CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 600 Lexington Avenue, 30th Floor New York, NY 10022
MEMORANDUM
March 8, 2023
TO: Theodore Langston, Billing Partner, Capital Markets Group
FROM: Jennifer Kwon, Responsible Partner, Capital Markets Group
RE: Staffing Plan and Budget Estimate — Optiwave Semiconductor Corp. Convertible Notes Offering and Capped Call Overlay
Matter No.: 1014-00001
Billing Code: 48710-001
Client: Optiwave Semiconductor Corp. ("OWS")
1. Purpose and Summary
The purpose of this memorandum is to set forth the proposed staffing assignments, work stream allocation, and detailed budget estimate for Calderwood & Harkness LLP's ("C&H" or the "Firm") representation of Optiwave Semiconductor Corp. ("OWS" or the "Company") as issuer's counsel in connection with the proposed $250,000,000 aggregate principal amount offering of 2.75% Convertible Senior Notes due 2028 (the "Notes") pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), to qualified institutional buyers ("QIBs"), together with a concurrent privately negotiated capped call overlay transaction (the "Capped Call Transactions" and, together with the offering of the Notes, the "Transaction").
The engagement letter for this matter was executed by David Shih, General Counsel and Corporate Secretary of OWS, on March 6, 2023. Pursuant to the terms of the engagement letter, the Firm has agreed to a fee cap of $1,850,000, exclusive of disbursements, which are estimated at approximately $45,000 based on anticipated filing fees, document production costs, travel, and other out-of-pocket expenses customary for a transaction of this nature and complexity.
The first organizational call with the full deal team — including representatives of OWS, the initial purchasers, initial purchasers' counsel, the trustee, and other transaction parties — is scheduled for March 10, 2023 at 2:00 p.m. Eastern Time. Based on current transaction timeline expectations, we anticipate the offering will proceed on a compressed but manageable schedule, with the target pricing, signing, and closing sequence occurring in late May 2023, and final closing deliverables and binder assembly to be completed within approximately two weeks thereafter, in early to mid-June 2023.
I respectfully request that you review and approve the staffing plan and budget allocation set forth herein prior to the organizational call so that I may communicate confirmed assignments and work stream responsibilities to the full deal team at that time.
2. Transaction Overview
The following is a brief structural and economic summary of the Transaction, provided for context in evaluating the proposed staffing and budget allocation. A comprehensive Deal Summary Memorandum will be prepared by Claire Dempsey and circulated to the deal team by approximately March 15, 2023.
Issuer. Optiwave Semiconductor Corp. (Nasdaq: OWS) is a Delaware-incorporated, Nasdaq-listed fabless semiconductor company headquartered at 4800 Great America Parkway, Suite 1200, San Jose, California 95054. For its fiscal year ended December 31, 2022, OWS reported revenue of $812.4 million and Adjusted EBITDA of $198.7 million. The Company's current market capitalization is approximately $4.3 billion, based on approximately 58.6 million diluted shares outstanding at a recent closing price of $73.38 per share.
Instrument. The Company proposes to issue $250,000,000 aggregate principal amount of 2.75% Convertible Senior Notes due 2028. The Notes will bear interest at 2.75% per annum, payable semi-annually, and will mature on June 1, 2028, unless earlier converted, redeemed, or repurchased. The Notes will be convertible into shares of OWS common stock (or, at the Company's election, cash or a combination of cash and shares) at an initial conversion rate of 10.5820 shares per $1,000 principal amount of Notes, corresponding to an initial conversion price of approximately $94.50 per share. The Company intends to elect net share settlement as its default settlement method.
Over-Allotment Option. The initial purchasers will be granted a 15% over-allotment option to purchase up to an additional $37,500,000 aggregate principal amount of Notes, for a potential total offering size of $287,500,000.
Offering Structure. The Notes will be offered and sold in a private placement pursuant to Rule 144A under the Securities Act to QIBs. No registration statement will be filed with the Securities and Exchange Commission (the "SEC") in connection with the offering, and the Company does not intend to grant registration rights or to file a shelf or resale registration statement covering the Notes or the underlying common stock.
Lead Initial Purchaser / Bookrunner. Ridgepoint Capital Markets LLC will serve as the lead initial purchaser, sole bookrunner, and representative of the initial purchasers. The primary contacts at Ridgepoint are Cameron Walsh (Managing Director, Equity-Linked Products) and Natasha Okonkwo (Vice President, Capital Markets Origination).
Co-Managers. Harborstone Securities Inc. (primary contact: Jonathan Mercer) and Velthorn Zanthor & Co. (primary contact: Samira El-Amin) will serve as co-managers of the offering.
Initial Purchasers' discount and Fee Allocation. The initial purchasers will receive a 2.00% initial purchasers' discount, representing $5,750,000 on the total issue (assuming full exercise of the over-allotment option). The discount will be allocated among the initial purchasers as follows: Ridgepoint Capital Markets LLC — 60% ($3,450,000); Harborstone Securities Inc. — 25% ($1,437,500); and Velthorn Zanthor & Co. — 15% ($862,500). In addition, Ridgepoint will receive a 0.25% structuring fee of $625,000 on the $250,000,000 base offering amount.
Capped Call Transactions. Concurrently with the closing of the Notes offering, OWS will enter into privately negotiated capped call transactions with two counterparties. Ridgepoint Capital Markets LLC will serve as a capped call counterparty covering 60% of the notional amount ($172,500,000), with a premium payable by OWS of $17,250,000. Northvane Financial Products LP (primary contact: Philip Granier) will serve as the second counterparty covering the remaining 40% of the notional amount ($115,000,000), with a premium of $11,500,000. The aggregate capped call premium is $28,750,000. The capped call transactions will have a lower strike price equal to the initial conversion price of approximately $94.50 per share and an upper strike price (cap price) of $110.07 per share, representing a 50.0% premium to the reference price of $73.38 per share. The capped call transactions will expire on June 1, 2028, coterminous with the maturity of the Notes.
Trustee / Paying Agent. Broadmere Trust Company, N.A. will serve as trustee and paying agent under the Indenture. The primary contact at Broadmere Trust is Karen Llewellyn (Vice President, Corporate Trust).
Initial Purchasers' Counsel. Prescott Whitfield LLP has been retained as counsel to the initial purchasers. The primary contacts at Prescott Whitfield are Diana Castellano (Partner) and Ryan Fujimoto (Associate).
Independent Auditor. Aldgate & Finch LLP serves as OWS's independent registered public accounting firm. The primary contact is Robert Nishimura (Engagement Partner).
Transfer Agent. Clearwater Transfer Services Inc. serves as the Company's transfer agent for its common stock.
Key Client Contacts at OWS. David Shih (General Counsel and Corporate Secretary), Priya Nandakumar (Chief Financial Officer), and Rachel Fontaine (Treasurer) will serve as the Company's primary contacts for this engagement.
Existing Credit Facility. OWS is party to a $300,000,000 senior secured revolving credit facility (the "Revolving Credit Facility") with Crestline National Bank, N.A. as administrative agent. The Company currently has $75,000,000 outstanding under the Revolving Credit Facility. OWS intends to apply a portion of the net proceeds from the Notes offering to repay the outstanding balance in full. We have identified that the incurrence of the Notes will require a limited consent and waiver under Section 7.01(b) of the Credit Agreement to permit the Notes as "Permitted Additional Indebtedness" thereunder. We anticipate this to be a straightforward process but have allocated time within our budget accordingly.
Use of Proceeds. Based on preliminary estimates, net proceeds from the offering are expected to be approximately $251,800,000, calculated as $287,500,000 in gross proceeds (assuming full exercise of the over-allotment option) less the initial purchasers' discount of $5,750,000, the aggregate capped call premium of $28,750,000, and estimated offering expenses of approximately $1,200,000. The Company intends to use approximately $75,000,000 of net proceeds to repay the outstanding balance under the Revolving Credit Facility, with the remainder to be used for general corporate purposes.
3. Proposed Staffing
3.1 Core Deal Team
The following table sets forth the proposed core deal team, together with each team member's role, position, estimated time commitment as a percentage of total anticipated hours, and standard billing rate. Specific hour estimates by work stream are provided in Section 6 below.
3.2 Support Resources
In addition to the core deal team, the following support resources will be utilized throughout the Transaction:
Paralegal Support. One dedicated capital markets paralegal will be assigned to the matter for the duration of the engagement. The paralegal will be responsible for closing binder assembly and organization, signature page coordination and collection, liaison with DTC and Broadmere Trust Company, N.A. on logistical and mechanical matters related to the deposit and authentication of the Global Note, blue sky compliance review and memorandum preparation (to the extent applicable to resale restrictions), preparation and filing of the Nasdaq Supplemental Listing Application, document management and version control throughout the drafting process, and general administrative support to the deal team. We estimate total paralegal time at approximately 60–80 hours over the life of the engagement, with the heaviest concentration of hours expected during the two-week period immediately preceding and following closing.
Word Processing and Document Production. Given the volume and complexity of drafting associated with the Indenture and Offering Memorandum in particular, the deal team will require dedicated word processing and document production support during peak drafting periods. We anticipate particularly heavy utilization of these resources during the initial drafting phase (mid-April through early May 2023) and the final execution and closing phase (late May through early June 2023). Word processing charges will be billed as disbursements at standard Firm rates.
3.3 Staffing Notes and Coordination Protocols
The following protocols will govern the allocation of responsibilities and lines of communication for the engagement:
Claire Dempsey will serve as the primary day-to-day point of contact for Prescott Whitfield LLP (Diana Castellano and Ryan Fujimoto) on all document drafting, negotiation, and comment exchange matters. Claire will also maintain the primary working relationship with Broadmere Trust Company, N.A. (Karen Llewellyn) on Indenture negotiation, trustee deliverables, and closing mechanics. All substantive drafts, mark-ups, and comment letters exchanged with counterpart counsel will flow through Claire, who will escalate material commercial and legal issues to Jennifer Kwon as appropriate.
Jennifer Kwon will lead all communications with David Shih (OWS General Counsel) and Ridgepoint Capital Markets LLC (Cameron Walsh) on deal strategy, material commercial points, pricing-related matters, and any issues requiring senior-level client or investment bank engagement. Jennifer will also serve as the Firm's opinion signatory and will have final approval authority over all substantive work product before external distribution.
Leonard Cross will coordinate directly with Priya Nandakumar (CFO) and Rachel Fontaine (Treasurer) on all tax treatment matters related to both the Notes and the Capped Call Transactions. Leonard will also engage directly with OWS's independent auditor, Aldgate & Finch LLP (Robert Nishimura), on any accounting and tax intersection issues, including the interaction between ASC 470-20 / ASU 2020-06 accounting treatment for the convertible notes and the U.S. federal income tax characterization of the instruments. Leonard's tax group engagement will be coordinated with the broader deal team to ensure consistency of disclosure in the Offering Memorandum.
Audrey Zhou will prepare the Rule 144A / Section 4(a)(2) exemption analysis memorandum as an early deliverable, targeted for completion by approximately April 3, 2023. This memorandum will serve as the foundational analysis supporting the offering exemption and will inform the selling restrictions and transfer restriction disclosure in the Offering Memorandum.
Conflicts Clearance. No conflicts issues have been identified. The Firm's conflict clearance memorandum dated March 3, 2023 confirmed that no disqualifying conflicts exist with respect to any party to the Transaction, including OWS, any of the initial purchasers (Ridgepoint, Harborstone, and Velthorn Zanthor), the capped call counterparties (Ridgepoint and Northvane), the trustee (Broadmere Trust), initial purchasers' counsel (Prescott Whitfield), the independent auditor (Aldgate & Finch), or the transfer agent (Clearwater Transfer Services). A copy of the conflict clearance memorandum is on file with the Firm's General Counsel.
4. Work Stream Allocation
The following sections describe in detail the five principal work streams that constitute the scope of the engagement, together with the assigned personnel, scope of deliverables, budget allocation, and target milestones for each work stream. The work streams are designed to proceed in parallel, with interdependencies managed through regular internal deal team calls (proposed weekly, on Wednesdays at 4:00 p.m. Eastern Time) and continuous coordination among team members.
4.1 Work Stream 1: Indenture and Related Documents
Primary Drafter: Claire Dempsey
Reviewer / Approver: Jennifer Kwon
Scope of Work
This work stream encompasses the preparation, negotiation, and finalization of the Indenture and all related documentation, including:
(a) Indenture. Drafting the Indenture between OWS, as issuer, and Broadmere Trust Company, N.A., as trustee (the "Indenture"). The Indenture will be governed by New York law and will contain the full terms of the Notes, including without limitation:
(i) Conversion Mechanics. The Notes will be convertible at an initial conversion rate of 10.5820 shares of OWS common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $94.50 per share). The Indenture will include provisions for net share settlement election, permitting the Company to satisfy its conversion obligation in cash, shares, or a combination thereof, with cash settlement of the principal amount and share settlement of the conversion value in excess of the principal amount as the intended default method. The conversion mechanics will include customary provisions for observation periods, daily settlement amounts, and daily conversion values.
(ii) Optional Redemption. The Company will have the right to redeem the Notes, in whole or in part, on or after June 6, 2026, if the last reported sale price of OWS common stock exceeds 130% of the conversion price (i.e., approximately $122.85 per share) for at least 20 trading days during any 30 consecutive trading day period. The redemption price will be 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
(iii) Fundamental Change Provisions. The Indenture will include a fundamental change put right permitting holders to require OWS to repurchase their Notes at 100% of the principal amount plus accrued and unpaid interest upon the occurrence of a "fundamental change" as defined therein.
(iv) Make-Whole Fundamental Change. The Indenture will include a make-whole fundamental change adjustment table providing for an increase to the conversion rate upon conversion of Notes in connection with a make-whole fundamental change, based on the effective date and the stock price in effect at such time.
(v) Events of Default. Customary events of default, including failure to pay principal or interest, failure to deliver conversion consideration, failure to provide required notices, breach of covenants or representations, cross-acceleration to other indebtedness in excess of a threshold amount, and certain bankruptcy and insolvency events.
(vi) Covenants and Reporting Obligations. The Indenture will include customary covenants applicable to convertible note issuances, including SEC reporting obligations (or, since the Notes will not be registered, obligations to provide equivalent information to holders and prospective purchasers in accordance with Rule 144A(d)(4)).
(b) Form of Global Note (Exhibit A to the Indenture). Drafting and finalization of the form of Global Note to be deposited with Broadmere Trust Company, N.A., as custodian for The Depository Trust Company ("DTC"). The Global Note will bear CUSIP number 683742AA5 and ISIN US683742AA53 and will be deposited with DTC through DTC Participant No. 2174 (Broadmere Trust Company, N.A.).
(c) First Supplemental Indenture. If required in connection with the issuance of additional Notes upon exercise of the over-allotment option, a First Supplemental Indenture will be prepared to supplement the base Indenture to reflect the additional principal amount.
(d) Instruction Letter to Trustee. Preparation of the instruction letter from OWS to Broadmere Trust Company, N.A. regarding the authentication and delivery of the Notes at closing.
(e) Officers' Certificate to Trustee. Drafting the Officers' Certificate to be delivered to the trustee at closing in connection with the establishment of the terms of the Notes under the Indenture.
(f) Paying Agent Agreement / Supplement. To the extent any paying agent arrangements require documentation separate from the Indenture itself, such agreements or supplements will be prepared as part of this work stream.
Budget Allocation. Approximately 30% of the total fee budget, or approximately $555,000, is allocated to Work Stream 1. This reflects the central importance of the Indenture as the governing document for the Notes and the substantial drafting, negotiation, and revision effort that complex convertible note indentures typically require. We anticipate that the Indenture negotiation with Prescott Whitfield will involve multiple rounds of mark-ups, given the customary areas of focus for initial purchasers' counsel (including conversion mechanics, settlement provisions, event of default thresholds, and reporting obligations).
Target Milestones. The first draft of the Indenture is targeted for circulation to all transaction parties by approximately April 21, 2023. We anticipate that negotiation of the Indenture with Prescott Whitfield LLP will proceed through late April and May 2023, with the execution version to be finalized and delivered at closing. The form of Global Note and ancillary trustee deliverables will be prepared in parallel with the Indenture negotiation and finalized for closing.
4.2 Work Stream 2: Purchase Agreement
Primary Drafter: Claire Dempsey
Supporting Drafter: Audrey Zhou (schedules and disclosure updates)
Reviewer / Approver: Jennifer Kwon
Scope of Work
This work stream covers the preparation and negotiation of the Purchase Agreement and related officers' certificates, including:
(a) Purchase Agreement. Drafting the Purchase Agreement among OWS, as issuer, and Ridgepoint Capital Markets LLC, as representative of the several initial purchasers, Harborstone Securities Inc., and Velthorn Zanthor & Co. (collectively, the "Initial Purchasers"). The Purchase Agreement will set forth the key economic terms of the offering, including:
(i) The initial purchasers' discount of 2.00%, representing $5,750,000 on the total issue (assuming full exercise of the over-allotment option of $37,500,000), allocated among the initial purchasers as follows: Ridgepoint Capital Markets LLC — 60% ($3,450,000); Harborstone Securities Inc. — 25% ($1,437,500); and Velthorn Zanthor & Co. — 15% ($862,500).
(ii) A structuring fee of 0.25% payable to Ridgepoint Capital Markets LLC, representing $625,000 on the $250,000,000 base offering amount.
(iii) The 15% over-allotment option, granting the initial purchasers the right to purchase up to an additional $37,500,000 aggregate principal amount of Notes on the same terms, exercisable within 13 days after the date of the Offering Memorandum.
The Purchase Agreement will also contain customary representations and warranties of OWS, conditions to the obligations of the Initial Purchasers to close (including the delivery of comfort letters from Aldgate & Finch LLP, legal opinions and negative assurance letters from issuer's counsel, opinions of initial purchasers' counsel, officers' certificates, and other closing deliverables), indemnification and contribution provisions, lock-up provisions applicable to the Company and its executive officers and directors, and customary termination provisions.
(b) Officers' Certificate Pursuant to Section 6(d) of the Purchase Agreement. Drafting the Officers' Certificate to be executed by Marcus Harding (Chief Executive Officer) and Priya Nandakumar (Chief Financial Officer) at closing, certifying to the accuracy of representations and warranties, the satisfaction of conditions to closing, and the absence of material adverse changes.
(c) Schedules and Disclosure Updates. Audrey Zhou will be responsible for the preparation and updating of disclosure schedules to the Purchase Agreement, drawing on the Company's public filings, due diligence information, and management representations.
Budget Allocation. Approximately 18% of the total fee budget, or approximately $333,000, is allocated to Work Stream 2. The Purchase Agreement is a critical but relatively more standardized document, and we expect to leverage the Firm's extensive precedent library from recent convertible note offerings. However, the budget allocation accounts for the potential need for negotiation with Prescott Whitfield on key provisions, including the scope of representations and warranties, the materiality qualifiers applicable to closing conditions, and the structure of the indemnification provisions.
Target Milestones. The first draft of the Purchase Agreement is targeted for circulation by approximately May 1, 2023. The Purchase Agreement will be executed on the pricing date plus one business day (currently estimated at approximately May 24, 2023), with all conditions to closing to be satisfied at closing on the settlement date (currently estimated at May 30, 2023 on a T+3 settlement basis, or as otherwise agreed among the parties).
4.3 Work Stream 3: Offering Memorandum
Primary Drafter: Claire Dempsey (Description of Notes, Description of Capped Call Transactions, Use of Proceeds, Capitalization)
Supporting Drafter: Audrey Zhou (Business section, Risk Factors, Selling Restrictions, Description of Capital Stock, Regulatory/Exemption disclosure)
Reviewer / Approver: Jennifer Kwon
Scope of Work
This work stream encompasses the preparation, revision, and finalization of both the Preliminary Offering Memorandum and the Final Offering Memorandum, together with all associated due diligence, disclosure coordination, and comfort letter processes:
(a) Preliminary Offering Memorandum. Drafting and finalization of the Preliminary Offering Memorandum (the "Preliminary OM"), which will include all material disclosure regarding the Transaction, the Company, and the Notes, with bracketed pricing terms to be completed upon pricing. The Preliminary OM will serve as the primary marketing document distributed to prospective QIB investors during the marketing period. Key sections include:
(i) Summary of the Offering and the Company
(ii) Risk Factors (including risks related to the Notes, conversion mechanics, capped call transactions, the Company's business and industry, and general market conditions)
(iii) Use of Proceeds (including the repayment of $75,000,000 outstanding under the Revolving Credit Facility and application of the remainder for general corporate purposes)
(iv) Capitalization (reflecting the Company's capitalization on a pro forma basis giving effect to the offering)
(v) Description of Notes (comprehensive description of the material terms of the Notes, including conversion, redemption, fundamental change, events of default, and covenants)
(vi) Description of Capped Call Transactions (overview of the economic terms, counterparties, and effect on dilution)
(vii) Business description (drawing on OWS public filings with updates as appropriate)
(viii) Description of Capital Stock
(ix) Material U.S. Federal Income Tax Considerations (coordinated with Leonard Cross)
(x) Selling Restrictions and Transfer Restrictions (Rule 144A offering to QIBs; no registration rights)
(xi) Plan of Distribution
The target for finalization of the Preliminary OM is approximately May 18, 2023.
(b) Final Offering Memorandum. Following pricing, Claire Dempsey will prepare the Final Offering Memorandum (the "Final OM"), incorporating final pricing terms. Based on current estimates, the final pricing terms are expected to include: reference price of $73.38 per share, conversion price of approximately $94.50 per share (conversion premium of approximately 28.8%), and cap price of $110.07 per share (representing a 50.0% premium to the reference price). The Final OM will be dated on or about the pricing date plus one business day, currently estimated at May 24, 2023.
(c) Due Diligence. The deal team will conduct due diligence sessions with OWS management, including Marcus Harding (CEO), Priya Nandakumar (CFO), and David Shih (General Counsel), to confirm the accuracy and completeness of all disclosure in the Offering Memorandum. We anticipate at least two formal management due diligence sessions, with supplemental calls as needed. Audrey Zhou will coordinate the due diligence process, including the preparation and circulation of a due diligence request list and the organization and review of due diligence materials.
(d) Marketing Coordination. Claire Dempsey will coordinate with Ridgepoint Capital Markets LLC (Natasha Okonkwo) to ensure consistency between the Offering Memorandum and any marketing materials, investor presentations, or messaging used by the initial purchasers in connection with the offering.
(e) Comfort Letter Coordination. The deal team will coordinate with Aldgate & Finch LLP (Robert Nishimura) on the delivery of the comfort letter. A comfort letter request letter will be prepared and sent to Aldgate & Finch by approximately May 16, 2023, with the comfort letter to be delivered at or prior to closing.
(f) Financial Disclosure Matters. The Offering Memorandum will include disclosure of OWS's fiscal year 2022 financial results, including revenue of $812.4 million and Adjusted EBITDA of $198.7 million, as well as the Company's current market capitalization of approximately $4.3 billion (based on approximately 58.6 million diluted shares outstanding at $73.38 per share). Claire Dempsey and Audrey Zhou will coordinate with OWS management and Aldgate & Finch to confirm the accuracy of all financial disclosure.
(g) Tax Disclosure Section. The tax disclosure section of the Offering Memorandum will be prepared in coordination with Leonard Cross, addressing the U.S. federal income tax treatment of the Notes (including their characterization as variable rate debt instruments) and the tax characterization of the capped call transactions.
(h) No Registration Rights Disclosure. The Offering Memorandum will disclose that the Company does not intend to file a shelf registration statement or a resale registration statement covering the Notes or the underlying common stock, and that holders will be required to rely on applicable exemptions from registration for any resale of the Notes.
Budget Allocation. Approximately 22% of the total fee budget, or approximately $407,000, is allocated to Work Stream 3. The Offering Memorandum is a labor-intensive deliverable, requiring extensive drafting, management review, factual verification, and coordination with multiple parties. The budget accounts for the time required to prepare both the Preliminary OM and the Final OM, conduct due diligence sessions, coordinate with Aldgate & Finch on the comfort letter, and ensure consistency of disclosure across all transaction documents.
Target Milestones. The Draft Preliminary Offering Memorandum is targeted for circulation to the Company and the Initial Purchasers by approximately April 14, 2023. Following comments from the Company, the Initial Purchasers, and Prescott Whitfield, the Preliminary OM is targeted for finalization by approximately May 18, 2023. The Final Offering Memorandum, incorporating final pricing terms, is targeted for completion on approximately May 24, 2023.
4.4 Work Stream 4: Capped Call Documentation
Primary Drafter: Claire Dempsey (ISDA Confirmations and Master Agreements)
Tax / Regulatory Review: Leonard Cross (tax characterization, Dodd-Frank swap considerations, Section 1032 analysis, constructive sale risk)
Reviewer / Approver: Jennifer Kwon
Scope of Work
This work stream covers the preparation, negotiation, and finalization of all documentation related to the Capped Call Transactions, together with associated tax and regulatory analysis:
(a) 2002 ISDA Master Agreements. Drafting and negotiation of two separate 2002 ISDA Master Agreements — one between OWS and Ridgepoint Capital Markets LLC, and one between OWS and Northvane Financial Products LP. Each ISDA Master Agreement will include a negotiated Schedule with elections and modifications tailored to the Transaction, including:
(i) Governing law: New York
(ii) Elections on cross-default threshold, credit event provisions, and termination event provisions
(iii) Netting provisions and close-out netting elections
(iv) Calculation agent designation (anticipated to be the respective counterparty, subject to dispute resolution mechanics)
(v) Representations, agreements, and elections appropriate for a corporate end-user entering into equity-linked derivative transactions
(b) Capped Call Confirmations. Drafting and negotiation of two Capped Call Confirmations, each supplementing the applicable ISDA Master Agreement:
(i) Ridgepoint Confirmation: Covering 60% of the notional amount, or $172,500,000 in aggregate notional amount, with a premium payable by OWS of $17,250,000. The lower strike price will be set at the conversion price of approximately $94.50 per share, and the upper strike price (cap price) will be $110.07 per share. The expiration date will be June 1, 2028.
(ii) Northvane Confirmation: Covering 40% of the notional amount, or $115,000,000 in aggregate notional amount, with a premium payable by OWS of $11,500,000. The economic terms (lower strike, upper strike, expiration) will be identical to the Ridgepoint Confirmation.
(c) Tax Memorandum. Leonard Cross will prepare a comprehensive tax memorandum analyzing the U.S. federal income tax treatment of the Capped Call Transactions, including:
(i) Whether the capped call transactions should be treated on an integrated basis with the convertible notes or as separate prepaid forward contracts on OWS common stock
(ii) The application of Section 1032 of the Internal Revenue Code (providing non-recognition treatment for a corporation's dealings in its own stock) to OWS's entry into the capped call transactions
(iii) Analysis of constructive sale risk under Section 1259 of the Internal Revenue Code
(iv) Interaction of the capped call tax treatment with the convertible notes tax characterization as variable rate debt instruments
(v) Target delivery date: May 29, 2023
(d) Internal Regulatory and Structural Issues Memorandum. Leonard Cross and Claire Dempsey will jointly prepare an internal memorandum addressing Dodd-Frank Act considerations applicable to the capped call counterparties, including:
(i) Northvane Financial Products LP's status as a CFTC-registered swap dealer and the implications thereof for the documentation and execution of the capped call transactions
(ii) Ridgepoint Capital Markets LLC's status as acting in a principal capacity (not as a registered swap dealer) and the resulting regulatory treatment
(iii) End-user exemption analysis for OWS as a commercial end-user of equity derivative products
(iv) Reporting and recordkeeping obligations under Title VII of the Dodd-Frank Act
(v) Target delivery date: approximately April 18, 2023
(e) Counterparty Negotiation. Claire Dempsey will lead the negotiation of the ISDA Master Agreements and Capped Call Confirmations with Ridgepoint Capital Markets LLC (Cameron Walsh) and Northvane Financial Products LP (Philip Granier). Jennifer Kwon will be available for escalation on material commercial terms.
Budget Allocation. Approximately 15% of the total fee budget, or approximately $277,500, is allocated to Work Stream 4. The capped call documentation involves specialized drafting of ISDA derivatives documentation, as well as complex tax and regulatory analysis. The budget reflects the involvement of Leonard Cross as a specialist partner, whose higher-value time is essential for the tax memorandum and regulatory analysis. The negotiation of two separate ISDA Master Agreements with two different counterparties (one of whom is a registered swap dealer) adds incremental complexity relative to a single-counterparty structure.
Target Milestones. The ISDA Master Agreements and Capped Call Confirmations are targeted to be substantially negotiated by mid-May 2023, with execution to occur at closing on May 30, 2023 (or as otherwise agreed). The internal regulatory and structural issues memorandum is targeted for delivery by approximately April 18, 2023, and the tax memorandum is targeted for delivery by May 29, 2023.
4.5 Work Stream 5: Legal Opinions, Closing Deliverables, and Ancillary Items
Primary Drafter: Claire Dempsey (opinions, secretary's certificate, officers' certificates, closing checklist)
Supporting Drafter: Audrey Zhou (Nasdaq listing application, DTC eligibility letter, ancillary filings)
Tax Opinion Drafter: Leonard Cross (tax memorandum / opinion to OWS)
Opinion Signatory: Jennifer Kwon
Scope of Work
This work stream encompasses the full range of legal opinions, closing certificates, corporate authorization documents, regulatory filings, and logistical closing deliverables required to consummate the Transaction:
(a) Issuer's Counsel Opinion to Initial Purchasers. Claire Dempsey will prepare, and Jennifer Kwon will review and sign, the Issuer's Counsel Opinion addressed to Ridgepoint Capital Markets LLC, Harborstone Securities Inc., and Velthorn Zanthor & Co. The opinion will cover the following matters:
(i) Corporate existence and good standing of OWS under the laws of the State of Delaware
(ii) Due authorization of the Notes, the Indenture, and the Purchase Agreement by all necessary corporate action
(iii) Enforceability of the Indenture and the Purchase Agreement against OWS in accordance with their respective terms, subject to customary exceptions and qualifications
(iv) Valid issuance of shares of common stock upon conversion of the Notes as fully paid and non-assessable
(v) No requirement for registration of the Notes under the Securities Act by reason of the exemption afforded by Section 4(a)(2) thereof and Rule 144A thereunder, assuming compliance with the conditions set forth therein
(vi) No requirement for registration of the Company as an investment company under the Investment Company Act of 1940, as amended
(vii) No conflict with the Company's certificate of incorporation, bylaws, or material agreements to which the Company is a party
(viii) Governed by New York law and Delaware law, as applicable
(b) Issuer's Counsel Negative Assurance (10b-5) Letter. Claire Dempsey will prepare, and Jennifer Kwon will review and sign, a negative assurance letter addressed to the Initial Purchasers, confirming that, based on our participation in the preparation of the Offering Memorandum and our review of the due diligence record, nothing has come to our attention that causes us to believe that the Offering Memorandum (as of its date and as of the closing date) contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
(c) Issuer's Counsel Opinion to Trustee. Claire Dempsey will prepare, and Jennifer Kwon will review and sign, the Issuer's Counsel Opinion addressed to Broadmere Trust Company, N.A., covering due authorization, execution, and delivery of the Indenture, enforceability of the Indenture, and valid issuance of shares of common stock upon conversion of the Notes.
(d) Tax Opinion / Memorandum. Leonard Cross will prepare a tax opinion or memorandum addressed to OWS, dated May 29, 2023, covering the U.S. federal income tax treatment of the Notes and the Capped Call Transactions. This deliverable is described in greater detail in Section 4.4(c) above.
(e) Secretary's Certificate. Claire Dempsey will draft the Secretary's Certificate to be executed by David Shih (General Counsel and Corporate Secretary of OWS), attaching the following exhibits:
(i) Certificate of Incorporation of OWS (as currently in effect)
(ii) Bylaws of OWS (as currently in effect)
(iii) Board Resolutions adopted on May 19, 2023 (authorizing the offering of the Notes and the entry into the Transaction)
(iv) Pricing Committee Resolutions adopted on May 23, 2023 (approving final pricing terms)
(v) Incumbency certificates for all authorized officers of OWS who will execute Transaction documents
(f) Board Resolutions and Pricing Committee Resolutions. Claire Dempsey will draft the Board Resolutions authorizing the offering and sale of up to $287,500,000 aggregate principal amount of Notes, the execution and delivery of the Indenture, the Purchase Agreement, and the Capped Call Confirmations, and the other actions necessary to consummate the Transaction. Separate Pricing Committee Resolutions will be drafted for adoption on or about the pricing date, approving the final pricing terms, including the conversion rate, cap price, capped call premium, initial purchasers' discount, and other economic terms to be determined at pricing.
(g) Limited Consent and Waiver under Revolving Credit Facility. Claire Dempsey will prepare a limited consent and waiver under the Revolving Credit Facility with Crestline National Bank, N.A. as administrative agent, to permit the incurrence of the Notes as "Permitted Additional Indebtedness" under Section 7.01(b) of the Credit Agreement. The target date for execution of the consent is May 22, 2023, in advance of the anticipated pricing and signing date.
(h) Nasdaq Supplemental Listing Application. Audrey Zhou will prepare and file a Nasdaq Supplemental Listing Application for the listing of up to approximately 3,042,325 shares of OWS common stock issuable upon conversion of the Notes (calculated as 287,500 Notes at a conversion rate of 10.5820 shares per Note). The target filing date is May 25, 2023.
(i) DTC Eligibility Letter / Letter of Representations. Audrey Zhou will prepare the DTC Eligibility Letter and Letter of Representations to be executed by OWS and Broadmere Trust Company, N.A. and delivered to DTC in connection with the deposit and book-entry settlement of the Notes.
(j) Comfort Letter Request. Claire Dempsey, with assistance from Audrey Zhou, will prepare and circulate the comfort letter request to Aldgate & Finch LLP (attention: Robert Nishimura) by approximately May 16, 2023, specifying the financial information, tables, and circles to be covered in the comfort letter.
(k) Master Closing Checklist. Claire Dempsey will prepare and maintain a comprehensive Master Closing Checklist throughout the engagement, tracking all deliverables, conditions precedent, and responsibility assignments. The Closing Checklist will be updated regularly and circulated to all transaction parties.
(l) Funds Flow Memorandum. Claire Dempsey will prepare the funds flow memorandum for closing, detailing the flow of proceeds from the initial purchasers through the trustee and to the issuer, the payment of initial purchasers' discount, structuring fee, capped call premiums, and offering expenses, and the application of net proceeds (including the repayment of the Revolving Credit Facility).
(m) Closing Confirmation Communications. Upon completion of closing, Claire Dempsey and the paralegal will manage all closing confirmation communications, including confirmation of wire transfers, authentication and delivery of the Notes, and issuance of closing certificates. The final closing binder will be assembled and distributed within approximately two weeks following closing.
Budget Allocation. Approximately 15% of the total fee budget, or approximately $277,500, is allocated to Work Stream 5. This allocation reflects the breadth of closing deliverables and the importance of the legal opinions as critical conditions to closing. While certain of these deliverables (such as the Nasdaq listing application, DTC eligibility letter, and officers' certificates) are relatively standardized, the legal opinions require careful drafting, internal review, and coordination with the broader deal record. The preparation of board resolutions and the limited consent under the Revolving Credit Facility add further complexity to this work stream.
Target Milestones. The legal opinions and closing certificates are targeted to be substantially drafted by mid-May 2023, with final versions delivered at closing on May 30, 2023. The Closing Checklist will be initiated at the commencement of the engagement and maintained on a rolling basis through matter close. The final closing binder is targeted for completion by approximately June 12, 2023.
5. Internal Memoranda and Analysis Work
In addition to the externally-facing deliverables described in the work stream allocations above, the deal team will prepare the following internal memoranda and analyses in support of the Transaction. The costs associated with these internal work products are included within the work stream budget allocations described in Section 4 (primarily within Work Streams 3 and 4).
Rule 144A / Section 4(a)(2) Exemption Memorandum. Audrey Zhou will prepare a memorandum analyzing the availability of the exemption from Securities Act registration for the offering of the Notes pursuant to Section 4(a)(2) of the Securities Act and Rule 144A thereunder. The memorandum will address the QIB requirements, information delivery obligations under Rule 144A(d)(4), general solicitation restrictions, integration analysis with other recent or contemplated securities offerings by OWS, and the applicability of the "safe harbor" provisions of Regulation D to the extent relevant. Target delivery date: approximately April 3, 2023.
ASC 470-20 / ASU 2020-06 Accounting and Tax Interaction Memorandum. Claire Dempsey and Leonard Cross will jointly prepare a memorandum analyzing the accounting treatment of the convertible notes and the capped call transactions, and the interaction between accounting treatment and U.S. federal income tax characterization. The memorandum will address: (a) the classification of the Notes as a single liability instrument under ASC 470-20 as amended by ASU 2020-06 (eliminating the prior requirement to bifurcate the embedded conversion feature into a separate equity component); (b) the equity classification of the capped call transactions under applicable accounting guidance (treatment as indexed to OWS stock and meeting equity classification conditions, with the capped call premium recorded as a reduction to additional paid-in capital); and (c) the interaction of these accounting treatments with the federal tax characterization of the instruments, including any areas where accounting and tax treatment may diverge. Target delivery date: approximately April 10, 2023.
Capped Call Regulatory and Structural Issues Memorandum. As described in Section 4.4(d) above, Leonard Cross and Claire Dempsey will prepare an internal memorandum addressing the tax treatment of the capped call transactions (integrated versus separate prepaid forward contract characterization), the application of Section 1032 of the Internal Revenue Code, constructive sale risk under Section 1259, and Dodd-Frank Act swap dealer considerations for Ridgepoint and Northvane. Target delivery date: approximately April 18, 2023.
Deal Summary Memorandum. Claire Dempsey will prepare a comprehensive Deal Summary Memorandum for circulation to Jennifer Kwon and the full deal team, providing a detailed structural and economic overview of the Transaction, a summary of all transaction parties and their roles, key economic terms, and a preliminary timeline. This memorandum will serve as the principal reference document for the deal team throughout the engagement. Target delivery date: approximately March 15, 2023.
6. Estimated Budget Against Fee Cap
6.1 Summary Budget Table
The following table sets forth the estimated hours and fees for each work stream, aggregated across all team members. The allocation is designed to fully utilize the agreed-upon fee cap while maintaining appropriate flexibility for negotiation dynamics and unforeseen complexities.
The blended effective rate across all team members, based on the above estimates, is approximately $1,451 per hour. This reflects the mix of partner, senior associate, mid-level associate, and paralegal time described in the staffing plan. Actual hourly allocation among team members may shift modestly during the engagement depending on the nature and complexity of specific tasks, but the overall fee will not exceed the cap absent prior approval.
6.2 Fee Cap and Contingency
The fee cap established in the engagement letter is $1,850,000. The budget set forth above is designed to fully utilize the cap with a minimal contingency cushion. Given the compressed timeline and the breadth of deliverables, we do not recommend building in a formal hold-back or contingency reserve. Rather, we will manage the budget actively through monthly tracking and regular check-ins between Jennifer Kwon and Theodore Langston.
Disbursements are estimated at approximately $45,000 and are excluded from the fee cap pursuant to the terms of the engagement letter. A detailed disbursement estimate is set forth in Section 6.3 below.
Key Budget Risks. We have identified the following principal risks to the budget:
(a) Extended Indenture or Purchase Agreement Negotiation. If negotiation of the Indenture or Purchase Agreement with Prescott Whitfield LLP proves more extensive than anticipated — for example, due to protracted discussions regarding conversion mechanics, event of default thresholds, or indemnification provisions — Work Streams 1 and 2 could exceed their allocated budgets.
(b) Complex Capped Call ISDA Negotiation. The negotiation of two separate ISDA Master Agreements and Capped Call Confirmations with two counterparties introduces incremental complexity. If Northvane Financial Products LP, as a CFTC-registered swap dealer, insists on non-standard terms or if significant disagreements arise regarding calculation agent designation, cross-default provisions, or other Schedule elections, additional time may be required.
(c) Offering Memorandum Due Diligence Depth. If due diligence reveals issues requiring additional disclosure, supplemental risk factors, or revisions to the business description, the Offering Memorandum drafting and revision process could extend beyond current estimates.
Mitigation Strategies. To manage these risks within the fee cap, the deal team will implement the following strategies:
(a) Audrey Zhou will handle initial research, first drafts of memoranda, and supporting drafting tasks to the maximum extent appropriate for her experience level, thereby preserving partner time for higher-value strategic and negotiation tasks.
(b) The deal team will leverage C&H's extensive precedent forms from recent convertible note offerings (including the [redacted] and [redacted] transactions in Q4 2022), reducing drafting time and ensuring that initial drafts reflect current market terms.
(c) Claire Dempsey will engage Prescott Whitfield LLP early in the process to establish mark-up protocols, agree on a negotiation timeline, and identify key issues in advance, minimizing inefficient back-and-forth and unnecessary revision cycles.
Budget Overrun Protocol. If, at any point during the engagement, it appears likely that total fees will approach or exceed the fee cap, Jennifer Kwon will promptly discuss the situation with Theodore Langston and, if appropriate, with the client (David Shih) to determine the appropriate course of action, which may include requesting an increase in the fee cap, adjusting the scope of work, or implementing additional efficiency measures. No fees in excess of the cap will be billed without the prior written consent of the client.
6.3 Disbursement Estimate
The following table sets forth the estimated disbursements for the engagement. All disbursements are outside the fee cap and will be billed to the client at actual cost.
Travel disbursements are contingent on whether in-person due diligence sessions are required at OWS's headquarters in San Jose, California. If all due diligence can be conducted via videoconference, travel costs may be significantly reduced or eliminated. We will confirm the due diligence format with David Shih during the organizational call on March 10, 2023.