CALDERWOOD & HARKNESS LLP Attorneys at Law
200 Park Avenue, 42nd Floor New York, NY 10166
Oliver Mackenzie Partner, Mergers & Acquisitions Direct: (212) 506-7400
Email: omackenzie@calderwoodharkness.com
October 3, 2024
VIA EMAIL AND OVERNIGHT COURIER
Graham Fielding Senior Vice President Atlas Indemnity Insurance Co. 300 First Stamford Place Stamford, CT 06902
Re: Buyer-Side Representation and Warranty Insurance Policy No. AIC-RWI-2024-07892 — Notice of Non-Closing and Premium Inquiry
Matter Reference: Calderwood & Harkness Matter No. 1018-00008
Dear Mr. Fielding:
I. Purpose of This Letter
This firm represents Penterra Pharmaceuticals Corp. ("Penterra" or the "Company"), a Delaware corporation whose shares of common stock are publicly traded on the Nasdaq Global Select Market under the ticker symbol "PPCA," in connection with the previously proposed acquisition of one hundred percent (100%) of the outstanding capital stock of Veridian Biosciences, Inc. ("Veridian"), a Delaware corporation (the "Transaction"). We write with reference to the buyer-side representation and warranty insurance policy, Policy No. AIC-RWI-2024-07892 (the "Policy"), issued by Atlas Indemnity Insurance Co. ("Atlas Indemnity") and bound on June 12, 2024, in connection with the Transaction.
The Policy was procured on behalf of Penterra by Prescott Whitfield Insurance Brokers, Inc. ("Prescott Whitfield"), through Amanda Chen-Kowalski, Managing Director, acting as Penterra's broker of record for this coverage placement.
The purpose of this letter is twofold. First, we write to provide you with formal notice that the Transaction underlying the Policy has not closed and will not close, as the governing transaction agreement has been terminated in accordance with its terms. Second, we write to inquire regarding the current status of the Policy and the premium previously paid by Penterra thereunder, and to request Atlas Indemnity's formal written confirmation on several related matters, each as more fully described below.
II. Background on the Transaction and the Policy
On June 10, 2024, Penterra entered into that certain Stock Purchase Agreement (the "SPA") by and among Penterra, as Buyer, Veridian, as the Company, the stockholders of Veridian named therein (collectively, the "Sellers"), and David Ng, in his capacity as Stockholder Representative, pursuant to which Penterra agreed to acquire one hundred percent (100%) of the outstanding capital stock of Veridian for an aggregate purchase price of Nine Hundred Million Dollars ($900,000,000) in cash, subject to customary purchase price adjustments for working capital, indebtedness, transaction expenses, and cash on hand as of the closing date (the "Purchase Price").
In connection with the execution of the SPA and the structuring of the Transaction's indemnification framework, Atlas Indemnity issued the Policy, which was bound on June 12, 2024, two days following the execution of the SPA. The Policy was structured as a buyer-side representation and warranty insurance policy, intended to provide Penterra with coverage for losses arising from breaches of the Sellers' representations and warranties contained in Article IV of the SPA, subject to the terms, conditions, exclusions, and limitations set forth in the Policy.
The key commercial and financial terms of the Policy, as understood by Penterra, are as follows:
• Policy Limit: $180,000,000, which amount is equal to twenty percent (20%) of the Purchase Price, and which was structured to match the aggregate indemnification cap applicable to the Sellers under Article IX of the SPA.
• Self-Insured Retention (SIR): $9,000,000, which amount is equal to one percent (1%) of the Purchase Price, and which was structured to match the indemnification basket (deductible threshold) applicable to the Sellers' indemnification obligations under Section 9.4(a) of the SPA.
• Premium: $3,960,000, representing two and two-tenths percent (2.2%) of the Policy Limit, plus applicable state and local taxes and surcharges.
• Underwriting Fee: $75,000, paid separately to Atlas Indemnity in connection with the underwriting review and diligence process conducted prior to binding.
We note for the record that both the premium in the amount of $3,960,000 and the underwriting fee in the amount of $75,000 were paid by Penterra to Atlas Indemnity at or around the time the Policy was bound on June 12, 2024, as required under the terms of the Policy. Penterra's total out-of-pocket payment to Atlas Indemnity in connection with the Policy was therefore $4,035,000, exclusive of applicable taxes.
III. Notice of Termination of the SPA and Non-Closing of the Transaction
Penterra hereby provides Atlas Indemnity with formal notice that the SPA was terminated by Penterra, effective as of September 30, 2024, pursuant to Penterra's termination right set forth in Section 8.1(d) of the SPA. A formal Termination Notice was delivered to Veridian and to David Ng, in his capacity as Stockholder Representative, on September 30, 2024, in accordance with the notice provisions of Section 10.1 of the SPA.
The termination of the SPA was based upon the failure of certain conditions precedent to Buyer's obligation to consummate the Closing, as set forth in Sections 7.2(a) and 7.2(b) of the SPA. In particular, the condition set forth in Section 7.2(a) of the SPA required that the representations and warranties of the Sellers and Veridian set forth in Article IV of the SPA be true and correct in all material respects (or, in the case of representations qualified by materiality, in all respects) as of the date of Closing as though made on and as of such date, except where the failure of such representations to be so true and correct would not, individually or in the aggregate, constitute a Material Adverse Effect (as defined in the SPA). Additionally, the condition set forth in Section 7.2(b) of the SPA required that Veridian and the Sellers have performed in all material respects all obligations required to be performed by them under the SPA on or prior to the Closing Date.
These closing conditions were not satisfied, and the basis for their non-satisfaction is as follows: Subsequent to the execution of the SPA on June 10, 2024, adverse clinical trial data emerged from the Marlowe Asset Management-2 Phase II clinical trial (Clinical Trial Registration No. NCT05893247) of Veridian's lead product candidate, VRD-4187 (a selective kinase inhibitor under investigation for the treatment of advanced non-small cell lung cancer). The interim efficacy analysis conducted by the independent Data Safety Monitoring Board in August 2024 revealed safety signals and insufficient efficacy data relative to pre-specified primary endpoints. Critically, on August 22, 2024, the United States Food and Drug Administration (the "FDA") imposed a partial clinical hold on VRD-4187 (IND Application No. 154832), requiring the suspension of new patient enrollment in the Marlowe Asset Management-2 trial pending the submission and review of additional safety data. The partial clinical hold and the underlying adverse clinical developments constituted a Material Adverse Effect with respect to Veridian's business, operations, condition (financial or otherwise), results of operations, and prospects, within the meaning of Section 1.1 of the SPA.
As a direct and proximate result of the foregoing, the conditions to Penterra's obligation to consummate the Closing under the SPA were not capable of being satisfied prior to the Outside Date (as defined in Section 8.1(b) of the SPA), and Penterra exercised its contractual right to terminate the SPA in accordance with Section 8.1(d) thereof.
Accordingly, the Transaction did not proceed to closing. No closing has occurred, and no closing will occur under the SPA. The SPA has been terminated, and neither party has any further obligation to consummate the Transaction.
IV. Confirmation That the Policy Will Not Be Triggered
In light of the termination of the SPA and the non-closing of the Transaction, we wish to bring the following points to Atlas Indemnity's attention and request formal acknowledgment thereof.
Because the Transaction did not close, the representations and warranties of the Sellers and Veridian contained in Article IV of the SPA did not survive execution of the SPA in any manner that would give rise to indemnification obligations or coverage under the Policy. Under Section 9.1 of the SPA, the general representations and warranties of the Sellers were to survive the Closing for a period of eighteen (18) months following the Closing Date, and the fundamental representations (including representations regarding organization, authority, capitalization, and tax matters) were to survive for the full applicable statute of limitations plus sixty (60) days. In each case, however, the survival of such representations and warranties was expressly contingent upon the occurrence of the Closing. Because the Closing never occurred, no representations or warranties have survived, and no indemnification obligations of the Sellers have been triggered or can be triggered under Article IX of the SPA.
Consequently, no indemnification claims have arisen, are pending, or can arise under the SPA's indemnification provisions, and Penterra does not anticipate that any claim will be made under Policy No. AIC-RWI-2024-07892. There is no known or anticipated loss, breach, or set of circumstances that would give rise to a claim under the Policy.
Additionally, we confirm that no escrow deposits were made with Fidelis National Escrow Corp. (the designated escrow agent under the SPA) in connection with the Transaction. Specifically, neither the indemnification escrow in the amount of $180,000,000 contemplated by Section 2.5(a) of the SPA nor the stockholder representative expense fund in the amount of $2,500,000 contemplated by Section 2.5(b) of the SPA was funded, as each such deposit was to be made at or immediately following the Closing, which, as stated above, did not occur.
V. Inquiry Regarding Status of Policy and Premium
In connection with the foregoing, Penterra respectfully requests that Atlas Indemnity provide formal written confirmation with respect to the following matters:
1. Policy Status. Please confirm the current status of Policy No. AIC-RWI-2024-07892 in light of the non-closing of the Transaction. Specifically, Penterra requests that Atlas Indemnity confirm whether the Policy is deemed terminated, lapsed, void, or otherwise extinguished as a result of the failure of the underlying Transaction to close, and, if so, the effective date of such termination, lapse, or extinguishment.
2. Premium Refundability. Please confirm whether any portion of the premium in the amount of $3,960,000 previously paid by Penterra is refundable, subject to return, or eligible for credit under the terms of the Policy or any applicable endorsement or side letter, given that the Transaction did not close and no coverage period under the Policy has effectively commenced. Penterra's inquiry extends to whether Atlas Indemnity, as a matter of policy, practice, or goodwill, provides any form of premium refund, rebate, or credit in circumstances where the insured transaction does not close and no claim has been or will be made under the policy.
3. Administrative Requirements. Please confirm whether any administrative steps, documentation, or formal actions are required on Penterra's part to effect the formal cancellation or termination of the Policy, and if so, please provide the specific requirements and any applicable deadlines for completion of such steps.
4. Effective Date of Termination or Cancellation. Please confirm the effective date upon which the Policy will be (or has been) terminated, cancelled, or otherwise rendered of no further force or effect, and confirm that no further premium installments, fees, assessments, or other charges will be due from Penterra in connection with the Policy following such date.
Penterra acknowledges that it has reviewed the terms of the Policy and understands that the premium may be characterized as fully earned and non-refundable upon binding, consistent with market practice for representation and warranty insurance policies of this nature. Notwithstanding the foregoing, Penterra wishes to receive Atlas Indemnity's formal written confirmation on each of the points set forth above for purposes of its corporate records, financial reporting, and regulatory compliance obligations as a publicly traded company. A definitive written response from Atlas Indemnity will also be necessary for Penterra's treatment of the premium payment in its financial statements for the fiscal quarter ending December 31, 2024, and Penterra's independent auditors may request confirmation directly from Atlas Indemnity as part of their customary audit procedures.
VI. Request to Coordinate with Broker of Record
Penterra requests that Atlas Indemnity coordinate any response, required actions, documentation, or communications relating to the matters addressed in this letter through Prescott Whitfield Insurance Brokers, Inc., Penterra's broker of record for this Policy. All communications to Prescott Whitfield should be directed to:
Amanda Chen-Kowalski Managing Director Prescott Whitfield Insurance Brokers, Inc. 175 Water Street, 22nd Floor New York, NY 10038
We respectfully request that a copy of any written response from Atlas Indemnity also be provided simultaneously to Calderwood & Harkness LLP at the address set forth below, as well as to Thomas F. Holbrook, General Counsel & Secretary, Penterra Pharmaceuticals Corp., at the address noted in the copy distribution below.
VII. Contact Information, Reservation of Rights, and Closing
Please direct all correspondence, inquiries, and communications regarding this matter to the undersigned at:
Oliver Mackenzie, Partner Calderwood & Harkness LLP 200 Park Avenue, 42nd Floor New York, NY 10166 Telephone: (212) 506-7400
Email: omackenzie@calderwoodharkness.com
For day-to-day coordination and administrative matters, you may also contact:
Megan Chu, Associate Calderwood & Harkness LLP 200 Park Avenue, 42nd Floor New York, NY 10166 Telephone: (212) 506-7523
Email: mchu@calderwoodharkness.com
Please also copy all correspondence to:
Thomas F. Holbrook General Counsel & Secretary Penterra Pharmaceuticals Corp. 1100 Meridian Boulevard, Suite 400 Princeton, NJ 08540
We thank Atlas Indemnity for its attention to this matter and for its cooperation throughout the underwriting and placement process. We respectfully request that Atlas Indemnity provide a written response addressing the inquiries set forth in Section V above at its earliest convenience, and in any event within thirty (30) days of the date of this letter, to the extent practicable.
Reservation of Rights. Nothing in this letter shall be construed as a waiver, release, or relinquishment of any rights, claims, defenses, or remedies available to Penterra under the Policy, the SPA, or applicable law. Penterra expressly reserves all such rights, claims, defenses, and remedies in their entirety, whether arising under contract, statute, equity, or otherwise, and this letter is provided without prejudice to any such rights.
We look forward to hearing from you.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Oliver Mackenzie Partner Mergers & Acquisitions
cc:
Thomas F. Holbrook, General Counsel & Secretary, Penterra Pharmaceuticals Corp., 1100 Meridian Boulevard, Suite 400, Princeton, NJ 08540
Catherine M. Burgess, Chief Financial Officer, Penterra Pharmaceuticals Corp., 1100 Meridian Boulevard, Suite 400, Princeton, NJ 08540
Amanda Chen-Kowalski, Managing Director, Prescott Whitfield Insurance Brokers, Inc., 175 Water Street, 22nd Floor, New York, NY 10038
Megan Chu, Associate, Calderwood & Harkness LLP, 200 Park Avenue, 42nd Floor, New York, NY 10166
Enclosure: Copy of Termination Notice dated September 30, 2024