TAX INDEMNITY PROVISIONS — DRAFT MARKUP OF MERGER AGREEMENT
Calderwood & Harkness LLP Redline Comments on Article IX (Tax Matters) and Article X (Indemnification — Tax)
DRAFT — FOR DISCUSSION PURPOSES ONLY
Circulated to:
Thomas Kundra, Esq. and Allison Cho, Esq. Harcourt Shaw & DeVries LLP (M&A Counsel to Buyer) 51 West 52nd Street New York, NY 10019
Patricia Engelman, Esq. and Kevin Driscoll, Esq. Whitford & Gaines LLP (Counsel to Sellers / Target) 1735 Market Street, Suite 2800 Philadelphia, PA 19103
Client:
Ardent Capital Partners III LP 600 Lexington Avenue, 38th Floor New York, NY 10022
Attention: Marcus Pellegrino, Partner, Healthcare
Note: This draft reflects Calderwood & Harkness's proposed redline changes to the Seller Draft dated March 3, 2024. Additions are shown in underline; deletions in strikethrough. Bracketed comments marked [C&H Comment] denote explanatory notes for discussion and are not intended for inclusion in the final agreement. All tracked changes are presented inline in the body of this memorandum. This document constitutes attorney work product and is subject to the attorney-client privilege.
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INTRODUCTORY TRANSMITTAL NOTE
March 10, 2024
Thomas Kundra, Esq. Harcourt Shaw & DeVries LLP 51 West 52nd Street New York, NY 10019
Patricia Engelman, Esq. Whitford & Gaines LLP 1735 Market Street, Suite 2800 Philadelphia, PA 19103
Re: Acquisition of Pinnacle Health Services Group LLC — Tax Indemnity and Escrow Provisions; Redline to Seller Draft dated March 3, 2024
Dear Tom and Trish:
We write on behalf of our client, Ardent Capital Partners III LP ("Buyer"), in connection with the proposed acquisition of one hundred percent (100%) of the membership interests in Pinnacle Health Services Group LLC (the "Company," EIN 82-1947632), a Delaware limited liability company taxed as a partnership for federal income tax purposes. Calderwood & Harkness LLP has completed its review of the tax indemnity and escrow provisions set forth in Article IX (Tax Matters) and the tax-specific provisions of Article X (Indemnification) of the Seller Draft of the Agreement and Plan of Merger (the "Merger Agreement") circulated by Whitford & Gaines LLP on March 3, 2024.
As you are aware, the transaction is structured as a reverse merger of Ardent Healthcare Merger Sub LLC, a Delaware limited liability company and wholly owned subsidiary of Ardent Healthcare Intermediate Inc. (the "Blocker"), a Delaware C-corporation, with and into the Company, with the Company surviving as a wholly owned subsidiary of the blocker. The blocker is, in turn, wholly owned by Ardent Healthcare Holdings LLC (the "Holdings LLC"), a Delaware limited liability company taxed as a partnership for federal income tax purposes. The agreed enterprise value is $412,000,000 and the equity value is $339,400,000 (enterprise value minus net debt of $72,600,000). The anticipated signing date is March 15, 2024, with an anticipated closing date of May 31, 2024, subject to satisfaction of all closing conditions, including receipt of all required state regulatory approvals.
Our redline markup focuses on the following core areas: (i) pre-closing tax indemnification scope and mechanics; (ii) tax indemnity escrow establishment, claims procedures, and release; (iii) Straddle Period tax allocation methodology; (iv) tax contest procedures, including control, participation, and settlement rights; (v) survival periods and limitations on tax indemnity claims; and (vi) coordination of the tax indemnity provisions with the general indemnification framework and the representations and warranties insurance policy.
We have endeavored to present our comments in a manner that is comprehensive yet practical, and we believe that the modifications proposed herein reflect market practice for transactions of this type and size in the healthcare services sector. In several instances, we have included explanatory notes (designated "[C&H Comment]") that are intended to facilitate discussion and are not proposed for inclusion in the definitive agreement.
We would appreciate the opportunity to schedule a call among counsel to discuss these comments prior to the next draft exchange. We are available at your convenience during the week of March 11, and we suggest a joint call no later than March 13 in order to allow sufficient time for incorporation of agreed revisions in advance of the target signing date.
We look forward to your response.
Very truly yours,
CALDERWOOD & HARKNESS LLP
Leonard Cross Partner, Tax (212) 555-7840 lcross@calderwoodharkness.com
Robert Jansen Senior Associate, Tax (212) 555-7862 rjansen@calderwoodharkness.com
ARTICLE IX — TAX MATTERS (Redline Markup)
Section 9.1 — Definitions (Tax-Specific)
For purposes of this Article IX and the tax-related provisions of Article X, the following terms shall have the meanings set forth below. Capitalized terms used but not otherwise defined in this Article IX shall have the meanings ascribed to them in Article I (Definitions) of this Agreement.
"Closing Date" means May 31, 2024, or such other date on which the Closing actually occurs in accordance with Section 2.3 of this Agreement. For all purposes of this Article IX, the Closing Date shall be the effective date for the determination of pre-closing and post-closing tax periods, and all references to the Closing Date shall mean the end of the day on such date (i.e., 11:59:59 p.m., Eastern Time, on May 31, 2024), unless the context otherwise requires.
"Pre-Closing Tax Period" means any taxable period ending on or before the Closing Date, including the short taxable period of the Company ending on the Closing Date as a result of the closing of the Company's partnership taxable year under Section 706(c)(1) of the Code with respect to the selling members.
"Post-Closing Tax Period" means any taxable period beginning after the Closing Date.
"Straddle Period" means any taxable period that includes but does not end on the Closing Date. For the avoidance of doubt, a Straddle Period shall include any taxable period of the Company or any of its subsidiaries for which a Tax Return is filed on an annual basis and that encompasses both the pre-closing portion and the post-closing portion of the Closing Date.
"Pre-Closing Taxes" means (a) all Taxes of the Company and its subsidiaries attributable to any Pre-Closing Tax Period, and (b) the portion of any Straddle Period Taxes allocated to the pre-closing portion of such Straddle Period in accordance with Section 9.5 of this Agreement, .
"Tax" or "Taxes" means all federal, state, and local income taxes, franchise taxes, gross receipts taxes, sales and use taxes, employment taxes (including FICA, FUTA, and state unemployment taxes), withholding taxes, real and personal property taxes, excise taxes, ad valorem taxes, value-added taxes, and any other taxes, levies, duties, charges, fees, assessments, or similar governmental charges of any kind whatsoever, in each case including the Philadelphia Business Income & Receipts Tax ("BIRT") applicable to the Company's three (3) Philadelphia clinic locations (located at 1420 Walnut Street, Suite 300; 7401 Ogontz Avenue; and 2015 South Broad Street, Philadelphia, PA 19103, 19138, and 19145, respectively), together with all interest, penalties, additions to tax, and additional amounts imposed with respect thereto, whether disputed or not, and whether imposed by assessment, withholding, or otherwise.
"Tax Return" means any return, declaration, report, claim for refund, information return, or other document (including any related or supporting schedule, statement, or information) filed or required to be filed with any taxing authority in connection with the determination, assessment, collection, or payment of any Tax or the administration of any laws, regulations, or administrative requirements relating to any Tax, including, without limitation, IRS Form 1065 (U.S. Return of Partnership Income), Schedule K-1 (Partner's Share of Income, Deductions, Credits, etc.), Form 8308 (Report of a Sale or Exchange of Certain Partnership Interests), and all corresponding state partnership returns and composite returns filed in Pennsylvania, Virginia, Maryland, North Carolina, and Georgia, together with any amendments thereto.
"Tax Indemnity Escrow Amount" means Four Million One Hundred Twenty Thousand Dollars ($4,120,000), which amount equals one percent (1%) of the Enterprise Value ($412,000,000), to be deposited with the Escrow Agent at Closing in accordance with Section 9.3 of this Agreement.
"General Indemnity Escrow Amount" means Ten Million Three Hundred Thousand Dollars ($10,300,000), which amount equals two and one-half percent (2.5%) of the Enterprise Value ($412,000,000), as more fully described in Article X of this Agreement. This definition is included in this Article IX for coordination purposes only, and the establishment, administration, and release of the General Indemnity Escrow are governed by Article X.
"Escrow Agent" means Ironbridge Trust Company, N.A., a national trust company, with its principal office located at 1201 North Market Street, Wilmington, Delaware 19801.
"Escrow Agreement" means that certain Escrow Agreement, reference number ITC-ESC-2024-05312, dated as of the Closing Date, among the Sellers' Representative, Buyer, and the Escrow Agent, in substantially the form attached hereto as Exhibit G, governing the establishment, maintenance, investment, disbursement, and termination of the Tax Indemnity Escrow and the General Indemnity Escrow.
"Permitted Tax Election" means (a) the election under Section 754 of the Code (and any corresponding elections under applicable state or local tax law) to be filed with the Company's partnership tax return (IRS Form 1065) for the taxable year ending December 31, 2024, and (b) any election under Section 83(b) of the Code made by a rollover participant (Dr. Raymond Carvallo, Dr. Nadia Ostrowski, or Jonathan Farnsworth) with respect to such participant's Class B Units in Ardent Healthcare Holdings LLC received in connection with the transactions contemplated by this Agreement.
"R&W Insurance Policy" means that certain buyer-side representations and warranties insurance policy, Policy No. CIP-RWI-2024-03821, issued by Continental Indemnity Partners Ltd. (a Bermuda-domiciled insurer), with a policy limit of Twenty Million Seven Hundred Fifty Thousand Dollars ($20,750,000) and a retention amount of One Million Dollars ($1,000,000), as placed through Bellhaven Risk Advisors LLC.
[C&H Comment: Calderwood & Harkness has proposed adding definitions for "Tax Benefit," "Tax Indemnity Claim," "Sellers' Representative" (as used in this Article IX), and "Tax Contest" to clarify the scope of the tax-specific provisions and to eliminate any ambiguity that might arise from relying solely on the general definitions in Article I. We believe these additional definitions are consistent with market practice and will reduce the potential for disputes. We note that the Sellers' Representative definition in Article I applies generally; the repetition here is intended to confirm that the Sellers' Representative has authority over Tax-specific matters, including Tax Contests.]
Section 9.2 — Tax Indemnification by Sellers
(a) Scope of Seller Tax Indemnity. From and after the Closing, the Sellers (including Dr. Raymond Carvallo, Dr. Nadia Ostrowski, Jonathan Farnsworth, and the fourteen (14) minority physician-investors identified on Schedule 9.2(a) hereto) shall, , indemnify, defend, and hold harmless the Buyer, Ardent Healthcare Holdings LLC, Ardent Healthcare Intermediate Inc. (the blocker), the Company, and each of their respective officers, directors, managers, members, partners, employees, agents, successors, and assigns (collectively, the "Buyer Indemnified Parties") from and against any and all Losses (as defined in Section 10.1) arising out of, relating to, or resulting from:
(i) all Pre-Closing Taxes of the Company and its subsidiaries (including the portion of any Straddle Period Taxes allocated to the pre-closing portion in accordance with Section 9.5);
(ii) all Taxes arising from, or attributable to, any breach or inaccuracy of any of the tax representations and warranties set forth in Section 4.16 (Tax Matters) of this Agreement;
(iii) all Taxes arising from transactions, actions, elections, or events undertaken by or on behalf of the Company or any of its subsidiaries on the Closing Date but prior to the Closing (other than transactions or actions taken in the ordinary course of business consistent with past practice ), ;
(iv) any Transfer Taxes allocated to the Sellers under Section 9.7 of this Agreement;
(v) all Taxes of any person (other than the Company) for which the Company or any of its subsidiaries is or becomes liable by reason of (A) being a member of an affiliated, consolidated, combined, or unitary group for Tax purposes at any time on or prior to the Closing Date, (B) any tax sharing, tax allocation, tax indemnity, or similar agreement or arrangement (whether written or oral) entered into prior to the Closing Date, or (C) the operation of Treasury Regulation Section 1.1502-6 or any analogous or similar state, local, or non-U.S. law or regulation;
[C&H Comment: We have expanded clause (iii) to expressly cover any pre-closing reorganization steps or internal restructurings that may have been undertaken by the Company or the Sellers in connection with the transaction. This is particularly important given our understanding that the Sellers may be considering certain pre-closing distributions or member redemptions, and we want to ensure that any Tax consequences arising from such actions are clearly allocated to the Sellers. We have also added clause (vi) to address pre-closing state withholding obligations, which is a common area of exposure for healthcare services businesses with significant W-2 workforces. The Company has approximately 1,620 employees (including 142 employed physicians) across five states, and any pre-closing withholding deficiencies should be the responsibility of the Sellers.]
(b) Buyer Tax Indemnity. From and after the Closing, Buyer shall indemnify, defend, and hold harmless the Sellers, the Sellers' Representative, and each of their respective heirs, executors, administrators, successors, and assigns (collectively, the "Seller Indemnified Parties") from and against any and all Losses arising out of, relating to, or resulting from:
(i) all Post-Closing Taxes of the Company and its subsidiaries;
(ii) all Taxes arising from, or attributable to, any breach of Buyer's tax covenants set forth in Section 9.6(b) of this Agreement;
(iii) all Taxes resulting from or attributable to the Section 754 election made by the Company or the Section 743(b) basis adjustment of approximately Two Hundred Twenty-Four Million Four Hundred Thousand Dollars ($224,400,000) arising from the transactions contemplated by this Agreement (calculated as the difference between the Enterprise Value of $412,000,000 and the Company's estimated aggregate inside basis of $187,600,000 in its assets as of the Closing Date);
(iv) all Taxes arising from the making of any Permitted Tax Election
[C&H Comment: We have proposed adding clause (v) to make clear that Buyer bears responsibility for any tax consequences arising from post-closing structural changes. While we do not anticipate that Buyer will seek to change the Company's partnership tax classification in the near term, this provision provides appropriate protection for the Sellers in the event of a future restructuring. This is consistent with the deal structure in which the Company will continue to be treated as a partnership for federal income tax purposes, with the blocker (Ardent Healthcare Intermediate Inc.) serving as the C-corporation tax blocker for Buyer's fund investors.]
(c) Exclusions. Notwithstanding anything to the contrary in this Section 9.2, no indemnification shall be required under Section 9.2(a) with respect to:
(i) Taxes to the extent such Taxes have been specifically reflected, reserved for, or otherwise taken into account as a liability in the calculation of Net Debt (as finally determined in accordance with Section 2.6, currently estimated at $72,600,000) or in the calculation of Working Capital (target Working Capital: $18,200,000; estimated closing Working Capital: $19,050,000), as the case may be, in each case as set forth in the Closing Statement;
(ii) Taxes arising from or attributable to the Earnout Payments (consisting of Period 1 payments of up to $15,000,000 and Period 2 payments of up to $20,000,000, with a maximum aggregate of $35,000,000), which are addressed separately under Section 9.12 (Tax Treatment of Earnout Payments) and the Earnout Tax Characterization provisions set forth in Section 2.8 of this Agreement; and
(iii) Taxes for which Buyer has received indemnification or payment from any third party, including (without limitation) under the R&W Insurance Policy (Policy No. CIP-RWI-2024-03821), to the extent of such indemnification or payment actually received by Buyer, it being the intent of the parties that no double recovery shall be permitted with respect to any single Tax Indemnity Claim or any other indemnifiable Tax Loss.
For the avoidance of doubt, the exclusion in clause (iii) above shall apply on a dollar-for-dollar basis and shall reduce the amount of the applicable Tax Indemnity Claim only to the extent of actual cash payments or credits received by or on behalf of a Buyer Indemnified Party with respect to the same underlying Tax matter giving rise to the Tax Indemnity Claim.
(d) Pro Rata Allocation Among Sellers.
[C&H Comment: Calderwood & Harkness strongly recommends switching from "joint and several" to "several and pro rata" liability for Tax Indemnity Claims. This is consistent with the several liability structure applicable to general indemnity claims under Article X and reflects market practice in sponsor-led acquisitions where the selling group includes both founders and minority investors. Joint and several liability would expose the majority sellers (Carvallo and Ostrowski) to disproportionate risk for Tax obligations that may be attributable to the Company as a whole or to the actions of minority sellers. The pro rata approach aligns each Seller's exposure with such Seller's economic interest in the transaction. We note that the rollover participants' ability to satisfy indemnity obligations through offset against their Class B Units provides meaningful additional security for Buyer without imposing unlimited personal liability on any individual Seller.]
Section 9.3 — Tax Indemnity Escrow
(a) Establishment. At the Closing on May 31, 2024, the sum of Four Million One Hundred Twenty Thousand Dollars ($4,120,000) (the "Tax Indemnity Escrow Amount") shall be deposited with Ironbridge Trust Company, N.A. (the "Escrow Agent") into a segregated tax indemnity escrow account (the "Tax Indemnity Escrow Account") pursuant to and in accordance with the terms and conditions of the Escrow Agreement (Ref. ITC-ESC-2024-05312). The Tax Indemnity Escrow Amount equals one percent (1%) of the Enterprise Value of Four Hundred Twelve Million Dollars ($412,000,000). The Tax Indemnity Escrow Amount shall be funded from the Sellers' portion of the closing cash consideration, with each Seller contributing to the Tax Indemnity Escrow in proportion to such Seller's Pro Rata Share (as set forth in Section 9.2(d)). The Tax Indemnity Escrow Account shall be maintained as a separate escrow account, distinct from the General Indemnity Escrow Account holding the General Indemnity Escrow Amount of Ten Million Three Hundred Thousand Dollars ($10,300,000) (equal to 2.5% of the Enterprise Value), and funds in the Tax Indemnity Escrow Account shall be available solely for the satisfaction of Tax Indemnity Claims in accordance with this Section 9.3.
(b) Investment and Earnings. The Escrow Agent shall invest and reinvest the Tax Indemnity Escrow Amount in short-term obligations of the United States government (including United States Treasury bills with maturities of ninety (90) days or less) or money market funds invested exclusively in such obligations, in each case at the direction of the Escrow Agent and in accordance with the investment provisions of the Escrow Agreement. All interest, dividends, and other earnings on the Tax Indemnity Escrow Amount (collectively, "Escrow Earnings") shall accrue for the benefit of the Sellers and, upon release of the Tax Indemnity Escrow (or any portion thereof) to the Sellers in accordance with Section 9.3(d), shall be distributed to the Sellers pro rata in accordance with each Seller's Pro Rata Share.
[C&H Comment: We have proposed adding specific language confirming that the Sellers are treated as the owners of the escrow funds for federal income tax purposes, consistent with Revenue Procedure 84-58. This is the standard treatment for escrow arrangements in M&A transactions and ensures that the Sellers, not Buyer, bear the tax burden on escrow earnings. The provision also requires consistent reporting by all parties and the Escrow Agent.]
(c) Claims Against Tax Indemnity Escrow. Claims against the Tax Indemnity Escrow shall be submitted and resolved as follows:
(i) Submission of Claims. Buyer (or any Buyer Indemnified Party) may submit a Tax Indemnity Claim to the Escrow Agent by delivering written notice thereof (a "Tax Indemnity Claim Notice") to the Escrow Agent, with a simultaneous copy to the Sellers' Representative. Each Tax Indemnity Claim Notice shall include: (A) a reasonably detailed description of the Tax matter giving rise to the claim, including the nature of the Tax, the applicable taxing authority, and the relevant Tax period(s); (B) the aggregate amount claimed (the "Claimed Amount"); (C) a statement of the factual and legal basis for the claim, including references to the applicable provisions of this Agreement; and (D) copies of any notices, assessments, correspondence, or other documents received from the applicable taxing authority in connection with the Tax matter, to the extent then available.
(ii) Dispute Period. The Sellers' Representative shall have thirty (30) business days following receipt of a Tax Indemnity Claim Notice (the "Tax Claim Dispute Period") to deliver written notice to Buyer and the Escrow Agent disputing all or any portion of the Claimed Amount (a "Tax Claim Dispute Notice"). Any Tax Claim Dispute Notice shall set forth in reasonable detail the basis for the Sellers' Representative's objection, including the amount (if any) that the Sellers' Representative concedes is payable and the amount that the Sellers' Representative disputes. If the Sellers' Representative does not deliver a Tax Claim Dispute Notice within the Tax Claim Dispute Period, the Claimed Amount shall be deemed undisputed and the Escrow Agent shall promptly (and in any event within five (5) business days) release funds from the Tax Indemnity Escrow to Buyer in the full Claimed Amount.
(iii) Resolution of Disputes. If the Sellers' Representative delivers a Tax Claim Dispute Notice within the Tax Claim Dispute Period, Buyer and the Sellers' Representative shall negotiate in good faith for a period of sixty (60) business days following delivery of the Tax Claim Dispute Notice to resolve the dispute (the "Tax Claim Resolution Period"). If the parties reach agreement during the Tax Claim Resolution Period, the Escrow Agent shall promptly release funds from the Tax Indemnity Escrow to Buyer in the agreed amount. Any amount conceded by the Sellers' Representative in the Tax Claim Dispute Notice shall be released by the Escrow Agent to Buyer upon receipt of joint written instructions from Buyer and the Sellers' Representative (or, if no concession is made, upon resolution of the dispute). If the dispute is not resolved within the Tax Claim Resolution Period, the matter shall be submitted to the dispute resolution mechanism set forth in Section 9.10 of this Agreement.
(iv) Escrow Agent Liability. The Escrow Agent shall act solely in accordance with the terms of the Escrow Agreement and shall not be required to determine the merits of any Tax Indemnity Claim or Tax Claim Dispute. The Escrow Agent shall release funds from the Tax Indemnity Escrow only upon receipt of (A) joint written instructions signed by both Buyer and the Sellers' Representative, (B) a final, non-appealable order of a court of competent jurisdiction, or (C) a written determination of the Tax Referee pursuant to Section 9.10, and shall otherwise hold such funds pending resolution.
(d) Release of Tax Indemnity Escrow.
[C&H Comment: Calderwood & Harkness proposes a partial release mechanism that is well-aligned with market practice in healthcare platform acquisitions. The 50% release at the one-year anniversary provides meaningful liquidity to the Sellers while maintaining adequate reserves for potential Tax claims. We note that the Tax Indemnity Survival Period (Section 9.8) extends for 60 days beyond the applicable statute of limitations, which for federal purposes is typically three (3) years from the later of the due date or filing date of the applicable return. Thus, the final release of the Tax Indemnity Escrow may not occur until mid-to-late 2028 at the earliest. A partial release at the one-year anniversary strikes an appropriate balance. We anticipate that Sellers' counsel may seek a larger initial release (e.g., 60% or 75%); we are open to discussion on this point provided that the reserve mechanics for pending claims are preserved.]
(e) Exclusive Remedy / Relationship to General Indemnity. The Tax Indemnity Escrow shall be the primary source for the satisfaction of Tax Indemnity Claims. If the Tax Indemnity Escrow is insufficient to satisfy any Tax Indemnity Claim (including as a result of partial or full exhaustion of the Tax Indemnity Escrow through prior claims), Buyer may seek recourse against the General Indemnity Escrow ($10,300,000) for the unsatisfied portion of such Tax Indemnity Claim, subject to the aggregate indemnity cap set forth in Section 9.15 (and Section 10.4, as applicable).
[C&H Comment: We believe strongly that Tax Indemnity Claims should be treated as "first dollar" claims without any basket, deductible, or de minimis threshold. Pre-closing tax exposures in a five-state pass-through entity are inherently difficult to quantify, and the application of a general indemnity basket (typically $1.0M or more in transactions of this size) could effectively insulate the Sellers from liability for material tax deficiencies. This is particularly important given the Company's status as a partnership with pass-through reporting obligations to its members, the complexity of the Company's five-state operations with varying apportionment methodologies, and the potential for employment tax and worker classification issues affecting 1,620 employees. The "first dollar" approach is consistent with the prevailing market standard in healthcare services transactions, as reflected in recent ABA Private Target M&A Deal Points Studies.]
Section 9.4 — Pre-Closing Tax Returns
(a) Preparation. The Sellers' Representative shall prepare, or cause to be prepared, all Tax Returns of the Company and its subsidiaries for Pre-Closing Tax Periods that are required to be filed after the Closing Date (collectively, "Pre-Closing Returns"), including (without limitation) the Company's IRS Form 1065 and related Schedules K-1 for the short taxable period ending on the Closing Date, and all corresponding state partnership returns and composite returns required to be filed in Pennsylvania, Virginia, Maryland, North Carolina, and Georgia. All Pre-Closing Returns shall be prepared in a manner consistent with past practice of the Company (including the positions and methodologies employed by Brewer Stanfield & Associates LLP in preparing the Company's Tax Returns for prior taxable periods), unless otherwise required by a change in applicable law occurring after the date hereof or unless a different position is required by this Agreement (including, without limitation, the Straddle Period allocation methodology set forth in Section 9.5). The Sellers' Representative shall engage Brewer Stanfield & Associates LLP, 1600 Arch Street, Suite 1200, Philadelphia, Pennsylvania 19103 (the Company's historical accounting firm), for the preparation of all Pre-Closing Returns, unless Buyer and the Sellers' Representative mutually agree in writing on an alternative preparer. All costs and expenses of preparing the Pre-Closing Returns shall be borne by the Sellers.
(b) Review and Approval. The Sellers' Representative shall submit drafts of all Pre-Closing Returns to Buyer (with a copy to Caldwell Pratt & Moorehouse LLP, Buyer's accounting firm, 277 Park Avenue, 29th Floor, New York, NY 10172) at least thirty (30) days before the applicable due date (including any extensions obtained in accordance with this Section 9.4(b)). Buyer shall have fifteen (15) days following receipt of each such draft Pre-Closing Return (the "Return Review Period") to review the draft and deliver written comments or objections to the Sellers' Representative. If Buyer does not deliver written comments or objections within the Return Review Period, Buyer shall be deemed to have approved the draft Pre-Closing Return as submitted. If Buyer delivers written comments or objections within the Return Review Period, the Sellers' Representative and Buyer shall negotiate in good faith to resolve any disagreements. If the Sellers' Representative and Buyer are unable to resolve any disagreement within ten (10) days following delivery of Buyer's comments, the disputed items shall be submitted to and resolved by an independent nationally recognized accounting firm mutually agreed upon by Buyer and the Sellers' Representative (the "Tax Referee"), in accordance with Section 9.10 of this Agreement. The Pre-Closing Return shall be filed as agreed by the parties (or, if applicable, as determined by the Tax Referee), and the Sellers' Representative shall cause such Pre-Closing Return to be timely filed (taking into account any available extensions).
[C&H Comment: We have proposed adding a requirement that the final Pre-Closing Tax Return be consistent with the Straddle Period allocation methodology and the Section 754 election. This ensures that the Company's partnership return for the year including the Closing Date reflects the agreed-upon allocation between pre-closing and post-closing periods and includes the Section 754 election that is critical to Buyer's step-up in the tax basis of the Company's assets.]
(c) Short-Period Returns. The Company's partnership taxable year shall close as of the Closing Date (May 31, 2024) with respect to the selling members in accordance with Section 706(c)(1) of the Code. The Sellers' Representative shall cause the Company (through Brewer Stanfield & Associates LLP or such other preparer as may be agreed upon pursuant to Section 9.4(a)) to prepare and issue Schedule K-1s (IRS Form 1065, Schedule K-1) for the short taxable period ending May 31, 2024 to all pre-closing members, including Dr. Raymond Carvallo, Dr. Nadia Ostrowski, Jonathan Farnsworth, and each of the fourteen (14) minority physician-investors identified on Schedule 9.2(d). Such Schedules K-1 shall reflect each such member's allocable share of the Company's income, gain, loss, deduction, and credit for the short period, determined in accordance with the Company's existing allocation provisions under its Amended and Restated Limited Liability Company Agreement dated as of January 1, 2019, as amended. In addition, the Sellers' Representative shall cause the Company to file IRS Form 8308 (Report of a Sale or Exchange of Certain Partnership Interests) with the Company's IRS Form 1065 for the taxable year that includes the Closing Date, reporting the sale or exchange of the membership interests in the Company by each selling member in connection with the transactions contemplated by this Agreement.
Section 9.5 — Straddle Period Tax Allocation
(a) Closing of the Books Method. For all income Taxes (including, without limitation, federal income tax, state income and franchise taxes, gross receipts taxes, and the Philadelphia Business Income & Receipts Tax), the portion of any Straddle Period Taxes that is allocable to the pre-closing portion of the Straddle Period shall be determined based on an interim closing of the books of the Company and its subsidiaries as of the end of the day on the Closing Date (May 31, 2024) (the "Closing of the Books Method"). Under this method, the Company shall be treated as if its taxable year ended at the close of business on the Closing Date, and items of income, gain, loss, deduction, and credit shall be allocated to the pre-closing portion based on the actual results of operations through such date.
[C&H Comment: Calderwood & Harkness strongly recommends the Closing of the Books Method rather than a pro rata (per diem) allocation for all income-based Taxes. The Closing of the Books Method provides the most accurate reflection of the economic income and deductions attributable to the pre- and post-closing periods, respectively, and avoids the distortions inherent in a per diem approach. This is particularly important for the Company given: (i) the Company's operations across five states with varying apportionment methodologies; (ii) the seasonal revenue patterns typical of urgent care clinic operations (historically, the Company's revenues are higher in Q4 and Q1 and lower in Q2 and Q3, which would result in a per diem approach potentially overallocating income to the pre-closing period in a May 31 closing); and (iii) the potential for significant one-time items (e.g., transaction bonuses, accelerated depreciation) occurring on or around the Closing Date. While the per diem method is simpler, it does not accurately reflect the economic realities and could result in inequitable allocation of Tax liabilities. We note that the Closing of the Books Method is required under Section 706(c)(1) of the Code for partnership returns with respect to a selling partner, and we believe it is appropriate to apply a consistent methodology for all income-based Taxes.]
(b) Per Diem Method for Certain Taxes. For real property taxes, personal property taxes, and other non-income-based Taxes imposed on a periodic basis (including, without limitation, annual business license taxes, occupancy taxes, and similar ad valorem or flat-rate levies), the portion of any Straddle Period Taxes allocable to the pre-closing portion of the Straddle Period shall be determined on a per diem basis, by multiplying the total amount of such Tax for the full Straddle Period by a fraction, the numerator of which is the number of calendar days in the Straddle Period ending on and including the Closing Date (May 31, 2024) and the denominator of which is the total number of calendar days in the full Straddle Period. The remainder of such Tax shall be allocated to the post-closing portion of the Straddle Period.
(c) State-Specific Allocation Rules. In addition to and in accordance with the general allocation principles set forth in Sections 9.5(a) and 9.5(b), the following state-specific allocation rules shall apply:
(i) Pennsylvania. Straddle Period income Taxes shall be allocated based on the Closing of the Books Method. The applicable state corporate net income tax rate for the 2024 taxable year is 8.99%. The Philadelphia Business Income & Receipts Tax (BIRT) shall be allocated based on the gross receipts and net income attributable to the pre-closing portion of the Straddle Period for each of the Company's three (3) Philadelphia clinic locations (1420 Walnut Street, Suite 300; 7401 Ogontz Avenue; and 2015 South Broad Street), determined by reference to the actual operations of such clinics through the Closing Date.
(ii) Virginia. Straddle Period income Taxes shall be allocated based on the Closing of the Books Method. The applicable state income tax rate is 6.0%. The Company currently operates twelve (12) facilities in the Commonwealth of Virginia, and its Virginia-source income shall be apportioned in accordance with the single-sales-factor formula under Virginia Code Section 58.1-408.
(iii) Maryland. Straddle Period income Taxes shall be allocated based on the Closing of the Books Method. The applicable state income tax rate is 8.25%. The Company currently operates eight (8) facilities in the State of Maryland, and its Maryland-source income shall be apportioned in accordance with the three-factor formula (double-weighted sales) under Maryland Tax-General Code Section 10-402.
(iv) North Carolina. Straddle Period income Taxes shall be allocated based on the Closing of the Books Method. The applicable state income tax rate is 2.5%. The North Carolina franchise tax, which is imposed on an annual basis, shall be allocated on a per diem basis in accordance with Section 9.5(b). The Company currently operates three (3) facilities in the State of North Carolina, and its North Carolina-source income shall be apportioned in accordance with the three-factor formula (double-weighted sales) under N.C. Gen. Stat. Section 105-130.4.
(v) Georgia. Straddle Period income Taxes shall be allocated based on the Closing of the Books Method. The applicable state income tax rate is 5.75%. The Company currently operates seven (7) facilities in the State of Georgia, and its Georgia-source income shall be apportioned in accordance with the single-sales-factor formula under O.C.G.A. Section 48-7-31.
[C&H Comment: We have proposed adding clause (vi) to eliminate any potential confusion between the blended rate used for TRA computations and the state-specific rates used for Straddle Period allocation. The blended rate is a useful simplifying assumption for modeling TRA payments over the multi-year amortization period of the Section 743(b) step-up, but it would be inappropriate to apply such a blended rate for the purpose of allocating actual Tax liabilities between the pre- and post-closing periods.]
(d) Apportionment. Pre-closing apportionment of the Company's income among the states of operation shall be determined using the apportionment formulas and factors employed by the Company in its historical Tax filings, as follows: (i) single-sales-factor apportionment in Pennsylvania (pursuant to 72 P.S. Section 7401), Virginia, and Georgia; and (ii) three-factor apportionment with double-weighted sales in Maryland and North Carolina. The Sellers' Representative shall cause all Pre-Closing Returns (and the pre-closing portion of any Straddle Period returns) to be prepared using these apportionment methodologies, consistent with the Company's past practice, unless a different methodology is required by a change in applicable law after the date hereof or is mandated by a taxing authority in connection with a Tax Contest.
Section 9.6 — Tax Covenants
(a) Pre-Closing Covenants (Seller Obligations). From the date of this Agreement until the Closing Date, except as expressly contemplated by this Agreement (including the Permitted Tax Elections) or as consented to in writing by Buyer (which consent shall not be unreasonably withheld, conditioned, or delayed), the Company shall not, and the Sellers shall cause the Company not to:
(i) make, change, or revoke any Tax election (other than a Permitted Tax Election);
(ii) file any amended Tax Return or make any claim for a Tax refund with respect to any Pre-Closing Tax Period or any Straddle Period;
(iii) settle, compromise, or concede any Tax claim, assessment, or proposed adjustment;
(iv) change any accounting method or accounting period for Tax purposes;
(v) enter into any closing agreement or similar agreement with any taxing authority;
(vi) surrender, waive, or allow to lapse any right to claim a Tax refund, credit, or offset;
(vii) incur any Tax liability outside the ordinary course of business;
(viii) enter into any Tax sharing, Tax allocation, or Tax indemnity agreement with any person (other than this Agreement); or
(ix) take any action, or fail to take any action, that could reasonably be expected to result in a material increase in the Tax liability of the Company for any Pre-Closing Tax Period or any Straddle Period.
The Company shall timely file (or cause to be timely filed) all Tax Returns that are required to be filed on or prior to the Closing Date and shall timely pay (or cause to be timely paid) all Taxes shown as due on such Tax Returns. In addition, each Seller who is a nonresident individual (as determined under applicable state law) shall comply with all nonresident withholding and reporting obligations applicable to such Seller in the states of Virginia, Maryland, and Georgia in connection with the sale of such Seller's membership interests in the Company pursuant to this Agreement.
(b) Post-Closing Covenants (Buyer Obligations). From and after the Closing Date:
(i) Buyer shall cause the Company to make a timely and valid election under Section 754 of the Code (and any corresponding elections under applicable state or local tax law) with the Company's IRS Form 1065 for the taxable year ending December 31, 2024. This election is a Permitted Tax Election and shall result in a basis adjustment under Section 743(b) of the Code in favor of Buyer (or the blocker) equal to approximately Two Hundred Twenty-Four Million Four Hundred Thousand Dollars ($224,400,000), which amount represents the excess of the purchase price allocable to the membership interests acquired over the Buyer's proportionate share of the Company's inside basis in its assets.
(ii) Buyer shall not amend, supplement, or cause to be amended or supplemented any Tax Return of the Company for any Pre-Closing Tax Period or any Straddle Period without the prior written consent of the Sellers' Representative, which consent shall not be unreasonably withheld, conditioned, or delayed. The Sellers' Representative shall be deemed to have consented to any amendment that is required by a final determination (as defined in Section 1313(a) of the Code) or by a written directive of the Tax Referee pursuant to Section 9.10.
(iii) Buyer shall not cause or permit the Company to make a check-the-box election (or any other election or filing) under Treasury Regulation Section 301.7701-3 to change the Company's classification for federal income tax purposes from a partnership to a corporation (or disregarded entity) for any taxable period that could retroactively affect the Tax treatment of the Pre-Closing Tax Period or any Straddle Period, or that could adversely affect the Tax position of any Seller with respect to any Pre-Closing Tax Period.
(iv) Buyer shall cooperate with the Sellers' Representative in the preparation and filing of all Pre-Closing Returns and all Straddle Period Tax Returns, including by providing the Sellers' Representative (and Brewer Stanfield & Associates LLP, as applicable) with reasonable access to the books, records, Tax Returns, workpapers, and other documents of the Company and its subsidiaries that are necessary or useful for the preparation and filing of such returns.
[C&H Comment: We have proposed adding clause (v) to require preservation of Tax records for at least seven years. This is essential to ensure that the Sellers' Representative has access to the records necessary to defend any Tax Contest and to prepare Pre-Closing Returns. Seven years exceeds the standard federal statute of limitations (three years) and the extended statute of limitations for substantial omissions (six years), providing an appropriate buffer.]
Section 9.7 — Transfer Taxes
All transfer taxes, documentary stamp taxes, recording taxes, and similar Taxes and fees (collectively, "Transfer Taxes") imposed on or in connection with the transactions contemplated by this Agreement shall be borne fifty percent (50%) by Buyer and fifty percent (50%) by the Sellers. The party that is required by applicable law to file any Tax Return or other documentation with respect to any Transfer Tax shall be responsible for timely filing such return or documentation, and the other party shall cooperate in connection therewith, including by providing any necessary information, certificates, or affidavits.
Transfer Taxes include, without limitation, any Pennsylvania realty transfer tax (if applicable to any real property interests held by the Company or any of its subsidiaries), Delaware limited liability company transfer taxes (if any), and any similar Taxes imposed by the states of Virginia, Maryland, North Carolina, or Georgia.
[C&H Comment: We recommend that Buyer's due diligence team confirm the nature of the Company's real property interests at each of its 42 facilities. If any facilities are owned (as opposed to leased), there may be realty transfer tax exposure in Pennsylvania (at a rate of up to 4% in Philadelphia) and potentially in other states. We understand that the majority of the Company's clinic locations are leased, but we have not yet received a complete real property schedule. We also note that certain states (including Pennsylvania) have enacted "entity-level" realty transfer tax rules that apply to changes in controlling interests in entities holding real property, even where the transaction is structured as a membership interest transfer rather than an asset transfer. These rules must be carefully analyzed in light of the specific facts of this transaction.]
Section 9.8 — Survival of Tax Representations and Indemnity
(a) Tax Representations Survival Period. The representations and warranties of the Sellers set forth in Section 4.16 (Tax Matters) of this Agreement (the "Tax Representations") shall survive the Closing until the date that is sixty (60) days after the expiration of the applicable statute of limitations (including any waivers or extensions thereof, whether voluntary or by operation of law) for the assessment or collection of the relevant Tax (the "Tax Representations Survival Period"). For reference, the applicable statutes of limitations (under current law, absent fraud or failure to file) are as follows:
(i) Federal: Three (3) years from the later of the due date (including extensions) or the actual filing date of the applicable Tax Return; provided, however, that in the case of a substantial omission of gross income (exceeding 25% of the gross income reported on the return), the statute of limitations shall be six (6) years from such later date, in accordance with Section 6501(e) of the Code.
(ii) Pennsylvania: Three (3) years from the date the Tax Return was filed (or the due date, if filed before the due date), in accordance with 72 P.S. Section 7407.1.
(iii) Virginia: Three (3) years from the later of the due date or the filing date, in accordance with Virginia Code Section 58.1-104.
(iv) Maryland: Three (3) years from the date the return was filed, in accordance with Maryland Tax-General Code Section 13-1101.
(v) North Carolina: Three (3) years from the date the return was filed or the date the tax was paid, whichever is later, in accordance with N.C. Gen. Stat. Section 105-241.6.
(vi) Georgia: Three (3) years from the date the return was filed or the due date of the return, whichever is later, in accordance with O.C.G.A. Section 48-2-49.
In each case, the applicable statute of limitations may be extended by agreement between the Company (or the Sellers' Representative, as applicable) and the relevant taxing authority, or by operation of law (including, without limitation, in cases of fraud, willful evasion, or failure to file a required Tax Return, in which cases the statute of limitations may be unlimited or extended under applicable law).
(b) Tax Indemnity Survival Period. The obligation of the Sellers to indemnify the Buyer Indemnified Parties under Section 9.2(a) of this Agreement (the "Tax Indemnity") shall survive for the full duration of the Tax Representations Survival Period (the "Tax Indemnity Survival Period").
(d) Contrast with General Indemnity Survival Period. For the avoidance of doubt, the Tax Representations Survival Period and the Tax Indemnity Survival Period are intentionally longer than the general indemnity survival period of eighteen (18) months from the Closing Date applicable to general representations and warranties under Section 10.3 of this Agreement. This extended survival period reflects the longer statutes of limitations applicable to Tax matters and the parties' recognition that Tax audits and assessments may not be initiated or concluded within the eighteen-month general survival period. Accordingly, the release schedule for the General Indemnity Escrow ($10,300,000), which is driven by the general survival period under Section 10.3, shall be independent of, and shall not affect, the release schedule for the Tax Indemnity Escrow ($4,120,000), which is driven by the longer Tax Indemnity Survival Period under this Section 9.8.
[C&H Comment: The extended survival period for Tax indemnity matters is critical to Buyer's protection and reflects the fundamental difference between the general indemnity regime (which typically expires 18 months after closing) and the Tax indemnity regime (which must account for the possibility of Tax assessments arising years after closing). We have also proposed an unlimited survival period for fraud-related claims, which is consistent with the approach taken in the general indemnity provisions (Section 10.3(b)) and with prevailing market practice. The specific provision for Employment Tax Matters reflects the heightened risk profile associated with the Company's large workforce, particularly in the healthcare services industry where worker classification issues (e.g., physician independent contractor arrangements) are a frequent area of IRS and state audit activity.]
Section 9.9 — Tax Contest Procedures
(a) Notice of Tax Contest. If any taxing authority asserts a claim, issues a notice of deficiency, proposed assessment, or similar notice, or commences an audit, examination, investigation, or other proceeding with respect to any Taxes of the Company or any of its subsidiaries for any Pre-Closing Tax Period or any Straddle Period (each, a "Tax Contest"), Buyer shall promptly (and in any event within fifteen (15) business days following Buyer's receipt of written notice of such Tax Contest) notify the Sellers' Representative in writing of such Tax Contest (a "Tax Contest Notice"). The Tax Contest Notice shall include a copy of the notice or correspondence received from the applicable taxing authority and a brief summary of the Tax matter at issue, the applicable Tax period, and the amount of Tax in controversy (if known or reasonably estimable).
(b) Control of Tax Contests.
(i) Pre-Closing Tax Periods. The Sellers' Representative shall have the right (but not the obligation) to control the conduct and defense of any Tax Contest relating solely to a Pre-Closing Tax Period, at the Sellers' sole cost and expense, using counsel of the Sellers' Representative's choosing (which is expected to be Patricia Engelman of Whitford & Gaines LLP, or such other counsel as the Sellers' Representative may select).
(ii) Straddle Periods. Buyer shall control the conduct and defense of any Tax Contest relating to a Straddle Period, at its own cost and expense. Buyer shall keep the Sellers' Representative reasonably informed of the status and material developments of any such Tax Contest, and shall not settle or compromise any Straddle Period Tax Contest without the prior written consent of the Sellers' Representative, which consent shall not be unreasonably withheld, conditioned, or delayed.
(iii) Post-Closing Tax Periods. Buyer shall have sole and exclusive control over any Tax Contest relating solely to a Post-Closing Tax Period, at its sole cost and expense, without obligation to consult with or obtain the consent of the Sellers' Representative, unless and to the extent such Tax Contest involves or could reasonably be expected to affect a position that was also taken on a Pre-Closing Return or a Straddle Period return, in which case Buyer shall provide reasonable prior notice to the Sellers' Representative and shall consider in good faith any comments of the Sellers' Representative relating to the position at issue.
[C&H Comment: We have proposed significant additions to the Sellers' Representative's control rights for Pre-Closing Tax Period contests to protect Buyer's interests. While it is appropriate for the Sellers' Representative to control a contest that relates solely to a pre-closing period (since the Sellers bear the economic burden of any resulting Tax liability), Buyer must have the right to participate and to consent to settlements that could have downstream consequences. The Section 743(b) basis adjustment of $224.4M is the single most significant tax benefit to Buyer from this transaction, generating estimated annual amortization deductions of approximately $20.0M and estimated annual tax savings of approximately $5.0M. Any adjustment to the purchase price or inside basis as a result of a Tax Contest settlement could directly reduce this step-up and the corresponding TRA payments. Accordingly, Buyer's consent right for settlements that could affect the 743(b) calculation is not a negotiable point.]
(c) Settlement Restrictions. No Tax Contest may be settled, compromised, or conceded by either party without the prior written consent of both the Sellers' Representative and Buyer (each acting reasonably and in good faith) if any of the following conditions is satisfied:
(i) the aggregate amount of the proposed settlement or compromise (including any Tax, interest, penalties, and additions to tax) exceeds ;
(ii) the settlement or compromise could reasonably be expected to create a precedent, establish a binding position, or result in an adjustment that affects the computation or reporting of Taxes for any Post-Closing Tax Period; or
(iii) the settlement or compromise could reasonably be expected to affect the computation of the Section 743(b) basis adjustment ($224,400,000), the amortization schedule thereunder (estimated at $20,040,000 per year over approximately 11.2 years), or the Tax Receivable Agreement payments under Section 9.16 of this Agreement (estimated at $4,260,000 per year).
[C&H Comment: We have proposed a $250,000 threshold for settlement consent, which we believe is appropriate given the size and complexity of the transaction. We anticipate that Sellers' counsel may propose a higher threshold (e.g., $500,000 or $1,000,000), and we are open to discussion on this point. However, we believe that the settlement consent rights in clauses (ii) and (iii) should apply without regard to any dollar threshold, as the potential adverse consequences to Buyer from a post-closing precedent or a reduction in the 743(b) step-up could be far larger than any individual settlement amount.]
(d) Cooperation. Each party shall (and shall cause its respective affiliates to) cooperate fully with the other party in connection with any Tax Contest, including by:
(i) providing reasonable access to books, records, workpapers, Tax Returns, correspondence, and other documents (including electronic records) in the possession or control of such party or its affiliates, to the extent relevant to the Tax Contest;
(ii) making available the employees, officers, accountants, and other personnel of such party and its affiliates as may be reasonably necessary for the preparation and prosecution or defense of the Tax Contest, including for purposes of providing testimony, affidavits, or declarations;
(iii) executing and delivering such powers of attorney, consents, and other authorizations as may be necessary to allow the controlling party to represent the Company before the applicable taxing authority in connection with the Tax Contest; and
(iv) filing such amended Tax Returns, refund claims, or other documents as may be required in connection with the resolution of the Tax Contest.
The Company's Employer Identification Number (EIN: 82-1947632) and all historical Tax filings, schedules, and related workpapers shall remain accessible to the Sellers' Representative for purposes of Tax Contest defense, and Buyer shall not take any action to close, deactivate, or otherwise restrict access to any Tax accounts or identification numbers of the Company without prior notice to the Sellers' Representative.
Section 9.10 — Dispute Resolution for Tax Matters
(a) Submission to Tax Referee. Any dispute between Buyer and the Sellers' Representative regarding: (i) the amount, computation, or allocation of Pre-Closing Taxes; (ii) the allocation of Straddle Period Taxes under Section 9.5; (iii) the preparation, content, or filing of Pre-Closing Tax Returns under Section 9.4; or (iv) the amount, validity, or computation of any Tax Indemnity Claim under this Article IX (each, a "Tax Dispute"), shall, if not resolved by good faith negotiation between the parties within the applicable resolution period set forth in this Article IX, be submitted to an independent nationally recognized public accounting firm (the "Tax Referee") for final and binding determination.
(b) Selection of Tax Referee. Buyer and the Sellers' Representative shall use good faith efforts to mutually agree upon a Tax Referee within ten (10) business days following the expiration of the applicable resolution period. If the parties cannot agree on a Tax Referee within such ten (10) business day period, each party shall, within five (5) business days thereafter, nominate one independent nationally recognized public accounting firm, and the two nominated firms shall jointly select a third independent nationally recognized public accounting firm to serve as the Tax Referee within ten (10) business days of their respective nominations. Neither Caldwell Pratt & Moorehouse LLP (Buyer's accounting firm) nor Brewer Stanfield & Associates LLP (the Company's historical accounting firm) nor Northmark Advisory Group LLC (the provider of the quality of earnings analysis in connection with this transaction) shall be eligible to serve as the Tax Referee.
(c) Procedures. The Tax Referee shall resolve the Tax Dispute based upon the submissions of the parties and in accordance with this Agreement and applicable Tax law. Each party shall submit a written statement of its position, together with supporting documentation, to the Tax Referee within fifteen (15) business days of the Tax Referee's engagement. The Tax Referee shall render a written determination within thirty (30) days of receiving both parties' submissions (or such longer period as the Tax Referee may reasonably require, but in no event more than sixty (60) days). The Tax Referee's determination shall be limited to the specific items in dispute and shall not modify or depart from the terms of this Agreement. The Tax Referee shall not assign a value to any disputed item that is greater than the highest value claimed by either party or less than the lowest value claimed by either party.
(d) Binding Effect. The determination of the Tax Referee shall be final and binding upon the parties and their respective affiliates, successors, and assigns, absent manifest error. Judgment upon the Tax Referee's determination may be entered in any court of competent jurisdiction.
(e) Allocation of Costs. The costs and expenses of the Tax Referee shall be allocated between Buyer and the Sellers in inverse proportion to the degree to which their respective positions are sustained by the Tax Referee. By way of example, if the Tax Referee determines that 70% of the disputed amount should be resolved in favor of Buyer and 30% in favor of the Sellers, the Sell