PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
MEMORANDUM
FROM: James Prentice, Partner, and Tiffany Rosenthal, Associate Calderwood & Harkness LLP 787 Seventh Avenue, 42nd Floor New York, NY 10019
TO: Hugh Pemberton, General Counsel, Aurelius Global Media Group PLC Rupert Ashford, Head of Corporate Development, Aurelius Global Media Group PLC
DATE: December 15, 2021
RE: Strategic Options for Dormant Tender Offer for Shares of Pinnacle Content Holdings, Inc. (Nasdaq: PCHL)
MATTER NO.: 1011-00002
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I. Executive Summary
The purpose of this memorandum is to evaluate the strategic options available to Aurelius Global Media Group PLC ("Aurelius" or "AGMG") and its wholly owned U.S. subsidiary, Aurelius Media Holdings LLC ("AMH LLC"), with respect to the dormant tender offer (the "Offer") for up to 6,980,050 shares of common stock of Pinnacle Content Holdings, Inc. ("Pinnacle" or "PCH") at $4.01 per share. This memorandum is furnished at the request of Mr. Pemberton and Mr. Ashford and is intended solely for the use of the addressees and those persons copied below in evaluating Aurelius's strategic posture vis-à-vis the Pinnacle investment. The analysis herein is protected by the attorney-client privilege and constitutes attorney work product.
Background. The Offer commenced on September 8, 2021, and was extended once through November 5, 2021. As of the expiration of the extended offer period, only approximately 1,420,000 shares had been tendered, representing 7.1% of the approximately 20,000,000 shares of Pinnacle common stock outstanding at that time. This figure fell far short of the minimum tender condition of 5,000,000 shares (25.0% of outstanding), rendering the Offer unsuccessful. Amendment No. 2 to the Schedule TO (SEC File No. 005-92847) was filed with the Securities and Exchange Commission on November 12, 2021, disclosing that the Offer had lapsed without acceptance but had not been formally withdrawn or terminated. All tendered shares have been returned to the tendering holders by Continental Fiduciary Services, Inc., the depositary for the Offer.
Current Position. Aurelius, through AMH LLC, retains its 980,000-share open-market position in Pinnacle, representing approximately 4.9% of outstanding shares at the time the Offer was launched and approximately 4.8% of the current 20,400,000 shares outstanding (the slight increase attributable to equity compensation issuances by Pinnacle). The shares were acquired at an average cost of $3.28 per share, for an aggregate cost basis of $3,214,400. The position is reported on the Schedule 13D filed with the SEC on August 26, 2021. As of the date of this memorandum, Pinnacle's common stock is trading at approximately $2.85 per share, representing a decline of approximately 17% from the undisturbed price of $3.42 per share (as of August 27, 2021, the last trading day prior to public disclosure of Aurelius's position) and approximately 29% below the Offer price. At current market prices, the position has a market value of approximately $2,793,000, representing an unrealized loss of approximately $421,400 relative to the aggregate cost basis.
Options Evaluated. This memorandum evaluates four strategic paths available to Aurelius:
(a) Formal Withdrawal and Termination — filing a final amendment to the Schedule TO formally terminating the Offer;
(b) Amendment and Relaunch on Revised Terms — amending the Offer to reflect revised pricing and terms, and relaunching the tender offer process;
(c) Continued Dormancy with Monitoring — maintaining the current posture in which the Offer is neither withdrawn nor relaunched, while actively monitoring developments at Pinnacle and in the regulatory environment; and
(d) Alternative Acquisition Structures — pursuing the strategic objective of acquiring a meaningful stake in Pinnacle through structures other than a tender offer, including a negotiated stock purchase, open-market accumulation, or consent solicitation/proxy contest.
Recommendation. After careful consideration of the legal, financial, regulatory, and strategic factors discussed below, we recommend that Aurelius pursue Option C — Continued Dormancy with Monitoring — in the near term. This approach preserves strategic optionality at minimal cost, avoids the negative market signal that would accompany formal withdrawal, and positions Aurelius to re-engage with Pinnacle at the most advantageous time. The single most significant catalyst on the horizon is the expiration of Pinnacle's shareholder rights plan on September 29, 2024, approximately 33 months from now. We recommend that Aurelius undertake a formal strategic re-evaluation no later than the second quarter of 2024, in advance of that expiration, to determine whether to relaunch a tender offer, pursue a negotiated transaction, commence a proxy contest, or formally withdraw.
As a near-term matter requiring immediate attention, we also recommend that Aurelius allow the Brindoval National Bank, N.A. commitment letter to lapse on its current expiration date of December 31, 2021, without exercising the available 90-day extension to March 31, 2022. The extension would cost approximately $37,500 in additional commitment fees and is not justified absent a concrete plan to relaunch the Offer in the first quarter of 2022, which we do not recommend.
II. Background and Current Posture
A. The Tender Offer
The Offer was structured as a partial tender offer by AMH LLC, the wholly owned U.S. subsidiary of Aurelius. The key terms and parties are summarized below:
Offeror. Aurelius Media Holdings LLC, a Delaware limited liability company (Delaware Secretary of State file number 7894512), the sole member of which is Aurelius Global Media Group PLC, a public limited company incorporated under the laws of England and Wales (registered number 08541276) with ordinary shares admitted to trading on the London Stock Exchange.
Target. Pinnacle Content Holdings, Inc., a Delaware corporation, with shares of common stock listed on the Nasdaq Stock Market under the ticker symbol "PCHL" (SEC Central Index Key 0001847263).
Shares Sought. The Offer sought up to 6,980,050 shares of Pinnacle common stock, representing approximately 34.9% of the 20,000,000 shares of Pinnacle common stock outstanding as of the commencement of the Offer. Combined with the 980,000 shares already held by AMH LLC through open-market purchases, full acceptance of the Offer would have resulted in Aurelius holding a total of 7,960,050 shares, or approximately 39.8% of outstanding shares.
Offer Price. The Offer price was $4.01 per share in cash, without interest. The aggregate purchase price for the maximum number of shares sought was approximately $27,989,000.50 (6,980,050 shares × $4.01 per share). The aggregate deal value, including the shares already held, was approximately $28,000,000 for the tendered shares alone.
Premium. The Offer price of $4.01 per share represented a premium of approximately 17.25% over the undisturbed closing price of $3.42 per share on August 27, 2021, the last full trading day prior to the public filing of the Schedule 13D.
Implied Valuation. At the Offer price of $4.01 per share, the implied 100% equity value of Pinnacle was $80,200,000 (20,000,000 shares × $4.01). Based on Pinnacle's reported fiscal year 2020 EBITDA of approximately $14,600,000, the implied EV/EBITDA multiple was approximately 5.5×, a valuation that fell within the range of comparable transactions in the mid-cap content and media sector.
Minimum Tender Condition. The Offer was subject to a minimum tender condition requiring that at least 5,000,000 shares (25.0% of outstanding) be validly tendered and not withdrawn prior to the expiration of the Offer. As discussed below, this condition was not satisfied.
Proration. The Offer to Purchase provided that if more than 6,980,050 shares were validly tendered and not withdrawn, shares would be accepted for payment on a pro rata basis in accordance with Rule 14d-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
B. Timeline of Key Events
The following chronology sets forth the principal events in the history of the Offer and Aurelius's investment in Pinnacle:
August 12, 2021. AMH LLC was formed as a Delaware limited liability company for the purpose of holding Aurelius's investment in Pinnacle and serving as the offeror in the contemplated tender offer.
August 16, 2021. Calderwood & Harkness LLP executed an engagement letter to serve as U.S. legal counsel to Aurelius and AMH LLC in connection with the acquisition of Pinnacle shares and the anticipated tender offer.
August 20, 2021. Brindoval National Bank, N.A. executed a commitment letter (reference CL-2021-MTC-00487) committing to provide a $30,000,000 senior secured term loan facility to AMH LLC, guaranteed by AGMG, to fund the share purchases contemplated by the Offer. The commitment letter provided for an interest rate of LIBOR plus 3.25% (with a 0.50% LIBOR floor), a three-year maturity from funding, and a commitment fee of 0.50% per annum on the undrawn commitment amount. The commitment was originally set to expire on December 31, 2021, with one 90-day extension option to March 31, 2022.
June 1 through August 25, 2021. AMH LLC (and prior to its formation, AGMG acting through an agent) acquired 980,000 shares of Pinnacle common stock in a series of open-market purchases at an average price of $3.28 per share, for an aggregate cost of $3,214,400. These purchases were conducted in a manner intended to minimize market impact and were executed through multiple broker-dealers over the approximately 12-week period.
August 26, 2021. AMH LLC filed a Schedule 13D with the SEC, disclosing its beneficial ownership of 980,000 shares (4.9% of outstanding) and its intention to evaluate strategic alternatives with respect to its investment in Pinnacle, including the possible commencement of a tender offer.
August 30, 2021. A Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") premerger notification (Transaction Number 20211892) was filed with the Federal Trade Commission and the Antitrust Division of the Department of Justice. The filing fee was $45,000.
September 1, 2021. The board of directors of Aurelius Global Media Group PLC adopted a resolution authorizing the commencement of the tender offer for Pinnacle shares through AMH LLC, on the terms subsequently set forth in the Offer to Purchase.
September 8, 2021. The Offer was formally commenced. AMH LLC filed the Schedule TO with the SEC (File No. 005-92847), including as exhibits the Offer to Purchase, the Letter of Transmittal, and other solicitation materials. The Offer to Purchase was disseminated to Pinnacle shareholders through the information agent, Ridgeway Proxy Advisors LLC.
September 10, 2021. Pinnacle filed a preliminary Schedule 14D-9 with the SEC, indicating that Pinnacle's board of directors was evaluating the Offer and had not yet made a recommendation to shareholders.
September 15, 2021. The HSR Act waiting period was terminated early by the FTC, and no second request for additional information or documentary material was issued. This clearance permitted the Offer to proceed without further antitrust delay.
September 22, 2021. The SEC's Division of Corporation Finance issued a comment letter containing four comments on the Schedule TO, authored by Katherine Wylie, Special Counsel in the Office of Mergers and Acquisitions. The comments addressed, among other things, disclosure regarding the financing arrangements, the relationship between the number of shares sought and the trigger threshold of Pinnacle's shareholder rights plan, and certain forward-looking statements in the Offer to Purchase.
September 29, 2021. Pinnacle's board of directors adopted a Section 382 NOL Preservation Shareholder Rights Plan (the "Rights Plan" or "pill"). The Rights Plan establishes an ownership trigger threshold of 35%, with an exercise price of $18.00 per right and Continental Fiduciary Services, Inc. serving as rights agent. The Rights Plan has a three-year term, expiring on September 29, 2024, unless earlier terminated, redeemed, or exchanged by Pinnacle's board. The stated purpose of the Rights Plan is to protect approximately $47,300,000 in federal net operating loss carryforwards that could be limited or eliminated in the event of an "ownership change" as defined in Section 382 of the Internal Revenue Code.
October 1, 2021. Pinnacle filed a definitive Schedule 14D-9 with the SEC in which Pinnacle's board of directors unanimously recommended that shareholders NOT tender their shares in the Offer. Pinnacle's Schedule 14D-9 was prepared with the assistance of Pinnacle's legal counsel, Caldwell Burris & Shoemaker LLP (Rebecca Fontaine, lead partner), and its financial advisor, Hargrove Meredith & Co. (Nathaniel Pace, lead banker). The board's stated reasons for the recommendation included the inadequacy of the Offer price, the Offer's partial nature, the absence of any premium to the Rights Plan trigger threshold, and the potential adverse tax consequences to remaining shareholders.
October 6, 2021. Calderwood & Harkness LLP filed Amendment No. 1 to the Schedule TO on behalf of AMH LLC, responding to the four SEC staff comments and making corresponding revisions to the Offer to Purchase and related materials.
October 8, 2021. The initial 20-business-day offer period expired. As of that date, the number of shares tendered remained well below the minimum tender condition. AMH LLC elected to extend the Offer for an additional period through November 5, 2021.
October 11, 2021. Calderwood & Harkness LLP delivered a letter to Caldwell Burris & Shoemaker LLP on behalf of Aurelius, proposing a framework for a standstill agreement and governance arrangements, including the potential for one or more board observer or designee positions in exchange for a commitment by Aurelius to cap its ownership at or below the 35% pill threshold. No substantive response was received from Pinnacle or its advisors.
November 2, 2021. As of the close of business on this date, approximately 1,420,000 shares had been validly tendered and not withdrawn, representing approximately 7.1% of outstanding shares — far below the 5,000,000-share minimum tender condition.
November 5, 2021. The extended offer period expired. The minimum tender condition was not satisfied, and AMH LLC did not waive the condition. The Offer lapsed without acceptance of any tendered shares.
November 12, 2021. AMH LLC filed Amendment No. 2 to the Schedule TO, disclosing that the Offer had lapsed without acceptance of any shares for payment. The amendment noted that the Offer was not being formally withdrawn or terminated at that time, and that AMH LLC was evaluating its options. All shares that had been tendered were returned to tendering holders by Continental Fiduciary Services, Inc., the depositary.
C. Pinnacle's Defensive Response
Pinnacle's board of directors responded to the Offer with a comprehensive defensive strategy that, in our assessment, was a significant factor in the Offer's failure to attract sufficient tenders. The key elements of Pinnacle's defensive posture are as follows:
Shareholder Rights Plan. The adoption of the Rights Plan on September 29, 2021, approximately three weeks after the Offer commenced, was the most consequential defensive action taken by Pinnacle's board. The Rights Plan was specifically calibrated with a 35% ownership trigger, creating a narrow margin above Aurelius's stated target of 34.9%. This calibration was almost certainly intentional, designed to maximize the risk that any successful tender, when combined with Aurelius's existing 4.9% open-market position, could result in total ownership exceeding the trigger threshold. The Rights Plan thus forced Aurelius into a position where the mathematical precision of tendering exactly 6,980,050 shares became critical, and any over-tendering (even modest) could have triggered the pill.
Board Recommendation Against Tendering. Pinnacle's board, chaired by Franklin Osei, with independent directors Miriam Castellano and Tyrone Nash, unanimously recommended against tendering in the definitive Schedule 14D-9 filed on October 1, 2021. The board retained Caldwell Burris & Shoemaker LLP as legal counsel (with Rebecca Fontaine as lead partner, supported by David Kwan) and Hargrove Meredith & Co. as financial advisor (with Nathaniel Pace as lead banker). The board's stated bases for the recommendation included that the Offer price was inadequate, that the partial nature of the Offer created risks for non-tendering shareholders, and that the Offer was opportunistically timed to take advantage of a temporary decline in Pinnacle's share price.
NOL Preservation Justification. The board's stated justification for the Rights Plan was the preservation of approximately $47,300,000 in federal net operating loss carryforwards under Section 382 of the Internal Revenue Code. An ownership change under Section 382 could significantly limit Pinnacle's ability to use these NOLs to offset future taxable income. While this is a legitimate justification that has been recognized by Delaware courts in cases such as Versata Enterprises, Inc. v. Selectica, Inc., 5 A.3d 586 (Del. 2010), the defensive effect of the Rights Plan extends well beyond NOL preservation and operates as a conventional anti-takeover measure.
Non-Engagement. Pinnacle's board and its advisors declined to engage constructively with Aurelius or Calderwood & Harkness LLP. The October 11, 2021 letter from Calderwood & Harkness to Caldwell Burris & Shoemaker proposing a standstill and governance framework received no substantive response. This non-engagement posture suggests that Pinnacle's management team, led by CEO Jordan Cavanaugh and co-founder and Chief Content Officer Victor Huang, is firmly opposed to Aurelius's involvement in the company and that the board is aligned with management's position.
D. Current Aurelius Position in Pinnacle
AMH LLC currently holds 980,000 shares of Pinnacle common stock, acquired through open-market purchases between June 1 and August 25, 2021. The key metrics of this position are as follows:
The Schedule 13D filed on August 26, 2021 remains on file with the SEC and discloses Aurelius's beneficial ownership and its plans regarding the Pinnacle investment. Under Rule 13d-2 of the Exchange Act, Aurelius is required to promptly amend the Schedule 13D in the event of any material change in the facts set forth therein, including changes in the amount of securities beneficially owned, changes in plans or proposals, and changes in the identity or background of controlling persons. No amendment to the Schedule 13D has been filed since the original filing, as no material change has occurred. However, if Aurelius determines to pursue any of the strategic options discussed in this memorandum, an amendment will likely be triggered, and Calderwood & Harkness should be consulted before any action is taken.
The slight increase in Pinnacle's shares outstanding from 20,000,000 to 20,400,000 — resulting from equity compensation issuances — has diluted AMH LLC's percentage ownership from 4.9% to approximately 4.8%. This dilution is modest and does not materially alter the ownership arithmetic relevant to the Rights Plan or future tender offer calculations.
E. Financing Status
The financing arrangements for the Offer were provided by Brindoval National Bank, N.A. under a commitment letter dated August 20, 2021 (reference CL-2021-MTC-00487). The key terms and current status of the commitment are as follows:
Commitment Amount. $30,000,000 in the form of a senior secured term loan to AMH LLC, with a guaranty by AGMG.
Interest Rate. LIBOR plus 3.25%, with a 0.50% LIBOR floor. Based on current LIBOR rates, the all-in interest rate would be approximately 3.75%.
Maturity. Three years from the date of funding.
Commitment Fee. 0.50% per annum on the undrawn commitment amount, payable quarterly. At a $30,000,000 commitment amount, this equates to $150,000 per year, or approximately $411 per day.
Fees Paid to Date. Approximately $75,000 in commitment fees have been paid to Brindoval since the execution of the commitment letter.
Commitment Expiration. The commitment was originally set to expire on December 31, 2021. The commitment letter provides for one 90-day extension option, which, if exercised, would extend the commitment to March 31, 2022. As of the date of this memorandum, no further extensions have been sought, and we understand from Thomas Brierly (Brindoval, Media & Telecom Lending Group) that Brindoval would not offer additional extensions beyond March 31, 2022 absent a concrete plan to draw on the facility.
Decision Point. The deadline for exercising the 90-day extension to March 31, 2022 is imminent — the extension must be exercised on or before December 31, 2021, which is 16 days from the date of this memorandum. The cost of the extension would be approximately $37,500 in additional commitment fees (90 days × $150,000 / 365 days). As discussed in greater detail in Section V.D below, we do not recommend exercising the extension unless Aurelius has a realistic prospect of relaunching the Offer in Q1 2022, which we believe is not the case given current circumstances. We therefore recommend that the commitment be allowed to lapse on December 31, 2021.
F. Costs Incurred to Date
The following is a summary of costs incurred by Aurelius in connection with the Offer and related activities:
These costs are sunk and non-recoverable regardless of which strategic option Aurelius pursues. The outstanding receivable of $22,400 owed to Calderwood & Harkness reflects fees billed but not yet paid as of the date of this memorandum.
It should be noted that the $600,000 success fee payable to Strathmore Corporation Harcourt Partners under the terms of its advisory engagement was conditioned upon the successful acquisition of shares through the Offer and therefore has not been earned. The disposition of this engagement is discussed further in Section VII below.
III. Option A: Formal Withdrawal and Termination
A. Mechanics Under Rule 14d-7
Rule 14d-7(a)(1) under the Exchange Act permits a bidder to withdraw a tender offer at any time while the offer remains open. Additionally, although the precise regulatory treatment of a tender offer that has "lapsed without acceptance" is somewhat novel, there is no impediment under the SEC's rules to the formal withdrawal and termination of a tender offer that has expired but has not been formally terminated. The appropriate procedure would be as follows:
Schedule TO Amendment. AMH LLC would file a final amendment to the Schedule TO (Amendment No. 3 to Schedule TO, File No. 005-92847) with the SEC, disclosing the formal withdrawal and termination of the Offer. The amendment would state that the Offer has been terminated, that no shares were accepted for payment, that all previously tendered shares have been returned to tendering holders, and that AMH LLC does not intend to recommence the Offer at this time. The amendment would be filed on EDGAR in the ordinary course.
Notice to Service Providers. Formal notice of the termination would be provided to Continental Fiduciary Services, Inc. (depositary; contact: Lisa Pryor) and Ridgeway Proxy Advisors LLC (information agent; contact: Martin Cheswick). Since all tendered shares have already been returned to holders, the procedural burden on the depositary would be minimal. Ridgeway Proxy Advisors would be notified to cease any further activity in connection with the Offer.
Press Release. A press release would be issued announcing the formal termination of the Offer, and the press release would be filed with the SEC as an exhibit to Amendment No. 3. The press release would be disseminated to Pinnacle shareholders through customary channels.
The mechanics of withdrawal are straightforward and could be accomplished within a matter of days.
B. Consequences of Formal Withdrawal
Formal withdrawal of the Offer would have the following principal consequences:
Elimination of Ongoing Schedule TO Obligations. The primary regulatory benefit of formal withdrawal is the elimination of any ongoing obligation to file further amendments to the Schedule TO in the event of material changes. While the dormant posture currently imposes minimal ongoing burden (as discussed in Section V.B below), formal withdrawal would provide complete regulatory clarity and eliminate any residual risk of non-compliance with the SEC's tender offer rules.
Schedule 13D Implications. Formal withdrawal of the Offer would itself constitute a material change in AMH LLC's plans and intentions with respect to its Pinnacle investment, triggering an obligation to promptly amend the Schedule 13D under Rule 13d-2(a). The amended Schedule 13D would disclose that the tender offer has been formally terminated and would describe AMH LLC's current plans regarding its 980,000-share position. To the extent that Aurelius intends to continue holding the shares as a passive investment or is evaluating its options, the amended Schedule 13D would need to describe these intentions with reasonable specificity.
Clean Regulatory Posture. Formal withdrawal would provide a clean and unambiguous regulatory posture. There would be no outstanding tender offer to monitor, amend, or revive. Aurelius's only ongoing SEC reporting obligation with respect to its Pinnacle position would be the Schedule 13D, which is a well-understood obligation with clear amendment triggers.
Signal to Pinnacle and the Market. Pinnacle's board and its advisors at Caldwell Burris & Shoemaker and Hargrove Meredith would almost certainly view a formal withdrawal as a retreat. This perception could weaken Aurelius's negotiating leverage in any future approach to Pinnacle's board, as Pinnacle would reasonably conclude that its defensive measures (particularly the Rights Plan) had achieved their intended purpose of deterring Aurelius. The market more broadly may interpret the withdrawal as a loss of interest by Aurelius, which could have a further depressive effect on Pinnacle's share price.
No Penalty or Liability. There is no penalty or liability under the Exchange Act or the SEC's rules for the formal withdrawal of a tender offer. The SEC staff would likely view the withdrawal as a routine and appropriate conclusion to the Offer.
Future Optionality. Formal withdrawal does not permanently preclude Aurelius from launching a new tender offer for Pinnacle shares at a future date. However, any new offer would require a new Schedule TO filing, new solicitation materials, and fresh SEC review. Aurelius would retain the right to purchase shares in the open market, subject to the 35% trigger under the Rights Plan and ongoing Schedule 13D disclosure requirements.
Sunk Costs. The approximately $970,800 in sunk costs described in Section II.F above are non-recoverable regardless of whether the Offer is formally withdrawn, relaunched, or maintained in a dormant posture.
C. Impact on Future Acquisition Efforts
If Aurelius were to formally withdraw the Offer and later determine to pursue a new tender offer for Pinnacle shares, the following considerations would apply:
New Schedule TO. A new Schedule TO would need to be filed with the SEC, accompanied by a new Offer to Purchase, Letter of Transmittal, and related solicitation materials. While some of the prior materials could be adapted, a new offer would need to reflect current circumstances, including updated financial information for both Aurelius and Pinnacle, revised offer terms, and updated risk factors and legal disclosures.
New HSR Filing. A new premerger notification under the HSR Act would likely be required. The early termination of the waiting period granted on September 15, 2021 was specific to the transaction as described in the original notification. A new tender offer, even for the same target, would constitute a new transaction requiring a new filing. HSR Act filing thresholds are adjusted annually, and the applicable thresholds at the time of a new filing would govern. The filing fee ($45,000 for the original filing) could also change depending on the size of the contemplated transaction.
New Financing. A new debt financing commitment would be required, as the Brindoval commitment will lapse on December 31, 2021 (or March 31, 2022 if the extension is exercised). As discussed in Section IV.B below, Brindoval has indicated a willingness to consider a new commitment, but terms would need to be renegotiated.
Market Perception. Formal withdrawal may paradoxically benefit Aurelius in one respect: if the market interprets the withdrawal as a definitive end to Aurelius's interest in Pinnacle, Pinnacle's share price could decline further from its already-depressed level of $2.85. This could benefit Aurelius in future open-market accumulation by reducing the cost of acquiring additional shares. However, this benefit is speculative and would need to be weighed against the loss of strategic leverage described above.
D. Assessment
Advantages:
• Regulatory clarity and elimination of ongoing Schedule TO compliance burden
• Clean posture with the SEC
• No further fees associated with dormant Schedule TO maintenance
• Simplifies Aurelius's ongoing SEC reporting to the Schedule 13D alone
Disadvantages:
• Loss of optionality — the dormant Offer can be revived or amended, whereas a formally withdrawn offer cannot
• Negative market signal suggesting disengagement from Pinnacle
• Requires an amendment to the Schedule 13D reflecting revised plans
• Any future tender offer would need to start from scratch (new Schedule TO, new HSR filing, new financing)
On balance, we do not recommend formal withdrawal at this time. The disadvantages, particularly the loss of optionality and the negative signaling effect, outweigh the modest regulatory benefits. However, formal withdrawal should remain available as an option if Aurelius determines at a future date that it no longer has any interest in pursuing the Pinnacle opportunity.
IV. Option B: Amendment and Relaunch on Revised Terms
A. Revised Offer Terms
Pinnacle's current share price of approximately $2.85 is significantly below both the original undisturbed price of $3.42 per share and the Offer price of $4.01 per share. This decline in Pinnacle's share price creates an opportunity for Aurelius to potentially relaunch the Offer at a lower per-share price while still offering a meaningful premium to the current trading price. We have considered the parameters of a revised offer as follows:
Revised Price Range. A revised offer in the range of $3.25 to $3.75 per share would represent a premium of approximately 14% to 32% over the current trading price of $2.85, which is within the range of premiums typically observed in partial tender offers for small- and mid-cap media companies. At the low end of this range ($3.25), the implied 100% equity value would be approximately $66,300,000 (20,400,000 × $3.25); at the high end ($3.75), the implied equity value would be approximately $76,500,000. These valuations would represent a discount to the original implied equity value of $80,200,000, reflecting the deterioration in Pinnacle's share price and, presumably, investor sentiment regarding the company's near-term prospects.
Filing Requirements. A revised offer would require the preparation and filing of new or amended solicitation materials, including a revised Offer to Purchase and Letter of Transmittal. The filing would take the form of either an Amendment No. 3 to the existing Schedule TO (if the SEC staff takes the position that the dormant Offer remains pending and can be amended) or a new Schedule TO filing. In either case, the revised materials would be subject to SEC review and comment. We would anticipate filing the revised materials and promptly seeking a meeting or telephone conference with the SEC staff to discuss any issues.
Re-Engagement of Service Providers. Continental Fiduciary Services, Inc. (depositary; Lisa Pryor) and Ridgeway Proxy Advisors LLC (information agent; Martin Cheswick) would need to be re-engaged for the revised offer. New engagement letters and fee arrangements would be required.
Rights Plan Considerations. Any relaunch of the Offer must carefully address the mechanics of the Rights Plan. The original Offer sought 6,980,050 shares, which, combined with AMH LLC's existing 980,000-share position, would have resulted in total ownership of 7,960,050 shares, or approximately 39.8% of the 20,000,000 shares then outstanding — well above the 35% pill trigger. The original Offer to Purchase addressed this issue by noting that Aurelius would not accept for payment a number of shares that, combined with its existing position, would exceed 34.9% of outstanding shares. However, the increase in Pinnacle's outstanding shares to 20,400,000 changes the arithmetic.
Two approaches are available to manage the Rights Plan constraint in a revised offer:
(i) Reduce the Number of Shares Sought. Aurelius could reduce the maximum number of shares sought to approximately 6,120,000, so that combined with the existing 980,000-share position, total ownership would be approximately 7,100,000 shares, or 34.8% of the current 20,400,000 shares outstanding — just below the 35% pill trigger. This approach would require careful calibration and would leave no room for error; any increase in outstanding shares (e.g., from additional equity compensation issuances) could push total ownership closer to or above the trigger.
(ii) Negotiate an Exemption from the Rights Plan. Aurelius could seek to negotiate with Pinnacle's board for an exemption from the Rights Plan, permitting Aurelius to accumulate shares above the 35% trigger without triggering the dilutive rights. This approach is preferable but requires the cooperation of Pinnacle's board, which has demonstrated no willingness to engage with Aurelius to date. The Rights Plan, by its terms, permits the board to exempt specific transactions or persons from the trigger provisions, but the board has sole discretion in this regard.
B. Financing Requirements
As noted above, the Brindoval National Bank commitment is scheduled to expire on December 31, 2021, with an available 90-day extension to March 31, 2022. Any relaunch of the Offer after the lapse of the Brindoval commitment would require fresh financing.
Thomas Brierly of Brindoval's Media & Telecom Lending Group has indicated informally that Brindoval would be willing to consider a new commitment, but that the terms would need to be renegotiated to reflect changed market conditions, including changes in interest rates, credit spreads in the leveraged lending market, and Pinnacle's deteriorated financial performance. It is possible that a new commitment would carry a higher interest rate or more restrictive covenants than the original commitment.
Alternative lenders could also be explored. Given the relatively modest size of the required financing ($20,000,000 to $25,000,000, depending on the revised offer price and the number of shares sought), this transaction should be financeable by a range of middle-market lending institutions. However, the process of securing new financing would require time and would entail additional commitment fees and legal costs.
Cost Estimate. New commitment fees would be in the range of $100,000 to $200,000 depending on the commitment amount and fee structure. Legal fees for financing documentation would be in the range of $50,000 to $75,000. These costs would be in addition to the sunk costs already incurred.
C. Regulatory Considerations
A relaunched offer would trigger several regulatory requirements:
HSR Act. A new or supplemental HSR Act filing would likely be required. The early termination granted on September 15, 2021 was specific to the transaction as described in the original notification, and a materially revised offer (whether in terms of price, number of shares sought, or both) would constitute a new transaction for HSR purposes. The filing fee, currently $45,000 for transactions valued at $92.0 million to $184.0 million (the most recently available thresholds at the time of the original filing), may change if the applicable thresholds are adjusted before the filing is made.
SEC Review. A materially amended offer will receive fresh scrutiny from the SEC's Division of Corporation Finance, Office of Mergers and Acquisitions. Based on our experience with the four comments received on the original Schedule TO (addressed in Amendment No. 1), we would anticipate a new comment letter, potentially with additional comments reflecting the novel circumstances of a tender offer being relaunched after a dormant period. We recommend that any relaunch be accompanied by robust disclosure addressing the reasons for the original Offer's failure, the basis for revised terms, and the current status of the Rights Plan.
UK Regulatory Considerations. Dunmore Asset Advisors Chambers LLP (Alistair Drummond) should be consulted on any LSE disclosure obligations that may be triggered by the relaunch of a U.S. tender offer by a UK-listed company. While the UK Takeover Code has limited application to acquisitions of shares in a U.S. target company, a voluntary consultation with the Takeover Panel may be prudent to ensure that no unexpected regulatory issues arise. Additionally, Aurelius's existing media holdings should be assessed for any changes since the original HSR filing that could raise competitive overlap concerns.
D. Pinnacle's Likely Response
A relaunched offer would almost certainly be met with renewed resistance from Pinnacle's board and management. The following factors inform this assessment:
Rights Plan Remains in Effect. The Rights Plan does not expire until September 29, 2024, providing Pinnacle's board with nearly three more years of protection at the 35% trigger level. Pinnacle's board could also amend the Rights Plan to lower the trigger threshold below 35%, further constraining Aurelius's ability to accumulate shares. While any such amendment would face legal challenge under Delaware law, particularly if it is adopted solely as a defensive measure without a legitimate business justification, the litigation risk and expense of challenging the amendment would be significant.
Board Posture. Pinnacle's board has demonstrated a clear willingness to resist Aurelius's overtures. The definitive Schedule 14D-9 recommendation against tendering was unanimous, and Pinnacle's advisors declined to respond substantively to Calderwood & Harkness's October 11 standstill proposal. We see no reason to expect a change in this posture in the near term.
Management Opposition. Pinnacle CEO Jordan Cavanaugh and co-founder and Chief Content Officer Victor Huang appear firmly opposed to Aurelius's involvement in the company. As co-founders with substantial influence over the company's culture and strategic direction, their opposition is a significant obstacle to any acquisition strategy, whether through a tender offer or a negotiated transaction.
Additional Defensive Measures. Pinnacle's board could adopt additional defensive measures in response to a relaunched offer, including accelerated equity compensation issuances (further diluting Aurelius's percentage ownership), entry into defensive joint ventures or licensing arrangements that could impair Pinnacle's standalone value to an acquirer, or the exploration of a "white knight" transaction with a third party.
E. Assessment
Advantages:
• Opportunity to acquire Pinnacle shares at a lower valuation than the original Offer, reflecting the decline in Pinnacle's share price
• Demonstrates continued strategic interest and commitment to the Pinnacle opportunity
• Could pressure Pinnacle's board to engage in negotiations
Disadvantages:
• High incremental cost (new financing, SEC filings, advisor fees, likely exceeding $500,000 in incremental expenses)
• Pinnacle's defenses remain firmly in place for nearly three more years
• Significant risk of a second failed tender, which would further undermine Aurelius's credibility and negotiating leverage
• Shareholders who declined to tender in the first Offer may be even more reluctant to tender in a second offer, particularly at a lower price
• Substantial time and resource commitment for Aurelius's management team and advisors
Timing. We do not recommend relaunching the Offer in the near term. The combination of Pinnacle's intact defensive posture, the absence of any engagement by Pinnacle's board, and the costs and risks of a second failed tender make relaunch inadvisable at this time. A relaunch should be considered only if financing market conditions improve materially, if Pinnacle's business or share price dynamics shift in a manner that increases the likelihood of shareholder support, or if changes in Pinnacle's board composition or defensive posture create a more favorable environment for engagement.
V. Option C: Continued Dormancy with Monitoring (Recommended)
A. Current Legal Status
The Offer is currently in an unusual but not unprecedented posture. Amendment No. 2 to the Schedule TO, filed on November 12, 2021, disclosed that the Offer had "lapsed without acceptance" but was not formally withdrawn or terminated. This posture leaves the Offer in a state of dormancy: it is neither active nor terminated. AMH LLC has not accepted any shares for payment, all tendered shares have been returned to holders, and the Offer is not currently open for tenders.
This dormant status is permissible under the SEC's tender offer rules. While the rules contemplate that a tender offer will either be completed (with acceptance and payment for tendered shares) or withdrawn (with return of tendered shares and formal termination), they do not require a bidder to formally withdraw an offer that has expired without satisfaction of its conditions. The SEC staff has not, to our knowledge, taken a position that a dormant tender offer must be affirmatively terminated within any particular timeframe.
Amendment No. 2 adequately disclosed the current status of the Offer to the market and to the SEC. The disclosure was transparent: it stated that the minimum tender condition was not satisfied, that no shares were accepted for payment, that tendered shares were returned, and that AMH LLC was evaluating its options. This disclosure satisfies Aurelius's obligations under the Exchange Act and the SEC's tender offer rules.
The dormant posture preserves optionality. Aurelius retains the ability to revive the Offer by filing an amendment setting forth new terms and a new expiration date, to amend the Offer on different terms, or to formally withdraw and terminate the Offer at any time. This flexibility is the principal advantage of dormancy over formal withdrawal.
B. Ongoing SEC Reporting Obligations
The dormant posture does not relieve Aurelius of all ongoing SEC reporting obligations. The following obligations remain in effect and must be monitored:
Schedule TO. Further amendments to the Schedule TO are required upon any "material change" in the information previously disclosed. Rule 14d-6(c) under the Exchange Act provides that if a material change occurs in the information set forth in the Schedule TO, the bidder must promptly disclose the change in an amendment. What constitutes a "material change" is a facts-and-circumstances inquiry, but it would include, for example: a decision by Aurelius to formally withdraw the Offer; a decision to relaunch or amend the Offer; a material change in Aurelius's financial condition that would affect its ability to fund the Offer; a material corporate event at either Aurelius or Pinnacle that affects the prior disclosures in the Schedule TO; or a material change in Aurelius's plans or intentions regarding its investment in Pinnacle.
Schedule 13D. The 980,000-share position held by AMH LLC is reported on the Schedule 13D filed on August 26, 2021. Under Rule 13d-2(a) of the Exchange Act, an amendment to the Schedule 13D must be filed "promptly" (generally interpreted as within two business days in practice, though the rule does not specify a precise timeframe) upon any "material change" in the information set forth therein. Material changes include, without limitation: the acquisition or disposition of 1% or more of the outstanding shares of Pinnacle common stock; any material change in AMH LLC's plans, proposals, or intentions regarding Pinnacle (including a decision to relaunch, amend, or withdraw the Offer, to pursue a negotiated transaction, to initiate a proxy contest, or to resume open-market purchases); and any change in the identity, background, or financial condition of the reporting persons that would be material to the disclosure in the Schedule 13D.
Recommendation. We recommend that Aurelius implement a quarterly internal review process, coordinated between Mr. Pemberton's office and Calderwood & Harkness, to assess the adequacy of the disclosures in the Schedule TO and Schedule 13D and to identify any events that may trigger an amendment obligation. As part of this process, Calderwood & Harkness will monitor Pinnacle's SEC filings (Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K) for developments that could trigger amendment obligations for Aurelius's filings.
Potential Liability. Failure to disclose material changes in the Schedule TO or Schedule 13D could result in liability under Section 14(e) of the Exchange Act (in the case of the Schedule TO) or Section 13(d) of the Exchange Act (in the case of the Schedule 13D). These risks are manageable with a disciplined internal process and regular engagement with outside counsel, and we do not view them as a significant deterrent to the continued dormancy strategy.
C. Strategic Rationale for Dormancy
Continued dormancy is supported by a compelling strategic rationale centered on the following considerations:
Rights Plan Expiration. The single most significant catalyst on the horizon is the expiration of Pinnacle's Rights Plan on September 29, 2024, approximately 33 months from the date of this memorandum. If the Rights Plan expires and Pinnacle's board does not renew it — or if a renewal is successfully challenged — Aurelius would be free to accumulate shares above the 35% trigger level without triggering the dilutive rights provisions. The absence of a pill would dramatically alter the competitive dynamics of any future acquisition effort, removing the principal defensive barrier that contributed to the failure of the original Offer.
Of course, there is a risk that Pinnacle's board will renew the Rights Plan upon or before its expiration. However, the legal landscape regarding shareholder rights plans has evolved, and institutional shareholders and proxy advisory firms have become increasingly skeptical of long-term pills that are adopted without shareholder approval. Pinnacle's current Rights Plan was adopted unilaterally by the board and has not been submitted to a shareholder vote. A board decision to renew the pill would face scrutiny from ISS and Tarrant Partners LLC, and could become a rallying point for dissident shareholders in a proxy contest.
Share Price Decline. Pinnacle's share price has declined approximately 17% from its undisturbed level of $3.42 to approximately $2.85. This decline suggests that the market has de-rated the stock, possibly reflecting disappointment with Pinnacle's operating performance, the withdrawal of the tender offer premium, or broader market conditions in the media and entertainment sector. Continued weakness in Pinnacle's share price may make shareholders more receptive to a future offer, particularly one that offers a meaningful premium to a depressed trading level.
Share Count. The slight increase in Pinnacle's shares outstanding from 20,000,000 to 20,400,000, attributable to equity compensation issuances, is modest and does not materially alter the ownership math. AMH LLC's percentage ownership has declined only marginally, from 4.9% to approximately 4.8%, and the cost of accumulating additional shares to reach any particular ownership threshold has increased only slightly.
Business Monitoring. The dormant period provides Aurelius with a valuable opportunity to monitor Pinnacle's business performance, content library growth, streaming licensing pipeline, and financial condition. Pinnacle's fiscal year 2020 results (revenue of $112,400,000; EBITDA of $14,600,000) provide a baseline, and updated financial results reported in Pinnacle's quarterly and annual SEC filings will inform any future offer pricing. If Pinnacle's financial performance deteriorates, the case for a lower offer price strengthens; if it improves, a higher offer price may be warranted.
Continued Economic Exposure. Aurelius's existing 4.8% stake in Pinnacle provides continued economic exposure to any upside in Pinnacle's share price. If Pinnacle's business prospects improve, the value of this stake increases, partially offsetting the sunk costs of the failed Offer. Conversely, if Pinnacle's share price continues to decline, the unrealized loss on the position increases, but the cost of accumulating additional shares decreases.
D. Costs of Dormancy
The costs of maintaining the dormant posture are minimal compared to the costs of the other strategic options:
Legal Fees. Calderwood & Harkness's dormant-period fees have been approximately $38,200 from November 2021 through the present. We anticipate that ongoing annual costs for monitoring, periodic advice, and SEC filing reviews will be in the range of $15,000 to $25,000 per year, assuming no material developments requiring substantial legal work. This represents a fraction of the costs associated with either a formal withdrawal (which would require Schedule 13D amendment preparation and filing) or a relaunch (which would require substantial new work on Schedule TO amendments, financing documentation, and SEC comment letter responses).
Financing Costs. If the Brindoval commitment is allowed to lapse on December 31, 2021, no further financing costs will be incurred. The commitment has already cost approximately $75,000 in fees, and the 90-day extension to March 31, 2022 would cost an additional approximately $37,500 in commitment fees (calculated as 90 days × $150,000 per year / 365 days). We recommend against exercising the extension, as discussed below.
Brindoval Extension Decision. The decision on whether to exercise the 90-day extension of the Brindoval commitment is the most time-sensitive action item arising from this memorandum. The extension must be exercised on or before December 31, 2021. The cost is approximately $37,500, and the only benefit is the preservation of the financing commitment through March 31, 2022 — valuable only if there is a realistic prospect of relaunching the Offer in Q1 2022. For the reasons discussed in Sections IV and V of this memorandum, we do not believe a Q1 2022 relaunch is advisable, and we therefore recommend allowing the Brindoval commitment to lapse on December 31, 2021 without exercising the extension. This recommendation is subject, of course, to any contrary views from Mr. Ashford or the broader Aurelius management team regarding the strategic timeline.
E. Risks of Continued Dormancy
While we recommend continued dormancy, it is important to identify and acknowledge the risks associated with this approach:
Pinnacle Defensive Actions. Pinnacle could take actions during the dormant period that reduce the attractiveness or feasibility of a future acquisition. These could include dilutive equity issuances that increase the number of outstanding shares and raise the cost of accumulation; material asset sales or licensing transactions that diminish the value of Pinnacle's content library; the incurrence of additional debt that burdens Pinnacle's balance sheet; or the entry into a change-of-control transaction with a third-party acquirer. Any such actions would need to be carefully evaluated under the Schedule 13D and Schedule TO amendment triggers described above.
Rights Plan Renewal. Pinnacle's board could renew or replace the Rights Plan before or upon its September 29, 2024 expiration. A renewed or replacement pill could have a lower trigger threshold (e.g., 20% or 25%), further constraining Aurelius's ability to accumulate shares. As noted above, however, unilateral board adoption of a poison pill without shareholder approval faces increasing institutional shareholder and proxy advisory firm opposition, and Aurelius's position as a significant shareholder would give it standing to oppose such a renewal.
Regulatory Changes. The regulatory environment may change during the dormant period. The SEC has periodically considered revisions to its tender offer rules, and any changes could affect the procedural requirements for a future tender offer. Similarly, the HSR Act thresholds and review standards are periodically adjusted, and changes to the antitrust review process could affect the timeline or feasibility of a future offer. Additionally, potential changes to UK regulatory requirements — including any revisions to the LSE Disclosure and Transparency Rules or the UK Takeover Code — should be monitored by Dunmore Asset Advisors Chambers LLP.
Aurelius Strategic Drift. Over a 33-month monitoring period, Aurelius's own strategic priorities may shift. The media and entertainment landscape is evolving rapidly, and Pinnacle's strategic value to Aurelius may increase or decrease depending on developments in both companies and in the broader market. The 980,000-share position has an unrealized loss of approximately $421,400 at current prices, and this loss could widen if Pinnacle's share price continues to decline. While the position is relatively small in the context of Aurelius's overall portfolio, it represents a continuing allocation of capital and management attention.
Perception of Evasion. There is a modest risk that the SEC staff or market participants could view the continued dormancy as evasive or as a tactic to avoid making required disclosures. This risk is mitigated by the transparent disclosure in Amendment No. 2, which clearly described the Offer as having "lapsed without acceptance" and stated that AMH LLC was "evaluating its options." We believe this disclosure is adequate and that the dormant posture is defensible, but we recommend periodic assessment of whether additional disclosure is warranted based on evolving facts.
F. Assessment and Recommendation
Continued dormancy is, in our judgment, the most capital-efficient and strategically flexible option available to Aurelius at this time. It preserves the full range of strategic alternatives — withdrawal, relaunch, negotiated transaction, open-market accumulation, and proxy contest — at a fraction of the cost of any active alternative. The annual monitoring costs of $15,000 to $25,000 are trivial relative to the potential strategic value of the Pinnacle opportunity.
The expiration of the Rights Plan on September 29, 2024 is the single most significant catalyst on the horizon and should be the focal point of Aurelius's strategic planning with respect to Pinnacle. We recommend that Aurelius undertake a formal strategic re-evaluation no later than Q2 2024 — approximately six months before the pill's expiration — to assess the full range of options in light of then-current market conditions, Pinnacle's financial performance, the composition of Pinnacle's board, and the broader regulatory environment.
In the interim, Calderwood & Harkness will maintain a watching brief: monitoring Pinnacle's SEC filings, tracking market developments, observing changes in Pinnacle's board composition or management team, and advising promptly on any events that trigger amendment obligations for the Schedule TO or Schedule 13D. Dunmore Asset Advisors Chambers LLP (Alistair Drummond) should be consulted periodically regarding any LSE or UK regulatory implications that may arise during the dormant period.
VI. Option D: Alternative Acquisition Structures
In addition to the three options directly relating to the dormant tender offer, Aurelius may wish to consider alternative structures for achieving its strategic objective of acquiring a meaningful ownership position in Pinnacle. We have evaluated three such alternatives.
A. Negotiated Stock Purchase Agreement
The most attractive alternative to a hostile tender offer would be a negotiated transaction in which Aurelius acquires shares directly from Pinnacle or its existing shareholders through a privately negotiated arrangement. Such a transaction could take several forms:
Purchase of Treasury Shares or Private Placement. Aurelius could approach Pinnacle's board — either through Franklin Osei in his capacity as Chairman or directly to CEO Jordan Cavanaugh — to propose a private placement of newly issued shares by Pinnacle to AMH LLC. Such a transaction could be structured as an issuance of shares at a negotiated price, potentially at a discount to market, in exchange for a package of governance rights, including one or more board seats or observer positions, information rights, and a negotiated standstill agreement under which Aurelius would agree to limit its ownership to a specified threshold for a defined period.
Advantages. A negotiated transaction would avoid the complexity and cost of the tender offer regulatory framework. It would allow Aurelius to build a cooperative relationship with Pinnacle's board and management rather than pursuing an adversarial acquisition strategy. Governance rights obtained through negotiation could provide Aurelius with meaningful influence over Pinnacle's strategic direction. And a standstill agreement, while limiting Aurelius's ability to accumulate additional shares, would provide certainty and stability to both parties.
Disadvantages. The most significant obstacle to a negotiated transaction is Pinnacle's demonstrated unwillingness to engage with Aurelius. Calderwood & Harkness's October 11, 2021 letter to Caldwell Burris & Shoemaker LLP proposing a standstill and governance framework received no substantive response, and the tenor of Pinnacle's Schedule 14D-9 and public communications suggests that Pinnacle's board and management view Aurelius as an unwelcome presence. Unless and until this posture changes — whether through a change in board composition, a shift in Pinnacle's business circumstances, or the application of external pressure — a negotiated transaction appears unlikely to succeed.
Additionally, a private placement by Pinnacle to Aurelius could require shareholder approval under Nasdaq Listing Rule 5635, which requires shareholder approval for issuances that exceed certain thresholds (including issuances of 20% or more of the pre-transaction outstanding shares at a price below the "Minimum Price" as defined in the rule). Pricing negotiations would also be challenging given the divergent views on Pinnacle's value held by the two parties.
Timing. We do not recommend an immediate approach to Pinnacle for a negotiated transaction. Such an approach should be considered following the expiration of the Rights Plan, upon a change in Pinnacle's board composition, or upon a significant deterioration in Pinnacle's financial condition that might make the board more receptive to external capital.
B. Open-Market Accumulation
Aurelius could continue purchasing Pinnacle shares on the open market through AMH LLC, gradually increasing its ownership position over time.
Current Position. AMH LLC currently holds 980,000 shares, representing approximately 4.8% of the current 20,400,000 shares outstanding. At current market prices of approximately $2.85 per share,