PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 200 Park Avenue, 42nd Floor New York, New York 10166 Telephone: (212) 558-4000 Facsimile: (212) 558-3588
MEMORANDUM
TO: Thomas F. Holbrook, General Counsel & Secretary, Penterra Pharmaceuticals Corp. Catherine M. Burgess, Chief Financial Officer, Penterra Pharmaceuticals Corp.
FROM: Megan Chu, Associate, Calderwood & Harkness LLP Reviewed by: Oliver Mackenzie, Partner, and Harrison Wexford, Partner
DATE: June 18, 2024
MATTER: Penterra Pharmaceuticals Corp. — Acquisition of Veridian Biosciences, Inc.
MATTER NO.: 1018-00008
RE: Mark-Up and Comments on Draft Term Loan Credit Agreement among Penterra Pharmaceuticals Corp., as Borrower, Ironclad Trust Company, N.A., as Administrative Agent, Summit Ridge Capital Partners, LP, as Lead Arranger, and the Lenders party thereto — Draft dated June 14, 2024 received from counsel to the Administrative Agent
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I. INTRODUCTION AND PURPOSE
Calderwood & Harkness LLP ("C&H" or "we") has reviewed the initial draft of the Term Loan Credit Agreement (the "Credit Agreement") circulated by White Pine & Associates LLP, counsel to Ironclad Trust Company, N.A. ("Ironclad" or the "Administrative Agent"), on June 14, 2024. This memorandum sets forth our marked-up comments on the draft Credit Agreement, organized by article and section, together with our recommendations for revisions to protect the interests of Penterra Pharmaceuticals Corp. ("Penterra," the "Borrower," or the "Company") in connection with its proposed acquisition of Veridian Biosciences, Inc. ("Veridian" or the "Target").
The Credit Agreement is intended to implement the $500,000,000 committed term loan facility contemplated by the Commitment Letter dated June 7, 2024 (Reference No. CL-2024-PPCA-0607) (the "Commitment Letter") among Penterra, Summit Ridge Capital Partners, LP ("Summit Ridge") as Lead Arranger, and Ironclad as Administrative Agent. The Commitment Letter represents the agreed economic and structural framework for the financing, and the Credit Agreement should be drafted in a manner fully consistent with those terms. Where the draft Credit Agreement departs from the Commitment Letter — whether by adding conditions, expanding the scope of representations and warranties, or introducing economic provisions not previously agreed — we have flagged such departures and recommended that they be resisted.
As background, the term loan proceeds of $500,000,000 are to be combined with approximately $400,000,000 from Penterra's existing cash on hand (the Company reported cash and cash equivalents of approximately $2.1 billion as of Q1 2024) to fund the aggregate purchase price of $900,000,000 payable in cash at closing under the Stock Purchase Agreement dated June 10, 2024 (the "SPA") for the acquisition of 100% of the outstanding capital stock of Veridian. The purchase price mechanics under the SPA contemplate a net closing payment to the Sellers of $717,500,000, with $180,000,000 deposited into an indemnification escrow and $2,500,000 deposited into a stockholder representative expense fund, in each case held at Fidelis National Escrow Corp.
This memorandum should be read in conjunction with the full marked-up/redlined Credit Agreement, which is attached separately as a companion document (the "Redline"). All margin comments in the Redline are keyed to the section-by-section discussion below. For ease of reference, we have also included in Section V a summary table of our principal requested changes, organized by priority level.
As a general matter, the overall financing structure contemplated by the Commitment Letter is as follows:
• Term Loan Amount: $500,000,000 (single draw at closing of the Acquisition)
• Commitment Fee: 0.35% per annum on unfunded commitments ($1,750,000 per year), payable quarterly in arrears from the date of the Commitment Letter
• Ticking Fee: 0.175% per annum, commencing 90 days after signing of the SPA (i.e., September 8, 2024), payable on the commitment amount in addition to the commitment fee
• Interest Rate: SOFR + 225 basis points on drawn amounts
• Maturity: Five years from the closing date
• Amortization: 1% per annum, payable quarterly, with the balance due at maturity
• Security: Unsecured
Our comments below are directed at ensuring that the Credit Agreement faithfully implements these agreed terms and provides Penterra with the operational flexibility and "certain funds" protections that are customary and expected in acquisition financing transactions of this nature.
II. SUMMARY OF KEY ISSUES AND RECOMMENDATIONS
Before turning to the article-by-article analysis, we provide the following executive-level summary of the principal negotiation points for the attention of Penterra's management team. Each of these items is discussed in greater detail in the sections that follow.
1. Conditions Precedent to Funding — Overbroad; Must Be Trimmed. The draft Credit Agreement includes a number of conditions to the initial funding that were not contemplated by the Commitment Letter and that are inconsistent with the "certain funds" / "SPA conditionality" protections that are fundamental to acquisition financing transactions. These additional conditions — including a separate Borrower MAE condition, a litigation condition, a requirement for post-FY2023 audited Veridian financial statements, and a requirement that no events of default (broadly defined) shall have occurred — must be struck or significantly narrowed. The conditions to funding should be limited to those expressly enumerated in the Commitment Letter. This is a threshold issue and our highest priority.
2. Representations and Warranties — Exceed Commitment Letter Scope. The draft improperly makes all Article IV representations and warranties conditions to the initial funding. Under the Commitment Letter and market practice for acquisition financings, only "specified representations" (a limited subset of borrower representations) should serve as conditions to funding. The full suite of representations should appear in the Credit Agreement, but their breach should have consequences only post-closing. We have marked up the Credit Agreement to implement this distinction.
3. Operating Covenants — Potential Conflicts with SPA Obligations and Penterra's Business. Several of the negative covenants in the draft contain baskets and thresholds that are inappropriately restrictive for a company of Penterra's size and complexity. Additionally, certain restrictions may conflict with Penterra's obligations under the SPA and the anticipated post-closing integration of Veridian. We have recommended specific revisions to the indebtedness, liens, investments, fundamental changes, dividends, and affiliate transaction covenants.
4. Events of Default — Cross-Default and Other Provisions Too Broadly Drafted. The cross-default threshold of $25,000,000 is far too low for a borrower with Penterra's $14.2 billion market capitalization and $4.87 billion in annual revenue. The judgment default threshold is similarly inadequate. Most critically, the draft includes the termination of the SPA as a standalone event of default, which is wholly inappropriate and could expose Penterra to cascading default risk. We strongly recommend that this provision be struck in its entirety and replaced with an automatic commitment termination mechanism.
5. Mandatory Prepayment Provisions — Require Revision. The asset sale prepayment threshold, the excess cash flow sweep percentage, and the absence of reinvestment rights are all inconsistent with market practice for investment-grade acquisition financings. The terms as drafted would unduly constrain Penterra's cash management flexibility in the critical post-acquisition integration period.
6. Termination Provisions — Must Be Coordinated with the SPA Outside Date. The Commitment Termination Date must be a date-certain (December 10, 2024) co-terminous with the SPA Outside Date, and the termination mechanics must ensure that SPA termination results in automatic commitment termination without default, penalty, or breakage cost to Penterra beyond accrued fees and documented expenses.
7. Market Flex and Fee Letter Integration. The draft Credit Agreement contains language that could permit the Administrative Agent to adjust economic terms post-closing under the guise of "market flex." Any market flex adjustments should be confined to the pre-closing syndication period and should be exercised only within the parameters agreed in the fee letter. The Credit Agreement should not serve as a vehicle for expanding those parameters.
We turn now to our detailed analysis.
III. ARTICLE-BY-ARTICLE MARK-UP AND COMMENTS
A. Article I — Definitions
Article I of the draft Credit Agreement sets forth the defined terms used throughout the agreement. As is typical, the definitions section is among the most important provisions in the Credit Agreement, as it establishes the scope and parameters for numerous substantive provisions. We have identified several definitions that require revision.
1. Definition of "Acquisition"
The draft Credit Agreement defines "Acquisition" broadly to encompass "any acquisition by the Borrower or any Subsidiary of all or substantially all of the assets or equity interests of any Person, whether by purchase, merger, consolidation or otherwise." This definition is plainly overbroad for an acquisition financing agreement in which the financing is being provided specifically and exclusively to fund a single, identified transaction.
C&H Recommendation: We recommend narrowing the definition of "Acquisition" to mean specifically the acquisition of 100% of the outstanding capital stock of Veridian Biosciences, Inc. (EIN: 84-2193047), a Delaware corporation, pursuant to the Stock Purchase Agreement dated June 10, 2024, among Penterra Pharmaceuticals Corp., Veridian Biosciences, Inc., the Sellers (as defined therein), and David Ng as Stockholder Representative, for an aggregate purchase price of $900,000,000 payable in cash. The definition should cross-reference the SPA execution version and should expressly confirm that it does not capture any future bolt-on acquisitions, tuck-in transactions, or other business combinations that Penterra may undertake in the ordinary course. To the extent other provisions of the Credit Agreement need to address future acquisitions (for example, in the context of the negative covenant on fundamental changes), those should use a separately defined term.
2. Definition of "Material Adverse Effect" (Borrower MAE)
The draft Credit Agreement contains its own freestanding definition of "Material Adverse Effect" applicable to the Borrower (Penterra) and its subsidiaries. This definition is patterned after a standard corporate credit facility MAE provision and encompasses any event, circumstance, or condition that has had, or would reasonably be expected to have, a material adverse effect on (a) the business, operations, assets, liabilities, financial condition, or results of operations of the Borrower and its subsidiaries taken as a whole, (b) the ability of the Borrower to perform its obligations under the Credit Agreement, or (c) the rights and remedies of the Administrative Agent and the Lenders under the Credit Agreement.
This definition presents two distinct issues:
First, as a standalone definition, the Borrower MAE is appropriately included in the Credit Agreement as part of the representation and warranty framework. However, the draft improperly elevates the Borrower MAE to the status of a separate condition to funding (see our discussion of Article III below). The Commitment Letter expressly limited the MAE condition to a "Company MAE" — that is, a material adverse effect relating to Veridian (the Target), as defined in the SPA at Section 1.1. The Commitment Letter did not include a Borrower MAE as a separate condition to funding, and the Credit Agreement should not add one. We have marked up the draft to strike the Borrower MAE as a condition to funding while retaining it as a representation.
Second, to the extent the Borrower MAE remains as a representation, its scope should be consistent with customary acquisition financing MAE standards, which are generally narrower than those used in typical corporate credit facilities. We note that the SPA's own MAE definition (Section 1.1) includes the following customary carveouts, each subject to a disproportionate-impact exception:
(i) general economic conditions in the United States or global economy;
(ii) conditions generally affecting the pharmaceutical and biotechnology industries;
(iii) changes in applicable law or GAAP;
(iv) pandemics, epidemics, and public health emergencies;
(v) natural disasters, acts of God, acts of war, armed hostilities, sabotage, or terrorism;
(vi) changes in financial, banking, or securities markets generally; and
(vii) the announcement or pendency of the transactions contemplated by the SPA.
While the Borrower MAE in the Credit Agreement need not replicate the SPA's MAE definition verbatim (since the two serve different purposes), the Borrower MAE should include analogous carveouts to ensure that broad market or industry developments do not improperly trigger a representation breach.
3. Definition of "SPA" and Related Defined Terms
We recommend that the definition of "Stock Purchase Agreement" or "SPA" track the actual title, parties, and date of the agreement with precision. The definition should read:
"Stock Purchase Agreement" means the Stock Purchase Agreement, dated as of June 10, 2024, among Penterra Pharmaceuticals Corp., Veridian Biosciences, Inc., the Sellers party thereto (as defined therein), and David Ng, as Stockholder Representative, as the same may be amended, restated, supplemented, or otherwise modified from time to time in accordance with Section [__] hereof (which shall require notice to, and the consent of, the Required Lenders for any material amendment).
We note that the requirement for lender consent to material amendments of the SPA is itself a point that may require negotiation — we believe that Penterra should have the right to make non-material amendments to the SPA without lender consent, and that only amendments that would materially and adversely affect the Lenders' interests (such as an increase in the purchase price beyond the committed facility amount, a material change in the closing conditions, or a material change in the structure of the Acquisition) should require Required Lender consent.
In addition, the Credit Agreement should include defined cross-references to the following key SPA provisions:
• Section 2.1 (Purchase Price — $900,000,000 in cash)
• Section 2.3 (Escrow — $180,000,000 indemnification escrow and $2,500,000 stockholder representative expense fund at Fidelis National Escrow Corp.)
• Section 7.1 (Mutual conditions to closing)
• Section 7.2 (Buyer's conditions to closing)
• Section 8.1 (Termination rights)
These cross-references are important to ensure proper coordination between the SPA and the Credit Agreement, particularly with respect to the conditions precedent to funding (Article III) and the termination provisions (Article VIII).
4. Definition of "Commitment Termination Date"
The draft Credit Agreement defines "Commitment Termination Date" as "the date that is 180 days after the Closing Date of the Commitment Letter." This formulation is problematic for two reasons.
First, the reference to "the Closing Date of the Commitment Letter" is ambiguous. The Commitment Letter does not have a defined "Closing Date" — it has a date of execution (June 7, 2024) and a commitment expiration date. Counting 180 days from June 7, 2024 would yield December 4, 2024, which is six days prior to the SPA Outside Date of December 10, 2024. This creates a gap period during which the SPA could still require closing but the commitments would have expired — an unacceptable result that would constitute a de facto financing failure.
Second, even if the ambiguity were resolved, a formula-based approach is unnecessarily imprecise. We recommend replacing the formula with a date-certain that is expressly co-terminous with the SPA Outside Date.
C&H Recommendation: Define "Commitment Termination Date" as December 10, 2024, the same date as the Outside Date under the SPA. This ensures that the commitments remain available for the full period during which the Acquisition may close. If the SPA is amended to extend the Outside Date (which would require Required Lender consent under the amendment provisions discussed above), the Commitment Termination Date should extend correspondingly. If the SPA is terminated prior to the Outside Date for any reason, the commitments should terminate automatically upon such termination, as discussed in our comments on Article VIII below.
5. SOFR-Related Definitions
The Credit Agreement contains a standard suite of SOFR-related definitions, including "Term SOFR," "SOFR Adjustment," "Benchmark Replacement," "Benchmark Transition Event," and related terms. We have reviewed these definitions for consistency with the Commitment Letter economics and offer the following comments:
(a) The Commitment Letter specifies an interest rate of SOFR + 225 basis points, without reference to any SOFR credit spread adjustment. The Credit Agreement should confirm that no additional spread adjustment applies. If the benchmark replacement language contemplates a credit spread adjustment in connection with a future transition from Term SOFR to an alternative benchmark, that adjustment should be clearly identified as applicable only upon an actual Benchmark Transition Event.
(b) The draft includes a SOFR floor of 0.50%. The Commitment Letter did not reference a SOFR floor. We recommend that this floor be struck, as it was not part of the agreed economics. If the Lenders insist on a floor, this should be treated as a market flex item subject to the parameters in the fee letter.
(c) The benchmark replacement waterfall and related conforming changes language appear to be generally consistent with ARRC-recommended provisions. We have no material objection to these provisions, subject to confirmation that Penterra receives reasonable advance notice of any benchmark replacement determination and that the "Benchmark Replacement Adjustment" is consistent with market practice.
6. Other Definitions
We have reviewed the remaining definitions in Article I and flag the following for attention:
"Permitted Indebtedness." The definition of Permitted Indebtedness must be broad enough to accommodate all of Penterra's existing credit facilities (including the Company's existing $750,000,000 revolving credit facility with Greaves Bancorp, as administrative agent), outstanding notes and bonds, capital lease obligations, ordinary-course trade payables, intercompany indebtedness, and hedging obligations. We recommend that the C&H team compare the Permitted Indebtedness baskets against Penterra's most recent debt schedule (as of Q1 2024) to ensure no existing indebtedness is inadvertently excluded.
"Permitted Liens." Similarly, the Permitted Liens definition should accommodate all existing liens on Penterra's assets, including liens securing existing credit facilities, statutory liens, tax liens being contested in good faith, and customary liens arising in the ordinary course of business.
"Permitted Investments." The Acquisition itself must be expressly included as a Permitted Investment, and the definition should also accommodate ordinary-course investments in subsidiaries, cash management investments, and investments in joint ventures and strategic collaborations that are customary in the pharmaceutical industry.
"Change of Control." This definition requires particular attention. We recommend that "Change of Control" be defined to mean (a) the acquisition by any Person or group of Persons (within the meaning of Section 13(d)(3) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of more than 50% of the outstanding voting stock of Penterra, or (b) a change in the majority of Penterra's board of directors that is not approved by the incumbent board. Critically, the acquisition of Veridian must be expressly excluded from the definition of Change of Control, and the definition should be aligned with Penterra's existing indentures and credit agreements to avoid triggering cross-default issues.
B. Article II — The Term Loan Facility
1. Section 2.1 — Term Loan Commitment
Section 2.1 sets forth the aggregate commitments under the term loan facility. We confirm that the draft reflects an aggregate commitment amount of $500,000,000, which is consistent with the Commitment Letter. We note the following additional points:
The facility is structured as a single-draw term loan, to be funded in full on the closing date of the Acquisition. There are no delayed draw, incremental, or multiple draw features. The draft includes language stating that amounts repaid or prepaid under the term loan may not be reborrowed, which is appropriate for a non-revolving facility. Funding is to occur simultaneously with the closing under the SPA, and the wire transfer instructions are to be set forth in the Funds Flow Memorandum (a revised draft of which, dated July 2, 2024, is currently in preparation and will reflect the final term loan mechanics). The Credit Agreement should cross-reference the Funds Flow Memorandum as the governing document for disbursement mechanics, rather than setting forth independent wire instructions that could create inconsistencies.
We also note that the commitment allocations among the individual Lenders are set forth in Schedule A to the draft Credit Agreement. As of the date of this memorandum, the syndication process has not yet commenced; accordingly, Schedule A reflects the initial commitments of Summit Ridge Capital Partners, LP ($300,000,000) and Ironclad Trust Company, N.A. ($200,000,000) prior to syndication. The final commitment allocations will be determined upon completion of the syndication process, which is expected to occur prior to the anticipated closing date.
2. Section 2.2 — Use of Proceeds
The draft restricts the use of term loan proceeds to "the funding of the Acquisition and the payment of related fees, costs, and expenses." While this is broadly consistent with the Commitment Letter, we recommend that the use-of-proceeds provision be drafted with sufficient specificity to avoid any ambiguity regarding the components of the purchase price mechanics.
C&H Recommendation: The use-of-proceeds clause should expressly provide that the term loan proceeds may be used to:
(a) fund a portion of the aggregate purchase price of $900,000,000 payable in cash at the closing of the Acquisition under the SPA;
(b) fund the deposit of $180,000,000 into the indemnification escrow at Fidelis National Escrow Corp. pursuant to Section 2.3 of the SPA;
(c) fund the deposit of $2,500,000 into the stockholder representative expense fund at Fidelis National Escrow Corp. pursuant to Section 2.3 of the SPA; and
(d) pay fees, commissions, costs, and expenses incurred in connection with the Acquisition, the Credit Agreement, and the related financing transactions.
We wish to confirm that the escrow deposits and the stockholder representative expense fund deposit are components of the purchase price mechanics under the SPA and should be deemed permitted uses of term loan proceeds. The net closing payment to the Sellers — after deduction of the escrow deposit and expense fund deposit — equals $717,500,000 ($900,000,000 − $180,000,000 − $2,500,000). Of this amount, $500,000,000 will be funded from term loan proceeds and $217,500,000 from Penterra's cash on hand. The balance of the escrow deposits and expense fund ($182,500,000) will similarly be funded from Penterra's cash on hand.
3. Section 2.3 — Interest Rate
The draft sets the interest rate at Term SOFR plus 225 basis points per annum, which is consistent with the Commitment Letter. We have the following specific comments:
Interest Period Options. The draft provides for interest periods of one, three, or six months, at the Borrower's election. This is consistent with market practice. We confirm that the Commitment Letter did not restrict interest period options, and we have no objection to this provision.
Default Interest. The draft provides for default interest at the applicable rate plus 200 basis points per annum, payable on demand. This is within market range, and we have no objection.
Post-Closing Margin Adjustment. The draft contains a provision at Section 2.3(d) permitting the Administrative Agent, in its sole discretion, to adjust the applicable margin at any time during the term of the Credit Agreement to reflect "then-prevailing market conditions." This provision is not consistent with the Commitment Letter, which establishes a fixed margin of 225 basis points, and which limits any economic adjustments to the pre-closing/syndication period under the market flex provisions of the fee letter.
C&H Mark-Up: We have struck Section 2.3(d) in its entirety. Any market flex adjustments authorized under the fee letter must be exercised prior to the closing of the Credit Agreement and are subject to the parameters agreed in the fee letter. Post-closing margin adjustments are not contemplated by the Commitment Letter and would fundamentally alter the economics of the financing. We will vigorously resist any attempt to retain this provision.
4. Section 2.4 — Commitment Fee and Ticking Fee
The draft addresses the commitment fee and ticking fee as follows:
Commitment Fee. The commitment fee is set at 0.35% per annum on unfunded commitments, which equals $1,750,000 per year on the full $500,000,000 commitment amount. The commitment fee is payable quarterly in arrears from the date of the Commitment Letter (June 7, 2024) until the earliest of (i) the funding date, (ii) the Commitment Termination Date, or (iii) termination of the commitments. This is consistent with the Commitment Letter, and we have no objection.
Ticking Fee. The ticking fee is set at 0.175% per annum, commencing 90 days after the signing of the SPA. The SPA was signed on June 10, 2024; accordingly, the ticking fee commences on September 8, 2024. The ticking fee is payable on the commitment amount.
C&H Comment — Ambiguity Regarding Ticking Fee. The draft language at Section 2.4(b) is ambiguous as to whether the ticking fee is additive to the commitment fee or a replacement for it. Specifically, the draft states that "commencing on the Ticking Fee Commencement Date, the Borrower shall pay to the Administrative Agent . . . a ticking fee . . . on the aggregate unfunded commitments," without expressly addressing whether the commitment fee continues to accrue. Under the Commitment Letter, the ticking fee is clearly additive — that is, from and after September 8, 2024, both the commitment fee (0.35% per annum) and the ticking fee (0.175% per annum) accrue simultaneously on the unfunded commitment amount, for a combined accrual rate of 0.525% per annum. We recommend that Section 2.4 be revised to state this expressly.
For the Borrower's internal budgeting purposes, we note the following fee calculations (assuming the commitments remain unfunded through the relevant periods):
• Commitment fee from June 7, 2024 through September 7, 2024 (93 days): $500,000,000 × 0.35% ÷ 365 × 93 = approximately $445,890
• Combined commitment fee and ticking fee from September 8, 2024 through September 30, 2024 (23 days): $500,000,000 × 0.525% ÷ 365 × 23 = approximately $165,411
• Total estimated fees through September 30, 2024 (116 days from June 7): approximately $611,301
• Note: The draft Credit Agreement's statement of accrued commitment fees through the same date would be approximately $556,164 if the ticking fee is excluded, which suggests the drafters may have intended the ticking fee to replace rather than supplement the commitment fee. This must be clarified and corrected to conform to the Commitment Letter.
5. Section 2.5 — Repayment and Maturity
Maturity. The draft provides for a maturity date of five years from the closing date, which is consistent with the Commitment Letter. We have no objection.
Amortization. The Commitment Letter provides for quarterly amortization at a rate of 1% per annum of the original principal amount, with the remaining balance due at maturity. This equates to quarterly amortization payments of $1,250,000 ($500,000,000 × 1% ÷ 4). We confirm that the draft amortization schedule is consistent with these terms.
C&H Mark-Up. We note that the draft includes a provision at Section 2.5(c) stating that "upon termination of the SPA, all outstanding Obligations shall become immediately due and payable." This provision is inappropriate for two reasons. First, the term loan is a single-draw facility that will not be funded until the closing of the Acquisition, which occurs simultaneously with the closing of the SPA. If the SPA is terminated prior to the closing of the Acquisition, no amounts will have been drawn under the Credit Agreement, and there will be no outstanding obligations to accelerate (other than accrued fees and expenses). Second, to the extent this provision is intended to address a post-closing scenario in which the SPA is terminated after the Acquisition has closed (which is not a realistic possibility, since the SPA would be fully performed at closing), it is duplicative of the maturity and acceleration provisions. We have struck Section 2.5(c) and replaced it with the automatic commitment termination mechanics discussed in our comments on Article VIII.
C. Article III — Conditions Precedent to Funding
Article III is, from Penterra's perspective, the single most important article in the Credit Agreement. The "certain funds" or "SPA conditionality" principle — which is the cornerstone of acquisition financing — requires that the conditions to the Lenders' obligation to fund the term loan on the closing date be limited to those conditions expressly agreed in the Commitment Letter. This principle ensures that if the SPA closing conditions are satisfied and the Acquisition is ready to close, the financing will be available. Any additional funding conditions beyond those in the Commitment Letter would undermine the certainty of financing and could expose Penterra to the $45,000,000 reverse termination fee under the SPA in the event of a financing failure.
1. Section 3.1 — Conditions to Closing and Initial Funding
Under the Commitment Letter, the conditions to the initial funding are limited to the following:
(a) Execution and delivery of the Credit Agreement and related loan documents in forms consistent with the Commitment Letter and the term sheet attached thereto;
(b) Satisfaction or waiver of all conditions to the closing of the Acquisition under Article VII of the SPA (including Section 7.1, mutual conditions, and Section 7.2, Buyer's conditions);
(c) Accuracy of "specified representations" (a limited subset of Borrower representations, as discussed below) as of the closing date;
(d) Delivery of customary closing documents, including an officer's certificate from Dr. Anand Rajagopal (CEO) and Catherine M. Burgess (CFO), a secretary's certificate with attached board resolutions, legal opinions from borrower's counsel (C&H) and from counsel to the Administrative Agent, and a solvency certificate from the CFO;
(e) Payment of fees and expenses then due and payable; and
(f) No Borrower material adverse effect — but only as a representation, not as a separate freestanding condition to funding (the Commitment Letter limits the MAE condition to the "Company MAE," i.e., the Veridian MAE under the SPA).
C&H Mark-Up — Key Objections. The draft Credit Agreement adds several conditions to funding that were not contemplated by the Commitment Letter and that are inconsistent with certain-funds practice. We have marked these for deletion or revision as follows:
Strike — Litigation Condition. Section 3.1(g) of the draft conditions funding on the absence of "any pending or threatened litigation, action, or proceeding against the Borrower or any of its Subsidiaries relating to or arising out of the Acquisition." This condition was not agreed in the Commitment Letter. Its inclusion would give the Lenders an open-ended basis for refusing to fund in the event of any litigation threat, no matter how meritless or immaterial. In an acquisition of this magnitude, it is not uncommon for appraisal actions, stockholder suits, or competitor challenges to be filed or threatened. The existence of such proceedings should not prevent funding. We have struck Section 3.1(g) in its entirety.
Strike — Borrower MAE Condition. Section 3.1(h) conditions funding on the absence of "a Material Adverse Effect with respect to the Borrower and its Subsidiaries since the date of this Agreement." As discussed above in our comments on the definition of "Material Adverse Effect," the Commitment Letter limits the MAE condition to the "Company MAE" under the SPA — that is, a material adverse effect relating to Veridian. A separate Borrower MAE condition to funding was not agreed. We acknowledge that the absence of a Borrower MAE is appropriately included as a representation in Article IV, but it should not be a separate condition to funding. We have struck Section 3.1(h).
Strike — Post-FY2023 Veridian Financial Statements. Section 3.1(i) conditions funding on the delivery of "audited consolidated financial statements of [Veridian] for its most recently completed fiscal year." Veridian's most recent audited financial statements, prepared by Northbridge Accounting Group LLP, cover fiscal years 2021 through 2023. Veridian's fiscal year 2024 will not end until December 31, 2024, and audited financial statements for that year would not be available until well after the expected closing of the Acquisition. The Commitment Letter requires only those financial statements that were available at the time of signing — that is, the FY2021–FY2023 audited financials. We have struck Section 3.1(i).
Narrow — Absence of Events of Default. Section 3.1(f) conditions funding on the absence of any "Event of Default or Default" under the Credit Agreement. Under certain-funds practice, the absence of events of default as a condition to the initial funding should be limited to payment defaults and bankruptcy/insolvency defaults only. The broader universe of potential defaults — including, for example, technical covenant violations, notice failures, or representation inaccuracies — should not serve as a basis for the Lenders to refuse funding on the closing date. We have revised Section 3.1(f) to limit the condition to the absence of payment defaults under Section 7.1(a) and bankruptcy/insolvency defaults under Section 7.1(e).
Insertion of Express SPA Conditionality Provision. To eliminate any ambiguity, we recommend inserting a new Section 3.1(j) containing an express "limited conditionality" or "SPA conditionality" provision, which would state:
"Notwithstanding anything to the contrary in this Agreement, the only conditions to the obligations of the Lenders to make the Term Loans on the Closing Date are those conditions set forth in clauses (a) through (f) of this Section 3.1 (as modified by the Commitment Letter). No other condition, whether express or implied, shall apply to the obligation of the Lenders to fund the Term Loans on the Closing Date. For the avoidance of doubt, if the conditions to the Buyer's obligation to consummate the Acquisition under Sections 7.1 and 7.2 of the Stock Purchase Agreement have been satisfied or waived, the conditions to funding set forth in this Section 3.1 shall be deemed satisfied."
This provision is critical to ensuring that Penterra has the financing certainty it needs to close the Acquisition and to minimizing the risk that the reverse termination fee under the SPA is triggered by a financing failure.
2. Section 3.2 — Closing Deliverables
Section 3.2 sets forth the specific documents and certificates to be delivered at or prior to the closing as conditions to funding. We have reviewed this list and offer the following comments:
The required deliverables include: (a) the executed Credit Agreement; (b) security documents, if any (we note that the facility is expected to be unsecured per the Commitment Letter, and we discuss this further below); (c) an officer's certificate signed by Dr. Anand Rajagopal (CEO) and Catherine M. Burgess (CFO) certifying as to the satisfaction of conditions precedent; (d) a solvency certificate signed by the CFO; (e) a secretary's certificate with attached resolutions of Penterra's board of directors authorizing the Credit Agreement and related transactions; (f) a legal opinion of C&H, as counsel to the Borrower; and (g) a legal opinion of counsel to the Administrative Agent.
Security Documents. The draft references the delivery of "Security Documents as described in Schedule 3.2." However, the Commitment Letter provides that the term loan facility will be unsecured. Schedule 3.2 of the draft is blank, suggesting that counsel for the Administrative Agent may have used a template that includes secured facility provisions. We have confirmed that no security documents should be required, and we have struck the references to security documents throughout the Credit Agreement. If the Lenders subsequently request security (which would constitute a material deviation from the Commitment Letter), this would need to be a subject of separate negotiation, and Penterra should resist any such request.
Legal Opinion. The forms of legal opinion to be delivered by C&H (as borrower's counsel) and by counsel to the Administrative Agent were to be agreed as exhibits to the Commitment Letter. We are in the process of finalizing the form of C&H opinion and will ensure that it is consistent with customary practice for acquisition financing transactions. We have marked up the legal opinion requirements in Section 3.2 to confirm that: (i) the C&H opinion will be limited to customary matters (enforceability, due authorization, no conflicts with organizational documents, no governmental approvals required, no violations of specified laws); (ii) the opinion will be subject to customary assumptions, qualifications, and exceptions; and (iii) the opinion will not impose unusual diligence requirements or extend to substantive legal conclusions regarding the Acquisition, the SPA, or Veridian.
Solvency Certificate. The solvency certificate is to be delivered by Catherine M. Burgess, CFO. We discuss the substantive solvency representation in our comments on Section 4.10 below.
Funds Flow Memorandum. We recommend that Section 3.2 include as a closing deliverable the final executed Funds Flow Memorandum (a revised draft dated July 2, 2024 is currently in preparation). The Funds Flow Memorandum should serve as the governing document for the disbursement mechanics, and the Credit Agreement should cross-reference it rather than establishing separate wire transfer instructions.
D. Article IV — Representations and Warranties of the Borrower
1. "Specified Representations" vs. Full Representations
This is one of the most significant structural issues in the Credit Agreement. Under the Commitment Letter and market practice for acquisition financings, only a limited subset of Borrower representations — commonly referred to as "specified representations" — should serve as conditions to the initial funding. The remaining representations (the "full" representation suite) should appear in the Credit Agreement but should not be conditions to the Lenders' obligation to fund on the closing date.
The rationale for this distinction is fundamental to the certain-funds principle: if the Lenders could refuse to fund based on the inaccuracy of any representation — including representations relating to financial statements, litigation, environmental matters, tax, ERISA, and other complex subjects that may involve gray areas or immaterial inaccuracies — the financing would not be "certain," and the Borrower would bear the risk that a technical misstatement in a representation could prevent the closing of the Acquisition and trigger the reverse termination fee.
The "specified representations" that should serve as conditions to funding are limited to:
(a) Organization and existence of the Borrower;
(b) Power and authority of the Borrower to enter into the Credit Agreement and related loan documents;
(c) Due authorization of the Credit Agreement and the transactions contemplated thereby;
(d) No conflict of the Credit Agreement with the Borrower's organizational documents;
(e) Enforceability of the Credit Agreement against the Borrower;
(f) Compliance with Federal Reserve Board margin regulations (Regulation U);
(g) Non-status as an "investment company" under the Investment Company Act of 1940;
(h) Use of proceeds consistent with Section 2.2; and
(i) Compliance with OFAC sanctions, anti-money laundering laws (including the USA PATRIOT Act), and anti-corruption laws (including the Foreign Corrupt Practices Act).
C&H Mark-Up. The draft Credit Agreement at Section 3.1(c) conditions funding on the accuracy of "all representations and warranties set forth in Article IV" — that is, the full suite of representations, not merely the specified representations. This is inconsistent with the Commitment Letter and with market practice. We have revised Section 3.1(c) to reference only the specified representations listed above, and we have added a new defined term, "Specified Representations," encompassing only those representations identified above. The full suite of representations in Article IV remains in the Credit Agreement and would be relevant for purposes of any post-closing defaults (though, as noted, this is a single-draw facility, so the practical significance is limited to potential post-closing covenant compliance certifications and disclosure obligations).
2. Specific Representation Comments
We turn now to our comments on specific representations in Article IV:
Section 4.1 — Organization and Existence. This representation confirms that the Borrower is duly organized, validly existing, and in good standing under the laws of its jurisdiction of organization. We confirm that Penterra Pharmaceuticals Corp. is a Delaware corporation, publicly traded on the Nasdaq Global Select Market under the ticker symbol "PPCA," with its principal executive office located at 1100 Meridian Boulevard, Suite 400, Princeton, New Jersey 08540. This representation is a "specified representation" and should remain as a condition to funding. We have no substantive objection, subject to confirming that the representation is given as of the closing date.
Section 4.3 — Financial Statements. This representation confirms the accuracy and completeness of the Borrower's financial statements delivered to the Lenders. The draft references audited financial statements for the three most recently completed fiscal years and unaudited interim statements for the most recently completed fiscal quarter. We confirm that Penterra's audited financial statements are prepared by Tarrant & Co. and that Penterra's FY2023 revenue was approximately $4.87 billion. This representation is NOT a specified representation and should NOT be a condition to the initial funding. We have ensured that the representation is qualified "in all material respects" and is made only as of the closing date (not on a continuing basis). We have also confirmed that the representation relates to the financial statements of Penterra and its existing subsidiaries, and does not extend to financial statements of Veridian prior to the closing of the Acquisition.
Section 4.4 — No Material Adverse Change. The draft includes a representation that "no Material Adverse Effect has occurred since December 31, 2023." As discussed at length above, this representation — to the extent it relates to the Borrower — should not be a condition to funding. We have ensured that it is excluded from the "specified representations" and that it remains only as a representation in the Credit Agreement. The representation should reference the date of Penterra's most recent audited financial statements (December 31, 2023) as the measuring date and should relate to Penterra's financial condition, not Veridian's. The MAE condition as applied to Veridian is separately addressed through the SPA conditionality provision.
Section 4.5 — Litigation. The draft contains a representation that "there is no action, suit, investigation, or proceeding pending or, to the knowledge of the Borrower, threatened, against the Borrower or any of its Subsidiaries before any court, governmental authority, or arbitrator." This representation is overbroad. Penterra, as a large publicly traded pharmaceutical company, is subject to numerous ordinary-course litigation matters at any given time, including product liability claims, patent disputes, employment matters, and regulatory inquiries. A representation that sweeps in all pending or threatened litigation, without qualification, would be perpetually inaccurate and could serve as a pretext for the Lenders to refuse funding or to assert a post-closing default.
C&H Recommendation: Qualify the litigation representation to cover only litigation or proceedings that (a) involve claims in excess of a specified dollar threshold (we recommend $50,000,000, consistent with the judgment default threshold we have recommended), or (b) would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect on Penterra's ability to perform its obligations under the Credit Agreement. This representation is not a "specified representation" and should not be a condition to funding.
Section 4.7 — Tax. The tax representation confirms that the Borrower has filed all material tax returns and has paid all material taxes when due (subject to taxes being contested in good faith). We confirm that Penterra's Employer Identification Number (EIN) is 22-3847561. We recommend confirming that this representation relates only to Penterra and its existing subsidiaries, and does not extend to Veridian or its pre-closing tax liabilities or positions. Post-closing, Veridian will be a wholly-owned subsidiary of Penterra and will be covered by the representation, but the representation as of the closing date should not require Penterra to make representations about Veridian's historical tax compliance before Penterra has had the opportunity to conduct a thorough post-closing integration review.
Section 4.10 — Solvency. The solvency representation is a specified representation (it is included in the Commitment Letter closing deliverables in the form of a solvency certificate to be delivered by the CFO). We have the following specific comment:
The solvency test must be applied on a pro forma basis giving effect to (i) the consummation of the Acquisition, (ii) the incurrence of the $500,000,000 term loan, (iii) the payment of the $900,000,000 purchase price, and (iv) the payment of all transaction fees and expenses. The solvency certificate should certify that, after giving effect to all of the foregoing on a pro forma basis, Penterra and its subsidiaries (including Veridian as a post-closing subsidiary), on a consolidated basis:
(a) are able to pay their debts as they become due;
(b) have assets with a fair value in excess of the amount of their total liabilities (including contingent and unliquidated liabilities); and
(c) do not have unreasonably small capital for their intended business operations.
We note that Penterra's Q2 2024 cash on hand of approximately $2.1 billion provides the baseline for the solvency analysis. After deducting the $400,000,000 cash contribution to the Acquisition, Penterra would retain approximately $1.7 billion in cash (plus the $500,000,000 in term loan proceeds applied directly to the purchase price, which does not reduce Penterra's cash position). Combined with the anticipated revenue and EBITDA of the combined Penterra-Veridian enterprise, we are confident that the solvency certificate can be delivered. We will coordinate with Ms. Burgess and Penterra's financial advisors to finalize the form of solvency certificate.
E. Article V — Affirmative Covenants
1. Section 5.1 — Financial Reporting
The draft requires the Borrower to deliver to the Administrative Agent: (a) annual audited consolidated financial statements within 90 days of fiscal year end; (b) quarterly unaudited consolidated financial statements within 45 days of each fiscal quarter end; and (c) annual operating budgets and projections.
C&H Comment. Penterra is a publicly traded company listed on the Nasdaq Global Select Market and files quarterly reports on Form 10-Q and annual reports on Form 10-K with the U.S. Securities and Exchange Commission. We recommend inserting a "public company carve-out" allowing Penterra to satisfy its financial reporting obligations under the Credit Agreement by timely filing its periodic reports with the SEC and making such reports available to the Lenders (which occurs automatically upon filing through the SEC's EDGAR system). This approach is standard in credit agreements with publicly traded borrowers and avoids the administrative burden and expense of preparing separate deliverables for the Lenders that would contain substantially the same information as the SEC filings.
We also recommend confirming that no separate financial reporting obligation exists for Veridian's standalone financial statements post-acquisition. Upon closing, Veridian will become a wholly-owned subsidiary of Penterra and its financial results will be consolidated into Penterra's financial statements. A separate Veridian reporting requirement would be duplicative and administratively burdensome.
2. Section 5.2 — Financial Covenants
The draft includes two financial maintenance covenants: (a) a maximum total net leverage ratio covenant, and (b) a minimum interest coverage ratio covenant. The specific covenant levels are set forth in Schedule 5.2 to the draft and are intended to be consistent with the terms outlined in the Commitment Letter. We are in the process of verifying the covenant levels against the Commitment Letter term sheet and Penterra's financial projections.
C&H Comment. Given Penterra's current financial profile — market capitalization of approximately $14.2 billion, FY2023 revenue of $4.87 billion, and substantial cash reserves — the covenant levels should provide meaningful headroom above Penterra's projected leverage and coverage ratios. We will coordinate with Penterra's finance team and financial advisors to ensure that the covenant levels are set at levels that accommodate reasonably foreseeable scenarios, including periods of elevated spending during the post-acquisition integration.
More importantly, we recommend that the Credit Agreement include a financial covenant holiday for at least two fiscal quarters following the closing of the Acquisition. This holiday period is intended to account for the significant one-time integration expenses, transaction costs, and potential purchase accounting adjustments (including fair value mark-to-market adjustments to Veridian's assets and liabilities) that will affect Penterra's consolidated financial results in the quarters immediately following the closing. A covenant holiday is a standard feature in acquisition financing credit agreements, particularly for transactions of this magnitude. During the holiday period, the financial covenants would not be tested; testing would resume beginning with the first full fiscal quarter following the expiration of the holiday period.
In the alternative, if the Lenders are unwilling to agree to a full covenant holiday, we recommend that the covenant levels for the first two post-closing quarters be set at significantly wider levels than those applicable for subsequent periods, with step-downs occurring over time as the integration is completed and Penterra's financial results normalize.
3. Section 5.3 — Compliance with Laws
The draft requires the Borrower to comply, and to cause its subsidiaries to comply, with all applicable laws, regulations, and orders, except where the failure to comply would not reasonably be expected to have a Material Adverse Effect. This is a standard provision, and we have no material objection. We have confirmed that the materiality qualifier is included.
4. Section 5.4 — Notice of Defaults
The draft requires the Borrower to provide prompt written notice to the Administrative Agent upon any officer of the Borrower obtaining knowledge of (a) any Event of Default or Default, (b) any material litigation or proceeding, (c) any ERISA event, or (d) any other event that would reasonably be expected to have a Material Adverse Effect.
C&H Comment. While notice-of-default provisions are standard, the scope of the notice obligation should be narrowed to avoid creating an undue operational burden and to minimize the risk that routine business developments are inadvertently elevated to the status of credit agreement defaults. We recommend:
(a) Notice of Events of Default should be limited to actual Events of Default, not "Defaults" (which include events that would become Events of Default with the giving of notice or passage of time). This avoids a situation in which the Borrower is required to notify the Lenders of potential problems before they have had an opportunity to cure.
(b) Notice of litigation should be limited to litigation that is material — defined as litigation involving claims in excess of $50,000,000 or that seeks injunctive or equitable relief that would reasonably be expected to materially impair Penterra's business operations or its ability to perform under the Credit Agreement.
(c) Notice of ERISA events should be limited to ERISA events that involve potential liability in excess of a specified threshold.
5. Section 5.5 — Insurance
The draft requires the Borrower to maintain insurance with financially sound and reputable insurance companies in such amounts and covering such risks as are consistent with prudent business practice for companies in the same or similar lines of business. This is a standard provision, and we have no material objection in principle.
C&H Comment. We wish to confirm that this provision does not require Penterra to maintain as a condition of the Credit Agreement the representation and warranty insurance policy (Policy No. AIC-RWI-2024-07892) issued by Atlas Indemnity Insurance Co. in connection with the Acquisition. That R&W insurance policy is a transaction-specific product procured for the purpose of supplementing the indemnification protections available to Penterra under the SPA, and it has its own terms, conditions, and duration. The maintenance of R&W insurance is not a general corporate insurance obligation, and it should not be treated as such under the Credit Agreement. We have added a clarifying note to the mark-up confirming this interpretation.
6. Section 5.6 — Post-Closing Covenants
The draft includes a provision requiring the Borrower to deliver certain post-closing items and to take certain actions within specified time periods following the closing date. These include (a) the delivery of updated organizational documents for any newly formed or acquired subsidiaries (including Veridian), (b) the delivery of updated financial information and projections reflecting the combined Penterra-Veridian enterprise, and (c) the completion of specified integration milestones.
C&H Comment. Post-closing covenants are generally acceptable, but the time periods for compliance must be reasonable. We recommend that all post-closing covenants carry a compliance period of not less than 90 days following the closing date, with an automatic extension of an additional 30 days (to 120 days total) if the Borrower is diligently pursuing compliance but has been unable to complete the required action due to circumstances beyond its reasonable control. In no event should a failure to satisfy a post-closing covenant within the specified time period constitute an immediate Event of Default — rather, it should be subject to the standard cure periods applicable to affirmative covenant defaults under Section 7.1.
F. Article VI — Negative Covenants
1. Section 6.1 — Limitation on Indebtedness
The draft restricts the incurrence of additional indebtedness by the Borrower and its subsidiaries, subject to certain "Permitted Indebtedness" exceptions. We have reviewed the Permitted Indebtedness baskets and have the following comments:
The Permitted Indebtedness baskets must be sufficiently broad to accommodate all of Penterra's existing credit facilities and outstanding debt obligations, as well as Penterra's ongoing operational financing needs. In particular, the baskets must expressly permit:
(a) Indebtedness under Penterra's existing $750,000,000 revolving credit facility with Greaves Bancorp;
(b) Outstanding senior notes and bonds issued by Penterra or its subsidiaries;
(c) Capital lease obligations and purchase money indebtedness;
(d) Intercompany indebtedness among Penterra and its subsidiaries (including Veridian post-closing);
(e) Hedging obligations entered into in the ordinary course of business;