PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
April 25, 2022
MEMORANDUM
FROM: Calderwood & Harkness LLP
TO: Jennifer Kwon, Responsible Partner, Capital Markets
PREPARED BY: Brendan Walsh, Lead Associate, Capital Markets Natasha Forbes, Working Associate, Capital Markets
RE: Calloway-Briggs Renewables Inc. — Proposed Initial Public Offering — Due Diligence Memorandum: Employment and Benefit Plans
C&H MATTER NO.: 1015-00001
STATUS: Draft — Subject to Revision
This memorandum constitutes attorney work product and is protected from disclosure by the attorney-client privilege and the work-product doctrine. This memorandum has been prepared for the exclusive use of Calderwood & Harkness LLP personnel working on the above-referenced matter and is not intended for distribution to any third party without the prior written consent of the undersigned. The analyses, opinions, and recommendations contained herein are preliminary, based upon documents and information made available through the date hereof, and are subject to revision upon receipt of additional information or further legal review.
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I. Executive Summary
This memorandum summarizes the findings of our employment and benefit-plan due diligence review conducted in connection with the proposed initial public offering (the "IPO" or the "Offering") of shares of common stock of Calloway-Briggs Renewables Inc. ("CBR" or the "Company") on the New York Stock Exchange (the "NYSE") under proposed ticker symbol CBRI. The anticipated offering size is approximately $600,000,000 of common stock at an assumed midpoint offering price of $22.00 per share. The underwriters for the Offering are led by Wainwright Kestrel Bancorp and Prescott Lehmann Securities LLC as joint book-running managers.
Scope of Review. Our review encompassed the following subject matter areas:
• Employment agreements for all named executive officers ("NEOs"), including base compensation, bonus arrangements, equity grants, and ancillary terms;
• Severance and change-in-control arrangements for all NEOs;
• Non-competition, non-solicitation, confidentiality, and inventions assignment agreements for NEOs and a representative sample of non-NEO senior employees;
• Equity compensation arrangements, including pre-IPO equity grants, the proposed 2022 Omnibus Equity Incentive Plan (the "2022 Plan"), and the proposed 2022 Employee Stock Purchase Plan (the "2022 ESPP");
• Employee benefit plans, including the CBR 401(k) Savings Plan, health and welfare plans, and other benefit programs;
• ERISA compliance for all applicable plans;
• Section 409A of the Internal Revenue Code of 1986, as amended (the "Code") compliance for deferred compensation arrangements and stock option grants;
• Workforce composition, including headcount, geographic distribution, and functional breakdown;
• Worker classification practices, including review of independent contractor arrangements;
• Collective bargaining analysis and unionization status;
• OSHA and workplace safety compliance; and
• Related policies and governance documents, including the Company's draft insider trading policy and draft code of business conduct and ethics.
Materials Reviewed. We reviewed responsive documents produced by CBR management, principally Sandra Haverford, General Counsel & Corporate Secretary, and Rachel Whitmore, Chief People Officer, pursuant to the Due Diligence Request List — Employment & Benefits (Document 13 in the matter document index, as supplemented by the Second Supplemental Request dated March 14, 2022). A complete list of documents reviewed is set forth in Appendix A to this memorandum. We also conducted telephonic due diligence interviews with Ms. Haverford and Ms. Whitmore on March 21, 2022 and April 4, 2022, respectively, and a follow-up call with both on April 18, 2022.
Coordination Note. The Section 409A valuation analysis and related "cheap stock" analysis are addressed in detail in the separate memorandum entitled "Section 409A Valuation Review Memorandum" prepared by Leonard Cross, Specialist Partner, Tax Group (the "Cross Memorandum"), and are cross-referenced herein as appropriate. The executive compensation benchmarking analysis prepared by Clarendon Rowe Advisory Group LLC ("Clarendon Rowe"), the Company's independent compensation consultant (Patricia Voss, Senior Managing Director), is discussed in the separate "Executive Compensation — IPO Equity Grant Analysis Memorandum" prepared by this working group. References to the Cross Memorandum and the Equity Grant Analysis Memorandum are made where relevant throughout this memorandum but are not reproduced herein.
Overall Assessment. Based upon our review of the documents and information described herein, and subject to the qualifications and assumptions set forth in this memorandum, we have not identified any material impediments to the Offering in the employment and benefit plans workstream. Several items require disclosure in the Company's Registration Statement on Form S-1 (the "S-1" or the "Registration Statement") and are specifically identified in the body of this memorandum and summarized in Section X below. In addition, certain remedial and preparatory actions are recommended prior to effectiveness of the Registration Statement, as described in Section XI below.
II. Company Workforce Overview
A. General Workforce Data
As of March 31, 2022 (the end of the first quarter of fiscal year 2022), CBR employed approximately 1,240 individuals on a full-time equivalent basis. The Company's corporate headquarters is located at 4200 Ridgeline Parkway, Suite 1100, Austin, Texas 78746, where the Company occupies approximately 42,000 square feet of office space under a lease expiring in 2028 (with two five-year renewal options).
Geographic Distribution. The Company's employees are distributed across five states corresponding to its operating project portfolio, development pipeline, and corporate functions:
The Company also maintains small contingents of development personnel at various pipeline project locations across additional states, though these do not represent material headcount concentrations.
Functional Breakdown. The Company's workforce is organized across the following functional areas:
Employee Growth Trajectory. The Company has experienced significant growth in its employee base over the past several years, reflecting the expansion of its operating portfolio from approximately 2.1 gigawatts ("GW") of operating capacity at year-end 2019 to approximately 3.8 GW of operating capacity plus approximately 1.4 GW under construction as of March 31, 2022. Correspondingly, employee headcount has grown from approximately 620 at year-end 2019 to approximately 1,240 at the end of the first quarter of 2022, representing a compound annual growth rate of approximately 26%. The most significant headcount additions have occurred in the operations and maintenance function, consistent with the commissioning of new projects and the in-sourcing of previously outsourced O&M activities.
This growth trajectory is relevant to the S-1 disclosure because it provides context for the Company's investment in human capital and the scalability of its organizational infrastructure. Additionally, the rapid growth increases the importance of confirming consistent application of employment policies, benefits eligibility, and worker classification practices across the expanding workforce.
B. Collective Bargaining and Unionization
Based on our review of documents provided and representations made by Company management during due diligence interviews, the Company's workforce is entirely non-unionized. Specifically:
• No collective bargaining agreements are currently in force between the Company (or any of its subsidiaries) and any labor union or employee organization.
• No pending union organizing campaigns have been identified at any Company facility or project site.
• No proceedings before the National Labor Relations Board ("NLRB") are pending or, to the knowledge of Company management, threatened.
• No strikes, work stoppages, slowdowns, or other material labor disputes have occurred in the Company's history.
The Company's operations span project construction sites and operations and maintenance facilities, many of which are located in states with "right to work" laws (Texas, Oklahoma, and Arizona), which may contribute to the absence of organized labor activity. However, we note that the renewable energy construction sector has experienced increasing union interest nationally, and certain of the Company's third-party EPC contractors and subcontractors may employ unionized labor on Company project sites (though the Company itself is not a party to any such collective bargaining arrangements).
S-1 Disclosure Recommendation. We recommend that the S-1 risk factors include customary language addressing the possibility of future organizing activity, particularly at construction and O&M sites. Such disclosure is standard for companies in the energy and infrastructure sectors with significant field-based workforces and is consistent with the approach taken by comparable publicly traded renewable energy companies. Proposed risk factor language has been circulated to the working group for review.
C. Worker Classification
We reviewed the Company's practices regarding the engagement of independent contractors. The Company primarily engages third-party contractors through project-level EPC (engineering, procurement, and construction) agreements and O&M (operations and maintenance) service agreements. These arrangements involve corporate entities, not individual workers, and therefore do not implicate individual worker classification risks in the traditional sense.
With respect to individual independent contractor arrangements, the Company has represented that it engages a limited number of individual independent contractors, primarily consisting of specialized consultants in areas such as environmental permitting, land acquisition, and interconnection studies. We reviewed the Company's standard independent contractor agreement form and a sample of executed agreements. The Company's classification practices appear to be reasonable based on the nature and scope of the engagements reviewed.
No pending or threatened misclassification claims have been identified, and the Company is not currently the subject of any audit or investigation by any federal or state taxing authority or labor agency with respect to worker classification.
Recommendation. We recommend that the Company confirm that any individual contractor arrangements involving personnel based in or performing services in California comply with the ABC test established by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018), and codified by Assembly Bill 5 (Cal. Lab. Code § 2775 et seq.). This is particularly relevant with respect to contractors engaged in connection with the Painted Rock Solar project in Maricopa County, Arizona (to the extent any California-based individuals are involved) and the Copper Basin development project in Riverside County, California. Company management has indicated that they will conduct this review, and we will follow up to confirm completion.
D. OSHA and Workplace Safety
We reviewed the Company's OSHA Form 300 (Log of Work-Related Injuries and Illnesses) and OSHA Form 300A (Summary of Work-Related Injuries and Illnesses) for each of the three calendar years ended December 31, 2019, December 31, 2020, and December 31, 2021, for all Company-operated facilities and project sites.
Based on our review:
• No material OSHA citations or penalties have been issued against the Company during the review period.
• The Company received two minor citations during the review period (one in 2019 related to a personal protective equipment documentation matter at the Solaris West construction site and one in 2020 related to a signage deficiency at the Red Mesa Wind facility), each of which resulted in penalties of less than $5,000 and was promptly abated. Neither citation constitutes a material regulatory matter requiring S-1 disclosure.
• No fatalities or serious workplace incidents requiring disclosure in the S-1 have occurred.
• The Company maintains formal safety programs at all operating and construction sites, including site-specific safety plans, regular safety training, and incident investigation protocols. The Company's Total Recordable Incident Rate ("TRIR") for 2021 was 0.89, which is below the industry average for the electric power generation sector.
We do not identify any OSHA or workplace safety matters that would constitute material disclosure items in the S-1. The Company's safety record is consistent with or better than industry benchmarks and supports the absence of material safety-related risk factors beyond customary language regarding inherent risks in the energy and construction sectors.
III. Named Executive Officer Employment Agreements
A. Overview of NEO Employment Arrangements
CBR has entered into written employment agreements with each of its eight named executive officers. The employment agreements were initially negotiated at the time of each executive's hire (or, in the case of the co-founders, at the time of the Company's formation and subsequently amended and restated) and have been amended from time to time to reflect changes in compensation and terms. Each agreement establishes the executive's title, reporting relationship, base salary, annual incentive bonus opportunity, equity compensation, benefits, severance and change-in-control protections, and restrictive covenants (non-competition, non-solicitation, confidentiality, and inventions assignment). All agreements are governed by Texas law.
The following table summarizes the basic terms of each NEO employment agreement:
Each employment agreement provides that either the Company or the executive may provide written notice of non-renewal at least 90 days prior to the expiration of the then-current term (180 days in the case of the co-founders). In the absence of such notice, each agreement automatically renews for an additional period as indicated above. Non-renewal by the Company is treated as a termination without "Cause" for purposes of the severance provisions discussed in Section IV below.
The material terms of each NEO's employment agreement are summarized in the following subsections. For purposes of this memorandum, all salary and bonus figures reflect current levels as of the date hereof (reflecting January 2022 annual compensation adjustments approved by the Board of Directors upon the recommendation of the Compensation Committee), unless otherwise noted.
B. Garrett Calloway — Co-Founder, Chairman & Chief Executive Officer
Mr. Calloway co-founded CBR in 2014 with Elaine Briggs and has served as the Company's Chairman and Chief Executive Officer since its inception. His employment agreement was originally entered into in 2014 in connection with the Company's founding and was amended and restated effective January 1, 2018 in connection with the Series B equity investment by Pinnacle Vista Capital Partners, L.P. ("Pinnacle Vista").
Base Salary. Mr. Calloway's current base salary is $625,000 per annum, as adjusted effective January 1, 2022 by the Board of Directors upon recommendation of the Compensation Committee. His base salary is subject to annual review by the Compensation Committee, with any increases in the sole discretion of the Compensation Committee; provided, however, that his base salary may not be decreased below the then-current level except in connection with an across-the-board reduction affecting all senior executives (and in such case, the reduction may not exceed 10% without constituting "Good Reason" as defined in the agreement).
Annual Incentive Bonus. Mr. Calloway is eligible to receive an annual cash bonus with a target of 100% of base salary and a maximum payout of 200% of base salary. The actual bonus amount is determined by the Compensation Committee based on the achievement of annual performance metrics established by the Board of Directors at the beginning of each fiscal year. For fiscal year 2022, the approved performance metrics consist of: (i) consolidated revenue (weighted 25%), (ii) Adjusted EBITDA (weighted 30%), (iii) safety performance as measured by TRIR (weighted 15%), and (iv) development milestones, including megawatt-hour targets for new project financial close and construction commencement (weighted 30%). The bonus is payable in a lump sum in cash following certification of performance results by the Compensation Committee, no later than March 15 of the year following the performance period, consistent with Section 409A requirements.
Equity Compensation. Mr. Calloway holds founders' equity in the Company, consisting of common stock acquired at founding in 2014. In addition, Mr. Calloway has received equity grants under the Company's informal pre-IPO equity grant program (described in Section VI.A below). In connection with the IPO, Mr. Calloway is expected to receive a grant of 500,000 restricted stock units ("RSUs") under the 2022 Omnibus Equity Incentive Plan. These RSUs will vest ratably over four years (25% per year), with vesting commencing on the first anniversary of the date of grant, subject to continued employment through each vesting date.
Benefits. Mr. Calloway is entitled to participate in all employee benefit plans generally available to the Company's senior executives, including the CBR 401(k) Savings Plan, group medical, dental, and vision insurance, and life and disability insurance. In addition, Mr. Calloway receives supplemental life insurance coverage (in an amount equal to 5x annual base salary, subject to a $3,000,000 cap) and access to an executive health plan providing for annual comprehensive physical examinations and related wellness services. These supplemental benefits are provided at the Company's expense.
Termination Provisions. Mr. Calloway's employment agreement contains severance and change-in-control provisions, which are described in detail in Section IV below.
Restrictive Covenants. Mr. Calloway is subject to the following post-termination restrictive covenants:
• Non-Competition: 18-month post-termination non-competition covenant restricting Mr. Calloway from engaging in, or being employed by or providing services to, any entity engaged in the development, construction, ownership, or operation of utility-scale solar, wind, or battery storage projects within the United States.
• Non-Solicitation: 24-month post-termination non-solicitation covenant restricting Mr. Calloway from (i) soliciting, recruiting, or hiring any employee of the Company or its subsidiaries, or (ii) soliciting or inducing any customer, supplier, or counterparty of the Company to terminate or materially reduce its business relationship with the Company.
• Confidentiality: Perpetual obligation to maintain the confidentiality of all proprietary and confidential information of the Company and its subsidiaries.
• Inventions Assignment: Standard assignment of all inventions, works of authorship, developments, and other intellectual property created during the term of employment and within the scope of Mr. Calloway's duties or using Company resources.
Governing Law. The employment agreement is governed by the laws of the State of Texas, without regard to conflict-of-laws principles.
C. Elaine Briggs — Co-Founder & President, Development
Ms. Briggs co-founded CBR in 2014 with Garrett Calloway and has served as the Company's President, Development since its inception. She is responsible for overseeing the Company's project development pipeline, including site identification, land acquisition, permitting, interconnection, and power purchase agreement origination. Her employment agreement follows the same structural framework as Mr. Calloway's, having been originally entered into in 2014 and amended and restated effective January 1, 2018.
Base Salary. Ms. Briggs's current base salary is $575,000 per annum, as adjusted effective January 1, 2022. Her base salary is subject to annual review by the Compensation Committee under the same terms applicable to Mr. Calloway, including the same 10% floor provision.
Annual Incentive Bonus. Ms. Briggs is eligible to receive an annual cash bonus with a target of 100% of base salary and a maximum payout of 200% of base salary, based on the same Board-approved performance metrics applicable to Mr. Calloway.
Equity Compensation. Ms. Briggs holds founders' equity in the Company and has received additional pre-IPO equity grants. In connection with the IPO, Ms. Briggs is expected to receive a grant of 400,000 RSUs under the 2022 Plan, vesting ratably over four years (25% per year) subject to continued employment.
Benefits. Ms. Briggs is entitled to the same standard and supplemental executive benefits as Mr. Calloway, including supplemental life insurance and the executive health plan.
Termination Provisions. Ms. Briggs's severance and change-in-control provisions are described in Section IV below and are substantively identical to Mr. Calloway's provisions.
Restrictive Covenants. Ms. Briggs is subject to the same restrictive covenants as Mr. Calloway: an 18-month post-termination non-competition covenant, a 24-month post-termination non-solicitation covenant, perpetual confidentiality obligations, and standard inventions assignment provisions.
Governing Law. Texas.
D. Marcus Yoon — Chief Financial Officer
Mr. Yoon joined the Company as Chief Financial Officer in August 2019, having been recruited from a senior finance position at a publicly traded independent power producer. His employment agreement was entered into as of August 5, 2019.
Base Salary. Mr. Yoon's current base salary is $475,000 per annum, as adjusted effective January 1, 2022.
Annual Incentive Bonus. Mr. Yoon is eligible to receive an annual cash bonus with a target of 75% of base salary and a maximum payout of 150% of base salary.
Equity Compensation. Mr. Yoon received pre-IPO equity grants upon commencement of employment and in subsequent annual grant cycles. In connection with the IPO, Mr. Yoon is expected to receive a grant of 300,000 RSUs under the 2022 Plan, vesting ratably over four years.
Sign-On Bonus. Mr. Yoon received a one-time sign-on bonus of $100,000, paid upon commencement of employment in August 2019. The sign-on bonus was subject to a one-year clawback provision requiring repayment in full if Mr. Yoon voluntarily resigned or was terminated for Cause within twelve months of his start date. The clawback period expired in August 2020 without incident. We confirmed that no repayment obligation remains outstanding.
Relocation Assistance. In connection with his relocation to Austin, Texas, the Company provided Mr. Yoon with a standard relocation package, including reimbursement of reasonable moving expenses, temporary housing assistance for up to 90 days, and reimbursement of real estate broker commissions in connection with the sale of his prior residence. The relocation benefits were provided under the Company's standard executive relocation policy and have been fully utilized; no ongoing obligations remain.
Restrictive Covenants. Mr. Yoon is subject to a 12-month post-termination non-competition covenant and an 18-month post-termination non-solicitation covenant (both employees and customers/counterparties), as well as perpetual confidentiality obligations and standard inventions assignment provisions.
Governing Law. Texas.
E. Sandra Haverford — General Counsel & Corporate Secretary
Ms. Haverford joined the Company as General Counsel and Corporate Secretary in March 2020. Her employment agreement was entered into as of March 2, 2020.
Base Salary. Ms. Haverford's current base salary is $425,000 per annum, as adjusted effective January 1, 2022.
Annual Incentive Bonus. Ms. Haverford is eligible to receive an annual cash bonus with a target of 60% of base salary and a maximum payout of 120% of base salary.
Equity Compensation. Ms. Haverford received pre-IPO equity grants upon commencement of employment and in subsequent annual grant cycles. In connection with the IPO, Ms. Haverford is expected to receive a grant of 200,000 RSUs under the 2022 Plan, vesting ratably over four years.
Restrictive Covenants. Ms. Haverford is subject to a 12-month post-termination non-competition covenant and an 18-month post-termination non-solicitation covenant, as well as perpetual confidentiality obligations and standard inventions assignment provisions.
Governing Law. Texas.
F. Dale Renfroe — Chief Operating Officer
Mr. Renfroe joined the Company as Chief Operating Officer in June 2018 and is responsible for overseeing the Company's construction management and operations and maintenance functions across its entire project portfolio. His employment agreement was entered into as of June 11, 2018.
Base Salary. Mr. Renfroe's current base salary is $450,000 per annum, as adjusted effective January 1, 2022.
Annual Incentive Bonus. Mr. Renfroe is eligible to receive an annual cash bonus with a target of 75% of base salary and a maximum payout of 150% of base salary.
Equity Compensation. Mr. Renfroe received pre-IPO equity grants upon commencement of employment and in subsequent annual grant cycles. In connection with the IPO, Mr. Renfroe is expected to receive a grant of 200,000 RSUs under the 2022 Plan, vesting ratably over four years.
Restrictive Covenants. Mr. Renfroe is subject to a 12-month post-termination non-competition covenant and an 18-month post-termination non-solicitation covenant, as well as perpetual confidentiality obligations and standard inventions assignment provisions.
Governing Law. Texas.
G. Priya Anand — Senior Vice President, Finance & Treasurer
Ms. Anand joined the Company as Senior Vice President, Finance & Treasurer in November 2020. She reports to the Chief Financial Officer and is responsible for project finance, treasury operations, and investor relations. Her employment agreement was entered into as of November 9, 2020.
Base Salary. Ms. Anand's current base salary is $350,000 per annum.
Annual Incentive Bonus. Ms. Anand is eligible to receive an annual cash bonus with a target of 50% of base salary and a maximum payout of 100% of base salary.
Equity Compensation. Ms. Anand received pre-IPO equity grants upon commencement of employment and in subsequent annual grant cycles. In connection with the IPO, Ms. Anand is expected to receive a grant of 150,000 RSUs under the 2022 Plan, vesting ratably over four years.
Restrictive Covenants. Ms. Anand is subject to a 12-month post-termination non-competition covenant and a 12-month post-termination non-solicitation covenant, as well as perpetual confidentiality obligations and standard inventions assignment provisions.
Governing Law. Texas.
H. Tomás Quintero — Senior Vice President, Project Development
Mr. Quintero joined the Company as Senior Vice President, Project Development in April 2019. He reports to the President, Development and is responsible for overseeing the origination and execution of new development projects, including site acquisition, permitting, and power marketing activities. His employment agreement was entered into as of April 15, 2019.
Base Salary. Mr. Quintero's current base salary is $375,000 per annum.
Annual Incentive Bonus. Mr. Quintero is eligible to receive an annual cash bonus with a target of 50% of base salary and a maximum payout of 100% of base salary.
Equity Compensation. Mr. Quintero received pre-IPO equity grants upon commencement of employment and in subsequent annual grant cycles. In connection with the IPO, Mr. Quintero is expected to receive a grant of 175,000 RSUs under the 2022 Plan, vesting ratably over four years.
Restrictive Covenants. Mr. Quintero is subject to a 12-month post-termination non-competition covenant and a 12-month post-termination non-solicitation covenant, as well as perpetual confidentiality obligations and standard inventions assignment provisions.
Governing Law. Texas.
I. Rachel Whitmore — Chief People Officer
Ms. Whitmore joined the Company as Chief People Officer in September 2021. She reports to the Chief Executive Officer and is responsible for all human resources, talent acquisition, employee engagement, and organizational development functions. Her employment agreement was entered into as of September 13, 2021.
Base Salary. Ms. Whitmore's current base salary is $325,000 per annum.
Annual Incentive Bonus. Ms. Whitmore is eligible to receive an annual cash bonus with a target of 50% of base salary and a maximum payout of 100% of base salary.
Equity Compensation. Ms. Whitmore received a pre-IPO equity grant upon commencement of employment. In connection with the IPO, Ms. Whitmore is expected to receive a grant of 150,000 RSUs under the 2022 Plan, vesting ratably over four years.
Restrictive Covenants. Ms. Whitmore is subject to a 12-month post-termination non-competition covenant and a 12-month post-termination non-solicitation covenant, as well as perpetual confidentiality obligations and standard inventions assignment provisions.
Governing Law. Texas.
J. Summary of IPO Equity Grants
The following table summarizes the proposed IPO RSU grants to be made to the named executive officers under the 2022 Omnibus Equity Incentive Plan. The total share reserve under the 2022 Plan is 12,727,273 shares, representing 10% of post-IPO outstanding shares on a fully-exercised basis of 127,272,727 shares (at the assumed $22.00 per share midpoint offering price):
The aggregate NEO IPO grants of 2,075,000 shares represent approximately 16.3% of the total 2022 Plan share reserve. The remaining share reserve of 10,652,273 shares will be available for grants to non-NEO employees, including senior management and field personnel, as well as non-employee directors.
The sizing and allocation of these grants were informed by the compensation benchmarking analysis conducted by Clarendon Rowe Advisory Group LLC (Patricia Voss, Senior Managing Director). Clarendon Rowe benchmarked executive compensation against a peer group of 15 publicly traded renewable energy and independent power companies. The detailed recommendations and underlying peer group analysis are discussed in the separate Executive Compensation — IPO Equity Grant Analysis Memorandum and are not reproduced herein.
IV. Severance and Change-in-Control Provisions
A. Overview. All NEO employment agreements contain severance provisions that are triggered upon a termination of employment by the Company without "Cause" or a resignation by the executive for "Good Reason" (as each such term is defined in the applicable employment agreement — see Sections IV.D and IV.E below). In addition, all NEO employment agreements contain enhanced severance and equity acceleration provisions that apply in the event of a qualifying termination of employment occurring within a specified period following a "Change in Control" of the Company. The change-in-control provisions are structured on a "double-trigger" basis — that is, the enhanced severance is triggered only if both a Change in Control occurs and the executive's employment is subsequently terminated without Cause or the executive resigns for Good Reason within the specified window. There are no "single-trigger" severance provisions in any NEO employment agreement.
We have reviewed the severance and change-in-control provisions for compliance with Section 409A of the Code and note certain considerations in our analysis below. The provisions have been structured to comply with Section 409A, including the use of salary continuation payments (rather than lump-sum payments) for non-change-in-control terminations and the inclusion of customary six-month delay provisions for "specified employees" (as defined in Section 409A) in the event of a separation from service.
B. Termination Without Cause / Resignation for Good Reason (No Change in Control)
The following table summarizes the severance benefits payable to each NEO upon a termination by the Company without Cause or a resignation by the executive for Good Reason, in each case not in connection with a Change in Control:
Release Requirement. All severance payments are expressly conditioned upon the executive's execution and non-revocation of a general release of claims in favor of the Company and its affiliates, directors, officers, and agents. Each employment agreement provides that the form of general release will be delivered within five business days following the date of termination and must be executed and become irrevocable within 60 days following the date of termination (or such shorter period as specified in the release). If the executive fails to execute and deliver the release within the specified period, or if the executive revokes the release within the applicable revocation period, all severance obligations are extinguished.
Payment Structure — 409A Compliance. The cash severance component is structured as salary continuation — that is, payments are made in substantially equal installments in accordance with the Company's regular payroll schedule over the applicable severance period — rather than as a single lump-sum payment. This structure is intended to comply with Section 409A by treating the payments as a series of installment payments subject to the "short-term deferral" and "separation pay" exceptions under Treasury Regulations Section 1.409A-1(b)(4) and (9), respectively. In the event the executive is a "specified employee" (as defined in Section 409A(a)(2)(B)(i)), payments that would otherwise be made during the first six months following separation from service are accumulated and paid in a lump sum on the first business day following the end of the six-month period (or, if earlier, upon the executive's death), consistent with Section 409A(a)(2)(B)(i).
Continuation of Restrictive Covenants. Each employment agreement provides that the executive's non-competition and non-solicitation obligations continue in full force and effect during the severance period (and, in the case of the founders, through the longer of the severance period or the stated restrictive covenant period).
C. Termination in Connection with a Change in Control (Double Trigger)
Each NEO employment agreement provides for enhanced severance benefits if the executive's employment is terminated by the Company without Cause or the executive resigns for Good Reason within 24 months following a "Change in Control" (as defined in Section IV.C.1 below). The enhanced benefits replace (and do not supplement) the standard severance benefits described in Section IV.B above.
The following table summarizes the enhanced change-in-control severance benefits:
Founders (Calloway and Briggs):
• Cash severance: 36 months of base salary
• Bonus: 100% of target bonus (not pro-rata)
• Benefits continuation: 24 months of COBRA subsidy
• Equity acceleration: Full acceleration of all unvested equity awards (100% vesting of all outstanding unvested RSUs and stock options)
CFO and COO (Yoon and Renfroe):
• Cash severance: 24 months of base salary
• Bonus: 100% of target bonus
• Benefits continuation: 18 months of COBRA subsidy
• Equity acceleration: Full acceleration of all unvested equity awards
Other NEOs (Haverford, Anand, Quintero, and Whitmore):
• Cash severance: 18 months of base salary
• Bonus: 100% of target bonus
• Benefits continuation: 18 months of COBRA subsidy
• Equity acceleration: Full acceleration of all unvested equity awards
Change in Control Definition. The definition of "Change in Control" in each NEO employment agreement is substantively identical and is defined to mean any of the following events:
(i) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities representing more than 50% of the combined voting power of the Company's then-outstanding voting securities;
(ii) the consummation of a merger, consolidation, reorganization, or similar business combination involving the Company, unless immediately following such transaction, the stockholders of the Company immediately prior to the transaction hold at least 50% of the combined voting power of the resulting entity;
(iii) the sale, lease, or other disposition of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole; or
(iv) a change in the composition of the Board of Directors such that the individuals who constitute the Board as of the date of the employment agreement (or as of the IPO closing date, if later), together with any directors whose election or nomination was approved by a majority of the then-incumbent directors, cease to constitute a majority of the Board.
We have confirmed that the definition of "Change in Control" in each NEO employment agreement is consistent with the definition contained in the 2022 Omnibus Equity Incentive Plan, eliminating the risk of divergent triggering events under the employment agreements and the equity plan.
Section 280G — No Gross-Up; "Best Net" Cutback. None of the NEO employment agreements contain a Section 280G "gross-up" provision (which would require the Company to make an additional payment to the executive to compensate for the excise tax imposed under Section 4999 of the Code on "excess parachute payments" as defined in Section 280G). Instead, each agreement contains a "best net" or "better of" cutback provision, which operates as follows: if the aggregate payments and benefits payable to the executive in connection with a Change in Control (including payments under the employment agreement, accelerated equity vesting, and any other payments contingent on the Change in Control) would constitute "parachute payments" within the meaning of Section 280G, then the aggregate payments will be reduced to the extent necessary to avoid triggering the excise tax under Section 4999, but only if the reduction would result in a greater after-tax benefit to the executive than receiving the full amount and paying the excise tax. This "best net" approach is now the market-standard formulation and avoids the potential negative public perception and proxy advisory criticism associated with tax gross-up provisions.
Preliminary Section 280G Analysis. We have conducted a preliminary analysis of the potential Section 280G "parachute payment" exposure at the assumed $22.00 per share IPO midpoint price. Based on current compensation levels and the proposed IPO equity grants, the estimated aggregate payments in a hypothetical change-in-control scenario occurring shortly after the IPO do not exceed the safe-harbor threshold (three times the executive's "base amount" as defined in Section 280G(b)(3)) for any NEO. However, this analysis is highly sensitive to the equity values and vesting schedules at the time of a future Change in Control, and we recommend that the Section 280G exposure be monitored on an ongoing basis, particularly following any material increase in the Company's stock price post-IPO or any amendment to the equity compensation arrangements.
D. Definition of "Cause"
Each NEO employment agreement defines "Cause" to mean, subject to the cure provisions described below, any of the following:
(i) a material breach by the executive of the employment agreement or any material written policy of the Company;
(ii) willful misconduct or gross negligence by the executive in the performance of the executive's duties under the employment agreement;
(iii) the executive's conviction of, or plea of guilty or nolo contendere to, a felony or any crime involving moral turpitude;
(iv) the executive's commission of fraud, embezzlement, misappropriation, or any act of dishonesty against the Company or its affiliates;
(v) a material violation by the executive of the Company's written policies, including but not limited to policies relating to sexual harassment, discrimination, workplace safety, and substance abuse; or
(vi) the executive's willful and continued refusal to perform the executive's lawful duties and responsibilities under the employment agreement (other than as a result of a disability), after written demand for performance is delivered by the Board of Directors.
With respect to clauses (i), (v), and (vi), the Company must provide the executive with written notice specifying in reasonable detail the grounds for termination, and the executive will have a period of 30 days following receipt of such notice to cure the condition giving rise to the Cause determination to the extent such condition is reasonably susceptible to cure. If the executive cures the condition within the 30-day cure period, the termination for Cause will not be effective.
This definition is substantively consistent across all eight NEO employment agreements and represents a standard formulation for agreements of this type.
E. Definition of "Good Reason"
Each NEO employment agreement defines "Good Reason" to mean, subject to the notice and cure provisions described below, any of the following:
(i) a material diminution in the executive's base salary (defined as a reduction of more than 10% of the then-current base salary), other than an across-the-board reduction applicable to all senior executives of the Company;
(ii) a material diminution in the executive's authority, duties, or responsibilities (including, in the case of the co-founders, a change in reporting relationship such that the executive reports to someone other than the Board of Directors);
(iii) the relocation of the executive's principal place of employment to a location more than 50 miles from the current principal place of employment (Austin, Texas for all NEOs); or
(iv) a material breach by the Company of its obligations under the employment agreement.
To invoke a resignation for Good Reason, the executive must provide the Company with written notice of the condition giving rise to Good Reason within 30 days following the initial occurrence of such condition. The Company will then have a period of 30 days following receipt of such notice to cure the condition. If the Company fails to cure the condition within the 30-day cure period, the executive may resign for Good Reason by providing written notice of resignation within 30 days following the expiration of the cure period.
This "notice and cure" framework is designed to ensure that the Good Reason definition satisfies the requirements of Treasury Regulations Section 1.409A-1(n)(2)(ii) for involuntary separation from service, which is necessary to preserve the favorable treatment of severance payments under Section 409A.
F. S-1 Disclosure Considerations
The severance and change-in-control provisions summarized above will require disclosure in the following sections of the S-1 Registration Statement:
(i) Executive Compensation — Employment Agreements. A narrative description of the material terms of each NEO employment agreement, including the severance and change-in-control provisions, the definitions of "Cause" and "Good Reason," and the "best net" cutback provision.
(ii) Executive Compensation — Potential Payments upon Termination or Change in Control. A quantitative disclosure table presenting the estimated aggregate severance payments and benefits payable to each NEO under various termination scenarios (termination without Cause / resignation for Good Reason with and without a Change in Control, termination for Cause, voluntary resignation without Good Reason, death, and disability), calculated as of the last day of the most recently completed fiscal year (December 31, 2021) or, if the working group determines it is more appropriate, as of a date closer to effectiveness.
(iii) Risk Factors. Reference to the potential costs associated with executive severance and change-in-control obligations in the event of a future change in control of the Company.
We recommend that the quantitative calculation tables for the Potential Payments upon Termination or Change in Control disclosure be prepared in coordination with Clarendon Rowe Advisory Group and the Company's finance team, and reviewed by Calderwood & Harkness prior to inclusion in the final S-1.
V. Restrictive Covenant Analysis
A. Non-Competition Agreements
All eight NEOs are subject to post-termination non-competition covenants as summarized below:
Enforceability Analysis Under Texas Law. All NEO employment agreements are governed by Texas law, and the analysis of enforceability of the non-competition covenants is therefore conducted primarily under the Texas Covenants Not to Compete Act, Texas Business and Commerce Code Section 15.50 et seq. Under Texas law, a covenant not to compete is enforceable if it is (i) ancillary to or part of an otherwise enforceable agreement at the time the agreement is made, (ii) contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee. See Tex. Bus. & Com. Code § 15.50(a).
Based on our analysis, we believe that the NEO non-competition covenants are reasonable and likely enforceable under Texas law for the following reasons:
(a) Ancillary to an otherwise enforceable agreement. Each non-competition covenant is ancillary to the executive's employment agreement, which provides for the payment of compensation (base salary, bonus, and equity awards), access to confidential and proprietary information, and the provision of specialized training and professional development opportunities. The Texas Supreme Court has held that a covenant not to compete is enforceable when it is ancillary to an agreement that gives rise to an interest worthy of protection, such as the provision of confidential information or specialized training. See Fenmore Benefit Group v. Cook, 354 S.W.3d 764, 776-77 (Tex. 2011).
(b) Reasonable duration. The non-competition periods of 12 to 18 months fall well within the range that Texas courts have upheld as reasonable. See, e.g., Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006) (upholding one-year non-compete).
(c) Reasonable geographic scope. Although the covenants cover the entire United States, this scope is appropriate given the national nature of CBR's business operations and the executives' access to competitive intelligence regarding the Company's development pipeline, customer and counterparty relationships, and strategic plans that are national in scope.