CONFIDENTIAL — INTERNAL USE ONLY
CALDERWOOD & HARKNESS LLP 200 Park Avenue, 42nd Floor New York, New York 10166
INTERNAL MEMORANDUM — NEW MATTER OPENING
Date: February 14, 2024
Matter Number: 1018-00008
To: New Matters Committee / Office of the General Counsel, Calderwood & Harkness LLP
From: Oliver Mackenzie, Partner, Mergers & Acquisitions
Re: New Matter Opening — Penterra Pharmaceuticals Corp. / Proposed Acquisition of Veridian Biosciences, Inc.
This memorandum is submitted to the New Matters Committee and the Office of the General Counsel of Calderwood & Harkness LLP in accordance with the firm's policies and procedures governing the opening of new client matters. The purpose of this memorandum is to provide the Committee with all information necessary to evaluate and approve the opening of the above-referenced matter, including details regarding the client, the proposed engagement, the transaction, adverse and target parties, conflicts clearance, staffing, billing arrangements, and other pertinent considerations. Approval of this memorandum will authorize the formal opening of the matter on the firm's systems and the commencement of legal services in connection with the engagement described herein.
1. Client Information
Full Legal Name: Penterra Pharmaceuticals Corp.
Short Name / Abbreviations: Penterra; PPC
Entity Type: Corporation, incorporated in the State of Delaware
Publicly Traded: Yes; listed on the Nasdaq Global Select Market under the ticker symbol PPCA
Employer Identification Number (EIN): 22-3847561
Principal Executive Office:
1100 Meridian Boulevard, Suite 400 Princeton, New Jersey 08540
Delaware Registered Agent:
Capitol Corporate Services, Inc. 1675 South Ashbury Asset Advisors, Suite B Dover, Delaware 19901
Primary Client Contact:
Thomas F. Holbrook General Counsel & Secretary Penterra Pharmaceuticals Corp. 1100 Meridian Boulevard, Suite 400 Princeton, New Jersey 08540
Additional Client Contacts:
• Dr. Anand Rajagopal, Chief Executive Officer
• Catherine M. Burgess, Chief Financial Officer
• Natalie Reiner, Senior Vice President, Corporate Development
Board Chair: Margaret Liu Whitfield
Approximate Market Capitalization: Approximately $14.2 billion (as of the date of this memorandum, February 2024)
Fiscal Year 2023 Revenue: $4.87 billion
Business Description: Penterra Pharmaceuticals Corp. is a mid-cap specialty pharmaceutical company headquartered in Princeton, New Jersey. Penterra maintains a commercial portfolio of twelve (12) marketed products spanning the oncology, immunology, and rare disease therapeutic areas. The company has historically derived a significant portion of its revenue from its oncology franchise, supported by a growing immunology portfolio. Penterra's research and development efforts have been principally directed toward immuno-oncology, where the company has invested substantial capital in building an internal pipeline of novel therapeutic candidates. Notably, Penterra's immuno-oncology pipeline experienced a material setback in November 2023, when the company announced a Phase III futility analysis for its lead internal candidate, PPC-0921, a programmed death-ligand 1 (PD-L1) inhibitor being evaluated in combination therapy for advanced non-small cell lung cancer. The failure of PPC-0921 created a significant gap in Penterra's late-stage oncology pipeline and has been identified by Penterra's management and board of directors as a strategic imperative requiring prompt remediation through external business development activities. The proposed acquisition of Veridian Biosciences, Inc. described in this memorandum represents Penterra's primary strategic response to this pipeline shortfall.
Penterra is an existing client of the firm. Calderwood & Harkness LLP has previously represented Penterra in connection with various corporate and securities matters, including its 2021 public offering of 5.00% Senior Notes due 2031 and its 2022 acquisition of certain commercial assets from Helios Therapeutics, Inc. The firm's prior representations of Penterra are reflected on the firm's client database, and no adverse issues or concerns have been identified in connection with the proposed new engagement.
2. Matter Description
2.1 Nature of Matter
This matter involves the proposed acquisition by Penterra Pharmaceuticals Corp. ("Penterra" or the "Buyer") of one hundred percent (100%) of the outstanding capital stock of Veridian Biosciences, Inc. ("Veridian" or the "Target"), a privately held clinical-stage biotechnology company. The transaction is anticipated to be structured as an all-cash stock purchase, pursuant to which Penterra (or a wholly owned subsidiary of Penterra formed for the purpose of the acquisition) will acquire all issued and outstanding shares of common stock and preferred stock of Veridian from the existing stockholders of Veridian (collectively, the "Sellers").
2.2 Transaction Type
Stock Purchase (all-cash consideration). No stock-for-stock exchange, merger structure, or tender offer is currently contemplated, although the final structure remains subject to further analysis and negotiation.
2.3 Anticipated Purchase Price
The anticipated aggregate purchase price for 100% of the outstanding capital stock of Veridian is approximately $850 million to $950 million, based on preliminary discussions between the parties and their respective financial advisors. The final purchase price remains subject to negotiation and is expected to be determined following the completion of due diligence, valuation analysis by Penterra's financial advisor, Garrison Zanthor & Co., LLC, and arm's-length negotiations with the Sellers and their advisors. The purchase price may include customary adjustments for cash, indebtedness, working capital, and transaction expenses at closing, as well as potential contingent consideration (e.g., milestone-based earnout payments tied to regulatory or commercial achievements), the inclusion and structure of which are currently under discussion.
2.4 Target Company Information
Full Legal Name: Veridian Biosciences, Inc.
Short Name / Abbreviations: Veridian; VBI
Entity Type: Corporation, incorporated in the State of Delaware; privately held
Employer Identification Number (EIN): 84-2193047
Principal Office:
550 Gateway Drive Cambridge, Massachusetts 02142
Delaware Registered Agent:
Tidewater Registered Agents LLC 838 Walker Road, Suite 21-2 Dover, Delaware 19904
Key Management:
• Dr. Julian Marek, Chief Executive Officer & Co-Founder
• Dr. Priya Chandrasekaran, Chief Scientific Officer & Co-Founder
• Steven R. Kessler, Chief Financial Officer
• Rachel Stein-Goldberg, General Counsel
Background: Veridian Biosciences, Inc. was founded in 2016 by Dr. Julian Marek and Dr. Priya Chandrasekaran, both of whom are leading researchers in the field of bispecific antibody therapeutics. Veridian is a clinical-stage biotechnology company focused on the development of immuno-oncology therapeutics leveraging its proprietary T-cell engager platform, known as "VeriTCE." The VeriTCE platform is designed to generate bispecific antibodies capable of simultaneously engaging tumor-associated antigens and T-cell surface receptors, thereby redirecting the patient's own immune cells to selectively target and destroy cancer cells.
Veridian's lead product candidate is VRD-4187, a bispecific T-cell engager targeting DLL3-expressing tumors, with a principal focus on the treatment of small cell lung cancer ("SCLC"). VRD-4187 is currently being evaluated in a multi-center, open-label Phase II clinical trial (IND 154832; ClinicalTrials.gov Identifier: NCT05837291). Preliminary Phase I/Ib data presented at the American Society of Clinical Oncology (ASCO) Annual Meeting in June 2023 demonstrated encouraging signs of clinical activity, including a confirmed objective response rate (ORR) of approximately 34% in heavily pre-treated SCLC patients, with a manageable safety profile. These data constitute a significant component of the Target's current valuation.
Veridian has no product revenue to date. The company has been funded entirely through venture capital and growth equity financing, having raised approximately $420 million in aggregate across four rounds of equity financing (Series A through Series D). As of the most recent available information, Veridian employs approximately 148 full-time employees, the majority of whom are engaged in research and development, clinical operations, and regulatory affairs at its Cambridge, Massachusetts headquarters.
2.5 Strategic Rationale
The proposed acquisition of Veridian is intended to serve as a critical strategic initiative for Penterra in the wake of the Phase III futility analysis for PPC-0921 announced in November 2023. The failure of PPC-0921 eliminated Penterra's most advanced internal immuno-oncology candidate and created a significant gap in the company's late-stage development pipeline. Penterra's board of directors and senior management team have determined that the acquisition of an externally developed clinical-stage asset with strong proof-of-concept data represents the most efficient path to rebuilding the company's oncology pipeline and sustaining its competitive position in the immuno-oncology therapeutic area. The VRD-4187 candidate and the underlying VeriTCE platform technology are viewed as highly complementary to Penterra's existing commercial capabilities in oncology and its established relationships with key oncology investigators and treatment centers.
2.6 Board Authorization
On February 12, 2024, the Board of Directors of Penterra Pharmaceuticals Corp. authorized the exploration and pursuit of the proposed acquisition of Veridian Biosciences, Inc., including the engagement of outside legal counsel and financial advisors to conduct due diligence, negotiate the terms of a potential transaction, and take all actions reasonably necessary to advance the proposed acquisition. A copy of the relevant board resolution is maintained in the client file.
3. Scope of Engagement
Calderwood & Harkness LLP has been retained to represent Penterra Pharmaceuticals Corp. as buyer in all aspects of the proposed acquisition of Veridian Biosciences, Inc. The scope of the engagement includes, but is not limited to, the following:
1. Due Diligence. Conducting and coordinating comprehensive legal due diligence on Veridian Biosciences, Inc. and its subsidiaries (if any), covering, without limitation, the following areas: corporate organization and governance; capitalization and equity structure; intellectual property (patents, trade secrets, proprietary technology, and licensing arrangements); regulatory and FDA matters (including the status of IND 154832 and the Phase II clinical trial for VRD-4187); material contracts and commercial agreements; employment and employee benefits (including stock option plans and retention arrangements); tax matters (including federal, state, and local tax compliance, net operating loss carryforwards, and Section 382 analysis); environmental compliance; pending and threatened litigation, claims, and government investigations; insurance coverage; and real property and lease arrangements.
2. Transaction Documentation. Negotiation, drafting, and finalization of all definitive transaction agreements and ancillary documents, including, without limitation: the Stock Purchase Agreement (including representations, warranties, covenants, indemnification provisions, closing conditions, and termination rights); the Escrow Agreement; any Stockholder Consent or Written Consent of the Sellers; employment, consulting, non-competition, and retention agreements with key Veridian personnel; and any other ancillary agreements, certificates, and instruments required in connection with the closing of the transaction.
3. Financial Advisor Coordination. Coordinating with Penterra's financial advisor, Garrison Zanthor & Co., LLC, and with any other advisors retained by Penterra in connection with the transaction, to ensure alignment on valuation, deal structure, and transaction terms.
4. Regulatory Filings and Approvals. Preparing and/or coordinating the preparation of all required regulatory filings, including the pre-merger notification filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), in coordination with the firm's designated antitrust counsel. Advising on any other regulatory approvals or notifications that may be required under applicable federal, state, or foreign law.
5. Financing Documentation Review. Reviewing and advising on the terms of any committed acquisition financing, including any credit agreement, commitment letter, fee letter, or other financing documentation, to ensure consistency with the terms of the definitive acquisition agreement and the interests of Penterra.
6. Representation and Warranty Insurance. Supporting the procurement of a buyer-side representation and warranty ("R&W") insurance policy, including coordinating with the designated R&W insurance broker and underwriters, reviewing and commenting on the R&W insurance policy, and negotiating any exclusions or limitations.
7. Board Advisory and Corporate Governance. Advising the Board of Directors of Penterra on all corporate governance matters related to the proposed acquisition, including fiduciary duty considerations, disclosure obligations, and compliance with applicable Nasdaq listing requirements and federal securities laws.
8. Closing Mechanics and Post-Closing Integration Support. Managing all pre-closing and closing mechanics, including the preparation of closing checklists, coordination of closing deliverables, and facilitation of the closing of the transaction. Providing post-closing legal support as needed, including integration-related matters, post-closing adjustment disputes, and compliance with any post-closing covenants or obligations.
9. Related Litigation or Dispute Resolution. Providing legal representation in connection with any litigation, arbitration, or other dispute resolution proceedings that may arise from or relate to the proposed transaction.
The scope of the engagement may be expanded or modified as the transaction progresses, subject to the mutual agreement of Penterra and Calderwood & Harkness LLP. Any material changes to the scope of the engagement will be documented in a supplemental engagement letter or amendment thereto.
4. Staffing / Engagement Team
The following attorneys have been assigned to the matter as of the date of this memorandum:
Additional Staffing. Additional staffing will be determined as the matter progresses and as the scope of due diligence and transaction negotiations becomes more fully defined. It is anticipated that associates and/or counsel from the following practice groups may be engaged to support specific workstreams in connection with the transaction:
• Regulatory / FDA: To advise on the regulatory status of VRD-4187, IND compliance, and FDA-related due diligence matters.
• Employment & Benefits: To advise on employment agreements, employee benefit plans, equity incentive plans, retention arrangements, and WARN Act compliance.
• intellectual Property: To advise on the patentability, freedom-to-operate, and licensing landscape for the VeriTCE platform and VRD-4187, and to review the Target's intellectual property portfolio.
• Litigation: To assess pending and threatened litigation, claims, and potential liabilities of the Target.
All staffing decisions will be made by the Responsible Partner in consultation with the Billing Partner, and any additions to the engagement team will be reflected in the firm's matter management system. The identities and rates of any additional timekeepers will be communicated to the client in accordance with the terms of the engagement letter.
5. Rate Structure / Billing Arrangements
5.1 Billing Method
This matter will be billed on an hourly basis in accordance with the firm's standard billing practices and the terms set forth in the engagement letter. The applicable hourly rates for the engagement team are as follows:
The hourly rates of any additional timekeepers assigned to the matter will be consistent with the firm's standard rates for the applicable practice group, seniority level, and calendar year. All rates are subject to the firm's annual rate adjustments, which are implemented on January 1 of each calendar year; provided, however, that the rates stated above shall remain effective for the duration of this engagement unless otherwise agreed with the client.
5.2 Engagement Letter
The formal engagement letter for this matter will be sent to Thomas F. Holbrook, General Counsel & Secretary, Penterra Pharmaceuticals Corp., concurrently with the submission of this memorandum. The engagement letter is dated February 14, 2024, and sets forth the terms and conditions of the firm's representation, including the scope of the engagement, fee arrangements, billing procedures, payment terms, and other standard terms.
5.3 Billing Address
All invoices will be directed to the following billing address:
Penterra Pharmaceuticals Corp. 1100 Meridian Boulevard, Suite 400 Princeton, New Jersey 08540
Attn: Thomas F. Holbrook, General Counsel
5.4 Expenses. In addition to professional fees, the firm will bill Penterra for reasonable out-of-pocket expenses incurred in connection with the engagement, including, without limitation, travel expenses, filing fees, courier and delivery charges, document reproduction costs, and expenses associated with the use of third-party databases and research services. All expenses will be billed at cost in accordance with the firm's standard expense reimbursement policies.
6. Adverse / Target Parties and Their Counsel
6.1 Target and Sellers
The target company in the proposed transaction is Veridian Biosciences, Inc., the details of which are set forth in Section 2.4 above. The sellers in the proposed transaction consist of the existing stockholders of Veridian, including both institutional investors and individual founders and management team members. Based on information currently available, the major stockholders of Veridian are as follows:
Crestline Ventures, LP served as the lead investor in Veridian's Series A and Series B financing rounds and is the single largest stockholder. Boreal Health Partners Fund III, LP led the Series C financing round. Apex Growth Equity Fund II, LP led the most recent Series D financing round. Together with the founders and other management holders, these three institutional investors represent a controlling majority of Veridian's outstanding equity on a fully diluted basis. It is anticipated that the transaction will require the approval of a requisite majority of Veridian's stockholders in accordance with Veridian's certificate of incorporation and applicable Delaware law, and that the approval of Crestline Ventures, Boreal Health Partners, and Apex Growth Equity (together with the founders) will be necessary to consummate the transaction.
6.2 Target's / Sellers' Outside Counsel
Zalcourt Archer & Cole LLP One Federal Street, 30th Floor Boston, Massachusetts 02110
Lead Partner: Rebecca Whitmore (Mergers & Acquisitions) Associate: Jonathan Pratt Tax Partner: Elaine Sato
It is understood that Zalcourt Archer & Cole LLP has been retained by Veridian Biosciences, Inc. to represent the Target and the Sellers in connection with the proposed transaction.
6.3 Target's Financial Advisor
Ridgeway Partners LLC 101 Huntington Avenue, Suite 2500 Boston, Massachusetts 02199
Lead Banker: Laura Beckett, Managing Director
It is understood that Ridgeway Partners LLC has been retained by Veridian to provide financial advisory services in connection with the proposed transaction.
7. Conflicts Check
A comprehensive conflicts check has been conducted in connection with this new matter in accordance with the firm's conflicts clearance policies and procedures.
Conflicts Clearance Memorandum: A separate conflicts clearance memorandum was prepared and circulated to the relevant members of the New Matters Committee and the Office of the General Counsel on February 13, 2024. That memorandum sets forth in detail the results of the conflicts search and the analysis performed by the firm's conflicts counsel.
Parties Searched. The conflicts check was conducted against the following parties, including all known aliases, affiliates, and related persons and entities:
• Veridian Biosciences, Inc.
• Dr. Julian Marek
• Dr. Priya Chandrasekaran
• Steven R. Kessler
• Rachel Stein-Goldberg
• Crestline Ventures, LP
• David Ng
• Boreal Health Partners Fund III, LP
• Sarah Dalmqvist
• Apex Growth Equity Fund II, LP
• Marcus Doyle
• Zalcourt Archer & Cole LLP
• Rebecca Whitmore
• Ridgeway Partners LLC
• Laura Beckett
Result: No conflicts of interest have been identified in connection with any of the parties listed above. The firm has not previously represented, and does not currently represent, any of the above-referenced parties in any matter that would be adverse to or create a conflict with the firm's representation of Penterra Pharmaceuticals Corp. in the proposed transaction. Conflicts clearance has been granted by the Office of the General Counsel, as documented in the separate conflicts clearance memorandum dated February 13, 2024.
In the event that additional parties are identified during the course of the engagement (including, without limitation, additional stockholders, financing sources, or counterparties to material contracts), supplemental conflicts checks will be conducted promptly and the results will be reported to the New Matters Committee as appropriate.
8. Other Advisors / Key Third Parties
The following advisors and key third parties have been engaged, or are anticipated to be engaged, in connection with the proposed transaction:
8.1 Buyer's Financial Advisor
Garrison Zanthor & Co., LLC 383 Madison Avenue New York, New York 10179
Lead Banker: Kevin Driscoll, Managing Director
Garrison Zanthor & Co., LLC has been engaged by Penterra concurrently with the engagement of Calderwood & Harkness LLP, effective February 14, 2024. Garrison Zanthor will serve as Penterra's exclusive financial advisor in connection with the proposed acquisition and will provide valuation analysis, negotiation support, and a fairness opinion (if requested by the Board of Directors).
8.2 Clinical / Scientific Due Diligence Advisor
Broadleaf Scientific Consulting LLC (anticipated engagement) 225 Franklin Street, Suite 1900 Boston, Massachusetts 02110
Lead Consultant: Dr. Raymond Kapoor, Managing Director
Broadleaf Scientific Consulting LLC is anticipated to be engaged to provide independent clinical and scientific due diligence advisory services in connection with the evaluation of Veridian's VRD-4187 clinical program and the VeriTCE platform technology. The engagement of Broadleaf is expected to be finalized in the coming weeks, subject to execution of an engagement letter and confidentiality agreement.
8.3 Antitrust Counsel
Stonebridge HSW Antitrust Advisors LLP 1440 New York Avenue NW, Suite 700 Washington, DC 20005
Lead Partner: Martin Prumvane
Stonebridge HSW Antitrust Advisors LLP will serve as specialized antitrust counsel to Penterra in connection with the proposed transaction. Stonebridge HSW will advise on the preparation and filing of the pre-merger notification under the HSR Act, coordinate with the Federal Trade Commission and/or the Antitrust Division of the U.S. Department of Justice, and provide guidance on antitrust clearance strategy and any second-request compliance, if applicable.
8.4 Representation and Warranty Insurance Broker
Prescott Whitfield Insurance Brokers, Inc. (anticipated engagement) 175 Water Street, 22nd Floor New York, New York 10038
Managing Director: Amanda Chen-Kowalski
Prescott Whitfield Insurance Brokers, Inc. is anticipated to be engaged to broker the placement of a buyer-side representation and warranty insurance policy in connection with the proposed transaction. The engagement of Prescott Whitfield is expected to be finalized following the commencement of due diligence and initial structuring discussions.
8.5 Independent Auditors
Penterra's Independent Auditor:
Tarrant & Co. 550 South Tryon Street, Suite 1400 Charlotte, North Carolina 28202
Engagement Partner: Diana Rourke
Veridian's Independent Auditor:
Northbridge Accounting Group LLP 125 High Street, Suite 3100 Boston, Massachusetts 02110
Engagement Partner: Patrick Calloway
8.6 Transfer Agent
Pinnacle Transfer Services, Inc. 6201 15th Avenue Brooklyn, New York 11219
Pinnacle Transfer Services, Inc. serves as the transfer agent for Penterra's common stock.
8.7 Escrow Agent
Fidelis National Escrow Corp. (anticipated engagement; to be determined) 601 Riverside Avenue Jacksonville, Florida 32204
Senior Vice President: Brian Mulcahy
Fidelis National Escrow Corp. is anticipated to serve as escrow agent in connection with the proposed transaction, holding a portion of the purchase price in escrow to secure the Sellers' indemnification obligations under the Stock Purchase Agreement. The engagement of Fidelis National is subject to finalization of the escrow agreement terms and confirmation by both parties.
8.8 Financing Sources
Summit Ridge Capital Partners, LP (preliminary discussions) 277 Park Avenue, 40th Floor New York, New York 10172
Managing Director: Philip Ostrander
Ironclad Trust Company, N.A. (anticipated administrative agent) 60 Wall Street New York, New York 10005
Vice President: Samantha Hwang
Penterra is currently in preliminary discussions with Summit Ridge Capital Partners, LP regarding committed acquisition financing in the form of a term loan facility to fund a portion of the purchase price. Ironclad Trust Company, N.A. is anticipated to serve as administrative agent under the credit facility. The financing structure and terms are subject to further negotiation and execution of a commitment letter.
9. Anticipated Timeline and Key Milestones
The following is a preliminary timeline for the proposed transaction, based on current expectations and subject to change as negotiations progress:
This timeline is preliminary and aspirational. The actual sequence and timing of events will depend on a number of factors, including the pace and results of due diligence, the status and progress of negotiations with the Sellers and their advisors, the timing and outcome of regulatory filings and reviews, and the availability and terms of acquisition financing. The engagement team will provide periodic updates to the client and to the firm's management as the transaction progresses.
10. Special Considerations / Key Issues Flagged
The following special considerations and key issues have been identified in connection with the proposed transaction and are flagged for the attention of the New Matters Committee:
10.1 Clinical-Stage Target with No Product Revenue
Veridian Biosciences, Inc. is a clinical-stage biotechnology company with no product revenue. The entire valuation of the Target is predicated on the clinical and commercial potential of its lead product candidate, VRD-4187, and the underlying VeriTCE platform technology. This presents heightened transaction risk relative to acquisitions of revenue-generating targets. The negotiation of the material adverse effect ("MAE") definition and the related closing conditions in the Stock Purchase Agreement will be a critical area of focus. In particular, the MAE definition and any carve-outs thereto must be carefully structured to address the inherent risks associated with a clinical-stage asset, including the risk of adverse clinical trial outcomes, unexpected safety signals, changes in the competitive landscape, and adverse FDA regulatory actions (including clinical holds, requests for additional studies, or refusals to file) occurring between signing and closing. The engagement team will work closely with Penterra's management, financial advisors, and scientific consultants to ensure that the contractual protections appropriately reflect the risk profile of the transaction.
10.2 Section 382 NOL Limitations
Veridian has accumulated significant net operating loss ("NOL") carryforwards, estimated at approximately $312 million as of December 31, 2023. These NOLs represent a potentially valuable tax asset for Penterra post-acquisition, to the extent they can be utilized to offset future taxable income. However, the utilization of Veridian's NOLs is subject to limitation under Internal Revenue Code Section 382, which imposes an annual limitation on the use of NOL carryforwards following an "ownership change" (generally defined as a greater than 50-percentage-point increase in stock ownership by one or more five-percent shareholders over a rolling three-year period). Given the multiple rounds of venture and growth equity financing completed by Veridian (Series A through Series D), particularly the Series C round completed in the third quarter of 2020, it is possible that one or more prior ownership changes have already occurred, which would have resulted in pre-existing Section 382 limitations on a portion of Veridian's NOLs. Due diligence will need to include a thorough Section 382 study analyzing all historical changes in Veridian's equity ownership and determining whether any prior ownership changes have occurred and, if so, the applicable annual limitation amounts. Leonard Cross (Tax Partner) will lead this workstream and advise on the implications for the overall transaction value and structure.
10.3 Transaction Structure and Tax Considerations
The transaction is currently anticipated to be structured as an all-cash stock purchase. No election under Section 338(h)(10) of the Internal Revenue Code is currently contemplated. A Section 338(h)(10) election, which would treat the stock purchase as an asset purchase for federal income tax purposes, would ordinarily be considered in the context of an acquisition of a C corporation in order to achieve a stepped-up tax basis in the Target's assets. However, given Veridian's significant NOL profile, a Section 338(h)(10) election could potentially trigger a substantial deemed gain at the Target level, consuming a meaningful portion of the NOLs without a corresponding tax benefit and potentially resulting in adverse tax consequences for the Sellers. Leonard Cross will advise on the optimal tax structuring of the transaction, including the analysis of Section 338(h)(10), Section 336(e), and any alternative structures that may be beneficial from a tax perspective.
10.4 Acquisition Financing
Penterra had approximately $2.1 billion in cash and cash equivalents on hand as of its most recently reported fiscal quarter. While Penterra has sufficient balance sheet liquidity to fund a significant portion of the anticipated purchase price from existing cash resources, it is expected that Penterra will seek partial acquisition financing in the form of a committed term loan facility to fund a portion of the purchase price and preserve financial flexibility. Preliminary discussions are underway with Summit Ridge Capital Partners, LP, as described in Section 8.8 above. The engagement team will review and advise on the terms of any commitment letter and credit agreement to ensure consistency with the definitive acquisition agreement, including any financing conditions, "SunGard" conditionality provisions, and cooperation covenants.
10.5 No-Shop Provision
The Stock Purchase Agreement is anticipated to include a no-shop covenant restricting Veridian and the Sellers from soliciting, initiating, encouraging, or entering into discussions or negotiations with third parties regarding alternative acquisition proposals during the period between signing and closing. The no-shop covenant is expected to include a limited fiduciary-out permitting the Veridian board of directors to consider and respond to unsolicited superior proposals, subject to customary procedural requirements (including notice and matching rights in favor of Penterra) and the payment of a termination fee in the event that the Veridian board elects to terminate the agreement to accept a superior proposal. The terms of the no-shop covenant, the fiduciary-out exceptions, and the termination fee will be key points of negotiation.
10.6 Indemnification and Representation and Warranty Insurance
The transaction is expected to include a contractual indemnification framework pursuant to which the Sellers will provide customary indemnification to Penterra for breaches of representations and warranties, breaches of covenants, and certain specified liabilities. In addition, it is anticipated that Penterra will procure a buyer-side representation and warranty ("R&W") insurance policy to supplement the contractual indemnification from the Sellers. R&W insurance is commonly utilized in private target acquisitions to bridge the gap between the buyer's indemnification requirements and the sellers' willingness to accept post-closing indemnification exposure, and its use is expected to facilitate negotiations regarding indemnification caps, baskets, survival periods, and other limitations. As noted in Section 8.4 above, Prescott Whitfield Insurance Brokers, Inc. is anticipated to be engaged to broker the R&W insurance placement.
10.7 Regulatory Considerations
The proposed transaction will require a pre-merger notification filing under the HSR Act, given that the anticipated purchase price exceeds the applicable notification thresholds. Stonebridge HSW Antitrust Advisors LLP has been engaged to advise on the HSR filing and antitrust clearance strategy. Based on a preliminary assessment of the parties' respective product portfolios and market positions, the transaction is not expected to raise significant antitrust concerns; however, a definitive antitrust risk assessment will be conducted following the completion of due diligence.
In addition, the FDA regulatory status of VRD-4187 will be closely monitored during the interim period between signing and closing. Veridian's Investigational New Drug application (IND 154832) and the ongoing Phase II clinical trial (ClinicalTrials.gov Identifier: NCT05837291) are subject to ongoing FDA oversight, and any adverse regulatory action by the FDA (including, but not limited to, a clinical hold, a refusal to file, or a request for additional clinical data) during the interim period could have a material impact on the value of the Target and the desirability of consummating the transaction. The Stock Purchase Agreement will need to include appropriate interim operating covenants and closing conditions to address these risks.
11. Document Retention and Filing
All documents, correspondence, memoranda, notes, emails, and other materials generated or received in connection with this matter shall be filed under Matter No. 1018-00008 in accordance with the firm's document retention and records management policies.
All electronic files related to this matter shall be maintained on the firm's secure document management system ("DMS") and shall be subject to the firm's information security policies and access controls. Access to the matter files shall be restricted to members of the engagement team and such other firm personnel as may be authorized by the Responsible Partner or the Office of the General Counsel.
Physical documents, to the extent any are generated or received, shall be stored in the firm's secure records storage facilities and catalogued in accordance with the firm's records management procedures.
The engagement team is reminded that all documents and communications related to this matter may be subject to the attorney-client privilege and/or the work product doctrine, and that appropriate steps should be taken to preserve and protect these privileges at all times.
12. Authorization and Approvals
By signing below, the undersigned Responsible Partner confirms that the information set forth in this memorandum is accurate and complete to the best of his knowledge and requests authorization from the New Matters Committee to open the above-referenced matter and commence the engagement described herein.
RESPONSIBLE PARTNER
________________________________________
Oliver Mackenzie Partner, Mergers & Acquisitions Calderwood & Harkness LLP
Date: ________
By signing below, the New Matters Committee hereby approves the opening of the above-referenced matter and authorizes the commencement of the engagement in accordance with the terms described in this memorandum and the accompanying engagement letter.
NEW MATTERS COMMITTEE APPROVAL
________________________________________
Name: ________
Title: ________
Date: ________
Distribution:
Copy to:
• Harrison Wexford, Partner, Mergers & Acquisitions