PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 200 Park Avenue, 42nd Floor New York, NY 10166
INTERNAL MEMORANDUM
Matter No.: 1018-00008
Date: March 15, 2024
From: Oliver Mackenzie, Partner, Mergers & Acquisitions Megan Chu, Associate, Mergers & Acquisitions
To: Deal Team: Harrison Wexford, Partner, Mergers & Acquisitions Derek Okonkwo, Associate, Mergers & Acquisitions Leonard Cross, Partner, Tax
Re: Proposed Acquisition of Veridian Biosciences, Inc. by Penterra Pharmaceuticals Corp. — Transaction Overview and Key Legal Issues
CONFIDENTIALITY NOTICE: This memorandum is intended solely for the internal use of the Calderwood & Harkness LLP deal team identified above and is protected by the attorney-client privilege and the work product doctrine. This memorandum contains mental impressions, conclusions, opinions, and legal theories of counsel prepared in anticipation of litigation and in connection with the provision of legal advice to the firm's client. Do not distribute outside the deal team without the prior written approval of the undersigned. Any inadvertent disclosure does not constitute a waiver of any applicable privilege or protection.
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I. Purpose and Scope
The purpose of this memorandum is to provide the Calderwood & Harkness LLP deal team with a comprehensive overview of the proposed acquisition of Veridian Biosciences, Inc. ("Veridian" or the "Target" or the "Company") by our client, Penterra Pharmaceuticals Corp. ("Penterra" or the "Buyer"), and to identify the key legal issues that will require focused attention during due diligence, negotiation of the definitive stock purchase agreement (the "SPA" or the "Definitive Agreement"), and the period leading to closing (the "Transaction" or the "Acquisition").
Our engagement in connection with this matter was confirmed on February 14, 2024, and the matter was opened on the same date under Matter No. 1018-00008. The Penterra Board of Directors (the "Board") authorized management to explore the potential acquisition of Veridian at a special meeting held on February 12, 2024, at which the Board considered the strategic rationale for the transaction in light of recent pipeline developments.
Following authorization, Penterra submitted a non-binding indication of interest to Veridian's Board of Directors and its financial advisor, Ridgeway Partners LLC, on March 1, 2024 (the "IOI"). The IOI proposed an indicative enterprise value range of $850 million to $950 million for the acquisition of 100% of the outstanding capital stock of Veridian. The IOI was subject to satisfactory completion of due diligence, negotiation and execution of a definitive agreement, receipt of all necessary regulatory approvals, and other customary conditions.
A mutual Confidentiality Agreement (the "NDA") was executed between Penterra and Veridian on March 4, 2024. The NDA includes customary confidentiality undertakings, a two-year standstill provision, and non-solicitation covenants for a period of eighteen months following termination of discussions. Virtual data room access was granted to the Penterra deal team on March 11, 2024 through the Crestline Solutions platform (project code: "Project Emerald").
Due diligence is currently underway across all major workstreams. Broadleaf Scientific Consulting LLC ("Broadleaf") has been engaged as of March 18, 2024 to conduct clinical and scientific due diligence on Veridian's pipeline assets, with Dr. Raymond Kapoor serving as the lead consultant. Garrison Zanthor & Co., LLC ("Garrison Zanthor") has been engaged simultaneously as Penterra's financial advisor, with Managing Director Kevin Driscoll serving as the lead banker. Additionally, we anticipate engaging Stonebridge HSW Antitrust Advisors LLP ("Stonebridge HSW") for Hart-Scott-Rodino ("HSR") pre-merger notification filing preparation and antitrust advice, with partner Martin Prumvane serving as the lead antitrust counsel.
This memorandum addresses the following topics: (i) a detailed overview of the parties, deal structure, economics, and anticipated timeline; (ii) identification and analysis of key legal issues, including the Material Adverse Effect definition, clinical-stage risk allocation, no-shop provisions, tax issues, indemnification mechanics, specific performance and remedies, regulatory matters, and governing law; (iii) staffing and workstream assignments; (iv) anticipated budget and cost estimates; and (v) next steps and immediate action items.
This memorandum is based on information available to us as of the date hereof, including preliminary review of data room materials and discussions with Penterra management. Our analysis and recommendations are preliminary and subject to revision as additional information becomes available through the due diligence process.
II. Transaction Overview
A. The Parties
1. Penterra Pharmaceuticals Corp. (Buyer / Client)
Penterra Pharmaceuticals Corp. is a corporation organized and existing under the laws of the State of Delaware. Penterra's shares of common stock are publicly traded on the Nasdaq Global Select Market under the ticker symbol "PPCA." Penterra's principal executive offices are located at 1100 Meridian Boulevard, Suite 400, Princeton, New Jersey 08540. Penterra's registered agent for service of process in Delaware is Capitol Corporate Services, Inc., 1675 South Ashbury Asset Advisors, Suite B, Dover, Delaware 19901.
Penterra's senior management team and key personnel relevant to this Transaction are as follows:
• Chief Executive Officer: Dr. Anand Rajagopal
• Chief Financial Officer: Catherine M. Burgess
• General Counsel and Corporate Secretary: Thomas F. Holbrook
• Senior Vice President, Corporate Development: Natalie Reiner
• Chair, Board of Directors: Margaret Liu Whitfield
Penterra's Employer Identification Number ("EIN") is 22-3847561.
As of the date of this memorandum, Penterra has an approximate market capitalization of $14.2 billion. For the fiscal year ended December 31, 2023, Penterra reported total revenue of approximately $4.87 billion. Based on management's estimates and preliminary financial projections, Penterra expects to have approximately $2.1 billion in cash and cash equivalents available as of the second quarter of 2024. Penterra is a mid-cap specialty pharmaceutical company with a commercial portfolio comprising twelve (12) marketed products spanning the oncology, immunology, and rare disease therapeutic areas.
The strategic rationale for this Transaction is primarily driven by the need to replenish Penterra's immuno-oncology pipeline. On November 18, 2023, Penterra announced that its internal lead immuno-oncology candidate, PPC-0921 (a PD-L1/VEGFR bispecific antibody), failed a pre-specified futility analysis at the interim review of its Phase III PINNACLE trial, resulting in discontinuation of the program. The failure of PPC-0921 created a significant and immediate gap in Penterra's late-stage pipeline, which the Veridian acquisition is specifically intended to address. The acquisition of Veridian and its proprietary VeriTCE platform, particularly the lead candidate VRD-4187, would provide Penterra with a differentiated immuno-oncology asset in advanced clinical development.
Penterra's independent auditor is Tarrant & Co., with Diana Rourke serving as the engagement partner. Penterra's transfer agent is Pinnacle Transfer Services, Inc.
2. Veridian Biosciences, Inc. (Target)
Veridian Biosciences, Inc. is a corporation organized and existing under the laws of the State of Delaware. Veridian is a privately held company and its shares are not listed or traded on any securities exchange. Veridian's principal office is located at 550 Gateway Drive, Cambridge, Massachusetts 02142. Veridian's registered agent for service of process in Delaware is Tidewater Registered Agents LLC, 838 Walker Road, Suite 21-2, Dover, Delaware 19904.
Veridian's senior management team and key personnel relevant to this Transaction are as follows:
• Chief Executive Officer & Co-Founder: Dr. Julian Marek (holding approximately 8.4% of the fully diluted equity)
• Chief Scientific Officer & Co-Founder: Dr. Priya Chandrasekaran (holding approximately 6.2% of the fully diluted equity)
• Chief Financial Officer: Steven R. Kessler
• Vice President, Regulatory Affairs: Dr. Anne-Marie Fontaine
• General Counsel: Rachel Stein-Goldberg
Veridian's EIN is 84-2193047.
Veridian was founded in 2016 and is a clinical-stage biotechnology company focused on the discovery and development of immuno-oncology therapeutics. The company's therapeutic approach is built upon its proprietary T-cell engager platform, branded as "VeriTCE," which is designed to redirect T-cells to target and destroy cancer cells. As a clinical-stage company, Veridian has not generated any product revenue to date. For the fiscal year ended December 31, 2023, Veridian reported total revenue of $0 and a net loss of approximately ($87.3 million), consisting primarily of research and development expenses, general and administrative expenses, and clinical trial costs. As of March 31, 2024, Veridian had approximately $112.4 million in cash and cash equivalents.
Since its founding, Veridian has raised approximately $420 million in aggregate venture capital financing across four rounds (Series A through Series D). As of the date of this memorandum, Veridian has a total of 148 employees, with operations and personnel located in Massachusetts (principal office and research laboratories), California (West Coast research facility), and Maryland (clinical operations office).
Veridian's independent auditor is Northbridge Accounting Group LLP, with Patrick Calloway serving as the engagement partner. Veridian has retained Zalcourt Archer & Cole LLP as its legal counsel in connection with this Transaction, with the following individuals serving as the primary points of contact:
• Lead M&A Partner: Rebecca Whitmore, One Federal Street, 30th Floor, Boston, Massachusetts 02110
• Lead M&A Associate: Jonathan Pratt
• Tax Partner: Elaine Sato
Veridian's financial advisor in connection with this Transaction is Ridgeway Partners LLC, with Managing Director Laura Beckett serving as the lead banker.
3. Major Stockholders
Based on the capitalization table provided in the data room and preliminary discussions with Veridian's counsel, the major stockholders of Veridian are as follows:
Crestline Ventures, LP (EIN: 83-1567842) is the largest single stockholder and is expected to serve as the Stockholder Representative in connection with the post-closing indemnification mechanics under the SPA. The concentration of equity among the three lead venture capital investors (Crestline, Boreal, and Apex), who collectively hold approximately 62.1% of the fully diluted equity, is significant for purposes of stockholder approval mechanics, as discussed below.
B. Deal Structure and Economics
Structure. The Transaction is structured as a stock purchase, pursuant to which Penterra will acquire 100% of the outstanding shares of capital stock of Veridian from the Veridian stockholders (the "Sellers"). The stock purchase structure was selected as the preferred approach after consultation with the deal team and Penterra's tax advisors. The key considerations favoring a stock purchase over an asset acquisition or merger structure include: (i) simplicity and speed of execution; (ii) avoidance of the need to identify and transfer individual assets and assume individual liabilities; (iii) preservation of Veridian's existing contracts, permits, and licenses by operation of law (subject to change-of-control provisions); and (iv) tax considerations, as discussed further in Section III.D below.
Purchase Price. The aggregate purchase price for 100% of the outstanding capital stock of Veridian is $900,000,000 in cash, payable at closing (the "Purchase Price"). The Purchase Price is a fixed amount and is not subject to any purchase price adjustments for cash on hand, working capital, indebtedness, or transaction expenses. The implied enterprise value of the Transaction is $900 million. We note that Veridian currently has no outstanding indebtedness, and the $112.4 million in cash on the Company's balance sheet as of March 31, 2024 was netted in Penterra's internal valuation model; however, for purposes of the SPA, the Purchase Price will be expressed as a fixed amount of $900 million without adjustments. This simplifies the closing mechanics and eliminates the need for post-closing working capital disputes, although it does mean that Penterra bears the risk of any deterioration in the Company's cash position between signing and closing.
Tax Election. No election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code"), is contemplated. As discussed in greater detail in Section III.D below, such an election would not provide meaningful asset step-up benefits given Veridian's significant net operating losses and the absence of depreciable or amortizable assets of significant value. Leonard Cross will perform additional analysis and confirm this determination as part of the tax due diligence workstream.
Stockholder Approval. Given the concentration of equity ownership among the venture capital investors, we anticipate that stockholder approval of the Transaction will be obtained through action by written consent of the Veridian stockholders pursuant to Section 228 of the Delaware General Corporation Law ("DGCL"), rather than through a formal meeting of stockholders. Crestline Ventures (28.3%), Boreal Health Partners (19.7%), and Apex Growth Equity (14.1%) collectively hold approximately 62.1% of the fully diluted equity, which is well in excess of the simple majority required for approval under DGCL § 228. The availability of action by written consent will need to be confirmed by reviewing Veridian's Certificate of Incorporation and Bylaws, as some companies include provisions requiring a stockholder meeting for certain fundamental transactions. Megan Chu will confirm this during the corporate governance review in diligence.
C. Proposed Indemnification Framework
The proposed indemnification framework represents one of the most critical economic and risk-allocation components of the SPA. The terms outlined below reflect Penterra's initial negotiating position and are subject to negotiation with Sellers' counsel at Zalcourt Archer & Cole LLP. The key terms are as follows:
Indemnification Cap (General Representations). The aggregate liability of the Sellers for indemnification claims arising from breaches of general representations and warranties will be capped at 20% of the Purchase Price, equaling $180,000,000. This cap is at the higher end of market but is appropriate given the clinical-stage risk profile of the Target and the fact that the entire enterprise value is predicated on the success of Veridian's pipeline assets.
Indemnification Basket. The indemnification basket (deductible threshold) will be set at 1% of the Purchase Price, equaling $9,000,000. We propose structuring this as a "tipping basket" (also referred to as a "first-dollar basket"), meaning that once aggregate indemnifiable losses exceed $9 million, the Sellers become liable for indemnification from the first dollar of losses, not merely the excess over the basket amount. This is a meaningful distinction from a "true deductible" structure and is discussed further in Section III.E below.
Fundamental Representations Cap. Indemnification claims arising from breaches of "fundamental" representations and warranties — which will include representations regarding organization, authorization, capitalization, title to shares, and taxes — will be subject to a separate cap equal to 100% of the Purchase Price, or $900,000,000.
Survival Periods. The following survival periods will apply:
• General representations and warranties: Eighteen (18) months following the Closing Date.
• Fundamental representations and warranties: The full applicable statute of limitations plus sixty (60) days.
• Tax representations and warranties: The full applicable statute of limitations plus sixty (60) days.
Indemnification Escrow. At closing, $180,000,000 of the aggregate Purchase Price will be deposited into an escrow account maintained by the escrow agent (the "Indemnification Escrow"). The Indemnification Escrow amount is intentionally set to match the indemnification cap for general representations, ensuring that a pool of funds is available to satisfy potential indemnification claims without requiring the Buyer to pursue individual stockholders for recovery.
Stockholder Representative Expense Fund. An additional $2,500,000 will be deposited at closing into a separate expense fund to cover the costs and expenses of the Stockholder Representative (anticipated to be Crestline Ventures, LP) in administering and resolving post-closing indemnification claims, disputes, and related matters.
Net Closing Payment. Based on the foregoing, the net aggregate cash amount payable to the Sellers at closing will be calculated as follows:
Escrow Agent. The escrow will be maintained by Fidelis National Escrow Corp., 601 Riverside Avenue, Jacksonville, Florida 32204, with Senior Vice President Brian Mulcahy serving as the primary point of contact. Harrison Wexford will take the lead on negotiating the Escrow Agreement.
D. Termination Fees
The Definitive Agreement will include two termination fee provisions designed to address specific risk scenarios:
Reverse Termination Fee (Financing Failure). In the event that the Transaction fails to close solely due to a failure of Penterra to obtain the committed financing necessary to fund the Purchase Price, Penterra will be obligated to pay Veridian a reverse termination fee of $45,000,000, representing 5% of the Purchase Price. This reverse termination fee is designed to provide the Sellers with a meaningful remedy in the event of a financing failure and serves as the Sellers' exclusive remedy in such circumstances. It is critically important that the reverse termination fee provision be carefully drafted to ensure that it is triggered only by a genuine financing failure and not by Penterra's exercise of its termination rights on other grounds (e.g., failure of closing conditions, exercise of MAE termination right, or breach by Sellers). This point is discussed further in Section III.F below.
Target Termination Fee (No-Shop Breach). In the event that Veridian breaches its no-shop covenant under the SPA or the Veridian Board changes its recommendation in connection with a Superior Proposal (as to be defined), Veridian will be obligated to pay Penterra a target termination fee of $36,000,000, representing 4% of the Purchase Price. This termination fee is within the market range for transactions of this size and type and is discussed further in Section III.C below.
E. Anticipated Financing
Penterra intends to fund the $900 million Purchase Price through a combination of debt and cash on hand, as follows:
Committed Term Loan Facility. Penterra will obtain a committed term loan facility in the principal amount of $500,000,000 from Summit Ridge Capital Partners, LP, which will serve as lead arranger. Ironclad Trust Company, N.A. will serve as administrative agent under the credit facility. The key contacts are:
• Summit Ridge Capital Partners, LP — Managing Director: Philip Ostrander
• Ironclad Trust Company, N.A. — Vice President: Samantha Hwang
The commitment letter (reference: CL-2024-PPCA-0607) is targeted to be executed in advance of the execution of the Definitive Agreement, with a target date of early June 2024. The anticipated terms of the committed term loan facility include:
• Interest Rate: Secured Overnight Financing Rate ("SOFR") plus 225 basis points
• Commitment Fee: 0.35% per annum on unfunded commitments, equaling approximately $1,750,000 per annum, payable from the date of execution of the commitment letter
• Ticking Fee: 0.175% per annum, commencing ninety (90) days after execution of the Definitive Agreement
• Term: The financing commitment will be co-terminous with the Outside Date under the Definitive Agreement
The commitment letter will contain customary conditions precedent to funding, including the accuracy of representations and warranties, execution and delivery of definitive credit documentation, and the satisfaction of the conditions to closing under the SPA. Megan Chu will coordinate with counsel for Summit Ridge and Ironclad to ensure that the conditions in the commitment letter are not more restrictive than the closing conditions in the SPA (i.e., "SunEdison" compliance).
Cash on Hand. The remaining $400,000,000 of the Purchase Price will be funded from Penterra's existing cash reserves. Based on management's current estimates, Penterra expects to have approximately $2.1 billion in cash and cash equivalents available as of the second quarter of 2024, providing substantial liquidity after funding the Transaction.
F. Anticipated Timeline
The following represents the anticipated timeline for the Transaction, subject to revision based on the progress of due diligence, negotiations, and regulatory review:
The 180-day Outside Date provides a substantial runway to accommodate the HSR review process (including any potential Second Request, which we view as unlikely but must plan for), the completion of any remaining closing conditions, and the execution of ancillary agreements. Key interim milestones between signing and closing include: (i) expiration or early termination of the HSR waiting period; (ii) receipt of the Veridian stockholder written consent; (iii) binding of the representation and warranty insurance policy; and (iv) satisfaction or waiver of all conditions precedent to closing as set forth in Articles VII and VIII of the SPA.
III. Key Legal Issues
This section identifies and analyzes the key legal issues that require focused attention by the deal team during the due diligence process, negotiation of the Definitive Agreement, and the period between signing and closing. Each issue is discussed in terms of the underlying risk, our recommended negotiating position, and the anticipated positions of Sellers' counsel.
A. Material Adverse Effect (MAE) Definition — Negotiation Strategy
The definition of "Material Adverse Effect" (or "MAE") is the single most important defined term in the SPA and will be the subject of intense negotiation with Sellers' counsel. This is particularly true in the context of the Veridian acquisition, given Veridian's status as a clinical-stage biotechnology company whose entire enterprise value is predicated on the success of its pipeline, and in particular, the lead candidate VRD-4187. Unlike acquisitions of revenue-generating targets where an MAE is measured against historical financial performance, the MAE analysis for a clinical-stage company necessarily implicates clinical trial outcomes, regulatory developments, and the viability of the target's scientific platform — all of which are inherently uncertain and forward-looking.
Proposed Definition. We expect the MAE definition to be included in Section 1.1 of the SPA and propose defining "Material Adverse Effect" as follows:
Any event, change, development, occurrence, condition, state of facts, or effect that, individually or in the aggregate, (a) has had or would reasonably be expected to have a material adverse effect on the business, results of operations, financial condition, or assets of the Company, taken as a whole, or (b) would reasonably be expected to prevent or materially delay the ability of the Sellers to consummate the Transactions contemplated hereby.
Standard Carveouts. It is customary for an MAE definition to include a series of carveouts — categories of events or conditions that are excluded from the determination of whether an MAE has occurred, even if they have a material adverse effect on the Company. Sellers' counsel at Zalcourt Archer & Cole will seek broad carveouts. We anticipate negotiating over the following standard carveouts:
(i) changes in general economic or political conditions in the United States or globally;
(ii) conditions generally affecting the biotechnology or pharmaceutical industries;
(iii) changes in applicable law, regulation, or generally accepted accounting principles ("GAAP") after the date of the Agreement;
(iv) pandemics, epidemics, or public health emergencies (including COVID-19 and any similar public health emergency);
(v) natural disasters, weather events, acts of God, acts of war, armed hostilities, sabotage, or terrorism (including any escalation or worsening thereof);
(vi) changes in financial, credit, or securities markets generally (including changes in interest rates, exchange rates, or commodity prices); and
(vii) the announcement or pendency of the Transactions contemplated by the Agreement, or the identity of Buyer.
Key Negotiating Points. Our negotiation strategy with respect to the MAE definition should focus on the following critical points:
First, we should insist on a "disproportionate impact" exception for carveouts (i) through (vi). Under this exception, a carveout does not apply to the extent that the relevant event, change, or condition disproportionately affects the Company relative to other companies operating in the biotechnology or pharmaceutical industry. This is a well-established market term and ensures that Penterra retains the ability to invoke the MAE if, for example, a general industry downturn has a uniquely severe impact on Veridian due to its clinical-stage profile and lack of diversified revenue streams. We should propose language such as: "provided, however, that the foregoing clauses (i) through (vi) shall not apply to the extent that such event, change, development, occurrence, condition, or effect has a disproportionate adverse effect on the Company relative to other similarly situated companies operating in the biotechnology industry."
Second, and most critically, we must resist any carveout for clinical trial results, adverse clinical trial data, or FDA regulatory actions specific to Veridian's pipeline. These are the core risks of a clinical-stage acquisition and represent precisely the scenarios in which Penterra needs the ability to invoke the MAE and refuse to close. Sellers' counsel will likely argue that clinical trial risk is inherent in a biotech acquisition and that the buyer has "priced in" that risk. This argument should be rejected — while Penterra's valuation accounts for a range of clinical outcomes, the MAE definition serves as a backstop against catastrophic developments (e.g., a full clinical hold on VRD-4187, a serious adverse event signal, or a complete failure of the Marlowe Asset Management-2 trial) that would fundamentally destroy the basis for the Transaction.
Third, Sellers' counsel will likely push for a carveout for "changes in law or regulation generally applicable to the pharmaceutical industry." While this is a standard carveout in the abstract, we must be vigilant about its scope. Broadly drafted, such a carveout could arguably encompass FDA regulatory actions that are company-specific in nature — for example, the imposition of a clinical hold on Veridian's IND, the issuance of a warning letter, or a Refuse to File decision — if Sellers characterize the FDA action as an application of "general" regulatory authority. We should ensure that the carveout is narrowly limited to changes in law or regulation of general applicability and does not extend to company-specific FDA actions, communications, or determinations relating to any Company Product or Company Clinical Trial.
Fourth, we should consider including explicit affirmative language in the MAE definition clarifying that adverse clinical trial data, adverse safety signals, clinical holds, or negative regulatory determinations relating to any Company Product (including VRD-4187) are not subject to any carveout and shall be considered in determining whether an MAE has occurred. While this is arguably implicit in the absence of a carveout for such events, making it explicit eliminates any ambiguity and strengthens Penterra's position in the event of a dispute.
Fifth, the deal team should be mindful of the heavy burden on buyers under Delaware law to establish that an MAE has occurred. In Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff'd, 198 A.3d 724 (Del. 2018), the Court of Chancery for the first time found that an MAE had occurred, but emphasized that the standard requires a showing of a material adverse effect that is "durationally significant" — i.e., one that substantially threatens the overall earnings potential of the target in a manner that is consequential to the company's long-term value. For a clinical-stage company with no revenue, this analysis is somewhat different from the traditional framework, and we should draft the definition to account for Veridian's unique characteristics as a pre-revenue company whose value is entirely dependent on its pipeline. We recommend including language defining materiality in context: for purposes of this Agreement, a "Material Adverse Effect" shall be measured with reference to the overall value of the Company and its pipeline assets, taken as a whole, and shall not be limited to effects on current revenue or earnings.
B. Clinical-Stage Risk Allocation
The clinical-stage risk profile of Veridian is the defining characteristic of this Transaction and requires careful attention throughout the due diligence process, the drafting of the SPA, and the negotiation of closing conditions. The lead clinical candidate, VRD-4187, is the primary value driver of the acquisition and accounts for the vast majority of the implied enterprise value.
VRD-4187 Overview. VRD-4187 is a bispecific T-cell engager targeting delta-like ligand 3 ("DLL3") for the treatment of small cell lung cancer ("SCLC"). SCLC is an aggressive form of lung cancer with limited treatment options and a poor prognosis, representing a significant area of unmet medical need. VRD-4187 is built on Veridian's proprietary VeriTCE platform, which enables the development of bispecific molecules designed to redirect a patient's T-cells to recognize and destroy tumor cells expressing the target antigen.
VRD-4187 is currently being evaluated in the Marlowe Asset Management-2 clinical trial (ClinicalTrials.gov identifier: NCT05837291), a randomized, open-label Phase II study conducted at 42 clinical sites across the United States and the European Union. The trial has enrolled 387 patients, with 194 patients randomized to the VRD-4187 treatment arm and 193 patients randomized to the control arm (standard-of-care chemotherapy). The Investigational New Drug Application ("IND") for VRD-4187 was filed with the U.S. Food and Drug Administration ("FDA") under IND number 154832.
Interim Period Risk. The Marlowe Asset Management-2 clinical trial will be ongoing between the anticipated signing date (early-to-mid June 2024) and the anticipated closing date (approximately December 2024). This creates a period of approximately six months during which the clinical profile of VRD-4187 may change materially — either positively or negatively. Adverse developments during this interim period — including, without limitation, serious adverse events, unexpected safety signals, recommendations by the Data Monitoring Committee ("DMC") to modify or suspend the trial, clinical holds imposed by the FDA, or data suggesting a lack of efficacy — could fundamentally alter the risk-reward calculus of the Transaction.
Due Diligence Priorities. Broadleaf Scientific Consulting LLC, under the direction of Dr. Raymond Kapoor, will conduct a comprehensive clinical and scientific due diligence review. The due diligence will focus on the following priority areas:
(a) Obtain and review all available Marlowe Asset Management-2 clinical data, including safety data, efficacy data (to the extent available at this stage), adverse event reports, serious adverse event ("SAE") reports, and all reports, recommendations, and minutes of the independent Data Monitoring Committee.
(b) Review the complete IND file for VRD-4187 (IND 154832), including all FDA correspondence, meeting minutes, FDA guidance letters, and the regulatory strategy for advancement to Phase III and potential Biologics License Application ("BLA") submission.
(c) Assess the VeriTCE platform technology, including the breadth of the platform, the strength of the intellectual property position (in coordination with the IP due diligence workstream), and the pipeline candidates beyond VRD-4187 that may be in preclinical or early clinical development.
(d) Evaluate the probability of technical and regulatory success ("PTRS") for VRD-4187, including an assessment of the expected regulatory pathway (standard review vs. accelerated approval vs. breakthrough therapy designation) and the competitive landscape for DLL3-targeting therapies in SCLC.
SPA Provisions to Negotiate. In light of the clinical-stage risk profile, the following provisions in the SPA will require particularly careful drafting and negotiation:
Representations and Warranties. The SPA should include robust representations and warranties regarding the conduct of Veridian's clinical trials, including: (i) compliance with Good Clinical Practices ("GCP"), Good Laboratory Practices ("GLP"), and Good Manufacturing Practices ("GMP"); (ii) accuracy and completeness of all clinical data and regulatory filings provided to the Buyer; (iii) absence of any pending or threatened FDA enforcement actions, clinical holds, warning letters, or consent decrees; (iv) compliance with all applicable FDA regulations, including the Federal Food, Drug, and Cosmetic Act; (v) maintenance of all necessary IND applications in good standing; and (vi) disclosure of all material adverse events, safety signals, and DMC communications.
Interim Operating Covenants. Section 5.1 of the SPA should include detailed interim operating covenants requiring Veridian to conduct all clinical trials in the ordinary course of business consistent with past practice between signing and closing. Critically, the interim covenants should require Veridian to obtain Penterra's prior written consent before making any material changes to clinical trial protocols, dosing regimens, patient enrollment criteria, or clinical endpoints. This consent requirement must be balanced against the need to comply with regulatory requirements and protect patient safety — we should include a carveout permitting Veridian to take actions required by applicable law, FDA regulations, or patient safety considerations without Buyer consent, provided that Veridian provides prompt notice to Buyer of any such actions.
Notification Obligations. Section 5.1(b) of the SPA should impose affirmative notification obligations on Veridian, requiring prompt written notice to Penterra of: (i) any material adverse events or serious adverse events in any Company clinical trial; (ii) any recommendation by the DMC to modify, suspend, or terminate any Company clinical trial; (iii) any communication from the FDA or any other regulatory authority regarding any Company Product or Company clinical trial, including clinical holds, requests for additional information, or adverse findings; (iv) any material deviation from any Company clinical trial protocol; and (v) any development that would reasonably be expected to constitute or give rise to a Material Adverse Effect.
Closing Conditions. Section 7.2(b) of the SPA should include a closing condition requiring that no Material Adverse Effect shall have occurred since the date of the Agreement. Additionally, Section 7.2(a) should include a standard bring-down condition requiring that the representations and warranties of the Sellers shall be true and correct in all material respects (or, for representations already qualified by materiality or MAE, in all respects) as of the Closing Date as though made on and as of such date, except to the extent that any such representation or warranty expressly relates to an earlier date (in which case, as of such earlier date). The bring-down standard and its interaction with the MAE-qualified representations must be carefully calibrated.
C. No-Shop Provision (Section 5.4)
We recommend including a comprehensive no-shop provision in Section 5.4 of the SPA, prohibiting Veridian and its representatives from, directly or indirectly, soliciting, initiating, encouraging, or facilitating any inquiry, proposal, or offer with respect to, or engaging in any discussions or negotiations concerning, any Acquisition Proposal (as to be defined) at any time between the execution of the Definitive Agreement and the earlier of (i) the Closing and (ii) the termination of the Agreement in accordance with its terms.
Given that Veridian is a privately held company and the sale process was conducted by Ridgeway Partners LLC on behalf of the Veridian Board of Directors, we expect that the Sellers and their counsel should be willing to accept a no-shop provision without significant resistance. Unlike public company transactions where fiduciary duties may require a "go-shop" period, the board of a private company that has conducted a thorough sale process and selected a preferred buyer has significant latitude to agree to exclusive dealing arrangements.
Notwithstanding the foregoing, the no-shop provision must include a limited fiduciary-out mechanism to address the fiduciary duties of the Veridian Board of Directors. Under the fiduciary-out, the Veridian Board would be permitted to consider and engage in discussions with respect to an unsolicited bona fide Superior Proposal (as to be defined in the SPA), but only after the Veridian Board has determined in good faith, after consultation with its outside legal counsel and financial advisor, that such proposal constitutes a Superior Proposal and that failure to engage with the proponent would be inconsistent with the Board's fiduciary duties to its stockholders. The inclusion of a fiduciary-out is important to avoid enforceability concerns under Delaware law, which generally requires that boards retain some ability to exercise their fiduciary duties even in the context of an agreed no-shop.
Matching Rights. The no-shop provision should include a matching rights mechanism granting Penterra the right, for a period of four (4) business days following receipt of notice that the Veridian Board has received a Superior Proposal, to propose revisions to the terms of the Transaction that would render the Superior Proposal no longer superior. During the matching period, Veridian would be prohibited from terminating the Agreement or changing its Board recommendation. If Penterra proposes revised terms within the matching period, the Veridian Board must consider such revised terms in good faith before determining whether the alternative proposal remains a Superior Proposal.
Target Termination Fee. As noted in Section II.D above, the SPA will provide that Veridian is obligated to pay Penterra a target termination fee of $36,000,000 (4% of the Purchase Price) in the event that: (i) Veridian breaches the no-shop covenant; (ii) the Veridian Board changes its recommendation in favor of a Superior Proposal; or (iii) the Agreement is terminated by Veridian in connection with a Superior Proposal (subject to the exercise of the fiduciary-out). A 4% termination fee is within the standard market range for transactions of this size and type and should not present enforceability issues under Delaware law.
D. Tax Issues — Section 382 NOL Limitations
Leonard Cross will lead the tax due diligence workstream, and a separate Tax Due Diligence Memorandum will be prepared and circulated to the deal team upon completion of the preliminary tax review. The following sets forth the key tax issues identified to date based on our preliminary review of information provided in the data room and initial discussions with Penterra management.
Net Operating Loss Carryforwards. Veridian has accumulated significant federal net operating loss ("NOL") carryforwards as a result of its years of operating losses as a clinical-stage company. As of December 31, 2023, Veridian's estimated federal NOL carryforward totals approximately $312 million. The ability of Penterra to utilize these NOLs following the acquisition is subject to significant limitations under Section 382 of the Code.
Prior Section 382 Ownership Change. Our preliminary analysis indicates that Veridian experienced an "ownership change" within the meaning of Section 382 during the third quarter of 2020, triggered by the Series C financing round led by Boreal Health Partners Fund III, LP. As a result of this prior ownership change, approximately $148 million in pre-change NOLs (i.e., NOLs generated prior to the 2020 ownership change) are currently subject to an annual Section 382 limitation of approximately $5.9 million per year. This annual limitation significantly restricts the rate at which these pre-change NOLs can be utilized to offset taxable income in any given year.
New Section 382 Limitation Upon Closing. The acquisition of 100% of Veridian's outstanding capital stock by Penterra will constitute a new ownership change under Section 382. As a result, Veridian's post-2020 NOLs — estimated at approximately $164 million — which are currently unrestricted, will become subject to a new annual Section 382 limitation upon closing. The amount of this new annual limitation will be determined by multiplying the value of Veridian's stock immediately before the ownership change by the applicable long-term tax-exempt rate published by the IRS. Leonard Cross will perform a detailed analysis of the anticipated new Section 382 limitation based on the implied equity value at closing and the prevailing long-term tax-exempt rate.
Additionally, the pre-change NOLs that are already subject to the existing $5.9 million annual limitation will remain subject to that limitation (and the new ownership change will not "reset" or increase that limitation). The interplay between the two Section 382 limitations (the 2020 limitation and the new closing limitation) will need to be carefully modeled to assess the present value of the available NOL benefit to Penterra.
No Section 338(h)(10) Election. As noted above, no Section 338(h)(10) election is contemplated. Such an election would cause the stock purchase to be treated as an asset purchase for federal income tax purposes, potentially providing Penterra with a step-up in the tax basis of Veridian's assets. However, given Veridian's significant NOL position and the fact that Veridian's primary assets are intangible in nature (principally intellectual property, clinical data, and in-process research and development) without significant depreciable or amortizable tangible assets, the potential tax benefit of a Section 338(h)(10) election is unlikely to exceed the tax cost of triggering a deemed asset sale. Leonard Cross will confirm this analysis as part of the tax due diligence.
State Tax Nexus. Veridian maintains operations and employees in three states: Massachusetts (principal office and research laboratories), California (West Coast research facility), and Maryland (clinical operations office). Each of these states has its own rules regarding the utilization of NOL carryforwards, including varying carryforward periods, limitations on usage, and apportionment methodologies. The state tax implications of the acquisition — including the ability to utilize state-level NOLs, the applicability of state-level Section 382-type limitations, and the impact of combined or consolidated reporting requirements — must be analyzed on a state-by-state basis. Leonard Cross will coordinate this analysis with Penterra's existing state tax advisors as needed.
Research and Development Tax Credits. Veridian has likely accumulated significant federal and state research and development ("R&D") tax credits under Section 41 of the Code and analogous state provisions, given its substantial research and development expenditures. The availability, quantum, and potential limitations on these credits (including Section 383 limitations that may apply following an ownership change) will be evaluated as part of the tax due diligence.
Transfer Taxes. All transfer taxes, documentary stamp taxes, and similar taxes arising in connection with the sale and transfer of the Veridian capital stock are anticipated to be the responsibility of the Sellers pursuant to Section 6.8 of the SPA. This is consistent with market practice for private company stock purchase transactions.
Pre-Closing Tax Period Indemnification. The SPA will include a tax indemnification provision requiring the Sellers to indemnify the Buyer for all taxes attributable to pre-closing tax periods (or the pre-closing portion of any Straddle Period). This indemnification obligation will be subject to the fundamental representation survival period (the full statute of limitations plus sixty days) rather than the general representation survival period of eighteen months.
E. Indemnification Mechanics — Detailed Negotiation Points
The general indemnification framework was outlined in Section II.C above. This section addresses the key negotiation points that we anticipate will arise during discussions with Sellers' counsel and the positions we recommend taking on behalf of Penterra.
Tipping Basket vs. True Deductible. As noted, we are proposing a tipping basket structure with a threshold of $9,000,000 (1% of the Purchase Price). Under a tipping basket, once aggregate indemnifiable losses exceed the basket amount, the Sellers become liable for indemnification from the first dollar of losses, effectively making the basket a threshold or trigger rather than a deductible. Sellers' counsel at Zalcourt Archer & Cole will likely push for a "true deductible" structure, under which the Sellers would be liable only for losses in excess of $9 million (i.e., the first $9 million of losses would be borne entirely by the Buyer). The difference between these two structures is economically significant: in a scenario where total losses equal $15 million, the Buyer would recover $15 million under a tipping basket but only $6 million under a true deductible. We should resist a true deductible structure. The tipping basket is more favorable to Penterra and is justified by the heightened risk profile of a clinical-stage acquisition.
Escrow as Exclusive Remedy. Sellers' counsel will likely seek to establish the $180 million Indemnification Escrow as the exclusive source from which the Buyer may satisfy indemnification claims. Under such a provision, the Buyer would have no right to pursue claims directly against the Sellers in excess of (or outside of) the escrow fund. We should resist this limitation and negotiate for the following exceptions to the escrow-exclusive remedy:
(a) Fundamental Representations. For claims arising from breaches of fundamental representations and warranties, the Buyer should have the right to pursue claims directly against the Sellers, subject to the fundamental representation cap of 100% of the Purchase Price ($900 million), and should not be limited to the escrow fund.
(b) Fraud. Claims based on fraud, intentional misrepresentation, or willful breach should not be subject to the escrow-exclusive remedy or any cap on liability, and the Buyer should have the right to pursue all available remedies directly against the Sellers.
(c) Tax Indemnification. Pre-closing tax indemnification claims should similarly be recoverable directly from the Sellers and not limited to the escrow fund.
Pro-Sandbagging. We recommend including an explicit pro-sandbagging provision in the SPA, which clarifies that the Buyer's right to indemnification for breaches of representations and warranties is not affected by or limited in any way by any knowledge of, or investigation by, the Buyer or its representatives with respect to the accuracy or inaccuracy of any such representation or warranty, whether acquired before, on, or after the date of the Agreement. Under a pro-sandbagging provision, Penterra would retain the right to bring an indemnification claim for a breach of representation even if Penterra had actual knowledge of the facts giving rise to the breach prior to closing. This is important in the context of a clinical-stage acquisition where ongoing diligence and interim-period developments may reveal information that is inconsistent with the Sellers' representations. Delaware law is generally favorable to pro-sandbagging provisions, but the provision must be explicitly included in the SPA to avoid uncertainty.
Representation and Warranty Insurance. Penterra intends to obtain a buyer-side representation and warranty ("R&W") insurance policy to supplement the contractual indemnification framework. Prescott Whitfield Insurance Brokers, Inc. has been engaged to manage the placement process, with Amanda Chen-Kowalski serving as the primary broker contact. The anticipated carrier is Atlas Indemnity Insurance Co., with Graham Fielding serving as the underwriter.
The anticipated terms of the R&W insurance policy are as follows:
• Policy Limit: $180,000,000 (matching the contractual indemnification cap for general representations)
• Self-Insured Retention ("SIR"): $9,000,000 (matching the contractual indemnification basket)
• Premium: Estimated at 2.0% to 2.5% of the policy limit, equaling approximately $3.6 million to $4.5 million (one-time premium)
• Coverage: Buyer-side policy providing coverage for breaches of representations and warranties by the Sellers, subject to customary exclusions
• Term: Co-extensive with the survival periods under the SPA
The R&W insurance policy will supplement, and not replace, the contractual indemnification obligations of the Sellers. The availability of R&W insurance, the final policy terms, the premium, and any exclusions or limitations will depend on the findings of the due diligence process and the underwriter's assessment of the risk profile of the Transaction. The R&W insurance placement process should be initiated promptly, as the underwriting process typically requires four to six weeks from initial submission to binding, and the insurer will require access to diligence reports and findings as part of the underwriting.
F. Specific Performance and Remedies
We recommend including a mutual specific performance provision in the SPA, anticipated to be set forth in Section 10.12, granting both parties the right to seek specific performance, injunctive relief, or other equitable remedies to compel the other party to perform its obligations under the Agreement. This provision is important because monetary damages may be inadequate to compensate the non-breaching party in the event of a breach of certain obligations — most notably, the obligations to consummate the closing, to comply with interim operating covenants, and to comply with the no-shop covenant.
Strategic Considerations for Penterra. The deal team should be aware that the inclusion of a mutual specific performance provision carries strategic implications for Penterra as the Buyer. If the Sellers have the right to compel closing through specific performance, Penterra's ability to decline to close is effectively limited to situations where (i) a closing condition has genuinely failed and cannot be satisfied, or (ii) Penterra has a valid basis to invoke the MAE termination right. In particular, Penterra cannot simply "walk away" from the Transaction by paying the reverse termination fee if the Sellers have the right to compel specific performance. Delaware courts have consistently enforced specific performance provisions in stock purchase agreements where all closing conditions have been satisfied. See, e.g., Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008). Accordingly, the decision to enter into the Definitive Agreement must be made with the understanding that Penterra may be compelled to close unless it can establish a valid basis for termination.
Reverse Termination Fee Limitations. The reverse termination fee of $45,000,000 serves as Penterra's exclusive monetary remedy limitation in the specific scenario of a financing failure. It is critical that the reverse termination fee provision be carefully drafted to ensure that the fee is triggered only in the event that the Transaction fails to close solely due to Penterra's inability to obtain the committed financing necessary to fund the Purchase Price, and not by Penterra's exercise of its termination rights on other legitimate grounds. Specifically:
(a) The reverse termination fee should not apply if Penterra terminates the Agreement due to a failure of a closing condition (including the MAE closing condition) or due to a breach by the Sellers.
(b) The reverse termination fee should not apply if the Sellers terminate the Agreement due to Penterra's breach of any covenant other than the financing covenant.
(c) The reverse termination fee should apply as the Sellers' sole and exclusive remedy only in the specific circumstance of a financing failure, as narrowly defined.
We will draft the termination and reverse termination fee provisions to clearly delineate between these scenarios and to preserve Penterra's rights to terminate on grounds other than financing failure without triggering the reverse termination fee.
G. Regulatory and Antitrust Matters
HSR Pre-Merger Notification. The Transaction is subject to the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), given that the Transaction value of $900 million exceeds the applicable size-of-transaction threshold under the HSR Act (currently $111.4 million for 2024). Both Penterra and Veridian meet the size-of-person test. Accordingly, HSR notification filings must be made by both Penterra (as the acquiring person) and Veridian (as the acquired person) with the Federal Trade Commission ("FTC") and the Antitrust Division of the U.S. Department of Justice ("DOJ").
Filing Fee. Based on the 2024 HSR filing fee schedule, the applicable filing fee for a transaction valued at $900 million is $280,500. This fee is payable by the acquiring person (Penterra).
Antitrust Counsel. Stonebridge HSW Antitrust Advisors LLP, with partner Martin Prumvane serving as the lead, will handle the preparation and filing of the HSR notification forms and provide advice on all antitrust-related aspects of the Transaction.
Preliminary Antitrust Assessment. Our preliminary view is that the Transaction presents low antitrust risk. Veridian is a clinical-stage company with no marketed products and no current commercial revenue. The competitive overlap between Veridian's pipeline assets and Penterra's existing commercial portfolio in the immuno-oncology space is limited, as Penterra does not currently market any DLL3-targeting therapies or bispecific T-cell engagers. The FTC's Pharmaceutical Mergers and Acquisitions Task Force has shown increased scrutiny of pharmaceutical transactions in recent years, including transactions involving pipeline assets, but we believe the clinical-stage status of VRD-4187 and the absence of direct competitive overlap significantly mitigate the risk of an extended review or a Second Request.
HSR Waiting Period. The HSR Act imposes an initial waiting period of 30 days following the filing of the HSR notification (15 days for cash tender offers, which is not applicable here). The agencies may grant early termination of the waiting period, which is an informal practice that allows the parties to close before expiration of the full 30-day period. Alternatively, the agencies may issue a "Second Request" — a request for additional information and documentary material — which extends the waiting period until 30 days after the parties have substantially complied with the Second Request. As noted, we view the likelihood of a Second Request as low.
SPA Closing Condition. The expiration or early termination of the HSR waiting period (including any extension thereof due to a Second Request) will be included as a mutual closing condition in the SPA. Neither party is obligated to close until this condition is satisfied.
Target Filing Date. We are targeting a late April 2024 HSR pre-filing submission date, which would position the waiting period to expire (or be terminated) well in advance of the anticipated signing date in early-to-mid June 2024, or, alternatively, the HSR filing may be made shortly after signing. The timing of the HSR filing will be coordinated with Stonebridge HSW and will depend in part on the availability of the information required for the filing from both parties.
H. Governing Law, Jurisdiction, and Dispute Resolution
Governing Law. The SPA and all ancillary Transaction documents will be governed by the laws of the State of Delaware, without regard to the conflict of laws principles thereof. The selection of Delaware law is appropriate and advisable given that both Penterra and Veridian are incorporated in the State of Delaware, and the Transaction involves the acquisition of capital stock of a Delaware corporation.
Exclusive Jurisdiction. The SPA will include an exclusive forum selection clause (anticipated to be set forth in Section 10.6), providing that any dispute, claim, or controversy arising out of or relating to the Agreement or the Transactions contemplated thereby shall be brought exclusively in the Court of Chancery of the State of Delaware (or, if the Court of Chancery declines to accept jurisdiction, any state or federal court within the State of Delaware).
Rationale. The selection of the Delaware Court of Chancery as the exclusive forum offers several significant advantages: (i) the Court of Chancery is a specialized equity court with deep expertise in corporate law, contractual disputes, and M&A transactions; (ii) the Court of Chancery regularly handles MAE disputes and specific performance claims with expedited briefing and hearing schedules; (iii) the body of Delaware case law interpreting MAE definitions, indemnification provisions, and other SPA terms is the most well-developed in the United States, providing a high degree of predictability; and (iv) the Court of Chancery's bench-trial format (no jury trials) is generally considered advantageous for complex commercial disputes involving sophisticated parties.
Both parties will be required to waive any right to a jury trial in connection with any dispute arising out of or relating to the Agreement. This waiver will be included in Section 10.6 of the SPA.
IV. Staffing and Workstream Assignments
The following sets forth the staffing plan and workstream assignments for the Calderwood & Harkness deal team, as well as the roles of external advisors. All team members should coordinate closely throughout the Transaction to ensure efficient allocation of resources and consistent communication with the client and counterparty.
Oliver Mackenzie — Responsible Partner (M&A) — $1,850/hr
Overall deal supervision and strategic direction; primary client relationship management with Penterra senior management and Board of Directors; participation in key negotiation sessions with Sellers' counsel; lead responsibility for the MAE definition, closing conditions, and termination provisions; Board presentations and updates to Penterra's Board of Directors and Corporate Development team.
Harrison Wexford — Billing Partner (M&A) — $1,750/hr
Billing oversight and matter administration; lead responsibility for SPA drafting and negotiation (in coordination with Oliver Mackenzie on key provisions); lead responsibility for ancillary doc