employment-benefits-dd-memo.docx

1018-00008 · Penterra Pharmaceuticals Corp · Diligence

employment-benefits-dd-memo.docx DOCUMENT M&A / Corporate

14 / 75 ← → ✕

Contract analysis Extract to table

CALDERWOOD & HARKNESS LLP 200 Park Avenue, 42nd Floor New York, NY 10166

MEMORANDUM

TO: Oliver Mackenzie, Partner; Harrison Wexford, Partner

FROM: Derek Okonkwo, Associate; Megan Chu, Lead Associate

DATE: May 22, 2024

RE: Employment and Benefits Due Diligence — Veridian Biosciences, Inc.

MATTER: Penterra Pharmaceuticals Corp. — Proposed Acquisition of Veridian Biosciences, Inc. / Matter No. 1018-00008

I. Executive Summary

This memorandum summarizes the results of the employment and benefits due diligence conducted by Calderwood & Harkness LLP on behalf of Penterra Pharmaceuticals Corp. ("Penterra" or "PPC") in connection with Penterra's proposed acquisition of Veridian Biosciences, Inc. ("Veridian" or "VBI"), a privately held Delaware corporation headquartered at 550 Gateway Drive, Cambridge, Massachusetts 02142. The proposed transaction is structured as an all-cash stock purchase for total consideration of Nine Hundred Million Dollars ($900,000,000), pursuant to which Penterra will acquire all of the outstanding capital stock of Veridian (the "Transaction"). The terms of the Transaction are set forth in that certain Stock Purchase Agreement (the "SPA"), drafts of which have been circulated among the parties and remain subject to ongoing negotiation.

Scope of Review. Our diligence review encompassed the following categories of documents and information relating to Veridian's employment practices, workforce arrangements, and employee benefit programs:

• Employment agreements and offer letters for named executive officers and other key employees;

• The Veridian employee handbook (most recently updated January 2024);

• The Veridian Biosciences, Inc. 2016 Equity Incentive Plan, as amended in 2018, 2020, and 2022, together with all forms of award agreement and individual award grants;

• Employee benefit plan documents, including group health and welfare plan summary plan descriptions, the 401(k) profit sharing plan document and amendments, and related Form 5500 filings;

• Consulting agreements and independent contractor arrangements;

• Immigration records, including I-9 documentation and H-1B visa sponsorship records;

• EEOC and employment litigation history, including records of any administrative charges, demand letters, settlements, and related correspondence;

• Noncompetition, nonsolicitation, confidentiality, and invention assignment agreements;

• State-specific employment law compliance materials, with particular focus on Massachusetts, California, and Maryland; and

• Such other documents and materials as were made available in the electronic data room established by Veridian and its advisors for purposes of the Transaction.

Data Room and Management Interviews. Access to the virtual data room was granted to Calderwood & Harkness on March 11, 2024. Our review of data room documents continued through May 20, 2024, encompassing over 340 individual documents uploaded across 18 data room folders relevant to employment and benefits matters. In addition to our documentary review, we conducted management interviews on the following dates and with the following individuals:

• April 3, 2024: Steven R. Kessler, Chief Financial Officer of Veridian;

• April 8, 2024: Rachel Stein-Goldberg, General Counsel of Veridian;

• April 15, 2024 and May 6, 2024: Rebecca Whitmore and Jonathan Pratt of Zalcourt Archer & Cole LLP, outside counsel to Veridian.

These interviews supplemented and, in certain instances, clarified information contained in the data room documents. We have not independently verified the completeness or accuracy of the information provided by Veridian or its advisors, and we note that our conclusions are based on the documents and information that were made available to us as of the date of this memorandum.

Overall Assessment. Based on our review, Veridian's employment and employee benefits arrangements are generally consistent with market practices for a clinical-stage biotechnology company of its size, which comprises 148 employees as of the date of this review. Veridian has adopted standard employment agreements for its executive officers, maintains a competitive benefits package, and has implemented equity incentive compensation arrangements that are typical for its stage and sector. We did not identify any systemic compliance failures or material unremediated legal violations in the employment and benefits area.

That said, we have identified several discrete areas of concern that warrant attention in connection with the Transaction and that should be addressed through the SPA, related transaction documents, or post-closing integration planning. These key areas of concern include:

1. Change-of-Control Severance Exposure. Veridian's key executive employment agreements contain significant change-of-control severance provisions that, if triggered, would result in aggregate cash severance payments of approximately $2.9 million, plus prorated bonuses, COBRA premium reimbursement, and full or partial acceleration of unvested equity awards. Because the Transaction is structured as a stock purchase, these severance obligations will be borne by Penterra as the post-closing owner of Veridian.

2. Section 280G Excise Tax Risks. A preliminary analysis under Section 280G of the Internal Revenue Code indicates that the combination of accelerated equity vesting and cash severance payments may constitute "excess parachute payments" for at least three named executive officers, potentially subjecting those individuals to a 20% excise tax under Section 4999 and limiting Penterra's tax deduction for such payments. As a privately held corporation, Veridian is eligible for the stockholder vote safe harbor under Section 280G(b)(5)(B), and we recommend that the SPA include a pre-closing covenant requiring Veridian to solicit such stockholder approval.

3. California Employment Law Compliance. Veridian employs approximately 15 individuals in California. We have identified certain non-competition provisions in employment agreements applicable to California-based employees that are likely unenforceable under California Business and Professions Code Section 16600. Additionally, Veridian's unlimited paid time off policy may present wage accrual issues under California law. Both matters should be addressed in connection with post-closing integration.

4. Maryland Employment Law Compliance. Veridian maintains approximately 8 employees at a research collaboration site in Maryland. While our review did not identify material compliance deficiencies, Penterra should ensure ongoing compliance with Maryland-specific requirements, including the Healthy Working Families Act and applicable noncompete restrictions.

5. Key-Person Dependence on Co-Founders. The VeriTCE platform technology and the lead clinical asset VRD-4187 are heavily dependent on the continued involvement of co-founders Dr. Julian Marek (CEO) and Dr. Priya Chandrasekaran (CSO). While the Transaction contemplates separate Non-Competition and Non-Solicitation Agreements with each co-founder, supplemental retention arrangements for these individuals and other key scientific personnel should be considered to protect the value of the acquisition.

The balance of this memorandum discusses each of these matters, and other employment and benefits findings, in greater detail.

II. Workforce Overview

A. Employee Census

As of the date of our diligence review, Veridian's total employee headcount stands at 148 individuals, all of whom are classified as regular full-time or part-time employees on a W-2 basis. This headcount is consistent with Veridian's representations in the data room and was confirmed during our management interview with Mr. Kessler on April 3, 2024.

The workforce is distributed across the following functional areas:

The heavy weighting toward R&D and clinical operations is consistent with Veridian's stage of development as a clinical-stage immuno-oncology company with one lead asset (VRD-4187) in a Phase 2 clinical trial (the Marlowe Asset Management-2 trial, ClinicalTrials.gov identifier NCT05837291) and several preclinical programs built on the proprietary VeriTCE T-cell engager platform.

The workforce is distributed across the following geographic locations:

Veridian does not employ any individuals outside of the United States. There are no expatriate or secondment arrangements in place.

We confirmed with Ms. Stein-Goldberg and Mr. Kessler that Veridian has no collective bargaining agreements, no unionized workforce, and no pending or threatened union organizing activity. Veridian has not received any petition for representation from any labor organization. Veridian does not maintain a works council, employee representative body, or any similar employee participation structure.

B. Employee Classification

All 148 individuals in Veridian's workforce are classified as W-2 employees for federal and state tax purposes. Our review of payroll records and offer letters did not identify any individuals who appear to be improperly classified as exempt or non-exempt under the Fair Labor Standards Act ("FLSA") or applicable state wage and hour laws, though we note that we did not conduct a position-by-position analysis of FLSA exemption status.

In addition to its W-2 workforce, Veridian engages approximately 12 independent contractors and consultants, who are discussed in greater detail in Section VI of this memorandum. These individuals include members of the Scientific Advisory Board, clinical research consultants, biostatistical consultants, and a medical affairs consultant. Each of these individuals is engaged pursuant to a written consulting or independent contractor agreement.

Our preliminary assessment of the classification of these individuals is that the independent contractor classification appears reasonable for the majority of the engaged consultants, based on the nature of the services provided, the degree of control exercised by Veridian, and the terms of the applicable agreements. However, we have identified approximately three consultants who have been engaged on a continuous basis for more than two years and who appear to work predominantly or exclusively for Veridian. These individuals present potential misclassification risk under applicable state law tests, including the ABC test adopted by California under Assembly Bill 5 ("AB5") and codified at California Labor Code Section 2775, as well as the Massachusetts independent contractor statute, Massachusetts General Laws chapter 149, section 148B. We discuss these risks further in Section VI.B below and recommend a post-closing review of these arrangements.

C. State Law Nexus and Multi-State Employment

Veridian has employees physically located in Massachusetts, California, Maryland, and approximately ten additional states where individual remote employees reside. The three states with the most significant employee concentrations — Massachusetts, California, and Maryland — each impose distinct employment law requirements that are relevant to the Transaction and post-closing integration. We discuss the compliance implications of each state's laws in Section VIII of this memorandum.

Veridian is registered as an employer in Massachusetts, California, and Maryland for purposes of state income tax withholding and unemployment insurance contributions. Based on our review of data room documents, Veridian has been filing the requisite state employer tax returns in each of these jurisdictions. We were not provided with, and therefore did not independently verify, Veridian's compliance with state employer registration and tax filing obligations in all other states where remote employees are located. We recommend that Penterra confirm, through its tax advisors or in connection with the tax diligence workstream, that Veridian has properly registered and filed in all states where it has employees.

III. Key Employee Agreements

Our review identified five named executive officers of Veridian whose employment agreements contain material provisions relevant to the Transaction, including severance, change-of-control, non-competition, and equity-related terms. A summary of each executive's employment agreement follows.

A. Chief Executive Officer — Dr. Julian Marek (Co-Founder; 8.4% Equity)

Dr. Marek is the co-founder of Veridian and has served as its Chief Executive Officer since the company's inception in 2016. Dr. Marek's current employment is governed by an Amended and Restated Employment Agreement dated as of September 15, 2020 (the "Marek Agreement"), which was originally entered into in 2016 and was amended and restated in connection with Veridian's Series C preferred stock financing.

Compensation. Under the Marek Agreement, Dr. Marek receives an annual base salary of $475,000. He is eligible for an annual discretionary bonus with a target of 50% of his base salary (i.e., a target annual bonus of $237,500), subject to achievement of individual and corporate performance objectives established by the Board of Directors or its compensation committee. The actual bonus paid in any given year is at the discretion of the Board.

Equity Holdings. Dr. Marek holds equity interests representing approximately 8.4% of Veridian's fully diluted capitalization, consisting of a combination of common shares issued at the time of the company's founding (founder shares) and stock options granted under the 2016 Equity Incentive Plan. A portion of Dr. Marek's stock options remain subject to time-based vesting.

Severance Provisions. The Marek Agreement provides for the following severance benefits:

Standard Severance (Non-Change-of-Control). In the event of a termination of Dr. Marek's employment by Veridian without "cause" (as defined in the Marek Agreement) or by Dr. Marek for "good reason" (as defined therein), Dr. Marek is entitled to (i) continued payment of his base salary for a period of 18 months following the date of termination, paid in accordance with Veridian's regular payroll schedule, and (ii) reimbursement of COBRA premiums for continued group health coverage for himself and his eligible dependents for a period of up to 18 months following termination. These severance benefits are conditioned upon Dr. Marek's timely execution and non-revocation of a general release of claims in favor of Veridian.

Double-Trigger Change-of-Control Severance. In the event of a termination of Dr. Marek's employment by Veridian (or any successor entity) without cause, or by Dr. Marek for good reason, in either case within 12 months following a "change of control" (as defined in the Marek Agreement), Dr. Marek is entitled to (i) continued payment of his base salary for a period of 24 months following the date of termination, (ii) a prorated annual bonus for the year in which the termination occurs (based on target bonus), and (iii) full acceleration of all unvested equity awards held by Dr. Marek as of the date of such termination. These enhanced severance benefits are also conditioned upon Dr. Marek's timely execution and non-revocation of a general release of claims.

It is important to note that the change-of-control severance provisions in the Marek Agreement are "double trigger" — meaning that the enhanced severance benefits are triggered only upon the combination of (1) a change of control and (2) a qualifying termination of employment within 12 months thereafter. The consummation of the Transaction alone would not, absent a subsequent qualifying termination, trigger these enhanced severance benefits.

Restrictive Covenants. The Marek Agreement contains the following post-termination restrictive covenants:

Non-Competition. Dr. Marek is subject to a 12-month post-termination non-competition covenant, which restricts him from engaging in or providing services to any business that is directly competitive with Veridian's business in the field of immuno-oncology T-cell engager therapeutics. The non-compete is limited in scope to the specific therapeutic modality in which Veridian operates and does not extend to the broader oncology or biotechnology industry.

Non-Solicitation. Dr. Marek is subject to an 18-month post-termination non-solicitation covenant, which prohibits him from (i) soliciting, recruiting, or hiring any employee of Veridian or (ii) soliciting or diverting any customer, collaborator, or business partner of Veridian.

Invention Assignment and Confidentiality. The Marek Agreement contains comprehensive invention assignment and confidentiality provisions, under which Dr. Marek assigns to Veridian all rights in and to any inventions, discoveries, developments, or intellectual property conceived or reduced to practice during the course of his employment. The confidentiality obligations survive the termination of Dr. Marek's employment without limitation as to time.

Transaction-Specific Note. The proposed Transaction contemplates that Dr. Marek will execute a separate Non-Competition and Non-Solicitation Agreement at closing, providing for a two-year post-closing non-competition period and a two-year post-closing non-solicitation period. This closing non-compete agreement will supersede and replace the non-competition and non-solicitation provisions contained in the Marek Agreement. The terms of this separate agreement are being negotiated in the context of the SPA and are not yet finalized as of the date of this memorandum.

B. Chief Scientific Officer — Dr. Priya Chandrasekaran (Co-Founder; 6.2% Equity)

Dr. Chandrasekaran is the co-founder of Veridian and has served as its Chief Scientific Officer since the company's inception. Dr. Chandrasekaran's current employment is governed by an Amended and Restated Employment Agreement dated as of September 15, 2020 (the "Chandrasekaran Agreement"), which mirrors the Marek Agreement in structure and was similarly amended and restated in connection with the Series C financing.

Compensation. Dr. Chandrasekaran receives an annual base salary of $435,000 and is eligible for an annual discretionary bonus with a target of 45% of her base salary (i.e., a target annual bonus of $195,750).

Equity Holdings. Dr. Chandrasekaran holds equity interests representing approximately 6.2% of Veridian's fully diluted capitalization, consisting of a combination of founder shares and stock options granted under the 2016 Equity Incentive Plan.

Severance Provisions. The Chandrasekaran Agreement contains severance provisions that are substantially similar to those in the Marek Agreement. Specifically, Dr. Chandrasekaran is entitled to (i) 18 months of base salary continuation and 18 months of COBRA premium reimbursement upon a termination without cause or resignation for good reason (non-change-of-control scenario), and (ii) 24 months of base salary continuation, a prorated target bonus, and full acceleration of unvested equity awards upon a qualifying termination within 12 months following a change of control (double-trigger change-of-control scenario). All severance benefits are conditioned upon execution and non-revocation of a release of claims.

Restrictive Covenants. The Chandrasekaran Agreement contains a 12-month post-termination non-competition covenant and an 18-month non-solicitation covenant, identical in scope and structure to those in the Marek Agreement.

Transaction-Specific Note. As with Dr. Marek, the Transaction contemplates that Dr. Chandrasekaran will execute a separate Non-Competition and Non-Solicitation Agreement at closing with a two-year non-compete and two-year non-solicitation period, which will supersede the restrictions in the Chandrasekaran Agreement.

C. Chief Financial Officer — Steven R. Kessler

Mr. Kessler has served as Veridian's Chief Financial Officer since 2019. His employment is governed by an Employment Agreement dated as of March 4, 2019, as amended by Amendment No. 1 dated as of July 12, 2022 (collectively, the "Kessler Agreement").

Compensation. Mr. Kessler receives an annual base salary of $390,000 and is eligible for an annual discretionary bonus with a target of 40% of his base salary (i.e., a target annual bonus of $156,000).

Severance Provisions. The Kessler Agreement provides for the following severance benefits:

Standard Severance (Non-Change-of-Control). Upon a termination without cause, Mr. Kessler is entitled to 12 months of base salary continuation and 12 months of COBRA premium reimbursement, subject to execution of a release.

Change-of-Control Provisions. The Kessler Agreement contains a hybrid change-of-control provision that includes both single-trigger and double-trigger elements. Specifically, upon the consummation of a change of control, 50% of Mr. Kessler's then-unvested equity awards will automatically accelerate and vest (single trigger). In addition, if Mr. Kessler's employment is terminated by the company without cause within 12 months following a change of control, he is entitled to (i) 12 months of base salary continuation and (ii) full acceleration of all remaining unvested equity awards (double trigger for the balance).

The single-trigger acceleration component of the Kessler Agreement is notable because it will be triggered by the closing of the Transaction itself, without any requirement of a termination of employment. Under the terms of the SPA, which provides for cancellation of all outstanding equity awards at closing in exchange for cash consideration, the 50% single-trigger acceleration will entitle Mr. Kessler to cash consideration in respect of 50% of his then-unvested options and RSUs at closing, with the remaining 50% also cashed out at closing (since all awards are being cancelled for cash regardless of vesting status). However, the cash consideration in respect of the remaining 50% of unvested awards may need to be structured to preserve the double-trigger protection. We are coordinating with the deal team on this point.

Restrictive Covenants. The Kessler Agreement contains a 12-month post-termination non-competition covenant. No separate closing non-compete agreement is contemplated for Mr. Kessler under the SPA.

D. Vice President, Regulatory Affairs — Dr. Anne-Marie Fontaine

Dr. Fontaine has served as Veridian's Vice President of Regulatory Affairs since 2021. Her employment is governed by an Employment Agreement dated as of June 1, 2021 (the "Fontaine Agreement").

Compensation. Dr. Fontaine receives an annual base salary of $340,000 and is eligible for an annual discretionary bonus with a target of 35% of her base salary (i.e., a target annual bonus of $119,000).

Severance Provisions. The Fontaine Agreement provides for 9 months of base salary continuation upon termination without cause (non-change-of-control scenario) and, in a double-trigger change-of-control scenario, 12 months of base salary continuation and 50% acceleration of unvested equity awards upon a qualifying termination within 12 months following a change of control.

Restrictive Covenants. The Fontaine Agreement contains a 12-month post-termination non-competition covenant.

Key Role Significance. Dr. Fontaine plays a critical role in Veridian's interactions with the U.S. Food and Drug Administration, including responsibility for managing the Investigational New Drug Application (IND) for VRD-4187 (IND No. 154832) and the ongoing Marlowe Asset Management-2 Phase 2 clinical trial (NCT05837291). Dr. Fontaine serves as the primary point of contact with the FDA Division of Oncology Products and has led all pre-IND and IND-related communications, as well as the design and execution of the regulatory strategy for the VRD-4187 program. Her continued involvement is critical for ensuring post-closing regulatory continuity, and we recommend that Penterra consider retention incentives for Dr. Fontaine in addition to the protections provided by her existing employment agreement.

E. General Counsel — Rachel Stein-Goldberg

Ms. Stein-Goldberg has served as Veridian's General Counsel since 2020. Her employment is governed by an Employment Agreement dated as of February 10, 2020 (the "Stein-Goldberg Agreement").

Compensation. Ms. Stein-Goldberg receives an annual base salary of $365,000.

Severance Provisions. The Stein-Goldberg Agreement provides for 12 months of base salary continuation upon termination without cause and standard double-trigger change-of-control provisions (12 months salary continuation and equity acceleration upon qualifying termination within 12 months following a change of control), in each case subject to execution and non-revocation of a release of claims.

Restrictive Covenants. The Stein-Goldberg Agreement contains a 12-month post-termination non-competition covenant.

F. Summary of Key Employee Severance Exposure

The following table summarizes the estimated aggregate cash severance costs in the event all five named executive officers are terminated without cause within 12 months following the closing of the Transaction (i.e., the double-trigger change-of-control severance scenario):

The total economic cost of the change-of-control severance obligations is significantly larger than the cash severance figures shown above when the value of equity acceleration is included. The equity acceleration value will depend on the per-share merger consideration implied by the $900,000,000 purchase price and the number and exercise prices of the unvested options and RSUs held by each executive. We recommend that the deal team quantify the total acceleration value based on the final per-share consideration once the capitalization table is finalized.

It is important to note that because the Transaction is structured as a stock purchase (rather than an asset purchase or merger), Veridian will remain a continuing legal entity and employer following the closing. Accordingly, all severance obligations of Veridian under the key employee employment agreements will become obligations of Veridian as a subsidiary of Penterra, and the economic cost of any such severance will be borne by Penterra as the post-closing owner.

IV. Equity Incentive Plan

A. Plan Structure

Veridian's equity compensation program is administered under the Veridian Biosciences, Inc. 2016 Equity Incentive Plan, as amended in 2018, 2020, and 2022 (the "Plan"). The Plan was adopted by the Veridian Board of Directors in connection with the company's incorporation and initial capitalization in 2016 and has been amended on three occasions to increase the share reserve and expand the types of awards available for grant.

The material terms of the Plan are summarized as follows:

Share Reserve. The Plan reserves a total of 9.8% of Veridian's fully diluted capitalization for issuance pursuant to equity awards to employees, consultants, and non-employee directors. This share reserve has been fully authorized by the Board and approved by the stockholders.

Types of Awards. The Plan authorizes the grant of the following types of awards: (i) incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code, (ii) non-qualified stock options ("NQSOs"), and (iii) restricted stock units ("RSUs"). The Plan does not currently authorize the grant of stock appreciation rights, restricted stock awards (other than RSUs), or performance-based equity awards, although the Board retains the authority to amend the Plan to add such award types.

Administration. The Plan is administered by the Board of Directors of Veridian, or by a compensation committee of the Board to which the Board has delegated administrative authority. The Plan administrator has discretion to determine the recipients, types, and terms of awards granted under the Plan, subject to the terms and conditions set forth in the Plan document.

Exercise Price. The Plan requires that all stock options be granted with an exercise price per share that is not less than 100% of the fair market value of a share of Veridian common stock on the date of grant (or 110% of fair market value for ISOs granted to 10% stockholders). We reviewed the exercise prices of all outstanding option grants and confirmed that each bears an exercise price at or above the fair market value as determined by independent Section 409A valuations performed by Northbridge Accounting Group LLP, Veridian's independent auditor (engagement partner Patrick Calloway). Copies of the Section 409A valuation reports for each applicable period were provided in the data room.

B. Outstanding Awards

As of the date of our review, approximately 112 of Veridian's 148 current employees hold outstanding options or RSUs under the Plan. The aggregate outstanding awards represent approximately 9.1% of Veridian's fully diluted capitalization, which is within the 9.8% share reserve established under the Plan, leaving approximately 0.7% of the fully diluted capitalization available for future grants (though no further grants are anticipated in light of the pending Transaction).

The outstanding awards have a weighted average exercise price of $4.82 per share (calculated on an as-converted basis across all outstanding options). The mix of outstanding awards is approximately 65% stock options (a combination of ISOs and NQSOs) and 35% RSUs. The standard vesting schedule for awards granted to non-executive employees is four-year vesting with a one-year cliff (i.e., 25% vesting on the first anniversary of the grant date, with the remainder vesting monthly or quarterly over the subsequent 36 months). Certain executive-level grants, as reflected in the employment agreements discussed in Section III above, provide for three-year vesting schedules.

A detailed schedule of all outstanding awards, including the grant date, award type, number of shares, exercise price, vesting schedule, and vesting status as of the closing date, is set forth in Exhibit B to this memorandum.

C. Change-of-Control Provisions

The interplay between the Plan-level change-of-control provisions and the individual change-of-control provisions contained in certain key employee agreements is an area of particular importance for the Transaction. We summarize the relevant provisions below.

Plan-Level Provision. The Plan contains a "double trigger" acceleration provision with respect to outstanding awards upon a change of control. Under the Plan, if a "change of control" (as defined in the Plan) occurs, outstanding awards will not automatically accelerate but instead will be assumed or substituted by the acquiring entity on equitable terms. If, however, the acquiring entity does not assume or substitute the outstanding awards, then all outstanding awards will fully accelerate and become vested and exercisable (or, in the case of RSUs, will become fully vested and settled) immediately prior to the consummation of the change of control. This "assumption or substitution" mechanism is the default treatment for all award holders under the Plan.

Individual Agreement Overrides. As described in Section III above, the employment agreements of Dr. Marek, Dr. Chandrasekaran, Mr. Kessler, and Dr. Fontaine contain individual change-of-control equity acceleration provisions that differ from, and in certain cases are more favorable than, the Plan-level default. To the extent that an individual employment agreement provides acceleration terms that conflict with the Plan-level provisions, the individual agreement terms will generally control pursuant to the "more favorable" or "superseding" provisions contained in the respective award agreements.

Treatment Under the SPA. Under the terms of the proposed SPA, Penterra has elected not to assume or substitute Veridian's outstanding equity awards. Instead, all outstanding and unexercised stock options and all outstanding RSUs will be cancelled at the closing in exchange for the right to receive cash consideration equal to:

(i) For stock options: the excess, if any, of the per-share merger consideration over the applicable per-share exercise price of the option, multiplied by the number of shares subject to the option; and

(ii) For RSUs: the per-share merger consideration multiplied by the number of shares underlying the RSU award;

in each case, less applicable federal, state, and local tax withholdings.

Because the acquiring entity (Penterra) is not assuming or substituting the awards, the Plan-level double-trigger provision effectively converts to full acceleration at closing for all award holders — i.e., all unvested awards will vest immediately prior to closing and be cashed out. This treatment is consistent with the Plan's terms and eliminates the need for post-closing equity administration. However, the total equity payout at closing represents a significant component of the aggregate transaction consideration and must be factored into Penterra's economic analysis, including for purposes of the Section 280G analysis discussed below.

Section 409A Compliance. We reviewed the outstanding option grants for potential compliance issues under Section 409A of the Internal Revenue Code, which imposes penalty taxes on certain deferred compensation arrangements. A stock option may be subject to Section 409A if it is granted with an exercise price below the fair market value of the underlying stock on the date of grant (a "Discounted option"). Based on our review of the Section 409A valuation reports provided by Northbridge Accounting Group LLP and the exercise prices reflected in the individual option award agreements, we did not identify any discounted options. All option grants appear to have been priced at or above the fair market value established by the applicable 409A valuation as of the date of grant. Accordingly, we do not believe that any outstanding options are subject to Section 409A.

D. Section 280G Analysis

We have conducted a preliminary analysis under Section 280G of the Internal Revenue Code to assess whether the payments and benefits to be received by Veridian's executive officers in connection with the Transaction may constitute "excess parachute payments" subject to the 20% excise tax imposed by Section 4999 of the Code.

Under Section 280G, a "parachute payment" is any payment in the nature of compensation made to a "disqualified individual" (generally, officers, highly compensated employees, and significant shareholders) that is contingent on a change of control and that, together with all other such payments, equals or exceeds three times the individual's "base amount" (generally, the individual's average annual taxable compensation for the five most recent taxable years preceding the change of control). If the aggregate parachute payments equal or exceed the three-times threshold, the portion of such payments that exceeds one times the base amount is treated as an "excess parachute payment," and (i) the employer loses its tax deduction for the excess parachute payment amount under Section 280G, and (ii) the individual is subject to a 20% excise tax on the excess parachute payment amount under Section 4999, in addition to regular income tax.

Our preliminary Section 280G analysis, which is summarized in Exhibit F, identified potential excise tax exposure for the following individuals:

• Dr. Julian Marek: The combination of Dr. Marek's accelerated equity (representing approximately 8.4% of fully diluted capitalization, a significant portion of which remains unvested), potential 24-month cash severance, and prorated bonus is likely to exceed the three-times base amount threshold, resulting in excess parachute payments subject to the excise tax.

• Dr. Priya Chandrasekaran: Similarly, the combination of Dr. Chandrasekaran's accelerated equity (approximately 6.2% of fully diluted capitalization) and potential 24-month cash severance and prorated bonus is likely to exceed the threshold.

• Steven R. Kessler: The single-trigger 50% equity acceleration at closing, combined with Mr. Kessler's potential 12-month cash severance and full equity acceleration upon a qualifying post-closing termination, may exceed the three-times threshold.

The $900,000,000 purchase price implies a per-share merger consideration that is substantially higher than the weighted average exercise price of outstanding options ($4.82 per share). When the spread between the per-share consideration and the exercise price is multiplied by the number of accelerating equity awards, the resulting "parachute payment" attributable to equity acceleration alone may be sufficient to breach the Section 280G threshold for these executives.

Stockholder Vote Safe Harbor. Because Veridian is a privately held corporation (i.e., its stock is not readily tradeable on an established securities market or otherwise), Veridian is eligible for the Section 280G stockholder vote safe harbor under Section 280G(b)(5)(B) of the Code. Under this safe harbor, if the parachute payments are approved by a vote of more than 75% of the voting power of the outstanding stock of the corporation, and the affected individual provides adequate disclosure to the stockholders and agrees to return any payments not approved, then the payments will not be treated as "parachute payments" for purposes of Section 280G, and neither the Section 280G deduction limitation nor the Section 4999 excise tax will apply.

We understand that Veridian has already obtained stockholder support for the Transaction through a written consent delivered on June 14, 2024, representing more than 90% of the outstanding voting power. This level of support suggests that obtaining the requisite 75%+ stockholder approval for purposes of the Section 280G safe harbor vote should be feasible.

Recommendation. We recommend that the SPA include a pre-closing covenant requiring Veridian to conduct a Section 280G stockholder vote prior to closing, in accordance with the safe harbor procedures set forth in Treasury Regulation Section 1.280G-1, Q&A-7. Alternatively, or in addition, the SPA could include the Section 280G stockholder vote as a condition to closing. The affected executives should be required to execute appropriate waivers agreeing to forfeit any parachute payments that are not approved by the stockholders. If the Section 280G stockholder vote is not obtained, Penterra's tax deduction for the excess parachute payment amounts would be permanently disallowed, and the affected executives would be subject to the 20% excise tax, which could create friction with key employees whom Penterra desires to retain.

V. Employee Benefit Plans — ERISA and Non-ERISA

A. Health and Welfare Plans

Veridian sponsors a comprehensive suite of group health and welfare benefit plans for its employees and their eligible dependents. Based on our review of the summary plan descriptions, insurance contracts, and related documents provided in the data room, the following plans are currently maintained:

1. Group Medical Insurance: Veridian offers two medical plan options — a Preferred Provider Organization ("PPO") plan and a High Deductible Health Plan ("HDHP") with a linked Health Savings Account ("HSA"). Both plans are fully insured through a group policy issued by a national health insurance carrier.

2. Group Dental Insurance: Veridian offers a fully insured group dental plan covering preventive, basic, and major dental services.

3. Group Vision Insurance: Veridian offers a fully insured group vision plan covering routine eye exams, lenses, and frames.

4. Group Life Insurance and Accidental Death & Dismemberment ("AD&D"): Veridian provides employer-paid group life insurance at a benefit level of one times (1x) annual base salary, together with a matching AD&D benefit. Employees may also elect supplemental voluntary life insurance at their own expense, subject to evidence of insurability requirements.

5. Short-Term Disability Insurance: Veridian provides employer-paid short-term disability coverage providing income replacement benefits, typically at 60% of base salary, for a benefit period of up to 26 weeks.

6. Long-Term Disability Insurance: Veridian provides employer-paid long-term disability coverage providing income replacement benefits, typically at 60% of base salary, commencing after the exhaustion of the short-term disability benefit period.

7. Flexible Spending Accounts: Veridian offers both medical flexible spending accounts ("Medical FSAs") and dependent care flexible spending accounts ("DCAP FSAs") under a Section 125 cafeteria plan.

8. Employee Assistance Program ("EAP"): Veridian provides an employer-paid EAP offering confidential counseling and referral services.

All of the foregoing health and welfare plans are fully insured, meaning that Veridian pays premiums to third-party insurance carriers that bear the risk of claims. Veridian does not maintain any self-funded or self-insured health plan arrangements. This is a favorable finding from a diligence perspective, as it means that Veridian does not have any exposure to unpaid or unreported health claims (sometimes referred to as "incurred but not reported" or "IBNR" claims), which can be a significant liability in acquisitions of companies that maintain self-funded plans.

ERISA Compliance. The health and welfare plans are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). We reviewed the Form 5500 Annual Return/Report filings for the three most recent plan years (Plan Years 2021, 2022, and 2023) for each plan that is required to file. No material deficiencies or delinquencies were identified in the Form 5500 filings. Summary plan descriptions and summaries of material modifications appear to have been distributed to participants in accordance with ERISA's disclosure requirements, based on the records provided.

COBRA Compliance. Veridian utilizes a third-party administrator for COBRA (Consolidated Omnibus Budget Reconciliation Act) compliance, including the generation and distribution of COBRA election notices and administration of COBRA continuation coverage. Our review of sample COBRA notices and administrative procedures indicates that Veridian's COBRA procedures appear to comply with the applicable notice and coverage continuation requirements under Section 4980B of the Code and ERISA Sections 601–608. We did not identify any instances of untimely COBRA notice delivery or improper denial of COBRA continuation coverage.

HIPAA Privacy and Security. Veridian has adopted business associate agreements with its health plan administrators and insurance carriers in compliance with the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the HITECH Act. Veridian has designated its Vice President of Human Resources as its HIPAA privacy officer. We reviewed Veridian's HIPAA privacy notice and found it to be consistent with the regulatory requirements.

ACA Compliance. As an employer with 148 full-time employees, Veridian is an "applicable large employer" within the meaning of Section 4980H of the Internal Revenue Code (the threshold being 50 full-time employees or full-time equivalent employees). Veridian is therefore subject to the Affordable Care Act's employer shared responsibility provisions (the "employer mandate") and the related reporting requirements under Sections 6055 and 6056 of the Code. We confirmed that Veridian has filed Forms 1094-C and 1095-C with the IRS for the 2022 and 2023 reporting years and has distributed Forms 1095-C to its full-time employees. Veridian has not received any employer shared responsibility penalty notices (Letter 226-J) from the IRS, and based on our review of the offers of coverage made to full-time employees, it appears that Veridian has satisfied its obligations under the employer mandate.

B. Retirement Plans

Veridian sponsors a single qualified retirement plan — a 401(k) profit sharing plan (the "401(k) Plan") — for the benefit of its employees. The material terms and compliance status of the 401(k) Plan are summarized below.

Plan Terms. The 401(k) Plan permits eligible employees to make pre-tax and Roth elective deferrals, subject to the annual limits under Section 402(g) of the Internal Revenue Code. Veridian makes an employer matching contribution equal to 50% of each participant's elective deferrals, up to 6% of the participant's compensation. In other words, the maximum employer matching contribution is 3% of compensation. The 401(k) Plan also permits Veridian to make discretionary employer profit sharing contributions; however, no profit sharing contributions were made for the 2022 or 2023 plan years.

Plan Document. The 401(k) Plan is a pre-approved prototype plan document, which was adopted by Veridian with individualized elections and has been amended from time to time to reflect legal and regulatory changes. The 401(k) Plan has received a favorable opinion letter from the IRS with respect to the prototype plan, which provides reliance that the plan's terms comply with the qualification requirements of Section 401(a) of the Code. We reviewed the plan document, adoption agreement, and all amendments and found them to be in order.

Nondiscrimination Testing. We reviewed the most recent nondiscrimination testing results for the 401(k) Plan, which were conducted for the 2023 plan year. The 401(k) Plan passed both the Actual Deferral Percentage ("ADP") test and the Actual Contribution Percentage ("ACP") test without the need for corrective distributions or other remedial action. This indicates that the plan has not experienced the type of coverage or contribution disparities that would require correction.

Form 5500 Filing. We reviewed the most recent Form 5500 Annual Return/Report filing for the 401(k) Plan (Plan Year 2023). The filing was timely, and no material issues were identified. The plan's assets are held in a trust administered by the plan's trustee and recordkeeper, as identified in the data room documents.

No Other Retirement Plans. Veridian does not maintain any defined benefit pension plan, any employee stock ownership plan (other than the equity incentive plan described in Section IV above), or any multiemployer (Taft-Hartley) plan. Veridian has never participated in any multiemployer plan. Accordingly, there are no withdrawal liability risks associated with the Transaction.

C. Non-Qualified Deferred Compensation

Veridian does not currently maintain any non-qualified deferred compensation plan or arrangement subject to Section 409A of the Internal Revenue Code, such as a supplemental executive retirement plan ("SERP"), a deferred compensation plan, or a phantom equity plan. This is a favorable finding, as the existence of such plans can create complex compliance and valuation issues in the context of an acquisition.

However, certain provisions of the executive employment agreements described in Section III of this memorandum — specifically, the severance pay provisions — could potentially be characterized as "deferred compensation" subject to Section 409A if not properly structured. Our initial review indicates that the severance payments provided under the Marek, Chandrasekaran, Kessler, Fontaine, and Stein-Goldberg employment agreements are structured to qualify for one or both of the following exemptions from Section 409A:

(i) The "short-term deferral" exemption under Treasury Regulation Section 1.409A-1(b)(4), which applies to payments made within the applicable two-and-a-half-month period following the taxable year in which the right to payment is no longer subject to a substantial risk of forfeiture; and

(ii) The "separation pay" exemption under Treasury Regulation Section 1.409A-1(b)(9)(iii), which applies to payments made on account of an involuntary separation from service that do not exceed the lesser of (a) two times the employee's annualized compensation or (b) two times the Section 401(a)(17) compensation limit (currently $345,000 for 2024), and that are paid by the end of the second taxable year following the taxable year of the separation from service.

We note that the 24-month severance periods for Dr. Marek and Dr. Chandrasekaran are at the outer limit of the separation pay exemption, and the total severance amounts (including prorated bonus) may exceed the dollar thresholds. We recommend that the deal team's tax counsel conduct a detailed Section 409A analysis of each executive's severance arrangements to confirm that the exemptions apply, or, if they do not, to determine whether any modifications to the payment timing are necessary to achieve compliance.

D. Paid Time Off and Leave Policies

Unlimited PTO Policy. Veridian has adopted an unlimited paid time off ("PTO") policy for all exempt employees, under which employees may take PTO as needed without a specified accrual or cap, subject to manager approval. Because PTO is not accrued under this policy, Veridian does not carry a PTO accrual liability on its balance sheet.

However, we note a potential issue with respect to Veridian's California-based employees. Under California law, vested PTO is treated as earned wages that must be paid to the employee upon termination of employment. California Labor Code Section 227.3 provides that all vested vacation must be paid at the employee's final rate of pay at the time of termination. While several California courts and the California Division of Labor Standards Enforcement ("DLSE") have generally accepted that a truly "unlimited" PTO policy does not create an accrued wage liability (because there is no finite amount of PTO that vests or accrues), this area of law is not entirely settled, and the characterization of the policy may depend on how it is implemented in practice. We recommend that Penterra consult with California employment counsel to confirm that Veridian's unlimited PTO policy, as applied to its California employees, does not create an accrued wage liability at termination.

Parental Leave. Veridian provides 12 weeks of paid parental leave to all employees, regardless of gender, in connection with the birth, adoption, or foster placement of a child. This benefit is in addition to any leave available under the federal Family and Medical Leave Act ("FMLA") and applicable state leave laws.

Massachusetts Paid Family and Medical Leave (PFML). Veridian participates in the Massachusetts Paid Family and Medical Leave program, a state-administered program that provides eligible employees with up to 26 weeks of paid family and medical leave per benefit year. Veridian makes the required employer and employee contributions to the Massachusetts PFML trust fund, and our review indicates that contributions are current.

E. Post-Closing Plan Integration Considerations

Because the Transaction is structured as a stock purchase, Veridian will remain a separate legal entity following the closing, and all of Veridian's employee benefit plans will continue in effect without interruption. There will be no automatic termination or cessation of any benefit plan as a result of the change of control. However, Penterra will need to make decisions regarding the long-term treatment of Veridian's benefit plans as part of its post-closing integration planning. The key considerations are summarized below.

Continuation vs. Termination vs. Merger. Penterra will need to determine, for each of Veridian's benefit plans, whether to (i) continue the plan as a standalone plan for Veridian employees, (ii) terminate the plan and transition Veridian employees to comparable Penterra plans, or (iii) merge the plan into an existing Penterra plan. Each approach has different legal, administrative, and employee relations implications.

Transition Services Agreement. A draft Transition Services Agreement (the "TSA"), dated June 5, 2024, has been circulated among the parties. The TSA provides for the continuation of benefits administration by Veridian (or its third-party administrators) for a period of up to 12 months following the closing. This TSA bridge period is intended to provide Penterra with adequate time to evaluate and execute its benefits integration strategy.

401(k) Plan Integration. The 401(k) Plan will require particular attention. If Penterra elects to merge Veridian's 401(k) Plan into Penterra's existing 401(k) plan, the merger must comply with the requirements of Section 414(l) of the Code and ERISA Section 208, which generally require that no participant's accrued benefit may be reduced as a result of the merger. Additionally, the merged plan must satisfy applicable nondiscrimination testing requirements, and crediting service for eligibility and vesting purposes for Veridian employees must be addressed to avoid gaps in coverage.

Alternatively, if Penterra elects to terminate Veridian's 401(k) Plan, the termination must comply with IRS procedures, including the filing of a final Form 5500 and the distribution or rollover of participant account balances. Importantly, if the termination of the 401(k) Plan is accompanied by a significant reduction in Veridian's workforce (e.g., as part of a post-closing integration or reduction in force), the IRS may treat the plan termination as a "partial termination" under Section 411(d)(3) of the Code, which would require full vesting of all affected participants' employer contributions. This risk is particularly relevant if Penterra contemplates any post-closing headcount reductions.

Health and Welfare Plan Harmonization. With respect to health and welfare plans, Penterra should evaluate whether to maintain Veridian's existing insurance arrangements or transition Veridian employees to Penterra's group health plans. Transitioning employees mid-plan-year may require special enrollment provisions and compliance with the ACA's coverage continuity requirements.

VI. Independent Contractors and Consulting Arrangements

A. Scientific Advisory Board

Veridian maintains a Scientific Advisory Board ("SAB") composed of eight distinguished academic and industry scientists who provide strategic and scientific advisory services to the company. Each SAB member is engaged under an individual consulting agreement with Veridian. The material terms of the SAB consulting agreements are summarized below:

Compensation. SAB members receive annual cash retainers ranging from $25,000 to $50,000, depending on their role and level of engagement. In addition, each SAB member has received equity grants under the 2016 Equity Incentive Plan, consisting of NQSOs or RSUs that vest over the term of the advisory engagement.

intellectual Property. Each SAB consulting agreement contains confidentiality provisions and an invention assignment clause, under which the SAB member assigns to Veridian all rights in and to any inventions, discoveries, or intellectual property developed in the course of the advisory engagement. These provisions are appropriately tailored to the consulting relationship and appear to be enforceable.

Restrictive Covenants. Consistent with market practice for scientific advisory board members, the SAB consulting agreements do not contain non-competition obligations. SAB members are permitted to maintain their academic appointments and to serve as advisors to other companies, subject to their confidentiality obligations to Veridian. The absence of non-compete restrictions for SAB members is standard in the biotechnology industry and does not raise any concerns.

B. Other Consulting Agreements

In addition to the SAB members, Veridian engages approximately 12 independent contractors and consultants pursuant to written consulting or independent contractor agreements. These engagements include clinical research consultants, biostatistical consultants, and a medical affairs consultant. The agreements generally provide for payment on an hourly, project-based, or fixed-fee basis and contain standard confidentiality and, in some cases, invention assignment provisions.

We reviewed the classification of these individuals under the IRS common-law test for distinguishing between employees and independent contractors, which focuses on the degree of behavioral control, financial control, and the type of relationship between the parties. Our preliminary assessment is that the independent contractor classification appears appropriate for the majority of these engagements, based on the following factors: (i) the consultants generally control the manner and means by which they perform their services; (ii) the consultants are responsible for their own taxes, benefits, and business expenses; (iii) the consulting agreements are project-based or for defined terms; and (iv) the consultants hold themselves out as independent contractors providing services to multiple clients.

However, we identified approximately three consultants who present elevated misclassification risk. These individuals have been engaged on a continuous basis for more than two years, work predominantly or exclusively for Veridian, and perform services that are integral to Veridian's core business operations. Under the more restrictive state-specific classification tests, these engagements may not withstand scrutiny:

California ABC Test. Under California's ABC test, as codified by Assembly Bill 5 (AB5) at California Labor Code Section 2775, a worker is presumed to be an employee unless the hiring entity demonstrates that (A) the worker is free from the control and direction of the hiring entity, (B) the worker performs work that is outside the usual course of the hiring entity's business, and (C) the worker is customarily engaged in an independently established trade, occupation, or business. The "B" prong is the most stringent and difficult to satisfy — if a consultant is performing work that is part of Veridian's core business (e.g., clinical research or scientific development), the consultant may fail the ABC test regardless of the degree of control or independence. At least two of the three flagged consultants appear to perform services that are within Veridian's usual course of business, which would make them difficult to classify as independent contractors under California law.

Massachusetts Independent Contractor Statute. Massachusetts General Laws chapter 149, section 148B, establishes a three-pronged test for independent contractor status that is similar to California's ABC test. Like the California test, the Massachusetts test creates a presumption of employment that can be rebutted only by satisfying all three prongs. The third prong — which requires that the worker be customarily engaged in an independently established trade, occupation, profession, or business — may be difficult to satisfy for consultants who work predominantly or exclusively for Veridian.

Recommendation. We recommend that Penterra conduct a post-closing review of the three flagged consulting arrangements, with a particular focus on the California and Massachusetts classification tests. Depending on the results of that review, it may be appropriate to convert these individuals to W-2 employment status or to restructure the engagement terms to more clearly establish the independence of the relationship. The potential liability for misclassification includes unpaid wages, overtime, benefits, employment taxes, and penalties, as well as exposure under state wage and hour laws. While the aggregate financial exposure is not expected to be material in the context of the Transaction, it is a compliance risk that should be addressed.

A complete list of all independent contractor and consulting agreements is set forth in Exhibit E to this memorandum.

VII. Employment Litigation and Disputes

Our review of Veridian's employment litigation history revealed a generally clean recor

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum has been prepared by Calderwood & Harkness LLP and is protected by the attorney-client privilege and the attorney work product doctrine. This memorandum and the information contained herein are intended solely for the use of the addressees and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
CALDERWOOD & HARKNESS LLP 200 Park Avenue, 42nd Floor New York, NY 10166
MEMORANDUM
TO: Oliver Mackenzie, Partner; Harrison Wexford, Partner
FROM: Derek Okonkwo, Associate; Megan Chu, Lead Associate
DATE: May 22, 2024
RE: Employment and Benefits Due Diligence — Veridian Biosciences, Inc.
MATTER: Penterra Pharmaceuticals Corp. — Proposed Acquisition of Veridian Biosciences, Inc. / Matter No. 1018-00008
I. Executive Summary
This memorandum summarizes the results of the employment and benefits due diligence conducted by Calderwood & Harkness LLP on behalf of Penterra Pharmaceuticals Corp. ("Penterra" or "PPC") in connection with Penterra's proposed acquisition of Veridian Biosciences, Inc. ("Veridian" or "VBI"), a privately held Delaware corporation headquartered at 550 Gateway Drive, Cambridge, Massachusetts 02142. The proposed transaction is structured as an all-cash stock purchase for total consideration of Nine Hundred Million Dollars ($900,000,000), pursuant to which Penterra will acquire all of the outstanding capital stock of Veridian (the "Transaction"). The terms of the Transaction are set forth in that certain Stock Purchase Agreement (the "SPA"), drafts of which have been circulated among the parties and remain subject to ongoing negotiation.
Scope of Review. Our diligence review encompassed the following categories of documents and information relating to Veridian's employment practices, workforce arrangements, and employee benefit programs:
• Employment agreements and offer letters for named executive officers and other key employees;
• The Veridian employee handbook (most recently updated January 2024);
• The Veridian Biosciences, Inc. 2016 Equity Incentive Plan, as amended in 2018, 2020, and 2022, together with all forms of award agreement and individual award grants;
• Employee benefit plan documents, including group health and welfare plan summary plan descriptions, the 401(k) profit sharing plan document and amendments, and related Form 5500 filings;
• Consulting agreements and independent contractor arrangements;
• Immigration records, including I-9 documentation and H-1B visa sponsorship records;
• EEOC and employment litigation history, including records of any administrative charges, demand letters, settlements, and related correspondence;
• Noncompetition, nonsolicitation, confidentiality, and invention assignment agreements;
• State-specific employment law compliance materials, with particular focus on Massachusetts, California, and Maryland; and
• Such other documents and materials as were made available in the electronic data room established by Veridian and its advisors for purposes of the Transaction.
Data Room and Management Interviews. Access to the virtual data room was granted to Calderwood & Harkness on March 11, 2024. Our review of data room documents continued through May 20, 2024, encompassing over 340 individual documents uploaded across 18 data room folders relevant to employment and benefits matters. In addition to our documentary review, we conducted management interviews on the following dates and with the following individuals:
• April 3, 2024: Steven R. Kessler, Chief Financial Officer of Veridian;
• April 8, 2024: Rachel Stein-Goldberg, General Counsel of Veridian;
• April 15, 2024 and May 6, 2024: Rebecca Whitmore and Jonathan Pratt of Zalcourt Archer & Cole LLP, outside counsel to Veridian.
These interviews supplemented and, in certain instances, clarified information contained in the data room documents. We have not independently verified the completeness or accuracy of the information provided by Veridian or its advisors, and we note that our conclusions are based on the documents and information that were made available to us as of the date of this memorandum.
Overall Assessment. Based on our review, Veridian's employment and employee benefits arrangements are generally consistent with market practices for a clinical-stage biotechnology company of its size, which comprises 148 employees as of the date of this review. Veridian has adopted standard employment agreements for its executive officers, maintains a competitive benefits package, and has implemented equity incentive compensation arrangements that are typical for its stage and sector. We did not identify any systemic compliance failures or material unremediated legal violations in the employment and benefits area.
That said, we have identified several discrete areas of concern that warrant attention in connection with the Transaction and that should be addressed through the SPA, related transaction documents, or post-closing integration planning. These key areas of concern include:
1. Change-of-Control Severance Exposure. Veridian's key executive employment agreements contain significant change-of-control severance provisions that, if triggered, would result in aggregate cash severance payments of approximately $2.9 million, plus prorated bonuses, COBRA premium reimbursement, and full or partial acceleration of unvested equity awards. Because the Transaction is structured as a stock purchase, these severance obligations will be borne by Penterra as the post-closing owner of Veridian.
2. Section 280G Excise Tax Risks. A preliminary analysis under Section 280G of the Internal Revenue Code indicates that the combination of accelerated equity vesting and cash severance payments may constitute "excess parachute payments" for at least three named executive officers, potentially subjecting those individuals to a 20% excise tax under Section 4999 and limiting Penterra's tax deduction for such payments. As a privately held corporation, Veridian is eligible for the stockholder vote safe harbor under Section 280G(b)(5)(B), and we recommend that the SPA include a pre-closing covenant requiring Veridian to solicit such stockholder approval.
3. California Employment Law Compliance. Veridian employs approximately 15 individuals in California. We have identified certain non-competition provisions in employment agreements applicable to California-based employees that are likely unenforceable under California Business and Professions Code Section 16600. Additionally, Veridian's unlimited paid time off policy may present wage accrual issues under California law. Both matters should be addressed in connection with post-closing integration.
4. Maryland Employment Law Compliance. Veridian maintains approximately 8 employees at a research collaboration site in Maryland. While our review did not identify material compliance deficiencies, Penterra should ensure ongoing compliance with Maryland-specific requirements, including the Healthy Working Families Act and applicable noncompete restrictions.
5. Key-Person Dependence on Co-Founders. The VeriTCE platform technology and the lead clinical asset VRD-4187 are heavily dependent on the continued involvement of co-founders Dr. Julian Marek (CEO) and Dr. Priya Chandrasekaran (CSO). While the Transaction contemplates separate Non-Competition and Non-Solicitation Agreements with each co-founder, supplemental retention arrangements for these individuals and other key scientific personnel should be considered to protect the value of the acquisition.
The balance of this memorandum discusses each of these matters, and other employment and benefits findings, in greater detail.
II. Workforce Overview
A. Employee Census
As of the date of our diligence review, Veridian's total employee headcount stands at 148 individuals, all of whom are classified as regular full-time or part-time employees on a W-2 basis. This headcount is consistent with Veridian's representations in the data room and was confirmed during our management interview with Mr. Kessler on April 3, 2024.
The workforce is distributed across the following functional areas:
The heavy weighting toward R&D and clinical operations is consistent with Veridian's stage of development as a clinical-stage immuno-oncology company with one lead asset (VRD-4187) in a Phase 2 clinical trial (the Marlowe Asset Management-2 trial, ClinicalTrials.gov identifier NCT05837291) and several preclinical programs built on the proprietary VeriTCE T-cell engager platform.
The workforce is distributed across the following geographic locations:
Veridian does not employ any individuals outside of the United States. There are no expatriate or secondment arrangements in place.
We confirmed with Ms. Stein-Goldberg and Mr. Kessler that Veridian has no collective bargaining agreements, no unionized workforce, and no pending or threatened union organizing activity. Veridian has not received any petition for representation from any labor organization. Veridian does not maintain a works council, employee representative body, or any similar employee participation structure.
B. Employee Classification
All 148 individuals in Veridian's workforce are classified as W-2 employees for federal and state tax purposes. Our review of payroll records and offer letters did not identify any individuals who appear to be improperly classified as exempt or non-exempt under the Fair Labor Standards Act ("FLSA") or applicable state wage and hour laws, though we note that we did not conduct a position-by-position analysis of FLSA exemption status.
In addition to its W-2 workforce, Veridian engages approximately 12 independent contractors and consultants, who are discussed in greater detail in Section VI of this memorandum. These individuals include members of the Scientific Advisory Board, clinical research consultants, biostatistical consultants, and a medical affairs consultant. Each of these individuals is engaged pursuant to a written consulting or independent contractor agreement.
Our preliminary assessment of the classification of these individuals is that the independent contractor classification appears reasonable for the majority of the engaged consultants, based on the nature of the services provided, the degree of control exercised by Veridian, and the terms of the applicable agreements. However, we have identified approximately three consultants who have been engaged on a continuous basis for more than two years and who appear to work predominantly or exclusively for Veridian. These individuals present potential misclassification risk under applicable state law tests, including the ABC test adopted by California under Assembly Bill 5 ("AB5") and codified at California Labor Code Section 2775, as well as the Massachusetts independent contractor statute, Massachusetts General Laws chapter 149, section 148B. We discuss these risks further in Section VI.B below and recommend a post-closing review of these arrangements.
C. State Law Nexus and Multi-State Employment
Veridian has employees physically located in Massachusetts, California, Maryland, and approximately ten additional states where individual remote employees reside. The three states with the most significant employee concentrations — Massachusetts, California, and Maryland — each impose distinct employment law requirements that are relevant to the Transaction and post-closing integration. We discuss the compliance implications of each state's laws in Section VIII of this memorandum.
Veridian is registered as an employer in Massachusetts, California, and Maryland for purposes of state income tax withholding and unemployment insurance contributions. Based on our review of data room documents, Veridian has been filing the requisite state employer tax returns in each of these jurisdictions. We were not provided with, and therefore did not independently verify, Veridian's compliance with state employer registration and tax filing obligations in all other states where remote employees are located. We recommend that Penterra confirm, through its tax advisors or in connection with the tax diligence workstream, that Veridian has properly registered and filed in all states where it has employees.
III. Key Employee Agreements
Our review identified five named executive officers of Veridian whose employment agreements contain material provisions relevant to the Transaction, including severance, change-of-control, non-competition, and equity-related terms. A summary of each executive's employment agreement follows.
A. Chief Executive Officer — Dr. Julian Marek (Co-Founder; 8.4% Equity)
Dr. Marek is the co-founder of Veridian and has served as its Chief Executive Officer since the company's inception in 2016. Dr. Marek's current employment is governed by an Amended and Restated Employment Agreement dated as of September 15, 2020 (the "Marek Agreement"), which was originally entered into in 2016 and was amended and restated in connection with Veridian's Series C preferred stock financing.
Compensation. Under the Marek Agreement, Dr. Marek receives an annual base salary of $475,000. He is eligible for an annual discretionary bonus with a target of 50% of his base salary (i.e., a target annual bonus of $237,500), subject to achievement of individual and corporate performance objectives established by the Board of Directors or its compensation committee. The actual bonus paid in any given year is at the discretion of the Board.
Equity Holdings. Dr. Marek holds equity interests representing approximately 8.4% of Veridian's fully diluted capitalization, consisting of a combination of common shares issued at the time of the company's founding (founder shares) and stock options granted under the 2016 Equity Incentive Plan. A portion of Dr. Marek's stock options remain subject to time-based vesting.
Severance Provisions. The Marek Agreement provides for the following severance benefits:
Standard Severance (Non-Change-of-Control). In the event of a termination of Dr. Marek's employment by Veridian without "cause" (as defined in the Marek Agreement) or by Dr. Marek for "good reason" (as defined therein), Dr. Marek is entitled to (i) continued payment of his base salary for a period of 18 months following the date of termination, paid in accordance with Veridian's regular payroll schedule, and (ii) reimbursement of COBRA premiums for continued group health coverage for himself and his eligible dependents for a period of up to 18 months following termination. These severance benefits are conditioned upon Dr. Marek's timely execution and non-revocation of a general release of claims in favor of Veridian.
Double-Trigger Change-of-Control Severance. In the event of a termination of Dr. Marek's employment by Veridian (or any successor entity) without cause, or by Dr. Marek for good reason, in either case within 12 months following a "change of control" (as defined in the Marek Agreement), Dr. Marek is entitled to (i) continued payment of his base salary for a period of 24 months following the date of termination, (ii) a prorated annual bonus for the year in which the termination occurs (based on target bonus), and (iii) full acceleration of all unvested equity awards held by Dr. Marek as of the date of such termination. These enhanced severance benefits are also conditioned upon Dr. Marek's timely execution and non-revocation of a general release of claims.
It is important to note that the change-of-control severance provisions in the Marek Agreement are "double trigger" — meaning that the enhanced severance benefits are triggered only upon the combination of (1) a change of control and (2) a qualifying termination of employment within 12 months thereafter. The consummation of the Transaction alone would not, absent a subsequent qualifying termination, trigger these enhanced severance benefits.
Restrictive Covenants. The Marek Agreement contains the following post-termination restrictive covenants:
Non-Competition. Dr. Marek is subject to a 12-month post-termination non-competition covenant, which restricts him from engaging in or providing services to any business that is directly competitive with Veridian's business in the field of immuno-oncology T-cell engager therapeutics. The non-compete is limited in scope to the specific therapeutic modality in which Veridian operates and does not extend to the broader oncology or biotechnology industry.
Non-Solicitation. Dr. Marek is subject to an 18-month post-termination non-solicitation covenant, which prohibits him from (i) soliciting, recruiting, or hiring any employee of Veridian or (ii) soliciting or diverting any customer, collaborator, or business partner of Veridian.
Invention Assignment and Confidentiality. The Marek Agreement contains comprehensive invention assignment and confidentiality provisions, under which Dr. Marek assigns to Veridian all rights in and to any inventions, discoveries, developments, or intellectual property conceived or reduced to practice during the course of his employment. The confidentiality obligations survive the termination of Dr. Marek's employment without limitation as to time.
Transaction-Specific Note. The proposed Transaction contemplates that Dr. Marek will execute a separate Non-Competition and Non-Solicitation Agreement at closing, providing for a two-year post-closing non-competition period and a two-year post-closing non-solicitation period. This closing non-compete agreement will supersede and replace the non-competition and non-solicitation provisions contained in the Marek Agreement. The terms of this separate agreement are being negotiated in the context of the SPA and are not yet finalized as of the date of this memorandum.
B. Chief Scientific Officer — Dr. Priya Chandrasekaran (Co-Founder; 6.2% Equity)
Dr. Chandrasekaran is the co-founder of Veridian and has served as its Chief Scientific Officer since the company's inception. Dr. Chandrasekaran's current employment is governed by an Amended and Restated Employment Agreement dated as of September 15, 2020 (the "Chandrasekaran Agreement"), which mirrors the Marek Agreement in structure and was similarly amended and restated in connection with the Series C financing.
Compensation. Dr. Chandrasekaran receives an annual base salary of $435,000 and is eligible for an annual discretionary bonus with a target of 45% of her base salary (i.e., a target annual bonus of $195,750).
Equity Holdings. Dr. Chandrasekaran holds equity interests representing approximately 6.2% of Veridian's fully diluted capitalization, consisting of a combination of founder shares and stock options granted under the 2016 Equity Incentive Plan.
Severance Provisions. The Chandrasekaran Agreement contains severance provisions that are substantially similar to those in the Marek Agreement. Specifically, Dr. Chandrasekaran is entitled to (i) 18 months of base salary continuation and 18 months of COBRA premium reimbursement upon a termination without cause or resignation for good reason (non-change-of-control scenario), and (ii) 24 months of base salary continuation, a prorated target bonus, and full acceleration of unvested equity awards upon a qualifying termination within 12 months following a change of control (double-trigger change-of-control scenario). All severance benefits are conditioned upon execution and non-revocation of a release of claims.
Restrictive Covenants. The Chandrasekaran Agreement contains a 12-month post-termination non-competition covenant and an 18-month non-solicitation covenant, identical in scope and structure to those in the Marek Agreement.
Transaction-Specific Note. As with Dr. Marek, the Transaction contemplates that Dr. Chandrasekaran will execute a separate Non-Competition and Non-Solicitation Agreement at closing with a two-year non-compete and two-year non-solicitation period, which will supersede the restrictions in the Chandrasekaran Agreement.
C. Chief Financial Officer — Steven R. Kessler
Mr. Kessler has served as Veridian's Chief Financial Officer since 2019. His employment is governed by an Employment Agreement dated as of March 4, 2019, as amended by Amendment No. 1 dated as of July 12, 2022 (collectively, the "Kessler Agreement").
Compensation. Mr. Kessler receives an annual base salary of $390,000 and is eligible for an annual discretionary bonus with a target of 40% of his base salary (i.e., a target annual bonus of $156,000).
Severance Provisions. The Kessler Agreement provides for the following severance benefits:
Standard Severance (Non-Change-of-Control). Upon a termination without cause, Mr. Kessler is entitled to 12 months of base salary continuation and 12 months of COBRA premium reimbursement, subject to execution of a release.
Change-of-Control Provisions. The Kessler Agreement contains a hybrid change-of-control provision that includes both single-trigger and double-trigger elements. Specifically, upon the consummation of a change of control, 50% of Mr. Kessler's then-unvested equity awards will automatically accelerate and vest (single trigger). In addition, if Mr. Kessler's employment is terminated by the company without cause within 12 months following a change of control, he is entitled to (i) 12 months of base salary continuation and (ii) full acceleration of all remaining unvested equity awards (double trigger for the balance).
The single-trigger acceleration component of the Kessler Agreement is notable because it will be triggered by the closing of the Transaction itself, without any requirement of a termination of employment. Under the terms of the SPA, which provides for cancellation of all outstanding equity awards at closing in exchange for cash consideration, the 50% single-trigger acceleration will entitle Mr. Kessler to cash consideration in respect of 50% of his then-unvested options and RSUs at closing, with the remaining 50% also cashed out at closing (since all awards are being cancelled for cash regardless of vesting status). However, the cash consideration in respect of the remaining 50% of unvested awards may need to be structured to preserve the double-trigger protection. We are coordinating with the deal team on this point.
Restrictive Covenants. The Kessler Agreement contains a 12-month post-termination non-competition covenant. No separate closing non-compete agreement is contemplated for Mr. Kessler under the SPA.
D. Vice President, Regulatory Affairs — Dr. Anne-Marie Fontaine
Dr. Fontaine has served as Veridian's Vice President of Regulatory Affairs since 2021. Her employment is governed by an Employment Agreement dated as of June 1, 2021 (the "Fontaine Agreement").
Compensation. Dr. Fontaine receives an annual base salary of $340,000 and is eligible for an annual discretionary bonus with a target of 35% of her base salary (i.e., a target annual bonus of $119,000).
Severance Provisions. The Fontaine Agreement provides for 9 months of base salary continuation upon termination without cause (non-change-of-control scenario) and, in a double-trigger change-of-control scenario, 12 months of base salary continuation and 50% acceleration of unvested equity awards upon a qualifying termination within 12 months following a change of control.
Restrictive Covenants. The Fontaine Agreement contains a 12-month post-termination non-competition covenant.
Key Role Significance. Dr. Fontaine plays a critical role in Veridian's interactions with the U.S. Food and Drug Administration, including responsibility for managing the Investigational New Drug Application (IND) for VRD-4187 (IND No. 154832) and the ongoing Marlowe Asset Management-2 Phase 2 clinical trial (NCT05837291). Dr. Fontaine serves as the primary point of contact with the FDA Division of Oncology Products and has led all pre-IND and IND-related communications, as well as the design and execution of the regulatory strategy for the VRD-4187 program. Her continued involvement is critical for ensuring post-closing regulatory continuity, and we recommend that Penterra consider retention incentives for Dr. Fontaine in addition to the protections provided by her existing employment agreement.
E. General Counsel — Rachel Stein-Goldberg
Ms. Stein-Goldberg has served as Veridian's General Counsel since 2020. Her employment is governed by an Employment Agreement dated as of February 10, 2020 (the "Stein-Goldberg Agreement").
Compensation. Ms. Stein-Goldberg receives an annual base salary of $365,000.
Severance Provisions. The Stein-Goldberg Agreement provides for 12 months of base salary continuation upon termination without cause and standard double-trigger change-of-control provisions (12 months salary continuation and equity acceleration upon qualifying termination within 12 months following a change of control), in each case subject to execution and non-revocation of a release of claims.
Restrictive Covenants. The Stein-Goldberg Agreement contains a 12-month post-termination non-competition covenant.
F. Summary of Key Employee Severance Exposure
The following table summarizes the estimated aggregate cash severance costs in the event all five named executive officers are terminated without cause within 12 months following the closing of the Transaction (i.e., the double-trigger change-of-control severance scenario):
The total economic cost of the change-of-control severance obligations is significantly larger than the cash severance figures shown above when the value of equity acceleration is included. The equity acceleration value will depend on the per-share merger consideration implied by the $900,000,000 purchase price and the number and exercise prices of the unvested options and RSUs held by each executive. We recommend that the deal team quantify the total acceleration value based on the final per-share consideration once the capitalization table is finalized.
It is important to note that because the Transaction is structured as a stock purchase (rather than an asset purchase or merger), Veridian will remain a continuing legal entity and employer following the closing. Accordingly, all severance obligations of Veridian under the key employee employment agreements will become obligations of Veridian as a subsidiary of Penterra, and the economic cost of any such severance will be borne by Penterra as the post-closing owner.
IV. Equity Incentive Plan
A. Plan Structure
Veridian's equity compensation program is administered under the Veridian Biosciences, Inc. 2016 Equity Incentive Plan, as amended in 2018, 2020, and 2022 (the "Plan"). The Plan was adopted by the Veridian Board of Directors in connection with the company's incorporation and initial capitalization in 2016 and has been amended on three occasions to increase the share reserve and expand the types of awards available for grant.
The material terms of the Plan are summarized as follows:
Share Reserve. The Plan reserves a total of 9.8% of Veridian's fully diluted capitalization for issuance pursuant to equity awards to employees, consultants, and non-employee directors. This share reserve has been fully authorized by the Board and approved by the stockholders.
Types of Awards. The Plan authorizes the grant of the following types of awards: (i) incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code, (ii) non-qualified stock options ("NQSOs"), and (iii) restricted stock units ("RSUs"). The Plan does not currently authorize the grant of stock appreciation rights, restricted stock awards (other than RSUs), or performance-based equity awards, although the Board retains the authority to amend the Plan to add such award types.
Administration. The Plan is administered by the Board of Directors of Veridian, or by a compensation committee of the Board to which the Board has delegated administrative authority. The Plan administrator has discretion to determine the recipients, types, and terms of awards granted under the Plan, subject to the terms and conditions set forth in the Plan document.
Exercise Price. The Plan requires that all stock options be granted with an exercise price per share that is not less than 100% of the fair market value of a share of Veridian common stock on the date of grant (or 110% of fair market value for ISOs granted to 10% stockholders). We reviewed the exercise prices of all outstanding option grants and confirmed that each bears an exercise price at or above the fair market value as determined by independent Section 409A valuations performed by Northbridge Accounting Group LLP, Veridian's independent auditor (engagement partner Patrick Calloway). Copies of the Section 409A valuation reports for each applicable period were provided in the data room.
B. Outstanding Awards
As of the date of our review, approximately 112 of Veridian's 148 current employees hold outstanding options or RSUs under the Plan. The aggregate outstanding awards represent approximately 9.1% of Veridian's fully diluted capitalization, which is within the 9.8% share reserve established under the Plan, leaving approximately 0.7% of the fully diluted capitalization available for future grants (though no further grants are anticipated in light of the pending Transaction).
The outstanding awards have a weighted average exercise price of $4.82 per share (calculated on an as-converted basis across all outstanding options). The mix of outstanding awards is approximately 65% stock options (a combination of ISOs and NQSOs) and 35% RSUs. The standard vesting schedule for awards granted to non-executive employees is four-year vesting with a one-year cliff (i.e., 25% vesting on the first anniversary of the grant date, with the remainder vesting monthly or quarterly over the subsequent 36 months). Certain executive-level grants, as reflected in the employment agreements discussed in Section III above, provide for three-year vesting schedules.
A detailed schedule of all outstanding awards, including the grant date, award type, number of shares, exercise price, vesting schedule, and vesting status as of the closing date, is set forth in Exhibit B to this memorandum.
C. Change-of-Control Provisions
The interplay between the Plan-level change-of-control provisions and the individual change-of-control provisions contained in certain key employee agreements is an area of particular importance for the Transaction. We summarize the relevant provisions below.
Plan-Level Provision. The Plan contains a "double trigger" acceleration provision with respect to outstanding awards upon a change of control. Under the Plan, if a "change of control" (as defined in the Plan) occurs, outstanding awards will not automatically accelerate but instead will be assumed or substituted by the acquiring entity on equitable terms. If, however, the acquiring entity does not assume or substitute the outstanding awards, then all outstanding awards will fully accelerate and become vested and exercisable (or, in the case of RSUs, will become fully vested and settled) immediately prior to the consummation of the change of control. This "assumption or substitution" mechanism is the default treatment for all award holders under the Plan.
Individual Agreement Overrides. As described in Section III above, the employment agreements of Dr. Marek, Dr. Chandrasekaran, Mr. Kessler, and Dr. Fontaine contain individual change-of-control equity acceleration provisions that differ from, and in certain cases are more favorable than, the Plan-level default. To the extent that an individual employment agreement provides acceleration terms that conflict with the Plan-level provisions, the individual agreement terms will generally control pursuant to the "more favorable" or "superseding" provisions contained in the respective award agreements.
Treatment Under the SPA. Under the terms of the proposed SPA, Penterra has elected not to assume or substitute Veridian's outstanding equity awards. Instead, all outstanding and unexercised stock options and all outstanding RSUs will be cancelled at the closing in exchange for the right to receive cash consideration equal to:
(i) For stock options: the excess, if any, of the per-share merger consideration over the applicable per-share exercise price of the option, multiplied by the number of shares subject to the option; and
(ii) For RSUs: the per-share merger consideration multiplied by the number of shares underlying the RSU award;
in each case, less applicable federal, state, and local tax withholdings.
Because the acquiring entity (Penterra) is not assuming or substituting the awards, the Plan-level double-trigger provision effectively converts to full acceleration at closing for all award holders — i.e., all unvested awards will vest immediately prior to closing and be cashed out. This treatment is consistent with the Plan's terms and eliminates the need for post-closing equity administration. However, the total equity payout at closing represents a significant component of the aggregate transaction consideration and must be factored into Penterra's economic analysis, including for purposes of the Section 280G analysis discussed below.
Section 409A Compliance. We reviewed the outstanding option grants for potential compliance issues under Section 409A of the Internal Revenue Code, which imposes penalty taxes on certain deferred compensation arrangements. A stock option may be subject to Section 409A if it is granted with an exercise price below the fair market value of the underlying stock on the date of grant (a "Discounted option"). Based on our review of the Section 409A valuation reports provided by Northbridge Accounting Group LLP and the exercise prices reflected in the individual option award agreements, we did not identify any discounted options. All option grants appear to have been priced at or above the fair market value established by the applicable 409A valuation as of the date of grant. Accordingly, we do not believe that any outstanding options are subject to Section 409A.
D. Section 280G Analysis
We have conducted a preliminary analysis under Section 280G of the Internal Revenue Code to assess whether the payments and benefits to be received by Veridian's executive officers in connection with the Transaction may constitute "excess parachute payments" subject to the 20% excise tax imposed by Section 4999 of the Code.
Under Section 280G, a "parachute payment" is any payment in the nature of compensation made to a "disqualified individual" (generally, officers, highly compensated employees, and significant shareholders) that is contingent on a change of control and that, together with all other such payments, equals or exceeds three times the individual's "base amount" (generally, the individual's average annual taxable compensation for the five most recent taxable years preceding the change of control). If the aggregate parachute payments equal or exceed the three-times threshold, the portion of such payments that exceeds one times the base amount is treated as an "excess parachute payment," and (i) the employer loses its tax deduction for the excess parachute payment amount under Section 280G, and (ii) the individual is subject to a 20% excise tax on the excess parachute payment amount under Section 4999, in addition to regular income tax.
Our preliminary Section 280G analysis, which is summarized in Exhibit F, identified potential excise tax exposure for the following individuals:
• Dr. Julian Marek: The combination of Dr. Marek's accelerated equity (representing approximately 8.4% of fully diluted capitalization, a significant portion of which remains unvested), potential 24-month cash severance, and prorated bonus is likely to exceed the three-times base amount threshold, resulting in excess parachute payments subject to the excise tax.
• Dr. Priya Chandrasekaran: Similarly, the combination of Dr. Chandrasekaran's accelerated equity (approximately 6.2% of fully diluted capitalization) and potential 24-month cash severance and prorated bonus is likely to exceed the threshold.
• Steven R. Kessler: The single-trigger 50% equity acceleration at closing, combined with Mr. Kessler's potential 12-month cash severance and full equity acceleration upon a qualifying post-closing termination, may exceed the three-times threshold.
The $900,000,000 purchase price implies a per-share merger consideration that is substantially higher than the weighted average exercise price of outstanding options ($4.82 per share). When the spread between the per-share consideration and the exercise price is multiplied by the number of accelerating equity awards, the resulting "parachute payment" attributable to equity acceleration alone may be sufficient to breach the Section 280G threshold for these executives.
Stockholder Vote Safe Harbor. Because Veridian is a privately held corporation (i.e., its stock is not readily tradeable on an established securities market or otherwise), Veridian is eligible for the Section 280G stockholder vote safe harbor under Section 280G(b)(5)(B) of the Code. Under this safe harbor, if the parachute payments are approved by a vote of more than 75% of the voting power of the outstanding stock of the corporation, and the affected individual provides adequate disclosure to the stockholders and agrees to return any payments not approved, then the payments will not be treated as "parachute payments" for purposes of Section 280G, and neither the Section 280G deduction limitation nor the Section 4999 excise tax will apply.
We understand that Veridian has already obtained stockholder support for the Transaction through a written consent delivered on June 14, 2024, representing more than 90% of the outstanding voting power. This level of support suggests that obtaining the requisite 75%+ stockholder approval for purposes of the Section 280G safe harbor vote should be feasible.
Recommendation. We recommend that the SPA include a pre-closing covenant requiring Veridian to conduct a Section 280G stockholder vote prior to closing, in accordance with the safe harbor procedures set forth in Treasury Regulation Section 1.280G-1, Q&A-7. Alternatively, or in addition, the SPA could include the Section 280G stockholder vote as a condition to closing. The affected executives should be required to execute appropriate waivers agreeing to forfeit any parachute payments that are not approved by the stockholders. If the Section 280G stockholder vote is not obtained, Penterra's tax deduction for the excess parachute payment amounts would be permanently disallowed, and the affected executives would be subject to the 20% excise tax, which could create friction with key employees whom Penterra desires to retain.
V. Employee Benefit Plans — ERISA and Non-ERISA
A. Health and Welfare Plans
Veridian sponsors a comprehensive suite of group health and welfare benefit plans for its employees and their eligible dependents. Based on our review of the summary plan descriptions, insurance contracts, and related documents provided in the data room, the following plans are currently maintained:
1. Group Medical Insurance: Veridian offers two medical plan options — a Preferred Provider Organization ("PPO") plan and a High Deductible Health Plan ("HDHP") with a linked Health Savings Account ("HSA"). Both plans are fully insured through a group policy issued by a national health insurance carrier.
2. Group Dental Insurance: Veridian offers a fully insured group dental plan covering preventive, basic, and major dental services.
3. Group Vision Insurance: Veridian offers a fully insured group vision plan covering routine eye exams, lenses, and frames.
4. Group Life Insurance and Accidental Death & Dismemberment ("AD&D"): Veridian provides employer-paid group life insurance at a benefit level of one times (1x) annual base salary, together with a matching AD&D benefit. Employees may also elect supplemental voluntary life insurance at their own expense, subject to evidence of insurability requirements.
5. Short-Term Disability Insurance: Veridian provides employer-paid short-term disability coverage providing income replacement benefits, typically at 60% of base salary, for a benefit period of up to 26 weeks.
6. Long-Term Disability Insurance: Veridian provides employer-paid long-term disability coverage providing income replacement benefits, typically at 60% of base salary, commencing after the exhaustion of the short-term disability benefit period.
7. Flexible Spending Accounts: Veridian offers both medical flexible spending accounts ("Medical FSAs") and dependent care flexible spending accounts ("DCAP FSAs") under a Section 125 cafeteria plan.
8. Employee Assistance Program ("EAP"): Veridian provides an employer-paid EAP offering confidential counseling and referral services.
All of the foregoing health and welfare plans are fully insured, meaning that Veridian pays premiums to third-party insurance carriers that bear the risk of claims. Veridian does not maintain any self-funded or self-insured health plan arrangements. This is a favorable finding from a diligence perspective, as it means that Veridian does not have any exposure to unpaid or unreported health claims (sometimes referred to as "incurred but not reported" or "IBNR" claims), which can be a significant liability in acquisitions of companies that maintain self-funded plans.
ERISA Compliance. The health and welfare plans are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). We reviewed the Form 5500 Annual Return/Report filings for the three most recent plan years (Plan Years 2021, 2022, and 2023) for each plan that is required to file. No material deficiencies or delinquencies were identified in the Form 5500 filings. Summary plan descriptions and summaries of material modifications appear to have been distributed to participants in accordance with ERISA's disclosure requirements, based on the records provided.
COBRA Compliance. Veridian utilizes a third-party administrator for COBRA (Consolidated Omnibus Budget Reconciliation Act) compliance, including the generation and distribution of COBRA election notices and administration of COBRA continuation coverage. Our review of sample COBRA notices and administrative procedures indicates that Veridian's COBRA procedures appear to comply with the applicable notice and coverage continuation requirements under Section 4980B of the Code and ERISA Sections 601–608. We did not identify any instances of untimely COBRA notice delivery or improper denial of COBRA continuation coverage.
HIPAA Privacy and Security. Veridian has adopted business associate agreements with its health plan administrators and insurance carriers in compliance with the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the HITECH Act. Veridian has designated its Vice President of Human Resources as its HIPAA privacy officer. We reviewed Veridian's HIPAA privacy notice and found it to be consistent with the regulatory requirements.
ACA Compliance. As an employer with 148 full-time employees, Veridian is an "applicable large employer" within the meaning of Section 4980H of the Internal Revenue Code (the threshold being 50 full-time employees or full-time equivalent employees). Veridian is therefore subject to the Affordable Care Act's employer shared responsibility provisions (the "employer mandate") and the related reporting requirements under Sections 6055 and 6056 of the Code. We confirmed that Veridian has filed Forms 1094-C and 1095-C with the IRS for the 2022 and 2023 reporting years and has distributed Forms 1095-C to its full-time employees. Veridian has not received any employer shared responsibility penalty notices (Letter 226-J) from the IRS, and based on our review of the offers of coverage made to full-time employees, it appears that Veridian has satisfied its obligations under the employer mandate.
B. Retirement Plans
Veridian sponsors a single qualified retirement plan — a 401(k) profit sharing plan (the "401(k) Plan") — for the benefit of its employees. The material terms and compliance status of the 401(k) Plan are summarized below.
Plan Terms. The 401(k) Plan permits eligible employees to make pre-tax and Roth elective deferrals, subject to the annual limits under Section 402(g) of the Internal Revenue Code. Veridian makes an employer matching contribution equal to 50% of each participant's elective deferrals, up to 6% of the participant's compensation. In other words, the maximum employer matching contribution is 3% of compensation. The 401(k) Plan also permits Veridian to make discretionary employer profit sharing contributions; however, no profit sharing contributions were made for the 2022 or 2023 plan years.
Plan Document. The 401(k) Plan is a pre-approved prototype plan document, which was adopted by Veridian with individualized elections and has been amended from time to time to reflect legal and regulatory changes. The 401(k) Plan has received a favorable opinion letter from the IRS with respect to the prototype plan, which provides reliance that the plan's terms comply with the qualification requirements of Section 401(a) of the Code. We reviewed the plan document, adoption agreement, and all amendments and found them to be in order.
Nondiscrimination Testing. We reviewed the most recent nondiscrimination testing results for the 401(k) Plan, which were conducted for the 2023 plan year. The 401(k) Plan passed both the Actual Deferral Percentage ("ADP") test and the Actual Contribution Percentage ("ACP") test without the need for corrective distributions or other remedial action. This indicates that the plan has not experienced the type of coverage or contribution disparities that would require correction.
Form 5500 Filing. We reviewed the most recent Form 5500 Annual Return/Report filing for the 401(k) Plan (Plan Year 2023). The filing was timely, and no material issues were identified. The plan's assets are held in a trust administered by the plan's trustee and recordkeeper, as identified in the data room documents.
No Other Retirement Plans. Veridian does not maintain any defined benefit pension plan, any employee stock ownership plan (other than the equity incentive plan described in Section IV above), or any multiemployer (Taft-Hartley) plan. Veridian has never participated in any multiemployer plan. Accordingly, there are no withdrawal liability risks associated with the Transaction.
C. Non-Qualified Deferred Compensation
Veridian does not currently maintain any non-qualified deferred compensation plan or arrangement subject to Section 409A of the Internal Revenue Code, such as a supplemental executive retirement plan ("SERP"), a deferred compensation plan, or a phantom equity plan. This is a favorable finding, as the existence of such plans can create complex compliance and valuation issues in the context of an acquisition.
However, certain provisions of the executive employment agreements described in Section III of this memorandum — specifically, the severance pay provisions — could potentially be characterized as "deferred compensation" subject to Section 409A if not properly structured. Our initial review indicates that the severance payments provided under the Marek, Chandrasekaran, Kessler, Fontaine, and Stein-Goldberg employment agreements are structured to qualify for one or both of the following exemptions from Section 409A:
(i) The "short-term deferral" exemption under Treasury Regulation Section 1.409A-1(b)(4), which applies to payments made within the applicable two-and-a-half-month period following the taxable year in which the right to payment is no longer subject to a substantial risk of forfeiture; and
(ii) The "separation pay" exemption under Treasury Regulation Section 1.409A-1(b)(9)(iii), which applies to payments made on account of an involuntary separation from service that do not exceed the lesser of (a) two times the employee's annualized compensation or (b) two times the Section 401(a)(17) compensation limit (currently $345,000 for 2024), and that are paid by the end of the second taxable year following the taxable year of the separation from service.
We note that the 24-month severance periods for Dr. Marek and Dr. Chandrasekaran are at the outer limit of the separation pay exemption, and the total severance amounts (including prorated bonus) may exceed the dollar thresholds. We recommend that the deal team's tax counsel conduct a detailed Section 409A analysis of each executive's severance arrangements to confirm that the exemptions apply, or, if they do not, to determine whether any modifications to the payment timing are necessary to achieve compliance.
D. Paid Time Off and Leave Policies
Unlimited PTO Policy. Veridian has adopted an unlimited paid time off ("PTO") policy for all exempt employees, under which employees may take PTO as needed without a specified accrual or cap, subject to manager approval. Because PTO is not accrued under this policy, Veridian does not carry a PTO accrual liability on its balance sheet.
However, we note a potential issue with respect to Veridian's California-based employees. Under California law, vested PTO is treated as earned wages that must be paid to the employee upon termination of employment. California Labor Code Section 227.3 provides that all vested vacation must be paid at the employee's final rate of pay at the time of termination. While several California courts and the California Division of Labor Standards Enforcement ("DLSE") have generally accepted that a truly "unlimited" PTO policy does not create an accrued wage liability (because there is no finite amount of PTO that vests or accrues), this area of law is not entirely settled, and the characterization of the policy may depend on how it is implemented in practice. We recommend that Penterra consult with California employment counsel to confirm that Veridian's unlimited PTO policy, as applied to its California employees, does not create an accrued wage liability at termination.
Parental Leave. Veridian provides 12 weeks of paid parental leave to all employees, regardless of gender, in connection with the birth, adoption, or foster placement of a child. This benefit is in addition to any leave available under the federal Family and Medical Leave Act ("FMLA") and applicable state leave laws.
Massachusetts Paid Family and Medical Leave (PFML). Veridian participates in the Massachusetts Paid Family and Medical Leave program, a state-administered program that provides eligible employees with up to 26 weeks of paid family and medical leave per benefit year. Veridian makes the required employer and employee contributions to the Massachusetts PFML trust fund, and our review indicates that contributions are current.
E. Post-Closing Plan Integration Considerations
Because the Transaction is structured as a stock purchase, Veridian will remain a separate legal entity following the closing, and all of Veridian's employee benefit plans will continue in effect without interruption. There will be no automatic termination or cessation of any benefit plan as a result of the change of control. However, Penterra will need to make decisions regarding the long-term treatment of Veridian's benefit plans as part of its post-closing integration planning. The key considerations are summarized below.
Continuation vs. Termination vs. Merger. Penterra will need to determine, for each of Veridian's benefit plans, whether to (i) continue the plan as a standalone plan for Veridian employees, (ii) terminate the plan and transition Veridian employees to comparable Penterra plans, or (iii) merge the plan into an existing Penterra plan. Each approach has different legal, administrative, and employee relations implications.
Transition Services Agreement. A draft Transition Services Agreement (the "TSA"), dated June 5, 2024, has been circulated among the parties. The TSA provides for the continuation of benefits administration by Veridian (or its third-party administrators) for a period of up to 12 months following the closing. This TSA bridge period is intended to provide Penterra with adequate time to evaluate and execute its benefits integration strategy.
401(k) Plan Integration. The 401(k) Plan will require particular attention. If Penterra elects to merge Veridian's 401(k) Plan into Penterra's existing 401(k) plan, the merger must comply with the requirements of Section 414(l) of the Code and ERISA Section 208, which generally require that no participant's accrued benefit may be reduced as a result of the merger. Additionally, the merged plan must satisfy applicable nondiscrimination testing requirements, and crediting service for eligibility and vesting purposes for Veridian employees must be addressed to avoid gaps in coverage.
Alternatively, if Penterra elects to terminate Veridian's 401(k) Plan, the termination must comply with IRS procedures, including the filing of a final Form 5500 and the distribution or rollover of participant account balances. Importantly, if the termination of the 401(k) Plan is accompanied by a significant reduction in Veridian's workforce (e.g., as part of a post-closing integration or reduction in force), the IRS may treat the plan termination as a "partial termination" under Section 411(d)(3) of the Code, which would require full vesting of all affected participants' employer contributions. This risk is particularly relevant if Penterra contemplates any post-closing headcount reductions.
Health and Welfare Plan Harmonization. With respect to health and welfare plans, Penterra should evaluate whether to maintain Veridian's existing insurance arrangements or transition Veridian employees to Penterra's group health plans. Transitioning employees mid-plan-year may require special enrollment provisions and compliance with the ACA's coverage continuity requirements.
VI. Independent Contractors and Consulting Arrangements
A. Scientific Advisory Board
Veridian maintains a Scientific Advisory Board ("SAB") composed of eight distinguished academic and industry scientists who provide strategic and scientific advisory services to the company. Each SAB member is engaged under an individual consulting agreement with Veridian. The material terms of the SAB consulting agreements are summarized below:
Compensation. SAB members receive annual cash retainers ranging from $25,000 to $50,000, depending on their role and level of engagement. In addition, each SAB member has received equity grants under the 2016 Equity Incentive Plan, consisting of NQSOs or RSUs that vest over the term of the advisory engagement.
intellectual Property. Each SAB consulting agreement contains confidentiality provisions and an invention assignment clause, under which the SAB member assigns to Veridian all rights in and to any inventions, discoveries, or intellectual property developed in the course of the advisory engagement. These provisions are appropriately tailored to the consulting relationship and appear to be enforceable.
Restrictive Covenants. Consistent with market practice for scientific advisory board members, the SAB consulting agreements do not contain non-competition obligations. SAB members are permitted to maintain their academic appointments and to serve as advisors to other companies, subject to their confidentiality obligations to Veridian. The absence of non-compete restrictions for SAB members is standard in the biotechnology industry and does not raise any concerns.
B. Other Consulting Agreements
In addition to the SAB members, Veridian engages approximately 12 independent contractors and consultants pursuant to written consulting or independent contractor agreements. These engagements include clinical research consultants, biostatistical consultants, and a medical affairs consultant. The agreements generally provide for payment on an hourly, project-based, or fixed-fee basis and contain standard confidentiality and, in some cases, invention assignment provisions.
We reviewed the classification of these individuals under the IRS common-law test for distinguishing between employees and independent contractors, which focuses on the degree of behavioral control, financial control, and the type of relationship between the parties. Our preliminary assessment is that the independent contractor classification appears appropriate for the majority of these engagements, based on the following factors: (i) the consultants generally control the manner and means by which they perform their services; (ii) the consultants are responsible for their own taxes, benefits, and business expenses; (iii) the consulting agreements are project-based or for defined terms; and (iv) the consultants hold themselves out as independent contractors providing services to multiple clients.
However, we identified approximately three consultants who present elevated misclassification risk. These individuals have been engaged on a continuous basis for more than two years, work predominantly or exclusively for Veridian, and perform services that are integral to Veridian's core business operations. Under the more restrictive state-specific classification tests, these engagements may not withstand scrutiny:
California ABC Test. Under California's ABC test, as codified by Assembly Bill 5 (AB5) at California Labor Code Section 2775, a worker is presumed to be an employee unless the hiring entity demonstrates that (A) the worker is free from the control and direction of the hiring entity, (B) the worker performs work that is outside the usual course of the hiring entity's business, and (C) the worker is customarily engaged in an independently established trade, occupation, or business. The "B" prong is the most stringent and difficult to satisfy — if a consultant is performing work that is part of Veridian's core business (e.g., clinical research or scientific development), the consultant may fail the ABC test regardless of the degree of control or independence. At least two of the three flagged consultants appear to perform services that are within Veridian's usual course of business, which would make them difficult to classify as independent contractors under California law.
Massachusetts Independent Contractor Statute. Massachusetts General Laws chapter 149, section 148B, establishes a three-pronged test for independent contractor status that is similar to California's ABC test. Like the California test, the Massachusetts test creates a presumption of employment that can be rebutted only by satisfying all three prongs. The third prong — which requires that the worker be customarily engaged in an independently established trade, occupation, profession, or business — may be difficult to satisfy for consultants who work predominantly or exclusively for Veridian.
Recommendation. We recommend that Penterra conduct a post-closing review of the three flagged consulting arrangements, with a particular focus on the California and Massachusetts classification tests. Depending on the results of that review, it may be appropriate to convert these individuals to W-2 employment status or to restructure the engagement terms to more clearly establish the independence of the relationship. The potential liability for misclassification includes unpaid wages, overtime, benefits, employment taxes, and penalties, as well as exposure under state wage and hour laws. While the aggregate financial exposure is not expected to be material in the context of the Transaction, it is a compliance risk that should be addressed.
A complete list of all independent contractor and consulting agreements is set forth in Exhibit E to this memorandum.
VII. Employment Litigation and Disputes
Our review of Veridian's employment litigation history revealed a generally clean recor

MEMORANDUM

Record

Parties

Dates

Amounts