PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
MEMORANDUM
TO: James Prentice, Sandra Tung, Tiffany Rosenthal, Andrew Fitzpatrick — Calderwood & Harkness LLP
FROM: Andrew Fitzpatrick
CC: Leonard Cross (Calderwood & Harkness LLP — Tax); Rebecca Chiang (General Counsel, Genome Dx Therapeutics Inc.); Martin Kowalski (Chief Financial Officer, Genome Dx Therapeutics Inc.)
DATE: July 18, 2023
RE: Employee and Benefits Transfer Mechanics — Divestiture of OncuPath™ Companion Diagnostics Business by Genome Dx Therapeutics Inc. to Meridian Precision Diagnostics, Inc.
Matter No.: 1013-00006&A-4471
Calderwood & Harkness LLP 555 South Hope Street, Suite 4400 Los Angeles, California 90071 Telephone: (213) 555-7200
I. Executive Summary
This memorandum analyzes the employee transfer mechanics arising in connection with the proposed $140,000,000 asset purchase of the OncuPath™ companion diagnostics assay line (the "OncuPath Business") by Meridian Precision Diagnostics, Inc. ("Meridian" or "Buyer") from Genome Dx Therapeutics Inc. ("GDT" or "Seller"), pursuant to that certain Asset Purchase Agreement dated May 11, 2023 (the "APA"). The transaction is expected to close on August 8, 2023 (the "Closing Date"), subject to satisfaction of the conditions precedent set forth in the APA.
Because the transaction is structured as an asset purchase — and not as a stock sale, merger, or other form of business combination in which equity interests in the selling entity are acquired — there is no automatic transfer of employment relationships from GDT to Meridian by operation of law. Instead, Meridian is required under Article VII of the APA to extend new offers of employment to the employees exclusively dedicated to the OncuPath Business, and GDT will terminate the employment of those employees who accept Meridian's offers effective as of the Closing Date.
The total number of OncuPath Business employees to whom Meridian is required to extend offers of employment under the APA is eighty-three (83). As of the date of this memorandum, seventy-eight (78) of the eighty-three (83) employees have accepted Meridian's offers of employment and are expected to transfer to Meridian at closing (the "Transferred Employees"). Five (5) employees have declined Meridian's offers and will remain employees of GDT, subject to GDT's standard human resources policies and procedures.
Among the key transferring personnel are Dr. Lara Okonkwo (Vice President, OncuPath R&D), Samuel Briggs (Director, OncuPath Commercial Operations), and Yuki Tanabe (Head of Regulatory Affairs, OncuPath). These individuals are critical to the continued operation and commercial success of the OncuPath Business following the divestiture, and special retention arrangements have been established to incentivize their acceptance of Meridian's offers and ensure continuity through the post-closing transition period.
This memorandum addresses the following principal topics as they relate to the employee transfer mechanics:
• Compliance with the federal Worker Adjustment and Retraining Notification Act ("WARN Act") and the California WARN Act;
• Benefits tail coverage for Transferred Employees, including health and welfare benefits, life and disability insurance, retirement/401(k) plan treatment, and equity compensation;
• GDT's obligations under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and California Cal-COBRA;
• Paid time off ("PTO") accrual assumptions and payout obligations under California law;
• Payroll transition mechanics and coordination with the Transition Services Agreement (the "TSA") pursuant to which GDT will provide HR/payroll transition services to Meridian for up to nine (9) months post-closing at cost plus five percent (5%);
• Service credit and seniority recognition for Transferred Employees;
• Non-competition and non-solicitation considerations;
• Key employee retention and transition incentive arrangements; and
• Coordination with Meridian's HR team and Buyer's counsel.
This memorandum should be read in conjunction with the APA, the TSA, the individual offer letters extended by Meridian, the GDT 2018 Equity Incentive Plan and related award agreements, and the various employee benefit plan documents maintained by GDT. Cross-references to these documents are provided throughout this memorandum where relevant.
II. Transaction Structure — Employment Implications
A. Asset Purchase Framework
The transaction is structured as an asset purchase agreement governed by the laws of the State of Delaware. Under the APA, Meridian is acquiring substantially all of the assets used in or related to the OncuPath Business, including intellectual property, regulatory authorizations, customer contracts, laboratory equipment, inventory, and the leasehold interests in the San Diego and Carlsbad facilities. Meridian is assuming certain specified liabilities (the "Assumed Liabilities") and GDT is retaining all other liabilities (the "Excluded Liabilities"), as more particularly described in the APA.
In an asset purchase, in contrast to a stock sale or merger, the buyer does not automatically succeed to the seller's employment relationships. Employees of the seller are not "transferred" by operation of law, and the buyer does not step into the shoes of the seller as employer. This principle is well established under both federal and California law and has significant implications for the treatment of employment relationships, employee benefit plans, and related obligations in the context of this transaction.
Article VII of the APA (Employee Matters) establishes the framework for the employee transfer. Specifically, Section 7.1 of the APA requires Meridian to make offers of employment to all eighty-three (83) employees who are exclusively dedicated to the OncuPath Business as of the date of the APA. The offers must be on terms that are, in the aggregate, no less favorable than the employees' current terms of employment with GDT, taking into account base salary, target bonus opportunity, and comparable benefits. This "no less favorable in the aggregate" standard is a common formulation in asset purchase agreements and provides Meridian with some flexibility to structure its compensation and benefits programs differently from GDT's, so long as the overall package is at least comparable.
Section 7.1(b) of the APA requires that Meridian extend its offers of employment no later than fifteen (15) business days prior to the Closing Date. Meridian satisfied this requirement by distributing offer letters to all eighty-three (83) OncuPath Business employees on July 14, 2023, which was seventeen (17) business days prior to the anticipated August 8, 2023 Closing Date. The offer letters were reviewed by Calderwood & Harkness prior to distribution and were found to be consistent with the requirements of Article VII of the APA.
Employees who accept Meridian's offers of employment become "Transferred Employees" effective as of 12:01 a.m. Pacific Time on the Closing Date (August 8, 2023). At that time, GDT will terminate the employment of the Transferred Employees, and Meridian will commence their employment. This approach creates a clean break in the employment relationship, with GDT serving as employer through 11:59 p.m. on August 7, 2023 and Meridian serving as employer beginning at 12:01 a.m. on August 8, 2023.
B. Transferred Employee Census
The following table summarizes the OncuPath Business employee census as of the date of this memorandum:
The seventy-eight (78) Transferred Employees are distributed across the following functional areas (approximate headcount by department):
Note that the foregoing headcounts reflect the total population of eighty-three (83) employees to whom offers were extended, including the five (5) who declined. A finalized breakdown of the seventy-eight (78) Transferred Employees by function and location will be prepared by GDT's HR department as of the Closing Date.
The primary work locations for the OncuPath Business employees are as follows:
(a) OncuPath Reference Laboratory and R&D Facility: 4820 Towne Centre Drive, Suite 200, San Diego, California 92121. This facility houses the OncuPath clinical laboratory, R&D laboratories, and the commercial operations team. Approximately sixty-five (65) of the eighty-three (83) employees work primarily at this location.
(b) OncuPath Manufacturing/Kitting Space: 925 Industrial Court, Carlsbad, California 92010. This facility is used for assay kit manufacturing, assembly, and quality control. Approximately eighteen (18) employees work primarily at this location.
Both facilities are leased by GDT, and the leasehold interests are being assigned (or subleased, as applicable) to Meridian at closing pursuant to the terms of the APA and applicable landlord consents. The Transferred Employees will continue to work at the same physical locations following closing; there is no relocation of any employee in connection with this transaction.
The following key personnel are among the Transferred Employees and are critical to the successful transition and continued operation of the OncuPath Business:
(a) Dr. Lara Okonkwo — Vice President, OncuPath R&D. Dr. Okonkwo leads the OncuPath research and development team, including the development of next-generation companion diagnostic assays and the management of clinical validation studies. Dr. Okonkwo has been with GDT for approximately seven (7) years and is the named inventor on several patents included in the Transferred intellectual Property.
(b) Samuel Briggs — Director, OncuPath Commercial Operations. Mr. Briggs manages the OncuPath commercial team, including sales, marketing, and customer support functions. He has been instrumental in establishing the OncuPath Business's commercial relationships with major pharmaceutical partners and reference laboratory networks.
(c) Yuki Tanabe — Head of Regulatory Affairs, OncuPath. Ms. Tanabe oversees all regulatory submissions and compliance activities related to the OncuPath diagnostic assays, including FDA premarket approvals, 510(k) clearances, and international regulatory filings. Her institutional knowledge of the regulatory history of the OncuPath product line is particularly important for the transition.
C. Non-Transferring Employees
Five (5) employees declined Meridian's offers of employment. Under Section 7.2 of the APA, employees who decline Meridian's offers remain employees of GDT, subject to GDT's standard HR policies and procedures. GDT has agreed to use commercially reasonable efforts to identify alternative positions for these individuals within GDT's retained business, which includes the GenoStrat™ genomic profiling platform and various corporate functions.
GDT bears all costs and liabilities associated with the five (5) non-transferring employees, including any severance obligations that may arise if GDT is unable to find suitable alternative positions and subsequently terminates their employment. These costs and liabilities are Excluded Liabilities under the APA and are expressly not assumed by Meridian. GDT's obligation to offer severance, if any, is governed by GDT's standard severance policies and any individual employment agreements that may be in place.
As of the date of this memorandum, GDT's HR team has been in communication with the five (5) non-transferring employees regarding potential alternative positions within GDT. We understand that at least two (2) of these employees have expressed interest in open positions within the GenoStrat™ business unit, and discussions are ongoing.
III. WARN Act Compliance Analysis
A. Federal WARN Act (Worker Adjustment and Retraining Notification Act)
The federal WARN Act, codified at 29 U.S.C. §§ 2101–2109 and implemented by regulations at 20 C.F.R. Part 639, requires employers with one hundred (100) or more full-time employees to provide at least sixty (60) calendar days' advance written notice to affected employees, their representatives (if any), and specified state and local government officials before undertaking a "plant closing" or "mass layoff."
The statute defines key terms as follows:
Plant Closing. A "plant closing" occurs when an "employment site" (or one or more "facilities or operating units" within an employment site) is permanently or temporarily shut down, and the shutdown results in an "employment loss" during any thirty (30)-day period for fifty (50) or more full-time employees at the site. 29 U.S.C. § 2101(a)(2). An "employment loss" is defined to include a termination (other than a discharge for cause, voluntary departure, or retirement), a layoff exceeding six months, or a greater than fifty percent (50%) reduction in hours of work during each month of any six-month period. 29 U.S.C. § 2101(a)(6).
Mass Layoff. A "mass layoff" occurs when there is an employment loss at a single site of employment during any thirty (30)-day period for either: (a) at least thirty-three percent (33%) of the active workforce and at least fifty (50) employees; or (b) at least five hundred (500) employees, regardless of the percentage of the workforce. 29 U.S.C. § 2101(a)(3).
Analysis. The transaction involves eighty-three (83) OncuPath Business employees across two (2) facilities — the San Diego facility at 4820 Towne Centre Drive and the Carlsbad facility at 925 Industrial Court. At closing, these employees are being offered employment by Meridian at the same work locations, not terminated or laid off in the traditional sense. Of the eighty-three (83) employees, seventy-eight (78) accepted Meridian's offers and will continue to perform the same or substantially similar job functions at the same physical locations. The remaining five (5) employees who declined Meridian's offers are being retained by GDT and offered alternative positions within GDT's retained business.
We have analyzed whether this transaction triggers federal WARN Act notification requirements and conclude that it does not, for the following reasons:
1. Fewer than 100 employees affected at any single site. The OncuPath workforce of eighty-three (83) employees is distributed across two (2) separate facilities, with approximately sixty-five (65) at the San Diego location and approximately eighteen (18) at the Carlsbad location. Neither facility has one hundred (100) or more affected employees. Moreover, GDT as a whole employs well over one hundred (100) employees, but the WARN Act analysis is site-specific and focuses on the number of employees experiencing an employment loss at a single site.
2. No "plant closing." The OncuPath facilities are not being permanently or temporarily shut down. Rather, they will continue to operate under Meridian's management following the closing. The operations, equipment, and workforce at these facilities are being transferred as a going concern. Accordingly, the transaction does not constitute a "plant closing" within the meaning of the WARN Act.
3. No "employment loss." The seventy-eight (78) Transferred Employees are being offered comparable employment with Meridian at the same work locations, with no material change in job duties, base salary, or benefits. Under the Department of Labor's implementing regulations, when employees are offered employment by a successor employer under comparable terms and conditions, they do not experience an "employment loss" for purposes of the WARN Act. See 20 C.F.R. § 639.3(f) (providing that employees who receive offers of reassignment to another location within reasonable commuting distance and accept within thirty (30) days do not experience employment loss). Here, the employees are not even being relocated — they will continue to work at the same physical locations.
4. Threshold not met for non-transferring employees. Even if the five (5) non-transferring employees who declined Meridian's offers were deemed to have experienced an "employment loss" (which we do not believe they have, since they are being retained by GDT and offered alternative positions), five (5) employees is well below the fifty (50)-employee threshold required to trigger either the "plant closing" or "mass layoff" provisions of the WARN Act.
Conclusion. No federal WARN Act notification is required in connection with this transaction.
B. California WARN Act (Cal. Labor Code §§ 1400–1408)
The California WARN Act, codified at California Labor Code Sections 1400 through 1408, applies to employers that have employed seventy-five (75) or more full-time or part-time employees within the preceding twelve (12) months. The California WARN Act requires sixty (60) days' advance written notice before a "mass layoff," "relocation," or "termination" affecting fifty (50) or more employees at a "covered establishment" within any thirty (30)-day period. The California WARN Act is generally broader than the federal WARN Act in several respects, including a lower employer-size threshold (75 employees versus 100) and the inclusion of part-time employees in the threshold calculation.
Analysis. GDT, as a California employer with well over seventy-five (75) employees company-wide, is subject to the California WARN Act. However, the analysis under the California WARN Act parallels the federal analysis in all material respects:
• The OncuPath facilities at 4820 Towne Centre Drive, San Diego, and 925 Industrial Court, Carlsbad, are not being shut down, relocated, or terminated as "covered establishments." They will continue to operate under Meridian's ownership and management.
• Seventy-eight (78) of the eighty-three (83) affected employees accepted offers of employment with Meridian at the same work locations and on comparable terms, and thus are not being subjected to a "mass layoff," "relocation," or "termination" within the meaning of the statute.
• Only five (5) employees declined Meridian's offers, which is far below the fifty (50)-employee threshold required to trigger the California WARN Act's notification requirements. Moreover, these five (5) employees are being retained by GDT, not laid off or terminated.
Conclusion. No California WARN Act notification is required in connection with this transaction.
C. Recommendations. Although we have concluded that neither the federal WARN Act nor the California WARN Act requires formal notification in connection with this transaction, we recommend the following best practices:
(a) Employee Communication. GDT should provide, and has provided, a general written communication to all eighty-three (83) OncuPath Business employees informing them of the transaction, their employment options, and the timeline for the closing and transition. This communication was developed in coordination with GDT's General Counsel, Rebecca Chiang, and reviewed by Calderwood & Harkness prior to distribution. The communication was distributed to employees on June 20, 2023, following the execution of the APA and the public announcement of the transaction.
(b) 90-Day Lookback Monitoring. Both the federal WARN Act and the California WARN Act include aggregation provisions that require employers to aggregate employment actions occurring within a ninety (90)-day period to determine whether the applicable thresholds have been met. See 29 U.S.C. § 2102(d); Cal. Lab. Code § 1400(d). Accordingly, GDT should monitor its workforce activities during the ninety (90)-day period surrounding the Closing Date (i.e., from approximately May 10, 2023 through approximately November 6, 2023) to ensure that no other GDT workforce reductions, when combined with the employee transfers and declinations in connection with this transaction, trigger WARN Act notification obligations. We will coordinate with GDT's HR department on an ongoing basis to monitor this issue.
IV. Benefits Tail Coverage
A. Health and Welfare Benefits
Transferred Employees' participation in GDT-sponsored group health plans — including GDT's self-insured medical plan (administered by Crestline Insurance), the GDT dental plan (administered by Halcyon Indemnity Co.), and the GDT vision plan (administered by VSP) — will terminate at 11:59 p.m. Pacific Time on August 7, 2023, the last day of their employment with GDT.
Pursuant to Section 7.3(a) of the APA, Meridian is required to provide Transferred Employees with health and welfare benefits that are, in the aggregate, no less favorable than the benefits provided by GDT, effective as of the Closing Date (August 8, 2023). The intent of this provision is to ensure that there is no gap in health and welfare coverage for Transferred Employees and their covered dependents. Meridian has confirmed in writing — through correspondence from Catherine Liang, Meridian's VP of Corporate Development, to Calderwood & Harkness dated July 10, 2023 — that its group health plans will:
(i) waive any pre-existing condition exclusions or limitations for Transferred Employees and their eligible dependents;
(ii) waive any waiting periods for enrollment in Meridian's group health, dental, and vision plans for Transferred Employees who were enrolled in GDT's corresponding plans as of the Closing Date;
(iii) give credit to Transferred Employees and their dependents for any co-payments, deductibles, and out-of-pocket maximums already paid or satisfied under GDT's plans during the 2023 plan year, to the extent that such amounts are applied toward corresponding co-payments, deductibles, and out-of-pocket maximums under Meridian's plans for the remainder of the 2023 plan year; and
(iv) enroll Transferred Employees and their eligible dependents in Meridian's group health plans effective as of 12:01 a.m. on August 8, 2023.
With respect to the allocation of claims liability between GDT and Meridian, the parties have agreed as follows: GDT will be responsible for all claims incurred by Transferred Employees and their dependents prior to the Closing Date under GDT's self-insured medical plan. A claim is deemed "incurred" on the date that the medical service giving rise to the claim is rendered. Any claims incurred on or after August 8, 2023 will be the responsibility of Meridian's health plan. For purposes of clarity, if a Transferred Employee is hospitalized prior to the Closing Date and remains hospitalized through and after the Closing Date, responsibility for the claim will be allocated between GDT and Meridian based on the dates of service, with GDT responsible for services rendered through August 7, 2023 and Meridian responsible for services rendered on or after August 8, 2023.
B. Life and Disability Insurance
GDT-sponsored group life insurance (basic and supplemental), accidental death and dismemberment (AD&D) insurance, and short-term and long-term disability coverage for Transferred Employees will terminate at the close of business on August 7, 2023. Pursuant to the APA, Meridian is required to provide comparable coverage to Transferred Employees effective on the Closing Date. Meridian has confirmed that it will enroll Transferred Employees in its group life insurance, AD&D, and disability plans effective as of August 8, 2023, with no evidence-of-insurability requirements for coverage levels at or below the coverage levels in effect under GDT's plans.
Any open disability claims as of the Closing Date remain GDT's responsibility. This includes both short-term and long-term disability claims that have been approved and are in pay status as of the Closing Date, as well as claims that are pending determination. Transferred Employees who are on approved short-term disability leave as of the Closing Date present a special case under the APA. Section 7.3(c) of the APA provides that GDT retains such employees on its payroll and benefits plans until they are medically cleared to return to work, at which point they transfer to Meridian's employment. As of the date of this memorandum, we are aware of one (1) OncuPath employee who is currently on short-term disability leave. GDT's HR department is monitoring this individual's status and will coordinate with Meridian as appropriate.
C. Retirement / 401(k) Plan
GDT sponsors the Genome Dx Therapeutics Inc. 401(k) Savings Plan (the "GDT 401(k) Plan"), a tax-qualified defined contribution plan under Section 401(a) of the Internal Revenue Code of 1986, as amended. The GDT 401(k) Plan provides for employer matching contributions of fifty cents ($0.50) per dollar on the first six percent (6%) of eligible compensation deferred by each participant.
As of the Closing Date, Transferred Employees will be fully vested in their GDT 401(k) account balances, including both their employee deferral accounts and employer matching contribution accounts. The GDT 401(k) Plan provides for immediate one hundred percent (100%) vesting of employer matching contributions upon a participant's enrollment, and accordingly, there are no forfeiture issues for Transferred Employees.
GDT 401(k) account balances will remain in the GDT 401(k) Plan until Transferred Employees affirmatively elect a rollover or distribution. Meridian's 401(k) plan (the "Meridian 401(k) Plan") accepts direct rollovers from other qualified plans, including the GDT 401(k) Plan. There is no mandatory distribution requirement, and Transferred Employees may leave their balances in the GDT 401(k) Plan indefinitely, subject to the plan's terms regarding separated participants and required minimum distributions.
GDT will cease employer matching contributions for Transferred Employees effective as of the Closing Date. Meridian's 401(k) Plan provides for employer matching contributions on terms comparable to GDT's plan, and Meridian has agreed to allow Transferred Employees to participate in the Meridian 401(k) Plan immediately upon their start date, with no waiting period.
Outstanding 401(k) Plan Loans. As of the date of this memorandum, GDT's plan administrator has identified approximately six (6) Transferred Employees with outstanding participant loans under the GDT 401(k) Plan. The aggregate outstanding loan balance is approximately $78,000. Under the terms of the GDT 401(k) Plan and applicable IRS rules, if a participant separates from employment while a loan is outstanding, the loan must be repaid or rolled over within the applicable timeframe (generally, the participant's tax return due date, including extensions, for the year of separation) to avoid a deemed distribution. A deemed distribution is treated as a taxable event and may be subject to the ten percent (10%) early withdrawal penalty under Section 72(t) of the Code if the participant is under age 59½.
We are coordinating with Meridian's plan administrator to determine whether the Meridian 401(k) Plan accepts rollovers of outstanding participant loans from the GDT 401(k) Plan. If Meridian's plan accepts loan rollovers, Transferred Employees with outstanding loans may be able to roll over their loan balances into the Meridian 401(k) Plan and continue making loan repayments through Meridian's payroll, thereby avoiding a deemed distribution. GDT's HR team will communicate the available options to affected Transferred Employees.
D. Equity Compensation
A number of Transferred Employees hold outstanding equity awards under the Genome Dx Therapeutics Inc. 2018 Equity Incentive Plan (the "GDT Equity Plan"), including stock options (both incentive stock options and nonqualified stock options) and restricted stock units ("RSUs"). The treatment of these equity awards in connection with the divestiture is governed by the terms of the GDT Equity Plan and the individual award agreements, as supplemented by a resolution of GDT's Board of Directors adopted on May 8, 2023 in connection with the approval of the transaction.
The GDT Equity Plan contains "double-trigger" acceleration provisions, which provide that vesting of outstanding equity awards may accelerate upon a qualifying termination of employment (i.e., an involuntary termination without cause or a resignation for good reason) occurring within a specified period following a "change of control" of GDT. Because the divestiture of the OncuPath Business is structured as an asset sale rather than a change of control of GDT (GDT continues as an independent company following the transaction), the standard double-trigger acceleration provisions of the GDT Equity Plan are not directly implicated by this transaction.
However, recognizing that the Transferred Employees' termination from GDT in connection with the divestiture is involuntary in nature and that the loss of unvested equity would be a significant detriment to Transferred Employees' total compensation, GDT's Board of Directors adopted a resolution on May 8, 2023 approving a discretionary acceleration of vesting for Transferred Employees. Specifically, the board resolution provides as follows:
• Each Transferred Employee holding unvested stock options or RSUs under the GDT Equity Plan will receive accelerated vesting of a number of shares equal to the shares that would have vested during the twelve (12)-month period immediately following the Closing Date, calculated on a pro rata basis based on the applicable vesting schedule.
• The accelerated vesting will be effective as of the Closing Date.
• All vested stock options (including those that vest pursuant to the discretionary acceleration) will remain exercisable for a period of ninety (90) days following the Closing Date, consistent with the post-termination exercise period set forth in the GDT Equity Plan for a termination without cause.
• Any stock options or RSUs that remain unvested after giving effect to the discretionary acceleration will be forfeited as of the Closing Date.
GDT's stock administration team is preparing individualized equity statements for each Transferred Employee holding equity awards, reflecting the impact of the discretionary acceleration. These statements will be distributed to affected employees prior to the Closing Date.
Tax withholding obligations arising from the accelerated vesting of equity awards will be handled by GDT through the final GDT payroll processed for each Transferred Employee. For RSUs, applicable federal and state income tax, FICA, and Medicare withholding will be deducted at the time of settlement. For stock options, to the extent Transferred Employees exercise vested options prior to or in connection with closing, applicable withholding will be processed through GDT's payroll system. Calderwood & Harkness's Tax group (Leonard Cross) is coordinating with GDT's stock administration team and external tax advisors on the withholding mechanics and reporting requirements.
E. Other Benefits
Employee Assistance Program (EAP). GDT's Employee Assistance Program, currently administered by Tarrant Systems, will remain available to Transferred Employees for a period of thirty (30) days following the Closing Date as a courtesy. After this thirty (30)-day tail coverage period, Transferred Employees will be covered by Meridian's EAP, which Meridian has confirmed will be available effective as of the Closing Date. The thirty-day overlap period is intended to ensure a smooth transition and to avoid any disruption in access to EAP services for Transferred Employees and their family members.
Tuition Reimbursement. Any pending tuition reimbursement applications submitted by OncuPath employees prior to the Closing Date will be processed and paid by GDT in accordance with GDT's tuition reimbursement policy. GDT's obligation extends to any tuition reimbursement applications that were submitted and approved (or pending approval) prior to closing, regardless of whether the tuition payments or course completion dates fall after the Closing Date, provided that the employee's enrollment in the applicable course commenced prior to the Closing Date. Any tuition reimbursement applications submitted after the Closing Date will be the responsibility of Meridian, subject to the terms of Meridian's own tuition reimbursement program.
V. COBRA Obligations
A. General COBRA Framework
The Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), as codified at 29 U.S.C. § 4980B and related provisions of the Internal Revenue Code (Sections 4980B, 6720C) and the Employee Retirement Income Security Act of 1974 (ERISA, Section 601 et seq.), requires group health plans maintained by employers with twenty (20) or more employees to offer "continuation coverage" to "qualified beneficiaries" who would otherwise lose coverage due to certain "qualifying events." Qualifying events include, among others, the termination of a covered employee's employment (other than for gross misconduct) and a reduction in a covered employee's hours of work.
Upon the occurrence of a qualifying event, the employer or plan administrator must provide written notice to the qualified beneficiary of his or her right to elect COBRA continuation coverage. The qualified beneficiary then has sixty (60) days to elect continuation coverage, which may be maintained for up to eighteen (18) months (or thirty-six (36) months in the case of certain qualifying events such as the death of the covered employee, divorce, or a dependent child losing dependent status).
GDT, as the prior employer, is responsible for COBRA administration with respect to any "qualifying event" that occurs on or before the Closing Date.
B. Transferred Employees
For the seventy-eight (78) Transferred Employees, the termination of their employment with GDT and the resulting loss of coverage under GDT's group health plans constitute a "qualifying event" under COBRA. Accordingly, GDT is required to provide COBRA election notices to the Transferred Employees (and their qualified beneficiaries, including spouses and dependent children who were covered under GDT's group health plans).
However, because the Transferred Employees are being offered comparable group health coverage by Meridian effective as of the Closing Date with no gap in coverage, as described in Section IV.A above, the practical significance of the COBRA election right is limited. As a practical matter, Transferred Employees who are enrolled in Meridian's group health plans effective on the Closing Date would have no economic incentive to elect COBRA continuation coverage under GDT's plan, as Meridian's coverage will be comparable and the employee will not be required to pay the full cost of coverage (plus the two percent (2%) administrative surcharge permitted under COBRA) as would be the case with COBRA continuation coverage.
Notwithstanding the foregoing practical considerations, GDT is legally obligated to provide COBRA election notices to all seventy-eight (78) Transferred Employees, and failure to do so could result in penalties under the Internal Revenue Code and ERISA. GDT will send COBRA election notices to all Transferred Employees within the required forty-four (44)-day window following the qualifying event. This window consists of two components: (i) fourteen (14) days for GDT to notify its group health plan administrator of the qualifying event, and (ii) thirty (30) days for the plan administrator to provide the COBRA election notice to the qualified beneficiary. The COBRA election notices will be distributed by GDT's benefits administration team, and Calderwood & Harkness has reviewed the form of COBRA election notice for compliance with the applicable Department of Labor model notice requirements.
COBRA continuation coverage from GDT, if elected by any Transferred Employee, would run for up to eighteen (18) months from the date of the qualifying event (i.e., from August 8, 2023 through approximately February 8, 2025). The Transferred Employee would be responsible for the full cost of coverage plus the permitted two percent (2%) administrative surcharge.
C. Non-Transferring Employees (5 Employees Who Declined Offers)
The five (5) employees who declined Meridian's offers of employment and remain employees of GDT do not experience a COBRA qualifying event in connection with this transaction, as their GDT employment and group health plan coverage continue without interruption. These employees remain covered under GDT's group health plans in the same manner as before the transaction.
If any of these five (5) employees subsequently terminate from GDT (whether voluntarily or involuntarily), standard COBRA rules will apply at that time, and GDT will be responsible for providing COBRA election notices and continuation coverage in accordance with applicable law.
D. Existing COBRA Participants
Any individuals who are already receiving COBRA continuation coverage under GDT's group health plans as of the Closing Date — for example, former GDT employees who separated from GDT prior to the closing and elected COBRA continuation coverage in connection with their earlier separation — remain GDT's responsibility. These existing COBRA participants are not affected by the transaction and will continue to receive COBRA continuation coverage under GDT's plans in accordance with the terms of their existing COBRA elections and applicable law. The costs and liabilities associated with these existing COBRA participants are Excluded Liabilities under the APA.
E. California Cal-COBRA
California's Cal-COBRA statute, codified at California Health & Safety Code Section 1366.20 et seq. and California Insurance Code Section 10128.50 et seq., provides continuation coverage rights that supplement and extend the federal COBRA requirements. Cal-COBRA has two primary applications:
(i) Small Employer Coverage. Cal-COBRA provides continuation coverage rights for employees of employers with two (2) to nineteen (19) employees who are not subject to federal COBRA (because they do not meet the twenty (20)-employee threshold). Since GDT has well over twenty (20) employees, this provision of Cal-COBRA is not applicable.
(ii) Extended Continuation Coverage. Cal-COBRA provides an additional eighteen (18) months of continuation coverage (for a total of thirty-six (36) months) beyond the federal COBRA period for qualified beneficiaries who exhaust their federal COBRA coverage. This extended coverage is available for qualifying events that are covered by federal COBRA (such as termination of employment).
Accordingly, if any Transferred Employee were to elect COBRA continuation coverage under GDT's plan and exhaust the eighteen (18)-month federal COBRA period, he or she would be entitled to an additional eighteen (18) months of Cal-COBRA continuation coverage, for a total of thirty-six (36) months of continuation coverage. GDT's COBRA election notices will include information regarding the availability of Cal-COBRA extended coverage, as required by California law.
VI. PTO Accrual Assumptions and Payout
A. California Law Requirements
Under California Labor Code Section 227.3, accrued and unused vacation or PTO is considered "earned wages" and must be paid out to an employee upon termination of employment, regardless of the reason for termination. California law does not permit "use-it-or-lose-it" vacation or PTO policies. Vacation or PTO vests proportionately as it is earned by the employee, and once vested, it cannot be forfeited. Any employer policy that purports to require forfeiture of accrued vacation or PTO upon termination is void and unenforceable under California law. See Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774 (1982); Cal. Lab. Code § 227.3.
Because the Transferred Employees are technically being terminated from GDT employment effective as of August 7, 2023 and hired by Meridian as new employees effective August 8, 2023, GDT is legally obligated to pay out all accrued and unused PTO to each Transferred Employee in his or her final GDT paycheck. This obligation exists regardless of the fact that the Transferred Employees will continue working at the same locations for a new employer and regardless of any agreement between GDT and Meridian regarding the crediting of PTO by Meridian.
GDT's PTO policy currently provides for accrual of PTO at rates ranging from fifteen (15) days per year for employees with fewer than three (3) years of service to twenty-five (25) days per year for employees with ten (10) or more years of service. GDT's policy imposes an accrual cap equal to one and one-half (1.5) times the employee's annual accrual rate. Under California law, accrual caps (as distinguished from "use-it-or-lose-it" policies) are permissible, as they merely cap the amount of PTO that can accrue at any given time and do not require forfeiture of previously accrued PTO.
B. Estimated PTO Liability
GDT's HR department has been instructed to prepare a final, employee-by-employee accounting of accrued and unused PTO for all eighty-three (83) OncuPath Business employees as of the Closing Date (August 8, 2023). This accounting will be based on the final payroll records and PTO tracking data maintained in GDT's HRIS system.
Based on preliminary payroll reports provided by GDT's HR department, the estimated aggregate accrued PTO liability for the eighty-three (83) OncuPath Business employees is approximately $620,000. This estimate is subject to adjustment based on PTO usage between the date of the preliminary report and the Closing Date, as well as any corrections to individual employee PTO records.
The accrued PTO payout is a pre-closing liability retained by GDT and is expressly classified as an Excluded Liability under Section 2.4 of the APA. Meridian does not assume any portion of the accrued PTO liability. The PTO liability is also relevant to the net working capital ("NWC") adjustment mechanism under the APA, as discussed further below.
C. Coordination with Meridian
Section 7.4 of the APA provides that Meridian will credit each Transferred Employee with a starting PTO balance under Meridian's PTO policy that recognizes the Transferred Employee's prior service with GDT for purposes of determining the applicable PTO accrual rate tier. For example, a Transferred Employee with eight (8) years of service at GDT would be placed in the corresponding accrual rate tier under Meridian's PTO policy (rather than starting at the lowest accrual rate as a new hire).
The APA further provides that Meridian will credit Transferred Employees with a starting PTO balance equal to the PTO accrued at GDT through the Closing Date, to the extent that GDT pays out the corresponding accrued PTO amounts. However, it is important to note that GDT's payout of accrued PTO at closing and Meridian's crediting of service and PTO are independent obligations. There is no "assumption" of PTO liability by Meridian. GDT's obligation is to pay out all accrued PTO in cash to each Transferred Employee in his or her final GDT paycheck. Meridian's obligation is to credit service and establish a starting PTO balance under Meridian's own PTO policy. These are distinct obligations that do not involve a transfer of liability from GDT to Meridian.
As a practical matter, this means that Transferred Employees will receive a cash payout of their accrued GDT PTO and will simultaneously receive a PTO accrual credit under Meridian's policy, resulting in a "fresh start" under Meridian's program with the benefit of credited prior service.
VII. Payroll Transition and TSA Coordination
A. Transition Services Agreement — HR/Payroll Services
Pursuant to the Transition Services Agreement dated August 8, 2023 (the "TSA"), GDT will provide certain human resources and payroll transition services to Meridian for a period of up to nine (9) months following the Closing Date (i.e., through approximately May 8, 2024). The TSA pricing for HR/payroll services is at GDT's cost plus a five percent (5%) administrative markup. The TSA services are intended to facilitate a smooth transition of the Transferred Employees to Meridian's own HR and payroll systems, recognizing that Meridian may not have the infrastructure in place to immediately process payroll and administer benefits for seventy-eight (78) new employees on the Closing Date.
The HR/payroll services to be provided by GDT under the TSA include the following:
(a) Payroll Processing. GDT will process bi-weekly payroll for the Transferred Employees through its existing payroll system (currently Meridian Health IT) on Meridian's behalf. Meridian will provide GDT with all necessary payroll inputs (including approved hours, salary adjustments, bonuses, and commission payments) in advance of each payroll cycle. GDT will process the payroll and remit net pay to Transferred Employees' bank accounts via direct deposit. All payroll will be processed under Meridian's employer identification number (EIN), with Meridian as the employer of record.
(b) Payroll Tax Filings. GDT will prepare and file all required federal and California payroll tax returns (including IRS Forms 941 and 940, California DE 9 and DE 9C, and related filings) on Meridian's behalf during the TSA period. Payroll tax deposits will be made from Meridian's accounts, with GDT providing the calculation and remittance instructions.
(c) Benefits Administration Support. GDT will provide transition support for benefits administration, including assisting with the enrollment of Transferred Employees in Meridian's benefit plans, coordinating the transition of benefits records, and responding to employee inquiries regarding benefits during the transition period.
(d) HRIS Access. GDT will provide Meridian with access to GDT's HRIS for historical employee records relating to the Transferred Employees, including employment history, compensation records, performance evaluations, and training records. Access will be provided through a secure, read-only interface, and GDT will maintain the historical records in its HRIS for a minimum of seven (7) years following the Closing Date.
Meridian is expected to establish its own payroll and HRIS systems for the Transferred Employees as promptly as practicable following the closing. Based on discussions with Meridian's HR team, the target migration date is within three (3) to four (4) months of closing (i.e., by approximately November to December 2023). Calderwood & Harkness will track the TSA milestones and coordinate with Buyer's counsel to ensure timely migration and termination of TSA services.
B. Final GDT Payroll
GDT will process a final payroll for all eighty-three (83) OncuPath Business employees through August 7, 2023 (the last day of their GDT employment). This final payroll will include the following components:
(a) Regular wages earned through August 7, 2023, calculated based on each employee's applicable pay rate and the number of hours or days worked through the last day of GDT employment;
(b) Accrued and unused PTO payout, as described in Section VI above;
(c) Any accelerated equity compensation withholding amounts arising from the discretionary acceleration of stock options and RSUs, as described in Section IV.D above;
(d) Applicable federal income tax withholding, California income tax withholding (including, if applicable, supplemental wage withholding rates), FICA (Social Security and Medicare) taxes, California State Disability Insurance (SDI) contributions, and any other applicable payroll tax withholdings; and
(e) Any other amounts owed to employees, including expense reimbursements and commissions earned through August 7, 2023.
Under California law, when an employer terminates an employee's employment, all wages earned and unpaid at the time of termination must be paid at the time of termination. Cal. Lab. Code § 201. Accordingly, GDT will process the final payroll on or before August 8, 2023. As a practical matter, GDT's payroll team has confirmed that the final payroll will be processed on GDT's next regular pay date following August 7, 2023, which falls on August 11, 2023. To the extent California law requires immediate payment upon termination, GDT may need to issue off-cycle paychecks on August 8, 2023 to comply with Section 201 of the Labor Code. We are coordinating with GDT's HR department and payroll vendor on the timing and mechanics.
C. Employer Identification Numbers
The following employer identification numbers (EINs) are applicable to the payroll transition:
Payroll tax filings and W-2 reporting will reference the appropriate EIN based on the dates of employment. For the 2023 tax year, Transferred Employees will receive two (2) W-2 forms: one from GDT (EIN 47-3892061) reflecting wages earned through August 7, 2023, and one from Meridian (EIN 56-4210783) reflecting wages earned from August 8, 2023 through December 31, 2023. GDT and Meridian will coordinate to ensure accurate W-2 reporting, including proper allocation of Social Security wage bases and other cumulative tax thresholds.
VIII. Service Credit and Seniority
Section 7.5 of the APA provides that Meridian will recognize each Transferred Employee's prior service with GDT for the following purposes:
(a) 401(k) Plan Eligibility and Vesting. Although the GDT 401(k) Plan provides immediate vesting, Meridian will credit Transferred Employees' GDT service for purposes of satisfying any eligibility or vesting requirements under the Meridian 401(k) Plan. As noted in Section IV.C above, Meridian has agreed to allow Transferred Employees to participate in the Meridian 401(k) Plan immediately upon their start date, with no waiting period.
(b) PTO Accrual Rate Tiers. Meridian will credit prior GDT service for purposes of determining the applicable PTO accrual rate tier under Meridian's PTO policy. This means that a Transferred Employee with eight (8) years of service at GDT would accrue PTO at the rate applicable to an employee with eight (8) years of service under Meridian's PTO policy, rather than starting at the introductory accrual rate.
(c) Benefit Plan Eligibility. Meridian will credit prior GDT service for purposes of determining eligibility for Meridian's other employee benefit plans, including group health, dental, vision, life insurance, and disability plans. As described in Section IV.A above, Meridian has agreed to waive waiting periods for Transferred Employees' enrollment in these plans.
(d) Severance Calculations. Meridian will credit prior GDT service for purposes of calculating severance payments under Meridian's standard severance policy, if applicable. This means that if a Transferred Employee is subsequently terminated by Meridian under circumstances that trigger Meridian's severance policy, the employee's severance would be calculated based on his or her combined GDT and Meridian service, rather than solely Meridian service.
The service credit provisions do not apply, however, for purposes of Meridian's equity incentive plans. Transferred Employees will be eligible to receive new-hire equity grants under Meridian's equity incentive plan at Meridian's discretion, but prior GDT service will not be credited for purposes of determining grant levels, vesting schedules, or eligibility for equity awards under Meridian's plan. Equity grants to Transferred Employees by Meridian are subject to Meridian's standard new-hire grant guidelines and the approval of Meridian's compensation committee.
IX. Non-Compete and Non-Solicitation Considerations
Pursuant to the Non-Competition and Non-Solicitation Agreement (the "Restrictive Covenant Agreement") executed by GDT and Meridian concurrently with the closing of the APA, GDT is subject to certain restrictive covenants that are relevant to the employee transfer mechanics:
Employee Non-Solicitation Covenant. Section 3(b) of the Restrictive Covenant Agreement prohibits GDT from, directly or indirectly, soliciting, recruiting, hiring, or attempting to solicit, recruit, or hire any Transferred Employee for a period of two (2) years following the Closing Date (i.e., through August 8, 2025). This covenant is designed to protect Meridian's investment in the OncuPath workforce and to prevent GDT from "clawing back" key employees who transferred to Meridian in connection with the divestiture. The non-solicitation covenant applies to GDT and its affiliates, officers, directors, and agents, and covers both active solicitation and hiring of Transferred Employees who approach GDT on their own initiative (i.e., the covenant includes a "no-hire" provision as well as a "no-solicit" provision).
GDT's Existing Employee Restrictive Covenant Agreements. GDT has in place employee non-competition and non-solicitation agreements with certain OncuPath employees, executed in connection with their initial hiring or promotion. Under California Labor Code Section 16600, which provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void," post-employment non-competition agreements with California-based employees are generally unenforceable, with narrow exceptions (such as the sale-of-business exception under California Business and Professions Code Section 16601). Since the OncuPath employees are individual employees and not sellers of a business (GDT is the corporate seller), the sale-of-business exception does not apply to their individual non-compete agreements.
Accordingly, any non-competition provisions in the OncuPath employees' existing agreements with GDT are likely unenforceable under California law to the extent they purport to restrict the employees' post-GDT employment activities. However, other provisions of these agreements — including confidentiality, non-disclosure, and proprietary information and inventions assignment provisions — remain enforceable and in effect with respect to GDT confidential information that is unrelated to the OncuPath Business.
To address the transition of proprietary information obligations, Transferred Employees will execute new Proprietary Information and Inventions Assignment Agreements ("PIIAs") with Meridian covering OncuPath-related confidential information, trade secrets, and inventions generated post-closing. The GDT PIIAs will continue to govern the employees' obligations with respect to GDT confidential information unrelated to the OncuPath Business (e.g., information relating to GDT's retained GenoStrat™ platform). Calderwood & Harkness has reviewed the form of Meridian PIIA provided by Buyer's counsel and confirmed that it does not conflict with the employees' ongoing obligations under their GDT PIIAs.
X. Key Employee Retention and Transition Incentives
To ensure the continuity of critical leadership through the transaction and post-closing transition period, GDT, at the direction of Pinnacle Biosciences Partners Fund III, L.P. ("Pinnacle"), GDT's majority stockholder, offered retention bonuses to three (3) key OncuPath employees. These retention arrangements were designed to incentivize the acceptance of Meridian's offers of employment and to promote a stable transition of the OncuPath Business. The retention arrangements were approved by GDT's Board of Directors on May 8, 2023 as part of the overall transaction authorization.
The three (3) key employees subject to retention arrangements are as follows:
(a) Dr. Lara Okonkwo (Vice President, OncuPath R&D) — Retention bonus funded by GDT, payable upon completion of six (6) months of continuous employment with Meridian following the Closing Date (i.e., payable on or about February 8, 2024, subject to continued employment).
(b) Samuel Briggs (Director, OncuPath Commercial Operations) — Similar retention arrangement, with the same six (6)-month continuous employment requirement.
(c) Yuki Tanabe (Head of Regulatory Affairs, OncuPath) — Similar retention arrangement, with the same six (6)-month continuous employment requirement.
The specific retention bonus amounts are confidential and are set forth in individual retention bonus agreements executed between GDT and each of the three (3) key employees. The retention bonuses are a pre-closing obligation of GDT; Meridian is not responsible for funding or paying the retention bonuses. Under the terms of the retention agreements, if a key employee is involuntarily terminated by Meridian without cause during the six (6)-month post-closing period, the retention bonus is deemed earned and is payable by GDT within thirty (30) days of such termination. If a key employee voluntarily resigns from Meridian during the six (6)-month post-closing period, the retention bonus is forfeited.
From a tax perspective, the retention bonus payments will be treated as ordinary compensation income to the employees and will be subject to applicable income tax and payroll tax withholding at the time of payment. Because the retention bonuses are GDT obligations payable after the Closing Date, GDT will process the retention bonus payments through GDT's payroll (or, if GDT's payroll system has been decommissioned for OncuPath employees by that time, through a manual payment process). Leonard Cross (Calderwood & Harkness Tax) is coordinating with GDT's tax and payroll teams on the withholding and reporting mechanics for the retention bonus payments.
XI. Coordination with Meridian's HR Team
Calderwood & Harkness has worked closely with Meridian's outside counsel, Whitfield Sayer & Gregg LLP ("WSG"), throughout the employee transfer process. The primary contacts at WSG are Jonathan Whitfield (lead partner) and Rachel Dempsey (senior associate). In addition, Meridian's VP of Corporate Development, Catherine Liang, has served as the primary business-side contact for employee and benefits matters.
The following matters have been coordinated between Calderwood & Harkness and WSG/Meridian:
(a) Timing and Content of Meridian's Offer Letters. Calderwood & Harkness reviewed the form of offer letter prepared by Meridian for consistency with the "no less favorable in the aggregate" standard set forth in Article VII of the APA. We confirmed that the offer letters accurately reflect each employee's current base salary, target bonus opportunity, and job title, and that the benefits summary attached to the offer letters is consistent with Meridian's confirmed benefits package for Transferred Employees.
(b) Benefits Comparability Analysis. Calderwood & Harkness prepared and circulated to WSG and Meridian a side-by-side benefits comparability analysis comparing GDT's health and welfare benefits, retirement benefits, PTO policies, and other employee benefits to the corresponding benefits offered by Meridian. The analysis confirmed that Meridian's benefits package is "no less favorable in the aggregate" when compared to GDT's benefits, as required by the APA. The comparability analysis is maintained in the Calderwood & Harkness deal file.
(c) Onboarding Logistics. Meridian has coordinated onboarding logistics at the San Diego and Carlsbad facilities, including the preparation of new-hire paperwork, IT provisioning (including issuance of Meridian email accounts and system access credentials), distribution of employee handbooks and policy acknowledgments, and scheduling of orientation sessions for Transferred Employees on the Closing Date.
(d) Background Check and I-9 Verification Requirements. As a new employer, Meridian is required to complete new Form I-9 (Employment Eligibility Verification) documentation for each Transferred Employee within three (3) business days of the Closing Date. Meridian may not rely on GDT's existing I-9 records. Meridian's HR team has been advised of this requirement and has made arrangements to complete I-9 verification for all seventy-eight (78) Transferred Employees during the onboarding process. With respect to background checks, Meridian has elected to waive its standard background check requirement for Transferred Employees, on the basis that these employees were previously screened by GDT in connection with their original hire.
(e) Integration of Transferred Employees into Meridian's HR Systems. Meridian has designated a dedicated HR integration lead — whose name and contact information have been provided to Calderwood & Harkness and GDT's HR department — to coordinate the integrat