreement to be executed by Malcolm Greer. As revised, the restricted territory is limited to the continental United States (rather than the broader formulation in the first draft, which included Canada and Mexico), which Buyer believes is appropriate given the current footprint of the acquired consumer products business. The four-year restrictive period has been maintained, as has the limitation to consumer products — the restrictive covenants do not extend to commercial janitorial services or other business activities outside the consumer products category. Buyer believes this revised formulation represents a reasonable and enforceable scope that balances Buyer's legitimate interest in protecting the goodwill and customer relationships being acquired with the need to avoid imposing unreasonable restrictions on Mr. Greer's ability to pursue other business activities.

II. Items Remaining Open — Requiring Further Negotiation

Notwithstanding the compromises described above, a number of significant items remain open and will require further discussion between the parties. The following is a summary of the principal open issues, together with Buyer's position on each.

A. Indemnification Cap

The indemnification cap remains a material open issue between the parties. Buyer's position, as reflected in the second draft, is that the aggregate cap on Seller's indemnification obligations for breaches of non-fundamental representations and warranties should be thirty-five percent (35%) of the Purchase Price, which equals $33,250,000. Seller's August 22 markup proposed reducing the indemnification cap to twenty percent (20%) of the Purchase Price (approximately $19,000,000).

Buyer has maintained its thirty-five percent (35%) position in the second draft. Buyer believes this cap is appropriate and justified given: (a) the scope of the assets being acquired and the complexity of the business being transferred; (b) the environmental diligence findings, and in particular the results of Phase I Environmental Site Assessment Report No. TEG-2022-0441, delivered September 2, 2022 by Terrapoint Environmental Group, Inc., which identified a recognized environmental condition at the Marysville, Ohio manufacturing facility requiring further investigation through a Phase II environmental site assessment, which has not yet been completed as of the date of this letter; and (c) the nature and breadth of the representations and warranties being made by Seller with respect to the business. Given the uncertainty surrounding the Marysville environmental condition and the potential magnitude of any remediation obligations that may arise, Buyer does not believe it would be prudent to reduce the indemnification cap at this time. We would welcome a discussion of this issue and are prepared to present market data supporting Buyer's position.

B. Survival Period for General Representations and Warranties

Buyer's position, as reflected in the second draft, is that general (non-fundamental) representations and warranties should survive for a period of twenty-four (24) months following the Closing Date. Seller's August 22 markup proposed reducing the survival period to eighteen (18) months.

Buyer has maintained the twenty-four (24) month survival period in the second draft. For the avoidance of doubt, the fundamental representations — including organization, authorization, title to Acquired Assets, brokers, and tax matters — continue to survive indefinitely, which is consistent with both parties' agreement as expressed in the August 22 markup. Buyer notes that a twenty-four (24) month survival period for general representations is consistent with prevailing market practice for transactions in this size range and is particularly appropriate in light of the outstanding diligence items described elsewhere in this letter, including the pending Phase II environmental assessment and the yet-to-be-delivered disclosure schedules.

C. Indemnification Basket (Deductible)

The parties remain apart on the structure of the indemnification basket. Buyer's position, as reflected in the second draft, is that the basket should be set at one percent (1%) of the Purchase Price — i.e., $950,000 — and should be structured as a tipping basket. Under a tipping basket structure, once the aggregate amount of indemnifiable losses exceeds the basket threshold, Buyer would be entitled to recover the full amount of such losses from the first dollar, rather than only the amount in excess of the threshold.

Seller's August 22 markup proposed restructuring the basket as a true deductible, under which Buyer would only be entitled to recover losses in excess of the $950,000 threshold. Buyer has maintained the tipping basket structure in the second draft. Buyer believes that a tipping basket is appropriate where, as here, the purchase price is substantial and the basket amount itself represents a meaningful threshold that will screen out immaterial or de minimis claims.

D. Escrow Holdback

Buyer's position, as reflected in the second draft, is that $9,500,000 — representing ten percent (10%) of the Purchase Price — should be held in escrow for a period of twenty-four (24) months following the Closing Date, with Atlantic Fiduciary Trust Company serving as escrow agent. The escrow funds would serve as the primary source of recovery for any post-Closing indemnification claims and would be released to Seller upon the expiration of the survival period, net of any pending or resolved claims.

Seller's August 22 markup proposed reducing the escrow amount to seven and one-half percent (7.5%) of the Purchase Price and shortening the escrow period to eighteen (18) months. Buyer has maintained its ten percent (10%) / twenty-four (24) month position in the second draft. Buyer believes it is important that the escrow period be co-extensive with the survival period for general representations and warranties, and that the escrow amount be sufficient to provide a meaningful source of recovery in the event of a post-Closing indemnification claim. The enclosed first draft of the Escrow Agreement among Meridian, Briarwood, and Atlantic Fiduciary Trust Company reflects Buyer's position on these points.

E. Earnout Structure and Revenue Threshold

The earnout provisions remain an area of significant disagreement between the parties. Buyer's position, as reflected in the second draft, is that the earnout component of the Purchase Price should be structured as follows: an additional payment of $8,000,000 shall be payable to Seller if the Year 1 post-Closing revenue of the acquired consumer products product line equals or exceeds $72,000,000. Revenue for purposes of the earnout would be calculated in accordance with GAAP consistently applied and would be determined based on the financial records of the acquired product line as maintained by Buyer following the Closing.

Seller's August 22 markup proposed several changes to the earnout calculation methodology, including: (a) adjustments for revenue attribution between the acquired product line and the Retained Business (the Commercial Janitorial Services Division), to address Seller's concern that certain shared customers may generate revenue that is difficult to allocate between the two businesses; and (b) a lower revenue threshold, which Seller argued would more appropriately reflect the base-case revenue trajectory of the business. Buyer has maintained the $72,000,000 Year 1 revenue threshold in the second draft. However, in response to Seller's concerns regarding Buyer's conduct during the earnout period, Buyer has agreed to include certain protective covenants in the APA, including a covenant to operate the acquired product line in the ordinary course of business consistent with past practice during the earnout period, and a prohibition on Buyer taking actions with the primary purpose of reducing earnout revenue or diverting revenue from the acquired product line to other Buyer operations.

We note that the earnout mechanics will also need to be reconciled with the inventory adjustment provisions described in Section II.F below once the parties have resolved the threshold issue regarding inventory valuation methodology. The interplay between these two provisions — particularly regarding the treatment of inventory carrying costs and their impact on revenue recognition — will require further discussion.

F. Inventory Adjustment Mechanism

The APA contemplates a post-Closing inventory adjustment based on the inventory of the acquired consumer products product line as of the Closing Date. There is a significant open issue regarding the methodology to be used in valuing the acquired inventory for purposes of this adjustment.

Briarwood's inventory of the consumer products product line carried a book value as of June 30, 2022 of approximately $14,300,000. However, Buyer's independent financial diligence advisor, Whitfield Ames LLP, has conducted an analysis of the acquired inventory and has determined that the net realizable value of such inventory is approximately $11,800,000 — reflecting a variance of approximately $2,500,000 from Briarwood's book value. This variance is attributable primarily to slow-moving and excess inventory items, items approaching or past their shelf-life expiration dates, and certain product SKUs that Buyer's commercial team has identified as having limited market demand going forward.

Buyer's position is that inventory should be valued at net realizable value, consistent with generally accepted accounting principles, and that the closing adjustment mechanism should reflect this methodology. Under GAAP (ASC 330), inventories are required to be stated at the lower of cost or net realizable value, and Buyer believes that a valuation methodology consistent with this standard is appropriate for purposes of the closing adjustment.

Seller has disputed the net realizable value methodology and has taken the position that inventory should be valued at book value or, alternatively, at historical cost. This is a threshold issue that must be resolved before the APA inventory adjustment provisions can be finalized. Buyer intends to raise this issue separately and in greater detail with Seller's team, and we expect to provide Whitfield Ames LLP's supporting analysis, including a detailed SKU-level inventory assessment, in the coming days to facilitate a productive discussion.

G. Disclosure Schedules

Buyer notes that, as of the date of this letter, Seller's disclosure schedules to the APA have not yet been delivered. Buyer understands that a first draft of the disclosure schedules is anticipated to be delivered by Seller on or about September 28, 2022. We further understand that the initial delivery may be partial, with certain schedules to follow thereafter.

Buyer wishes to emphasize that its review of the disclosure schedules will be critical to the finalization of the representations and warranties set forth in the APA. Many of the representations and warranties are qualified by reference to the disclosure schedules, and the adequacy and completeness of those schedules will directly affect Buyer's assessment of the risk allocation reflected in the APA. We respectfully request that Seller deliver complete disclosure schedules as promptly as practicable, and we reserve Buyer's right to propose further revisions to the representations and warranties and other provisions of the APA in response to the information disclosed therein.

H. Lease Assignment — Marysville Facility

The APA requires, as a condition to Closing, that landlord consent be obtained from Buckeye Industrial Properties LLC for the assignment to Buyer of the lease for the manufacturing and warehouse facility located at 2800 Industrial Parkway, Marysville, Ohio 43040 (the "Marysville Lease"). The Marysville facility is a key operating asset of the acquired product line, and assignment of the Marysville Lease is essential to Buyer's ability to operate the business post-Closing without interruption.

Buyer intends to transmit a consent request letter to Buckeye Industrial Properties LLC in the near term and will coordinate with Seller's counsel on obtaining this consent in a timely manner. We would propose that the parties discuss at the earliest opportunity whether the landlord consent should remain a hard condition to Closing under Section 7.2 of the APA, or whether a fallback arrangement — such as a sublease from Seller to Buyer, or a management agreement — should be negotiated to address the contingency in which landlord consent cannot be obtained prior to the targeted Closing Date. Buyer is open to exploring a practical workaround provided that it achieves substantially the same economic and operational result as a direct lease assignment.

I. Customer Contract Consents

As noted above, seven (7) of the twenty-three (23) Assigned Contracts contain change-of-control or assignment consent provisions that require the consent of the counterparty prior to assignment to Buyer. The parties should discuss and agree upon the allocation of responsibility for obtaining these consents, including which party will take the lead on solicitation efforts with each counterparty. In addition, the parties should discuss the consequences of a failure to obtain one or more such consents prior to Closing, including whether the APA should provide for alternative arrangements — such as a subcontracting or agency arrangement — pursuant to which Buyer would receive the economic benefits and bear the obligations of any non-assigned contract pending receipt of the requisite consent.

Buyer has begun preliminary outreach to certain of the counterparties but believes that Seller's participation in the consent solicitation process will be important given Seller's existing relationships with these customers. We look forward to coordinating with your team on a consent solicitation plan.

J. Transition Services Agreement — Termination for Convenience

While the pricing methodology and scope of services under the TSA have been agreed in principle, as described in Section I.D above, the parties remain apart on the termination for convenience provisions. Seller's August 22 markup proposed that either party should have the right to terminate any individual service under the TSA upon thirty (30) days' prior written notice to the other party, at any time following the Closing Date.

Buyer's position is that a minimum commitment period of six (6) months should apply before either party may exercise a right to terminate individual services for convenience. Buyer believes that a minimum commitment period is necessary to ensure stability and continuity during the critical initial post-Closing integration period and to enable Buyer to plan for and implement the transition of each service from Seller's infrastructure to Buyer's own operations in an orderly manner. After the expiration of the six-month minimum commitment period, Buyer would agree that either party may terminate individual services upon thirty (30) days' prior written notice.

III. Ancillary Documents Enclosed

In addition to the second draft of the APA, the following ancillary documents are enclosed with this transmittal in the forms indicated:

1. Bill of Sale — draft form, intended to serve as a Closing deliverable and attached as an exhibit to the APA. This document will effect the conveyance of the tangible personal property included in the Acquired Assets from Seller to Buyer at Closing.

2. Assignment and Assumption Agreement — draft form, attached as an exhibit to the APA. This document will effect the assignment by Seller of the Assigned Contracts, Assumed Liabilities, and other intangible rights included in the Acquired Assets, and the assumption by Buyer of the Assumed Liabilities.

3. intellectual Property Assignment Agreement — draft form, covering the assignment of the following intellectual property assets from Seller to Buyer: (a) the CleanLeaf and PureHaven trademarks and associated registrations; (b) all trade dress associated with the consumer products product line; (c) the domain names associated with the CleanLeaf and PureHaven brands; and (d) all formulation trade secrets, proprietary formulas, and related technical know-how used in the manufacture of the consumer products product line.

4. Transition Services Agreement — revised first draft, reflecting the agreed service descriptions and pricing methodology as described in Section I.D above, with open items noted in redline.

5. Escrow Agreement — first draft, among Meridian Consumer Brands LLC, Briarwood Home Essentials, Inc., and Atlantic Fiduciary Trust Company, as escrow agent, reflecting Buyer's position on escrow amount and term as described in Section II.D above.

6. Non-Competition and Non-Solicitation Agreement — revised draft, to be executed by Malcolm Greer, reflecting a four-year restrictive period, the revised geographic scope described in Section I.E above, and a restriction limited to consumer products (not extending to commercial janitorial services).

7. Schedules to APA — Buyer's initial draft, including:

(a) Schedule of Acquired Assets;

(b) Schedule of Assumed Liabilities (listing assumed trade payables of approximately $4,200,000 and assumed product warranty obligations of approximately $620,000);

(c) Schedule of Assigned Contracts (listing twenty-three (23) customer contracts, with notation of the seven (7) contracts requiring counterparty consent to assignment);

(d) Schedule of Transferred Employees (listing one hundred eighty-six (186) employees to be offered employment by Buyer at or prior to Closing);

(e) Schedule of Permitted Encumbrances; and

(f) Schedule of Excluded Assets.

We invite your review of each of these ancillary documents and welcome your comments and markups at your earliest convenience.

IV. Process and Next Steps

Buyer is committed to advancing this transaction toward a timely closing and respectfully requests that Seller's counsel return a markup of the second draft APA and the enclosed ancillary documents at Seller's earliest convenience. Given the number and significance of the open items identified above, we believe it would be productive to schedule a call between the deal teams — including business principals as appropriate — to discuss the principal open issues, with particular focus on the following: (a) the indemnification cap; (b) the survival period for general representations and warranties; (c) the earnout mechanics and revenue threshold; and (d) the inventory valuation dispute. We are available at your convenience and would suggest a call during the week of September 26, 2022, if that timing works for your team.

We also wish to note that the debt financing for this transaction is being provided pursuant to a commitment letter from Harborview National Bank, N.A., dated August 5, 2022, which is subject to a finite commitment period. Similarly, the equity commitment for this transaction is evidenced by a commitment letter from Lakepoint Capital Partners, LP, dated August 12, 2022, which is also time-sensitive. While we do not anticipate any immediate issues with either commitment, we believe it is in both parties' interest to work toward the timely negotiation, execution, and closing of the APA so as to avoid any complications arising from the expiration or potential need for extension of these financing commitments.

Buyer remains enthusiastic about this transaction and views the acquisition of Briarwood's consumer products business as a highly attractive strategic opportunity. We are committed to engaging constructively and in good faith on all open points and are confident that the remaining issues can be resolved in a manner that is fair and workable for both parties.

We look forward to your response and remain available to discuss any of the foregoing at your convenience. Should you have any questions regarding the enclosed draft or the positions described in this letter, please do not hesitate to contact me directly at (212) 554-7148 or by email at afitzpatrick@calderwoodharkness.com.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Andrew Fitzpatrick Partner

Enclosures:

1. Asset Purchase Agreement — Second Draft (clean copy)

2. Asset Purchase Agreement — Second Draft (blackline against July 19, 2022 first draft)

3. Bill of Sale — draft form

4. Assignment and Assumption Agreement — draft form

5. Intellectual Property Assignment Agreement — draft form

6. Transition Services Agreement — revised first draft

7. Escrow Agreement — first draft

8. Non-Competition and Non-Solicitation Agreement — revised draft

9. Schedules to APA — Buyer's initial draft

cc (via email):

Sandra Tung, Esq., Calderwood & Harkness LLP

Diana Ressler, General Counsel, Meridian Consumer Brands LLC

David Soo, Esq., Caldwell, Pruitt & Shaw LLP

CALDERWOOD & HARKNESS LLP Attorneys at Law 599 Lexington Avenue, 36th Floor New York, New York 10022 Telephone: (212) 554-7000 Facsimile: (212) 554-7001 www.calderwoodharkness.com
September 15, 2022
VIA EMAIL AND OVERNIGHT COURIER
Rachel Underwood, Esq. Caldwell, Pruitt & Shaw LLP 41 South High Street, Suite 2800 Columbus, OH 43215
Re: Asset Purchase Agreement by and between Meridian Consumer Brands LLC and Briarwood Home Essentials, Inc. — Second Draft Calderwood & Harkness LLP Matter No. 1011-00005
Dear Rachel:
On behalf of our client, Meridian Consumer Brands LLC ("Buyer"), enclosed please find the second draft of the Asset Purchase Agreement (the "APA") by and between Meridian Consumer Brands LLC and Briarwood Home Essentials, Inc. ("Seller"), together with revised forms of the ancillary agreements described in further detail below and Buyer's initial draft of the schedules to the APA. This revised draft reflects our careful review and consideration of the markup returned by your firm on behalf of Briarwood on August 22, 2022, and we have endeavored to address the comments and concerns raised therein in a manner that we believe is balanced and commercially reasonable.
For your convenience, the second draft of the APA is provided in both clean and blackline format, with the blackline redlined against the first draft circulated by this office on July 19, 2022. We trust that the blackline will facilitate your review and enable you to identify the specific changes made in response to Seller's comments, as well as certain additional revisions initiated by Buyer that we discuss in this letter.
Also enclosed with this transmittal is Buyer's initial draft of the Schedules to the APA, including the following: (i) the Schedule of Acquired Assets; (ii) the Schedule of Assumed Liabilities; (iii) the Schedule of Assigned Contracts; (iv) the Schedule of Permitted Encumbrances; (v) the Schedule of Transferred Employees; and (vi) the Schedule of Excluded Assets. We recognize that these schedules will require coordination with Seller's disclosure schedules once they are delivered, and we look forward to working together to ensure consistency between the respective schedules.
By way of this letter, we wish to provide a summary of Buyer's approach to the second draft and to identify the principal areas where the parties have reached agreement or compromise, as well as the items that remain open and require further discussion. We note at the outset that Buyer has endeavored to address many of Seller's comments, and a number of compromises have been reached as outlined below. At the same time, certain positions have been maintained where Buyer believes they are consistent with market practice for asset purchase transactions of this nature and size — in this case, an aggregate purchase price of $95,000,000 — and where Buyer considers such provisions necessary to appropriately allocate risk. This letter summarizes: (i) items on which the parties have reached agreement or compromise; and (ii) items that remain open and require further discussion between the parties.
I. Items Where Compromise Was Reached
The following is a summary of the principal areas in which Buyer has accepted or partially accepted Seller's proposed revisions, or where the parties have otherwise reached a mutually acceptable position in the second draft.
A. Definition of Acquired Assets
Buyer has accepted certain narrowing revisions to the definition of "Acquired Assets" proposed by Seller in its August 22 markup. In particular, Buyer has agreed to more precisely delineate the carve-outs applicable to the Retained Business, which encompasses Briarwood's Commercial Janitorial Services Division. The revised definition now includes additional specificity regarding the assets, rights, and properties associated exclusively with the Commercial Janitorial Services Division that are not being transferred to Buyer in connection with the transaction.
Correspondingly, the definition of "Excluded Assets" has been clarified to expressly enumerate the following items, among others, that are being retained by Seller and are not included in the Acquired Assets: (a) Briarwood's corporate headquarters lease at 1175 Creekside Drive, Columbus, Ohio, including all leasehold improvements and fixtures located at such premises; (b) all cash, cash equivalents, and short-term investments of Briarwood as of the Closing Date; and (c) all tax refunds and credits attributable to pre-Closing tax periods, regardless of when received. We believe these clarifications are consistent with the commercial understanding between the parties and should resolve the ambiguities identified by Seller in its prior markup.
B. Knowledge Qualifiers
In response to Seller's request for the inclusion of knowledge qualifiers on certain of Seller's representations and warranties, Buyer has agreed to expand certain knowledge qualifiers on select representations to include a "should have known after reasonable inquiry" standard. Specifically, this expanded knowledge qualifier has been applied to the environmental compliance representations in Section 4.17 and the intellectual property non-infringement representations in Section 4.14. Buyer believes that this formulation addresses Seller's request for a knowledge limitation while preserving the meaningful scope of these representations — the "should have known after reasonable inquiry" standard imposes a constructive knowledge obligation on Seller that avoids creating a safe harbor for willful ignorance while recognizing that Seller should not be held strictly liable for matters entirely outside its awareness.
We note, however, that the fundamental representations — including those pertaining to organization, authorization, title to assets, and capitalization — remain unqualified by knowledge, which is consistent with market practice and with the parties' prior discussions on this point.
C. Definition Scope — Assigned Contracts
Buyer has accepted Seller's proposed clarification regarding the scope of the contracts to be assigned to Buyer at Closing. The second draft now provides that only the twenty-three (23) customer contracts specifically listed on the Schedule of Assigned Contracts, together with the related supply agreements identified therein, shall constitute "Assigned Contracts" for purposes of the APA. This replaces the broader formulation in the first draft, which defined Assigned Contracts to include all contracts "primarily related to" the consumer products product line. Buyer acknowledges that Seller's proposed approach provides greater clarity and certainty for both parties regarding which contractual relationships are being transferred.
We note that seven (7) of the twenty-three (23) Assigned Contracts contain change-of-control or assignment consent provisions that require the consent of the counterparty to such contract prior to assignment. Buyer has separately begun the consent solicitation process with respect to these contracts, and we address the allocation of responsibility and consequences of failure to obtain such consents in Section II.I below.
D. Transition Services Agreement
Buyer has accepted Seller's proposed revisions to the service descriptions and pricing methodology set forth in the Transition Services Agreement ("TSA"). As revised, the TSA contemplates that Seller will provide the following categories of transitional services to Buyer for a period of up to twelve (12) months following the Closing Date: information technology services (including access to Seller's ERP system and data migration support), accounting and financial reporting services, warehousing and distribution services at Seller's existing distribution facilities, and customer service support. The pricing methodology has been revised to reflect Seller's proposed cost-plus structure, with an administrative markup of fifteen percent (15%) over Seller's direct costs of providing such services.
We note, however, that certain differences remain between the parties with respect to the termination for convenience provisions of the TSA, which are addressed as an open item in Section II.J below.
E. Non-Competition Agreement — Geographic Scope
Buyer has agreed to narrow the geographic limitation in the Non-Competition and Non-Solicitation Agreement to be executed by Malcolm Greer. As revised, the restricted territory is limited to the continental United States (rather than the broader formulation in the first draft, which included Canada and Mexico), which Buyer believes is appropriate given the current footprint of the acquired consumer products business. The four-year restrictive period has been maintained, as has the limitation to consumer products — the restrictive covenants do not extend to commercial janitorial services or other business activities outside the consumer products category. Buyer believes this revised formulation represents a reasonable and enforceable scope that balances Buyer's legitimate interest in protecting the goodwill and customer relationships being acquired with the need to avoid imposing unreasonable restrictions on Mr. Greer's ability to pursue other business activities.
II. Items Remaining Open — Requiring Further Negotiation
Notwithstanding the compromises described above, a number of significant items remain open and will require further discussion between the parties. The following is a summary of the principal open issues, together with Buyer's position on each.
A. Indemnification Cap
The indemnification cap remains a material open issue between the parties. Buyer's position, as reflected in the second draft, is that the aggregate cap on Seller's indemnification obligations for breaches of non-fundamental representations and warranties should be thirty-five percent (35%) of the Purchase Price, which equals $33,250,000. Seller's August 22 markup proposed reducing the indemnification cap to twenty percent (20%) of the Purchase Price (approximately $19,000,000).
Buyer has maintained its thirty-five percent (35%) position in the second draft. Buyer believes this cap is appropriate and justified given: (a) the scope of the assets being acquired and the complexity of the business being transferred; (b) the environmental diligence findings, and in particular the results of Phase I Environmental Site Assessment Report No. TEG-2022-0441, delivered September 2, 2022 by Terrapoint Environmental Group, Inc., which identified a recognized environmental condition at the Marysville, Ohio manufacturing facility requiring further investigation through a Phase II environmental site assessment, which has not yet been completed as of the date of this letter; and (c) the nature and breadth of the representations and warranties being made by Seller with respect to the business. Given the uncertainty surrounding the Marysville environmental condition and the potential magnitude of any remediation obligations that may arise, Buyer does not believe it would be prudent to reduce the indemnification cap at this time. We would welcome a discussion of this issue and are prepared to present market data supporting Buyer's position.
B. Survival Period for General Representations and Warranties
Buyer's position, as reflected in the second draft, is that general (non-fundamental) representations and warranties should survive for a period of twenty-four (24) months following the Closing Date. Seller's August 22 markup proposed reducing the survival period to eighteen (18) months.
Buyer has maintained the twenty-four (24) month survival period in the second draft. For the avoidance of doubt, the fundamental representations — including organization, authorization, title to Acquired Assets, brokers, and tax matters — continue to survive indefinitely, which is consistent with both parties' agreement as expressed in the August 22 markup. Buyer notes that a twenty-four (24) month survival period for general representations is consistent with prevailing market practice for transactions in this size range and is particularly appropriate in light of the outstanding diligence items described elsewhere in this letter, including the pending Phase II environmental assessment and the yet-to-be-delivered disclosure schedules.
C. Indemnification Basket (Deductible)
The parties remain apart on the structure of the indemnification basket. Buyer's position, as reflected in the second draft, is that the basket should be set at one percent (1%) of the Purchase Price — i.e., $950,000 — and should be structured as a tipping basket. Under a tipping basket structure, once the aggregate amount of indemnifiable losses exceeds the basket threshold, Buyer would be entitled to recover the full amount of such losses from the first dollar, rather than only the amount in excess of the threshold.
Seller's August 22 markup proposed restructuring the basket as a true deductible, under which Buyer would only be entitled to recover losses in excess of the $950,000 threshold. Buyer has maintained the tipping basket structure in the second draft. Buyer believes that a tipping basket is appropriate where, as here, the purchase price is substantial and the basket amount itself represents a meaningful threshold that will screen out immaterial or de minimis claims.
D. Escrow Holdback
Buyer's position, as reflected in the second draft, is that $9,500,000 — representing ten percent (10%) of the Purchase Price — should be held in escrow for a period of twenty-four (24) months following the Closing Date, with Atlantic Fiduciary Trust Company serving as escrow agent. The escrow funds would serve as the primary source of recovery for any post-Closing indemnification claims and would be released to Seller upon the expiration of the survival period, net of any pending or resolved claims.
Seller's August 22 markup proposed reducing the escrow amount to seven and one-half percent (7.5%) of the Purchase Price and shortening the escrow period to eighteen (18) months. Buyer has maintained its ten percent (10%) / twenty-four (24) month position in the second draft. Buyer believes it is important that the escrow period be co-extensive with the survival period for general representations and warranties, and that the escrow amount be sufficient to provide a meaningful source of recovery in the event of a post-Closing indemnification claim. The enclosed first draft of the Escrow Agreement among Meridian, Briarwood, and Atlantic Fiduciary Trust Company reflects Buyer's position on these points.
E. Earnout Structure and Revenue Threshold
The earnout provisions remain an area of significant disagreement between the parties. Buyer's position, as reflected in the second draft, is that the earnout component of the Purchase Price should be structured as follows: an additional payment of $8,000,000 shall be payable to Seller if the Year 1 post-Closing revenue of the acquired consumer products product line equals or exceeds $72,000,000. Revenue for purposes of the earnout would be calculated in accordance with GAAP consistently applied and would be determined based on the financial records of the acquired product line as maintained by Buyer following the Closing.
Seller's August 22 markup proposed several changes to the earnout calculation methodology, including: (a) adjustments for revenue attribution between the acquired product line and the Retained Business (the Commercial Janitorial Services Division), to address Seller's concern that certain shared customers may generate revenue that is difficult to allocate between the two businesses; and (b) a lower revenue threshold, which Seller argued would more appropriately reflect the base-case revenue trajectory of the business. Buyer has maintained the $72,000,000 Year 1 revenue threshold in the second draft. However, in response to Seller's concerns regarding Buyer's conduct during the earnout period, Buyer has agreed to include certain protective covenants in the APA, including a covenant to operate the acquired product line in the ordinary course of business consistent with past practice during the earnout period, and a prohibition on Buyer taking actions with the primary purpose of reducing earnout revenue or diverting revenue from the acquired product line to other Buyer operations.
We note that the earnout mechanics will also need to be reconciled with the inventory adjustment provisions described in Section II.F below once the parties have resolved the threshold issue regarding inventory valuation methodology. The interplay between these two provisions — particularly regarding the treatment of inventory carrying costs and their impact on revenue recognition — will require further discussion.
F. Inventory Adjustment Mechanism
The APA contemplates a post-Closing inventory adjustment based on the inventory of the acquired consumer products product line as of the Closing Date. There is a significant open issue regarding the methodology to be used in valuing the acquired inventory for purposes of this adjustment.
Briarwood's inventory of the consumer products product line carried a book value as of June 30, 2022 of approximately $14,300,000. However, Buyer's independent financial diligence advisor, Whitfield Ames LLP, has conducted an analysis of the acquired inventory and has determined that the net realizable value of such inventory is approximately $11,800,000 — reflecting a variance of approximately $2,500,000 from Briarwood's book value. This variance is attributable primarily to slow-moving and excess inventory items, items approaching or past their shelf-life expiration dates, and certain product SKUs that Buyer's commercial team has identified as having limited market demand going forward.
Buyer's position is that inventory should be valued at net realizable value, consistent with generally accepted accounting principles, and that the closing adjustment mechanism should reflect this methodology. Under GAAP (ASC 330), inventories are required to be stated at the lower of cost or net realizable value, and Buyer believes that a valuation methodology consistent with this standard is appropriate for purposes of the closing adjustment.
Seller has disputed the net realizable value methodology and has taken the position that inventory should be valued at book value or, alternatively, at historical cost. This is a threshold issue that must be resolved before the APA inventory adjustment provisions can be finalized. Buyer intends to raise this issue separately and in greater detail with Seller's team, and we expect to provide Whitfield Ames LLP's supporting analysis, including a detailed SKU-level inventory assessment, in the coming days to facilitate a productive discussion.
G. Disclosure Schedules
Buyer notes that, as of the date of this letter, Seller's disclosure schedules to the APA have not yet been delivered. Buyer understands that a first draft of the disclosure schedules is anticipated to be delivered by Seller on or about September 28, 2022. We further understand that the initial delivery may be partial, with certain schedules to follow thereafter.
Buyer wishes to emphasize that its review of the disclosure schedules will be critical to the finalization of the representations and warranties set forth in the APA. Many of the representations and warranties are qualified by reference to the disclosure schedules, and the adequacy and completeness of those schedules will directly affect Buyer's assessment of the risk allocation reflected in the APA. We respectfully request that Seller deliver complete disclosure schedules as promptly as practicable, and we reserve Buyer's right to propose further revisions to the representations and warranties and other provisions of the APA in response to the information disclosed therein.
H. Lease Assignment — Marysville Facility
The APA requires, as a condition to Closing, that landlord consent be obtained from Buckeye Industrial Properties LLC for the assignment to Buyer of the lease for the manufacturing and warehouse facility located at 2800 Industrial Parkway, Marysville, Ohio 43040 (the "Marysville Lease"). The Marysville facility is a key operating asset of the acquired product line, and assignment of the Marysville Lease is essential to Buyer's ability to operate the business post-Closing without interruption.
Buyer intends to transmit a consent request letter to Buckeye Industrial Properties LLC in the near term and will coordinate with Seller's counsel on obtaining this consent in a timely manner. We would propose that the parties discuss at the earliest opportunity whether the landlord consent should remain a hard condition to Closing under Section 7.2 of the APA, or whether a fallback arrangement — such as a sublease from Seller to Buyer, or a management agreement — should be negotiated to address the contingency in which landlord consent cannot be obtained prior to the targeted Closing Date. Buyer is open to exploring a practical workaround provided that it achieves substantially the same economic and operational result as a direct lease assignment.
I. Customer Contract Consents
As noted above, seven (7) of the twenty-three (23) Assigned Contracts contain change-of-control or assignment consent provisions that require the consent of the counterparty prior to assignment to Buyer. The parties should discuss and agree upon the allocation of responsibility for obtaining these consents, including which party will take the lead on solicitation efforts with each counterparty. In addition, the parties should discuss the consequences of a failure to obtain one or more such consents prior to Closing, including whether the APA should provide for alternative arrangements — such as a subcontracting or agency arrangement — pursuant to which Buyer would receive the economic benefits and bear the obligations of any non-assigned contract pending receipt of the requisite consent.
Buyer has begun preliminary outreach to certain of the counterparties but believes that Seller's participation in the consent solicitation process will be important given Seller's existing relationships with these customers. We look forward to coordinating with your team on a consent solicitation plan.
J. Transition Services Agreement — Termination for Convenience
While the pricing methodology and scope of services under the TSA have been agreed in principle, as described in Section I.D above, the parties remain apart on the termination for convenience provisions. Seller's August 22 markup proposed that either party should have the right to terminate any individual service under the TSA upon thirty (30) days' prior written notice to the other party, at any time following the Closing Date.
Buyer's position is that a minimum commitment period of six (6) months should apply before either party may exercise a right to terminate individual services for convenience. Buyer believes that a minimum commitment period is necessary to ensure stability and continuity during the critical initial post-Closing integration period and to enable Buyer to plan for and implement the transition of each service from Seller's infrastructure to Buyer's own operations in an orderly manner. After the expiration of the six-month minimum commitment period, Buyer would agree that either party may terminate individual services upon thirty (30) days' prior written notice.
III. Ancillary Documents Enclosed
In addition to the second draft of the APA, the following ancillary documents are enclosed with this transmittal in the forms indicated:
1. Bill of Sale — draft form, intended to serve as a Closing deliverable and attached as an exhibit to the APA. This document will effect the conveyance of the tangible personal property included in the Acquired Assets from Seller to Buyer at Closing.
2. Assignment and Assumption Agreement — draft form, attached as an exhibit to the APA. This document will effect the assignment by Seller of the Assigned Contracts, Assumed Liabilities, and other intangible rights included in the Acquired Assets, and the assumption by Buyer of the Assumed Liabilities.
3. intellectual Property Assignment Agreement — draft form, covering the assignment of the following intellectual property assets from Seller to Buyer: (a) the CleanLeaf and PureHaven trademarks and associated registrations; (b) all trade dress associated with the consumer products product line; (c) the domain names associated with the CleanLeaf and PureHaven brands; and (d) all formulation trade secrets, proprietary formulas, and related technical know-how used in the manufacture of the consumer products product line.
4. Transition Services Agreement — revised first draft, reflecting the agreed service descriptions and pricing methodology as described in Section I.D above, with open items noted in redline.
5. Escrow Agreement — first draft, among Meridian Consumer Brands LLC, Briarwood Home Essentials, Inc., and Atlantic Fiduciary Trust Company, as escrow agent, reflecting Buyer's position on escrow amount and term as described in Section II.D above.
6. Non-Competition and Non-Solicitation Agreement — revised draft, to be executed by Malcolm Greer, reflecting a four-year restrictive period, the revised geographic scope described in Section I.E above, and a restriction limited to consumer products (not extending to commercial janitorial services).
7. Schedules to APA — Buyer's initial draft, including:
(a) Schedule of Acquired Assets;
(b) Schedule of Assumed Liabilities (listing assumed trade payables of approximately $4,200,000 and assumed product warranty obligations of approximately $620,000);
(c) Schedule of Assigned Contracts (listing twenty-three (23) customer contracts, with notation of the seven (7) contracts requiring counterparty consent to assignment);
(d) Schedule of Transferred Employees (listing one hundred eighty-six (186) employees to be offered employment by Buyer at or prior to Closing);
(e) Schedule of Permitted Encumbrances; and
(f) Schedule of Excluded Assets.
We invite your review of each of these ancillary documents and welcome your comments and markups at your earliest convenience.
IV. Process and Next Steps
Buyer is committed to advancing this transaction toward a timely closing and respectfully requests that Seller's counsel return a markup of the second draft APA and the enclosed ancillary documents at Seller's earliest convenience. Given the number and significance of the open items identified above, we believe it would be productive to schedule a call between the deal teams — including business principals as appropriate — to discuss the principal open issues, with particular focus on the following: (a) the indemnification cap; (b) the survival period for general representations and warranties; (c) the earnout mechanics and revenue threshold; and (d) the inventory valuation dispute. We are available at your convenience and would suggest a call during the week of September 26, 2022, if that timing works for your team.
We also wish to note that the debt financing for this transaction is being provided pursuant to a commitment letter from Harborview National Bank, N.A., dated August 5, 2022, which is subject to a finite commitment period. Similarly, the equity commitment for this transaction is evidenced by a commitment letter from Lakepoint Capital Partners, LP, dated August 12, 2022, which is also time-sensitive. While we do not anticipate any immediate issues with either commitment, we believe it is in both parties' interest to work toward the timely negotiation, execution, and closing of the APA so as to avoid any complications arising from the expiration or potential need for extension of these financing commitments.
Buyer remains enthusiastic about this transaction and views the acquisition of Briarwood's consumer products business as a highly attractive strategic opportunity. We are committed to engaging constructively and in good faith on all open points and are confident that the remaining issues can be resolved in a manner that is fair and workable for both parties.
We look forward to your response and remain available to discuss any of the foregoing at your convenience. Should you have any questions regarding the enclosed draft or the positions described in this letter, please do not hesitate to contact me directly at (212) 554-7148 or by email at afitzpatrick@calderwoodharkness.com.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Andrew Fitzpatrick Partner
Enclosures:
1. Asset Purchase Agreement — Second Draft (clean copy)
2. Asset Purchase Agreement — Second Draft (blackline against July 19, 2022 first draft)
3. Bill of Sale — draft form
4. Assignment and Assumption Agreement — draft form
5. Intellectual Property Assignment Agreement — draft form
6. Transition Services Agreement — revised first draft
7. Escrow Agreement — first draft
8. Non-Competition and Non-Solicitation Agreement — revised draft
9. Schedules to APA — Buyer's initial draft
cc (via email):
Sandra Tung, Esq., Calderwood & Harkness LLP
Diana Ressler, General Counsel, Meridian Consumer Brands LLC
David Soo, Esq., Caldwell, Pruitt & Shaw LLP

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