MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
TO: Jennifer Kwon, Responsible Partner, Capital Markets Theodore Langston, Billing Partner, Capital Markets
FROM: Brendan Walsh, Lead Associate, Capital Markets Natasha Forbes, Working Associate, Capital Markets
DATE: April 4, 2022
RE: Calloway-Briggs Renewables Inc. — Analysis of NYSE Controlled-Company Exemption and Independent-Director Phase-In Requirements in Connection with Proposed IPO
C&H Matter No.: 1015-00001
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I. Executive Summary
The purpose of this memorandum is to analyze whether Calloway-Briggs Renewables Inc. ("CBR" or the "Company") will qualify as a "controlled company" under the corporate governance rules of the New York Stock Exchange (the "NYSE") following the completion of its proposed initial public offering of approximately $600,000,000 of common stock (proposed ticker: CBRI), and to set forth the implications of such status for the Company's board composition, committee structure, and the phase-in schedule for independent directors should controlled-company status later be lost. This memorandum also addresses the disclosure obligations that attach to the controlled-company exemption and the investor-perception considerations the Company should anticipate in the IPO marketing process.
Key Conclusion. Based on our analysis of the Company's pre-IPO capitalization, the contemplated offering structure, and the contractual arrangements set forth in the Amended and Restated Stockholders' Agreement (to be effective upon IPO closing), CBR will likely qualify as a "controlled company" under NYSE Listed Company Manual Section 303A.00 immediately following the consummation of the IPO. Pinnacle Vista Capital Partners III, LP ("Pinnacle Vista" or "PVCP III"), CBR's pre-IPO majority stockholder (holding approximately 62% of the fully diluted pre-IPO common stock), together with the Company's co-founders, Garrett Calloway and Elaine Briggs (the "Founders," holding approximately 24% of the fully diluted pre-IPO common stock), will collectively hold more than 50% of the Company's post-IPO voting power under both the base-offering scenario (no exercise of the underwriters' overallotment option) and the full-overallotment scenario. In addition, Pinnacle Vista's board designation rights under the Amended and Restated Stockholders' Agreement, coupled with the Founders' contractual voting commitments, provide Pinnacle Vista with effective control of board composition independently of a strict mathematical analysis of voting percentages.
The controlled-company exemption, if elected, will exempt CBR from certain NYSE requirements regarding independent directors on the board and on the nominating/corporate governance and compensation committees. However, the exemption does not relieve the Company of its obligations with respect to audit committee independence, and it carries affirmative disclosure obligations in the Company's S-1 registration statement, prospectus, and subsequent annual proxy statements. It also carries significant investor-perception considerations that must be addressed during the IPO marketing process.
Recommendation. We recommend that CBR elect the controlled-company exemption at the time of the IPO and include appropriate disclosures in the S-1 registration statement regarding its controlled-company status and the specific exemptions upon which it intends to rely. Concurrently, the Company should establish a transition plan — including quarterly monitoring of ownership levels and identification of prospective independent director candidates — to ensure timely compliance with NYSE independence requirements upon the eventual loss of controlled-company status.
The balance of this memorandum sets forth the factual background, a detailed analysis of the post-IPO voting power calculations, the applicable NYSE legal framework, the Company's board and committee composition, the phase-in schedule upon loss of controlled-company status, disclosure considerations, the interaction with the Company's emerging growth company status, and investor-perception considerations.
II. Background
A. The Proposed IPO
Calloway-Briggs Renewables Inc. is a Delaware-incorporated, Austin, Texas-headquartered developer and operator of utility-scale solar, wind, and battery-storage projects across the continental United States. The Company was founded in 2015 by Garrett Calloway and Elaine Briggs and has grown significantly since Pinnacle Vista's initial investment in 2017, expanding from a regional solar development platform into a diversified renewable energy company with a development pipeline exceeding 12 gigawatts across 17 states.
The Company is proposing to conduct an initial public offering of shares of its common stock on the NYSE under the proposed ticker symbol "CBRI." The aggregate offering size is targeted at approximately $600,000,000, inclusive of the underwriters' 15% overallotment option. The assumed midpoint IPO price for the purposes of this analysis is $22.00 per share, which falls within the range currently under discussion with the lead underwriters.
The Company's pre-IPO capitalization, on a fully diluted basis following the reclassification of all outstanding preferred stock into common stock (which will occur automatically upon the closing of the IPO pursuant to the terms of the Company's Amended and Restated Certificate of Incorporation), consists of 100,000,000 shares of common stock. This fully diluted figure accounts for all outstanding shares of common stock, all shares issuable upon conversion of outstanding preferred stock, and all shares issuable upon the exercise or vesting of outstanding equity awards, but does not include unissued shares under the Company's equity incentive plan or employee stock purchase plan that will be adopted in connection with the IPO.
The key offering metrics are as follows:
• Total aggregate offering size (inclusive of overallotment): approximately $600,000,000
• Base offering size (excluding overallotment): approximately $521,700,000
• Overallotment option (15%): approximately $78,300,000
• Assumed midpoint IPO price: $22.00 per share
• Base offering shares: 23,713,636 shares ($521,700,000 ÷ $22.00)
• Overallotment shares: 3,559,091 shares ($78,300,000 ÷ $22.00)
• Pre-IPO fully diluted shares outstanding: 100,000,000
• Post-IPO shares outstanding (base offering, no overallotment): 123,713,636
• Post-IPO shares outstanding (full overallotment exercise): 127,272,727
B. Pre-IPO Ownership Structure
The Company's pre-IPO ownership structure, on a fully diluted basis following the reclassification of all preferred stock, is as follows:
Pinnacle Vista Capital Partners III, LP is a Delaware limited partnership whose general partner is Pinnacle Vista Capital Management LLC, a Delaware limited liability company. Pinnacle Vista's Series III Fund is a 2016-vintage fund with approximately $4.8 billion in committed capital. Pinnacle Vista made its initial equity investment in CBR of approximately $385 million in 2017 and a follow-on investment of approximately $120 million in 2019, for an aggregate equity investment of approximately $505 million.
Pinnacle Vista is represented in connection with the IPO by Whitfield Archer & Doss LLP (Philip Archer, Christine Navarro, and Derek Fong). Our primary point of contact at Whitfield Archer & Doss for matters relating to governance and the Stockholders' Agreement has been Christine Navarro, with whom we have discussed the controlled-company analysis in general terms.
The Founders — Garrett Calloway (Chairman and Chief Executive Officer) and Elaine Briggs (President, Development) — hold their shares directly and through trusts and family holding entities. For the purposes of this memorandum, we treat all Founder shares as held by a cohesive group. Other management holders include the Company's Chief Financial Officer, Chief Operating Officer, and other members of senior management, whose aggregate holdings are relatively small (included in the 24% Founders/Management figure) and who are subject to the same lock-up restrictions as the Founders.
C. Offering Structure — Primary and Secondary Components
The base offering of approximately $521,700,000 consists of both primary shares sold by the Company and secondary shares sold by Pinnacle Vista. Specifically:
• Primary shares (sold by the Company): approximately $371,700,000, or 16,895,455 shares at the assumed $22.00 midpoint price. The net proceeds from the primary offering will be used by the Company for general corporate purposes, including funding the development pipeline and repaying a portion of outstanding indebtedness under the Company's revolving credit facility.
• Secondary shares (sold by Pinnacle Vista): approximately $150,000,000, or 6,818,182 shares at the assumed $22.00 midpoint price. The Company will not receive any of the proceeds from the sale of secondary shares by Pinnacle Vista. The secondary sale represents the initial step in Pinnacle Vista's monetization of its investment in CBR.
• Overallotment option: The underwriters' overallotment option covers an additional $78,300,000, or 3,559,091 shares. The allocation of the overallotment option as between primary shares to be sold by the Company and secondary shares to be sold by Pinnacle Vista has not yet been determined and will be negotiated at the time of pricing. For the purposes of this memorandum, we analyze the scenarios in which the overallotment is (i) entirely primary and (ii) entirely secondary (from Pinnacle Vista), as well as intermediate allocations.
The distinction between primary and secondary shares is critical to the controlled-company analysis because secondary sales by Pinnacle Vista reduce its post-IPO share count and, therefore, its post-IPO voting power, while primary sales increase the total number of shares outstanding (diluting all existing holders proportionally) without directly reducing Pinnacle Vista's share count.
III. Post-IPO Voting-Power Analysis
A. Methodology. CBR's common stock carries one vote per share on all matters submitted to a vote of the stockholders. The Company does not have, and does not currently propose to adopt, a dual-class or supervoting share structure. Accordingly, a stockholder's voting power is equal to the number of shares of common stock it holds divided by the total number of shares of common stock outstanding. This straightforward one-vote-per-share structure simplifies the controlled-company analysis considerably, as voting power is directly proportional to economic ownership.
We analyze the Company's post-IPO voting power under two primary scenarios: (1) the base offering scenario, in which the underwriters' overallotment option is not exercised, and (2) the full overallotment scenario, in which the overallotment option is exercised in full. Within each scenario, we also examine the allocation of the overallotment as between primary and secondary shares and the effect on Pinnacle Vista's voting power. All calculations are based on the assumed midpoint IPO price of $22.00 per share and the pre-IPO capitalization of 100,000,000 fully diluted shares.
B. Pinnacle Vista Post-IPO Voting Power
1. Base Offering Scenario (No Overallotment). Under the base offering scenario, the underwriters' overallotment option is not exercised. The total number of new shares issued in the offering is 23,713,636 (base offering only). Of these, 16,895,455 are primary shares (new shares issued by the Company) and 6,818,182 are secondary shares (existing shares sold by Pinnacle Vista).
The calculation of Pinnacle Vista's post-IPO voting power is as follows:
• Pinnacle Vista pre-IPO shares: 62,000,000
• Less: Secondary shares sold by Pinnacle Vista in the base offering: (6,818,182)
• Pinnacle Vista post-IPO shares: 55,181,818
• Total post-IPO shares outstanding: 100,000,000 (pre-IPO) + 16,895,455 (primary shares) = 116,895,455
Note on total share count: The total post-IPO shares outstanding must be calculated as the pre-IPO shares outstanding (100,000,000) plus the primary shares newly issued in the offering (16,895,455). The secondary shares sold by Pinnacle Vista do not increase the total share count — they merely transfer existing shares from Pinnacle Vista to public investors. Accordingly, total post-IPO shares outstanding under the base offering scenario are 116,895,455.
However, the figure cited in the offering materials (123,713,636) includes both primary and secondary shares in the denominator, which appears to reflect a calculation of 100,000,000 + 23,713,636. This is because the stated "post-IPO shares outstanding" in the offering documents is computed as pre-IPO shares outstanding plus the total number of shares in the offering (both primary and secondary), which equals 123,713,636. We note that this calculation method is conventional in the IPO context, where "post-IPO shares outstanding" refers to the total shares outstanding after the IPO, which equals 100,000,000 pre-IPO shares plus 16,895,455 newly issued primary shares, for a total of 116,895,455. The difference arises because the figure 123,713,636 assumes the total offering of 23,713,636 shares are all primary (i.e., newly issued), which is the figure used in the capitalization table for simplicity. For voting power analysis, the correct denominator is 116,895,455 (since secondary shares are already included in the pre-IPO base of 100,000,000).
Using the correct total of 116,895,455 post-IPO shares outstanding:
Pinnacle Vista voting power (base offering): 55,181,818 ÷ 116,895,455 ≈ 47.2%
Using the conventional total of 123,713,636 as stated in the offering documents (which treats all offering shares as newly issued for purposes of the capitalization presentation):
Pinnacle Vista voting power (base offering, conventional method): 55,181,818 ÷ 123,713,636 ≈ 44.6%
We present both calculations for completeness. Under either methodology, Pinnacle Vista's individual voting power falls below 50% following the IPO, principally as a result of both the dilution from the primary offering and the reduction in Pinnacle Vista's share count from the secondary sale.
It is important to note, however, that the controlled-company test under NYSE rules is not limited to a single holder's voting power. As discussed in Section III.C below, the combined voting power of Pinnacle Vista and the Founders — who constitute a "group" by virtue of the Stockholders' Agreement — well exceeds 50%.
2. Full Overallotment Scenario. Under the full overallotment scenario, the overallotment option of 3,559,091 shares is exercised in full. The impact on Pinnacle Vista's voting power depends on the allocation of the overallotment as between primary and secondary shares.
Scenario 2(a): Overallotment Entirely Primary.
If the overallotment shares are entirely primary (newly issued by the Company), Pinnacle Vista does not sell additional shares. In that case:
• Pinnacle Vista post-IPO shares: 55,181,818 (same as base offering scenario)
• Total post-IPO shares outstanding: 116,895,455 + 3,559,091 = 120,454,546
• Pinnacle Vista voting power: 55,181,818 ÷ 120,454,546 ≈ 45.8%
Using the conventional total (127,272,727):
• Pinnacle Vista voting power: 55,181,818 ÷ 127,272,727 ≈ 43.4%
Scenario 2(b): Overallotment Entirely Secondary (from Pinnacle Vista).
If the overallotment shares are entirely secondary (sold by Pinnacle Vista), then:
• Pinnacle Vista post-IPO shares: 55,181,818 − 3,559,091 = 51,622,727
• Total post-IPO shares outstanding: 116,895,455 (unchanged, as no new primary shares are issued)
• Pinnacle Vista voting power: 51,622,727 ÷ 116,895,455 ≈ 44.2%
Using the conventional total (127,272,727):
• Pinnacle Vista voting power: 51,622,727 ÷ 127,272,727 ≈ 40.6%
In all scenarios, Pinnacle Vista's individual post-IPO voting power falls below 50%. Accordingly, Pinnacle Vista, standing alone, may not satisfy the controlled-company test. However, as set forth below, the combined voting power of Pinnacle Vista and the Founders comfortably exceeds 50% in every scenario.
C. Combined Voting Power: Pinnacle Vista Plus Founders
The Founders — Garrett Calloway and Elaine Briggs — hold approximately 24,000,000 shares in the aggregate on a pre-IPO fully diluted basis. The Founders are not selling shares in the IPO; accordingly, their post-IPO share count remains 24,000,000 under all scenarios.
Base Offering Scenario (No Overallotment):
• Pinnacle Vista post-IPO shares: 55,181,818
• Founders post-IPO shares: 24,000,000
• Combined shares: 79,181,818
• Total post-IPO shares outstanding: 116,895,455
• Combined voting power: 79,181,818 ÷ 116,895,455 ≈ 67.7%
Using the conventional total (123,713,636):
• Combined voting power: 79,181,818 ÷ 123,713,636 ≈ 64.0%
Full Overallotment Scenario (Overallotment Entirely Primary):
• Combined shares: 79,181,818
• Total post-IPO shares outstanding: 120,454,546
• Combined voting power: 79,181,818 ÷ 120,454,546 ≈ 65.7%
Using the conventional total (127,272,727):
• Combined voting power: 79,181,818 ÷ 127,272,727 ≈ 62.2%
Full Overallotment Scenario (Overallotment Entirely Secondary from Pinnacle Vista):
• Combined shares: 51,622,727 + 24,000,000 = 75,622,727
• Total post-IPO shares outstanding: 116,895,455
• Combined voting power: 75,622,727 ÷ 116,895,455 ≈ 64.7%
Using the conventional total (127,272,727):
• Combined voting power: 75,622,727 ÷ 127,272,727 ≈ 59.4%
Under every scenario analyzed — including the most dilutive scenario in which the overallotment is exercised in full entirely from Pinnacle Vista secondary shares — the combined voting power of Pinnacle Vista and the Founders exceeds 50% by a substantial margin. The range of combined voting power across all scenarios is approximately 59.4% to 67.7%, depending on the methodology and the allocation of the overallotment.
D. Control Through the Stockholders' Agreement
Independent of the arithmetic voting-power analysis, Pinnacle Vista and the Founders maintain effective control over the Company through the provisions of the Amended and Restated Stockholders' Agreement, which will become effective upon the closing of the IPO. The key provisions relevant to the controlled-company analysis are as follows:
Board Designation Rights. Pinnacle Vista has the right to designate two directors to the CBR board of directors so long as it holds at least 30% of the Company's outstanding common stock. The current Pinnacle Vista designees are Hugh Pemberton (Co-Founder and Managing Partner of Pinnacle Vista Capital Management LLC) and Diane Kovac (Co-Founder and Managing Partner of Pinnacle Vista Capital Management LLC). These designation rights step down to one designee if Pinnacle Vista's ownership falls below 30% but remains at or above 20%, and terminate entirely if Pinnacle Vista's ownership falls below 20%.
Founder Voting Commitments. The Founders have committed to vote all of their shares in favor of Pinnacle Vista's board designees at each annual or special meeting of stockholders at which directors are to be elected, for so long as Pinnacle Vista's board designation rights remain in effect. This voting commitment ensures that Pinnacle Vista's designees will be elected to the board so long as the combined voting power of Pinnacle Vista and the Founders exceeds the threshold necessary to elect directors (which, under the Company's plurality voting standard, is effectively a majority of shares voting at a meeting at which a quorum is present).
Transfer Restrictions. The Stockholders' Agreement imposes transfer restrictions on both Pinnacle Vista and the Founders during the 180-day lock-up period following the date of the final prospectus, subject to customary exceptions. Following the lock-up period, the Stockholders' Agreement imposes certain volume limitations on Founder sales and requires that any Founder sale be conducted in a manner that does not undermine the governance provisions of the Agreement.
Standstill Provisions. The Stockholders' Agreement includes standstill provisions applicable to Pinnacle Vista that restrict certain activist-type behaviors (such as soliciting proxies against board-recommended proposals) but that are generally consistent with Pinnacle Vista's role as a supportive, governance-oriented controlling stockholder.
Under NYSE Listed Company Manual Section 303A.00, a "group" that holds more than 50% of the voting power for the election of directors triggers controlled-company status. The NYSE has consistently interpreted the concept of a "group" to include stockholders who have entered into contractual arrangements — such as voting agreements and stockholders' agreements — that provide for coordinated action with respect to the election of directors. The Founders' voting commitments in favor of Pinnacle Vista's board designees, together with the coordinated governance provisions of the Stockholders' Agreement, clearly establish that Pinnacle Vista and the Founders constitute a "group" for purposes of the NYSE controlled-company test.
Accordingly, even if Pinnacle Vista's individual voting power is below 50%, the combined voting power of the Pinnacle Vista/Founder group — which exceeds 50% in all scenarios — satisfies the controlled-company test. The contractual arrangements under the Stockholders' Agreement reinforce this conclusion by demonstrating that the group members act in concert with respect to the election of directors.
E. Conclusion on Controlled-Company Status
Based on the foregoing analysis, CBR will qualify as a "controlled company" under NYSE Listed Company Manual Section 303A.00 immediately following the closing of the IPO. The combined voting power of Pinnacle Vista and the Founders, acting as a group pursuant to the Amended and Restated Stockholders' Agreement, will exceed 50% of the total voting power of the Company's outstanding capital stock under both the base-offering and full-overallotment scenarios, regardless of the allocation of the overallotment between primary and secondary shares. The Company is therefore eligible to elect the controlled-company exemption and to rely upon the governance accommodations provided by NYSE rules for controlled companies.
IV. NYSE Controlled-Company Exemption — Legal Framework
A. Applicable Rules
The NYSE's corporate governance requirements for listed companies are set forth in Section 303A of the NYSE Listed Company Manual. The following provisions are directly relevant to the controlled-company analysis:
NYSE Listed Company Manual Section 303A.00 — Definition of "Controlled Company." Section 303A.00 defines a "controlled company" as a listed company of which more than 50% of the voting power for the election of directors is held by an individual, a group, or another company. A controlled company that elects to take advantage of the controlled-company exemption must disclose in its annual proxy statement that it is a controlled company and the basis for that determination. Section 303A.00 provides that the determination of whether a company is "controlled" is to be made as of the date of listing and thereafter on an ongoing basis.
NYSE Listed Company Manual Section 303A.01 — Independent Directors. Section 303A.01 requires that listed companies have a majority of independent directors on their boards. This requirement is waivable under the controlled-company exemption. Independence is determined in accordance with the NYSE's independence standards, which require, among other things, that the director have no material relationship with the listed company (either directly or as a partner, stockholder, or officer of an organization that has a relationship with the company). The NYSE grants the board latitude in determining the materiality of a director's relationship with the company.
NYSE Listed Company Manual Section 303A.04 — Nominating/Corporate Governance Committee. Section 303A.04 requires that listed companies have a nominating/corporate governance committee composed entirely of independent directors and that the committee have a written charter that addresses, at minimum, the committee's purpose and responsibilities with respect to director qualifications and nominations, board governance principles, and annual board self-evaluations. This requirement is waivable under the controlled-company exemption.
NYSE Listed Company Manual Section 303A.05 — Compensation Committee. Section 303A.05 requires that listed companies have a compensation committee composed entirely of independent directors and that the committee have a written charter that addresses, at minimum, the committee's purpose and responsibilities with respect to CEO compensation, executive compensation, and incentive compensation and equity-based plans. This requirement is waivable under the controlled-company exemption.
NYSE Listed Company Manual Sections 303A.06 and 303A.07 — Audit Committee. Sections 303A.06 and 303A.07 establish the requirements for the audit committee of a listed company, including the requirement that the committee consist of at least three members, all of whom must be independent directors, and that at least one member qualify as an "audit committee financial expert" as defined in Item 407(d)(5)(ii) of Regulation S-K. These requirements are not waivable under the controlled-company exemption and must be complied with in full.
SEC Rule 10A-3 under the Securities Exchange Act of 1934. Rule 10A-3 imposes independent audit committee requirements that are separate from and in addition to the NYSE rules. These requirements apply to all listed companies without exception and are not subject to the controlled-company exemption. Rule 10A-3 requires, among other things, that the audit committee be directly responsible for the appointment, compensation, retention, and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review, or attest services for the listed company.
B. Exemptions Available
If CBR elects the controlled-company exemption, it will be exempt from the following NYSE requirements:
1. Majority Independent Board (Section 303A.01). CBR will not be required to have a majority of independent directors on its board. This exemption is critical for CBR, as only three of its seven current directors are independent, and the addition of independent directors to achieve a majority would conflict with Pinnacle Vista's negotiated board designation rights under the Stockholders' Agreement.
2. Fully Independent Nominating/Corporate Governance Committee (Section 303A.04). The Company's nominating/corporate governance committee need not be composed entirely of independent directors, and the committee need not have a written charter meeting the specific requirements of Section 303A.04. This exemption is particularly important for CBR, as the current Nominating and Corporate Governance Committee includes Hugh Pemberton, a Pinnacle Vista designee who is not independent under NYSE standards.
3. Fully Independent Compensation Committee (Section 303A.05). The Company's compensation committee need not be composed entirely of independent directors, and the committee need not have a written charter meeting the specific requirements of Section 303A.05. Although CBR's current Compensation Committee is already fully independent (composed of Catherine Liang, Richard Estavez, and Warren Okoro), this exemption provides the Company with flexibility to modify the composition of the Compensation Committee in the future without triggering a NYSE governance violation.
C. Requirements That Remain Applicable
Notwithstanding the controlled-company exemption, CBR must comply with the following NYSE requirements:
Audit Committee (Sections 303A.06, 303A.07; SEC Rule 10A-3). The Company must maintain an audit committee consisting of at least three members, all of whom must be independent directors, with at least one member qualifying as an "audit committee financial expert" as defined under SEC rules. CBR must comply with these requirements in full at or promptly following the closing of the IPO.
The NYSE provides a limited phase-in exception for newly listed companies with respect to audit committee composition:
• At least one independent member at the time of listing;
• A majority of independent members within 90 days of listing; and
• Full compliance (all members independent) within one year of listing.
However, consistent with best practices and the current plan developed by the Company's management and its General Counsel, Sandra Haverford, CBR intends to achieve full audit committee compliance at the time of the IPO closing. The current Audit Committee composition (Warren Okoro, Catherine Liang, and Richard Estavez) is fully compliant.
Code of Business Conduct and Ethics (Section 303A.10). The Company must adopt and disclose a code of business conduct and ethics applicable to all directors, officers, and employees, regardless of whether the controlled-company exemption is elected. The code must comply with the content requirements set forth in Section 303A.10. The Company is in the process of finalizing its Code of Business Conduct and Ethics for adoption prior to the IPO.
Internal Audit Function (Section 303A.07(d)). The Company must maintain an internal audit function, which may be achieved through in-house staff, co-sourcing arrangements, or full outsourcing to a third party (other than the Company's independent auditor). CBR currently maintains an internal audit function through a co-sourcing arrangement with Severin Beck CPAs LLP (the Company's independent auditor is Penrose Firth CPAs LLP).
CEO Certification (Section 303A.12). The Company's Chief Executive Officer must annually certify compliance with NYSE corporate governance standards. This obligation applies regardless of controlled-company status.
D. Disclosure Requirements
S-1 Registration Statement. NYSE Section 303A.00 requires a controlled company to disclose its status and the basis for that determination. In the context of the IPO, this disclosure must appear in the Company's S-1 registration statement. Specifically, the S-1 must include disclosure in the following sections:
Risk Factors. The Company must include a risk factor addressing its controlled-company status and the reduced corporate governance protections available to public stockholders, including the absence of a requirement for a majority independent board and the absence of a requirement for fully independent nominating/corporate governance and compensation committees. The risk factor should address the implications for minority stockholders, including the limited ability of public stockholders to influence corporate governance decisions and the potential for conflicts of interest between the controlling group and the public stockholders.
Management and Board of Directors. The Company must disclose in this section that it is a "controlled company" within the meaning of the NYSE Listed Company Manual, identify the specific exemptions upon which it intends to rely, describe the composition of its board and each committee (including the independence status of each member), and describe the basis for its controlled-company status, including the voting power of Pinnacle Vista and the Founders and the provisions of the Stockholders' Agreement.
Principal and Selling Stockholders. The principal and selling stockholders table must show Pinnacle Vista's pre- and post-IPO ownership percentages, the Founders' holdings, and a footnote describing the Stockholders' Agreement and the voting commitments contained therein.
Annual Proxy Statement. Following the IPO, the Company has an ongoing obligation to disclose its controlled-company status and the exemptions relied upon in each annual proxy statement filed with the SEC. The proxy statement must affirmatively state that the Company is a "controlled company" and identify the controlling group and the basis for the determination.
V. CBR Board Composition Analysis
A. Current Board of Directors (Pre-IPO)
The Company's board of directors currently consists of seven members. The independence status of each director, assessed in accordance with NYSE independence standards, is as follows:
The board consists of three independent directors (42.9%) and four non-independent directors (57.1%). Of the four non-independent directors, two are members of management (Calloway and Briggs) and two are Pinnacle Vista designees (Pemberton and Kovac).
Without the controlled-company exemption, NYSE Section 303A.01 would require the Company to have a majority of independent directors — that is, at least four of the seven directors must be independent. The Company's current board composition does not satisfy this requirement. Achieving compliance would require either (a) the addition of at least one new independent director (bringing the total to eight directors, four of whom would be independent), or (b) the removal of one non-independent director and the potential addition of an independent replacement. Either approach would implicate Pinnacle Vista's negotiated board designation rights and would likely require amendments to the Stockholders' Agreement, which Pinnacle Vista's counsel has indicated would be unacceptable to Pinnacle Vista at this stage.
B. Committee Composition
Audit Committee. The Company's Audit Committee consists of three members: Warren Okoro (Chair), Catherine Liang, and Richard Estavez. All three members are independent under both NYSE and SEC Rule 10A-3 standards. Warren Okoro has been designated by the board as the Audit Committee's "audit committee financial expert" pursuant to Item 407(d)(5)(ii) of Regulation S-K, based on his qualifications as a former Chief Financial Officer of Atlas Energy Holdings, Inc. and his experience in financial reporting, internal controls, and audit oversight.
The Audit Committee is fully compliant with the requirements of NYSE Sections 303A.06 and 303A.07 and SEC Rule 10A-3. No changes to the Audit Committee composition are necessary in connection with the IPO, and the controlled-company exemption does not affect the Audit Committee requirements.
Compensation Committee. The Company's Compensation Committee consists of three members: Catherine Liang (Chair), Richard Estavez, and Warren Okoro. All three members are independent under NYSE standards. The Compensation Committee's current composition satisfies the NYSE requirement of Section 303A.05 that the committee be composed entirely of independent directors, even without reliance on the controlled-company exemption.
However, if the controlled-company exemption is elected, the Company is not required to maintain a fully independent Compensation Committee, which provides the Company with flexibility to modify the committee's composition in the future — for example, to add a Pinnacle Vista designee or a management representative — without triggering a NYSE governance violation. We note that such a modification would likely attract negative attention from proxy advisory firms and institutional investors, and we do not recommend it at this time. The current fully independent composition of the Compensation Committee is a governance strength that should be preserved and highlighted in the Company's disclosure.
Nominating and Corporate Governance Committee. The Company's Nominating and Corporate Governance Committee consists of three members: Richard Estavez (Chair), Catherine Liang, and Hugh Pemberton. Two of the three members (Estavez and Liang) are independent, but Hugh Pemberton is non-independent by reason of his affiliation with Pinnacle Vista.
This committee does not currently satisfy the NYSE requirement of Section 303A.04 that the committee be composed entirely of independent directors. Without the controlled-company exemption, the inclusion of Hugh Pemberton on the Nominating and Corporate Governance Committee would constitute a violation of NYSE governance rules.
With the controlled-company exemption, the current composition of the Nominating and Corporate Governance Committee is permissible. Pinnacle Vista has expressed a strong preference for retaining a representative on the Nominating and Corporate Governance Committee in order to participate directly in the director nomination process and to protect its contractual board designation rights.
C. Analysis. The controlled-company exemption is necessary for CBR at the time of the IPO for two principal reasons:
1. Board Composition. The Company's board does not have a majority of independent directors. Three of seven directors (42.9%) are independent, which falls short of the majority (57.1% or greater) required by NYSE Section 303A.01. The controlled-company exemption waives this requirement.
2. Nominating and Corporate Governance Committee Composition. The Company's Nominating and Corporate Governance Committee includes Hugh Pemberton, a non-independent Pinnacle Vista designee. This composition violates NYSE Section 303A.04, which requires that the committee be composed entirely of independent directors. The controlled-company exemption waives this requirement.
If the controlled-company exemption is not elected, the Company would need to restructure its board and committee composition to achieve compliance with NYSE governance rules prior to the IPO closing. This would require either adding independent directors to the board (to achieve a majority) and replacing Hugh Pemberton on the Nominating and Corporate Governance Committee with an independent director, or removing one or more non-independent directors. Any such restructuring would conflict directly with Pinnacle Vista's negotiated board designation rights under the Stockholders' Agreement and would likely require renegotiation of the Agreement — a process that could delay the IPO timeline and create significant tension between the Company, the Founders, and Pinnacle Vista.
VI. Phase-In Schedule Upon Loss of Controlled-Company Status
A. Triggering Event
CBR will lose its status as a "controlled company" under NYSE rules if and when Pinnacle Vista, the Founders, and any other members of the "group" (as determined by the Stockholders' Agreement and other contractual arrangements) collectively hold 50% or less of the Company's total voting power. This is a bright-line test: the exemption is available so long as the group holds more than 50%, and ceases to be available at the moment the group holds exactly 50% or less.
The loss of controlled-company status could be triggered by one or more of the following events:
• Secondary offerings by Pinnacle Vista. Following the expiration of the 180-day lock-up period (approximately early-to-mid October 2022, assuming an April/May 2022 IPO closing), Pinnacle Vista will be free to sell additional shares through registered secondary offerings, block trades, or other transactions. Each such sale reduces Pinnacle Vista's share count and, consequently, the group's combined voting power.
• Lock-up expirations. The 180-day lock-up period restricts sales by Pinnacle Vista, the Founders, and other insiders. Upon expiration, the potential for accelerated share sales increases.
• Future follow-on offerings. The Company may conduct follow-on primary offerings to raise additional capital. Each primary offering increases the total number of shares outstanding and dilutes the group's voting percentage without reducing the group's absolute share count.
• Distributions by Pinnacle Vista to its limited partners. As a private equity fund, Pinnacle Vista's Series III Fund will eventually distribute its CBR shares to its limited partners as part of the fund's wind-down process. Such distributions could result in the shares being held by a dispersed group of limited partners who are not bound by the Stockholders' Agreement, effectively removing those shares from the "group" for purposes of the controlled-company test.
• Dilution from equity plan issuances. The Company's 2022 Equity Incentive Plan will reserve 12,727,273 shares (representing approximately 10% of the post-IPO shares outstanding on a full-overallotment-exercise basis) for issuance to employees, directors, and consultants. In addition, the Company's 2022 Employee Stock Purchase Plan will reserve 2,545,455 shares (approximately 2% of post-IPO shares outstanding). As these shares are issued over time — through grants of restricted stock units, stock options, and ESPP purchases — the total number of shares outstanding will increase, diluting the group's voting percentage. The combined equity plan reserves of approximately 15,272,728 shares represent a potential dilution of approximately 10.7% on a post-IPO basis (15,272,728 ÷ [127,272,727 + 15,272,728]).
B. NYSE Phase-In Requirements (Section 303A.00)
Upon ceasing to be a controlled company, CBR must comply with the NYSE independence requirements within the transition periods specified in Section 303A.00 and the applicable subsections. The phase-in schedule is as follows:
The phase-in schedule provides a reasonable but limited transition period. The "clock" begins to run on the date on which the Company ceases to qualify as a controlled company, which the Company must determine on an ongoing basis by monitoring the ownership levels of Pinnacle Vista, the Founders, and any other members of the group. There is no grace period or notice period: the phase-in requirements take effect immediately upon loss of controlled-company status.
C. Practical Implications for CBR
The practical implications of the phase-in schedule for CBR's current governance structure are as follows:
Board Composition. To comply with the majority-independent-board requirement of Section 303A.01 within one year of losing controlled-company status, CBR would need to add at least one additional independent director (bringing the independent count to at least four of seven, assuming no change in total board size) or, alternatively, reduce the number of non-independent directors. If the total board size remains at seven, the minimum requirement is four independent directors. If the total board size is expanded to nine (which may be desirable to accommodate both Pinnacle Vista's designation rights and the independence requirement), at least five directors must be independent.
Nominating and Corporate Governance Committee. Hugh Pemberton would need to be removed from the Nominating and Corporate Governance Committee within one year of the loss of controlled-company status, as the committee must be composed entirely of independent directors by that date. Within 90 days, a majority of the committee must be independent — which is already satisfied by the current composition (two of three members are independent). Immediately upon the loss of controlled-company status, the committee must have at least one independent member — which is also already satisfied.
Compensation Committee. The Compensation Committee is already composed entirely of independent directors (Catherine Liang, Richard Estavez, and Warren Okoro). No changes would be required upon the loss of controlled-company status, as the committee already satisfies the fully independent composition requirement.
Audit Committee. The Audit Committee is already fully compliant with NYSE and SEC Rule 10A-3 requirements. No changes would be required upon the loss of controlled-company status.
Ongoing Monitoring. We recommend that the Company include a standing item on its board's quarterly meeting agenda to review the ownership levels of Pinnacle Vista, the Founders, and other members of the control group. Sandra Haverford, the Company's General Counsel and Corporate Secretary, should be tasked with maintaining a current record of share ownership based on SEC filings (Schedule 13D, Form 4, Section 16 reports), transfer agent records, and direct communications with Pinnacle Vista. The Company should also establish an early-warning threshold — for example, when the group's combined voting power falls below 55% — to trigger the commencement of a transition planning process, including the identification and recruitment of prospective independent director candidates.
VII. Pinnacle Vista Board Designation Rights — Step-Down Schedule
A. Stockholders' Agreement Provisions
The Amended and Restated Stockholders' Agreement (to be effective upon the closing of the IPO) grants Pinnacle Vista contractual rights to designate members of the Company's board of directors. These designation rights are subject to a step-down schedule tied to Pinnacle Vista's ownership of the Company's outstanding common stock:
• ≥30% ownership: Pinnacle Vista has the right to designate two directors to the CBR board of directors. The current designees are Hugh Pemberton and Diane Kovac.
• ≥20% but <30% ownership: Pinnacle Vista has the right to designate one director to the CBR board of directors.
• <20% ownership: Pinnacle Vista has no board designation rights.
The Stockholders' Agreement further provides that the Founders — Garrett Calloway and Elaine Briggs — are obligated to vote all of their shares in favor of Pinnacle Vista's board designees at each annual or special meeting of stockholders at which directors are elected, for so long as Pinnacle Vista's board designation rights remain in effect. This voting commitment ensures that Pinnacle Vista's designees will be elected, as the combined voting power of Pinnacle Vista and the Founders will exceed the plurality threshold for director elections.
The Stockholders' Agreement also includes transfer restrictions (including the 180-day lock-up) and standstill provisions applicable to Pinnacle Vista, as discussed in Section III.D above.
B. Interaction with Controlled-Company Status
The step-down of Pinnacle Vista's board designation rights may or may not coincide with the loss of controlled-company status under NYSE rules. These are independent triggers governed by different metrics: the board designation rights are governed by Pinnacle Vista's individual ownership percentage (not the group's combined voting power), while controlled-company status is governed by the group's combined voting power (more than 50%).
This creates several potential scenarios that the Company should anticipate:
Scenario 1: Loss of controlled-company status while Pinnacle Vista retains board designation rights. If Pinnacle Vista sells significant secondary shares (beyond the $150 million sold at IPO) and the Founders do not sell, the group's combined voting power could drop below 50% while Pinnacle Vista still retains more than 30% ownership and therefore retains the right to designate two directors. In this scenario, CBR would lose the controlled-company exemption and must commence the phase-in to full NYSE compliance, but Pinnacle Vista would continue to have the contractual right to designate two non-independent directors. This creates a practical tension: Pinnacle Vista may designate non-independent directors at the same time that the board is required to transition to a majority-independent composition.
Resolution: The Stockholders' Agreement expressly provides that Pinnacle Vista's designation rights are "subject to applicable stock exchange rules and regulations." This clause preserves the Company's ability to comply with NYSE requirements — including the requirement to achieve a majority independent board within one year — even if Pinnacle Vista continues to exercise its designation rights. In practice, this may require the Company to expand the board size to accommodate both Pinnacle Vista's designees and the required number of independent directors. For example, if the board is expanded from seven to nine members, Pinnacle Vista could retain its two designees while the Company adds independent directors to achieve a majority (five of nine).
Scenario 2: Loss of Pinnacle Vista designation rights before loss of controlled-company status. If Pinnacle Vista's individual ownership falls below 30% (triggering a step-down in designation rights) but the group's combined voting power remains above 50% (because the Founders retain their shares and the voting agreement remains in effect), the Company would remain a controlled company even though Pinnacle Vista has lost its right to designate two directors. In this scenario, the controlled-company exemption remains available, but the composition of the board may naturally evolve toward greater independence as Pinnacle Vista's designation rights step down.
Scenario 3: Simultaneous loss of controlled-company status and designation rights. If the events coincide — for example, if Pinnacle Vista's ownership falls below 20% (extinguishing all designation rights) at approximately the same time that the group's combined voting power falls below 50% — the transition is more straightforward, as there are no competing obligations. The Company simply commences the phase-in to full NYSE compliance with no ongoing Pinnacle Vista designation rights to accommodate.
We have discussed these scenarios in general terms with Christine Navarro of Whitfield Archer & Doss LLP, who represents Pinnacle Vista. Ms. Navarro has confirmed that Pinnacle Vista understands that its board designation rights are subject to applicable stock exchange rules and that the Company will need to comply with NYSE phase-in requirements upon the loss of controlled-company status. Pinnacle Vista has expressed a preference for expanding the board (rather than removing its designees) as the mechanism for achieving compliance, and we expect that this preference will be reflected in the Company's transition planning.
VIII. Disclosure Considerations for the S-1 Registration Statement
A. Prospectus Disclosure
The Company's S-1 registration statement must include comprehensive disclosure regarding its controlled-company status, the exemptions upon which it intends to rely, and the associated risks to investors. The following disclosure elements should be addressed:
Risk Factors. The "Risk Factors" section of the S-1 should include a prominently placed risk factor addressing the Company's controlled-company status and the implications for public stockholders. The risk factor should address the following points:
• The Company is a "controlled company" within the meaning of the NYSE Listed Company Manual because Pinnacle Vista and the Founders, together, hold more than 50% of the Company's total voting power following the IPO.
• As a controlled company, the Company is not required to have a majority of independent directors on its board.
• The Company's Nominating and Corporate Governance Committee is not required to be composed entirely of independent directors, and currently includes Hugh Pemberton, a non-independent Pinnacle Vista designee.
• The Company's Compensation Committee is not required to be composed entirely of independent directors, although it is currently fully independent on a voluntary basis.
• As a result of these reduced governance protections, public stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. Specifically, the interests of the controlling group may not align with the interests of the Company's other stockholders, and the controlling group has the ability to control the outcome of matters submitted to a stockholder vote, including the election of directors and the approval of significant corporate transactions.
• Public stockholders' ability to influence corporate governance decisions is limited as long as the controlled-company exemption is in effect.