PRIVILEGED & CONFIDENTIAL
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, New York 10022
Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
May 16, 2022
C&H Matter No. 1015-00001
Margaret Yee, Esq. Partner, Capital Markets Prescott, Danforth & Yee LLP 1271 Avenue of the Americas New York, New York 10020
Re: Calloway-Briggs Renewables Inc. — Proposed Initial Public Offering of Common Stock — Residual Comments on Underwriting Agreement
Dear Margaret:
I. Introduction and Background
We write on behalf of our client, Calloway-Briggs Renewables Inc. (the "Company" or "CBR"), in connection with the ongoing negotiation of the Underwriting Agreement (the "Underwriting Agreement") to be entered into among CBR, Pinnacle Vista Capital Partners III, LP (the "Selling Stockholder"), and the several underwriters named therein (the "Underwriters"), with Hargrove Keating & Co. ("Hargrove Keating") acting as representative of the Underwriters (in such capacity, the "Representative"), in connection with the proposed initial public offering (the "Offering" or the "IPO") of approximately $600,000,000 of shares of common stock, par value $0.01 per share (the "Common Stock" or the "Shares"), of the Company on the New York Stock Exchange (proposed ticker symbol: CBRI). The Offering is expected to comprise both a primary offering by the Company and a secondary offering by the Selling Stockholder.
This letter follows our initial comment letter dated April 22, 2022 (the "First Comment Letter"), in which we set forth Calderwood & Harkness's preliminary comments on the form of Underwriting Agreement circulated by your firm on April 15, 2022. We have carefully reviewed your response letter dated May 2, 2022 (the "PD&Y Response"), and we appreciate the progress made on numerous provisions in that exchange. However, a number of substantive issues remain unresolved, and this letter addresses those residual items in detail.
This second comment letter is organized into four principal topics:
(A) Material Adverse Effect definition and carve-outs;
(B) conditions to closing;
(C) force-majeure and termination provisions; and
(D) lock-up release mechanics.
In addition, we address certain other residual items relating to indemnification and contribution, the overallotment option, and the survivability of representations and warranties.
Concurrently with the delivery of this letter, Calderwood & Harkness is transmitting to you a revised markup of the Underwriting Agreement reflecting the positions described herein (the "Revised Markup"). We are circulating the Revised Markup under separate cover to the full working group. The markup is based on the version dated May 2, 2022, incorporating the changes reflected in the PD&Y Response, and reflects our further proposed revisions in track-changes format.
We note that certain of the comments set forth below, where expressly indicated, reflect input from Whitfield Archer & Doss LLP ("WAD") on behalf of the Selling Stockholder, which has been communicated to us through Christine Navarro. We have coordinated with WAD on those specific points, and the positions described herein are consistent with the Selling Stockholder's expectations as communicated to us.
II. Material Adverse Effect Definition and Carve-Outs
We turn first to the definition of "Material Adverse Effect" (or "MAE"), which remains a central area of disagreement. Our comments are organized by reference to the specific carve-outs within the definition.
A. Scope of the Baseline Definition
The current draft of the Underwriting Agreement defines "Material Adverse Effect" as any event, change, occurrence, or development that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on (a) the business, assets, properties, financial condition, or results of operations of the Company and its subsidiaries, taken as a whole, or (b) the ability of the Company to consummate the transactions contemplated by the Underwriting Agreement.
We have two comments on the baseline definition itself, before addressing the carve-outs:
First, the formulation "taken as a whole" currently appears in clause (a), but it is not entirely clear from the current drafting whether the same qualification applies to clause (b). We believe the intent of the parties is that both prongs be measured in relation to the Company and its subsidiaries taken as a whole, and we request confirmation that this is the case. Our Revised Markup adds "taken as a whole" to clause (b) as well, for the avoidance of doubt.
Second, clause (a) currently references the "business, assets, properties, financial condition, or results of operations" of the Company and its subsidiaries. We note that the term "properties" is largely duplicative of "assets" in most contexts and introduces potential ambiguity. We request deletion of "properties" from clause (a), as the term "assets" is sufficiently broad to encompass all tangible and intangible property interests of the Company and its subsidiaries. Alternatively, if your client and the Representative prefer to retain "properties," we request confirmation that the term is intended to refer only to real property interests (i.e., the Company's owned and leased project sites, facilities, and land rights) and is not intended to expand the scope of the definition beyond what "assets" would otherwise capture. We are open to either approach but would appreciate clarity on this point.
B. Carve-Out (i): General Economic and Market Conditions
The current draft carves out "changes in general economic or market conditions" from the MAE definition. While we appreciate the inclusion of this carve-out, we believe the current formulation is too narrow in light of the macroeconomic and capital-markets risks to which a renewable-energy company of CBR's profile is particularly exposed.
Specifically, Calderwood & Harkness requests that this carve-out be broadened to include changes in "financial, banking, credit, debt, capital, or securities market conditions, including changes in interest rates, exchange rates, and commodity prices." This expanded language is consistent with recent precedent in renewables-sector IPOs, including the underwriting agreements for SunBright Energy Inc. (October 2021), Horizon Wind Holdings Corp. (June 2021), and Clearway Power Corp. (December 2020), each of which included substantially similar formulations.
The rationale for this request is straightforward and commercially significant. CBR's business model is fundamentally dependent on the availability of project-level financing, and its project-finance economics are highly sensitive to changes in interest rates and credit-market conditions. Changes in the broader financial, banking, and credit markets — such as the ongoing tightening of monetary policy by the Federal Reserve — should not, standing alone, give rise to a determination that a Material Adverse Effect has occurred with respect to the Company. Similarly, changes in commodity prices (including electricity wholesale prices, natural gas reference prices, and renewable energy certificate prices) are market-wide phenomena that should be excluded from the MAE analysis.
With respect to the "disproportionate-impact" qualifier, we note that the current draft provides that the general economic and market conditions carve-out applies "except to the extent" such changes disproportionately affect the Company relative to "other companies in similar industries." We request that this qualifier be refined to reference companies "operating in the renewable-energy and utility industries," rather than the vague formulation "similar industries." This specificity is important to ensure that any disproportionate-impact analysis is conducted against an appropriate peer group and does not inadvertently compare CBR to companies in unrelated sectors.
C. Carve-Out (iii): Changes Affecting the Renewable-Energy or Utility Industries Generally
The current draft includes a carve-out for "changes affecting the renewable-energy or utility industries generally." We support the inclusion of this carve-out but request that it be expanded to expressly encompass certain sector-specific policy and regulatory factors that are of particular importance to CBR's business.
Specifically, we request that the carve-out be revised to include changes in "government subsidies, tax credits (including the Investment Tax Credit and the Production Tax Credit), incentive programs, renewable portfolio standards, or feed-in tariff regimes." Changes to these policy frameworks — which by their nature affect the renewable-energy industry broadly rather than any single company — should not, standing alone, give rise to a determination of a Material Adverse Effect absent a disproportionate impact on the Company relative to similarly situated companies.
This request is particularly important given CBR's substantial reliance on ITC and PTC frameworks across its operations. As disclosed in the Registration Statement, the Company's operating portfolio consists of approximately 3.8 GW of solar, wind, and energy-storage assets, and its development pipeline encompasses an additional 7.6 GW of under-construction and development-stage projects. The economics of virtually all of these projects are predicated, in part, on the availability of federal and state tax credits and incentive programs. A legislative change to the ITC or PTC that affected the entire renewable-energy sector should not be treated as a Company-specific Material Adverse Effect for purposes of the Underwriting Agreement.
As with the general economic and market conditions carve-out, the "disproportionate-impact" qualifier should apply to this carve-out, and the relevant comparison group should be companies "operating in the renewable-energy and utility industries."
D. Carve-Out (iv): Force Majeure Events
The current draft carves out "natural disasters, pandemics, or acts of war" from the MAE definition. While we appreciate the inclusion of these items, we believe the current formulation is incomplete and does not adequately address the full range of force majeure events to which CBR is exposed given its geographic footprint and the nature of its operations.
Calderwood & Harkness requests that this carve-out be expanded to include "epidemics, earthquakes, hurricanes, tornadoes, floods, wildfires, weather events, acts of terrorism, cyberattacks, and other force majeure events, and any governmental or regulatory response thereto." This expanded language reflects the reality that CBR's project sites are located across Texas, New Mexico, Arizona, California, and Oklahoma — all jurisdictions that are subject to significant severe-weather risk, wildfire exposure, and related governmental emergency responses. The inclusion of "any governmental or regulatory response thereto" is critical to ensure that government-mandated shutdowns, evacuations, permitting delays, or grid-curtailment orders issued in response to force majeure events are also carved out of the MAE analysis.
We note that the inclusion of "cyberattacks" in this carve-out has become standard market practice following the increased frequency of cyberattacks on critical infrastructure, including energy-sector targets. CBR's grid-connected assets and SCADA systems are potential targets for cyberattacks, and industry-wide cyber events should not constitute a Company-specific Material Adverse Effect.
As with the other carve-outs discussed above, the disproportionate-impact exception should apply to the force-majeure carve-out, and the relevant comparison group should be companies operating in the renewable-energy and utility industries.
E. Carve-Out (v): Announcement or Pendency of the IPO
The current draft carves out "changes resulting from the announcement or pendency of the IPO." We support this carve-out but request clarification that it is broad enough to encompass the full range of consequences that may flow from the announcement, pendency, or consummation of the Offering and related transactions.
Specifically, we request that the carve-out expressly encompass any loss of, or adverse change in the relationship with, customers, suppliers, employees, independent contractors, financing sources, joint-venture partners, or other business relationships that is attributable to the announcement, pendency, or consummation of the Offering and the related transactions, including the filing or public availability of the Registration Statement and the Prospectus. It is not uncommon for an IPO-bound company to experience some disruption to its business relationships as counterparties react to the prospect of a change in the company's ownership structure, governance, or public reporting obligations. These effects are a natural and foreseeable consequence of the IPO process and should not be treated as a Material Adverse Effect.
F. Additional Requested Carve-Out: Company's Own Stock Price or Trading Volume
The current carve-out (vi) references "changes in the Company's stock price or credit rating." We note that, since the Company has no publicly traded stock prior to the IPO, this carve-out is relevant only in the post-IPO context (i.e., in connection with the bring-down of representations at closing or a potential delayed closing).
We request that this carve-out be revised as follows:
First, it should be broadened to include "changes in trading volume" in addition to changes in stock price. Fluctuations in the Company's trading volume in the immediate post-IPO period are to be expected and should not, standing alone, constitute a Material Adverse Effect.
Second, the carve-out should include "any failure by the Company to meet published analyst estimates, projections, or forecasts or internal budgets, plans, or projections." This is a standard formulation designed to ensure that a miss on earnings or operational targets is not treated as an MAE in its own right; rather, the MAE analysis should focus on the underlying causes of any such failure. To be clear, this carve-out should include the proviso that the underlying causes of any such failure are not themselves excluded from the MAE definition by virtue of this carve-out — in other words, if the underlying cause of a failure to meet projections would independently constitute an MAE, the carve-out would not protect against the underlying cause itself.
G. Disproportionate-Impact Qualifier
Finally, with respect to the MAE definition as a whole, Calderwood & Harkness's position is that the "except to the extent not disproportionately affecting" qualifier should be applied selectively, to carve-outs (i) (general economic and market conditions), (iii) (changes affecting the renewable-energy or utility industries generally), and (iv) (force majeure events) only.
The disproportionate-impact qualifier should not apply to the following carve-outs:
• Carve-out (ii): Changes in applicable law or GAAP — changes in law or accounting standards affect all companies subject to those laws or standards and are not susceptible to a meaningful "disproportionate impact" analysis.
• Carve-out (v): Announcement or pendency of the IPO — by definition, the effects of the Company's own IPO announcement cannot meaningfully be measured against the effects of that announcement on other companies.
• Carve-out (vi): Stock price, trading volume, or failure to meet projections — as discussed above, these are inherently company-specific phenomena, and applying a disproportionate-impact qualifier would render the carve-out meaningless.
We believe this approach is consistent with prevailing market practice in recent IPO underwriting agreements and appropriately balances the interests of the Company, the Selling Stockholder, and the Underwriters.
III. Conditions to Closing
We turn next to the conditions precedent to the Underwriters' obligations to purchase the Shares at closing. Calderwood & Harkness has several comments on these provisions, as described below.
A. Bring-Down of Representations and Warranties
The current draft of the Underwriting Agreement provides, as a condition to closing, that the representations and warranties of the Company and the Selling Stockholder shall be "true and correct in all material respects" both as of the date of the Underwriting Agreement and as of the closing date (the "Closing Date").
Calderwood & Harkness's position is that this formulation gives rise to a "double-materiality" problem with respect to representations and warranties that are already qualified by materiality or by reference to the Material Adverse Effect standard. Where a representation states, for example, that the Company has not experienced any changes that would reasonably be expected to have a "Material Adverse Effect," applying an additional "in all material respects" bring-down qualifier effectively dilutes the representation by introducing a second layer of materiality.
We request that the bring-down condition be revised to employ the standard "Xeroxx/double-materiality scrub" approach, as follows:
(a) Representations and warranties that are already qualified by materiality, "Material Adverse Effect," or similar qualifications shall be brought down as "true and correct in all respects" as of the Closing Date (i.e., without the additional "in all material respects" qualifier).
(b) Representations and warranties that are not so qualified shall be brought down as "true and correct in all material respects" as of the Closing Date.
This approach ensures that the materiality thresholds embedded in the representations themselves are given full effect, without being eroded by a second layer of materiality qualification at the bring-down stage. This is standard market practice for IPO underwriting agreements and was employed in each of the renewables-sector precedent transactions referenced above.
B. Officer's Certificate
The current draft requires that Garrett Calloway, Chief Executive Officer, and Marcus Yoon, Chief Financial Officer, deliver a joint officer's certificate at closing confirming, among other things, that no Material Adverse Effect has occurred since the date of the most recent financial statements included in the Registration Statement, and that the representations and warranties of the Company are true and correct as of the Closing Date.
Calderwood & Harkness has two comments on this condition:
First, the current draft provides that the "no MAE" bring-down in the officer's certificate runs from "the date of the Underwriting Agreement." We believe the standard and more appropriate formulation is for the look-back period to run from the date of the most recent balance sheet included in the Registration Statement — which, at present, is December 31, 2021, and which will be updated to include the most recent interim period (Q1 2022, ending March 31, 2022) if unaudited interim financial data for that period is included in the Registration Statement or Prospectus at the time of effectiveness. The rationale for this approach is that the officer's certificate is designed to confirm that no deterioration has occurred since the date of the financial statements on which investors are relying in making their investment decision. Tying the look-back period to the date of the Underwriting Agreement would create a shorter and less informative look-back period and is inconsistent with standard market formulations.
Second, we request that the officer's certificate expressly confirm that the representations and warranties contained in the Registration Statement and the Prospectus are "true and correct" as of the Closing Date, subject to the same double-materiality scrub described in Section III.A above. The current draft references the representations and warranties in the Underwriting Agreement but does not explicitly address the accuracy of the disclosure in the Registration Statement as a separate certificate item.
C. Legal Opinion and Negative Assurance Letters
The current draft conditions closing on the delivery of the following legal opinions and negative assurance letters:
(a) A legal opinion from Calderwood & Harkness LLP, as issuer's counsel, addressed to the Underwriters;
(b) A legal opinion from Prescott, Danforth & Yee LLP, as underwriters' counsel, addressed to the Underwriters;
(c) A negative assurance (Rule 10b-5) letter from Calderwood & Harkness LLP addressed to the Underwriters; and
(d) A negative assurance (Rule 10b-5) letter from Prescott, Danforth & Yee LLP addressed to the Underwriters.
Calderwood & Harkness does not object to the delivery of these opinions and letters as closing conditions. However, we have two comments regarding the scope of the issuer's counsel opinion:
First, we request that the scope of the Calderwood & Harkness legal opinion be limited to customary matters for an IPO underwriting agreement, including: (i) due organization, valid existence, and good standing of the Company under Delaware law; (ii) enforceability of the Underwriting Agreement against the Company; (iii) valid issuance of the Shares (duly authorized, validly issued, fully paid, and non-assessable); (iv) no conflicts with the Company's Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws (each, as in effect at the time of closing) or any material agreements of the Company; and (v) compliance with the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, and the Securities Exchange Act of 1934, as amended, to the extent applicable to the Registration Statement and Prospectus.
Second, we object to the inclusion in the current draft of a stand-alone opinion that the Company is in compliance with "all applicable laws." A broad "no violation of applicable law" opinion is not customary for issuer's counsel in the IPO context and would require a review of all federal, state, and local laws, rules, and regulations applicable to the Company's operations — an undertaking that is neither practical nor consistent with established opinion practice. The legal opinion should be limited to compliance with (x) the federal and New York securities laws and (y) the Delaware General Corporation Law. To the extent your client or the Representative requires broader legal comfort on regulatory compliance, that comfort is appropriately provided through the representations and warranties in the Underwriting Agreement and the Registration Statement, not through a stand-alone opinion of issuer's counsel.
We are prepared to circulate our proposed form of legal opinion once the Underwriting Agreement is substantially finalized and would suggest doing so in connection with the next working-group call.
D. Comfort Letter Conditions
The current draft conditions closing on the delivery of comfort letters from Ashford & Pemberton LLP (the "Auditor"), including an initial comfort letter and a bring-down comfort letter. Calderwood & Harkness has the following comments:
First, the condition should specify that three circle-ups of the comfort letter are required: (i) an initial comfort letter delivered on or prior to the date of the Registration Statement, (ii) a bring-down comfort letter delivered at or prior to pricing, and (iii) a further bring-down comfort letter delivered at or prior to the Closing Date. This is consistent with the agreed-upon scope of the Auditor's engagement and with standard practice for IPO transactions of this size.
Second, we request that the condition require the comfort letters to be in "form and substance reasonably satisfactory to the Company and the Representative," rather than solely to the Representative. The Company has a legitimate interest in the scope and content of the comfort letters, particularly with respect to the financial data covered and any qualifications or exceptions noted by the Auditor. The current draft gives the Representative sole approval authority, which is not consistent with the Company's interests.
Third, we request confirmation that the comfort letters will cover audited financial statements for fiscal years 2019, 2020, and 2021, as well as the unaudited interim financial data for the quarterly period ended March 31, 2022 (Q1 2022), to the extent such data is included in the Registration Statement or Prospectus at the time of effectiveness. The scope of the comfort letters should be consistent with the financial information on which investors will rely in making their investment decisions.
E. Lock-Up Agreements as a Condition
The current draft conditions closing on the receipt of executed lock-up agreements from all eighteen (18) identified lock-up parties, including all directors and executive officers of the Company, the Selling Stockholder (Pinnacle Vista Capital Partners III, LP), and all other holders of one percent (1%) or more of the Company's outstanding Common Stock on a pre-IPO basis.
Calderwood & Harkness has two alternative requests with respect to this condition:
Primary position: We request that this condition be deemed satisfied upon receipt of executed lock-up agreements from holders representing at least ninety-five percent (95%) of the pre-IPO shares outstanding, rather than requiring lock-up agreements from one hundred percent (100%) of the identified lock-up parties. As a practical matter, it may be difficult to obtain executed lock-up agreements from every identified lock-up party prior to closing, particularly from smaller holders who may be traveling, incapacitated, or otherwise difficult to reach on the required timetable. A 95% threshold provides sufficient comfort to the Underwriters while avoiding the risk that the Offering could be delayed or derailed by the inability to obtain a single signature from a de minimis holder.
Alternative position: If the 95% threshold is not acceptable, we request in the alternative that the condition provide that the Representative may, in its discretion, waive the lock-up condition with respect to specific lock-up parties who hold, individually, less than one percent (1%) of the pre-IPO shares outstanding. This preserves the Underwriters' ability to insist on lock-up agreements from all significant holders while providing flexibility with respect to smaller positions.
F. Additional Conditions — Good Standing Certificates
The current draft conditions closing on the delivery of good-standing certificates (or certificates of existence, as applicable) for CBR from the Delaware Secretary of State and the Texas Secretary of State, as well as good-standing certificates for each of the Company's ten (10) material subsidiaries:
1. CBR Holdings LLC (Delaware)
2. Calloway-Briggs Operating Company LLC (Delaware)
3. Solaris West Solar LLC (Arizona)
4. Red Mesa Wind Energy LLC (New Mexico)
5. Painted Rock Solar LLC (Arizona)
6. Pronghorn Wind LLC (Oklahoma)
7. Brazos Energy Storage LLC (Texas)
8. Mesquite Wind Holdings LLC (Texas)
9. Cimarron Solar Development LLC (New Mexico)
10. CBR Development Co. LLC (Delaware)
Given the number of jurisdictions involved (Delaware, Texas, Oklahoma, Arizona, and New Mexico), Calderwood & Harkness requests that the good-standing certificates be dated no earlier than five (5) business days prior to the Closing Date. The current draft requires that good-standing certificates be dated no earlier than three (3) business days prior to the Closing Date, which is impractical given the processing times of several of the relevant Secretaries of State offices. In particular, the New Mexico Secretary of State and the Oklahoma Secretary of State have experienced processing delays in recent months, and a five-business-day window provides adequate assurance of currency while allowing sufficient time to obtain all required certificates.
G. FINRA and NYSE Conditions
The current draft conditions closing on (a) receipt of a no-objection letter from the Financial Industry Regulatory Authority ("FINRA") with respect to the fairness and reasonableness of the underwriting terms and arrangements (FINRA Filing No. 20221129-01) and (b) approval for listing of the Shares on the New York Stock Exchange (NYSE Application No. NYSE-2022-04218).
Calderwood & Harkness requests that the NYSE listing condition be revised to reference "approval for listing, subject only to official notice of issuance," rather than unconditional listing approval. This formulation is consistent with standard NYSE practice for IPO transactions, in which the NYSE issues conditional listing approval prior to effectiveness of the Registration Statement and issues final listing approval upon receipt of an official notice of issuance following pricing and the closing of the Offering. Conditioning closing on unconditional listing approval would be inconsistent with the standard IPO timeline and could create an unnecessary obstacle to closing.
We have no comments on the FINRA condition at this time, other than to note that the FINRA filing is currently under review and we expect to receive the no-objection letter in advance of the anticipated pricing window.
IV. Termination and Force-Majeure Provisions
The termination provisions of the Underwriting Agreement are another area of significant importance to the Company. Calderwood & Harkness's comments on these provisions are set forth below.
A. Market-Out Termination Right
The current draft permits the Representative to terminate the Underwriting Agreement prior to closing if "trading on the New York Stock Exchange or the Nasdaq Stock Market shall have been suspended or materially limited."
Calderwood & Harkness has two comments on this provision:
First, we request clarification that "materially limited" refers to a general suspension or material limitation of trading across the relevant exchange as a whole, rather than a limitation affecting only certain securities or categories of securities. The purpose of the market-out is to protect the Underwriters against a breakdown in the functioning of the public equity markets generally, not to permit termination based on a halt in trading of a particular security or sector.
Second, we request the addition of a temporal threshold to ensure that mere temporary trading halts — such as market-wide circuit breakers triggered under NYSE Rule 7.12 or comparable exchange rules — do not trigger the termination right. Specifically, we propose that the market-out be triggered only if the suspension or material limitation of trading continues for more than four (4) hours during any single trading day or for any period in excess of two (2) consecutive trading days. This threshold is designed to distinguish between routine market volatility events (which should not give rise to a termination right) and genuine market crises that impair the Underwriters' ability to proceed with the Offering.
B. Disaster-Out / Force-Majeure Termination Right
The current draft permits the Representative to terminate the Underwriting Agreement upon the occurrence of "any attack on, outbreak or escalation of hostilities or act of terrorism involving the United States, any declaration of war by Congress, or any other calamity or crisis."
Calderwood & Harkness requests that this provision be tightened in two respects:
First, the disaster-out should be triggered only if such event, "in the reasonable judgment of the Representative, makes it impracticable or inadvisable to proceed with the offering, sale, or delivery of the Shares on the terms and in the manner contemplated by the Registration Statement and the Prospectus." The current draft appears to create an automatic termination right upon the occurrence of any enumerated event, without requiring the Representative to make any determination that the event actually impairs the Offering. This is overly broad. The "reasonable judgment" standard is critical — the determination should not be left to the sole and unfettered discretion of the Representative, but should be subject to a reasonableness standard that is consistent with the Representative's fiduciary obligations to the Company and the other parties to the Underwriting Agreement.
Second, we propose an additional limitation: the force-majeure termination provision should not be triggered by events, conditions, or circumstances that were known and publicly reported as of the date of the Underwriting Agreement. Pre-existing geopolitical situations — such as ongoing military conflicts, trade disputes, or public health emergencies that are already reflected in the market environment at the time the Underwriting Agreement is executed — should not serve as a basis for termination after the fact. The termination right should be limited to new events or material escalations of pre-existing events that were not reasonably foreseeable as of the date of the Underwriting Agreement.
C. Regulatory-Out. The current draft permits the Representative to terminate the Underwriting Agreement if "there shall have been any material adverse change in the financial markets or any new financial, political, or economic condition or any material change in existing financial, political, or economic conditions."
Calderwood & Harkness's position is that this provision is overbroad as currently drafted. The "any material adverse change in the financial markets" and "any new financial, political, or economic condition" formulations are extraordinarily broad and could encompass virtually any change in market or economic conditions, including changes that have no bearing on the Offering or the marketability of the Shares.
We request that this provision be limited to changes that would "materially adversely affect the marketability of the Shares or the ability of the Underwriters to enforce contracts for the sale of the Shares." This formulation ties the termination right to the actual impact of the relevant change on the Offering, rather than creating a free-standing right to terminate based on any generalized market deterioration.
Additionally, we request that the regulatory-out be subject to the "reasonable judgment of the Representative" standard, consistent with our comments on the disaster-out provision in Section IV.B above. The Representative should not have sole and unfettered discretion to invoke this termination right; rather, the determination should be subject to a reasonableness standard.
D. Material Adverse Effect on the Company as a Termination Trigger
The current draft permits the Representative to terminate the Underwriting Agreement if there has been "a material adverse effect" on the Company since the date of the most recent financial statements in the Registration Statement.
Calderwood & Harkness's position is that this termination right should incorporate the full MAE definition, including all carve-outs, as negotiated and agreed in connection with Section II of this letter. It would be anomalous for the parties to negotiate a comprehensive MAE definition with detailed carve-outs, only to have the termination provision reference a bare "material adverse effect" standard that is not subject to those same carve-outs. The carve-outs are designed to reflect the parties' agreement as to what types of events and conditions should and should not constitute a Material Adverse Effect, and that agreement should be consistently applied across all provisions of the Underwriting Agreement that reference the MAE standard.
We request that the Underwriting Agreement include express cross-reference language providing that any reference to a "Material Adverse Effect" or a "material adverse effect" in the termination provisions shall have the meaning set forth in the MAE definition section, including all carve-outs and qualifications set forth therein.
E. Expenses Upon Termination
The current draft of the Underwriting Agreement is silent on the allocation of expenses upon termination by the Representative. Calderwood & Harkness believes this is a significant gap that should be addressed, as the allocation of expenses upon termination is a material economic term of the Underwriting Agreement.
Calderwood & Harkness's position is as follows:
(a) If the Representative terminates the Underwriting Agreement pursuant to the market-out, disaster-out, or regulatory-out provisions, each party should bear its own expenses. The Company should not be liable for the Underwriters' expense reimbursement in such circumstances, as the termination is not attributable to any breach or failure on the part of the Company. In no event should the Company's aggregate liability for FINRA-related expenses exceed the $350,000 cap previously agreed among the parties.
(b) If the Underwriting Agreement is terminated due to a breach by the Company of its representations, warranties, covenants, or agreements under the Underwriting Agreement, the Company should be obligated to reimburse the Underwriters for their documented, reasonable, out-of-pocket expenses incurred in connection with the Offering. Such reimbursement should be subject to (i) the $350,000 cap with respect to FINRA-related expenses, as previously agreed, and (ii) a separate cap of $150,000 for all other documented, non-FINRA out-of-pocket expenses (including travel, due diligence, and printing expenses, but excluding the Underwriters' own legal fees and disbursements, which should be borne by the Underwriters in all circumstances).
We believe this allocation is fair and appropriate and reflects the principle that the terminating party should not be able to shift the economic consequences of a market-driven termination to the non-terminating party.
V. Lock-Up Release Mechanics
Calderwood & Harkness's comments on the lock-up provisions are set forth below. These comments address both the lock-up release mechanics in the body of the Underwriting Agreement and the form of Lock-Up Agreement to be executed by the individual lock-up parties.
A. Early Release — Consent Standard
The current draft provides that lock-up parties may be released from their lock-up obligations "upon the prior written consent of Hargrove Keating & Co." This formulation gives the Representative unrestricted discretion to grant or withhold consent to an early release, without any standard of reasonableness.
Calderwood & Harkness requests the following modifications:
First, the consent standard should be revised to provide that the Representative's consent shall not be "unreasonably withheld, delayed, or conditioned." While we recognize that the Representative has a legitimate interest in maintaining the lock-up restrictions to support the post-IPO trading market, we believe it is appropriate to subject the consent right to a reasonableness standard to protect against arbitrary or bad-faith withholding of consent.
Second, if the Representative grants an early release to any lock-up party, the Company should receive prompt written notice of such release — specifically, within two (2) business days of the date on which the release is granted. This notice requirement is important to ensure that the Company is aware of any changes to the lock-up restrictions that may affect the trading market for the Common Stock.
Third, we request the inclusion of an "equal treatment" provision, under which any early release granted by the Representative to one lock-up party must be offered on a pro rata basis to all similarly situated lock-up parties. For purposes of this provision, lock-up parties should be considered "similarly situated" if they hold the same class of securities and are subject to the same lock-up period and restrictions. The equal-treatment provision is designed to prevent selective releases that could benefit certain lock-up parties at the expense of others and is consistent with evolving market practice regarding lock-up transparency.
B. Change of Control Release
The current draft provides for an automatic release of the lock-up restrictions upon the occurrence of a "Change of Control" of the Company. Calderwood & Harkness supports the inclusion of an automatic change-of-control release but requests that the definition of "Change of Control" be clarified as follows:
(a) Any person or "group" (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) acquiring beneficial ownership (within the meaning of Rule 13d-3 promulgated thereunder) of more than fifty percent (50%) of the Company's outstanding voting securities (measured on a post-IPO basis);
(b) The consummation of a merger, consolidation, or other business combination involving the Company in which the holders of the Company's outstanding voting securities immediately prior to such transaction hold less than fifty percent (50%) of the outstanding voting power of the surviving or resulting entity immediately following such transaction; or
(c) A sale, lease, exclusive license, or other disposition of all or substantially all of the Company's and its subsidiaries' consolidated assets.
We request deletion of any "tender or exchange offer" trigger unless such offer is actually consummated. The current draft appears to provide for an automatic lock-up release upon the commencement of a tender or exchange offer, regardless of whether such offer is completed. A mere offer — which may be hostile, unsolicited, inadequate, or ultimately withdrawn — should not automatically trigger a release of the lock-up restrictions. To include such a trigger could create perverse incentives and undermine the stability of the lock-up during the critical post-IPO period. We believe the lock-up release should be triggered only by the events described in clauses (a), (b), and (c) above — each of which involves an actual change in control or disposition of assets — and not by the mere commencement of an offer that may or may not be consummated.
C. Lock-Up Carve-Outs
The current draft includes the following carve-outs from the lock-up restrictions, which Calderwood & Harkness confirms are acceptable:
• Transfers to affiliates of the lock-up party, provided that the transferee agrees in writing to be bound by the same lock-up restrictions for the remainder of the lock-up period;
• Bona fide estate-planning transfers, including transfers to trusts, family members, or family-controlled entities, provided that the transferee agrees in writing to be bound by the same lock-up restrictions;
• The adoption or establishment of a Rule 10b5-1 trading plan in compliance with the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, provided that no sales or transfers may occur under such plan during the lock-up period; and
• Pledges of shares to a lending institution as collateral for a bona fide loan, provided that such pledge does not result in any disposition of shares during the lock-up period.
In addition to these agreed-upon carve-outs, Calderwood & Harkness requests the inclusion of the following additional carve-outs:
• Transfers pursuant to a qualified domestic relations order ("QDRO") issued by a court of competent jurisdiction, provided that the transferee agrees in writing to be bound by the same lock-up restrictions for the remainder of the lock-up period;
• Sales or transfers of shares solely to cover tax withholding obligations arising upon the vesting, settlement, or exercise of equity awards granted under the Company's 2022 Omnibus Equity Incentive Plan or the Company's 2022 Employee Stock Purchase Plan, to the extent that such sales or transfers are required to satisfy the lock-up party's minimum statutory tax withholding obligations; and
• Forfeiture or surrender of shares to the Company in satisfaction of tax withholding obligations arising upon the vesting, settlement, or exercise of equity awards, including any net settlement or "sell-to-cover" arrangements approved by the Company's Compensation Committee.
These additional carve-outs address practical situations that are likely to arise during the lock-up period and are consistent with the carve-outs included in recent IPO lock-up agreements for similarly situated companies.
D. Issuer Lock-Up — Additional Carve-Outs
The current draft restricts the Company itself from issuing, selling, or registering shares of Common Stock (or securities convertible into or exchangeable for Common Stock) for a period of 180 days following the date of the final Prospectus (the "Issuer Lock-Up"). Calderwood & Harkness supports the inclusion of the Issuer Lock-Up but requests the following additional carve-outs:
(a) Issuances of shares (including grants of stock options, restricted stock units, performance stock units, and other equity awards) pursuant to the Company's 2022 Omnibus Equity Incentive Plan (with an initial share reserve of 12,727,273 shares) and the Company's 2022 Employee Stock Purchase Plan (with an initial share reserve of 2,545,455 shares);
(b) Issuances of shares in connection with acquisitions, strategic transactions, or joint ventures, provided that the aggregate number of shares issued in reliance on this carve-out does not exceed ten percent (10%) of the total number of shares of Common Stock outstanding immediately following the closing of the Offering, and provided further that the recipients of such shares agree in writing to be bound by lock-up restrictions for the remainder of the 180-day lock-up period;
(c) The filing of a registration statement on Form S-8 covering the shares reserved for issuance under the 2022 Omnibus Equity Incentive Plan and the 2022 Employee Stock Purchase Plan;
(d) Issuances of shares upon the conversion, exercise, or exchange of securities that are outstanding as of the date of the Underwriting Agreement, including convertible notes, warrants, and existing equity awards; and
(e) Issuances of shares to the Selling Stockholder (Pinnacle Vista Capital Partners III, LP) or its affiliates pursuant to the Amended and Restated Stockholders' Agreement or the Registration Rights Agreement, in each case as in effect on the date of the Underwriting Agreement, provided that any shares so issued are subject to lock-up restrictions equivalent to those set forth in the Issuer Lock-Up for the remainder of the 180-day lock-up period.
These carve-outs are necessary to ensure that the Issuer Lock-Up does not impede the Company's ability to conduct ordinary-course business activities, including compensating its employees and officers, pursuing strategic growth opportunities, and complying with its contractual obligations to the Selling Stockholder and other pre-IPO stakeholders.
E. Disclosure of Lock-Up Modifications or Releases
Calderwood & Harkness requests that the Underwriting Agreement include a transparency requirement with respect to any modification, amendment, or waiver of the lock-up restrictions by the Representative. Specifically, we request that Hargrove Keating be required to provide at least three (3) business days' prior written notice to the Company before effecting any release, modification, or waiver of the lock-up restrictions with respect to any lock-up party or any class of lock-up parties. During this three-business-day notice period, the Company should have the opportunity to announce the pending release via press release or by filing a Current Report on Form 8-K with the Securities and Exchange Commission, so that investors are made aware of the release before the released shares enter the market.
This transparency requirement is consistent with guidance issued by the SEC regarding lock-up disclosure practices and reflects the view — shared by the Company and an increasing number of market participants — that lock-up releases should be announced publicly in advance to ensure that investors have the information necessary to make informed trading decisions. We note that the SEC staff has commented in the past on the lack of transparency surrounding lock-up release practices, and we believe that a proactive disclosure approach is in the best interests of the Company, its stockholders, and the investing public.
VI. Other Residual Items
In addition to the four principal topics addressed above, Calderwood & Harkness has the following comments on certain other residual provisions of the Underwriting Agreement.
A. Indemnification — Scope and Procedures
The parties are substantially agreed on the indemnification provisions of the Underwriting Agreement, and we do not propose to revisit the overall indemnification framework at this time. However, we note two residual points that remain open:
First, the Company's indemnification of the Underwriters should not cover losses, claims, damages, or liabilities arising out of or based upon information provided in writing by or on behalf of the Underwriters specifically for inclusion in the Registration Statement or the Prospectus (the "Underwriter Information"). This is the standard "underwriter information" carve-out, which is included in virtually all IPO underwriting agreements. The Underwriter Information typically encompasses the following categories of information:
(a) The names and addresses of the Underwriters;
(b) The number of shares to be purchased by each Underwriter and the share allocation table;
(c) Information in the underwriting section of the Prospectus regarding stabilization transactions, short sales, penalty bids, and overallotment transactions; and
(d) The amount of the underwriting discount and commission.
We request that these categories be expressly identified in the Underwriting Agreement so that there is no ambiguity regarding the scope of the Underwriter Information carve-out.
Second, the Selling Stockholder's indemnification obligation should be limited to the net proceeds received by the Selling Stockholder from the secondary portion of the Offering. Based on the assumed midpoint price of $22.00 per share and the Selling Stockholder's expected sale of approximately 6,818,182 shares in the secondary offering, the Selling Stockholder's gross proceeds would be approximately $150,000,000, less the Selling Stockholder's pro rata share of the underwriting discount (estimated at approximately $10,500,000 at an assumed 7.0% underwriting discount), yielding estimated net proceeds to the Selling Stockholder of approximately $139,500,000. The Selling Stockholder's indemnification obligation should not exceed this amount. This position has been communicated by Whitfield Archer & Doss LLP on behalf of Pinnacle Vista Capital Partners III, LP, and we understand it to be a firm requirement of the Selling Stockholder.
B. Contribution — Cap for Selling Stockholder
Consistent with the indemnification cap described above, the contribution provisions of the Underwriting Agreement should cap the Selling Stockholder's contribution obligation at the net proceeds actually received by the Selling Stockholder from the secondary portion of the Offering. This cap should apply in all circumstances, regardless of the nature or amount of the losses, claims, damages, or liabilities giving rise to the contribution obligation.
This position has been communicated to us by Christine Navarro of Whitfield Archer & Doss LLP on behalf of Pinnacle Vista Capital Partners III, LP, and is consistent with the Selling Stockholder's contractual expectations as set forth in the term sheet agreed at the organizational meeting held March 14–18, 2022.
C. Overallotment Option
The Underwriting Agreement provides for a standard 15% overallotment option (the "Greenshoe Option"), entitling the Underwriters to purchase up to 3,559,091 additional shares of Common Stock at the public offering price, less the underwriting discount ($78,300,000 at the assumed midpoint price of $22.00 per share). The Greenshoe Option is exercisable within thirty (30) days of the date of the final Prospectus.
Calderwood & Harkness confirms these terms but requests confirmation that the overallotment shares shall be issuable solely by the Company as primary shares, and that the Selling Stockholder shall not be obligated to sell any additional shares pursuant to the Greenshoe Option. This is consistent with the parties' understanding as communicated at the organizational meeting held March 14–18, 2022, at which it was agreed that the Selling Stockholder's participation in the Offering would be limited to the base secondary offering and would not extend to the overallotment option.
D. Representations and Warranties — Survivability
The current draft of the Underwriting Agreement is silent on the survivability of the representations and warranties of the Company and the Selling Stockholder following closing. Calderwood & Harkness requests the inclusion of a survivability provision providing that the representations and warranties of the Company and the Selling Stockholder shall survive the closing of the Offering for a period of two (2) years from the Closing Date.
This survivability period is relevant primarily in connection with the indemnification provisions of the Underwriting Agreement. Without an express survivability provision, there is a risk that the representations and warranties could be deemed to expire upon closing, thereby limiting the Underwriters' ability to seek indemnification for breaches of representations and warranties that are discovered after closing. A two-year survivability period is consistent with market practice for IPO underwriting agreements and provides an appropriate balance between the Underwriters' need for post-closing protection and the Company's desire for certainty regarding the duration of its indemnification exposure.
VII. Conclusion and Next Steps
Calderwood & Harkness is available to discuss the comments set forth in this letter at the working group's convenience. We suggest scheduling a call during the week of May 23, 2022, to work through any remaining open points and to reach agreement on the final form of the Underwriting Agreement. We are mindful that the SEC first-round comment response and Amendment No. 1 to the Registration Statement on Form S-1 were filed on May 20, 2022, and that the Underwriting Agreement should be substantially finalized in anticipation of potential pricing following SEC clearance.
We are prepared to coordinate with Whitfield Archer & Doss LLP (Christine Navarro) and Prescott, Danforth & Yee LLP (Margaret Yee and Scott Halverson) on any points that require tripartite discussion among issuer's counsel, underwriters' counsel, and selling stockholder's counsel. To the extent it would be helpful, we can arrange a joint call among all three firms to address the overlapping issues relating to the Selling Stockholder's indemnification and contribution caps, the lock-up release mechanics, and the Greenshoe Option allocation.
As noted above, a revised markup of the Underwriting Agreement reflecting the positions described in this letter is being circulated under separate cover to the full working group. We look forward to receiving your response and to continued productive discussions.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Brendan Walsh Lead Associate, Capital Markets
Direct: (212) 558-4327
Email: bwalsh@calderwoodharkness.com
Enclosure: Revised Markup of Underwriting Agreement (circulated separately)