MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
To: Jennifer Kwon, Responsible Partner, Capital Markets
From: Brendan Walsh, Lead Associate, Capital Markets; Natasha Forbes, Working Associate, Capital Markets
Date: April 25, 2022
Re: Calloway-Briggs Renewables Inc. — Proposed IPO — Related-Party Transactions Requiring Disclosure Under Item 404 of Regulation S-K
Matter No.: 1015-00001
I. Executive Summary and Purpose
The purpose of this memorandum is to identify, analyze, and recommend disclosure treatment for all related-party transactions involving Calloway-Briggs Renewables Inc. ("CBR" or the "Company"), its directors, executive officers, and holders of more than 5% of its voting securities, in connection with the proposed initial public offering (the "IPO") of approximately $600,000,000 of common stock on the New York Stock Exchange (proposed ticker: CBRI). This memorandum is intended to serve as a comprehensive reference for the deal team in preparing the "Certain Relationships and Related-Party Transactions" section of the Company's Registration Statement on Form S-1 (the "S-1") and to ensure that all transactions requiring disclosure under applicable securities laws and stock exchange rules are identified and adequately addressed.
The primary legal framework governing the disclosure of related-party transactions in the context of the Company's S-1 is Item 404 of Regulation S-K promulgated under the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Item 404(a) of Regulation S-K requires disclosure of any transaction since the beginning of the Company's last completed fiscal year—that is, since January 1, 2021, for purposes of this filing—in which the amount involved exceeds $120,000, in which the Company is or was a participant, and in which any "related person" has or had a direct or indirect material interest. Item 404(b) further requires disclosure of the Company's policies and procedures for the review, approval, or ratification of such transactions.
For purposes of this analysis, the related persons identified as requiring review include the following:
• Pinnacle Vista Capital Partners III, LP (and its affiliates Pinnacle Vista Capital Management LLC ("PVCM"), Hugh Pemberton, and Diane Kovac), as the holder of approximately 62% of the Company's pre-IPO fully diluted common stock;
• Garrett Calloway, Chairman of the Board of Directors and Chief Executive Officer, co-founder of the Company, holding approximately 14% of the Company's pre-IPO fully diluted common stock individually;
• Elaine Briggs, President, Development, co-founder of the Company, holding approximately 10% of the Company's pre-IPO fully diluted common stock individually;
• Marcus Yoon, Chief Financial Officer;
• Sandra Haverford, General Counsel and Corporate Secretary;
• Dale Renfroe, Chief Operating Officer;
• Priya Anand, Senior Vice President, Finance and Treasurer;
• Tomás Quintero, Senior Vice President, Project Development;
• Rachel Whitmore, Chief People Officer;
• Warren Okoro, independent director;
• Catherine Liang, independent director; and
• Richard Estavez, independent director.
This memorandum will serve as the principal working document and basis for drafting the "Certain Relationships and Related-Party Transactions" section of the S-1 (designated as Document 45 in the matter document index). Our review has encompassed a comprehensive analysis of all agreements, arrangements, and transactions between the Company and the foregoing related persons, drawing upon the due diligence record, management interviews, and documents produced in connection with the IPO workstream.
Based on our analysis, we have identified four principal categories of related-party transactions that require disclosure under Item 404 of Regulation S-K: (1) the Pinnacle Vista Management-Services Agreement and the equity investment history; (2) the Amended and Restated Stockholders' Agreement and the Registration Rights Agreement; (3) the employment agreements and equity compensation arrangements with the Company's co-founders and executive officers; and (4) the indemnification agreements and D&O insurance program applicable to the Company's directors and officers. In addition, we address Pinnacle Vista's participation as a selling stockholder in the IPO, the lock-up arrangements, and the proposed IPO equity grants. All of the identified transactions are customary for sponsor-backed IPOs of this nature and scale. However, each requires full and accurate description in the prospectus to comply with the disclosure requirements of Regulation S-K and to satisfy the expectations of the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the "SEC" or the "Staff").
The sections that follow set forth in detail the applicable legal standards, a transaction-by-transaction description of each identified related-party transaction, our review of additional potential transactions that did not meet the disclosure threshold, our recommendations for the Company's related-party transactions policy, and our drafting guidance for the relevant sections of the S-1.
II. Applicable Legal Standards
A. Item 404(a) of Regulation S-K — Transactions with Related Persons
Item 404(a) of Regulation S-K requires the disclosure, in a registration statement on Form S-1, of any transaction since the beginning of the registrant's last completed fiscal year, or any currently proposed transaction, in which the registrant was or is to be a participant and the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest. For the purposes of the Company's S-1 filing, the "look-back" period commenced on January 1, 2021 (the beginning of the Company's last completed fiscal year ended December 31, 2021), and extends through the date of effectiveness of the registration statement, including any currently proposed transactions that are expected to be consummated in connection with or following the IPO.
The term "related person" is defined under Item 404 and Instruction 1 thereto to include:
(a) any director or nominee for director of the registrant;
(b) any executive officer of the registrant;
(c) any beneficial owner of more than 5% of any class of the registrant's voting securities; and
(d) any immediate family member (as defined in Item 404) of any of the foregoing persons.
The concept of "immediate family member" encompasses a spouse, parent, stepparent, child, stepchild, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, and any person (other than a tenant or employee) sharing the household of any of the foregoing persons. This definition is broad in scope and requires careful inquiry into the personal relationships and household arrangements of each related person.
The nature of the interest that triggers disclosure is a "direct or indirect material interest." The SEC has interpreted this standard to encompass not only situations where the related person is a direct counterparty to the transaction, but also situations where the related person has an interest by virtue of a position with, or ownership stake in, an entity that is a party to the transaction. In the present case, this analysis is particularly relevant with respect to Hugh Pemberton and Diane Kovac, who serve as Co-Founders and Managing Partners of PVCM, which is the general partner of Pinnacle Vista Capital Partners III, LP, which in turn is a direct equity holder of the Company. Each of Pemberton and Kovac has both a direct interest (as directors of CBR) and an indirect interest (as principals of the entity that manages the fund holding the majority equity stake in CBR) in the transactions between the Company and the Pinnacle Vista affiliates.
When disclosure is required, Item 404(a) mandates the following elements:
(i) the name of the related person and the basis on which the person is a related person;
(ii) the related person's interest in the transaction, including the related person's position or relationship with, or ownership in, a firm, corporation, or other entity that is a party to, or has an interest in, the transaction;
(iii) the approximate dollar value of the amount involved in the transaction;
(iv) the approximate dollar value of the amount of the related person's interest in the transaction, which shall be computed without regard to the amount of profit or loss; and
(v) in the case of any transaction involving indebtedness, the largest aggregate amount of principal outstanding during the period, the amount thereof outstanding as of the latest practicable date, the amount of principal paid during the period, the amount of interest paid during the period, and the rate or amount of interest payable on the indebtedness.
It is important to note that the instruction to Item 404(a) provides that certain transactions are deemed not to involve a material interest and therefore need not be disclosed. These include, among others, compensation paid to executive officers that is disclosed pursuant to Item 402 of Regulation S-K and transactions where the interest of the related person arises solely from the person's position as a director of another corporation that is a party to the transaction, or the direct or indirect ownership of less than a 10% equity interest in another person (other than a partnership) that is a party to the transaction, or both. These exclusions have been considered in our analysis of each identified transaction.
B. Item 404(b) of Regulation S-K — Policies and Procedures for Review of Related-Party Transactions
Item 404(b) of Regulation S-K requires disclosure of the registrant's policies and procedures for the review, approval, or ratification of transactions with related persons that are required to be reported under Item 404(a). The disclosure must identify the persons or groups responsible for the review and the standards applied in such review. If the registrant has no such policies or procedures, or if such policies or procedures do not address the matters specified in Item 404(b), the registrant must so state.
Because CBR is a private company that has not yet adopted a formal written related-party transactions policy, we recommend that the Company adopt such a policy prior to or contemporaneously with the effectiveness of the S-1 registration statement. The proposed policy, described in Section V of this memorandum, should require that all related-party transactions in which the amount involved exceeds $120,000, and in which any related person has a direct or indirect material interest, be submitted to the Audit Committee of the Board of Directors for pre-approval. The S-1 should include a description of the policy and its principal features, as set forth in our drafting recommendations in Section VI below.
Warren Okoro has been designated as the "audit committee financial expert" within the meaning of Item 407(d)(5) of Regulation S-K pursuant to resolutions of the Board of Directors adopted in connection with the IPO preparations. The Audit Committee, composed of Okoro (Chair), Catherine Liang, and Richard Estavez—all of whom satisfy the independence requirements of the NYSE listing standards and Rule 10A-3 under the Exchange Act—will serve as the reviewing body for all related-party transactions.
C. NYSE Listing Standards — Related-Party Transaction Oversight
The NYSE Listed Company Manual Section 314.00 requires that each listed company's audit committee, or another independent body of the board of directors, conduct a review of all related-party transactions on an ongoing basis and that the company's independent directors approve all such transactions. This requirement applies to all listed companies, including those availing themselves of the "controlled company" exemption under Section 303A of the Listed Company Manual.
With respect to the controlled-company exemption, we note that following the IPO, Pinnacle Vista Capital Partners III, LP is expected to hold approximately 44.6% of the Company's outstanding common stock on a base offering basis (approximately 43.3% if the underwriters' overallotment option is exercised in full). Although these percentages are below 50%, Pinnacle Vista's combined voting power, when considered together with the shares held by the Founders (Calloway and Briggs) and the governance provisions of the Amended and Restated Stockholders' Agreement, may result in Pinnacle Vista effectively controlling the composition of the Board of Directors and the outcome of matters submitted to stockholders for approval. If Pinnacle Vista is determined to "control" the Company for purposes of the NYSE listing standards, the Company may elect to rely on the controlled-company exemption, which permits certain accommodations with respect to the independence requirements for the board and the nominating and compensation committees.
Critically, however, the controlled-company exemption does not exempt the Company from the requirement that it have a fully independent audit committee under Rule 10A-3 of the Exchange Act, and it does not relieve the Company of its disclosure obligations under Item 404 of Regulation S-K. The phase-in schedule for independent directors under the NYSE rules permits newly listed companies to have at least one independent member on the audit committee at the time of listing, a majority within 90 days of listing, and a fully independent committee within one year of listing. The Company's current composition of the Audit Committee (Okoro, Liang, and Estavez) already satisfies the full independence requirement, and no phase-in is necessary with respect to the Audit Committee. The composition requirements of the Compensation Committee and the Nominating and Corporate Governance Committee may, however, be subject to phase-in if the controlled-company exemption is relied upon, as addressed separately in the corporate governance workstream.
III. Identified Related-Party Transactions
Set forth below is a detailed description of each related-party transaction identified in connection with the Company's proposed IPO. For each transaction, we provide a summary of the parties, the material terms, the amounts involved, the related persons having a direct or indirect material interest, and our recommendation regarding the disclosure treatment in the S-1.
A. Pinnacle Vista Management-Services Agreement
1. Parties. The Management-Services Agreement (the "MSA") was entered into between Calloway-Briggs Renewables Inc., on the one hand, and Pinnacle Vista Capital Management LLC, on the other hand. PVCM is a Delaware limited liability company and serves as the general partner of Pinnacle Vista Capital Partners III, LP. PVCM is controlled by its co-founders and managing partners, Hugh Pemberton and Diane Kovac, each of whom also serves as a non-independent, investor-designated member of the Company's Board of Directors.
2. Date and Term. The MSA was originally entered into on or about September 15, 2017, contemporaneously with Pinnacle Vista's initial equity investment of $385,000,000 in the Company. The MSA was subsequently amended on or about March 22, 2019, in connection with the $120,000,000 follow-on equity investment by Pinnacle Vista Capital Partners III, LP. The 2019 amendment updated the scope of advisory services to reflect the Company's expanded operations and geographic footprint, but did not alter the annual management fee or the payment schedule. The MSA has no fixed expiration date and, by its terms, continues until terminated in accordance with the termination provisions set forth therein.
3. Description of Services. Under the MSA, PVCM provides CBR with a range of strategic advisory services, including, but not limited to, the following:
• strategic planning and business development advisory;
• financial oversight, budgeting, and forecasting support;
• portfolio-company management support and operational best practices derived from PVCM's experience managing its broader portfolio;
• assistance with capital allocation decisions, including review of potential acquisition targets, project-level investment decisions, and capital expenditure prioritization;
• assistance with debt financing, including advice on credit facility negotiations, project finance structures, and capital markets transactions; and
• periodic operational reviews and performance benchmarking against comparable renewable energy companies in the PVCM portfolio and the broader market.
The services contemplated by the MSA are provided primarily by Hugh Pemberton and Diane Kovac, each of whom has dedicated a portion of his or her time to oversight of the Company's strategic direction and financial performance in his or her capacity as a managing partner of PVCM and as a member of CBR's Board of Directors. The MSA does not require PVCM to dedicate any specific number of hours or full-time-equivalent personnel to the provision of services, and PVCM retains full discretion to determine the manner and timing of service delivery.
4. Compensation. The MSA provides for an annual management fee of $2,400,000, payable quarterly in arrears in equal installments of $600,000 per quarter. The management fee was calculated as a percentage of PVCM's committed equity in the Company at the time of the initial investment and was negotiated at arm's length between PVCM and the Company's founders in connection with the 2017 investment. The annual management fee is not subject to annual escalation, cost-of-living adjustment, or performance-based modification. The fee has remained at $2,400,000 per annum since the inception of the MSA.
The following table summarizes the management fees paid to PVCM during the applicable reporting periods:
PVCM is responsible for all of its own costs and expenses in connection with the provision of services under the MSA, including travel, personnel, and overhead costs. The Company does not reimburse PVCM for any out-of-pocket expenses incurred in connection with the performance of the MSA, except for extraordinary expenses (such as third-party consultants retained at the Company's specific request) that are pre-approved in writing by the Company's Chief Financial Officer.
5. Termination Upon IPO. The MSA contains a provision that causes it to terminate automatically and without further action by either party upon the closing of an initial public offering of the Company's equity securities resulting in gross proceeds to the Company and any selling stockholders of at least $250,000,000. The proposed IPO, with aggregate gross proceeds of approximately $600,000,000, will satisfy this termination trigger. Significantly, the MSA provides that no termination fee, tail payment, success fee, or other compensation is owed by the Company to PVCM upon an IPO-triggered termination of the MSA. This is a favorable provision from the Company's perspective and should be highlighted in the prospectus disclosure.
Following the IPO, PVCM and its principals (Pemberton and Kovac) will continue to have board representation rights under the Amended and Restated Stockholders' Agreement, as described in Section III.E below. However, neither PVCM nor Pinnacle Vista Capital Partners III, LP will receive any separate management-services compensation, advisory fees, or monitoring fees from the Company following the closing of the IPO. The termination of the MSA will result in annual cost savings to the Company of $2,400,000.
We recommend that the S-1 disclosure describe the MSA, the annual management fee, the services provided, the IPO termination provision, and the fact that no further fees will be paid to PVCM or any Pinnacle Vista affiliate following the closing of the IPO.
6. Analysis. The MSA clearly exceeds the $120,000 disclosure threshold in each of Fiscal Years 2019, 2020, and 2021, and in the current fiscal year (2022). The Company is a participant in the transaction. The related persons having a direct or indirect material interest in the MSA include:
• Hugh Pemberton — as Co-Founder and Managing Partner of PVCM (the counterparty to the MSA), as a managing partner of the general partner of Pinnacle Vista Capital Partners III, LP (the majority stockholder of CBR), and as a non-independent member of CBR's Board of Directors;
• Diane Kovac — on the same bases as Pemberton;
• Pinnacle Vista Capital Partners III, LP — as the fund making the investment in CBR, managed by PVCM, having an indirect interest in the MSA by virtue of its relationship with PVCM; and
• Pinnacle Vista Capital Management LLC — as the direct counterparty to the MSA.
Accordingly, disclosure of the MSA is required under Item 404(a) of Regulation S-K.
B. Founder Employment Agreements
The Company has entered into employment agreements with each of its two co-founders, Garrett Calloway and Elaine Briggs, both of whom are executive officers and directors of the Company and each of whom beneficially owns more than 5% of the Company's voting securities. In light of their status as both directors and holders of more than 5% of the Company's voting securities, the employment agreements constitute related-party transactions subject to analysis under Item 404(a). We note, however, that compensation paid to executive officers that is reported in the Summary Compensation Table and related tables under Item 402 of Regulation S-K is generally excluded from the Item 404(a) analysis under the instruction to that item. Nevertheless, given the significance of the founders' roles and their substantial ownership stakes, we recommend that the material terms of the employment agreements be described in the Related-Party Transactions section with appropriate cross-references to the Executive Compensation section of the S-1.
1. Garrett Calloway — Chairman of the Board and Chief Executive Officer. Parties. Calloway-Briggs Renewables Inc. and Garrett Calloway.
Date and History. The employment agreement was originally entered into in 2014 at the time of the Company's formation by Calloway and Briggs. The agreement was subsequently amended and restated in September 2017, contemporaneously with the Pinnacle Vista initial equity investment, to reflect the Company's post-investment capital structure, governance arrangements, and updated compensation terms negotiated among the founders and PVCM. The amended and restated employment agreement has been in effect since September 2017 and will remain in effect following the IPO, subject to certain modifications as described below.
Compensation. For Fiscal Year 2021, Calloway's compensation consisted of a base salary, an annual performance bonus (with a target amount expressed as a percentage of base salary), and long-term equity incentive awards. The specific amounts of Calloway's compensation for Fiscal Year 2021 will be set forth in the Summary Compensation Table and the accompanying Compensation Discussion and Analysis ("CD&A") in the Executive Compensation section of the S-1 (Document 43 in the matter document index). We recommend that the Related-Party Transactions section cross-reference the Executive Compensation section for the complete details of Calloway's compensation.
Co-Founder Equity Ownership. Calloway holds approximately 14% of the Company's pre-IPO fully diluted common stock on an individual basis, representing a portion of the approximately 24% aggregate founder and management ownership block. Calloway's shares are subject to the transfer restrictions and other provisions of the Amended and Restated Stockholders' Agreement and the 180-day lock-up agreement to be executed in connection with the IPO, each as described elsewhere in this memorandum.
Key Terms of the Employment Agreement. The material terms of Calloway's amended and restated employment agreement include the following:
• Employment At-Will with Severance Protections. Calloway's employment is at-will and may be terminated by either party at any time, with or without cause. In the event of a termination by the Company without "cause" or a resignation by Calloway for "good reason" (each as defined in the agreement), Calloway is entitled to severance payments consisting of a specified multiple of his base salary and target bonus, continued health benefits for a specified period, and accelerated vesting of a portion of his outstanding equity awards. The specific severance terms are set forth in the employment agreement and will be described in the Executive Compensation section.
• Change-of-Control Provisions (Double-Trigger). The employment agreement provides for enhanced severance and accelerated equity vesting in the event of a qualifying termination of employment occurring within a specified period following a "change of control" of the Company (as defined in the agreement). The change-of-control severance provisions are structured on a "double-trigger" basis, meaning that both a change of control and a qualifying termination of employment (without cause or for good reason) must occur before the enhanced benefits are triggered.
• Non-Compete. For a period of 12 months following the termination of Calloway's employment for any reason, Calloway is prohibited from engaging in or being employed by any business that competes directly with the Company's principal lines of business within the geographic territories in which the Company operates. The non-compete is limited in scope to the renewable energy development and operations sector.
• Non-Solicitation. For a period of 18 months following termination, Calloway is prohibited from soliciting or hiring any employee of the Company or its subsidiaries or from soliciting the business of any material customer, supplier, or business partner of the Company.
• Confidentiality and intellectual Property Assignment. The agreement includes customary provisions requiring Calloway to maintain the confidentiality of the Company's proprietary and trade-secret information during and following employment, and to assign to the Company all intellectual property developed during the course of his employment.
Proposed IPO Equity Grants. In connection with the IPO, the Company proposes to grant Calloway an award of 500,000 restricted stock units ("RSUs") under the 2022 Omnibus Equity Incentive Plan (the "2022 Plan"). The RSUs will vest ratably over a four-year period following the grant date, subject to Calloway's continued employment with the Company. The proposed grant is consistent with the executive compensation equity grant analysis set forth in Document 149 of the matter document index and with the benchmarking data provided by Clarendon Rowe Advisory Group LLC, the Company's independent compensation consultant.
Disclosure Recommendation. We recommend that the S-1 describe the material terms of Calloway's employment agreement in the Related-Party Transactions section, with a cross-reference to the Executive Compensation section for detailed compensation information, and separately note the proposed IPO equity grant of 500,000 RSUs.
2. Elaine Briggs — Co-Founder and President, Development. Parties. Calloway-Briggs Renewables Inc. and Elaine Briggs.
Date and History. Briggs's employment agreement was originally entered into in 2014 at the time of the Company's founding and was amended and restated in September 2017, contemporaneously with the Pinnacle Vista initial equity investment, on terms structurally consistent with Calloway's amended and restated employment agreement.
Compensation. For Fiscal Year 2021, Briggs's compensation consisted of a base salary, an annual performance bonus, and long-term equity incentive awards. As with Calloway, the specific amounts of Briggs's compensation will be set forth in the Summary Compensation Table and the accompanying CD&A in the Executive Compensation section of the S-1 (Document 43).
Co-Founder Equity Ownership. Briggs holds approximately 10% of the Company's pre-IPO fully diluted common stock on an individual basis, representing a portion of the approximately 24% aggregate founder and management ownership block. Briggs's shares are subject to the same transfer restrictions, lock-up arrangements, and stockholders' agreement provisions applicable to Calloway.
Key Terms of the Employment Agreement. The material terms of Briggs's amended and restated employment agreement are structurally consistent with those of Calloway's agreement, including the following:
• Employment at-will with severance protections (specified multiple of base salary and target bonus, continued health benefits, accelerated equity vesting upon qualifying termination);
• Change-of-control provisions on a double-trigger basis;
• Non-compete for 12 months post-termination;
• Non-solicitation for 18 months post-termination; and
• Customary confidentiality and intellectual property assignment provisions.
Proposed IPO Equity Grants. In connection with the IPO, the Company proposes to grant Briggs an award of 400,000 RSUs under the 2022 Plan, vesting ratably over four years, subject to continued employment.
Disclosure Recommendation. The treatment should mirror that of Calloway's employment agreement: describe material terms in the Related-Party Transactions section, cross-reference the Executive Compensation section for detailed compensation data, and note the proposed IPO equity grant of 400,000 RSUs.
C. Other Executive Officer Arrangements
In addition to the co-founders, the Company has entered into employment agreements with each of the following executive officers, each of whom is expected to receive an IPO equity grant under the 2022 Plan:
The final RSU grant amounts for Haverford, Renfroe, Anand, Quintero, and Whitmore are expected to be determined prior to the filing of Amendment No. 1 to the S-1, based on the executive compensation equity grant analysis (Document 149) and the benchmarking data provided by Clarendon Rowe Advisory Group LLC (Patricia Voss, Managing Director). The employment agreements for each of these officers contain terms generally consistent with those described above for the co-founders, including at-will employment with severance protections, change-of-control provisions, restrictive covenants, and confidentiality and intellectual property assignment provisions, although the specific severance multiples and restrictive covenant durations may differ in certain respects from those applicable to the co-founders.
While executive compensation is primarily disclosed in the dedicated Executive Compensation section of the S-1 pursuant to Item 402 of Regulation S-K, Item 404(a) requires identification of material employment arrangements with related persons. To the extent that any officer listed above is a "related person" by virtue of beneficial ownership of more than 5% of the Company's voting securities, specific identification and cross-referencing in the Related-Party Transactions section is required. Based on our current review of the Company's capitalization table, none of the officers listed in this Section III.C (other than Calloway and Briggs, addressed above) individually holds more than 5% of the Company's pre-IPO fully diluted common stock. However, these officers are "related persons" by virtue of their status as executive officers of the Company, and their employment agreements therefore fall within the scope of Item 404(a) analysis.
Disclosure Recommendation. We recommend that the Related-Party Transactions section of the S-1 reference the existence of the executive officer employment agreements with a cross-reference to the full Executive Compensation discussion, noting the proposed IPO equity grants and the material terms of the employment arrangements.
D. Pinnacle Vista Equity Investment History
1. Initial Investment (2017). In September 2017, Pinnacle Vista Capital Partners III, LP (the "Fund"), a Delaware limited partnership and the Series III flagship fund of the Pinnacle Vista Capital Partners platform (2016 vintage, approximately $4.8 billion of total committed capital), invested $385,000,000 in the equity of CBR. The investment was made in exchange for shares of preferred stock of the Company, which were subsequently reclassified into shares of common stock in connection with the corporate reorganization described elsewhere in the S-1. As a result of the initial investment, Pinnacle Vista acquired a majority ownership position in the Company. In connection with the investment, Hugh Pemberton and Diane Kovac, the co-founders and managing partners of PVCM, were appointed to the Company's Board of Directors as investor-designated directors pursuant to the terms of the then-existing stockholders' agreement.
2. Follow-On Investment (2019). In March 2019, Pinnacle Vista Capital Partners III, LP invested an additional $120,000,000 in CBR equity to fund the Company's expansion into new geographic markets and to support the development pipeline for utility-scale solar and onshore wind projects. The follow-on investment brought Pinnacle Vista's total equity investment in the Company to $505,000,000. The 2019 investment was made on terms negotiated between the Fund and the Company's management and board, including updated governance and protective provisions reflected in the amended stockholders' agreement and the amended MSA.
As of the date of this memorandum, Pinnacle Vista Capital Partners III, LP holds approximately 62,000,000 shares of the Company's common stock, representing approximately 62% of the Company's 100,000,000 shares of pre-IPO common stock outstanding on a fully diluted basis.
3. Post-IPO Ownership (Pro Forma). In connection with the IPO, Pinnacle Vista Capital Partners III, LP will sell 6,818,182 shares of common stock (representing approximately $150,000,000 at the assumed initial public offering price of $22.00 per share) in the secondary component of the offering. The following table summarizes the pro forma ownership of Pinnacle Vista following the IPO:
Pinnacle Vista's continued significant ownership of the Company following the IPO, together with its board representation rights under the Amended and Restated Stockholders' Agreement and its registration rights under the Registration Rights Agreement, will create ongoing related-party considerations that must be addressed in the Company's periodic filings with the SEC (annual proxy statements, annual reports on Form 10-K, and quarterly reports on Form 10-Q).
4. Disclosure Recommendation. We recommend that the investment history of Pinnacle Vista, including the amounts and dates of the initial and follow-on investments, the pre-IPO and pro forma post-IPO ownership percentages, and the ongoing relationship between Pinnacle Vista and the Company, be described in both the "Principal and Selling Stockholders" table (Document 44 in the matter document index) and the "Certain Relationships and Related-Party Transactions" section of the S-1. The disclosure should note the significance of Pinnacle Vista's continued post-IPO ownership and its potential to influence corporate governance and business decisions.
E. Amended and Restated Stockholders' Agreement
1. Parties. The Amended and Restated Stockholders' Agreement (the "Stockholders' Agreement") will be entered into among Calloway-Briggs Renewables Inc., Pinnacle Vista Capital Partners III, LP, Garrett Calloway, and Elaine Briggs.
2. Effective Date. The Stockholders' Agreement will become effective upon the closing of the IPO and will replace the existing pre-IPO stockholders' agreement, which was originally entered into in 2017 and amended in 2019. The form of the Amended and Restated Stockholders' Agreement is currently being negotiated among the parties and their respective counsel, and the final terms are expected to be agreed upon prior to the filing of Amendment No. 1 to the S-1.
3. Key Terms. The principal terms of the Stockholders' Agreement, as currently contemplated, include the following:
Board Designation Rights. Pinnacle Vista Capital Partners III, LP will have the right to designate members of the Company's Board of Directors on a step-down schedule tied to its beneficial ownership of the Company's outstanding common stock. Specifically, it is currently expected that Pinnacle Vista will be entitled to designate:
• two (2) director designees for so long as Pinnacle Vista beneficially owns 30% or more of the outstanding common stock;
• one (1) director designee for so long as Pinnacle Vista beneficially owns at least 15% but less than 30% of the outstanding common stock; and
• zero (0) director designees if Pinnacle Vista's beneficial ownership falls below 15% of the outstanding common stock.
These thresholds are subject to finalization in the definitive Stockholders' Agreement. At the time of the IPO, based on Pinnacle Vista's expected post-IPO ownership of approximately 44.6% (base offering) to 43.3% (full overallotment), Pinnacle Vista will be entitled to designate two members to the Board, expected to be Hugh Pemberton and Diane Kovac.
Transfer Restrictions. The Stockholders' Agreement will impose limitations on the transfer of shares by Pinnacle Vista and the Founders during specified periods following the IPO, separate from and in addition to the 180-day lock-up agreements described in Section III.H below. These transfer restrictions are intended to provide for an orderly post-IPO market for the Company's common stock and to ensure alignment between the interests of the major stockholders and the public investors.
Standstill Provisions. Under the Stockholders' Agreement, Pinnacle Vista will agree to certain standstill restrictions regarding the acquisition of additional shares of the Company's common stock above its post-IPO ownership level, subject to customary exceptions (including acquisitions approved by the Board and acquisitions resulting from stock dividends, splits, or similar corporate actions).
Information Rights. Pinnacle Vista will retain certain information rights regarding the Company's financial performance and operations, including the right to receive periodic financial reports, access to management, and notice of certain material events. These information rights are subject to compliance with applicable securities laws, including Regulation FD, and the Company will be required to establish appropriate information barriers and disclosure controls to manage these obligations.
Governing Law. The Stockholders' Agreement will be governed by and construed in accordance with the laws of the State of Delaware.
4. Disclosure Recommendation. Full disclosure of the Stockholders' Agreement is required in both the "Certain Relationships and Related-Party Transactions" section and the "Description of Capital Stock" section of the S-1. The step-down schedule for board designation rights, the transfer restrictions, the standstill provisions, and the information rights are each material to investors' understanding of the Company's corporate governance structure and the ongoing influence of Pinnacle Vista and the Founders on the Company's affairs.
F. Registration Rights Agreement
1. Parties. The Registration Rights Agreement (the "RRA") will be entered into between Calloway-Briggs Renewables Inc. and Pinnacle Vista Capital Partners III, LP (and its permitted transferees). The form of the RRA is under negotiation and is expected to be finalized prior to the filing of Amendment No. 1 to the S-1.
2. Key Terms. The principal terms of the RRA, as currently contemplated, include the following:
Demand Registration Rights. Pinnacle Vista may, subject to customary limitations, require the Company to file a registration statement under the Securities Act to register for resale all or a portion of the shares of common stock held by Pinnacle Vista. The RRA is expected to limit the number of demand registrations that Pinnacle Vista may request (typically, two to four demand registrations) and to impose minimum offering size requirements (expected to be not less than $50,000,000 in aggregate offering amount) to ensure that the Company is not subjected to an unreasonable number of registered offerings.
Piggyback Registration Rights. In the event that the Company proposes to register any shares of common stock under the Securities Act (whether for the Company's own account or for the account of other stockholders), Pinnacle Vista will have the right to include its shares in such registration, subject to customary cut-back provisions. The piggyback registration rights do not count against the demand registration limits described above.
S-3 Shelf Registration Rights. Upon the Company's eligibility to register securities on Form S-3 (typically 12 months after becoming a reporting company, subject to certain other conditions), Pinnacle Vista may request that the Company file and maintain a shelf registration statement on Form S-3 covering the resale of all or a portion of Pinnacle Vista's shares. The shelf registration would enable Pinnacle Vista to conduct takedown offerings from the shelf on an accelerated basis, which is the most common method by which private equity sponsors monetize their remaining positions in post-IPO portfolio companies.
Cut-Back Provisions. In the event of an underwritten offering in which the managing underwriter determines that the number of shares proposed to be included would adversely affect the price, timing, or distribution of the offering, the shares to be included will be subject to cut-back on a priority basis set forth in the RRA (typically, shares sold by the Company for its own account have priority, followed by shares of the demanding holder, followed by shares of piggyback participants on a pro rata basis).
Governing Law. The RRA will be governed by and construed in accordance with the laws of the State of Delaware.
3. Disclosure Recommendation. The registration rights should be described in both the "Certain Relationships and Related-Party Transactions" section and the "Shares Eligible for Future Sale" section of the S-1. The disclosure should note that the exercise of registration rights by Pinnacle Vista could result in a substantial number of shares being registered for resale and sold into the public market, which could have a negative impact on the market price of the Company's common stock. This consideration should also be addressed in the Risk Factors section (Document 33).
G. Indemnification Agreements
1. Description. The Company has entered into, or will enter into upon or prior to the closing of the IPO, individual indemnification agreements (the "Indemnification Agreements") with each of its directors and executive officers. In total, the Company expects to be a party to thirteen (13) Indemnification Agreements, covering the following individuals:
Directors:
1. Garrett Calloway — Chairman of the Board and Chief Executive Officer
2. Elaine Briggs — President, Development
3. Hugh Pemberton — Non-Independent Director (Pinnacle Vista designee)
4. Diane Kovac — Non-Independent Director (Pinnacle Vista designee)
5. Warren Okoro — Independent Director
6. Catherine Liang — Independent Director
7. Richard Estavez — Independent Director
Executive Officers:
1. Marcus Yoon — Chief Financial Officer
2. Sandra Haverford — General Counsel and Corporate Secretary
3. Dale Renfroe — Chief Operating Officer
4. Priya Anand — Senior Vice President, Finance and Treasurer
5. Tomás Quintero — Senior Vice President, Project Development
6. Rachel Whitmore — Chief People Officer
The Indemnification Agreements provide for the advancement of expenses (including attorneys' fees) incurred in connection with legal proceedings arising from the individual's service as a director or officer of the Company, subject to an undertaking by the indemnitee to repay such amounts if it is ultimately determined that the indemnitee is not entitled to indemnification. The agreements further provide for broad indemnification for losses, damages, and expenses incurred by the indemnitee in connection with such proceedings, to the fullest extent permitted by Delaware law. The Indemnification Agreements also require the Company to maintain directors' and officers' liability insurance covering the indemnitees for so long as the indemnitee's service as a director or officer is continuing and for a specified period thereafter.
2. D&O Insurance Context. In connection with the IPO, the Company has procured a directors' and officers' liability insurance program with an aggregate limit of $50,000,000, structured as a tower of three layers:
The aggregate annual premium for the D&O insurance program is $1,870,000. The D&O insurance program was placed by Dravello Place Insurance Advisors LLC, the Company's insurance broker (Nina Radcliffe, Senior Vice President, Financial Lines).
The D&O insurance program is consistent with market practice for newly public renewable energy companies and has been structured to provide coverage for claims arising from both pre-IPO and post-IPO acts, errors, and omissions by the Company's directors and officers. The program includes standard provisions for Side A (direct coverage for individual directors and officers when the Company is unable to indemnify), Side B (reimbursement to the Company for indemnification payments), and Side C (entity coverage for securities claims).
3. Disclosure Recommendation. We recommend that the form of Indemnification Agreement and the D&O insurance program be described in the "Certain Relationships and Related-Party Transactions" section of the S-1 and cross-referenced to Part II, Item 14 ("Indemnification of Directors and Officers") of the S-1. The disclosure should note that the Company has entered into Indemnification Agreements with each of its directors and executive officers, summarize the key terms of the form agreement (advancement of expenses, scope of indemnification, insurance maintenance obligation), and describe the Company's D&O insurance program.
H. Participation in the IPO
1. Pinnacle Vista as Selling Stockholder. As discussed in Section III.D above, Pinnacle Vista Capital Partners III, LP will sell approximately 6,818,182 shares of common stock (representing approximately $150,000,000 at an assumed initial public offering price of $22.00 per share) as a selling stockholder in the secondary component of the IPO. The Company will not receive any proceeds from the sale of shares by Pinnacle Vista. Pinnacle Vista's participation as a selling stockholder has been negotiated among the Company, Pinnacle Vista, and the underwriters (Hargrove Keating & Co., as lead left bookrunner) and reflects a balance between providing partial liquidity for the Fund's limited partners and maintaining a significant post-IPO ownership position by the Company's largest stockholder.
Pinnacle Vista is represented in the IPO by separate counsel, Whitfield Archer & Doss LLP (Philip Archer, Partner; Christine Navarro, Counsel; Derek Fong, Associate). A custodial arrangement for the secondary shares has been established with Hargrove Keating & Co. during the offering period to facilitate the settlement mechanics for the secondary shares.
2. Director and Officer Lock-Up Agreements. All directors and executive officers of the Company are among the eighteen (18) lock-up signatories who will execute 180-day lock-up agreements in favor of Hargrove Keating & Co. in connection with the IPO. The lock-up agreements provide that, for a period of 180 days following the date of the final prospectus, the signatories may not, without the prior written consent of Hargrove Keating & Co., directly or indirectly:
• offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale, or otherwise transfer or dispose of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock;
• enter into any swap, hedge, or other agreement or arrangement that transfers, in whole or in part, the economic consequences of ownership of common stock; or
• publicly disclose the intention to engage in any of the foregoing.
The lock-up agreements may be released prior to the expiration of the 180-day period only with the prior written consent of Hargrove Keating & Co. or upon the occurrence of a Change of Control of the Company (as defined in the lock-up agreement). The lock-up agreements contain the following customary carve-outs:
• transfers to affiliates (including family trusts and estate-planning vehicles), provided the transferee executes a lock-up agreement on substantially identical terms;
• estate-planning transfers, including gifts, transfers by will, or intestate succession;
• adoption of a trading plan pursuant to Rule 10b5-1 under the Exchange Act, provided that no sales may be made under such plan during the lock-up period; and
• pledges of shares to lenders as collateral for bona fide margin or lending arrangements, provided that no foreclosure or disposition of the pledged shares may occur during the lock-up period.
3. IPO Equity Grants to Officers and Directors. In connection with the IPO, the Company will adopt the 2022 Omnibus Equity Incentive Plan (the "2022 Plan") and the 2022 Employee Stock Purchase Plan (the "2022 ESPP"), each of which will become effective upon the pricing of the IPO.
2022 Omnibus Equity Incentive Plan. The 2022 Plan will provide for a share reserve of 12,727,273 shares of common stock, representing approximately 10% of the Company's post-IPO fully diluted shares outstanding (based on 127,272,727 total post-IPO shares assuming full exercise of the underwriters' overallotment option). Pursuant to the 2022 Plan, the Company proposes to grant the following RSU awards to its executive officers in connection with the IPO:
The aggregate executive officer IPO grants are expected to total approximately 2,250,000 to 2,400,000 RSUs. Additional grants to non-executive employees and non-employee directors are expected but are addressed separately in the Executive Compensation workstream.
2022 Employee Stock Purchase Plan. The 2022 ESPP will provide for a share reserve of 2,545,455 shares of common stock, representing approximately 2% of the Company's post-IPO fully diluted shares outstanding. The ESPP will be available to all eligible employees of the Company and its participating subsidiaries, including executive officers. Eligible employees may purchase shares of common stock at a purchase price equal to 85% of the lesser of the fair market value of a share of common stock on (i) the first day of the applicable offering period and (ii) the last day of the applicable offering period. The ESPP will have six-month offering periods, with the first offering period expected to commence upon the effectiveness of the S-1.
4. Disclosure Recommendation. We recommend that the S-1 describe Pinnacle Vista's participation as a selling stockholder in the IPO, including the number of shares being sold and the expected proceeds, in the "Principal and Selling Stockholders" and "Underwriting" sections, with a cross-reference in the "Certain Relationships and Related-Party Transactions" section. The lock-up arrangements should be described in the "Underwriting" and "Shares Eligible for Future Sale" sections, with a cross-reference in the Related-Party Transactions section. The IPO equity grants should be described in the "Executive Compensation" section, with appropriate cross-references from the Related-Party Transactions section.
IV. Review of Additional Potential Related-Party Transactions
In addition to the transactions described in Section III above, we have conducted a comprehensive review of potential related-party transactions that may exist between the Company and its related persons. The following summarizes the results of that review and our conclusions regarding the need for disclosure under Item 404(a) of Regulation S-K.
A. Transactions Between CBR and Portfolio-Company Affiliates of Pinnacle Vista
During the due diligence process, we conducted an inquiry into whether any portfolio companies of Pinnacle Vista Capital Partners (across its four flagship funds, representing approximately $14.2 billion of aggregate assets under management) have entered into commercial transactions with CBR during the review period (since January 1, 2019). This inquiry was conducted in accordance with the due diligence request lists set forth in Documents 9 and 16 of the matter document index and included a review of the Company's vendor payment records, accounts receivable records, and commercial contracts, as well as inquiries of the Company's management and of PVCM.
Conclusion. Based on our review, no material transactions between the Company and any other portfolio company of Pinnacle Vista were identified during the review period. While certain Pinnacle Vista portfolio companies operate in sectors that are tangentially related to the renewable energy industry (including companies in the industrial equipment manufacturing and logistics sectors), none of these entities has entered into any contract, agreement, or other arrangement with CBR in which the amount involved exceeded $120,000 during the review period.
Disclosure Recommendation. No specific disclosure under Item 404(a) is required with respect to transactions between CBR and Pinnacle Vista portfolio-company affiliates. We recommend that this diligence inquiry and its results be noted in the working files for the record in the event of future SEC Staff inquiries.
B. Transactions with Immediate Family Members of Directors and Officers
Pursuant to the due diligence request list set forth in Document 13 of the matter document index (Employment and Benefits), we sought information from the Company regarding the employment or engagement of immediate family members (as defined in Item 404 of Regulation S-K) of any director or executive officer of the Company. This inquiry covered employment relationships, consulting arrangements, vendor relationships, and any other form of compensation or benefit provided to immediate family members of the Company's related persons.
Conclusion. Based on the Company's responses and our review of the relevant records, no employment or consulting arrangements with immediate family members of directors or officers were identified that exceed the $120,000 threshold during the review period. The Company has represented that it does not employ any immediate family member of any director or executive officer in any capacity.
Disclosure Recommendation. No specific disclosure under Item 404(a) is required with respect to transactions with immediate family members of directors and officers.
C. Loans to or from Directors and Officers
Section 402 of the Sarbanes-Oxley Act of 2002 ("SOX") prohibits an issuer that has a class of securities registered under Section 12 of the Exchange Act, or that is required to file reports under Section 15(d) of the Exchange Act, from extending or maintaining credit, or arranging for the extension of credit, in the form of a personal loan to or for any director or executive officer. This prohibition will apply to the Company upon its becoming a reporting company under the Exchange Act.
We have confirmed through the due diligence process that there are no outstanding loans from the Company to any director or executive officer, and there are no outstanding loans from any director or executive officer to the Company. The Company has represented that it has not, at any time during the review period, extended credit to, guaranteed obligations of, or otherwise made any loan to or for the benefit of any director or executive officer.
Disclosure Recommendation. No disclosure under Item 404(a) is required with respect to loans to or from directors and officers. We recommend that the SOX Section 402 prohibition on personal loans to directors and executive officers be referenced in the corporate governance section of the proxy statement following the IPO.
D. Other Arrangements
In addition to the foregoing, we have reviewed the following categories of potential related-party transactions and have determined that no disclosable transactions exist:
• Real Property Leases. No leases of real property between the Company, on the one hand, and any related person, on the other hand, have been identified during the review period. The Company's principal office leases and project-site leases are with unrelated third-party landlords.
• Guarantees. No guarantees by any related person of the Company's obligations, or by the Company of any related person's obligations, have been identified during the review period, other than customary subsidiary guarantees in the Company's corporate debt structure (e.g., the subsidiary guarantees under the Company's $350,000,000 senior secured revolving credit facility). The subsidiary guarantees do not constitute related-party transactions for purposes of Item 404(a) because the guarantors are wholly owned subsidiaries of the Company.
• Joint Ventures and Partnerships. No joint ventures or partnerships between the Company and any related person have been identified during the review period, other than the Pinnacle Vista equity investment itself, which is addressed in Section III.D above.
V. Recommended Related-Party Transactions Policy
As noted in Section II.B above, Item 404(b) of Regulation S-K requires the Company to disclose its policies and procedures for the review, approval, or ratification of related-party transactions. Because the Company has not previously adopted a formal written related-party transactions policy, we recommend that the Board of Directors adopt such a policy prior to or contemporaneously with the effectiveness of the S-1 registration statement. Set forth below is a summary of the recommended terms of the proposed policy, a draft of which is attached as Exhibit E.
A. Scope. The proposed policy applies to all transactions, arrangements, or relationships (including any series of similar or related transactions, arrangements, or relationships) in which:
(i) the Company is, was, or will be a participant;
(ii) the aggregate amount involved exceeds or is expected to exceed $120,000; and