MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED
TO: Thomas F. Holbrook, General Counsel & Secretary, Penterra Pharmaceuticals Corp. Catherine M. Burgess, Chief Financial Officer, Penterra Pharmaceuticals Corp.
FROM: Oliver Mackenzie, Partner, Calderwood & Harkness LLP Megan Chu, Associate, Calderwood & Harkness LLP
DATE: June 9, 2024
RE: Review and Analysis of Fee Letter Associated with Commitment Letter (Ref. CL-2024-PPCA-0607) — $500,000,000 Term Loan Facility — Summit Ridge Capital Partners, LP / Ironclad Trust Company, N.A.
Matter No.: 1018-00008
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I. Executive Summary
This memorandum summarizes the key findings and recommendations of Calderwood & Harkness LLP ("C&H") arising from our review of the fee letter dated June 7, 2024 (the "Fee Letter"), executed concurrently with the Commitment Letter bearing reference number CL-2024-PPCA-0607 (the "Commitment Letter"), in connection with the proposed $500,000,000 senior secured term loan facility (the "Term Loan Facility"). The Term Loan Facility is intended to partially fund the acquisition by Penterra Pharmaceuticals Corp. ("Penterra," "PPC," or the "Company") of 100% of the outstanding capital stock of Veridian Biosciences, Inc. ("Veridian" or the "Target"), a Delaware corporation, pursuant to that certain Stock Purchase Agreement (the "SPA") anticipated to be executed on or about June 10, 2024 (the "Acquisition").
The parties to the Fee Letter are as follows:
• Borrower: Penterra Pharmaceuticals Corp., a Delaware corporation, with its principal offices at 1100 Meridian Boulevard, Suite 400, Princeton, NJ 08540;
• Lead Arranger: Summit Ridge Capital Partners, LP ("Summit Ridge"), attention Philip Ostrander, Managing Director, located at 277 Park Avenue, 40th Floor, New York, NY 10172; and
• Administrative Agent: Ironclad Trust Company, N.A. ("Ironclad"), attention Samantha Hwang, Vice President, located at 60 Wall Street, New York, NY 10005.
The aggregate purchase price for the Acquisition is $900,000,000, payable in cash at closing. Penterra intends to fund the purchase price through a combination of (i) $500,000,000 in borrowings under the Term Loan Facility and (ii) approximately $400,000,000 from Penterra's available cash on hand. As of the end of the second quarter of 2024, Penterra reports cash and cash equivalents of approximately $2,100,000,000, providing substantial liquidity to support both the equity component of the Acquisition and the ongoing fee obligations under the Fee Letter.
Overall Assessment. Based on our review, the terms of the Fee Letter are within the market range for committed acquisition financing of this size and type, and the fee structure is consistent with customary practice in the leveraged acquisition finance market. In particular, the commitment fee rate of 0.35% per annum, the ticking fee rate of 0.175% per annum (commencing 90 days after execution of the SPA), and the non-refundability provisions are all consistent with comparable precedent transactions. That said, certain provisions warrant particular attention from the deal team, including: (a) the absolute non-refundability of fees, even in the event of a valid SPA termination; (b) the mechanics governing the commencement of the ticking fee and its interaction with the SPA execution date; and (c) the relationship between the Fee Letter obligations and the reverse termination fee provisions of the SPA.
Recommendation. C&H recommends that Penterra approve execution of the Fee Letter, subject to the minor clarification requests outlined in Section VII of this memorandum. We do not believe these clarification requests should delay the SPA execution timeline currently planned for June 10, 2024.
II. Background and Transaction Context
Overview of the Penterra-Veridian Transaction
Penterra Pharmaceuticals Corp. is a Nasdaq-listed biopharmaceutical company (ticker: PPCA) headquartered at 1100 Meridian Boulevard, Suite 400, Princeton, NJ 08540. The Company has a current market capitalization of approximately $14.2 billion and reported revenue of $4.87 billion for fiscal year 2023. Penterra's existing portfolio is concentrated in oncology, immunology, and rare disease therapeutics, with a pipeline that includes both marketed products and late-stage clinical candidates.
The proposed Acquisition involves the purchase by Penterra of 100% of the outstanding capital stock of Veridian Biosciences, Inc., a Delaware corporation with its principal office at 550 Gateway Drive, Cambridge, MA 02142. Veridian is a clinical-stage biotechnology company focused on immuno-oncology therapeutics, with a lead product candidate currently in Phase II clinical trials for the treatment of non-small cell lung cancer and an additional candidate in Phase I for pancreatic ductal adenocarcinoma. Veridian's pipeline is considered complementary to Penterra's existing oncology franchise, and the Acquisition is intended to bolster Penterra's immuno-oncology capabilities following the Phase III futility analysis of PPC-0921 announced in November 2023. The loss of PPC-0921 created a significant gap in Penterra's late-stage pipeline, which the Veridian assets are expected to address.
The aggregate purchase price for the Acquisition is $900,000,000, payable entirely in cash at closing. No earnout or contingent consideration is contemplated.
Financing and Advisory Arrangements
The Commitment Letter was executed on June 7, 2024 (Ref. CL-2024-PPCA-0607), and the Fee Letter was executed concurrently on the same date. Together, these documents govern the economic terms of Summit Ridge's and Ironclad's commitment to provide the Term Loan Facility.
Penterra has engaged Garrison Zanthor & Co., LLC ("Garrison Zanthor") as its exclusive financial advisor in connection with the Acquisition. Kevin Driscoll, Managing Director, is the lead advisory contact at Garrison Zanthor. Garrison Zanthor is expected to deliver its fairness opinion to Penterra's Board of Directors on or about June 9, 2024.
Key Transaction Dates
The following is a summary of the key dates relevant to this memorandum:
• June 7, 2024: Execution of the Commitment Letter and Fee Letter.
• June 9, 2024: Anticipated delivery of Garrison Zanthor fairness opinion; date of this memorandum.
• June 10, 2024: Anticipated execution of the SPA.
• September 8, 2024: Commencement of the ticking fee (90 days after anticipated SPA execution on June 10, 2024).
• December 10, 2024: SPA Outside Date; expiration of the financing commitment; date by which closing must occur or the SPA terminates by its terms.
The financing commitment under the Commitment Letter is co-terminous with the SPA Outside Date of December 10, 2024. If the Acquisition does not close by that date, the Commitment Letter and the associated fee obligations terminate automatically, subject to the payment of all accrued and unpaid fees.
III. Summary of Fee Categories
The Fee Letter provides for five categories of fees payable by Penterra in connection with the Term Loan Facility. Each is summarized below.
A. Arrangement Fee
The Fee Letter provides for a one-time upfront arrangement fee payable to Summit Ridge Capital Partners, LP in its capacity as Lead Arranger for the Term Loan Facility. The arrangement fee is intended to compensate Summit Ridge for its commitment to arrange and underwrite the facility, including the credit analysis, documentation, and syndication efforts associated with the transaction.
Amount. The specific dollar amount of the arrangement fee is set forth in the Fee Letter and is subject to the confidentiality provisions discussed in Section VII.D below. Based on prevailing market practice for committed acquisition financing facilities of $500,000,000, arrangement fees typically range between 25 and 50 basis points on the total committed amount, which would imply a fee in the range of $1,250,000 to $2,500,000. The amount specified in the Fee Letter falls within this range.
Payment Timing. The arrangement fee is payable upon the earlier of (i) the initial funding of the Term Loan Facility on the Closing Date and (ii) the termination of the Commitment Letter for any reason. This dual trigger ensures that Summit Ridge receives the arrangement fee regardless of whether the Acquisition ultimately closes.
Non-Refundability. The Fee Letter specifies that the arrangement fee is fully earned upon execution and is non-refundable in all circumstances. This means that Penterra's obligation to pay the arrangement fee crystallized on June 7, 2024, the date of execution of the Fee Letter, although the payment itself is deferred until funding or termination. The non-refundability of the arrangement fee is discussed further in Section V of this memorandum.
B. Commitment Fee
The Fee Letter provides for an annual commitment fee of 0.35% per annum on the aggregate unfunded commitments under the Term Loan Facility. The commitment fee compensates the Lenders for maintaining the $500,000,000 commitment available during the period between the execution of the Commitment Letter and either the funding of the facility or its termination.
Rate and Base Amount. The commitment fee rate is 0.35% per annum, calculated on the full $500,000,000 committed amount. On an annualized basis, this equates to a commitment fee of $1,750,000 per year. The commitment fee accrues on a daily basis, using an Actual/365 day count convention, meaning that the per-diem accrual is $500,000,000 × 0.35% ÷ 365 = approximately $4,795 per day.
Accrual Period. The commitment fee begins accruing on the date of execution of the Commitment Letter, June 7, 2024, and continues to accrue through the earlier of (i) the Closing Date (i.e., the date on which the Term Loan Facility is initially funded), (ii) the date of termination of the Commitment Letter, or (iii) the expiration of the commitment on the SPA Outside Date of December 10, 2024.
Payment Frequency. The commitment fee is payable quarterly in arrears. The first quarterly payment would be due on or about September 7, 2024 (90 days after execution), and subsequent quarterly payments would be due on or about December 7, 2024, with any remaining accrued amount payable upon closing or termination.
Payee. The commitment fee is payable to Ironclad Trust Company, N.A. in its capacity as Administrative Agent, for the account of the Lenders participating in the Term Loan Facility.
Maximum Exposure. If the full commitment period runs from June 7, 2024 through the SPA Outside Date of December 10, 2024 (a period of approximately 186 days), the maximum commitment fee exposure is calculated as follows:
$500,000,000 × 0.35% ÷ 365 × 186 ≈ $892,466
Non-Refundability. Consistent with the general non-refundability provisions of the Fee Letter, the commitment fee is non-refundable once accrued, regardless of whether the Term Loan Facility is funded or the Acquisition closes. This provision is discussed further in Section V.
C. Ticking Fee
In addition to the commitment fee, the Fee Letter provides for a ticking fee of 0.175% per annum on the aggregate commitments under the Term Loan Facility. The ticking fee is designed to incentivize prompt closing of the Acquisition by increasing the carrying cost of the committed facility as the transaction timeline extends. This type of fee is standard in committed acquisition financing arrangements and serves to compensate the Lenders for the increased risk and opportunity cost associated with maintaining a commitment for an extended period.
Rate and Relationship to Commitment Fee. The ticking fee rate of 0.175% per annum is equal to one-half of the commitment fee rate (0.35%), which is the customary ratio observed in comparable transactions. Critically, the ticking fee is in addition to, and not a substitute for, the commitment fee. Upon commencement of the ticking fee, the total combined carrying cost of the committed facility increases from 0.35% per annum to 0.525% per annum (0.35% commitment fee + 0.175% ticking fee).
Commencement Date. The ticking fee commences on the 90th day following the signing of the SPA (referred to in the Fee Letter as "the Acquisition Agreement"). Assuming the SPA is executed on June 10, 2024, the ticking fee commences on September 8, 2024. This 90-day grace period is intended to provide Penterra with a reasonable window in which to satisfy closing conditions and obtain necessary regulatory approvals without incurring the incremental cost of the ticking fee. If closing occurs within the 90-day period, no ticking fee will be payable.
Accrual and Calculation. The ticking fee accrues on a daily basis from the commencement date through the earlier of (i) the Closing Date, (ii) the termination of the Commitment Letter, or (iii) the expiration of the commitment on the SPA Outside Date. If the ticking fee runs from September 8, 2024 through the SPA Outside Date of December 10, 2024 (a period of approximately 93 days), the maximum ticking fee exposure is:
$500,000,000 × 0.175% ÷ 365 × 93 ≈ $222,945
Payee. The ticking fee is payable to Ironclad Trust Company, N.A. as Administrative Agent, for the account of the Lenders.
Non-Refundability. The ticking fee is non-refundable once accrued, consistent with the treatment of the other fees under the Fee Letter.
D. Administrative Agent Fee
The Fee Letter provides for an annual administrative agent fee payable to Ironclad Trust Company, N.A. in its capacity as Administrative Agent for the Term Loan Facility. This fee compensates Ironclad for its ongoing administrative duties under the credit agreement, including processing notices, maintaining registers, distributing payments, and performing related ministerial functions.
Amount. The specific amount of the administrative agent fee is set forth in the Fee Letter. Consistent with market practice for term loan facilities of this size, the administrative agent fee is typically structured as a flat annual fee, generally in the range of $50,000 to $150,000 per annum.
Payment Timing. The administrative agent fee is payable annually in advance, with the first installment payable upon the initial funding of the Term Loan Facility. Significantly, the administrative agent fee is not payable unless and until the Term Loan Facility is actually funded. If the Acquisition does not close and the facility is never drawn, no administrative agent fee will be owed. This distinguishes the administrative agent fee from the commitment fee, arrangement fee, and ticking fee, each of which may be payable regardless of whether funding occurs.
E. Syndication / Participation Fees
The Fee Letter includes certain provisions relating to fees payable in connection with any syndication of the Term Loan Facility to additional lenders. Under the Commitment Letter, Summit Ridge has the right (but not the obligation) to syndicate a portion of the $500,000,000 commitment to other financial institutions. This is standard for acquisition financing of this size, as lead arrangers typically distribute risk through syndication.
Penterra Consent Rights. The Fee Letter, read in conjunction with the Commitment Letter, provides that Penterra has consent rights over the identity of any syndicate lenders invited to participate in the facility. These consent rights are consistent with the "yank-a-bank" protections commonly included in acquisition financing arrangements and are intended to ensure that Penterra has the ability to approve (or reject) any lender whose participation could create reputational, regulatory, or commercial concerns.
Effect on Fee Obligations. The Fee Letter expressly provides that the syndication of commitments by Summit Ridge does not affect, reduce, or otherwise modify Penterra's obligation to pay the fees set forth in the Fee Letter. Penterra's fee obligations remain the same regardless of the composition of the lending group.
IV. Fee Calculation Scenarios and Cost Modeling
In order to assist the deal team in evaluating Penterra's fee exposure under the Fee Letter across a range of potential transaction timelines, we have prepared the following scenario analyses. Each scenario calculates the commitment fee and ticking fee based on the applicable rate, the $500,000,000 commitment amount, and the Actual/365 day count convention. The arrangement fee and administrative agent fee are excluded from these calculations because the arrangement fee is a fixed dollar amount (not a function of time) and the administrative agent fee is payable only upon funding.
A. Scenario 1: Closing on Estimated Timeline
This scenario assumes that the Acquisition closes on approximately October 8, 2024, which is approximately 120 days after the execution of the SPA (and approximately 123 days after execution of the Commitment Letter). This timeline is consistent with the deal team's current working assumption for obtaining required regulatory approvals and satisfying closing conditions under the SPA.
Commitment Fee: The commitment fee accrues from June 7, 2024 through October 8, 2024, a period of 123 days.
$500,000,000 × 0.35% ÷ 365 × 123 = $589,726 (approximately)
Ticking Fee: The ticking fee commences on September 8, 2024 (90 days after SPA execution on June 10, 2024) and accrues through October 8, 2024, a period of 30 days.
$500,000,000 × 0.175% ÷ 365 × 30 = $71,918 (approximately)
Total Estimated Fees (Excluding Arrangement Fee and Administrative Agent Fee): approximately $661,644
B. Scenario 2: Closing at SPA Outside Date
This scenario assumes that the Acquisition does not close until the SPA Outside Date of December 10, 2024. This represents the maximum possible commitment period and the worst-case fee exposure scenario in which the Acquisition ultimately closes. This timeline could result from protracted regulatory review, delays in satisfying closing conditions, or other unforeseen impediments to closing.
Commitment Fee: The commitment fee accrues from June 7, 2024 through December 10, 2024, a period of 186 days.
$500,000,000 × 0.35% ÷ 365 × 186 = $892,466 (approximately)
Ticking Fee: The ticking fee accrues from September 8, 2024 through December 10, 2024, a period of 93 days.
$500,000,000 × 0.175% ÷ 365 × 93 = $222,945 (approximately)
Total Estimated Fees (Excluding Arrangement Fee and Administrative Agent Fee): approximately $1,115,411
C. Scenario 3: Termination Before Ticking Fee Commences
This scenario contemplates a termination of the SPA (and, by extension, the Commitment Letter) prior to September 8, 2024, meaning that the ticking fee would never commence. This scenario could arise if, for example, Penterra determines prior to the 90-day mark that a material adverse effect has occurred with respect to Veridian, or if the parties agree to terminate the SPA by mutual consent.
Commitment Fee Only: For illustrative purposes, if the SPA and Commitment Letter terminate 90 days after execution of the Commitment Letter (i.e., approximately September 5, 2024), the commitment fee would accrue for 90 days.
$500,000,000 × 0.35% ÷ 365 × 90 = $431,507 (approximately)
Ticking Fee: None. The ticking fee does not commence until September 8, 2024 in this scenario.
Total Estimated Fees (Excluding Arrangement Fee and Administrative Agent Fee): approximately $431,507
D. Actual Accrual Through Date of This Memorandum
As of the date of this memorandum (June 9, 2024), the Commitment Letter has been in effect for two days (since June 7, 2024). The commitment fee accrued during this period is:
$500,000,000 × 0.35% ÷ 365 × 2 = $9,589 (approximately)
No ticking fee has commenced, and the arrangement fee, while earned, is not yet payable.
E. Note on Sunk Cost Exposure
The fees described in this memorandum represent one component of Penterra's total sunk transaction cost exposure in connection with the Acquisition. Other components include advisory fees payable to Garrison Zanthor & Co., legal fees payable to C&H and other counsel, due diligence costs, regulatory filing fees (including any HSR Act filing fees), and other miscellaneous transaction expenses. We understand that the deal team, in coordination with Ms. Burgess and Penterra's treasury group, is maintaining a comprehensive cost tracker for all transaction-related expenses.
The commitment fee and ticking fee, once accrued, constitute non-recoverable costs payable by Penterra regardless of whether the Acquisition closes. This is a critical consideration in evaluating the economics of the transaction at each stage and in making determinations regarding whether to proceed with, or terminate, the SPA. The non-recoverability of these fees is discussed in greater detail in Section V below.
V. Non-Refundability and Clawback Provisions
A. General Non-Refundability
The Fee Letter provides, in clear and unequivocal terms, that all fees — including the arrangement fee, commitment fees, ticking fees, and administrative agent fees — are non-refundable once earned or accrued. This non-refundability applies regardless of whether the Term Loan Facility is ultimately funded, regardless of whether the Acquisition closes, and regardless of the reason for any failure to fund or close. The relevant provision states that fees are "irrevocably earned and non-refundable upon accrual," and that no event, circumstance, or condition shall give rise to a right of refund, return, or credit (except as specifically provided in the fee credit provision discussed in Section V.D below).
This non-refundability is consistent with market practice for committed acquisition financing. In a committed financing arrangement, the Lenders are binding themselves to fund the full $500,000,000 commitment, subject only to limited conditions precedent. The non-refundable fees compensate the Lenders for the risk and opportunity cost of maintaining this commitment, including the capital they must set aside, the credit exposure they accept, and the forgone opportunity to deploy these resources elsewhere. It is universally understood in the leveraged finance market that commitment fees and related charges are a cost of obtaining the certainty of committed financing.
Even if the SPA is terminated by Penterra for any reason — including the invocation of the material adverse effect clause, failure of a closing condition, regulatory non-approval, or mutual agreement — all accrued fees under the Fee Letter remain payable. There is no "walk-away" provision that would relieve Penterra of its fee obligations upon a valid termination of the SPA.
B. Interaction with SPA Termination
The Commitment Letter and Fee Letter are co-terminous with the SPA Outside Date of December 10, 2024. The termination mechanics operate as follows:
(i) If the SPA terminates by its terms (e.g., upon the Outside Date, upon mutual consent, or upon the exercise of a valid termination right), the Commitment Letter terminates automatically, and no further fees accrue;
(ii) Notwithstanding such termination, all fees that have accrued and remain unpaid as of the date of termination remain due and payable by Penterra; and
(iii) Payment of all accrued and unpaid fees is due "promptly" (defined in the Fee Letter as within three business days) following the date of termination.
This structure means that if Penterra terminates the SPA prior to the Outside Date (for example, due to a material adverse effect affecting Veridian), Penterra must promptly pay all commitment fees and ticking fees that have accrued through the date of such termination, plus the arrangement fee (to the extent not previously paid). There is no grace period or deferral mechanism beyond the three-business-day window.
C. Reverse Termination Fee Interaction
The SPA provides for a reverse termination fee of $45,000,000, representing 5% of the $900,000,000 aggregate purchase price, payable by Penterra to Veridian (or its equityholders) if the Acquisition fails to close due to a financing failure. This reverse termination fee is a standard feature in acquisition agreements involving committed financing and serves to protect the seller against the buyer's inability to obtain the financing necessary to consummate the transaction.
It is important to distinguish the reverse termination fee from the fees payable under the Fee Letter:
(i) Trigger. The reverse termination fee is triggered only by a failure to obtain or fund the committed financing. It is not triggered by a valid termination of the SPA under Section 8.1(d) for a material adverse effect, failure of closing conditions, or other contractually permitted termination grounds. In contrast, the Fee Letter fees accrue and are payable regardless of the reason for termination.
(ii) Payee. The reverse termination fee is payable to Veridian (or its equityholders). The Fee Letter fees are payable to Summit Ridge and Ironclad.
(iii) Independence. The Fee Letter fees and the reverse termination fee are independent obligations. Payment (or non-payment) of one does not affect the other. Penterra could, in theory, owe both the reverse termination fee and accrued Fee Letter fees simultaneously, though this would occur only in the narrow circumstance of a financing failure.
C&H Assessment. Based on our review, Penterra should not be exposed to the reverse termination fee if it terminates the SPA for valid contractual reasons (e.g., material adverse effect, failure of closing conditions, or mutual consent). However, accrued commitment and ticking fees under the Fee Letter remain an independent obligation that survives termination of the SPA under all circumstances. The deal team should be aware that in a "busted deal" scenario, Penterra's total exposure would include (a) accrued Fee Letter fees, (b) the arrangement fee, and (c) depending on the reason for the failure, potentially the reverse termination fee. In the worst case (financing failure at the Outside Date), total exposure could reach approximately $46,115,411 ($45,000,000 reverse termination fee + approximately $1,115,411 in accrued commitment and ticking fees, plus the arrangement fee and any administrative agent fee).
D. Fee Credits
The Fee Letter includes a fee credit provision under which the arrangement fee, if the Term Loan Facility is funded, will be credited against the initial interest payment due under the Term Loan. In effect, the arrangement fee serves as a prepayment of interest in the event the Acquisition closes and the facility is drawn. This is a borrower-favorable provision that reduces the incremental cost of funding.
If the Term Loan Facility is not funded (i.e., the Acquisition does not close and the facility is never drawn), no credit applies and the arrangement fee is payable in full upon termination of the Commitment Letter. The credit applies only to the arrangement fee; there is no corresponding credit for commitment fees or ticking fees.
VI. Conditions to Fee Obligations; Triggers
A. Conditions to Accrual
The conditions governing the commencement of each fee obligation under the Fee Letter are summarized as follows:
(i) Commitment Fee: Begins accruing immediately upon execution of the Commitment Letter, which occurred on June 7, 2024. No precondition to accrual exists; the fee begins running upon signing.
(ii) Ticking Fee: Begins accruing on the 90th day following execution of the SPA. Assuming SPA execution on June 10, 2024, the ticking fee commences on September 8, 2024. If the SPA is not executed, or if it is executed on a different date, the commencement date adjusts accordingly.
(iii) Arrangement Fee: Fully earned upon execution of the Fee Letter on June 7, 2024. Payment is deferred until funding of the Term Loan or termination of the Commitment Letter, but the obligation crystallizes on the date of execution.
(iv) Administrative Agent Fee: Payable only upon funding of the Term Loan Facility. If the facility is never funded, no administrative agent fee is owed.
B. Termination Triggers for Fee Obligations
Fees cease accruing upon the earliest to occur of the following:
(i) The funding of the Term Loan Facility (i.e., the Closing Date of the Acquisition);
(ii) The termination of the Commitment Letter; or
(iii) The expiration of the Commitment Letter on the SPA Outside Date of December 10, 2024.
Termination of the Commitment Letter may occur under any of the following circumstances:
(a) Mutual Consent. Penterra, Summit Ridge, and Ironclad may agree to terminate the Commitment Letter at any time.
(b) Automatic Termination upon SPA Termination. The Commitment Letter terminates automatically upon the termination of the SPA for any reason, including termination by either party for cause, mutual consent, or expiration of the Outside Date.
(c) Expiration on the Outside Date. The Commitment Letter expires automatically on December 10, 2024 if the Acquisition has not closed by that date.
Importantly, Penterra has no unilateral right to terminate the Commitment Letter without also terminating the SPA (or having the SPA terminate by its terms). This structural linkage means that Penterra cannot avoid or limit its fee exposure under the Fee Letter by terminating the Commitment Letter alone; it must terminate the underlying Acquisition in order to stop the accrual of fees.
C. "Market Flex" Provisions
The Fee Letter contains market flex provisions that permit Summit Ridge, in its capacity as Lead Arranger, to adjust the pricing and structural terms of the Term Loan Facility in connection with syndication efforts. Market flex provisions are standard in committed acquisition financing and give the arranger the ability to modify certain economic terms if market conditions require adjustments in order to successfully syndicate the facility.
The market flex provisions in the Fee Letter are subject to the following limitations:
(i) Spread Adjustments. Summit Ridge may increase or decrease the applicable spread on the Term Loan by up to 25 basis points (i.e., the SOFR + 225 bps rate specified in the Commitment Letter could be adjusted to as high as SOFR + 250 bps or as low as SOFR + 200 bps).
(ii) Original Issue discount ("OID"). Summit Ridge may introduce or increase OID by up to 1.0% (100 basis points) in connection with syndication.
(iii) Other Adjustments. Summit Ridge may make other customary modifications to the Term Loan structure, including adjustments to amortization schedules, prepayment premiums, and financial covenants, in each case subject to the limitations set forth in the Commitment Letter.
If market flex is exercised, the economics of the Term Loan Facility could change materially, potentially increasing Penterra's borrowing costs over the life of the loan. However, market flex is relevant only if the facility is actually funded. Given the current focus on the pre-closing period and the risk of termination prior to closing, market flex is less of an immediate concern. Nonetheless, we recommend that the deal team monitor market conditions and maintain a dialogue with Summit Ridge regarding syndication progress. Should Summit Ridge indicate an intention to exercise market flex, we will provide a supplemental analysis of the impact on Penterra's cost of capital.
VII. Key Issues and Recommendations
Based on our review of the Fee Letter, we have identified the following issues that warrant attention from the deal team. For each issue, we provide our analysis and a specific recommendation.
A. Clarification of Ticking Fee Trigger Date
Issue. The Fee Letter defines the commencement date of the ticking fee as "the date which is ninety (90) days following the signing date of the Acquisition Agreement." The "Acquisition Agreement" is defined as the SPA to be entered into between Penterra and Veridian. Although the anticipated execution date for the SPA is June 10, 2024, there is a potential ambiguity as to whether the 90-day period should be measured from the SPA execution date (June 10, 2024) or from the Commitment Letter execution date (June 7, 2024). The three-day difference is nominal in dollar terms (approximately $14,384), but the distinction is important as a matter of contractual precision.
Analysis. We believe the correct interpretation is that the 90-day period runs from the SPA execution date (June 10, 2024), not from the Commitment Letter execution date (June 7, 2024). The Fee Letter clearly references "the signing date of the Acquisition Agreement," not the Commitment Letter date. However, we note that the SPA has not yet been executed, and the Fee Letter was drafted based on the assumption that the SPA would be signed on June 10, 2024. If the SPA execution is delayed beyond June 10, 2024, the ticking fee commencement date would shift accordingly.
Recommendation. We recommend that Penterra confirm this interpretation in writing with Summit Ridge and Ironclad, ideally through a brief side letter or email exchange, to eliminate any potential for future dispute. This confirmation should be obtained prior to or concurrently with the execution of the SPA.
B. Fee Cap / Maximum Exposure Analysis
Issue. The Fee Letter does not contain an express fee cap or maximum aggregate fee amount. Penterra's total fee exposure is therefore a function of the duration of the commitment period.
Analysis. Based on our calculations in Section IV, Penterra's maximum commitment fee and ticking fee exposure through the Outside Date is approximately $1,115,411 (excluding the arrangement fee and administrative agent fee). This amount is within the budget allocation discussed with Penterra's treasury group and is immaterial relative to the Company's cash position ($2.1 billion) and the total transaction value ($900 million). Including the arrangement fee (which falls within the $1,250,000 to $2,500,000 range based on market benchmarks), total maximum fee exposure is likely in the range of $2,365,411 to $3,615,411.
Recommendation. We recommend that the deal team document Penterra's maximum fee exposure under the Fee Letter in the comprehensive transaction cost tracker being maintained by Penterra's treasury group. This will ensure that all stakeholders have visibility into the total cost of the committed financing.
C. Set-Off Rights
Issue. The Fee Letter does not include any set-off rights in favor of Penterra. This means that Penterra cannot offset amounts owed under the Fee Letter against any other amounts that may be owed by Summit Ridge, Ironclad, or any of their affiliates to Penterra.
Analysis. The absence of set-off rights is consistent with standard market practice for fee letters in committed acquisition financing transactions. Fee letters are short-form agreements that are intended to be self-contained with respect to fee obligations, and borrowers do not customarily negotiate for set-off rights in this context. In our experience, the inclusion of set-off provisions would be unusual and could introduce unnecessary complexity.
Recommendation. We consider the Fee Letter acceptable as drafted with respect to this issue. No action is required.
D. Confidentiality of Fee Letter
Issue. The Fee Letter contains standard confidentiality provisions requiring that its terms not be disclosed to third parties, with customary exceptions for professional advisors (including legal counsel, accountants, and financial advisors) and as required by applicable law.
Analysis. Given that Penterra is a publicly traded company listed on the Nasdaq, certain aspects of the Fee Letter may need to be disclosed in connection with SEC filings. Specifically, Penterra will likely file a Form 8-K reporting the execution of the SPA and the related financing arrangements, and the Fee Letter (or a summary of its material terms) may need to be filed as an exhibit to such Form 8-K or incorporated into the Form 8-K's disclosure. Additionally, to the extent the Acquisition is subject to shareholder approval, the Fee Letter terms may need to be disclosed in a proxy statement. The confidentiality provisions of the Fee Letter include a carve-out for disclosures required by "applicable law," but it would be prudent to confirm that this carve-out is broad enough to encompass all required regulatory filings.
Recommendation. We recommend that Penterra confirm with its securities counsel (and, if appropriate, with Summit Ridge and Ironclad) that the confidentiality carve-out in the Fee Letter covers all required SEC filings and other regulatory disclosures. If the existing carve-out is insufficient, a brief amendment or supplemental side letter should be negotiated.
E. Tax Treatment of Fees
Issue. The proper federal income tax treatment of the fees payable under the Fee Letter depends on whether the Term Loan Facility is ultimately funded.
Analysis. Under general principles of federal income tax law:
(i) If the Term Loan Facility is funded (i.e., the Acquisition closes), the commitment fee and ticking fee may be treated as a cost of borrowing and may be required to be capitalized as part of the original issue discount or debt issuance cost under IRC § 263 and the regulations thereunder. Capitalized amounts would be amortized over the life of the Term Loan using the effective yield method.
(ii) If the Term Loan Facility is not funded (i.e., the Acquisition does not close), the commitment fee and ticking fee are generally deductible as ordinary business expenses in the taxable year in which they are paid or accrued, under IRC § 162. The arrangement fee, similarly, would be deductible in the year paid if the facility is not funded.
The distinction between these two treatments can have a meaningful impact on Penterra's tax position, particularly given the potential magnitude of the arrangement fee.
Recommendation. We recommend coordination with Leonard Cross, Tax Partner at Calderwood & Harkness LLP, regarding the proper characterization and timing of these fee payments for federal income tax purposes. We have alerted Mr. Cross to this matter and will arrange for a briefing with Penterra's tax department. For reference, Penterra's Employer Identification Number is 22-3847561.
F. Wire Instructions and Payment Mechanics
Issue. The Fee Letter requires that all fees be paid by wire transfer of immediately available funds to the accounts specified in the Fee Letter. Ironclad Trust Company, N.A. (60 Wall Street, New York, NY 10005) is designated as the payment agent for all fee payments.
Analysis. Standard wire transfer instructions are set forth in the Fee Letter. Given the non-trivial amounts involved and the time-sensitive nature of certain payment obligations (e.g., the three-business-day payment deadline following termination), it is important that Penterra's treasury operations confirm authorized signatories and establish the necessary internal approvals to facilitate timely payment.
Recommendation. We recommend that Penterra's treasury team confirm the wire instructions specified in the Fee Letter, verify the identity of the payment agent, and ensure that appropriate internal authorization procedures are in place for the relevant payment amounts. This should be completed well in advance of the first quarterly payment date (on or about September 7, 2024).
VIII. Comparison to Market Terms
To provide context for our assessment of the Fee Letter, we have benchmarked the fee structure against comparable committed acquisition financings in the pharmaceutical and biotechnology sector completed during 2023 and the first half of 2024. Our review included publicly available fee disclosures, proprietary C&H deal data, and market intelligence from leveraged finance desks at major investment banks.
Commitment Fee. The commitment fee rate of 0.35% per annum is within the prevailing market range for investment-grade-adjacent borrowers in the pharmaceutical sector. Comparable transactions during the reference period featured commitment fee rates ranging from 0.25% to 0.50%, with the median falling at approximately 0.35%. Penterra's rate is at the median, reflecting the Company's strong credit profile (investment-grade-adjacent ratings, substantial cash reserves, and moderate leverage). The rate is appropriate for a borrower of Penterra's size and creditworthiness.
Ticking Fee. The ticking fee rate of 0.175% per annum, equal to one-half of the commitment fee rate, is consistent with market convention. In our sample of comparable transactions, ticking fees were uniformly set at 50% of the commitment fee rate, which is the standard approach in the leveraged acquisition finance market.
Ticking Fee Grace Period. The 90-day grace period before the ticking fee commences is within the typical range of 60 to 120 days observed in comparable transactions. A 90-day grace period is the most commonly observed standard and reflects a reasonable balance between the borrower's need for time to complete closing conditions and the lenders' desire to be compensated for extended commitment periods.
Interest Rate. The Term Loan Facility bears interest at a rate of SOFR plus 225 basis points. The interest rate is separately analyzed in our Commitment Letter Summary and Analysis Memorandum dated June 8, 2024, and we do not repeat that analysis here. We note only that the SOFR + 225 bps rate is competitive for a facility of this size and credit quality.
Overall Assessment. Based on our market benchmarking analysis, the fee terms in the Fee Letter are commercially reasonable and competitive. The fees reflect the current state of the leveraged acquisition finance market and are consistent with what a borrower of Penterra's credit profile and stature would expect to pay for a $500,000,000 committed acquisition financing facility. We do not believe that more favorable terms could be obtained from an alternative arranger without material delay to the transaction timeline.
IX. Conclusion
Based on our comprehensive review of the Fee Letter, Calderwood & Harkness LLP recommends that Penterra Pharmaceuticals Corp. proceed with the Fee Letter as drafted, subject to the clarification items identified in Section VII of this memorandum. Specifically, we recommend that Penterra:
1. Confirm the interpretation of the ticking fee trigger date with Summit Ridge and Ironclad (Section VII.A);
2. Document Penterra's maximum fee exposure in the transaction cost tracker (Section VII.B);
3. Confirm that the confidentiality carve-out in the Fee Letter covers required SEC and regulatory disclosures (Section VII.D);
4. Coordinate with Leonard Cross on tax treatment (Section VII.E); and
5. Confirm wire instructions and internal authorization procedures with Penterra's treasury team (Section VII.F).
Penterra's total fee exposure under the Fee Letter is manageable relative to the Company's financial resources. With $2.1 billion in cash on hand and a market capitalization of approximately $14.2 billion, the maximum combined commitment and ticking fee exposure of approximately $1,115,411 (plus the arrangement fee and administrative agent fee) represents a de minimis fraction of Penterra's total financial resources and total estimated transaction costs.
The non-refundable nature of the fees underscores the importance of proceeding expeditiously with the SPA execution timeline. The SPA is currently anticipated to be executed on June 10, 2024, and any delay in execution could introduce uncertainty regarding the ticking fee commencement date and other timing-sensitive provisions.
Calderwood & Harkness LLP will continue to coordinate with Summit Ridge Capital Partners, LP and Ironclad Trust Company, N.A. regarding the negotiation and documentation of the definitive term loan credit agreement and related ancillary documents. We will provide supplemental memoranda as additional issues arise during the documentation process.
We are available to discuss this memorandum and its recommendations at your convenience.
Appendix A: Fee Summary Table
Appendix B: Fee Accrual Timeline (Illustrative)
The following illustrative timeline depicts the key dates and cumulative fee accrual from the Commitment Letter execution date through the SPA Outside Date. All figures are approximate and assume SPA execution on June 10, 2024.
Key Milestone Dates:
• June 7, 2024 — Commitment Letter and Fee Letter executed; commitment fee accrual begins
• June 10, 2024 — Anticipated SPA execution
• September 8, 2024 — Ticking fee commences (90 days post-SPA signing)
• December 10, 2024 — SPA Outside Date; commitment and financing expiration
Cumulative Fee Accrual at 30-Day Intervals:
Note: The above table excludes the arrangement fee (fixed amount, not time-dependent) and the administrative agent fee (payable only upon funding). Figures are calculated on an Actual/365 basis and are rounded to the nearest dollar.
The timeline illustrates the step-up in daily accrual that occurs on September 8, 2024, when the ticking fee commences. Prior to that date, the daily carrying cost is approximately $4,795; after that date, the combined daily carrying cost increases to approximately $7,192. This 50% increase in the daily carry is designed to incentivize prompt closing and is consistent with the ticking fee structure observed in comparable transactions.
DISTRIBUTION AND CONFIDENTIALITY NOTICE
This memorandum is protected by the attorney-client privilege and the attorney work product doctrine. It has been prepared by Calderwood & Harkness LLP, 200 Park Avenue, 42nd Floor, New York, NY 10166, for the exclusive use of Penterra Pharmaceuticals Corp. in connection with Matter No. 1018-00008. This memorandum contains confidential and privileged information regarding the Fee Letter, Commitment Letter, and related transaction documents associated with Penterra's proposed acquisition of Veridian Biosciences, Inc.
This memorandum is not to be distributed, copied, or disclosed to any person or entity without the prior written consent of Oliver Mackenzie, Partner, Calderwood & Harkness LLP, or Thomas F. Holbrook, General Counsel & Secretary, Penterra Pharmaceuticals Corp. Any unauthorized disclosure may result in a waiver of the applicable privilege.