1003-00003 · Harrowgate Private Equity Fund IV LP · Opinions

enforceability-analysis-memo.docx DOCUMENT M&A / Corporate

53 / 78 ← → ✕

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Sandra Tung, Responsible Partner, Mergers & Acquisitions

FROM: Megan Chu, Lead Associate, Mergers & Acquisitions

DATE: March 16, 2025 (finalized in advance of March 18, 2025 signing)

RE: Enforceability Analysis of Key Provisions — Agreement and Plan of Merger Among Harrowgate Private Equity Fund IV LP, Harrowgate Velocity Merger Sub Inc., and VeloPay Systems, Inc.

Matter Number: 1003-00003

Client: Harrowgate Private Equity Fund IV LP

Right-click to update Table of Contents

I. Executive Summary and Purpose

The purpose of this memorandum is to set forth an internal analysis of the enforceability under Delaware law of the key protective provisions contained in the Agreement and Plan of Merger (the "Merger Agreement"), dated as of March 18, 2025, among Harrowgate Private Equity Fund IV LP ("HPE Fund IV"), Harrowgate Velocity Merger Sub Inc. ("Merger Sub"), and VeloPay Systems, Inc. ("VeloPay" and, together with HPE Fund IV and Merger Sub, the "Parties"). This memorandum is prepared solely for the use of the Calderwood & Harkness LLP deal team and is intended to identify areas of legal risk, provide a candid assessment of enforceability under current Delaware precedent, and offer practical guidance for the pre-closing period. This memorandum constitutes attorney work product and is protected by the attorney-client privilege.

Transaction Overview. The Merger Agreement contemplates a reverse triangular merger pursuant to Section 251 of the Delaware General Corporation Law (the "DGCL"), in which Merger Sub, a newly formed Delaware corporation and wholly owned subsidiary of HPE Fund IV, will merge with and into VeloPay, with VeloPay surviving the merger as a wholly owned subsidiary of HPE Fund IV (the "Merger"). The aggregate merger consideration is approximately $1,900,000,000, payable as $20.00 per share on a fully diluted, as-converted basis (based on approximately 95,000,000 fully diluted shares of VeloPay common stock). The consideration is payable in cash. The transaction represents a significant acquisition within the fintech and payments processing sector and is HPE Fund IV's largest platform investment to date.

Provisions Analyzed. This memorandum addresses the enforceability of the following five key provisions of the Merger Agreement:

1. The no-shop provision (Article 5, Section 5.3 of the Merger Agreement);

2. The VeloPay termination fee of $76,000,000 (Article 8, Section 8.3(a) of the Merger Agreement);

3. The HPE Fund IV reverse termination fee of $57,000,000 (Article 8, Section 8.3(b) of the Merger Agreement);

4. The specific performance remedy (Article 9, Section 9.9 of the Merger Agreement); and

5. The material adverse effect definition and related carve-outs (Article 1, Section 1.1 of the Merger Agreement, as applied to the closing conditions set forth in Article 7).

Overall Conclusion. Based on the analysis set forth herein, each of the five provisions identified above is expected to be enforceable under Delaware law, subject to customary equitable limitations and the specific factual circumstances that may exist at the time of any dispute. The deal-protection package as a whole — including the interaction of the no-shop, termination fees, specific performance remedy, stockholder support agreements, and the material adverse effect closing condition — is within the range of structures that the Delaware Court of Chancery has upheld in comparable leveraged buyout transactions. The material adverse effect standard presents inherently fact-intensive questions that cannot be resolved in the abstract, but the definition as drafted is well-crafted, consistent with prevailing Delaware precedent (particularly Akorn, Inc. v. Fresenius Kabi AG), and appropriately allocates risk between the Parties. We have identified certain areas of moderate risk, particularly with respect to the interaction between the no-shop provision and the concurrent delivery of stockholder written consent, which we discuss in detail below.

Review. This memorandum has been reviewed by Sandra Tung, Responsible Partner, Mergers & Acquisitions.

II. No-Shop Provision

A. Summary of Contractual Terms

Section 5.3(a) of the Merger Agreement imposes a no-shop restriction on VeloPay commencing upon the execution of the Merger Agreement on March 18, 2025 and continuing through the earlier of (x) the Effective Time (as defined in the Merger Agreement) and (y) the valid termination of the Merger Agreement in accordance with Article 8. During the no-shop period, VeloPay and its subsidiaries are prohibited from, and are required to cause their respective directors, officers, employees, investment bankers, financial advisors, attorneys, accountants, and other representatives not to, directly or indirectly:

(i) solicit, initiate, or knowingly encourage or facilitate (including by way of furnishing non-public information or providing access to properties, books, or records) any inquiry or the making of any proposal or offer that constitutes, or would reasonably be expected to lead to, an Acquisition Proposal (as defined in Section 1.1 of the Merger Agreement);

(ii) furnish any non-public information relating to VeloPay or any of its subsidiaries to any person in connection with or in response to an Acquisition Proposal or any inquiry or indication of interest that would reasonably be expected to lead to an Acquisition Proposal;

(iii) engage in, continue, or otherwise participate in any discussions or negotiations with any person with respect to an Acquisition Proposal or any inquiry or indication of interest that would reasonably be expected to lead to an Acquisition Proposal (other than to inform such person of the existence of the restrictions set forth in Section 5.3); or

(iv) approve, endorse, recommend, or enter into any letter of intent, memorandum of understanding, merger agreement, acquisition agreement, or other similar agreement relating to an Acquisition Proposal.

The no-shop provision further requires VeloPay to immediately cease and cause to be terminated any existing discussions or negotiations with any third party with respect to any Acquisition Proposal or any inquiry or indication of interest that would reasonably be expected to lead to an Acquisition Proposal, including any such discussions or negotiations that may have been ongoing as of the date of the Merger Agreement. VeloPay is required to request the prompt return or destruction of any non-public information previously furnished to any such third party in connection with any such discussions or negotiations.

In addition, Section 5.3(b) of the Merger Agreement requires VeloPay to promptly notify HPE Fund IV (and in any event within 48 hours) upon receipt of any Acquisition Proposal or any inquiry that could reasonably be expected to lead to an Acquisition Proposal, including disclosure of the identity of the person making such proposal or inquiry and the material terms and conditions thereof. VeloPay is further required to keep HPE Fund IV reasonably informed of any material developments, discussions, or negotiations with respect to any such Acquisition Proposal or inquiry, including any changes in the material terms thereof.

The term "Acquisition Proposal" is defined broadly in Section 1.1 of the Merger Agreement to include any proposal or offer with respect to (a) any direct or indirect acquisition of assets constituting 20% or more of the consolidated assets of VeloPay and its subsidiaries, or to which 20% or more of VeloPay's consolidated revenues or earnings are attributable, (b) any direct or indirect acquisition of 20% or more of any class of equity securities of VeloPay, (c) any tender offer or exchange offer that, if consummated, would result in any person beneficially owning 20% or more of any class of equity securities of VeloPay, or (d) any merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution, or similar transaction involving VeloPay or any of its significant subsidiaries, in each case other than the transactions contemplated by the Merger Agreement.

B. Fiduciary Out Exception

Section 5.3(c) of the Merger Agreement contains a customary fiduciary-out exception that, notwithstanding the restrictions of Section 5.3(a), permits VeloPay's Board of Directors (the "VeloPay Board"), prior to the receipt of the Requisite Stockholder Approval (as defined in the Merger Agreement), to:

(i) furnish non-public information relating to VeloPay and its subsidiaries to a person making a bona fide, unsolicited Acquisition Proposal that did not result from a material breach of the no-shop obligation, subject to the execution by such person of a confidentiality agreement on terms no less restrictive than those contained in the Confidentiality Agreement between VeloPay and HPE Fund IV dated October 12, 2024; and

(ii) engage in discussions and negotiations with such person regarding such Acquisition Proposal,

in each case, if and only if, prior to taking any such action, the VeloPay Board determines in good faith, after consultation with its outside legal counsel (Whitford Jessup & Crane LLP) and its financial advisor (Velthryn Greer & Associates), that (A) such Acquisition Proposal constitutes or would reasonably be expected to lead to a Superior Proposal (as defined in the Merger Agreement) and (B) the failure to take such action would be inconsistent with the VeloPay Board's fiduciary duties under applicable law.

The fiduciary-out exception also permits the VeloPay Board, prior to the receipt of the Requisite Stockholder Approval, to (x) withhold, withdraw, qualify, or modify (or publicly propose to withhold, withdraw, qualify, or modify) the Board Recommendation in a manner adverse to HPE Fund IV (a "Change of Recommendation") or (y) terminate the Merger Agreement to enter into a definitive agreement providing for a transaction constituting a Superior Proposal, in each case, subject to compliance with the match right provisions discussed in Section II.C below.

Complication Arising from Concurrent Written Consent. A significant structural feature of this transaction is that the Requisite Stockholder Approval was obtained simultaneously with the signing of the Merger Agreement. Specifically, the written consent of stockholders holding approximately 63.1% of the outstanding shares of VeloPay common stock was delivered concurrently with the execution of the Merger Agreement on March 18, 2025, pursuant to the Stockholder Support Agreement (the "Support Agreement") of the same date. The consenting stockholders are:

Because the Requisite Stockholder Approval has already been received by written consent at signing, the fiduciary-out exception — which by its terms is operative only "prior to the receipt of the Requisite Stockholder Approval" — is effectively inoperative for purposes of the VeloPay Board's ability to change its recommendation or terminate the Merger Agreement to accept a Superior Proposal. The written consent, once delivered, is irrevocable under Section 228 of the DGCL and under the terms of the Support Agreement.

We note, however, that the Merger has not yet closed as of the date of this memorandum. The Information Statement required by DGCL Section 228(e) was not mailed to non-consenting stockholders until April 14, 2025 (the Merger Agreement contemplates mailing within 20 business days following signing), and the Merger will not become effective until the closing, which is expected to occur on or about July 22, 2025. During the interim period between signing and closing, the VeloPay Board retains its fiduciary duties, but its practical ability to act on those duties is constrained by (i) the irrevocable stockholder consent, (ii) the no-shop restriction, and (iii) the termination fee obligation. This structural dynamic is analyzed further in Section II.D below.

We have carefully reviewed the Merger Agreement for any residual window or mechanism through which the fiduciary-out exception might operate notwithstanding the concurrent delivery of stockholder consent. The Merger Agreement does not contain a "continuing fiduciary out" that would survive the receipt of stockholder approval. Accordingly, the practical significance of the fiduciary-out exception is limited in the context of this transaction structure.

C. Match Right

Section 5.3(d) of the Merger Agreement provides HPE Fund IV with a match right in the event the VeloPay Board proposes to effect a Change of Recommendation or to terminate the Merger Agreement to accept a Superior Proposal. Specifically, VeloPay is required to provide HPE Fund IV with:

(i) written notice at least five (5) business days in advance of the VeloPay Board taking any such action, which notice must include a copy of the relevant Superior Proposal (including any proposed definitive agreement) and the identity of the person making such proposal; and

(ii) during such five-business-day period, VeloPay is required to negotiate in good faith with HPE Fund IV (if HPE Fund IV elects to negotiate) to make such adjustments to the terms and conditions of the Merger Agreement as would enable the VeloPay Board to proceed with the transactions contemplated by the Merger Agreement without effecting a Change of Recommendation.

In the event of any material amendment or modification to the financial or other material terms of the Superior Proposal, VeloPay is required to provide a new written notice to HPE Fund IV, and a new three-business-day match period commences with respect to such amended or modified proposal.

The five-business-day match period is a standard structure in comparable M&A transactions. It is neither unreasonably short (which might render it ineffective for HPE Fund IV) nor unreasonably long (which might be viewed as preclusive by a reviewing court). Delaware courts have generally accepted match right periods of three to five business days as customary and reasonable.

As noted above, however, the practical significance of the match right is limited in this transaction because the Requisite Stockholder Approval has already been obtained, effectively closing the window for a Change of Recommendation or a termination to accept a Superior Proposal under the fiduciary-out exception as currently drafted.

D. Enforceability Analysis Under Delaware Law

General Enforceability of No-Shop Provisions. No-shop provisions are standard features of merger agreements and are routinely upheld by Delaware courts as valid contractual covenants freely entered into by sophisticated parties. The Delaware Supreme Court has recognized that deal-protection measures, including no-shop provisions, serve the legitimate purpose of inducing an acquiror to enter into a merger agreement by providing a degree of transaction certainty, and that boards of directors may reasonably agree to such measures as part of the overall negotiated exchange. See In re Topps Co. S'holders Litig., 926 A.2d 58, 86 (Del. Ch. 2007) (upholding no-shop provision with fiduciary-out exception as reasonable deal-protection measure); In re Smurfit-Stone Container Corp. S'holder Litig., C.A. No. 6164-VCP, 2011 WL 2028076 (Del. Ch. May 20, 2011).

The Critical Importance of the Fiduciary Out. Delaware courts have consistently emphasized that the enforceability of no-shop provisions is closely linked to the existence of a meaningful fiduciary-out exception. In Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003), the Delaware Supreme Court, in a deeply divided 3-2 decision, invalidated a merger agreement that contained a combination of deal-protection measures — including irrevocable stockholder voting agreements covering a majority of shares and the absence of a fiduciary-out exception — that, in the Court's view, rendered the deal-protection measures preclusive by completely eliminating the board's ability to consider competing offers. The majority held that "deal protection devices are unenforceable... if their effect is to prevent the board from meeting its subsequent fiduciary obligations to its stockholders." Id. at 936.

Omnicare is the most relevant precedent for our analysis, and we must confront its implications directly. In Omnicare, the combination of (i) irrevocable voting agreements from stockholders holding a majority of shares and (ii) the absence of any fiduciary-out exception was held to create an impermissible "fait accompli" that precluded the board from exercising its fiduciary duties. The present transaction shares some structural similarities: stockholders holding 63.1% of shares have delivered irrevocable written consent at signing. However, there are several critical distinctions:

First, the Merger Agreement does contain a fiduciary-out exception in Section 5.3(c). Although the fiduciary out is effectively inoperative because the Requisite Stockholder Approval was obtained at signing, the exception exists in the agreement as a contractual matter. This is a formal distinction, and it is uncertain how much weight a court would give to a fiduciary-out exception that was effectively neutralized from inception by the concurrent delivery of stockholder consent.

Second, the stockholders who delivered consent — Ridgeline Ventures Fund III LP, Apex Growth Partners II LP, Nathan Aldridge, and Sonia Reyes-Watkins — did so voluntarily as arm's-length parties pursuant to the Support Agreement. In Omnicare, the voting agreements were entered into by two directors who were also the company's largest stockholders, which raised concerns about conflicts of interest and entrenchment. Here, while Nathan Aldridge (Co-Founder and CEO) and Sonia Reyes-Watkins (Co-Founder and CTO) are members of management, the institutional investors Ridgeline Ventures and Apex Growth Partners are independent third parties with their own fiduciary obligations to their limited partners. Their decision to support the transaction was based on their own independent evaluation of the merits of the $20.00 per share price.

Third, the VeloPay Board conducted a robust process prior to approving the Merger Agreement. The Board engaged Velthryn Greer & Associates as its independent financial advisor, and Patricia Navarro (Lead Managing Director) delivered a fairness opinion to the Board opining that the $20.00 per share consideration was fair, from a financial point of view, to the holders of VeloPay common stock (other than the consenting stockholders and their affiliates). Pendleton Hawkes & Co. served as HPE Fund IV's financial advisor. The Board's process included a thorough market check and the solicitation of interest from multiple potential strategic and financial acquirors over a period of approximately four months prior to the execution of the Merger Agreement. This is distinguishable from the truncated and inadequate process that characterized the Omnicare transaction.

Fourth, the VeloPay Board is composed of six directors, including two independent directors — Janet Gould and Philip Rosenthal — who have no affiliation with HPE Fund IV, Ridgeline Ventures, Apex Growth Partners, or VeloPay management. The independent directors participated fully in the Board's deliberations and approved the Merger Agreement.

Post-*Omnicare* Developments. Subsequent decisions in the Court of Chancery have distinguished Omnicare on its facts and have generally upheld deal-protection structures that include a fiduciary-out exception, even where the fiduciary out was of limited practical significance. In In re Smurfit-Stone Container Corp. S'holder Litig., the Court declined to enjoin a merger on the basis of the deal-protection measures where the agreement contained a fiduciary-out exception and the board had conducted a thorough process. The Court emphasized that Omnicare involved the "extreme combination" of irrevocable voting agreements from a majority of shares plus the total absence of a fiduciary out, and that not every combination of deal-protection measures rises to the level of preclusion.

Risk Assessment. We assess the risk of the no-shop provision being found unenforceable as low to moderate. The most significant vulnerability in our deal-protection structure is the combination of the no-shop restriction with the concurrent delivery of irrevocable stockholder written consent by holders of 63.1% of shares, which effectively locks up the transaction at signing and renders the fiduciary-out exception inoperative as a practical matter. A hypothetical competing bidder that emerges post-signing, or a stockholder plaintiff challenging the transaction, could argue that this combination renders the deal-protection mechanisms preclusive under Omnicare. However, the distinguishing factors identified above — the existence of the fiduciary out in the agreement (even if functionally limited), the voluntary nature of the Support Agreement, the robust Board process, the fairness opinion, and the independent director participation — substantially mitigate this risk.

Conclusion. The no-shop provision, taken together with the fiduciary-out exception, the match right, and the notification obligations, is expected to be enforceable under Delaware law. However, Calderwood & Harkness should be prepared to defend the deal-protection structure as a whole if challenged, and should emphasize the robust Board process and the arm's-length, voluntary nature of the Support Agreement in any such defense.

III. VeloPay Termination Fee ($76,000,000)

A. Summary of Contractual Terms

Section 8.3(a) of the Merger Agreement provides that VeloPay is obligated to pay HPE Fund IV a termination fee in the amount of $76,000,000 (the "VeloPay Termination Fee"), which represents 4.0% of the aggregate merger consideration of $1,900,000,000. The VeloPay Termination Fee is payable in immediately available funds within two (2) business days of the applicable termination event. The VeloPay Termination Fee is triggered upon the occurrence of any of the following termination events:

(i) Superior Proposal Termination. VeloPay terminates the Merger Agreement pursuant to Section 8.1(d)(ii) to enter into a definitive agreement with respect to a Superior Proposal, subject to compliance with the fiduciary-out procedures set forth in Section 5.3(c) and the match right provisions of Section 5.3(d);

(ii) Change of Recommendation Termination. HPE Fund IV terminates the Merger Agreement pursuant to Section 8.1(c)(ii) following a Change of Recommendation by the VeloPay Board; or

(iii) Tail Termination. (A) An Acquisition Proposal is publicly proposed, announced, or communicated to the VeloPay Board (and not publicly withdrawn) prior to the termination of the Merger Agreement, (B) the Merger Agreement is thereafter terminated by either party pursuant to Section 8.1(b)(i) (failure to consummate the Merger by the Outside Date of September 30, 2025) or by HPE Fund IV pursuant to Section 8.1(c)(i) (uncured breach by VeloPay), and (C) within twelve (12) months following such termination, VeloPay consummates, or enters into a definitive agreement that is subsequently consummated with respect to, an Acquisition Proposal (provided that, for purposes of this clause (iii), the 20% thresholds in the definition of Acquisition Proposal are replaced with 50% thresholds).

The Merger Agreement provides that, upon payment of the VeloPay Termination Fee, HPE Fund IV's receipt of the VeloPay Termination Fee shall constitute HPE Fund IV's sole and exclusive remedy against VeloPay and its affiliates in connection with the termination of the Merger Agreement giving rise to such payment (other than with respect to claims arising from fraud or willful breach of the Merger Agreement, which are expressly preserved). The VeloPay Termination Fee is characterized in the Merger Agreement as liquidated damages, and the Parties have acknowledged that the actual damages to HPE Fund IV in the event of such termination would be difficult to ascertain and that the VeloPay Termination Fee represents a reasonable estimate of the damages that HPE Fund IV would suffer.

B. Delaware Law Standard for Termination Fees

Delaware courts analyze the enforceability of termination fees under the enhanced scrutiny framework applicable to board actions that implicate Revlon duties (in a change-of-control transaction) or Unocal duties (in the context of defensive measures). The standard requires that deal-protection measures, including termination fees, be reasonable in relation to the benefit conferred on the target and its stockholders and must not operate as a coercive or preclusive barrier to competing bids.

The seminal case on the enforceability of termination fees is In re Toys "R" Us, Inc. Shareholder Litigation, 877 A.2d 975 (Del. Ch. 2005), in which Vice Chancellor Strine (as he then was) provided extensive guidance on the evaluation of termination fees. The Court held that a termination fee of 3.75% of equity value was within the range that had been found reasonable by the Delaware courts, and declined to enjoin the transaction on the basis of the termination fee. The Court observed:

"There is no magic percentage that cleaves reasonable termination fees from unreasonable ones. That said, termination fees of around 3% are standard in the market and have routinely been upheld. Fees of 4% or somewhat above have also been approved, particularly in the context of leveraged buyout transactions where the buyer has incurred substantial expenses in connection with financing commitments and due diligence."

Subsequent decisions have reinforced this framework:

• In re Dollar Thrifty Shareholder Litigation, C.A. No. 5458-VCS, 2010 WL 3503471 (Del. Ch. Sept. 8, 2010): The Court of Chancery noted that termination fees in the range of approximately 3% to 4% of equity value have been "routinely upheld" and found a fee of approximately 3.5% to be within the range of reasonableness.

• In re Cogent, Inc. Shareholder Litigation, C.A. No. 5780-VCP, 2010 WL 5377246 (Del. Ch. Dec. 23, 2010): A termination fee of 3.3% of equity value was upheld as reasonable, with the Court emphasizing that the fee was the product of arm's-length negotiation between sophisticated parties advised by experienced counsel and financial advisors.

• In re Compuware Corp. S'holders Litig., C.A. No. 9080-VCL, 2014 WL 315843 (Del. Ch. Jan. 27, 2014): The Court upheld a 3.0% termination fee and noted that fees in the 3%–4% range are "relatively standard" in change-of-control transactions.

The key inquiry in each case is not solely the percentage figure, but whether the termination fee, viewed in context and in combination with other deal-protection measures, operates to preclude a competing bid or otherwise coerce stockholders into accepting the proposed transaction.

C. Analysis of the $76 Million Fee

The VeloPay Termination Fee of $76,000,000 represents 4.0% of the $1,900,000,000 aggregate merger consideration. This figure places the fee at the higher end of the customary range that Delaware courts have generally approved (typically 2.5% to 4.0%), but it remains within the zone of reasonableness established by the precedent discussed above.

The following factors support the enforceability of the VeloPay Termination Fee:

(i) Arm's-Length Negotiation. The VeloPay Termination Fee was the product of extensive arm's-length negotiation between sophisticated parties advised by experienced legal counsel — Whitford Jessup & Crane LLP for VeloPay and Calderwood & Harkness LLP for HPE Fund IV — and experienced financial advisors — Velthryn Greer & Associates for VeloPay and Pendleton Hawkes & Co. for HPE Fund IV. The initial draft of the Merger Agreement proposed by Calderwood & Harkness included a termination fee of 4.5%, which was negotiated down to 4.0% at VeloPay's request. The negotiation history supports the characterization of the fee as a genuine liquidated damages provision rather than a penalty or coercive measure.

(ii) Board Approval. The VeloPay Board, including its two independent directors (Janet Gould and Philip Rosenthal), approved the VeloPay Termination Fee as part of its overall approval of the Merger Agreement, and determined that the fee was reasonable in light of the size and scope of the transaction, the competitive landscape for acquisitions in the payments industry, and the benefit to VeloPay's stockholders of the $20.00 per share price. The Board's deliberations on the termination fee are documented in the minutes of the Board meetings held on March 10, 2025 and March 17, 2025.

(iii) Non-Preclusive Effect. The $76,000,000 fee, while substantial in absolute terms, does not render the deal preclusive in the context of a $1.9 billion transaction. A hypothetical competing bidder would need to offer approximately $20.80 per share (an approximately 4% premium to the HPE Fund IV price) to cover the termination fee and still offer VeloPay stockholders equivalent consideration, and would need to offer a meaningfully higher premium to constitute a "Superior Proposal" under the Merger Agreement. Given VeloPay's strategic value as a payments platform with growing revenue ($412.3 million in FY2024), adjusted EBITDA ($98.1 million), and strong market position, a competing bidder with a genuine strategic interest could absorb the termination fee as a cost of the transaction if the strategic value warranted a higher price. The termination fee therefore does not function as an absolute bar to competing bids.

(iv) Compensation for Actual Costs and Opportunity Costs. The VeloPay Termination Fee compensates HPE Fund IV for the substantial transaction costs and opportunity costs it has incurred and will incur in connection with the Merger, including (a) legal, accounting, and financial advisory fees, (b) costs associated with obtaining the committed debt financing (including the $500,000,000 term loan facility from Tralvendo National Bank and the $260,000,000 revolving credit facility from Prairie State Bank, N.A.), (c) the cost of the buyer-side representations and warranties insurance policy from Oakbridge Omnivrel Insurance Group, (d) management time and resources devoted to the transaction, and (e) the opportunity cost of foregoing other investment opportunities during the exclusivity and due diligence period. While liquidated damages provisions need not precisely compensate for actual losses, the existence of these substantial costs supports the reasonableness of the fee.

Potential Challenges. A competing bidder or stockholder plaintiff could argue that the 4.0% termination fee, when combined with the simultaneous stockholder consent lock-up, creates an unreasonably preclusive barrier to competing bids. This argument would rely on the holistic evaluation of deal-protection measures, rather than an isolated assessment of the fee percentage. As discussed in Section VII below, Delaware courts evaluate deal-protection measures as a package, and the combination of the termination fee with the stockholder lock-up is the most likely basis for a challenge. However, we believe this challenge would be unlikely to succeed given the factors identified above, the Board process, and the prevailing precedent approving fees in the 3%–4% range.

A stockholder plaintiff could also challenge the fee as a "penalty" rather than a valid liquidated damages provision under general contract law principles. However, the Merger Agreement's characterization of the fee as liquidated damages, the parties' acknowledgment that actual damages would be difficult to ascertain, and the reasonableness of the fee in relation to anticipated damages all weigh in favor of enforceability. Delaware courts have consistently upheld termination fees of this magnitude as valid liquidated damages provisions rather than unenforceable penalties.

Conclusion. The VeloPay Termination Fee of $76,000,000 (4.0% of deal value) is expected to be enforceable under Delaware law. The fee is at the upper boundary of the customary range but falls within the zone of reasonableness established by Delaware precedent, was the product of arm's-length negotiation between sophisticated parties, was approved by VeloPay's Board (including independent directors), and does not operate as a preclusive barrier to competing bids in the context of a $1.9 billion transaction.

IV. HPE Fund IV Reverse Termination Fee ($57,000,000)

A. Summary of Contractual Terms

Section 8.3(b) of the Merger Agreement provides that HPE Fund IV is obligated to pay VeloPay a reverse termination fee in the amount of $57,000,000 (the "Reverse Termination Fee"), which represents 3.0% of the aggregate merger consideration of $1,900,000,000. The Reverse Termination Fee is triggered upon the occurrence of either of the following events:

(i) Financing Failure. VeloPay terminates the Merger Agreement pursuant to Section 8.1(d)(i) following HPE Fund IV's failure to consummate the Merger at the Closing due to the failure to obtain the committed debt financing contemplated by the Debt Commitment Letter (including the $500,000,000 senior secured term loan facility from Tralvendo National Bank and the $260,000,000 senior secured revolving credit facility from Prairie State Bank, N.A., each dated February 14, 2025), provided that all other conditions to HPE Fund IV's and Merger Sub's obligation to close have been satisfied or waived; or

(ii) Willful Breach by HPE Fund IV or Merger Sub. VeloPay terminates the Merger Agreement pursuant to Section 8.1(d)(iii) following a willful and material breach by HPE Fund IV or Merger Sub of any representation, warranty, covenant, or agreement contained in the Merger Agreement, which breach has not been cured within thirty (30) days following written notice thereof, and which breach would result in the failure of the conditions to closing set forth in Sections 7.2(a) or 7.2(b).

The Reverse Termination Fee is payable in immediately available funds within two (2) business days of the applicable termination event. The payment of the Reverse Termination Fee is guaranteed by the Limited Guarantee dated March 18, 2025 (the "Limited Guarantee"), executed by Harrowgate Capital Management IV LLC (the general partner of HPE Fund IV and the entity managing the HPE Fund IV investment vehicle) in favor of VeloPay.

The Merger Agreement further provides that, upon payment of the Reverse Termination Fee, VeloPay's receipt of such fee shall constitute VeloPay's sole and exclusive monetary remedy against HPE Fund IV, Merger Sub, and their respective affiliates (including Harrowgate Capital Management IV LLC and the limited partners of HPE Fund IV) in connection with the Merger Agreement and the transactions contemplated thereby, subject to the specific performance carve-out discussed in Section V below and subject to claims arising from fraud. This "sole and exclusive remedy" provision is a critical structural element of the transaction from HPE Fund IV's perspective, as it caps HPE Fund IV's maximum monetary exposure to VeloPay at $57,000,000 (plus specified enforcement expenses) in the event of a financing failure or willful breach.

B. Delaware Law Analysis

Reverse termination fees are a standard and well-established feature of private equity leveraged buyout transactions, reflecting the unique financing dynamics of such transactions. In a typical PE buyout, the acquisition vehicle (here, Merger Sub) is a shell entity with no independent assets, and the buyer's obligation to close is typically funded by a combination of equity contributions from the PE fund and third-party debt financing. The reverse termination fee serves as the target's primary monetary remedy in the event the buyer fails to close, providing a quantified and certain recovery in lieu of the uncertain prospect of a breach-of-contract damages claim against a shell entity.

Delaware courts have consistently upheld reverse termination fees as enforceable liquidated damages provisions. The conceptual framework was established in the litigation arising from the Hollowell Private Capital/United Rentals transaction, in which the Delaware courts confirmed that a buyer's obligation to pay a reverse termination fee upon failure to close constitutes a valid contractual obligation, and that a properly drafted "sole and exclusive remedy" provision limits the target's recourse to the reverse termination fee (plus any applicable specific performance remedy, if the contract so provides). See United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810 (Del. Ch. 2007).

The $57,000,000 Reverse Termination Fee represents 3.0% of the $1,900,000,000 aggregate deal value. This percentage is well within the range of 3% to 6% that has become standard in PE buyout transactions. Market data for comparable PE buyouts in the fintech sector over the 2022–2024 period indicates that reverse termination fees have typically ranged from 3.0% to 5.0% of deal value, with the median falling at approximately 3.5%. The 3.0% figure here is on the lower end of this range, reflecting the negotiated outcome between the Parties.

The asymmetry between the VeloPay Termination Fee (4.0%, or $76,000,000) and the HPE Fund IV Reverse Termination Fee (3.0%, or $57,000,000) is a customary feature of PE buyout transactions and is not objectionable under Delaware law. This asymmetry reflects the different risk profiles of the parties: the VeloPay Termination Fee compensates HPE Fund IV for the risk of losing the deal to a competing bidder (a risk that HPE Fund IV does not control), while the Reverse Termination Fee compensates VeloPay for the risk of a buyer financing failure (which is mitigated by the specific performance remedy discussed in Section V). Delaware courts have recognized that different termination fee levels for buyer and seller reflect the different economics and risk allocations in PE buyout transactions and do not render either fee unreasonable.

C. Enforceability of the Limited Guarantee

The Limited Guarantee is a limited recourse obligation of Harrowgate Capital Management IV LLC (the "Guarantor") in favor of VeloPay, pursuant to which the Guarantor guarantees the payment of the Reverse Termination Fee and certain specified enforcement expenses, subject to a cap equal to $57,000,000 (plus up to $5,000,000 in enforcement expenses and costs). The Limited Guarantee is not a guarantee of HPE Fund IV's or Merger Sub's obligation to consummate the Merger generally; rather, it is limited solely to the Reverse Termination Fee obligation and the specified enforcement expenses.

The Limited Guarantee includes the following key provisions:

(i) Cap. The Guarantor's aggregate liability under the Limited Guarantee is capped at $57,000,000 (plus enforcement expenses of up to $5,000,000).

(ii) Non-Recourse. The Limited Guarantee is non-recourse to the limited partners of HPE Fund IV and to any portfolio company, fund, or other affiliate of Harrowgate Capital Management IV LLC (other than HPE Fund IV and Merger Sub).

(iii) Termination. The Limited Guarantee terminates upon the earliest of (a) the Effective Time of the Merger, (b) the valid termination of the Merger Agreement under circumstances that do not give rise to the Reverse Termination Fee obligation, and (c) the date that is sixty (60) days following the valid termination of the Merger Agreement under circumstances that would give rise to the Reverse Termination Fee obligation, if VeloPay has not commenced a proceeding to enforce the Limited Guarantee within such sixty-day period.

(iv) Sole Remedy. VeloPay acknowledges that the Limited Guarantee, together with the specific performance remedy, constitutes VeloPay's sole and exclusive remedy against the Guarantor and its affiliates (other than HPE Fund IV and Merger Sub) in connection with the Merger Agreement and the transactions contemplated thereby.

The Guarantor, Harrowgate Capital Management IV LLC, is the general partner and investment manager of HPE Fund IV, a private equity fund with approximately $6.8 billion in aggregate capital commitments (vintage 2022). Based on publicly available information and information provided by HPE Fund IV's counsel during the due diligence process, HPE Fund IV had approximately $2.4 billion in uncalled capital commitments as of December 31, 2024, and the Guarantor has the right, pursuant to the HPE Fund IV limited partnership agreement, to call capital from the limited partners to fund investments and related obligations. Accordingly, the Guarantor has ample assets and resources to satisfy the $57,000,000 guarantee obligation.

Delaware courts enforce limited guarantees in accordance with their terms, treating them as ordinary contractual obligations subject to standard principles of contract interpretation. See Genuine Parts Co. v. Pinnacle Corporation, C.A. No. 2020-0276-KSJM, 2020 WL 5816668 (Del. Ch. Sept. 30, 2020) (enforcing limited guarantee in M&A context). The Limited Guarantee is a straightforward, well-drafted guarantee instrument that does not present novel enforceability issues.

Conclusion. The Reverse Termination Fee of $57,000,000 (3.0% of deal value) and the Limited Guarantee from Harrowgate Capital Management IV LLC are expected to be fully enforceable under Delaware law. The Reverse Termination Fee is within the standard range for PE buyout transactions, the Limited Guarantee is supported by the Guarantor's ample financial resources, and both instruments are consistent with prevailing market practice and Delaware precedent.

V. Specific Performance

A. Summary of Contractual Terms

Section 9.9 of the Merger Agreement contains a mutual specific performance provision that permits either Party to seek an injunction, specific performance, or other equitable relief to prevent breaches of the Merger Agreement and to enforce specifically the terms and provisions thereof, in addition to (and not in limitation of) any other remedy to which such Party may be entitled at law or in equity.

The specific performance provision is structured as follows:

(i) Mutual Right to Seek Equitable Relief. Each Party acknowledges and agrees that irreparable damage would occur and that monetary damages, even if available, would not be an adequate remedy in the event that any of the provisions of the Merger Agreement are not performed in accordance with their specific terms or are otherwise breached. Accordingly, each Party is entitled to an injunction or injunctions, or any other form of equitable relief, to prevent breaches or threatened breaches of the Merger Agreement and to enforce specifically the terms and provisions of the Merger Agreement, without proof of actual damages and without the necessity of posting a bond or other security as a condition to obtaining such equitable relief.

(ii) VeloPay's Right to Specific Performance of Closing Obligations. Subject to the terms and conditions of the Merger Agreement, VeloPay has the right to seek specific performance of HPE Fund IV's and Merger Sub's obligations to consummate the Merger at the Closing, including the obligation to cause the equity financing to be funded pursuant to the Equity Commitment Letter dated February 14, 2025, in an amount of $1,140,000,000 from Harrowgate Capital Management IV LLC on behalf of HPE Fund IV, provided that (A) all conditions to HPE Fund IV's and Merger Sub's obligation to close set forth in Section 7.2 have been satisfied or waived (other than conditions that by their nature are to be satisfied at the Closing), (B) the debt financing has been funded or will be funded at the Closing if the equity financing is funded at the Closing, and (C) VeloPay has confirmed in writing to HPE Fund IV that it is ready, willing, and able to consummate the Closing.

(iii) HPE Fund IV's Right to Specific Performance. HPE Fund IV has the right to seek specific performance of VeloPay's obligations under the Merger Agreement, including (A) compliance with the no-shop provisions of Section 5.3, (B) compliance with VeloPay's covenants regarding the conduct of business during the interim period set forth in Section 5.1, and (C) VeloPay's obligation to consummate the Merger at the Closing when all conditions to closing set forth in Section 7.3 have been satisfied or waived.

(iv) Waiver of Bond Requirement. Each Party irrevocably waives any requirement for the securing or posting of any bond or other security in connection with any action seeking equitable relief, including specific performance, injunction, or other equitable remedies.

The specific performance provision is a critical element of the Merger Agreement's enforcement framework, particularly from VeloPay's perspective. It provides VeloPay with a remedy beyond the $57,000,000 Reverse Termination Fee in the event HPE Fund IV fails or refuses to close when all conditions have been satisfied. The provision effectively prevents HPE Fund IV from exercising a "walk-away" option by simply paying the Reverse Termination Fee, at least in circumstances where the debt financing remains available and all other closing conditions have been met.

B. Delaware Law Analysis

Delaware's Court of Chancery possesses broad equitable jurisdiction, including the power to grant specific performance of contractual obligations. The Delaware courts have a well-established tradition of enforcing merger agreements through specific performance, and the Court of Chancery regularly considers requests for specific performance in the M&A context.

The general requirements for specific performance under Delaware law are well settled:

(i) the existence of a valid and binding contract between the parties;

(ii) the party seeking performance has complied with, or is ready, willing, and able to comply with, its own obligations under the contract;

(iii) the contract is of a character suitable for specific enforcement (i.e., the terms are sufficiently definite and the subject matter is unique or otherwise not amenable to an adequate monetary remedy); and

(iv) there is no adequate remedy at law (i.e., monetary damages would be insufficient to compensate the injured party for the breach).

In the M&A context, Delaware courts have recognized that merger agreements involve unique transactions that are not readily susceptible to valuation through monetary damages, and that specific performance is frequently the most appropriate remedy for breach of a merger agreement. See Channel Medsystems, Inc. v. Boston Scientific Corp., C.A. No. 2018-0673-AGB (Del. Ch. Dec. 18, 2019) (ordering specific performance of buyer's obligation to close a merger transaction following a dispute regarding the satisfaction of closing conditions); AB Stable VIII LLC v. Maps Hotels & Resorts One LLC, 2020 WL 7024929 (Del. Ch. Nov. 30, 2020), aff'd, 2021 WL 4459338 (Del. Oct. 1, 2021) (conducting extensive analysis of closing conditions before determining whether specific performance was appropriate; ultimately denying specific performance because the buyer established that certain closing conditions had not been satisfied).

The Channel Medsystems decision is particularly instructive. In that case, the Court of Chancery enforced specific performance of the buyer's obligation to close a merger transaction, finding that (i) the merger agreement was a valid and binding contract, (ii) the seller had complied with its obligations, (iii) the closing conditions had been satisfied, and (iv) monetary damages would be inadequate because the merger involved the acquisition of a unique business. The Court rejected the buyer's arguments that it should not be compelled to close and ordered the buyer to consummate the transaction.

The AB Stable decision, by contrast, illustrates the limits of specific performance. In that case, the Court of Chancery conducted an exhaustive 176-page analysis of whether the seller had complied with its obligations (including its interim operating covenants) and whether the closing conditions had been satisfied. The Court ultimately found that the seller had breached its obligation to operate in the ordinary course of business, which excused the buyer's obligation to close and rendered specific performance unavailable. The key takeaway from AB Stable is that specific performance of a buyer's obligation to close is available only if the party seeking performance can demonstrate that all conditions to the buyer's obligation to close have been satisfied or waived.

C. Specific Performance of Equity Financing Commitment

A critical feature of the specific performance provision in the Merger Agreement is VeloPay's right to specifically enforce HPE Fund IV's obligation to cause the equity financing to be funded pursuant to the Equity Commitment Letter. The Equity Commitment Letter, dated February 14, 2025, provides for an equity contribution of $1,140,000,000 from Harrowgate Capital Management IV LLC on behalf of HPE Fund IV, which represents the equity component of the $1,900,000,000 aggregate merger consideration (with the balance to be funded through the committed debt financing).

This is a significant provision from VeloPay's perspective because it prevents HPE Fund IV from "walking away" from the transaction by simply paying the $57,000,000 Reverse Termination Fee in a scenario where all conditions to closing have been satisfied but HPE Fund IV elects not to close for strategic or financial reasons unrelated to the Merger Agreement's closing conditions. Without the specific performance remedy for the equity commitment, VeloPay's sole recourse would be the Reverse Termination Fee, which — at $57,000,000 — represents only 3.0% of the $1,900,000,000 deal value and may be inadequate to compensate VeloPay and its stockholders for the loss of the transaction.

The specific performance remedy for the equity financing commitment is subject to the important proviso that the debt financing must also be available — that is, VeloPay can specifically enforce the equity funding obligation only if the debt financing has been funded or will be funded at the Closing if the equity financing is funded. This is a customary limitation that reflects the practical reality that the Merger cannot be consummated without both the equity and debt components of the financing. If the debt financing fails and cannot be replaced, the specific performance remedy for the equity commitment is not available, and VeloPay's sole monetary remedy is the Reverse Termination Fee.

Delaware courts have enforced specific performance of equity financing commitments in PE buyout transactions. In Channel Medsystems, the Court ordered the buyer to fund its equity commitment and close the transaction. The Hexion/Huntsman litigation (Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008)) also involved a request for specific performance of a buyer's closing obligations in a leveraged buyout, although that case was ultimately resolved through a settlement rather than a final order of specific performance. The availability of specific performance of equity financing commitments is now well established in Delaware practice.

D. Risk Assessment

The specific performance remedy serves as the primary enforcement mechanism for both Parties and interacts with the termination fee and reverse termination fee structure as follows:

For VeloPay (Seller). If all conditions to HPE Fund IV's obligation to close have been satisfied (including the availability of debt financing), VeloPay can seek specific performance of HPE Fund IV's closing obligations, including the equity financing commitment. In this scenario, the Reverse Termination Fee becomes a secondary remedy — VeloPay's primary remedy is an order compelling HPE Fund IV to close. If specific performance is not available (e.g., because the debt financing has failed and cannot be replaced), VeloPay's sole monetary remedy is the $57,000,000 Reverse Termination Fee under the Limited Guarantee.

For HPE Fund IV (Buyer). HPE Fund IV can seek specific performance of VeloPay's obligations, including compliance with the no-shop provisions and VeloPay's obligation to close when all conditions have been satisfied. In the event of a breach of the no-shop or a Change of Recommendation, HPE Fund IV may seek injunctive relief to prevent VeloPay from entering into a competing transaction, and may also terminate the Merger Agreement and collect the $76,000,000 VeloPay Termination Fee.

The specific performance provision is well-drafted and addresses the key scenarios in which specific performance might be sought. The waiver of the bond requirement is a significant practical benefit, as it eliminates a potential barrier to obtaining emergency injunctive relief. The provision is consistent with current Court of Chancery practice, which has generally granted specific performance of merger agreements where the conditions to closing have been satisfied and the party seeking performance has complied with its own obligations.

Conclusion. The specific performance provision set forth in Section 9.9 of the Merger Agreement is well-drafted and expected to be enforceable under Delaware law, consistent with current Chancery precedent. The provision provides meaningful protection to both Parties and serves as an essential complement to the termination fee and reverse termination fee structure. Calderwood & Harkness should be prepared to seek emergency injunctive relief in the Court of Chancery if any circumstance arises during the pre-closing period that threatens the consummation of the Merger.

VI. Material Adverse Effect Definition

A. Summary of Contractual Terms

Section 1.1 of the Merger Agreement defines "Material Adverse Effect" as:

"any event, change, effect, development, condition, circumstance, or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the business, financial condition, or results of operations of the Company and its Subsidiaries, taken as a whole."

For purposes of this definition, VeloPay's subsidiaries include VeloPay Processing LLC (the primary operating subsidiary responsible for transaction processing), VeloPay Canada Inc. (the Canadian operating subsidiary), VeloPay Europe, Unipessoal Lda. (the Portuguese-incorporated European operating subsidiary), VeloPay Fraud intelligence Inc. (the subsidiary responsible for fraud detection and prevention services), and PayStream Gateway LLC (the subsidiary operating VeloPay's payment gateway infrastructure). The Material Adverse Effect definition is measured across VeloPay and all of its subsidiaries "taken as a whole," meaning that adverse developments affecting a single subsidiary may not constitute a Material Adverse Effect if VeloPay and its subsidiaries, viewed on a consolidated basis, have not experienced a material adverse change.

The Material Adverse Effect definition is relevant in two principal contexts within the Merger Agreement:

(i) Closing Condition. Under Section 7.2(a) of the Merger Agreement, HPE Fund IV's and Merger Sub's obligation to consummate the Merger at the Closing is conditioned upon the accuracy of VeloPay's representations and warranties as of the Closing Date, subject to a "Material Adverse Effect" qualification — that is, HPE Fund IV is not obligated to close if VeloPay's representations and warranties are not true and correct (disregarding all "Material Adverse Effect" qualifications contained therein) except where the failure to be true and correct has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

(ii) Stand-Alone MAE Condition. Under Section 7.2(c) of the Merger Agreement, HPE Fund IV's and Merger Sub's obligation to close is separately conditioned upon the absence of any Material Adverse Effect since the date of the Merger Agreement that is continuing as of the Closing Date. This is the "no-MAE" closing condition, which provides HPE Fund IV with the right to refuse to close if a Material Adverse Effect has occurred between signing (March 18, 2025) and the Closing.

B. Carve-Outs from the Material Adverse Effect Definition

The Material Adverse Effect definition is subject to seven categories of carve-outs (the "MAE Carve-Outs"), which exclude specified types of events from the definition. If an event falls within one of these carve-out categories, it cannot be relied upon by HPE Fund IV as the basis for a Material Adverse Effect claim, unless (in the case of certain carve-outs) the event has a disproportionate impact on VeloPay relative to similarly situated companies in the fintech or payments industry. The MAE Carve-Outs are as follows:

(i) Pandemics. Any event, change, effect, development, condition, circumstance, or occurrence arising out of, resulting from, or attributable to any epidemic, pandemic, or disease outbreak (including COVID-19 and any mutation or recurrence thereof, and any future epidemic or pandemic), including any governmental or regulatory actions taken in response thereto (including quarantine, "shelter in place," "stay at home," workforce reduction, social distancing, shutdown, closure, sequester, or similar orders, restrictions, or measures), except to the extent such event, change, effect, development, condition, circumstance, or occurrence has had a materially disproportionate adverse impact on the Company and its Subsidiaries, taken as a whole, relative to other participants in the fintech or payments industry.

(ii) War. Any event, change, effect, development, condition, circumstance, or occurrence arising out of, resulting from, or attributable to any outbreak or escalation of hostilities, war (whether or not declared), military action, armed conflict, terrorism, sabotage, cyberattack (to the extent constituting an act of war or terrorism), or any other act of war, except to the extent such event has had a materially disproportionate adverse impact on the Company and its Subsidiaries, taken as a whole, relative to other participants in the fintech or payments industry.

(iii) General Economic or Market Conditions. Any change in general economic or market conditions (including changes in interest rates, exchange rates, commodity prices, credit markets, capital markets, or securities markets generally), except to the extent such change has had a materially disproportionate adverse impact on the Company and its Subsidiaries, taken as a whole, relative to other participants in the fintech or payments industry.

(iv) Industry-Wide Changes. Any change, event, or development generally affecting the fintech or payments industry, except to the extent such change, event, or development has had a materially disproportionate adverse impact on the Company and its Subsidiaries, taken as a whole, relative to other participants in the fintech or payments industry.

(v) Changes in Law or GAAP. Any change in applicable law, regulation, or governmental policy, or any change in generally accepted accounting principles ("GAAP") or the interpretation or enforcement thereof, except to the extent such change has had a materially disproportionate adverse impact on the Company and its Subsidiaries, taken as a whole, relative to other participants in the fintech or payments industry.

(vi) Failure to Meet Projections. Any failure by the Company or any of its Subsidiaries to meet any internal or published projection, forecast, estimate, or prediction in respect of revenues, earnings, or other financial or operating metrics for any period (it being understood and agreed that the facts and circumstances underlying any such failure may be taken into account in determining whether a Material Adverse Effect has occurred, to the extent such facts and circumstances are not otherwise excluded from the definition of Material Adverse Effect by another carve-out).

(vii) Announcement or Pendency of the Transaction. Any event, change, effect, development, condition, circumstanc

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Sandra Tung, Responsible Partner, Mergers & Acquisitions
FROM: Megan Chu, Lead Associate, Mergers & Acquisitions
DATE: March 16, 2025 (finalized in advance of March 18, 2025 signing)
RE: Enforceability Analysis of Key Provisions — Agreement and Plan of Merger Among Harrowgate Private Equity Fund IV LP, Harrowgate Velocity Merger Sub Inc., and VeloPay Systems, Inc.
Matter Number: 1003-00003
Client: Harrowgate Private Equity Fund IV LP
Right-click to update Table of Contents
I. Executive Summary and Purpose
The purpose of this memorandum is to set forth an internal analysis of the enforceability under Delaware law of the key protective provisions contained in the Agreement and Plan of Merger (the "Merger Agreement"), dated as of March 18, 2025, among Harrowgate Private Equity Fund IV LP ("HPE Fund IV"), Harrowgate Velocity Merger Sub Inc. ("Merger Sub"), and VeloPay Systems, Inc. ("VeloPay" and, together with HPE Fund IV and Merger Sub, the "Parties"). This memorandum is prepared solely for the use of the Calderwood & Harkness LLP deal team and is intended to identify areas of legal risk, provide a candid assessment of enforceability under current Delaware precedent, and offer practical guidance for the pre-closing period. This memorandum constitutes attorney work product and is protected by the attorney-client privilege.
Transaction Overview. The Merger Agreement contemplates a reverse triangular merger pursuant to Section 251 of the Delaware General Corporation Law (the "DGCL"), in which Merger Sub, a newly formed Delaware corporation and wholly owned subsidiary of HPE Fund IV, will merge with and into VeloPay, with VeloPay surviving the merger as a wholly owned subsidiary of HPE Fund IV (the "Merger"). The aggregate merger consideration is approximately $1,900,000,000, payable as $20.00 per share on a fully diluted, as-converted basis (based on approximately 95,000,000 fully diluted shares of VeloPay common stock). The consideration is payable in cash. The transaction represents a significant acquisition within the fintech and payments processing sector and is HPE Fund IV's largest platform investment to date.
Provisions Analyzed. This memorandum addresses the enforceability of the following five key provisions of the Merger Agreement:
1. The no-shop provision (Article 5, Section 5.3 of the Merger Agreement);
2. The VeloPay termination fee of $76,000,000 (Article 8, Section 8.3(a) of the Merger Agreement);
3. The HPE Fund IV reverse termination fee of $57,000,000 (Article 8, Section 8.3(b) of the Merger Agreement);
4. The specific performance remedy (Article 9, Section 9.9 of the Merger Agreement); and
5. The material adverse effect definition and related carve-outs (Article 1, Section 1.1 of the Merger Agreement, as applied to the closing conditions set forth in Article 7).
Overall Conclusion. Based on the analysis set forth herein, each of the five provisions identified above is expected to be enforceable under Delaware law, subject to customary equitable limitations and the specific factual circumstances that may exist at the time of any dispute. The deal-protection package as a whole — including the interaction of the no-shop, termination fees, specific performance remedy, stockholder support agreements, and the material adverse effect closing condition — is within the range of structures that the Delaware Court of Chancery has upheld in comparable leveraged buyout transactions. The material adverse effect standard presents inherently fact-intensive questions that cannot be resolved in the abstract, but the definition as drafted is well-crafted, consistent with prevailing Delaware precedent (particularly Akorn, Inc. v. Fresenius Kabi AG), and appropriately allocates risk between the Parties. We have identified certain areas of moderate risk, particularly with respect to the interaction between the no-shop provision and the concurrent delivery of stockholder written consent, which we discuss in detail below.
Review. This memorandum has been reviewed by Sandra Tung, Responsible Partner, Mergers & Acquisitions.
II. No-Shop Provision
A. Summary of Contractual Terms
Section 5.3(a) of the Merger Agreement imposes a no-shop restriction on VeloPay commencing upon the execution of the Merger Agreement on March 18, 2025 and continuing through the earlier of (x) the Effective Time (as defined in the Merger Agreement) and (y) the valid termination of the Merger Agreement in accordance with Article 8. During the no-shop period, VeloPay and its subsidiaries are prohibited from, and are required to cause their respective directors, officers, employees, investment bankers, financial advisors, attorneys, accountants, and other representatives not to, directly or indirectly:
(i) solicit, initiate, or knowingly encourage or facilitate (including by way of furnishing non-public information or providing access to properties, books, or records) any inquiry or the making of any proposal or offer that constitutes, or would reasonably be expected to lead to, an Acquisition Proposal (as defined in Section 1.1 of the Merger Agreement);
(ii) furnish any non-public information relating to VeloPay or any of its subsidiaries to any person in connection with or in response to an Acquisition Proposal or any inquiry or indication of interest that would reasonably be expected to lead to an Acquisition Proposal;
(iii) engage in, continue, or otherwise participate in any discussions or negotiations with any person with respect to an Acquisition Proposal or any inquiry or indication of interest that would reasonably be expected to lead to an Acquisition Proposal (other than to inform such person of the existence of the restrictions set forth in Section 5.3); or
(iv) approve, endorse, recommend, or enter into any letter of intent, memorandum of understanding, merger agreement, acquisition agreement, or other similar agreement relating to an Acquisition Proposal.
The no-shop provision further requires VeloPay to immediately cease and cause to be terminated any existing discussions or negotiations with any third party with respect to any Acquisition Proposal or any inquiry or indication of interest that would reasonably be expected to lead to an Acquisition Proposal, including any such discussions or negotiations that may have been ongoing as of the date of the Merger Agreement. VeloPay is required to request the prompt return or destruction of any non-public information previously furnished to any such third party in connection with any such discussions or negotiations.
In addition, Section 5.3(b) of the Merger Agreement requires VeloPay to promptly notify HPE Fund IV (and in any event within 48 hours) upon receipt of any Acquisition Proposal or any inquiry that could reasonably be expected to lead to an Acquisition Proposal, including disclosure of the identity of the person making such proposal or inquiry and the material terms and conditions thereof. VeloPay is further required to keep HPE Fund IV reasonably informed of any material developments, discussions, or negotiations with respect to any such Acquisition Proposal or inquiry, including any changes in the material terms thereof.
The term "Acquisition Proposal" is defined broadly in Section 1.1 of the Merger Agreement to include any proposal or offer with respect to (a) any direct or indirect acquisition of assets constituting 20% or more of the consolidated assets of VeloPay and its subsidiaries, or to which 20% or more of VeloPay's consolidated revenues or earnings are attributable, (b) any direct or indirect acquisition of 20% or more of any class of equity securities of VeloPay, (c) any tender offer or exchange offer that, if consummated, would result in any person beneficially owning 20% or more of any class of equity securities of VeloPay, or (d) any merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution, or similar transaction involving VeloPay or any of its significant subsidiaries, in each case other than the transactions contemplated by the Merger Agreement.
B. Fiduciary Out Exception
Section 5.3(c) of the Merger Agreement contains a customary fiduciary-out exception that, notwithstanding the restrictions of Section 5.3(a), permits VeloPay's Board of Directors (the "VeloPay Board"), prior to the receipt of the Requisite Stockholder Approval (as defined in the Merger Agreement), to:
(i) furnish non-public information relating to VeloPay and its subsidiaries to a person making a bona fide, unsolicited Acquisition Proposal that did not result from a material breach of the no-shop obligation, subject to the execution by such person of a confidentiality agreement on terms no less restrictive than those contained in the Confidentiality Agreement between VeloPay and HPE Fund IV dated October 12, 2024; and
(ii) engage in discussions and negotiations with such person regarding such Acquisition Proposal,
in each case, if and only if, prior to taking any such action, the VeloPay Board determines in good faith, after consultation with its outside legal counsel (Whitford Jessup & Crane LLP) and its financial advisor (Velthryn Greer & Associates), that (A) such Acquisition Proposal constitutes or would reasonably be expected to lead to a Superior Proposal (as defined in the Merger Agreement) and (B) the failure to take such action would be inconsistent with the VeloPay Board's fiduciary duties under applicable law.
The fiduciary-out exception also permits the VeloPay Board, prior to the receipt of the Requisite Stockholder Approval, to (x) withhold, withdraw, qualify, or modify (or publicly propose to withhold, withdraw, qualify, or modify) the Board Recommendation in a manner adverse to HPE Fund IV (a "Change of Recommendation") or (y) terminate the Merger Agreement to enter into a definitive agreement providing for a transaction constituting a Superior Proposal, in each case, subject to compliance with the match right provisions discussed in Section II.C below.
Complication Arising from Concurrent Written Consent. A significant structural feature of this transaction is that the Requisite Stockholder Approval was obtained simultaneously with the signing of the Merger Agreement. Specifically, the written consent of stockholders holding approximately 63.1% of the outstanding shares of VeloPay common stock was delivered concurrently with the execution of the Merger Agreement on March 18, 2025, pursuant to the Stockholder Support Agreement (the "Support Agreement") of the same date. The consenting stockholders are:
Because the Requisite Stockholder Approval has already been received by written consent at signing, the fiduciary-out exception — which by its terms is operative only "prior to the receipt of the Requisite Stockholder Approval" — is effectively inoperative for purposes of the VeloPay Board's ability to change its recommendation or terminate the Merger Agreement to accept a Superior Proposal. The written consent, once delivered, is irrevocable under Section 228 of the DGCL and under the terms of the Support Agreement.
We note, however, that the Merger has not yet closed as of the date of this memorandum. The Information Statement required by DGCL Section 228(e) was not mailed to non-consenting stockholders until April 14, 2025 (the Merger Agreement contemplates mailing within 20 business days following signing), and the Merger will not become effective until the closing, which is expected to occur on or about July 22, 2025. During the interim period between signing and closing, the VeloPay Board retains its fiduciary duties, but its practical ability to act on those duties is constrained by (i) the irrevocable stockholder consent, (ii) the no-shop restriction, and (iii) the termination fee obligation. This structural dynamic is analyzed further in Section II.D below.
We have carefully reviewed the Merger Agreement for any residual window or mechanism through which the fiduciary-out exception might operate notwithstanding the concurrent delivery of stockholder consent. The Merger Agreement does not contain a "continuing fiduciary out" that would survive the receipt of stockholder approval. Accordingly, the practical significance of the fiduciary-out exception is limited in the context of this transaction structure.
C. Match Right
Section 5.3(d) of the Merger Agreement provides HPE Fund IV with a match right in the event the VeloPay Board proposes to effect a Change of Recommendation or to terminate the Merger Agreement to accept a Superior Proposal. Specifically, VeloPay is required to provide HPE Fund IV with:
(i) written notice at least five (5) business days in advance of the VeloPay Board taking any such action, which notice must include a copy of the relevant Superior Proposal (including any proposed definitive agreement) and the identity of the person making such proposal; and
(ii) during such five-business-day period, VeloPay is required to negotiate in good faith with HPE Fund IV (if HPE Fund IV elects to negotiate) to make such adjustments to the terms and conditions of the Merger Agreement as would enable the VeloPay Board to proceed with the transactions contemplated by the Merger Agreement without effecting a Change of Recommendation.
In the event of any material amendment or modification to the financial or other material terms of the Superior Proposal, VeloPay is required to provide a new written notice to HPE Fund IV, and a new three-business-day match period commences with respect to such amended or modified proposal.
The five-business-day match period is a standard structure in comparable M&A transactions. It is neither unreasonably short (which might render it ineffective for HPE Fund IV) nor unreasonably long (which might be viewed as preclusive by a reviewing court). Delaware courts have generally accepted match right periods of three to five business days as customary and reasonable.
As noted above, however, the practical significance of the match right is limited in this transaction because the Requisite Stockholder Approval has already been obtained, effectively closing the window for a Change of Recommendation or a termination to accept a Superior Proposal under the fiduciary-out exception as currently drafted.
D. Enforceability Analysis Under Delaware Law
General Enforceability of No-Shop Provisions. No-shop provisions are standard features of merger agreements and are routinely upheld by Delaware courts as valid contractual covenants freely entered into by sophisticated parties. The Delaware Supreme Court has recognized that deal-protection measures, including no-shop provisions, serve the legitimate purpose of inducing an acquiror to enter into a merger agreement by providing a degree of transaction certainty, and that boards of directors may reasonably agree to such measures as part of the overall negotiated exchange. See In re Topps Co. S'holders Litig., 926 A.2d 58, 86 (Del. Ch. 2007) (upholding no-shop provision with fiduciary-out exception as reasonable deal-protection measure); In re Smurfit-Stone Container Corp. S'holder Litig., C.A. No. 6164-VCP, 2011 WL 2028076 (Del. Ch. May 20, 2011).
The Critical Importance of the Fiduciary Out. Delaware courts have consistently emphasized that the enforceability of no-shop provisions is closely linked to the existence of a meaningful fiduciary-out exception. In Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003), the Delaware Supreme Court, in a deeply divided 3-2 decision, invalidated a merger agreement that contained a combination of deal-protection measures — including irrevocable stockholder voting agreements covering a majority of shares and the absence of a fiduciary-out exception — that, in the Court's view, rendered the deal-protection measures preclusive by completely eliminating the board's ability to consider competing offers. The majority held that "deal protection devices are unenforceable... if their effect is to prevent the board from meeting its subsequent fiduciary obligations to its stockholders." Id. at 936.
Omnicare is the most relevant precedent for our analysis, and we must confront its implications directly. In Omnicare, the combination of (i) irrevocable voting agreements from stockholders holding a majority of shares and (ii) the absence of any fiduciary-out exception was held to create an impermissible "fait accompli" that precluded the board from exercising its fiduciary duties. The present transaction shares some structural similarities: stockholders holding 63.1% of shares have delivered irrevocable written consent at signing. However, there are several critical distinctions:
First, the Merger Agreement does contain a fiduciary-out exception in Section 5.3(c). Although the fiduciary out is effectively inoperative because the Requisite Stockholder Approval was obtained at signing, the exception exists in the agreement as a contractual matter. This is a formal distinction, and it is uncertain how much weight a court would give to a fiduciary-out exception that was effectively neutralized from inception by the concurrent delivery of stockholder consent.
Second, the stockholders who delivered consent — Ridgeline Ventures Fund III LP, Apex Growth Partners II LP, Nathan Aldridge, and Sonia Reyes-Watkins — did so voluntarily as arm's-length parties pursuant to the Support Agreement. In Omnicare, the voting agreements were entered into by two directors who were also the company's largest stockholders, which raised concerns about conflicts of interest and entrenchment. Here, while Nathan Aldridge (Co-Founder and CEO) and Sonia Reyes-Watkins (Co-Founder and CTO) are members of management, the institutional investors Ridgeline Ventures and Apex Growth Partners are independent third parties with their own fiduciary obligations to their limited partners. Their decision to support the transaction was based on their own independent evaluation of the merits of the $20.00 per share price.
Third, the VeloPay Board conducted a robust process prior to approving the Merger Agreement. The Board engaged Velthryn Greer & Associates as its independent financial advisor, and Patricia Navarro (Lead Managing Director) delivered a fairness opinion to the Board opining that the $20.00 per share consideration was fair, from a financial point of view, to the holders of VeloPay common stock (other than the consenting stockholders and their affiliates). Pendleton Hawkes & Co. served as HPE Fund IV's financial advisor. The Board's process included a thorough market check and the solicitation of interest from multiple potential strategic and financial acquirors over a period of approximately four months prior to the execution of the Merger Agreement. This is distinguishable from the truncated and inadequate process that characterized the Omnicare transaction.
Fourth, the VeloPay Board is composed of six directors, including two independent directors — Janet Gould and Philip Rosenthal — who have no affiliation with HPE Fund IV, Ridgeline Ventures, Apex Growth Partners, or VeloPay management. The independent directors participated fully in the Board's deliberations and approved the Merger Agreement.
Post-*Omnicare* Developments. Subsequent decisions in the Court of Chancery have distinguished Omnicare on its facts and have generally upheld deal-protection structures that include a fiduciary-out exception, even where the fiduciary out was of limited practical significance. In In re Smurfit-Stone Container Corp. S'holder Litig., the Court declined to enjoin a merger on the basis of the deal-protection measures where the agreement contained a fiduciary-out exception and the board had conducted a thorough process. The Court emphasized that Omnicare involved the "extreme combination" of irrevocable voting agreements from a majority of shares plus the total absence of a fiduciary out, and that not every combination of deal-protection measures rises to the level of preclusion.
Risk Assessment. We assess the risk of the no-shop provision being found unenforceable as low to moderate. The most significant vulnerability in our deal-protection structure is the combination of the no-shop restriction with the concurrent delivery of irrevocable stockholder written consent by holders of 63.1% of shares, which effectively locks up the transaction at signing and renders the fiduciary-out exception inoperative as a practical matter. A hypothetical competing bidder that emerges post-signing, or a stockholder plaintiff challenging the transaction, could argue that this combination renders the deal-protection mechanisms preclusive under Omnicare. However, the distinguishing factors identified above — the existence of the fiduciary out in the agreement (even if functionally limited), the voluntary nature of the Support Agreement, the robust Board process, the fairness opinion, and the independent director participation — substantially mitigate this risk.
Conclusion. The no-shop provision, taken together with the fiduciary-out exception, the match right, and the notification obligations, is expected to be enforceable under Delaware law. However, Calderwood & Harkness should be prepared to defend the deal-protection structure as a whole if challenged, and should emphasize the robust Board process and the arm's-length, voluntary nature of the Support Agreement in any such defense.
III. VeloPay Termination Fee ($76,000,000)
A. Summary of Contractual Terms
Section 8.3(a) of the Merger Agreement provides that VeloPay is obligated to pay HPE Fund IV a termination fee in the amount of $76,000,000 (the "VeloPay Termination Fee"), which represents 4.0% of the aggregate merger consideration of $1,900,000,000. The VeloPay Termination Fee is payable in immediately available funds within two (2) business days of the applicable termination event. The VeloPay Termination Fee is triggered upon the occurrence of any of the following termination events:
(i) Superior Proposal Termination. VeloPay terminates the Merger Agreement pursuant to Section 8.1(d)(ii) to enter into a definitive agreement with respect to a Superior Proposal, subject to compliance with the fiduciary-out procedures set forth in Section 5.3(c) and the match right provisions of Section 5.3(d);
(ii) Change of Recommendation Termination. HPE Fund IV terminates the Merger Agreement pursuant to Section 8.1(c)(ii) following a Change of Recommendation by the VeloPay Board; or
(iii) Tail Termination. (A) An Acquisition Proposal is publicly proposed, announced, or communicated to the VeloPay Board (and not publicly withdrawn) prior to the termination of the Merger Agreement, (B) the Merger Agreement is thereafter terminated by either party pursuant to Section 8.1(b)(i) (failure to consummate the Merger by the Outside Date of September 30, 2025) or by HPE Fund IV pursuant to Section 8.1(c)(i) (uncured breach by VeloPay), and (C) within twelve (12) months following such termination, VeloPay consummates, or enters into a definitive agreement that is subsequently consummated with respect to, an Acquisition Proposal (provided that, for purposes of this clause (iii), the 20% thresholds in the definition of Acquisition Proposal are replaced with 50% thresholds).
The Merger Agreement provides that, upon payment of the VeloPay Termination Fee, HPE Fund IV's receipt of the VeloPay Termination Fee shall constitute HPE Fund IV's sole and exclusive remedy against VeloPay and its affiliates in connection with the termination of the Merger Agreement giving rise to such payment (other than with respect to claims arising from fraud or willful breach of the Merger Agreement, which are expressly preserved). The VeloPay Termination Fee is characterized in the Merger Agreement as liquidated damages, and the Parties have acknowledged that the actual damages to HPE Fund IV in the event of such termination would be difficult to ascertain and that the VeloPay Termination Fee represents a reasonable estimate of the damages that HPE Fund IV would suffer.
B. Delaware Law Standard for Termination Fees
Delaware courts analyze the enforceability of termination fees under the enhanced scrutiny framework applicable to board actions that implicate Revlon duties (in a change-of-control transaction) or Unocal duties (in the context of defensive measures). The standard requires that deal-protection measures, including termination fees, be reasonable in relation to the benefit conferred on the target and its stockholders and must not operate as a coercive or preclusive barrier to competing bids.
The seminal case on the enforceability of termination fees is In re Toys "R" Us, Inc. Shareholder Litigation, 877 A.2d 975 (Del. Ch. 2005), in which Vice Chancellor Strine (as he then was) provided extensive guidance on the evaluation of termination fees. The Court held that a termination fee of 3.75% of equity value was within the range that had been found reasonable by the Delaware courts, and declined to enjoin the transaction on the basis of the termination fee. The Court observed:
"There is no magic percentage that cleaves reasonable termination fees from unreasonable ones. That said, termination fees of around 3% are standard in the market and have routinely been upheld. Fees of 4% or somewhat above have also been approved, particularly in the context of leveraged buyout transactions where the buyer has incurred substantial expenses in connection with financing commitments and due diligence."
Subsequent decisions have reinforced this framework:
• In re Dollar Thrifty Shareholder Litigation, C.A. No. 5458-VCS, 2010 WL 3503471 (Del. Ch. Sept. 8, 2010): The Court of Chancery noted that termination fees in the range of approximately 3% to 4% of equity value have been "routinely upheld" and found a fee of approximately 3.5% to be within the range of reasonableness.
• In re Cogent, Inc. Shareholder Litigation, C.A. No. 5780-VCP, 2010 WL 5377246 (Del. Ch. Dec. 23, 2010): A termination fee of 3.3% of equity value was upheld as reasonable, with the Court emphasizing that the fee was the product of arm's-length negotiation between sophisticated parties advised by experienced counsel and financial advisors.
• In re Compuware Corp. S'holders Litig., C.A. No. 9080-VCL, 2014 WL 315843 (Del. Ch. Jan. 27, 2014): The Court upheld a 3.0% termination fee and noted that fees in the 3%–4% range are "relatively standard" in change-of-control transactions.
The key inquiry in each case is not solely the percentage figure, but whether the termination fee, viewed in context and in combination with other deal-protection measures, operates to preclude a competing bid or otherwise coerce stockholders into accepting the proposed transaction.
C. Analysis of the $76 Million Fee
The VeloPay Termination Fee of $76,000,000 represents 4.0% of the $1,900,000,000 aggregate merger consideration. This figure places the fee at the higher end of the customary range that Delaware courts have generally approved (typically 2.5% to 4.0%), but it remains within the zone of reasonableness established by the precedent discussed above.
The following factors support the enforceability of the VeloPay Termination Fee:
(i) Arm's-Length Negotiation. The VeloPay Termination Fee was the product of extensive arm's-length negotiation between sophisticated parties advised by experienced legal counsel — Whitford Jessup & Crane LLP for VeloPay and Calderwood & Harkness LLP for HPE Fund IV — and experienced financial advisors — Velthryn Greer & Associates for VeloPay and Pendleton Hawkes & Co. for HPE Fund IV. The initial draft of the Merger Agreement proposed by Calderwood & Harkness included a termination fee of 4.5%, which was negotiated down to 4.0% at VeloPay's request. The negotiation history supports the characterization of the fee as a genuine liquidated damages provision rather than a penalty or coercive measure.
(ii) Board Approval. The VeloPay Board, including its two independent directors (Janet Gould and Philip Rosenthal), approved the VeloPay Termination Fee as part of its overall approval of the Merger Agreement, and determined that the fee was reasonable in light of the size and scope of the transaction, the competitive landscape for acquisitions in the payments industry, and the benefit to VeloPay's stockholders of the $20.00 per share price. The Board's deliberations on the termination fee are documented in the minutes of the Board meetings held on March 10, 2025 and March 17, 2025.
(iii) Non-Preclusive Effect. The $76,000,000 fee, while substantial in absolute terms, does not render the deal preclusive in the context of a $1.9 billion transaction. A hypothetical competing bidder would need to offer approximately $20.80 per share (an approximately 4% premium to the HPE Fund IV price) to cover the termination fee and still offer VeloPay stockholders equivalent consideration, and would need to offer a meaningfully higher premium to constitute a "Superior Proposal" under the Merger Agreement. Given VeloPay's strategic value as a payments platform with growing revenue ($412.3 million in FY2024), adjusted EBITDA ($98.1 million), and strong market position, a competing bidder with a genuine strategic interest could absorb the termination fee as a cost of the transaction if the strategic value warranted a higher price. The termination fee therefore does not function as an absolute bar to competing bids.
(iv) Compensation for Actual Costs and Opportunity Costs. The VeloPay Termination Fee compensates HPE Fund IV for the substantial transaction costs and opportunity costs it has incurred and will incur in connection with the Merger, including (a) legal, accounting, and financial advisory fees, (b) costs associated with obtaining the committed debt financing (including the $500,000,000 term loan facility from Tralvendo National Bank and the $260,000,000 revolving credit facility from Prairie State Bank, N.A.), (c) the cost of the buyer-side representations and warranties insurance policy from Oakbridge Omnivrel Insurance Group, (d) management time and resources devoted to the transaction, and (e) the opportunity cost of foregoing other investment opportunities during the exclusivity and due diligence period. While liquidated damages provisions need not precisely compensate for actual losses, the existence of these substantial costs supports the reasonableness of the fee.
Potential Challenges. A competing bidder or stockholder plaintiff could argue that the 4.0% termination fee, when combined with the simultaneous stockholder consent lock-up, creates an unreasonably preclusive barrier to competing bids. This argument would rely on the holistic evaluation of deal-protection measures, rather than an isolated assessment of the fee percentage. As discussed in Section VII below, Delaware courts evaluate deal-protection measures as a package, and the combination of the termination fee with the stockholder lock-up is the most likely basis for a challenge. However, we believe this challenge would be unlikely to succeed given the factors identified above, the Board process, and the prevailing precedent approving fees in the 3%–4% range.
A stockholder plaintiff could also challenge the fee as a "penalty" rather than a valid liquidated damages provision under general contract law principles. However, the Merger Agreement's characterization of the fee as liquidated damages, the parties' acknowledgment that actual damages would be difficult to ascertain, and the reasonableness of the fee in relation to anticipated damages all weigh in favor of enforceability. Delaware courts have consistently upheld termination fees of this magnitude as valid liquidated damages provisions rather than unenforceable penalties.
Conclusion. The VeloPay Termination Fee of $76,000,000 (4.0% of deal value) is expected to be enforceable under Delaware law. The fee is at the upper boundary of the customary range but falls within the zone of reasonableness established by Delaware precedent, was the product of arm's-length negotiation between sophisticated parties, was approved by VeloPay's Board (including independent directors), and does not operate as a preclusive barrier to competing bids in the context of a $1.9 billion transaction.
IV. HPE Fund IV Reverse Termination Fee ($57,000,000)
A. Summary of Contractual Terms
Section 8.3(b) of the Merger Agreement provides that HPE Fund IV is obligated to pay VeloPay a reverse termination fee in the amount of $57,000,000 (the "Reverse Termination Fee"), which represents 3.0% of the aggregate merger consideration of $1,900,000,000. The Reverse Termination Fee is triggered upon the occurrence of either of the following events:
(i) Financing Failure. VeloPay terminates the Merger Agreement pursuant to Section 8.1(d)(i) following HPE Fund IV's failure to consummate the Merger at the Closing due to the failure to obtain the committed debt financing contemplated by the Debt Commitment Letter (including the $500,000,000 senior secured term loan facility from Tralvendo National Bank and the $260,000,000 senior secured revolving credit facility from Prairie State Bank, N.A., each dated February 14, 2025), provided that all other conditions to HPE Fund IV's and Merger Sub's obligation to close have been satisfied or waived; or
(ii) Willful Breach by HPE Fund IV or Merger Sub. VeloPay terminates the Merger Agreement pursuant to Section 8.1(d)(iii) following a willful and material breach by HPE Fund IV or Merger Sub of any representation, warranty, covenant, or agreement contained in the Merger Agreement, which breach has not been cured within thirty (30) days following written notice thereof, and which breach would result in the failure of the conditions to closing set forth in Sections 7.2(a) or 7.2(b).
The Reverse Termination Fee is payable in immediately available funds within two (2) business days of the applicable termination event. The payment of the Reverse Termination Fee is guaranteed by the Limited Guarantee dated March 18, 2025 (the "Limited Guarantee"), executed by Harrowgate Capital Management IV LLC (the general partner of HPE Fund IV and the entity managing the HPE Fund IV investment vehicle) in favor of VeloPay.
The Merger Agreement further provides that, upon payment of the Reverse Termination Fee, VeloPay's receipt of such fee shall constitute VeloPay's sole and exclusive monetary remedy against HPE Fund IV, Merger Sub, and their respective affiliates (including Harrowgate Capital Management IV LLC and the limited partners of HPE Fund IV) in connection with the Merger Agreement and the transactions contemplated thereby, subject to the specific performance carve-out discussed in Section V below and subject to claims arising from fraud. This "sole and exclusive remedy" provision is a critical structural element of the transaction from HPE Fund IV's perspective, as it caps HPE Fund IV's maximum monetary exposure to VeloPay at $57,000,000 (plus specified enforcement expenses) in the event of a financing failure or willful breach.
B. Delaware Law Analysis
Reverse termination fees are a standard and well-established feature of private equity leveraged buyout transactions, reflecting the unique financing dynamics of such transactions. In a typical PE buyout, the acquisition vehicle (here, Merger Sub) is a shell entity with no independent assets, and the buyer's obligation to close is typically funded by a combination of equity contributions from the PE fund and third-party debt financing. The reverse termination fee serves as the target's primary monetary remedy in the event the buyer fails to close, providing a quantified and certain recovery in lieu of the uncertain prospect of a breach-of-contract damages claim against a shell entity.
Delaware courts have consistently upheld reverse termination fees as enforceable liquidated damages provisions. The conceptual framework was established in the litigation arising from the Hollowell Private Capital/United Rentals transaction, in which the Delaware courts confirmed that a buyer's obligation to pay a reverse termination fee upon failure to close constitutes a valid contractual obligation, and that a properly drafted "sole and exclusive remedy" provision limits the target's recourse to the reverse termination fee (plus any applicable specific performance remedy, if the contract so provides). See United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810 (Del. Ch. 2007).
The $57,000,000 Reverse Termination Fee represents 3.0% of the $1,900,000,000 aggregate deal value. This percentage is well within the range of 3% to 6% that has become standard in PE buyout transactions. Market data for comparable PE buyouts in the fintech sector over the 2022–2024 period indicates that reverse termination fees have typically ranged from 3.0% to 5.0% of deal value, with the median falling at approximately 3.5%. The 3.0% figure here is on the lower end of this range, reflecting the negotiated outcome between the Parties.
The asymmetry between the VeloPay Termination Fee (4.0%, or $76,000,000) and the HPE Fund IV Reverse Termination Fee (3.0%, or $57,000,000) is a customary feature of PE buyout transactions and is not objectionable under Delaware law. This asymmetry reflects the different risk profiles of the parties: the VeloPay Termination Fee compensates HPE Fund IV for the risk of losing the deal to a competing bidder (a risk that HPE Fund IV does not control), while the Reverse Termination Fee compensates VeloPay for the risk of a buyer financing failure (which is mitigated by the specific performance remedy discussed in Section V). Delaware courts have recognized that different termination fee levels for buyer and seller reflect the different economics and risk allocations in PE buyout transactions and do not render either fee unreasonable.
C. Enforceability of the Limited Guarantee
The Limited Guarantee is a limited recourse obligation of Harrowgate Capital Management IV LLC (the "Guarantor") in favor of VeloPay, pursuant to which the Guarantor guarantees the payment of the Reverse Termination Fee and certain specified enforcement expenses, subject to a cap equal to $57,000,000 (plus up to $5,000,000 in enforcement expenses and costs). The Limited Guarantee is not a guarantee of HPE Fund IV's or Merger Sub's obligation to consummate the Merger generally; rather, it is limited solely to the Reverse Termination Fee obligation and the specified enforcement expenses.
The Limited Guarantee includes the following key provisions:
(i) Cap. The Guarantor's aggregate liability under the Limited Guarantee is capped at $57,000,000 (plus enforcement expenses of up to $5,000,000).
(ii) Non-Recourse. The Limited Guarantee is non-recourse to the limited partners of HPE Fund IV and to any portfolio company, fund, or other affiliate of Harrowgate Capital Management IV LLC (other than HPE Fund IV and Merger Sub).
(iii) Termination. The Limited Guarantee terminates upon the earliest of (a) the Effective Time of the Merger, (b) the valid termination of the Merger Agreement under circumstances that do not give rise to the Reverse Termination Fee obligation, and (c) the date that is sixty (60) days following the valid termination of the Merger Agreement under circumstances that would give rise to the Reverse Termination Fee obligation, if VeloPay has not commenced a proceeding to enforce the Limited Guarantee within such sixty-day period.
(iv) Sole Remedy. VeloPay acknowledges that the Limited Guarantee, together with the specific performance remedy, constitutes VeloPay's sole and exclusive remedy against the Guarantor and its affiliates (other than HPE Fund IV and Merger Sub) in connection with the Merger Agreement and the transactions contemplated thereby.
The Guarantor, Harrowgate Capital Management IV LLC, is the general partner and investment manager of HPE Fund IV, a private equity fund with approximately $6.8 billion in aggregate capital commitments (vintage 2022). Based on publicly available information and information provided by HPE Fund IV's counsel during the due diligence process, HPE Fund IV had approximately $2.4 billion in uncalled capital commitments as of December 31, 2024, and the Guarantor has the right, pursuant to the HPE Fund IV limited partnership agreement, to call capital from the limited partners to fund investments and related obligations. Accordingly, the Guarantor has ample assets and resources to satisfy the $57,000,000 guarantee obligation.
Delaware courts enforce limited guarantees in accordance with their terms, treating them as ordinary contractual obligations subject to standard principles of contract interpretation. See Genuine Parts Co. v. Pinnacle Corporation, C.A. No. 2020-0276-KSJM, 2020 WL 5816668 (Del. Ch. Sept. 30, 2020) (enforcing limited guarantee in M&A context). The Limited Guarantee is a straightforward, well-drafted guarantee instrument that does not present novel enforceability issues.
Conclusion. The Reverse Termination Fee of $57,000,000 (3.0% of deal value) and the Limited Guarantee from Harrowgate Capital Management IV LLC are expected to be fully enforceable under Delaware law. The Reverse Termination Fee is within the standard range for PE buyout transactions, the Limited Guarantee is supported by the Guarantor's ample financial resources, and both instruments are consistent with prevailing market practice and Delaware precedent.
V. Specific Performance
A. Summary of Contractual Terms
Section 9.9 of the Merger Agreement contains a mutual specific performance provision that permits either Party to seek an injunction, specific performance, or other equitable relief to prevent breaches of the Merger Agreement and to enforce specifically the terms and provisions thereof, in addition to (and not in limitation of) any other remedy to which such Party may be entitled at law or in equity.
The specific performance provision is structured as follows:
(i) Mutual Right to Seek Equitable Relief. Each Party acknowledges and agrees that irreparable damage would occur and that monetary damages, even if available, would not be an adequate remedy in the event that any of the provisions of the Merger Agreement are not performed in accordance with their specific terms or are otherwise breached. Accordingly, each Party is entitled to an injunction or injunctions, or any other form of equitable relief, to prevent breaches or threatened breaches of the Merger Agreement and to enforce specifically the terms and provisions of the Merger Agreement, without proof of actual damages and without the necessity of posting a bond or other security as a condition to obtaining such equitable relief.
(ii) VeloPay's Right to Specific Performance of Closing Obligations. Subject to the terms and conditions of the Merger Agreement, VeloPay has the right to seek specific performance of HPE Fund IV's and Merger Sub's obligations to consummate the Merger at the Closing, including the obligation to cause the equity financing to be funded pursuant to the Equity Commitment Letter dated February 14, 2025, in an amount of $1,140,000,000 from Harrowgate Capital Management IV LLC on behalf of HPE Fund IV, provided that (A) all conditions to HPE Fund IV's and Merger Sub's obligation to close set forth in Section 7.2 have been satisfied or waived (other than conditions that by their nature are to be satisfied at the Closing), (B) the debt financing has been funded or will be funded at the Closing if the equity financing is funded at the Closing, and (C) VeloPay has confirmed in writing to HPE Fund IV that it is ready, willing, and able to consummate the Closing.
(iii) HPE Fund IV's Right to Specific Performance. HPE Fund IV has the right to seek specific performance of VeloPay's obligations under the Merger Agreement, including (A) compliance with the no-shop provisions of Section 5.3, (B) compliance with VeloPay's covenants regarding the conduct of business during the interim period set forth in Section 5.1, and (C) VeloPay's obligation to consummate the Merger at the Closing when all conditions to closing set forth in Section 7.3 have been satisfied or waived.
(iv) Waiver of Bond Requirement. Each Party irrevocably waives any requirement for the securing or posting of any bond or other security in connection with any action seeking equitable relief, including specific performance, injunction, or other equitable remedies.
The specific performance provision is a critical element of the Merger Agreement's enforcement framework, particularly from VeloPay's perspective. It provides VeloPay with a remedy beyond the $57,000,000 Reverse Termination Fee in the event HPE Fund IV fails or refuses to close when all conditions have been satisfied. The provision effectively prevents HPE Fund IV from exercising a "walk-away" option by simply paying the Reverse Termination Fee, at least in circumstances where the debt financing remains available and all other closing conditions have been met.
B. Delaware Law Analysis
Delaware's Court of Chancery possesses broad equitable jurisdiction, including the power to grant specific performance of contractual obligations. The Delaware courts have a well-established tradition of enforcing merger agreements through specific performance, and the Court of Chancery regularly considers requests for specific performance in the M&A context.
The general requirements for specific performance under Delaware law are well settled:
(i) the existence of a valid and binding contract between the parties;
(ii) the party seeking performance has complied with, or is ready, willing, and able to comply with, its own obligations under the contract;
(iii) the contract is of a character suitable for specific enforcement (i.e., the terms are sufficiently definite and the subject matter is unique or otherwise not amenable to an adequate monetary remedy); and
(iv) there is no adequate remedy at law (i.e., monetary damages would be insufficient to compensate the injured party for the breach).
In the M&A context, Delaware courts have recognized that merger agreements involve unique transactions that are not readily susceptible to valuation through monetary damages, and that specific performance is frequently the most appropriate remedy for breach of a merger agreement. See Channel Medsystems, Inc. v. Boston Scientific Corp., C.A. No. 2018-0673-AGB (Del. Ch. Dec. 18, 2019) (ordering specific performance of buyer's obligation to close a merger transaction following a dispute regarding the satisfaction of closing conditions); AB Stable VIII LLC v. Maps Hotels & Resorts One LLC, 2020 WL 7024929 (Del. Ch. Nov. 30, 2020), aff'd, 2021 WL 4459338 (Del. Oct. 1, 2021) (conducting extensive analysis of closing conditions before determining whether specific performance was appropriate; ultimately denying specific performance because the buyer established that certain closing conditions had not been satisfied).
The Channel Medsystems decision is particularly instructive. In that case, the Court of Chancery enforced specific performance of the buyer's obligation to close a merger transaction, finding that (i) the merger agreement was a valid and binding contract, (ii) the seller had complied with its obligations, (iii) the closing conditions had been satisfied, and (iv) monetary damages would be inadequate because the merger involved the acquisition of a unique business. The Court rejected the buyer's arguments that it should not be compelled to close and ordered the buyer to consummate the transaction.
The AB Stable decision, by contrast, illustrates the limits of specific performance. In that case, the Court of Chancery conducted an exhaustive 176-page analysis of whether the seller had complied with its obligations (including its interim operating covenants) and whether the closing conditions had been satisfied. The Court ultimately found that the seller had breached its obligation to operate in the ordinary course of business, which excused the buyer's obligation to close and rendered specific performance unavailable. The key takeaway from AB Stable is that specific performance of a buyer's obligation to close is available only if the party seeking performance can demonstrate that all conditions to the buyer's obligation to close have been satisfied or waived.
C. Specific Performance of Equity Financing Commitment
A critical feature of the specific performance provision in the Merger Agreement is VeloPay's right to specifically enforce HPE Fund IV's obligation to cause the equity financing to be funded pursuant to the Equity Commitment Letter. The Equity Commitment Letter, dated February 14, 2025, provides for an equity contribution of $1,140,000,000 from Harrowgate Capital Management IV LLC on behalf of HPE Fund IV, which represents the equity component of the $1,900,000,000 aggregate merger consideration (with the balance to be funded through the committed debt financing).
This is a significant provision from VeloPay's perspective because it prevents HPE Fund IV from "walking away" from the transaction by simply paying the $57,000,000 Reverse Termination Fee in a scenario where all conditions to closing have been satisfied but HPE Fund IV elects not to close for strategic or financial reasons unrelated to the Merger Agreement's closing conditions. Without the specific performance remedy for the equity commitment, VeloPay's sole recourse would be the Reverse Termination Fee, which — at $57,000,000 — represents only 3.0% of the $1,900,000,000 deal value and may be inadequate to compensate VeloPay and its stockholders for the loss of the transaction.
The specific performance remedy for the equity financing commitment is subject to the important proviso that the debt financing must also be available — that is, VeloPay can specifically enforce the equity funding obligation only if the debt financing has been funded or will be funded at the Closing if the equity financing is funded. This is a customary limitation that reflects the practical reality that the Merger cannot be consummated without both the equity and debt components of the financing. If the debt financing fails and cannot be replaced, the specific performance remedy for the equity commitment is not available, and VeloPay's sole monetary remedy is the Reverse Termination Fee.
Delaware courts have enforced specific performance of equity financing commitments in PE buyout transactions. In Channel Medsystems, the Court ordered the buyer to fund its equity commitment and close the transaction. The Hexion/Huntsman litigation (Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008)) also involved a request for specific performance of a buyer's closing obligations in a leveraged buyout, although that case was ultimately resolved through a settlement rather than a final order of specific performance. The availability of specific performance of equity financing commitments is now well established in Delaware practice.
D. Risk Assessment
The specific performance remedy serves as the primary enforcement mechanism for both Parties and interacts with the termination fee and reverse termination fee structure as follows:
For VeloPay (Seller). If all conditions to HPE Fund IV's obligation to close have been satisfied (including the availability of debt financing), VeloPay can seek specific performance of HPE Fund IV's closing obligations, including the equity financing commitment. In this scenario, the Reverse Termination Fee becomes a secondary remedy — VeloPay's primary remedy is an order compelling HPE Fund IV to close. If specific performance is not available (e.g., because the debt financing has failed and cannot be replaced), VeloPay's sole monetary remedy is the $57,000,000 Reverse Termination Fee under the Limited Guarantee.
For HPE Fund IV (Buyer). HPE Fund IV can seek specific performance of VeloPay's obligations, including compliance with the no-shop provisions and VeloPay's obligation to close when all conditions have been satisfied. In the event of a breach of the no-shop or a Change of Recommendation, HPE Fund IV may seek injunctive relief to prevent VeloPay from entering into a competing transaction, and may also terminate the Merger Agreement and collect the $76,000,000 VeloPay Termination Fee.
The specific performance provision is well-drafted and addresses the key scenarios in which specific performance might be sought. The waiver of the bond requirement is a significant practical benefit, as it eliminates a potential barrier to obtaining emergency injunctive relief. The provision is consistent with current Court of Chancery practice, which has generally granted specific performance of merger agreements where the conditions to closing have been satisfied and the party seeking performance has complied with its own obligations.
Conclusion. The specific performance provision set forth in Section 9.9 of the Merger Agreement is well-drafted and expected to be enforceable under Delaware law, consistent with current Chancery precedent. The provision provides meaningful protection to both Parties and serves as an essential complement to the termination fee and reverse termination fee structure. Calderwood & Harkness should be prepared to seek emergency injunctive relief in the Court of Chancery if any circumstance arises during the pre-closing period that threatens the consummation of the Merger.
VI. Material Adverse Effect Definition
A. Summary of Contractual Terms
Section 1.1 of the Merger Agreement defines "Material Adverse Effect" as:
"any event, change, effect, development, condition, circumstance, or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the business, financial condition, or results of operations of the Company and its Subsidiaries, taken as a whole."
For purposes of this definition, VeloPay's subsidiaries include VeloPay Processing LLC (the primary operating subsidiary responsible for transaction processing), VeloPay Canada Inc. (the Canadian operating subsidiary), VeloPay Europe, Unipessoal Lda. (the Portuguese-incorporated European operating subsidiary), VeloPay Fraud intelligence Inc. (the subsidiary responsible for fraud detection and prevention services), and PayStream Gateway LLC (the subsidiary operating VeloPay's payment gateway infrastructure). The Material Adverse Effect definition is measured across VeloPay and all of its subsidiaries "taken as a whole," meaning that adverse developments affecting a single subsidiary may not constitute a Material Adverse Effect if VeloPay and its subsidiaries, viewed on a consolidated basis, have not experienced a material adverse change.
The Material Adverse Effect definition is relevant in two principal contexts within the Merger Agreement:
(i) Closing Condition. Under Section 7.2(a) of the Merger Agreement, HPE Fund IV's and Merger Sub's obligation to consummate the Merger at the Closing is conditioned upon the accuracy of VeloPay's representations and warranties as of the Closing Date, subject to a "Material Adverse Effect" qualification — that is, HPE Fund IV is not obligated to close if VeloPay's representations and warranties are not true and correct (disregarding all "Material Adverse Effect" qualifications contained therein) except where the failure to be true and correct has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
(ii) Stand-Alone MAE Condition. Under Section 7.2(c) of the Merger Agreement, HPE Fund IV's and Merger Sub's obligation to close is separately conditioned upon the absence of any Material Adverse Effect since the date of the Merger Agreement that is continuing as of the Closing Date. This is the "no-MAE" closing condition, which provides HPE Fund IV with the right to refuse to close if a Material Adverse Effect has occurred between signing (March 18, 2025) and the Closing.
B. Carve-Outs from the Material Adverse Effect Definition
The Material Adverse Effect definition is subject to seven categories of carve-outs (the "MAE Carve-Outs"), which exclude specified types of events from the definition. If an event falls within one of these carve-out categories, it cannot be relied upon by HPE Fund IV as the basis for a Material Adverse Effect claim, unless (in the case of certain carve-outs) the event has a disproportionate impact on VeloPay relative to similarly situated companies in the fintech or payments industry. The MAE Carve-Outs are as follows:
(i) Pandemics. Any event, change, effect, development, condition, circumstance, or occurrence arising out of, resulting from, or attributable to any epidemic, pandemic, or disease outbreak (including COVID-19 and any mutation or recurrence thereof, and any future epidemic or pandemic), including any governmental or regulatory actions taken in response thereto (including quarantine, "shelter in place," "stay at home," workforce reduction, social distancing, shutdown, closure, sequester, or similar orders, restrictions, or measures), except to the extent such event, change, effect, development, condition, circumstance, or occurrence has had a materially disproportionate adverse impact on the Company and its Subsidiaries, taken as a whole, relative to other participants in the fintech or payments industry.
(ii) War. Any event, change, effect, development, condition, circumstance, or occurrence arising out of, resulting from, or attributable to any outbreak or escalation of hostilities, war (whether or not declared), military action, armed conflict, terrorism, sabotage, cyberattack (to the extent constituting an act of war or terrorism), or any other act of war, except to the extent such event has had a materially disproportionate adverse impact on the Company and its Subsidiaries, taken as a whole, relative to other participants in the fintech or payments industry.
(iii) General Economic or Market Conditions. Any change in general economic or market conditions (including changes in interest rates, exchange rates, commodity prices, credit markets, capital markets, or securities markets generally), except to the extent such change has had a materially disproportionate adverse impact on the Company and its Subsidiaries, taken as a whole, relative to other participants in the fintech or payments industry.
(iv) Industry-Wide Changes. Any change, event, or development generally affecting the fintech or payments industry, except to the extent such change, event, or development has had a materially disproportionate adverse impact on the Company and its Subsidiaries, taken as a whole, relative to other participants in the fintech or payments industry.
(v) Changes in Law or GAAP. Any change in applicable law, regulation, or governmental policy, or any change in generally accepted accounting principles ("GAAP") or the interpretation or enforcement thereof, except to the extent such change has had a materially disproportionate adverse impact on the Company and its Subsidiaries, taken as a whole, relative to other participants in the fintech or payments industry.
(vi) Failure to Meet Projections. Any failure by the Company or any of its Subsidiaries to meet any internal or published projection, forecast, estimate, or prediction in respect of revenues, earnings, or other financial or operating metrics for any period (it being understood and agreed that the facts and circumstances underlying any such failure may be taken into account in determining whether a Material Adverse Effect has occurred, to the extent such facts and circumstances are not otherwise excluded from the definition of Material Adverse Effect by another carve-out).
(vii) Announcement or Pendency of the Transaction. Any event, change, effect, development, condition, circumstanc

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

MEMORANDUM

Record

Parties

Dates

Amounts