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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

From: Tiffany Rosenthal and Andrew Fitzpatrick, Calderwood & Harkness LLP

To: James Prentice (Calderwood & Harkness LLP); Hugh Pemberton (General Counsel, Aurelius Global Media Group PLC); Rupert Ashford (Head of Corporate Development, Aurelius Global Media Group PLC)

Date: October 4, 2021

Re: Analysis of Section 382 NOL Preservation Shareholder Rights Plan Adopted by Pinnacle Content Holdings, Inc.

Matter No.: 1011-00002

Office: Calderwood & Harkness LLP, 787 Seventh Avenue, 42nd Floor, New York, NY 10019

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I. Executive Summary

On September 29, 2021, the board of directors of Pinnacle Content Holdings, Inc. ("Pinnacle" or "PCH"), a Delaware corporation whose common stock is listed on the Nasdaq Capital Market under the ticker symbol "PCHL" (CIK 0001847263), adopted a Section 382 NOL Preservation Shareholder Rights Plan (the "Rights Plan" or the "Pill"). The Rights Plan was adopted approximately three weeks after the commencement, on September 8, 2021, of the tender offer by Aurelius Media Holdings LLC ("AMH LLC"), a wholly owned subsidiary of Aurelius Global Media Group PLC ("Aurelius" or "AGMG"), to acquire up to 34.9% of Pinnacle's outstanding common stock (Schedule TO, SEC File No. 005-92847).

The Rights Plan establishes a 35.0% beneficial ownership trigger threshold. This threshold is set only 10 basis points above the 34.9% stake sought by AMH LLC in the tender offer, creating significant practical impediments to the consummation of the offer as currently structured. Specifically, because Aurelius already beneficially owns approximately 4.9% of Pinnacle's outstanding common stock through open-market purchases disclosed on Schedule 13D, the full consummation of the tender offer would result in a combined beneficial ownership position of approximately 39.8%, exceeding the 35.0% trigger by a substantial margin and causing the rights to become exercisable, resulting in catastrophic dilution of Aurelius's position.

Pinnacle's stated justification for the adoption of the Rights Plan is the preservation of approximately $47,300,000 in federal net operating loss carryforwards ("NOLs") under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). The Pinnacle board has asserted that the 35.0% threshold was designed to reduce the risk that significant share accumulations could trigger or contribute to a Section 382 "ownership change," which would severely limit or eliminate the company's ability to utilize these NOLs to offset future taxable income.

This memorandum analyzes the terms and conditions of the Rights Plan, examines its interaction with the pending Aurelius tender offer, evaluates the potential legal challenges available to Aurelius under Delaware law, and presents strategic options for the Aurelius team's consideration.

Based on our analysis, we conclude that while a legal challenge to the Rights Plan under the enhanced scrutiny framework of Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995), is legally viable, the outcome of such a challenge is uncertain. Delaware courts have generally been cautious about ordering the redemption of poison pills adopted by boards with independent director majorities acting on the advice of qualified financial and legal advisors, and the NOL preservation rationale—while questionable in its application here—provides the Pinnacle board with a facially legitimate business justification. Accordingly, we believe that a negotiated approach, seeking a standstill agreement in exchange for a board exemption from the Rights Plan, represents the most promising initial path. We recommend preparing litigation materials concurrently as leverage and as a contingency should negotiations prove unsuccessful.

We discuss each of these matters in detail below.

II. Background

A. The Tender Offer

On September 8, 2021, AMH LLC commenced a tender offer (the "Offer") to acquire up to 6,980,050 shares of Pinnacle common stock, par value $0.001 per share, representing 34.9% of the 20,000,000 shares of Pinnacle common stock currently outstanding. The offer price is $4.01 per share, net to the seller in cash, without interest and subject to any applicable withholding taxes. The aggregate maximum consideration payable under the Offer, assuming 6,980,050 shares are tendered and accepted for payment, is approximately $28,000,000 (6,980,050 × $4.01 = $27,989,000.50, approximately $28,000,000).

The offer price of $4.01 per share represents a premium of approximately 17.25% over the undisturbed closing trading price of Pinnacle common stock on August 27, 2021 (the last trading day prior to the public disclosure of Aurelius's interest in Pinnacle), which was $3.42 per share. The premium was calculated as ($4.01 − $3.42) / $3.42 = 17.25%. This premium is broadly consistent with premiums observed in partial tender offers for media and entertainment companies in recent transactions, though it falls somewhat below the median premium for controlling-stake acquisitions in the sector, which has historically ranged from 25% to 40%.

The Offer is subject to several conditions, including:

• Minimum Tender Condition: At least 5,000,000 shares of Pinnacle common stock (representing 25.0% of outstanding shares) must be validly tendered and not withdrawn prior to the expiration of the Offer;

• HSR Clearance: Expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. We note that HSR early termination was granted on September 15, 2021 (HSR Transaction Number 20211892), and this condition has therefore been satisfied;

• No Material Adverse Effect: The absence of any material adverse effect on the business, assets, financial condition, or results of operations of Pinnacle since September 8, 2021;

• No Injunction: The absence of any order, injunction, decree, or judgment of any court or governmental authority restraining or prohibiting the consummation of the Offer; and

• Financing Condition: The availability of financing sufficient to consummate the Offer and pay all related fees and expenses.

The initial 20-business-day offer period, as required by Rule 14e-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is scheduled to expire at 12:00 midnight, Eastern Time, on October 8, 2021, unless extended in accordance with applicable law and the terms of the Offer.

The Offer is funded by a $30,000,000 senior secured term loan commitment from Brindoval National Bank, N.A. (the "Financing Commitment"), pursuant to a commitment letter dated August 20, 2021 (reference CL-2021-MTC-00487). The term loan bears interest at a rate per annum equal to LIBOR plus 3.25%, with a LIBOR floor of 0.50%. The Financing Commitment is subject to customary conditions precedent, including the consummation of the Offer. The commitment expires on December 31, 2021, with a 90-day extension option exercisable at AMH LLC's election, extending the outside date to March 31, 2022.

B. Aurelius's Existing Pinnacle Holdings

Prior to the commencement of the Offer, AMH LLC acquired 980,000 shares of Pinnacle common stock through a series of open-market purchases executed between June 1, 2021 and August 25, 2021. These shares were purchased at a volume-weighted average price of $3.28 per share, representing an aggregate investment cost of approximately $3,214,400. The open-market purchases were made through various broker-dealers and were conducted in compliance with applicable volume limitations and other requirements.

The 980,000-share position represents approximately 4.9% of Pinnacle's 20,000,000 outstanding shares of common stock. A Schedule 13D was filed with the Securities and Exchange Commission (the "SEC") on August 26, 2021, disclosing Aurelius's beneficial ownership of these shares and its intention to evaluate strategic alternatives with respect to its investment in Pinnacle, including the possibility of commencing a tender offer or engaging in other transactions. The Schedule 13D was filed jointly by AMH LLC, Aurelius Global Media Group PLC, and certain affiliates, as reporting persons.

If the Offer were fully successful and 6,980,050 shares were tendered and accepted for payment, Aurelius's combined beneficial ownership would total 980,000 + 6,980,050 = 7,960,050 shares, representing approximately 39.8% of Pinnacle's outstanding common stock. This combined ownership level would exceed the Rights Plan's 35.0% trigger threshold by approximately 4.8 percentage points—a fact that is central to the analysis set forth in this memorandum.

C. Pinnacle's Response

Pinnacle and its advisors have undertaken a series of actions in response to the Offer, which we summarize chronologically below.

On September 10, 2021, two business days after the commencement of the Offer, Pinnacle filed a preliminary Schedule 14D-9 with the SEC. The preliminary Schedule 14D-9, filed in compliance with Rule 14d-9 under the Exchange Act, set forth a brief acknowledgment of the Offer and indicated that the Pinnacle board would evaluate the Offer and make a recommendation to shareholders in due course. The filing did not contain a board recommendation at that time.

On September 22, 2021, the SEC Division of Corporation Finance issued a comment letter addressed to Pinnacle's counsel of record concerning the Schedule TO filed by AMH LLC. The comment letter contained four comments and was prepared by Katherine Wylie, Special Counsel, Office of Mergers and Acquisitions. The comments addressed, among other things, certain disclosure issues relating to the source of financing for the Offer and the plans and proposals of AMH LLC with respect to Pinnacle. Aurelius is preparing a response to these comments in connection with Amendment No. 1 to the Schedule TO, expected to be filed on or about October 6, 2021.

On September 29, 2021, the Pinnacle board of directors adopted the Rights Plan, which is the subject of this memorandum and which we analyze in detail in Sections III through V below. The Rights Plan was adopted by unanimous vote of the board at a special meeting held at Pinnacle's principal offices at 1100 Glendon Avenue, Suite 1700, Los Angeles, CA 90024.

On October 1, 2021, Pinnacle filed a definitive Schedule 14D-9 with the SEC, which included the board's recommendation that Pinnacle shareholders not tender their shares in the Offer. The Schedule 14D-9 set forth the board's reasons for its recommendation, including the board's view that the Offer undervalues Pinnacle, that the Offer could adversely affect the company's ability to utilize its NOL carryforwards, and that the Offer is coercive to shareholders who might feel compelled to tender to avoid being left in a minority position with a dominant shareholder.

The board recommendation was endorsed by all members of the Pinnacle board, including:

• Franklin Osei — Independent Chairman of the Board;

• Miriam Castellano — Independent Director;

• Tyrone Nash — Independent Director;

• Jordan Cavanaugh — Chief Executive Officer and Co-Founder;

• Patricia Langford — Chief Financial Officer;

• Derek Soo — General Counsel and Secretary; and

• Victor Huang — Chief Content Officer and Co-Founder.

Pinnacle has engaged Hargrove Meredith & Co. as its financial advisor in connection with its evaluation of the Offer and the adoption of the Rights Plan. The lead banker on the engagement is Nathaniel Pace, Managing Director, Media & Entertainment Group, located at 600 Lexington Avenue, 34th Floor, New York, NY 10022. Pinnacle's legal counsel is Caldwell Burris & Shoemaker LLP, with lead partner Rebecca Fontaine (Corporate/M&A) and associate David Kwan, located at 1999 Avenue of the Stars, Suite 2800, Los Angeles, CA 90067.

We understand from the definitive Schedule 14D-9 that Hargrove Meredith & Co. has been asked to provide a financial analysis in support of the board's recommendation, although it is not clear from the public filings whether a formal fairness opinion has been rendered. The Schedule 14D-9 references financial analyses prepared by Hargrove Meredith & Co. but does not attach a formal opinion letter.

III. Summary of the Rights Plan Terms

Set forth below is a summary of the material terms of the Rights Plan as disclosed in Pinnacle's Form 8-K filed with the SEC on September 30, 2021, and the Rights Agreement (including all exhibits thereto) filed as Exhibit 4.1 to that Form 8-K. This summary is not exhaustive and is qualified in its entirety by reference to the full text of the Rights Agreement.

A. Basic Structure

The Rights Plan is structured as a Section 382 NOL Preservation Shareholder Rights Plan—a variation of the traditional shareholder rights plan (or "poison pill") that is designed specifically to protect a corporation's ability to utilize its net operating loss carryforwards by deterring share accumulations that could trigger an "ownership change" within the meaning of Section 382 of the Code.

The Rights Plan was adopted by the Pinnacle board of directors on September 29, 2021, and became effective immediately upon adoption. No shareholder vote was required for the adoption of the Rights Plan under Delaware law, and no vote has been scheduled. The Pinnacle board adopted the plan pursuant to its authority under Section 151 of the Delaware General Corporation Law and Article IV of Pinnacle's Restated Certificate of Incorporation, as amended.

The Rights Agent under the Rights Plan is Continental Fiduciary Services, Inc. ("Continental Fiduciary"), located at 1 Ashbury Asset Advisors Plaza, 30th Floor, New York, NY 10004. We note that Continental Fiduciary is also serving as the depositary and paying agent for the Aurelius tender offer itself, under a separate and independent engagement agreement. While we do not believe this dual role creates a disqualifying conflict—the depositary function is ministerial in nature and governed by separate contractual terms—it is worth noting for the file, and we will monitor for any issues that may arise.

B. Trigger Threshold

The Rights Plan is triggered if any person or group (an "Acquiring Person") acquires beneficial ownership of 35.0% or more of Pinnacle's outstanding shares of common stock. Upon the occurrence of such a triggering event (a "Stock Acquisition Date" or "Flip-In Event"), the rights distributed to all other shareholders become exercisable, resulting in massive dilution of the Acquiring Person's ownership position, as described in Section III.C below.

The term "beneficial ownership" is defined broadly in the Rights Agreement, in a manner generally consistent with Rule 13d-3 under the Exchange Act and with customary rights plan definitions. Specifically, a person is deemed to "beneficially own" shares of Pinnacle common stock if such person, directly or indirectly, (i) has or shares voting power or investment power with respect to such shares, (ii) has the right to acquire such shares through the exercise of options, warrants, or conversion rights, or pursuant to the power to revoke a trust, discretionary account, or similar arrangement, or (iii) has any agreement, arrangement, or understanding with any other person for the purpose of acquiring, holding, voting, or disposing of such shares (i.e., is a member of a "group" within the meaning of Section 13(d)(3) of the Exchange Act). The definition of beneficial ownership under the Rights Agreement also includes shares held by affiliates and associates of the person, as those terms are defined in the Rights Agreement.

The 35.0% trigger threshold is set with precision. As noted in the Executive Summary, this threshold is exactly 10 basis points above the 34.9% stake targeted in the Aurelius tender offer. This razor-thin margin is discussed in detail in Section IV.A below. Critically, however, the trigger threshold is relevant not merely to the shares sought in the Offer but to Aurelius's combined beneficial ownership position. As described in Section IV.B below, if the Offer were fully successful, Aurelius's combined beneficial ownership would total approximately 39.8%, clearly exceeding the 35.0% trigger.

The Rights Plan includes customary exceptions for certain types of share acquisitions, including (i) shares acquired directly from Pinnacle in transactions approved by the board, (ii) shares acquired by the company itself (including through share repurchases), and (iii) inadvertent acquisitions where the person promptly divests to below the threshold upon becoming aware of the triggering acquisition. The plan also exempts certain "Exempt Persons," including Pinnacle's existing directors and officers to the extent of their current holdings and any additional shares acquired through equity compensation plans, provided their aggregate holdings remain below specified levels.

C. Rights and Exercise Price

In connection with the adoption of the Rights Plan, the Pinnacle board declared a dividend of one right (a "Right") for each outstanding share of Pinnacle common stock, payable to shareholders of record as of the close of business on October 11, 2021 (the "Record Date"). Each Right, when exercisable, entitles the holder to purchase from Pinnacle 1/100th of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share (the "Preferred Stock"), at an exercise price of $18.00 per Right (the "Exercise Price"), subject to adjustment as provided in the Rights Agreement.

The Rights are not currently exercisable and will not become exercisable unless and until a triggering event occurs (i.e., a person or group acquires beneficial ownership of 35.0% or more of Pinnacle's outstanding common stock). Until a triggering event, the Rights will be attached to and trade with the shares of Pinnacle common stock, will not be separately transferable, and will not be evidenced by separate certificates.

Upon the occurrence of a triggering event—specifically, the acquisition by an Acquiring Person of beneficial ownership of 35.0% or more of Pinnacle's outstanding common stock—the Rights "flip in." This means that each Right (other than Rights held by the Acquiring Person, which become void and are no longer exercisable) entitles the holder to purchase, at the Exercise Price of $18.00, a number of shares of Pinnacle common stock having a market value equal to twice the Exercise Price (i.e., $36.00 worth of Pinnacle common stock at the then-current market price). The effect of this mechanism is to massively dilute the Acquiring Person's ownership percentage and economic interest in Pinnacle, making the continued accumulation of shares prohibitively expensive and economically destructive for the Acquiring Person.

By way of illustration, if the Rights were to become exercisable at a time when Pinnacle common stock was trading at $4.01 per share, each Right would entitle the holder (other than the Acquiring Person) to purchase approximately 8.98 shares of Pinnacle common stock (i.e., $36.00 / $4.01 ≈ 8.98 shares) for the Exercise Price of $18.00 per Right. Given that there are currently 20,000,000 shares outstanding and therefore 20,000,000 Rights outstanding (excluding those held by the Acquiring Person), the potential dilutive effect is enormous and would render any triggering acquisition economically irrational.

D. Term and Expiration

The Rights Plan has a three-year term, commencing on September 29, 2021 (the date of adoption) and expiring at the close of business on September 29, 2024 (the "Expiration Date"), unless earlier redeemed, exchanged, or terminated in accordance with the Rights Agreement.

The Pinnacle board retains broad authority to manage the Rights Plan throughout its term. Specifically:

• Redemption: At any time prior to the occurrence of a triggering event (i.e., prior to a person or group becoming an Acquiring Person), the Pinnacle board may redeem all of the then-outstanding Rights at a redemption price of $0.001 per Right (the "Redemption Price"). The redemption of the Rights would effectively terminate the Rights Plan. This redemption authority is a standard feature of shareholder rights plans and provides the board with the flexibility to remove the pill if circumstances change—for example, if the board determines that a proposed transaction is in the best interests of shareholders, it can redeem the Rights to facilitate that transaction.

• Exemption: The Pinnacle board may also exempt specific persons, groups, or transactions from the definition of "Acquiring Person" or from the triggering provisions of the Rights Plan. This exemption authority is particularly relevant in the context of the Aurelius tender offer, as Aurelius could seek a board exemption that would permit the Offer to proceed without triggering the pill. We discuss this possibility further in Section VI.A below.

• Amendment: The Rights Plan may be amended by the Pinnacle board at any time prior to the occurrence of a triggering event, without the consent of the Rights Agent or any holder of Rights, in any manner that the board deems appropriate, subject to certain limitations in the Rights Agreement.

E. Stated Justification — NOL Preservation

The Pinnacle board has publicly stated that the primary justification for the adoption of the Rights Plan is the preservation of the company's net operating loss carryforwards, which the board has estimated at approximately $47,300,000 as of December 31, 2020. These NOLs, if available for use, could potentially shield a significant amount of Pinnacle's future taxable income from federal income tax, providing substantial economic value to the company and its shareholders. Pinnacle's most recent Annual Report on Form 10-K, filed with the SEC on March 15, 2021 for the fiscal year ended December 31, 2020, discloses the NOL carryforwards and notes that they are subject to the limitations of Section 382 of the Code.

Section 382 of the Code limits a corporation's ability to use pre-change NOLs (and certain other tax attributes) following an "ownership change." An ownership change occurs, generally, when there is a more-than-50-percentage-point increase in the stock ownership of one or more "5-percent shareholders" (as defined in Section 382) over a rolling three-year testing period. If an ownership change occurs, the amount of pre-change NOLs that may be used in any post-change year is generally limited to the product of (i) the fair market value of the corporation's stock immediately before the ownership change, multiplied by (ii) the applicable long-term tax-exempt rate published by the Internal Revenue Service (currently approximately 1.22% for ownership changes occurring in October 2021). This annual limitation can dramatically reduce the practical value of the NOLs, and in some cases may effectively eliminate the corporation's ability to use them during the remaining carryforward period.

The Pinnacle board has asserted that the 35.0% trigger threshold was selected to reduce the risk that the acquisition of a significant block of Pinnacle stock by a single investor or group, combined with trading activity by other 5-percent shareholders over the relevant testing period, could trigger or contribute to a Section 382 ownership change. The board characterized the Rights Plan as a prudent protective measure designed to preserve significant value for all Pinnacle shareholders.

We note, however, that the NOL preservation rationale, while facially legitimate, is subject to skepticism in the specific circumstances of this case, as we discuss in our legal analysis in Section V below. The timing of the adoption—21 days after the commencement of the Aurelius tender offer—and the precise calibration of the 35.0% trigger to fall just above the 34.9% offer target raise questions about whether the primary purpose of the plan is genuinely NOL preservation or whether it is instead designed to impede the specific pending tender offer.

IV. Interaction with the Aurelius Tender Offer

A. The 34.9% vs. 35.0% Razor-Thin Margin

The Aurelius tender offer was deliberately structured to acquire 34.9% (6,980,050 shares) of Pinnacle's outstanding common stock. In structuring the Offer, the deal team was advised that NOL preservation shareholder rights plans typically employ ownership thresholds in the range of 4.9% to 35%, and selected a target acquisition level of 34.9% that would fall below a conventional 35% trigger. A 35% threshold is a common trigger level for NOL preservation pills adopted by companies with significant NOL carryforwards, as it provides a meaningful margin below the 50-percentage-point ownership change threshold of Section 382 while still permitting substantial accumulations by individual investors.

The Pinnacle board adopted its Rights Plan at precisely the 35.0% trigger level, creating only a 10-basis-point buffer between the maximum stake sought in the Offer and the threshold at which the pill would be triggered. This extraordinarily narrow margin has several important implications:

First, even if the tender offer were the only relevant transaction, the 10-basis-point margin introduces significant operational risk. Minor increases in beneficial ownership—for example, through inadvertent open-market purchases, the exercise of options or other derivative instruments, attribution under the complex beneficial ownership rules of the Rights Agreement, or the formation of a "group" with other shareholders—could cause an inadvertent triggering event. Managing compliance with a 10-basis-point buffer over an extended period would require constant monitoring and impose significant practical constraints on Aurelius's ability to trade in Pinnacle securities.

Second, and more fundamentally, the 35.0% threshold is relevant to Aurelius's combined beneficial ownership position, not merely to the shares acquired in the Offer itself. As discussed in the following section, this is the dispositive issue.

B. The Combined Position Problem

The critical issue presented by the Rights Plan is not the narrow margin between the 34.9% offer target and the 35.0% trigger threshold, but rather the fact that Aurelius already beneficially owns 980,000 shares of Pinnacle common stock (4.9% of outstanding) through the open-market purchases disclosed in the Schedule 13D filed on August 26, 2021.

If the Offer were fully successful—meaning that 6,980,050 shares were validly tendered and accepted for payment—Aurelius's combined beneficial ownership would total:

980,000 shares (existing position) + 6,980,050 shares (tendered) = 7,960,050 shares

This would represent approximately 39.8% of Pinnacle's 20,000,000 outstanding shares—exceeding the 35.0% pill trigger by approximately 4.8 percentage points. This is not a marginal exceedance; it is a clear and substantial breach of the trigger threshold that would unambiguously cause Aurelius to become an "Acquiring Person" under the Rights Plan and would result in the activation of the flip-in mechanism, with catastrophic dilutive consequences for Aurelius's investment.

Accordingly, the tender offer cannot be consummated in full under its current terms without one of the following occurring:

(a) Triggering the Rights Plan, which would result in massive dilution of Aurelius's position and would be economically irrational—this is not a viable path;

(b) Obtaining a board exemption from the Rights Plan for the Aurelius tender offer, which would require the affirmative action of the Pinnacle board, acting in its discretion, to either redeem the rights or specifically exempt the Offer from the plan's triggering provisions; or

(c) Reducing the number of shares sought in the tender offer to a level that would keep Aurelius's combined beneficial ownership position below 35.0%.

With respect to option (c), if Aurelius were to cap its combined position at just below 35.0%, the maximum number of additional shares it could acquire through the Offer would be:

35.0% × 20,000,000 shares = 7,000,000 shares (maximum combined position)

7,000,000 − 980,000 (existing position) = 6,020,000 shares (maximum tender)

However, in light of the operational risks associated with the narrow margin discussed above, a prudent buffer would be advisable. For example, targeting a combined position of 34.0% would limit the tender to:

34.0% × 20,000,000 shares = 6,800,000 shares (combined position)

6,800,000 − 980,000 = 5,820,000 shares (maximum tender)

This would represent only approximately 29.1% of outstanding shares through the tender, a significant reduction from the originally targeted 34.9% and a material diminution in the strategic significance of the resulting position. Such a reduced position would limit Aurelius's influence over Pinnacle's governance and strategic direction and could undermine the economic rationale for the transaction.

C. Proration and Oversubscription Risk

If the Offer were amended to reduce the maximum number of shares sought and an unexpectedly large number of shares were tendered by Pinnacle shareholders, the tender offer would be subject to proration under the terms of the Offer and in accordance with Rule 14d-8 under the Exchange Act. In such a scenario, each tendering shareholder's shares would be accepted for payment on a pro rata basis, such that the aggregate number of shares accepted would not exceed the stated maximum.

Proration itself does not create an independent trigger risk under the Rights Plan, provided the Offer is properly structured and administered. The combined ownership calculation under the Rights Plan would be based on shares actually acquired and accepted for payment, not on shares tendered but not yet accepted. Accordingly, if proration operates to limit the number of shares accepted to a level that keeps Aurelius's combined position below 35.0%, the Rights Plan would not be triggered—assuming no other source of beneficial ownership (such as the formation of a group or the acquisition of additional derivative positions) pushes the total above the threshold.

That said, the mechanics of proration in a partial tender offer with a reduced maximum present certain operational complexities. Aurelius and its depositary agent (Continental Fiduciary) would need to implement procedures to ensure that the final acceptance of shares does not inadvertently result in a combined beneficial ownership position at or above 35.0%. We recommend that Calderwood & Harkness review the terms of the depositary agreement and the Offer procedures to confirm that adequate safeguards are in place.

D. Share Count Variability

The beneficial ownership percentage calculations set forth in this memorandum are based on 20,000,000 shares of Pinnacle common stock currently outstanding, as reported in Pinnacle's most recent Quarterly Report on Form 10-Q filed with the SEC on August 9, 2021 for the quarter ended June 30, 2021.

Any future equity issuances by Pinnacle—whether through the exercise of outstanding stock options, the vesting of restricted stock units, the issuance of shares under Pinnacle's equity compensation plans, or otherwise—could increase the number of shares outstanding, thereby altering the denominator used in calculating beneficial ownership percentages. An increase in shares outstanding would have the effect of slightly reducing Aurelius's beneficial ownership percentage for any given number of shares held or acquired.

We note that Pinnacle's most recent proxy statement (filed on April 14, 2021 in connection with the 2021 annual meeting of shareholders) disclosed that, as of April 1, 2021, there were 1,150,000 shares reserved for issuance under the company's 2019 Equity Incentive Plan, of which 780,000 shares were subject to outstanding awards (options and restricted stock units) and 370,000 shares remained available for future grants. The vesting and exercise of these awards could modestly increase shares outstanding over time.

We recommend that Aurelius monitor Pinnacle's SEC filings and public disclosures for any changes to the share count, particularly any Form 8-K filings or Section 16 filings (Forms 3, 4, and 5) that might indicate equity issuance activity. This monitoring should be conducted on an ongoing basis throughout the pendency of the Offer and any subsequent negotiations.

V. Legal Analysis — Potential Challenges Under Delaware Law

A. Applicable Standard of Review: Unocal/Unitrin

Because the Rights Plan was adopted by the Pinnacle board as a defensive measure in response to the Aurelius tender offer—an unsolicited acquisition proposal that the board has recommended shareholders reject—the plan is subject to enhanced judicial scrutiny under the two-part test established by the Delaware Supreme Court in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and refined in Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995).

Under the Unocal standard, when a board of directors takes defensive action in response to a perceived threat to corporate policy and effectiveness, the board bears the initial burden of demonstrating:

(1) The Threat Prong: That the board had reasonable grounds for believing that a danger to corporate policy and effectiveness existed. In establishing this element, the board must show that it acted in good faith and after reasonable investigation. The presence of a majority of outside, independent directors on the board is a significant factor, and if a majority of independent directors approve the defensive measure, the burden on the board is somewhat lessened.

(2) The Proportionality Prong: That the defensive measure adopted was reasonable in relation to the threat posed. The court will examine whether the response was proportionate—neither coercive nor preclusive—and fell within a "range of reasonableness." A measure is "preclusive" if it renders the success of the offer "mathematically impossible" or "realistically unattainable." A measure is "coercive" if it forces shareholders to accept a particular transaction or forgo their rights.

If the board satisfies both prongs of the Unocal test, the court will apply the deferential business judgment rule. If the board fails to meet its burden, the defensive measure will be enjoined.

The Unocal/Unitrin framework has been applied in numerous Delaware cases involving challenges to shareholder rights plans, and remains the governing standard. We analyze each prong in detail below as applied to the facts of this case.

B. Threat Prong Analysis

Under the first prong of the Unocal test, the Pinnacle board must demonstrate that it had reasonable grounds for believing that the Aurelius tender offer posed a threat to corporate policy and effectiveness. Based on the disclosures in the definitive Schedule 14D-9 and the Rights Agreement, we anticipate that the Pinnacle board will advance the following arguments in support of its position:

Pinnacle's likely arguments:

NOL Preservation. The board will likely argue that the tender offer, if consummated, poses a genuine threat to Pinnacle's ability to utilize its approximately $47,300,000 in federal net operating loss carryforwards. The board will contend that the acquisition of a 34.9% block of Pinnacle stock by a single shareholder, when combined with Aurelius's existing 4.9% position and other trading activity by 5-percent shareholders over the Section 382 testing period, could contribute to or trigger a Section 382 ownership change that would severely limit the annual amount of NOLs available to offset future taxable income. The board will argue that the loss of these NOLs would destroy significant value for all Pinnacle shareholders and that the Rights Plan was a reasonable prophylactic measure to preserve this value.

Structural Coercion. The board will likely characterize the partial tender offer as structurally coercive. In particular, the board may argue that shareholders face a "prisoner's dilemma": each shareholder may feel individually compelled to tender into the offer—even if the shareholder believes the offer price is inadequate—to avoid being left in a minority position with a dominant 34.9% shareholder. This type of structural coercion argument has been recognized by Delaware courts as a cognizable threat in the Unocal framework. See, e.g., Unocal, 493 A.2d at 956 (discussing "the threat of greenmail, the inadequacy of the price offered, . . . and the impact on 'ichconstituencies' other than shareholders").

Inadequacy of Price. The board will argue that the offer price of $4.01 per share is inadequate and does not reflect the full, long-term value of Pinnacle and its assets. The definitive Schedule 14D-9 references the company's extensive content library of approximately 1,800 hours of programming spanning drama, documentary, and reality formats, as well as a growing streaming licensing pipeline. The board may contend that an implied enterprise value-to-EBITDA multiple of approximately 5.5× (based on an implied 100% equity value of approximately $80,200,000, calculated as $4.01 × 20,000,000 shares = $80,200,000, and Pinnacle's fiscal year 2020 EBITDA of approximately $14,600,000) undervalues the company relative to comparable publicly traded content companies and recent precedent transactions in the media and entertainment sector. While the specific comparable company and precedent transaction analysis will depend on the work of Hargrove Meredith & Co., we note that several recent content acquisitions have been consummated at EV/EBITDA multiples in the 7.0× to 10.0× range.

Aurelius's counterarguments:

Pretextual NOL Justification. Aurelius's strongest argument on the threat prong is that the NOL preservation rationale is pretextual and that the Rights Plan was adopted for the primary purpose of impeding the specific pending tender offer, not to protect the company's NOLs in the abstract. Several facts support this argument:

First, the timing of the adoption is highly suggestive. The Rights Plan was adopted on September 29, 2021—exactly 21 days after the commencement of the Aurelius tender offer on September 8, 2021. If the Pinnacle board had been genuinely concerned about protecting its NOLs from erosion through share accumulations, one would expect the board to have adopted an NOL preservation pill proactively, well in advance of any specific acquisition threat. The fact that the board waited until a specific tender offer was pending before adopting the plan undercuts the claim that the plan was motivated by a general concern about Section 382 compliance.

Second, the precise calibration of the 35.0% trigger to fall just above the 34.9% tender offer target is circumstantially damning. NOL preservation pills adopted by other companies have used a wide range of trigger thresholds—from as low as 4.9% (which is common for companies seeking to preserve NOLs by preventing any significant accumulation) to 10%, 15%, 20%, or 35%. The selection of a 35.0% threshold—rather than a lower threshold that would have been more protective of the NOLs—suggests that the board's primary concern was not maximizing NOL protection but rather establishing a trigger that would be specifically preclusive of the Aurelius tender offer while appearing to be minimally restrictive. If the board were genuinely motivated by NOL preservation, a lower threshold (e.g., 10% or 15%) would have been more appropriate and more consistent with the stated purpose of the plan.

Third, Aurelius can argue that the partial tender offer at 34.9%, by itself, would not necessarily trigger a Section 382 ownership change. The Section 382 ownership change threshold is 50 percentage points (not 50% of outstanding shares), measured on a rolling three-year basis. Even if Aurelius were to acquire 34.9% of Pinnacle's shares, an ownership change would only occur if, in combination with other ownership shifts by 5-percent shareholders during the testing period, the aggregate increase exceeded 50 percentage points. The Pinnacle board has not disclosed whether it has conducted a Section 382 analysis demonstrating that the Aurelius tender offer would, in fact, trigger or contribute to an ownership change, and Aurelius should demand the production of any such analysis in any litigation.

Non-Controlling Partial Offer. Aurelius can also argue that a partial, non-controlling tender offer is inherently less threatening than a change-of-control transaction. The Offer does not seek a majority of Pinnacle's outstanding shares and does not contemplate a second-step merger or squeeze-out of minority shareholders. Shareholders retain the unfettered ability to reject the Offer—they can simply decline to tender their shares. The board's characterization of the Offer as "coercive" is therefore arguably overstated.

On balance, we believe that Aurelius has colorable arguments on the threat prong, particularly with respect to the pretextual nature of the NOL justification. However, we note that Delaware courts have generally afforded boards significant latitude in identifying threats under Unocal, and the presence of a majority of independent directors on the Pinnacle board (three of seven directors are classified as independent) will weigh in the board's favor.

C. Proportionality Prong Analysis

Under the second prong of the Unocal/Unitrin test, the court will examine whether the Rights Plan is a proportionate response to the identified threat. The Delaware Supreme Court in Unitrin held that a defensive measure is disproportionate if it is either "coercive" or "preclusive." If the measure is neither coercive nor preclusive, the court will evaluate whether it falls within a "range of reasonableness."

Preclusive Effect. The most significant argument Aurelius can advance on the proportionality prong is that the Rights Plan is preclusive—that is, it effectively prevents the consummation of the tender offer as structured. The combined 39.8% beneficial ownership position that would result from full consummation of the Offer would clearly trigger the pill, and there is no practical way for Aurelius to consummate the Offer in its current form without breaching the 35.0% threshold. The narrow 10-basis-point margin between the 34.9% offer target and the 35.0% trigger threshold, combined with the board's refusal to exempt the Offer, appears designed to make the Offer "realistically unattainable" within the meaning of Unitrin.

However, Pinnacle will counter that the Rights Plan is not preclusive because it does not prevent all acquisition proposals or all share accumulations below the 35.0% threshold. Pinnacle will argue that:

(i) Aurelius could acquire up to approximately 30.1% of Pinnacle's outstanding shares through a reduced tender offer (capping the combined position at just below 35.0%), which would give Aurelius a very substantial and influential minority position;

(ii) Aurelius could pursue a negotiated transaction with the Pinnacle board, which retains the authority to redeem the rights or exempt the Offer from the plan;

(iii) Aurelius could pursue a proxy contest or consent solicitation to replace directors with nominees who would redeem the pill; and

(iv) The Rights Plan has a three-year term and will expire on September 29, 2024, after which Aurelius could freely pursue the Offer without the impediment of the pill.

Delaware courts have generally held that a poison pill is not preclusive if the offeror retains the ability to pursue alternative paths to acquiring control or influence, including through a proxy contest. See, e.g., Unitrin, 651 A.2d at 1387-88 (noting that a defensive measure is not preclusive if the offeror can wage a proxy contest to replace the board and eliminate the pill). The availability of a proxy contest as an alternative path is a significant factor in the Unitrin analysis, and Pinnacle will likely argue that Aurelius has this option available.

Aurelius could respond that the proxy contest avenue, while theoretically available, is practically cumbersome and expensive for a 4.9% shareholder, and that the combination of the pill and the board's refusal to negotiate effectively precludes the specific tender offer at issue. Aurelius could also argue that the board is using the pill not to protect the company's NOLs but to entrench itself and prevent shareholders from exercising their right to accept a premium offer.

Coercive Effect. The Rights Plan is not directly coercive to Pinnacle shareholders. Unlike certain other defensive measures (such as a recapitalization or restructuring that alters the economic rights of shareholders), the pill does not force shareholders to accept or reject any transaction. It operates exclusively against the Acquiring Person by diluting the Acquiring Person's position upon a triggering event. Accordingly, we do not believe that a coercion argument would be successful.

Range of Reasonableness. If the court determines that the pill is neither preclusive nor coercive, it will evaluate whether the measure falls within a "range of reasonableness." Pinnacle will argue that NOL preservation shareholder rights plans with ownership thresholds ranging from 4.9% to 35% have been widely adopted by public companies and have generally been upheld or accepted by Delaware courts. A 35% threshold is at the higher end of this range, which Pinnacle may argue makes the plan more shareholder-friendly than pills with lower triggers (such as 4.9% or 10%), because it permits shareholders to accumulate substantial positions without triggering the plan. Pinnacle will contend that the 35% threshold represents a careful balancing of the need to protect the NOLs against the desire to avoid unduly restricting shareholder trading activity.

We note, however, that the "range of reasonableness" analysis is fact-specific, and the circumstances of the adoption—particularly the timing and the precise calibration of the threshold—could lead a court to conclude that this particular pill, adopted in these particular circumstances, falls outside the range of reasonableness even though a 35% threshold might be reasonable in the abstract.

D. Fiduciary Duty Considerations

Beyond the Unocal/Unitrin framework, the adoption of the Rights Plan is subject to the general fiduciary duties of the Pinnacle board, including the duty of care and the duty of loyalty. The board members are required to act in good faith, on an informed basis, and in the honest belief that their actions are in the best interests of the corporation and its shareholders.

Several factors are relevant to the fiduciary duty analysis:

Board Composition and Independence. The Pinnacle board consists of seven members, three of whom—Franklin Osei (Chairman), Miriam Castellano, and Tyrone Nash—are classified as independent directors under Nasdaq listing standards. The remaining four members—Jordan Cavanaugh (CEO/Co-Founder), Patricia Langford (CFO), Derek Soo (General Counsel), and Victor Huang (Co-Founder/CCO)—are management directors. While a majority of the independent directors (three of three) approved the Rights Plan, the fact that independent directors do not constitute a majority of the full board (three of seven) is a potential vulnerability. Delaware courts place significant weight on the involvement of independent directors in the adoption of defensive measures, and the presence of a board with a majority of management or insider directors may subject the decision to somewhat closer scrutiny. That said, we note that all three independent directors approved the plan, and the board acted unanimously.

Informed Decision-Making. The Pinnacle board was advised by experienced legal counsel (Caldwell Burris & Shoemaker LLP) and a financial advisor (Hargrove Meredith & Co.) in connection with the adoption of the Rights Plan and the evaluation of the Offer. The involvement of qualified advisors is an important factor under the duty of care, and the fact that the board acted on the advice of counsel and financial advisors strengthens its position in any fiduciary challenge. However, the absence of a formal fairness opinion from Hargrove Meredith & Co. (as noted in Section II.C above) could be a point of vulnerability, particularly if Aurelius argues that the board's recommendation against the Offer was not supported by a rigorous financial analysis.

Good Faith. Aurelius could argue that the Rights Plan was adopted in bad faith—not for the stated purpose of protecting the NOLs, but for the purpose of entrenching the incumbent management team and blocking a premium offer to shareholders. The timing and calibration of the threshold, as discussed above, are relevant to this argument. However, claims of bad faith are notoriously difficult to prove, and Delaware courts have generally been reluctant to second-guess the subjective motivations of directors who have the appearance of acting for legitimate business reasons.

E. Likelihood of Success in a Legal Challenge

Based on the foregoing analysis, we assess the likelihood of success in a legal challenge to the Rights Plan as follows:

A challenge to the Rights Plan under the Unocal/Unitrin framework is legally viable. Aurelius has colorable arguments that the plan is pretextual and preclusive, and the narrow margin between the offer target and the trigger threshold provides circumstantial evidence that the plan was designed to block the specific tender offer rather than to protect NOLs in the abstract. These arguments could be persuasive to a judge, particularly if Aurelius is able to develop factual support through discovery (e.g., board minutes, communications between Pinnacle's directors and advisors, and any Section 382 analyses prepared in connection with the adoption of the plan).

However, the outcome of such a challenge is uncertain. Delaware courts have a long history of deference to boards of directors in the adoption of defensive measures, particularly where the board includes a meaningful complement of independent directors acting on the advice of qualified legal and financial advisors. The NOL preservation rationale, while questionable in this context, provides the board with a facially legitimate justification that is not obviously pretextual on its face. Courts have recognized the potential value of NOLs and the legitimacy of measures designed to protect them, and the Pinnacle board's argument will not be easily dismissed.

Moreover, we note that there is limited Delaware case law specifically addressing the validity of NOL preservation pills adopted in the context of pending tender offers with precisely calibrated trigger thresholds. While the general Unocal/Unitrin framework applies, the specific application of that framework to the facts of this case would be somewhat novel, adding an additional element of uncertainty.

From a practical standpoint, litigation in the Delaware Court of Chancery would involve significant costs (we estimate legal fees and expenses of $2,000,000 to $4,000,000 through trial) and a timeline of approximately 3 to 6 months to reach trial on an expedited schedule. During this period, the tender offer dynamics may shift—Pinnacle could take additional defensive actions (such as a strategic transaction or a self-tender), market conditions could change, and the financing commitment from Brindoval National Bank could expire or need to be extended. There is also the possibility of an appeal to the Delaware Supreme Court, which could add several additional months to the timeline.

Finally, litigation carries the risk of negative publicity and could damage the relationship between Aurelius and Pinnacle, making a negotiated transaction more difficult if the litigation is unsuccessful. This consideration weighs in favor of pursuing a negotiated approach in the first instance, with litigation held in reserve as a contingency and a source of leverage.

VI. Strategic Options

Based on the foregoing analysis, we have identified five strategic options available to Aurelius. We discuss each option below, along with our assessment of its relative advantages and disadvantages.

A. Option 1 — Negotiate Standstill and Board Exemption

Description. Aurelius could approach the Pinnacle board (through its counsel, Rebecca Fontaine at Caldwell Burris & Shoemaker LLP) with a proposal for a standstill and governance framework that would address the board's stated concerns while permitting the tender offer to proceed. The key elements of such a proposal could include:

• Aurelius would agree to cap its aggregate beneficial ownership of Pinnacle common stock at 34.9% (below the 35.0% Rights Plan trigger threshold), providing the board with assurance that the Aurelius position would not contribute to a Section 382 ownership change;

• Aurelius would limit its board representation requests to no more than two seats on the seven-member Pinnacle board, and would agree not to seek to acquire control of the board through a proxy contest or consent solicitation during the standstill period;

• The standstill period would be 24 months from the date of execution of the agreement, during which Aurelius would be subject to customary standstill restrictions, including limitations on additional share purchases, public statements, and solicitation of other shareholders;

• In exchange, the Pinnacle board would grant an exemption under the Rights Plan for the Aurelius tender offer (or, alternatively, would redeem the rights prior to the offer's expiration), and would revise its Schedule 14D-9 recommendation from "reject" to either "accept" or "no recommendation/neutral."

Assessment. This approach preserves the relationship between Aurelius and Pinnacle and avoids the cost, delay, uncertainty, and negative publicity associated with litigation. It also provides the Pinnacle board with a face-saving mechanism—the board can characterize the standstill as evidence that it successfully negotiated protections for shareholders and the company's NOLs. The primary risk is that the Pinnacle board may reject the proposal or insist on terms that are unacceptable to Aurelius (such as a higher offer price or more restrictive standstill terms).

Recommendation. We recommend this as the preferred initial approach. A formal letter should be sent on behalf of Aurelius proposing this framework, with a request for a meeting between the parties' advisors within the next 5 to 7 business days.

B. Option 2 — Reduce the Tender Offer Size

Description. Aurelius could unilaterally amend the tender offer to reduce the maximum number of shares sought, such that the combined beneficial ownership position (980,000 existing shares plus newly tendered shares) would remain below 35.0%, thereby avoiding any triggering event under the Rights Plan.

The maximum number of additional shares Aurelius could acquire through a reduced Offer, without exceeding the 35.0% trigger, would be approximately 6,020,000 shares (35.0% × 20,000,000 = 7,000,000 − 980,000 = 6,020,000). However, as noted above, a prudent buffer would be advisable to account for the operational risks associated with the narrow margin. Targeting a combined position of approximately 34.0% would reduce the maximum tender to approximately 5,820,000 shares (34.0% × 20,000,000 = 6,800,000 − 980,000 = 5,820,000), yielding a total combined position of approximately 6,800,000 shares or 34.0% of outstanding.

At the offer price of $4.01 per share, a reduced tender of 5,820,000 shares would result in an aggregate deal value of approximately $23,338,200, compared to the original aggregate deal value of approximately $28,000,000—a reduction of approximately $4,662,000 or 16.6%.

Assessment. This option has the advantage of simplicity and of eliminating the pill as an obstacle without requiring the Pinnacle board's cooperation. However, it significantly reduces the strategic significance of the resulting position. A 34.0% stake, while substantial, provides less influence and less defensive capacity than a 34.9% stake. Moreover, the minimum tender condition of 5,000,000 shares would need to be reassessed—at a maximum tender of 5,820,000 shares, the minimum tender condition would represent approximately 86% of the maximum, which is unusually high and could reduce the probability of satisfaction.

Additionally, reducing the offer size does not address the Pinnacle board's recommendation against the Offer. The board's "do not tender" recommendation would remain in effect, potentially reducing the number of shares tendered and making it more difficult to satisfy even a reduced minimum tender condition.

Recommendation. This option should be considered as a fallback if negotiations with the Pinnacle board are unsuccessful and litigation is either not pursued or not successful. It is not recommended as the primary approach.

C. Option 3 — Litigate to Challenge the Rights Plan

Description. Aurelius could file a complaint in the Delaware Court of Chancery seeking declaratory and injunctive relief. Specifically, the complaint would seek:

(i) A declaration that the Rights Plan was adopted in breach of the Pinnacle board's fiduciary duties and is invalid and unenforceable;

(ii) An injunction compelling the Pinnacle board to redeem the rights or to exempt the Aurelius tender offer from the Rights Plan; and

(iii) Such other and further relief as the court deems just and equitable.

The complaint would be accompanied by a motion for a preliminary injunction, seeking expedited proceedings and an early trial date. The legal arguments in support of the challenge would be based on the Unocal/Unitrin analysis set forth in Section V above, emphasizing the pretextual nature of the NOL preservation rationale, the preclusive effect of the 35.0% trigger threshold, and the board's bad faith in adopting the pill specifically to block the pending tender offer.

Assessment. As discussed in Section V.E above, the outcome of a legal challenge is uncertain. Delaware courts have generally been reluctant to order the redemption of poison pills, and the Pinnacle board's NOL preservation rationale, while questionable, is not obviously frivolous. Litigation would involve significant costs (estimated at $2,000,000 to $4,000,000 through trial), a timeline of 3 to 6 months on an expedited schedule, and the risk of negative publicity and damage to the negotiating relationship with Pinnacle. An adverse ruling would also establish unfavorable precedent and could embolden the Pinnacle board to take additional defensive actions.

However, the filing of a complaint and motion for preliminary injunction could serve as important leverage in negotiations with the Pinnacle board, even if Aurelius does not ultimately seek to prosecute the litigation to a final judgment. The Pinnacle board and its advisors will recognize the risk of an adverse ruling, and the pendency of litigation may create pressure to reach a negotiated resolution.

Recommendation. We recommend that litigation materials be prepared and held in reserve as leverage for negotiations (Option A) and as a fallback if negotiations are unsuccessful. We do not recommend filing suit as the first step, given the risks and costs involved.

D. Option 4 — Wait for Pill Expiration

Description. The Rights Plan expires by its terms on September 29, 2024. If Aurelius is prepared to adopt a patient posture, it could maintain its current 4.9% beneficial ownership position and allow the tender offer to expire or be withdrawn, then wait for the Rights Plan to lapse before reviving or relaunching the tender offer at that time.

Assessment. This option has the advantage of avoiding both litigation and the need for the Pinnacle board's cooperation. However, it presents several significant risks and practical considerations:

Successor Pill. The Pinnacle board is not precluded from adopting a successor rights plan upon or prior to the expiration

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
From: Tiffany Rosenthal and Andrew Fitzpatrick, Calderwood & Harkness LLP
To: James Prentice (Calderwood & Harkness LLP); Hugh Pemberton (General Counsel, Aurelius Global Media Group PLC); Rupert Ashford (Head of Corporate Development, Aurelius Global Media Group PLC)
Date: October 4, 2021
Re: Analysis of Section 382 NOL Preservation Shareholder Rights Plan Adopted by Pinnacle Content Holdings, Inc.
Matter No.: 1011-00002
Office: Calderwood & Harkness LLP, 787 Seventh Avenue, 42nd Floor, New York, NY 10019
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I. Executive Summary
On September 29, 2021, the board of directors of Pinnacle Content Holdings, Inc. ("Pinnacle" or "PCH"), a Delaware corporation whose common stock is listed on the Nasdaq Capital Market under the ticker symbol "PCHL" (CIK 0001847263), adopted a Section 382 NOL Preservation Shareholder Rights Plan (the "Rights Plan" or the "Pill"). The Rights Plan was adopted approximately three weeks after the commencement, on September 8, 2021, of the tender offer by Aurelius Media Holdings LLC ("AMH LLC"), a wholly owned subsidiary of Aurelius Global Media Group PLC ("Aurelius" or "AGMG"), to acquire up to 34.9% of Pinnacle's outstanding common stock (Schedule TO, SEC File No. 005-92847).
The Rights Plan establishes a 35.0% beneficial ownership trigger threshold. This threshold is set only 10 basis points above the 34.9% stake sought by AMH LLC in the tender offer, creating significant practical impediments to the consummation of the offer as currently structured. Specifically, because Aurelius already beneficially owns approximately 4.9% of Pinnacle's outstanding common stock through open-market purchases disclosed on Schedule 13D, the full consummation of the tender offer would result in a combined beneficial ownership position of approximately 39.8%, exceeding the 35.0% trigger by a substantial margin and causing the rights to become exercisable, resulting in catastrophic dilution of Aurelius's position.
Pinnacle's stated justification for the adoption of the Rights Plan is the preservation of approximately $47,300,000 in federal net operating loss carryforwards ("NOLs") under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). The Pinnacle board has asserted that the 35.0% threshold was designed to reduce the risk that significant share accumulations could trigger or contribute to a Section 382 "ownership change," which would severely limit or eliminate the company's ability to utilize these NOLs to offset future taxable income.
This memorandum analyzes the terms and conditions of the Rights Plan, examines its interaction with the pending Aurelius tender offer, evaluates the potential legal challenges available to Aurelius under Delaware law, and presents strategic options for the Aurelius team's consideration.
Based on our analysis, we conclude that while a legal challenge to the Rights Plan under the enhanced scrutiny framework of Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995), is legally viable, the outcome of such a challenge is uncertain. Delaware courts have generally been cautious about ordering the redemption of poison pills adopted by boards with independent director majorities acting on the advice of qualified financial and legal advisors, and the NOL preservation rationale—while questionable in its application here—provides the Pinnacle board with a facially legitimate business justification. Accordingly, we believe that a negotiated approach, seeking a standstill agreement in exchange for a board exemption from the Rights Plan, represents the most promising initial path. We recommend preparing litigation materials concurrently as leverage and as a contingency should negotiations prove unsuccessful.
We discuss each of these matters in detail below.
II. Background
A. The Tender Offer
On September 8, 2021, AMH LLC commenced a tender offer (the "Offer") to acquire up to 6,980,050 shares of Pinnacle common stock, par value $0.001 per share, representing 34.9% of the 20,000,000 shares of Pinnacle common stock currently outstanding. The offer price is $4.01 per share, net to the seller in cash, without interest and subject to any applicable withholding taxes. The aggregate maximum consideration payable under the Offer, assuming 6,980,050 shares are tendered and accepted for payment, is approximately $28,000,000 (6,980,050 × $4.01 = $27,989,000.50, approximately $28,000,000).
The offer price of $4.01 per share represents a premium of approximately 17.25% over the undisturbed closing trading price of Pinnacle common stock on August 27, 2021 (the last trading day prior to the public disclosure of Aurelius's interest in Pinnacle), which was $3.42 per share. The premium was calculated as ($4.01 − $3.42) / $3.42 = 17.25%. This premium is broadly consistent with premiums observed in partial tender offers for media and entertainment companies in recent transactions, though it falls somewhat below the median premium for controlling-stake acquisitions in the sector, which has historically ranged from 25% to 40%.
The Offer is subject to several conditions, including:
•  Minimum Tender Condition: At least 5,000,000 shares of Pinnacle common stock (representing 25.0% of outstanding shares) must be validly tendered and not withdrawn prior to the expiration of the Offer;
•  HSR Clearance: Expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. We note that HSR early termination was granted on September 15, 2021 (HSR Transaction Number 20211892), and this condition has therefore been satisfied;
•  No Material Adverse Effect: The absence of any material adverse effect on the business, assets, financial condition, or results of operations of Pinnacle since September 8, 2021;
•  No Injunction: The absence of any order, injunction, decree, or judgment of any court or governmental authority restraining or prohibiting the consummation of the Offer; and
•  Financing Condition: The availability of financing sufficient to consummate the Offer and pay all related fees and expenses.
The initial 20-business-day offer period, as required by Rule 14e-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is scheduled to expire at 12:00 midnight, Eastern Time, on October 8, 2021, unless extended in accordance with applicable law and the terms of the Offer.
The Offer is funded by a $30,000,000 senior secured term loan commitment from Brindoval National Bank, N.A. (the "Financing Commitment"), pursuant to a commitment letter dated August 20, 2021 (reference CL-2021-MTC-00487). The term loan bears interest at a rate per annum equal to LIBOR plus 3.25%, with a LIBOR floor of 0.50%. The Financing Commitment is subject to customary conditions precedent, including the consummation of the Offer. The commitment expires on December 31, 2021, with a 90-day extension option exercisable at AMH LLC's election, extending the outside date to March 31, 2022.
B. Aurelius's Existing Pinnacle Holdings
Prior to the commencement of the Offer, AMH LLC acquired 980,000 shares of Pinnacle common stock through a series of open-market purchases executed between June 1, 2021 and August 25, 2021. These shares were purchased at a volume-weighted average price of $3.28 per share, representing an aggregate investment cost of approximately $3,214,400. The open-market purchases were made through various broker-dealers and were conducted in compliance with applicable volume limitations and other requirements.
The 980,000-share position represents approximately 4.9% of Pinnacle's 20,000,000 outstanding shares of common stock. A Schedule 13D was filed with the Securities and Exchange Commission (the "SEC") on August 26, 2021, disclosing Aurelius's beneficial ownership of these shares and its intention to evaluate strategic alternatives with respect to its investment in Pinnacle, including the possibility of commencing a tender offer or engaging in other transactions. The Schedule 13D was filed jointly by AMH LLC, Aurelius Global Media Group PLC, and certain affiliates, as reporting persons.
If the Offer were fully successful and 6,980,050 shares were tendered and accepted for payment, Aurelius's combined beneficial ownership would total 980,000 + 6,980,050 = 7,960,050 shares, representing approximately 39.8% of Pinnacle's outstanding common stock. This combined ownership level would exceed the Rights Plan's 35.0% trigger threshold by approximately 4.8 percentage points—a fact that is central to the analysis set forth in this memorandum.
C. Pinnacle's Response
Pinnacle and its advisors have undertaken a series of actions in response to the Offer, which we summarize chronologically below.
On September 10, 2021, two business days after the commencement of the Offer, Pinnacle filed a preliminary Schedule 14D-9 with the SEC. The preliminary Schedule 14D-9, filed in compliance with Rule 14d-9 under the Exchange Act, set forth a brief acknowledgment of the Offer and indicated that the Pinnacle board would evaluate the Offer and make a recommendation to shareholders in due course. The filing did not contain a board recommendation at that time.
On September 22, 2021, the SEC Division of Corporation Finance issued a comment letter addressed to Pinnacle's counsel of record concerning the Schedule TO filed by AMH LLC. The comment letter contained four comments and was prepared by Katherine Wylie, Special Counsel, Office of Mergers and Acquisitions. The comments addressed, among other things, certain disclosure issues relating to the source of financing for the Offer and the plans and proposals of AMH LLC with respect to Pinnacle. Aurelius is preparing a response to these comments in connection with Amendment No. 1 to the Schedule TO, expected to be filed on or about October 6, 2021.
On September 29, 2021, the Pinnacle board of directors adopted the Rights Plan, which is the subject of this memorandum and which we analyze in detail in Sections III through V below. The Rights Plan was adopted by unanimous vote of the board at a special meeting held at Pinnacle's principal offices at 1100 Glendon Avenue, Suite 1700, Los Angeles, CA 90024.
On October 1, 2021, Pinnacle filed a definitive Schedule 14D-9 with the SEC, which included the board's recommendation that Pinnacle shareholders not tender their shares in the Offer. The Schedule 14D-9 set forth the board's reasons for its recommendation, including the board's view that the Offer undervalues Pinnacle, that the Offer could adversely affect the company's ability to utilize its NOL carryforwards, and that the Offer is coercive to shareholders who might feel compelled to tender to avoid being left in a minority position with a dominant shareholder.
The board recommendation was endorsed by all members of the Pinnacle board, including:
•  Franklin Osei — Independent Chairman of the Board;
•  Miriam Castellano — Independent Director;
•  Tyrone Nash — Independent Director;
•  Jordan Cavanaugh — Chief Executive Officer and Co-Founder;
•  Patricia Langford — Chief Financial Officer;
•  Derek Soo — General Counsel and Secretary; and
•  Victor Huang — Chief Content Officer and Co-Founder.
Pinnacle has engaged Hargrove Meredith & Co. as its financial advisor in connection with its evaluation of the Offer and the adoption of the Rights Plan. The lead banker on the engagement is Nathaniel Pace, Managing Director, Media & Entertainment Group, located at 600 Lexington Avenue, 34th Floor, New York, NY 10022. Pinnacle's legal counsel is Caldwell Burris & Shoemaker LLP, with lead partner Rebecca Fontaine (Corporate/M&A) and associate David Kwan, located at 1999 Avenue of the Stars, Suite 2800, Los Angeles, CA 90067.
We understand from the definitive Schedule 14D-9 that Hargrove Meredith & Co. has been asked to provide a financial analysis in support of the board's recommendation, although it is not clear from the public filings whether a formal fairness opinion has been rendered. The Schedule 14D-9 references financial analyses prepared by Hargrove Meredith & Co. but does not attach a formal opinion letter.
III. Summary of the Rights Plan Terms
Set forth below is a summary of the material terms of the Rights Plan as disclosed in Pinnacle's Form 8-K filed with the SEC on September 30, 2021, and the Rights Agreement (including all exhibits thereto) filed as Exhibit 4.1 to that Form 8-K. This summary is not exhaustive and is qualified in its entirety by reference to the full text of the Rights Agreement.
A. Basic Structure
The Rights Plan is structured as a Section 382 NOL Preservation Shareholder Rights Plan—a variation of the traditional shareholder rights plan (or "poison pill") that is designed specifically to protect a corporation's ability to utilize its net operating loss carryforwards by deterring share accumulations that could trigger an "ownership change" within the meaning of Section 382 of the Code.
The Rights Plan was adopted by the Pinnacle board of directors on September 29, 2021, and became effective immediately upon adoption. No shareholder vote was required for the adoption of the Rights Plan under Delaware law, and no vote has been scheduled. The Pinnacle board adopted the plan pursuant to its authority under Section 151 of the Delaware General Corporation Law and Article IV of Pinnacle's Restated Certificate of Incorporation, as amended.
The Rights Agent under the Rights Plan is Continental Fiduciary Services, Inc. ("Continental Fiduciary"), located at 1 Ashbury Asset Advisors Plaza, 30th Floor, New York, NY 10004. We note that Continental Fiduciary is also serving as the depositary and paying agent for the Aurelius tender offer itself, under a separate and independent engagement agreement. While we do not believe this dual role creates a disqualifying conflict—the depositary function is ministerial in nature and governed by separate contractual terms—it is worth noting for the file, and we will monitor for any issues that may arise.
B. Trigger Threshold
The Rights Plan is triggered if any person or group (an "Acquiring Person") acquires beneficial ownership of 35.0% or more of Pinnacle's outstanding shares of common stock. Upon the occurrence of such a triggering event (a "Stock Acquisition Date" or "Flip-In Event"), the rights distributed to all other shareholders become exercisable, resulting in massive dilution of the Acquiring Person's ownership position, as described in Section III.C below.
The term "beneficial ownership" is defined broadly in the Rights Agreement, in a manner generally consistent with Rule 13d-3 under the Exchange Act and with customary rights plan definitions. Specifically, a person is deemed to "beneficially own" shares of Pinnacle common stock if such person, directly or indirectly, (i) has or shares voting power or investment power with respect to such shares, (ii) has the right to acquire such shares through the exercise of options, warrants, or conversion rights, or pursuant to the power to revoke a trust, discretionary account, or similar arrangement, or (iii) has any agreement, arrangement, or understanding with any other person for the purpose of acquiring, holding, voting, or disposing of such shares (i.e., is a member of a "group" within the meaning of Section 13(d)(3) of the Exchange Act). The definition of beneficial ownership under the Rights Agreement also includes shares held by affiliates and associates of the person, as those terms are defined in the Rights Agreement.
The 35.0% trigger threshold is set with precision. As noted in the Executive Summary, this threshold is exactly 10 basis points above the 34.9% stake targeted in the Aurelius tender offer. This razor-thin margin is discussed in detail in Section IV.A below. Critically, however, the trigger threshold is relevant not merely to the shares sought in the Offer but to Aurelius's combined beneficial ownership position. As described in Section IV.B below, if the Offer were fully successful, Aurelius's combined beneficial ownership would total approximately 39.8%, clearly exceeding the 35.0% trigger.
The Rights Plan includes customary exceptions for certain types of share acquisitions, including (i) shares acquired directly from Pinnacle in transactions approved by the board, (ii) shares acquired by the company itself (including through share repurchases), and (iii) inadvertent acquisitions where the person promptly divests to below the threshold upon becoming aware of the triggering acquisition. The plan also exempts certain "Exempt Persons," including Pinnacle's existing directors and officers to the extent of their current holdings and any additional shares acquired through equity compensation plans, provided their aggregate holdings remain below specified levels.
C. Rights and Exercise Price
In connection with the adoption of the Rights Plan, the Pinnacle board declared a dividend of one right (a "Right") for each outstanding share of Pinnacle common stock, payable to shareholders of record as of the close of business on October 11, 2021 (the "Record Date"). Each Right, when exercisable, entitles the holder to purchase from Pinnacle 1/100th of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share (the "Preferred Stock"), at an exercise price of $18.00 per Right (the "Exercise Price"), subject to adjustment as provided in the Rights Agreement.
The Rights are not currently exercisable and will not become exercisable unless and until a triggering event occurs (i.e., a person or group acquires beneficial ownership of 35.0% or more of Pinnacle's outstanding common stock). Until a triggering event, the Rights will be attached to and trade with the shares of Pinnacle common stock, will not be separately transferable, and will not be evidenced by separate certificates.
Upon the occurrence of a triggering event—specifically, the acquisition by an Acquiring Person of beneficial ownership of 35.0% or more of Pinnacle's outstanding common stock—the Rights "flip in." This means that each Right (other than Rights held by the Acquiring Person, which become void and are no longer exercisable) entitles the holder to purchase, at the Exercise Price of $18.00, a number of shares of Pinnacle common stock having a market value equal to twice the Exercise Price (i.e., $36.00 worth of Pinnacle common stock at the then-current market price). The effect of this mechanism is to massively dilute the Acquiring Person's ownership percentage and economic interest in Pinnacle, making the continued accumulation of shares prohibitively expensive and economically destructive for the Acquiring Person.
By way of illustration, if the Rights were to become exercisable at a time when Pinnacle common stock was trading at $4.01 per share, each Right would entitle the holder (other than the Acquiring Person) to purchase approximately 8.98 shares of Pinnacle common stock (i.e., $36.00 / $4.01 ≈ 8.98 shares) for the Exercise Price of $18.00 per Right. Given that there are currently 20,000,000 shares outstanding and therefore 20,000,000 Rights outstanding (excluding those held by the Acquiring Person), the potential dilutive effect is enormous and would render any triggering acquisition economically irrational.
D. Term and Expiration
The Rights Plan has a three-year term, commencing on September 29, 2021 (the date of adoption) and expiring at the close of business on September 29, 2024 (the "Expiration Date"), unless earlier redeemed, exchanged, or terminated in accordance with the Rights Agreement.
The Pinnacle board retains broad authority to manage the Rights Plan throughout its term. Specifically:
•  Redemption: At any time prior to the occurrence of a triggering event (i.e., prior to a person or group becoming an Acquiring Person), the Pinnacle board may redeem all of the then-outstanding Rights at a redemption price of $0.001 per Right (the "Redemption Price"). The redemption of the Rights would effectively terminate the Rights Plan. This redemption authority is a standard feature of shareholder rights plans and provides the board with the flexibility to remove the pill if circumstances change—for example, if the board determines that a proposed transaction is in the best interests of shareholders, it can redeem the Rights to facilitate that transaction.
•  Exemption: The Pinnacle board may also exempt specific persons, groups, or transactions from the definition of "Acquiring Person" or from the triggering provisions of the Rights Plan. This exemption authority is particularly relevant in the context of the Aurelius tender offer, as Aurelius could seek a board exemption that would permit the Offer to proceed without triggering the pill. We discuss this possibility further in Section VI.A below.
•  Amendment: The Rights Plan may be amended by the Pinnacle board at any time prior to the occurrence of a triggering event, without the consent of the Rights Agent or any holder of Rights, in any manner that the board deems appropriate, subject to certain limitations in the Rights Agreement.
E. Stated Justification — NOL Preservation
The Pinnacle board has publicly stated that the primary justification for the adoption of the Rights Plan is the preservation of the company's net operating loss carryforwards, which the board has estimated at approximately $47,300,000 as of December 31, 2020. These NOLs, if available for use, could potentially shield a significant amount of Pinnacle's future taxable income from federal income tax, providing substantial economic value to the company and its shareholders. Pinnacle's most recent Annual Report on Form 10-K, filed with the SEC on March 15, 2021 for the fiscal year ended December 31, 2020, discloses the NOL carryforwards and notes that they are subject to the limitations of Section 382 of the Code.
Section 382 of the Code limits a corporation's ability to use pre-change NOLs (and certain other tax attributes) following an "ownership change." An ownership change occurs, generally, when there is a more-than-50-percentage-point increase in the stock ownership of one or more "5-percent shareholders" (as defined in Section 382) over a rolling three-year testing period. If an ownership change occurs, the amount of pre-change NOLs that may be used in any post-change year is generally limited to the product of (i) the fair market value of the corporation's stock immediately before the ownership change, multiplied by (ii) the applicable long-term tax-exempt rate published by the Internal Revenue Service (currently approximately 1.22% for ownership changes occurring in October 2021). This annual limitation can dramatically reduce the practical value of the NOLs, and in some cases may effectively eliminate the corporation's ability to use them during the remaining carryforward period.
The Pinnacle board has asserted that the 35.0% trigger threshold was selected to reduce the risk that the acquisition of a significant block of Pinnacle stock by a single investor or group, combined with trading activity by other 5-percent shareholders over the relevant testing period, could trigger or contribute to a Section 382 ownership change. The board characterized the Rights Plan as a prudent protective measure designed to preserve significant value for all Pinnacle shareholders.
We note, however, that the NOL preservation rationale, while facially legitimate, is subject to skepticism in the specific circumstances of this case, as we discuss in our legal analysis in Section V below. The timing of the adoption—21 days after the commencement of the Aurelius tender offer—and the precise calibration of the 35.0% trigger to fall just above the 34.9% offer target raise questions about whether the primary purpose of the plan is genuinely NOL preservation or whether it is instead designed to impede the specific pending tender offer.
IV. Interaction with the Aurelius Tender Offer
A. The 34.9% vs. 35.0% Razor-Thin Margin
The Aurelius tender offer was deliberately structured to acquire 34.9% (6,980,050 shares) of Pinnacle's outstanding common stock. In structuring the Offer, the deal team was advised that NOL preservation shareholder rights plans typically employ ownership thresholds in the range of 4.9% to 35%, and selected a target acquisition level of 34.9% that would fall below a conventional 35% trigger. A 35% threshold is a common trigger level for NOL preservation pills adopted by companies with significant NOL carryforwards, as it provides a meaningful margin below the 50-percentage-point ownership change threshold of Section 382 while still permitting substantial accumulations by individual investors.
The Pinnacle board adopted its Rights Plan at precisely the 35.0% trigger level, creating only a 10-basis-point buffer between the maximum stake sought in the Offer and the threshold at which the pill would be triggered. This extraordinarily narrow margin has several important implications:
First, even if the tender offer were the only relevant transaction, the 10-basis-point margin introduces significant operational risk. Minor increases in beneficial ownership—for example, through inadvertent open-market purchases, the exercise of options or other derivative instruments, attribution under the complex beneficial ownership rules of the Rights Agreement, or the formation of a "group" with other shareholders—could cause an inadvertent triggering event. Managing compliance with a 10-basis-point buffer over an extended period would require constant monitoring and impose significant practical constraints on Aurelius's ability to trade in Pinnacle securities.
Second, and more fundamentally, the 35.0% threshold is relevant to Aurelius's combined beneficial ownership position, not merely to the shares acquired in the Offer itself. As discussed in the following section, this is the dispositive issue.
B. The Combined Position Problem
The critical issue presented by the Rights Plan is not the narrow margin between the 34.9% offer target and the 35.0% trigger threshold, but rather the fact that Aurelius already beneficially owns 980,000 shares of Pinnacle common stock (4.9% of outstanding) through the open-market purchases disclosed in the Schedule 13D filed on August 26, 2021.
If the Offer were fully successful—meaning that 6,980,050 shares were validly tendered and accepted for payment—Aurelius's combined beneficial ownership would total:
980,000 shares (existing position) + 6,980,050 shares (tendered) = 7,960,050 shares
This would represent approximately 39.8% of Pinnacle's 20,000,000 outstanding shares—exceeding the 35.0% pill trigger by approximately 4.8 percentage points. This is not a marginal exceedance; it is a clear and substantial breach of the trigger threshold that would unambiguously cause Aurelius to become an "Acquiring Person" under the Rights Plan and would result in the activation of the flip-in mechanism, with catastrophic dilutive consequences for Aurelius's investment.
Accordingly, the tender offer cannot be consummated in full under its current terms without one of the following occurring:
(a) Triggering the Rights Plan, which would result in massive dilution of Aurelius's position and would be economically irrational—this is not a viable path;
(b) Obtaining a board exemption from the Rights Plan for the Aurelius tender offer, which would require the affirmative action of the Pinnacle board, acting in its discretion, to either redeem the rights or specifically exempt the Offer from the plan's triggering provisions; or
(c) Reducing the number of shares sought in the tender offer to a level that would keep Aurelius's combined beneficial ownership position below 35.0%.
With respect to option (c), if Aurelius were to cap its combined position at just below 35.0%, the maximum number of additional shares it could acquire through the Offer would be:
35.0% × 20,000,000 shares = 7,000,000 shares (maximum combined position)
7,000,000 − 980,000 (existing position) = 6,020,000 shares (maximum tender)
However, in light of the operational risks associated with the narrow margin discussed above, a prudent buffer would be advisable. For example, targeting a combined position of 34.0% would limit the tender to:
34.0% × 20,000,000 shares = 6,800,000 shares (combined position)
6,800,000 − 980,000 = 5,820,000 shares (maximum tender)
This would represent only approximately 29.1% of outstanding shares through the tender, a significant reduction from the originally targeted 34.9% and a material diminution in the strategic significance of the resulting position. Such a reduced position would limit Aurelius's influence over Pinnacle's governance and strategic direction and could undermine the economic rationale for the transaction.
C. Proration and Oversubscription Risk
If the Offer were amended to reduce the maximum number of shares sought and an unexpectedly large number of shares were tendered by Pinnacle shareholders, the tender offer would be subject to proration under the terms of the Offer and in accordance with Rule 14d-8 under the Exchange Act. In such a scenario, each tendering shareholder's shares would be accepted for payment on a pro rata basis, such that the aggregate number of shares accepted would not exceed the stated maximum.
Proration itself does not create an independent trigger risk under the Rights Plan, provided the Offer is properly structured and administered. The combined ownership calculation under the Rights Plan would be based on shares actually acquired and accepted for payment, not on shares tendered but not yet accepted. Accordingly, if proration operates to limit the number of shares accepted to a level that keeps Aurelius's combined position below 35.0%, the Rights Plan would not be triggered—assuming no other source of beneficial ownership (such as the formation of a group or the acquisition of additional derivative positions) pushes the total above the threshold.
That said, the mechanics of proration in a partial tender offer with a reduced maximum present certain operational complexities. Aurelius and its depositary agent (Continental Fiduciary) would need to implement procedures to ensure that the final acceptance of shares does not inadvertently result in a combined beneficial ownership position at or above 35.0%. We recommend that Calderwood & Harkness review the terms of the depositary agreement and the Offer procedures to confirm that adequate safeguards are in place.
D. Share Count Variability
The beneficial ownership percentage calculations set forth in this memorandum are based on 20,000,000 shares of Pinnacle common stock currently outstanding, as reported in Pinnacle's most recent Quarterly Report on Form 10-Q filed with the SEC on August 9, 2021 for the quarter ended June 30, 2021.
Any future equity issuances by Pinnacle—whether through the exercise of outstanding stock options, the vesting of restricted stock units, the issuance of shares under Pinnacle's equity compensation plans, or otherwise—could increase the number of shares outstanding, thereby altering the denominator used in calculating beneficial ownership percentages. An increase in shares outstanding would have the effect of slightly reducing Aurelius's beneficial ownership percentage for any given number of shares held or acquired.
We note that Pinnacle's most recent proxy statement (filed on April 14, 2021 in connection with the 2021 annual meeting of shareholders) disclosed that, as of April 1, 2021, there were 1,150,000 shares reserved for issuance under the company's 2019 Equity Incentive Plan, of which 780,000 shares were subject to outstanding awards (options and restricted stock units) and 370,000 shares remained available for future grants. The vesting and exercise of these awards could modestly increase shares outstanding over time.
We recommend that Aurelius monitor Pinnacle's SEC filings and public disclosures for any changes to the share count, particularly any Form 8-K filings or Section 16 filings (Forms 3, 4, and 5) that might indicate equity issuance activity. This monitoring should be conducted on an ongoing basis throughout the pendency of the Offer and any subsequent negotiations.
V. Legal Analysis — Potential Challenges Under Delaware Law
A. Applicable Standard of Review: Unocal/Unitrin
Because the Rights Plan was adopted by the Pinnacle board as a defensive measure in response to the Aurelius tender offer—an unsolicited acquisition proposal that the board has recommended shareholders reject—the plan is subject to enhanced judicial scrutiny under the two-part test established by the Delaware Supreme Court in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and refined in Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995).
Under the Unocal standard, when a board of directors takes defensive action in response to a perceived threat to corporate policy and effectiveness, the board bears the initial burden of demonstrating:
(1) The Threat Prong: That the board had reasonable grounds for believing that a danger to corporate policy and effectiveness existed. In establishing this element, the board must show that it acted in good faith and after reasonable investigation. The presence of a majority of outside, independent directors on the board is a significant factor, and if a majority of independent directors approve the defensive measure, the burden on the board is somewhat lessened.
(2) The Proportionality Prong: That the defensive measure adopted was reasonable in relation to the threat posed. The court will examine whether the response was proportionate—neither coercive nor preclusive—and fell within a "range of reasonableness." A measure is "preclusive" if it renders the success of the offer "mathematically impossible" or "realistically unattainable." A measure is "coercive" if it forces shareholders to accept a particular transaction or forgo their rights.
If the board satisfies both prongs of the Unocal test, the court will apply the deferential business judgment rule. If the board fails to meet its burden, the defensive measure will be enjoined.
The Unocal/Unitrin framework has been applied in numerous Delaware cases involving challenges to shareholder rights plans, and remains the governing standard. We analyze each prong in detail below as applied to the facts of this case.
B. Threat Prong Analysis
Under the first prong of the Unocal test, the Pinnacle board must demonstrate that it had reasonable grounds for believing that the Aurelius tender offer posed a threat to corporate policy and effectiveness. Based on the disclosures in the definitive Schedule 14D-9 and the Rights Agreement, we anticipate that the Pinnacle board will advance the following arguments in support of its position:
Pinnacle's likely arguments:
NOL Preservation. The board will likely argue that the tender offer, if consummated, poses a genuine threat to Pinnacle's ability to utilize its approximately $47,300,000 in federal net operating loss carryforwards. The board will contend that the acquisition of a 34.9% block of Pinnacle stock by a single shareholder, when combined with Aurelius's existing 4.9% position and other trading activity by 5-percent shareholders over the Section 382 testing period, could contribute to or trigger a Section 382 ownership change that would severely limit the annual amount of NOLs available to offset future taxable income. The board will argue that the loss of these NOLs would destroy significant value for all Pinnacle shareholders and that the Rights Plan was a reasonable prophylactic measure to preserve this value.
Structural Coercion. The board will likely characterize the partial tender offer as structurally coercive. In particular, the board may argue that shareholders face a "prisoner's dilemma": each shareholder may feel individually compelled to tender into the offer—even if the shareholder believes the offer price is inadequate—to avoid being left in a minority position with a dominant 34.9% shareholder. This type of structural coercion argument has been recognized by Delaware courts as a cognizable threat in the Unocal framework. See, e.g., Unocal, 493 A.2d at 956 (discussing "the threat of greenmail, the inadequacy of the price offered, . . . and the impact on 'ichconstituencies' other than shareholders").
Inadequacy of Price. The board will argue that the offer price of $4.01 per share is inadequate and does not reflect the full, long-term value of Pinnacle and its assets. The definitive Schedule 14D-9 references the company's extensive content library of approximately 1,800 hours of programming spanning drama, documentary, and reality formats, as well as a growing streaming licensing pipeline. The board may contend that an implied enterprise value-to-EBITDA multiple of approximately 5.5× (based on an implied 100% equity value of approximately $80,200,000, calculated as $4.01 × 20,000,000 shares = $80,200,000, and Pinnacle's fiscal year 2020 EBITDA of approximately $14,600,000) undervalues the company relative to comparable publicly traded content companies and recent precedent transactions in the media and entertainment sector. While the specific comparable company and precedent transaction analysis will depend on the work of Hargrove Meredith & Co., we note that several recent content acquisitions have been consummated at EV/EBITDA multiples in the 7.0× to 10.0× range.
Aurelius's counterarguments:
Pretextual NOL Justification. Aurelius's strongest argument on the threat prong is that the NOL preservation rationale is pretextual and that the Rights Plan was adopted for the primary purpose of impeding the specific pending tender offer, not to protect the company's NOLs in the abstract. Several facts support this argument:
First, the timing of the adoption is highly suggestive. The Rights Plan was adopted on September 29, 2021—exactly 21 days after the commencement of the Aurelius tender offer on September 8, 2021. If the Pinnacle board had been genuinely concerned about protecting its NOLs from erosion through share accumulations, one would expect the board to have adopted an NOL preservation pill proactively, well in advance of any specific acquisition threat. The fact that the board waited until a specific tender offer was pending before adopting the plan undercuts the claim that the plan was motivated by a general concern about Section 382 compliance.
Second, the precise calibration of the 35.0% trigger to fall just above the 34.9% tender offer target is circumstantially damning. NOL preservation pills adopted by other companies have used a wide range of trigger thresholds—from as low as 4.9% (which is common for companies seeking to preserve NOLs by preventing any significant accumulation) to 10%, 15%, 20%, or 35%. The selection of a 35.0% threshold—rather than a lower threshold that would have been more protective of the NOLs—suggests that the board's primary concern was not maximizing NOL protection but rather establishing a trigger that would be specifically preclusive of the Aurelius tender offer while appearing to be minimally restrictive. If the board were genuinely motivated by NOL preservation, a lower threshold (e.g., 10% or 15%) would have been more appropriate and more consistent with the stated purpose of the plan.
Third, Aurelius can argue that the partial tender offer at 34.9%, by itself, would not necessarily trigger a Section 382 ownership change. The Section 382 ownership change threshold is 50 percentage points (not 50% of outstanding shares), measured on a rolling three-year basis. Even if Aurelius were to acquire 34.9% of Pinnacle's shares, an ownership change would only occur if, in combination with other ownership shifts by 5-percent shareholders during the testing period, the aggregate increase exceeded 50 percentage points. The Pinnacle board has not disclosed whether it has conducted a Section 382 analysis demonstrating that the Aurelius tender offer would, in fact, trigger or contribute to an ownership change, and Aurelius should demand the production of any such analysis in any litigation.
Non-Controlling Partial Offer. Aurelius can also argue that a partial, non-controlling tender offer is inherently less threatening than a change-of-control transaction. The Offer does not seek a majority of Pinnacle's outstanding shares and does not contemplate a second-step merger or squeeze-out of minority shareholders. Shareholders retain the unfettered ability to reject the Offer—they can simply decline to tender their shares. The board's characterization of the Offer as "coercive" is therefore arguably overstated.
On balance, we believe that Aurelius has colorable arguments on the threat prong, particularly with respect to the pretextual nature of the NOL justification. However, we note that Delaware courts have generally afforded boards significant latitude in identifying threats under Unocal, and the presence of a majority of independent directors on the Pinnacle board (three of seven directors are classified as independent) will weigh in the board's favor.
C. Proportionality Prong Analysis
Under the second prong of the Unocal/Unitrin test, the court will examine whether the Rights Plan is a proportionate response to the identified threat. The Delaware Supreme Court in Unitrin held that a defensive measure is disproportionate if it is either "coercive" or "preclusive." If the measure is neither coercive nor preclusive, the court will evaluate whether it falls within a "range of reasonableness."
Preclusive Effect. The most significant argument Aurelius can advance on the proportionality prong is that the Rights Plan is preclusive—that is, it effectively prevents the consummation of the tender offer as structured. The combined 39.8% beneficial ownership position that would result from full consummation of the Offer would clearly trigger the pill, and there is no practical way for Aurelius to consummate the Offer in its current form without breaching the 35.0% threshold. The narrow 10-basis-point margin between the 34.9% offer target and the 35.0% trigger threshold, combined with the board's refusal to exempt the Offer, appears designed to make the Offer "realistically unattainable" within the meaning of Unitrin.
However, Pinnacle will counter that the Rights Plan is not preclusive because it does not prevent all acquisition proposals or all share accumulations below the 35.0% threshold. Pinnacle will argue that:
(i) Aurelius could acquire up to approximately 30.1% of Pinnacle's outstanding shares through a reduced tender offer (capping the combined position at just below 35.0%), which would give Aurelius a very substantial and influential minority position;
(ii) Aurelius could pursue a negotiated transaction with the Pinnacle board, which retains the authority to redeem the rights or exempt the Offer from the plan;
(iii) Aurelius could pursue a proxy contest or consent solicitation to replace directors with nominees who would redeem the pill; and
(iv) The Rights Plan has a three-year term and will expire on September 29, 2024, after which Aurelius could freely pursue the Offer without the impediment of the pill.
Delaware courts have generally held that a poison pill is not preclusive if the offeror retains the ability to pursue alternative paths to acquiring control or influence, including through a proxy contest. See, e.g., Unitrin, 651 A.2d at 1387-88 (noting that a defensive measure is not preclusive if the offeror can wage a proxy contest to replace the board and eliminate the pill). The availability of a proxy contest as an alternative path is a significant factor in the Unitrin analysis, and Pinnacle will likely argue that Aurelius has this option available.
Aurelius could respond that the proxy contest avenue, while theoretically available, is practically cumbersome and expensive for a 4.9% shareholder, and that the combination of the pill and the board's refusal to negotiate effectively precludes the specific tender offer at issue. Aurelius could also argue that the board is using the pill not to protect the company's NOLs but to entrench itself and prevent shareholders from exercising their right to accept a premium offer.
Coercive Effect. The Rights Plan is not directly coercive to Pinnacle shareholders. Unlike certain other defensive measures (such as a recapitalization or restructuring that alters the economic rights of shareholders), the pill does not force shareholders to accept or reject any transaction. It operates exclusively against the Acquiring Person by diluting the Acquiring Person's position upon a triggering event. Accordingly, we do not believe that a coercion argument would be successful.
Range of Reasonableness. If the court determines that the pill is neither preclusive nor coercive, it will evaluate whether the measure falls within a "range of reasonableness." Pinnacle will argue that NOL preservation shareholder rights plans with ownership thresholds ranging from 4.9% to 35% have been widely adopted by public companies and have generally been upheld or accepted by Delaware courts. A 35% threshold is at the higher end of this range, which Pinnacle may argue makes the plan more shareholder-friendly than pills with lower triggers (such as 4.9% or 10%), because it permits shareholders to accumulate substantial positions without triggering the plan. Pinnacle will contend that the 35% threshold represents a careful balancing of the need to protect the NOLs against the desire to avoid unduly restricting shareholder trading activity.
We note, however, that the "range of reasonableness" analysis is fact-specific, and the circumstances of the adoption—particularly the timing and the precise calibration of the threshold—could lead a court to conclude that this particular pill, adopted in these particular circumstances, falls outside the range of reasonableness even though a 35% threshold might be reasonable in the abstract.
D. Fiduciary Duty Considerations
Beyond the Unocal/Unitrin framework, the adoption of the Rights Plan is subject to the general fiduciary duties of the Pinnacle board, including the duty of care and the duty of loyalty. The board members are required to act in good faith, on an informed basis, and in the honest belief that their actions are in the best interests of the corporation and its shareholders.
Several factors are relevant to the fiduciary duty analysis:
Board Composition and Independence. The Pinnacle board consists of seven members, three of whom—Franklin Osei (Chairman), Miriam Castellano, and Tyrone Nash—are classified as independent directors under Nasdaq listing standards. The remaining four members—Jordan Cavanaugh (CEO/Co-Founder), Patricia Langford (CFO), Derek Soo (General Counsel), and Victor Huang (Co-Founder/CCO)—are management directors. While a majority of the independent directors (three of three) approved the Rights Plan, the fact that independent directors do not constitute a majority of the full board (three of seven) is a potential vulnerability. Delaware courts place significant weight on the involvement of independent directors in the adoption of defensive measures, and the presence of a board with a majority of management or insider directors may subject the decision to somewhat closer scrutiny. That said, we note that all three independent directors approved the plan, and the board acted unanimously.
Informed Decision-Making. The Pinnacle board was advised by experienced legal counsel (Caldwell Burris & Shoemaker LLP) and a financial advisor (Hargrove Meredith & Co.) in connection with the adoption of the Rights Plan and the evaluation of the Offer. The involvement of qualified advisors is an important factor under the duty of care, and the fact that the board acted on the advice of counsel and financial advisors strengthens its position in any fiduciary challenge. However, the absence of a formal fairness opinion from Hargrove Meredith & Co. (as noted in Section II.C above) could be a point of vulnerability, particularly if Aurelius argues that the board's recommendation against the Offer was not supported by a rigorous financial analysis.
Good Faith. Aurelius could argue that the Rights Plan was adopted in bad faith—not for the stated purpose of protecting the NOLs, but for the purpose of entrenching the incumbent management team and blocking a premium offer to shareholders. The timing and calibration of the threshold, as discussed above, are relevant to this argument. However, claims of bad faith are notoriously difficult to prove, and Delaware courts have generally been reluctant to second-guess the subjective motivations of directors who have the appearance of acting for legitimate business reasons.
E. Likelihood of Success in a Legal Challenge
Based on the foregoing analysis, we assess the likelihood of success in a legal challenge to the Rights Plan as follows:
A challenge to the Rights Plan under the Unocal/Unitrin framework is legally viable. Aurelius has colorable arguments that the plan is pretextual and preclusive, and the narrow margin between the offer target and the trigger threshold provides circumstantial evidence that the plan was designed to block the specific tender offer rather than to protect NOLs in the abstract. These arguments could be persuasive to a judge, particularly if Aurelius is able to develop factual support through discovery (e.g., board minutes, communications between Pinnacle's directors and advisors, and any Section 382 analyses prepared in connection with the adoption of the plan).
However, the outcome of such a challenge is uncertain. Delaware courts have a long history of deference to boards of directors in the adoption of defensive measures, particularly where the board includes a meaningful complement of independent directors acting on the advice of qualified legal and financial advisors. The NOL preservation rationale, while questionable in this context, provides the board with a facially legitimate justification that is not obviously pretextual on its face. Courts have recognized the potential value of NOLs and the legitimacy of measures designed to protect them, and the Pinnacle board's argument will not be easily dismissed.
Moreover, we note that there is limited Delaware case law specifically addressing the validity of NOL preservation pills adopted in the context of pending tender offers with precisely calibrated trigger thresholds. While the general Unocal/Unitrin framework applies, the specific application of that framework to the facts of this case would be somewhat novel, adding an additional element of uncertainty.
From a practical standpoint, litigation in the Delaware Court of Chancery would involve significant costs (we estimate legal fees and expenses of $2,000,000 to $4,000,000 through trial) and a timeline of approximately 3 to 6 months to reach trial on an expedited schedule. During this period, the tender offer dynamics may shift—Pinnacle could take additional defensive actions (such as a strategic transaction or a self-tender), market conditions could change, and the financing commitment from Brindoval National Bank could expire or need to be extended. There is also the possibility of an appeal to the Delaware Supreme Court, which could add several additional months to the timeline.
Finally, litigation carries the risk of negative publicity and could damage the relationship between Aurelius and Pinnacle, making a negotiated transaction more difficult if the litigation is unsuccessful. This consideration weighs in favor of pursuing a negotiated approach in the first instance, with litigation held in reserve as a contingency and a source of leverage.
VI. Strategic Options
Based on the foregoing analysis, we have identified five strategic options available to Aurelius. We discuss each option below, along with our assessment of its relative advantages and disadvantages.
A. Option 1 — Negotiate Standstill and Board Exemption
Description. Aurelius could approach the Pinnacle board (through its counsel, Rebecca Fontaine at Caldwell Burris & Shoemaker LLP) with a proposal for a standstill and governance framework that would address the board's stated concerns while permitting the tender offer to proceed. The key elements of such a proposal could include:
•  Aurelius would agree to cap its aggregate beneficial ownership of Pinnacle common stock at 34.9% (below the 35.0% Rights Plan trigger threshold), providing the board with assurance that the Aurelius position would not contribute to a Section 382 ownership change;
•  Aurelius would limit its board representation requests to no more than two seats on the seven-member Pinnacle board, and would agree not to seek to acquire control of the board through a proxy contest or consent solicitation during the standstill period;
•  The standstill period would be 24 months from the date of execution of the agreement, during which Aurelius would be subject to customary standstill restrictions, including limitations on additional share purchases, public statements, and solicitation of other shareholders;
•  In exchange, the Pinnacle board would grant an exemption under the Rights Plan for the Aurelius tender offer (or, alternatively, would redeem the rights prior to the offer's expiration), and would revise its Schedule 14D-9 recommendation from "reject" to either "accept" or "no recommendation/neutral."
Assessment. This approach preserves the relationship between Aurelius and Pinnacle and avoids the cost, delay, uncertainty, and negative publicity associated with litigation. It also provides the Pinnacle board with a face-saving mechanism—the board can characterize the standstill as evidence that it successfully negotiated protections for shareholders and the company's NOLs. The primary risk is that the Pinnacle board may reject the proposal or insist on terms that are unacceptable to Aurelius (such as a higher offer price or more restrictive standstill terms).
Recommendation. We recommend this as the preferred initial approach. A formal letter should be sent on behalf of Aurelius proposing this framework, with a request for a meeting between the parties' advisors within the next 5 to 7 business days.
B. Option 2 — Reduce the Tender Offer Size
Description. Aurelius could unilaterally amend the tender offer to reduce the maximum number of shares sought, such that the combined beneficial ownership position (980,000 existing shares plus newly tendered shares) would remain below 35.0%, thereby avoiding any triggering event under the Rights Plan.
The maximum number of additional shares Aurelius could acquire through a reduced Offer, without exceeding the 35.0% trigger, would be approximately 6,020,000 shares (35.0% × 20,000,000 = 7,000,000 − 980,000 = 6,020,000). However, as noted above, a prudent buffer would be advisable to account for the operational risks associated with the narrow margin. Targeting a combined position of approximately 34.0% would reduce the maximum tender to approximately 5,820,000 shares (34.0% × 20,000,000 = 6,800,000 − 980,000 = 5,820,000), yielding a total combined position of approximately 6,800,000 shares or 34.0% of outstanding.
At the offer price of $4.01 per share, a reduced tender of 5,820,000 shares would result in an aggregate deal value of approximately $23,338,200, compared to the original aggregate deal value of approximately $28,000,000—a reduction of approximately $4,662,000 or 16.6%.
Assessment. This option has the advantage of simplicity and of eliminating the pill as an obstacle without requiring the Pinnacle board's cooperation. However, it significantly reduces the strategic significance of the resulting position. A 34.0% stake, while substantial, provides less influence and less defensive capacity than a 34.9% stake. Moreover, the minimum tender condition of 5,000,000 shares would need to be reassessed—at a maximum tender of 5,820,000 shares, the minimum tender condition would represent approximately 86% of the maximum, which is unusually high and could reduce the probability of satisfaction.
Additionally, reducing the offer size does not address the Pinnacle board's recommendation against the Offer. The board's "do not tender" recommendation would remain in effect, potentially reducing the number of shares tendered and making it more difficult to satisfy even a reduced minimum tender condition.
Recommendation. This option should be considered as a fallback if negotiations with the Pinnacle board are unsuccessful and litigation is either not pursued or not successful. It is not recommended as the primary approach.
C. Option 3 — Litigate to Challenge the Rights Plan
Description. Aurelius could file a complaint in the Delaware Court of Chancery seeking declaratory and injunctive relief. Specifically, the complaint would seek:
(i) A declaration that the Rights Plan was adopted in breach of the Pinnacle board's fiduciary duties and is invalid and unenforceable;
(ii) An injunction compelling the Pinnacle board to redeem the rights or to exempt the Aurelius tender offer from the Rights Plan; and
(iii) Such other and further relief as the court deems just and equitable.
The complaint would be accompanied by a motion for a preliminary injunction, seeking expedited proceedings and an early trial date. The legal arguments in support of the challenge would be based on the Unocal/Unitrin analysis set forth in Section V above, emphasizing the pretextual nature of the NOL preservation rationale, the preclusive effect of the 35.0% trigger threshold, and the board's bad faith in adopting the pill specifically to block the pending tender offer.
Assessment. As discussed in Section V.E above, the outcome of a legal challenge is uncertain. Delaware courts have generally been reluctant to order the redemption of poison pills, and the Pinnacle board's NOL preservation rationale, while questionable, is not obviously frivolous. Litigation would involve significant costs (estimated at $2,000,000 to $4,000,000 through trial), a timeline of 3 to 6 months on an expedited schedule, and the risk of negative publicity and damage to the negotiating relationship with Pinnacle. An adverse ruling would also establish unfavorable precedent and could embolden the Pinnacle board to take additional defensive actions.
However, the filing of a complaint and motion for preliminary injunction could serve as important leverage in negotiations with the Pinnacle board, even if Aurelius does not ultimately seek to prosecute the litigation to a final judgment. The Pinnacle board and its advisors will recognize the risk of an adverse ruling, and the pendency of litigation may create pressure to reach a negotiated resolution.
Recommendation. We recommend that litigation materials be prepared and held in reserve as leverage for negotiations (Option A) and as a fallback if negotiations are unsuccessful. We do not recommend filing suit as the first step, given the risks and costs involved.
D. Option 4 — Wait for Pill Expiration
Description. The Rights Plan expires by its terms on September 29, 2024. If Aurelius is prepared to adopt a patient posture, it could maintain its current 4.9% beneficial ownership position and allow the tender offer to expire or be withdrawn, then wait for the Rights Plan to lapse before reviving or relaunching the tender offer at that time.
Assessment. This option has the advantage of avoiding both litigation and the need for the Pinnacle board's cooperation. However, it presents several significant risks and practical considerations:
Successor Pill. The Pinnacle board is not precluded from adopting a successor rights plan upon or prior to the expiration

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