1003-00004 · Harrowgate Private Equity Fund IV LP · Diligence/Tax

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MEMORANDUM

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED WORK PRODUCT

To:

Oliver Mackenzie, Responsible Partner, M&A, Calderwood & Harkness LLP

Harrison Wexford, Billing Partner, M&A, Calderwood & Harkness LLP

Ryan Kowalski, Lead Associate, M&A, Calderwood & Harkness LLP

Megan Chu, Working Associate, M&A, Calderwood & Harkness LLP

Jonah Whitfield, Principal, Harrowgate Capital Partners LLC

Rebecca Talmadge, Partner, Harrowgate Capital Partners LLC

From:

Sylvia Hartwell, Specialist Partner, Tax, Calderwood & Harkness LLP

Date: March 28, 2025

Re: Federal Income Tax Analysis of Reverse Triangular Merger Structure — Acquisition of Pennfield Holdings, Inc. (Nasdaq: PNFD) by Harrowgate Private Equity Fund IV LP (Project Summit)

Matter No.: 1003-00004

CONFIDENTIALITY LEGEND: This memorandum constitutes attorney-client privileged and attorney work product. It is prepared for the exclusive use of Harrowgate Private Equity Fund IV LP and its affiliates and is not intended for distribution to, or reliance by, any third party without the prior written consent of Calderwood & Harkness LLP. Any unauthorized disclosure, reproduction, or distribution of this memorandum, in whole or in part, is strictly prohibited.

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I. Executive Summary

This memorandum sets forth our analysis of the principal federal income tax considerations arising from the proposed take-private acquisition of Pennfield Holdings, Inc. ("Pennfield" or the "Target"), a publicly traded Delaware corporation listed on the Nasdaq Global Select Market under the ticker symbol PNFD, by Harrowgate Private Equity Fund IV LP ("HPE Fund IV" or the "Sponsor"). The acquisition will be structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law ("DGCL"), whereby Pinnacle Merger Sub, Inc. ("Merger Sub"), a newly formed, wholly owned Delaware corporation subsidiary of HPE Fund IV (Employer Identification Number ("EIN"): 93-4081562), will merge with and into Pennfield (EIN: 82-4917305), with Pennfield surviving as a wholly owned subsidiary of HPE Fund IV (the "Merger").

The aggregate merger consideration is $980,000,000. The per-share consideration to be received by Pennfield's public stockholders is $15.95 in cash, calculated on a fully diluted basis reflecting 61,450,000 shares outstanding (comprised of approximately 58,200,000 basic shares of common stock and approximately 3,250,000 shares underlying outstanding stock options and restricted stock units ("RSUs")).

The sources of funding for the Merger are as follows: (a) $490,000,000 in senior secured Term Loan B credit facilities provided by Falconer National Bank, N.A. and arranged by Dunmore Capital Markets LLC; (b) $340,000,000 in total equity, consisting of $258,500,000 in net equity from HPE Fund IV, $60,000,000 from Ashford Growth Partners LP as a co-investor, and $21,500,000 in management rollover equity from three members of Pennfield's senior management team; and (c) $90,000,000 of cash on Pennfield's balance sheet available at closing.

Set forth below is a summary of our principal federal income tax conclusions, each of which is discussed in detail in the sections that follow:

1. Taxable Acquisition. The Merger will be treated as a fully taxable acquisition for federal income tax purposes and will not qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). The transaction fails to satisfy the requirements of Section 368(a)(2)(E) (reverse triangular merger reorganization) because (i) the merger consideration is overwhelmingly cash, with only approximately 2.2% equity continuity attributable to the management rollover, which is far below any recognized continuity of interest threshold; and (ii) HPE Fund IV is a limited partnership and cannot issue "voting stock" as required by the statute.

2. Public Stockholder Gain or Loss Recognition. Each Pennfield public stockholder receiving the $15.95 per-share cash consideration will recognize gain or loss equal to the difference between the cash received and the stockholder's adjusted tax basis in their Pennfield common stock. The character of such gain or loss will be capital (long-term or short-term depending on the stockholder's holding period) for stockholders who hold their shares as capital assets.

3. Tax-Deferred Management Rollover. The management rollover participants — Catherine Langford (Chief Executive Officer), Derek Simmons (Chief Financial Officer), and Maxwell Dunn (Chief Operating Officer) — can achieve tax-deferred treatment on their respective rollover contributions if the rollover is properly structured under either Section 351 of the Code (if the post-closing holding entity is a corporation) or Section 721 of the Code (if the post-closing holding entity is a partnership or LLC treated as a partnership). We recommend the partnership/LLC structure for the reasons detailed in Section V.E below.

4. Section 338(h)(10) Election Not Available. A Section 338(h)(10) election to treat the stock acquisition as a deemed asset acquisition is not available for this transaction. The conditions for such an election are not met in the context of a take-private merger of a widely held public company. A detailed analysis is set forth in a companion memorandum dated March 29, 2025.

5. Equity Commitment and Co-Investment Structures. The equity commitment letter from HPE Fund IV and the co-investment arrangement with Ashford Growth Partners LP do not create adverse federal income tax consequences for HPE Fund IV, Ashford Growth Partners, or the post-closing entity. The contributions are straightforward capital contributions subject to nonrecognition treatment.

The conclusions set forth herein are subject to the assumptions, qualifications, and open items described throughout this memorandum. Several items require further analysis prior to the signing of the definitive Merger Agreement, currently targeted for April 7, 2025, as described in Section XV below.

II. Transaction Structure Overview

A. Description of Parties

Harrowgate Private Equity Fund IV LP (HPE Fund IV). HPE Fund IV is a Delaware limited partnership formed for the purpose of making private equity investments in middle-market companies across a range of industries, with a particular emphasis on consumer, retail, healthcare, and business services sectors. HPE Fund IV's general partner is Harrowgate Capital Partners IV GP LLC, a Delaware limited liability company. The investment manager of the Fund is Harrowgate Capital Partners LLC, a Delaware limited liability company. HPE Fund IV has aggregate committed capital of approximately $4.8 billion (2023 vintage) and is one of four active funds managed by the Harrowgate platform, which has firm-wide assets under management of approximately $14.2 billion. HPE Fund IV's principal office is located at 1200 Market Street, Suite 3100, Wilmington, Delaware 19801. HPE Fund IV's EIN is 87-2263148. For purposes of this memorandum, unless the context indicates otherwise, references to "HPE Fund IV" include Harrowgate Capital Partners IV GP LLC in its capacity as general partner.

Pinnacle Merger Sub, Inc. (Merger Sub). Merger Sub is a newly formed Delaware corporation organized solely for the purpose of effecting the Merger. Merger Sub is, and at all times prior to the effective time of the Merger will be, a direct, wholly owned subsidiary of HPE Fund IV (or of a holding entity owned by HPE Fund IV, depending on the final post-closing holding structure). The sole incorporator of Merger Sub is Jonah Whitfield, Principal at Harrowgate Capital Partners LLC. Merger Sub's EIN is 93-4081562, and its registered office is located at 1200 Market Street, Suite 3100, Wilmington, Delaware 19801. Merger Sub has not engaged in any business activities other than those incidental to its formation and the transactions contemplated by the Merger Agreement. At the effective time of the Merger, Merger Sub will cease to exist, having merged with and into Pennfield.

Pennfield Holdings, Inc. (Pennfield or Target). Pennfield is a Delaware corporation that is publicly traded on the Nasdaq Global Select Market under the ticker symbol PNFD (CUSIP: 708234109). Pennfield is a specialty retailer focused on outdoor lifestyle, sporting goods, and adventure apparel, operating 187 company-owned stores and 22 outlet locations across 34 states. The company employs approximately 8,400 individuals. Pennfield's corporate headquarters are located at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202. Pennfield's EIN is 82-4917305. Pennfield operates on a fiscal year ending January 31 (a retail fiscal calendar). For its most recently completed fiscal year ended January 31, 2025 ("FY 2024"), Pennfield reported revenue of $1.62 billion, EBITDA of $142 million, and net income of $54.3 million, in each case as reported in Pennfield's Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Ashford Growth Partners LP (Ashford or Co-Investor). Ashford Growth Partners LP is a Delaware limited partnership that will participate in the transaction as a co-investor alongside HPE Fund IV. Ashford has committed $60,000,000 to the acquisition pursuant to the Co-Investment Agreement described below. Ashford's principal office is located at 150 North Riverside Plaza, Suite 2200, Chicago, Illinois 60606. The primary contact for Ashford is David Nakamura, Partner. Ashford is a growth-oriented private equity fund with a track record of investing alongside larger sponsors in consumer-facing transactions.

B. Merger Mechanics

The Merger will be structured as a reverse triangular merger pursuant to Section 251 of the DGCL. The key mechanics are as follows:

(a) Merger of Merger Sub with and into Pennfield. At the effective time of the Merger, Pinnacle Merger Sub, Inc. will merge with and into Pennfield Holdings, Inc. Pennfield will be the surviving corporation in the Merger and will continue its separate corporate existence as a wholly owned subsidiary of HPE Fund IV (or of the post-closing holding entity, as applicable). The separate corporate existence of Merger Sub will cease upon consummation of the Merger.

(b) Treatment of Public Stockholder Shares. Each share of Pennfield common stock issued and outstanding immediately prior to the effective time of the Merger (other than (i) shares owned by HPE Fund IV, Merger Sub, or any of their respective wholly owned subsidiaries, (ii) shares subject to the management rollover described below, and (iii) dissenting shares held by stockholders who have properly exercised and perfected their appraisal rights under Section 262 of the DGCL and have not withdrawn or otherwise lost such rights) will be converted into the right to receive $15.95 per share in cash, without interest (the "Per-Share Merger Consideration").

(c) Treatment of Merger Sub Shares. At the effective time, each share of common stock of Merger Sub issued and outstanding immediately prior to the effective time will be converted into one share of common stock of the surviving corporation. Following the Merger, HPE Fund IV (or the post-closing holding entity) will hold all outstanding shares of Pennfield.

(d) Treasury Shares and Acquirer-Owned Shares. Any shares held in the treasury of Pennfield or owned by HPE Fund IV, Merger Sub, or any of their respective wholly owned subsidiaries immediately prior to the effective time will be cancelled without payment of any consideration.

(e) Dissenting Shares. Shares held by stockholders who properly exercise and perfect appraisal rights under DGCL Section 262 will not be converted into the right to receive the Per-Share Merger Consideration, but instead will be entitled to receive the fair value of such shares as determined by the Delaware Court of Chancery. If any stockholder who demands appraisal subsequently withdraws such demand or fails to perfect appraisal rights, such stockholder's shares will be treated as though they were converted into the right to receive the Per-Share Merger Consideration as of the effective time.

(f) Stockholder Approval. The Merger will be submitted to a vote of Pennfield's stockholders and will require the affirmative vote of a majority of the outstanding shares of Pennfield common stock entitled to vote thereon, in accordance with DGCL Section 251 and Pennfield's certificate of incorporation and bylaws.

(g) Timing. The estimated closing date for the Merger is June 30, 2025, subject to satisfaction or waiver of all closing conditions, including stockholder approval, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), and the absence of any restraining order or injunction prohibiting the consummation of the Merger. The outside date for the Merger, beyond which either party may terminate the Merger Agreement if closing has not occurred, is September 30, 2025 (the "Outside Date").

C. Sources and Uses Summary (Tax-Relevant)

For purposes of the federal income tax analysis set forth in this memorandum, the relevant sources and uses of funds are summarized in the following table:

Sources of Funds

Uses of Funds

The revolving credit facility of $150,000,000 (bearing interest at SOFR + 350 basis points) is expected to be undrawn at closing but available to Pennfield as a post-closing working capital facility. From a tax perspective, the revolver does not create interest expense until drawn and is therefore not included in the closing sources analysis, but it is relevant to the post-closing Section 163(j) interest deduction limitation analysis set forth in Section XI.A below.

III. Federal Income Tax Classification of the Merger

The threshold federal income tax question presented by the Merger is whether the reverse triangular merger constitutes a taxable acquisition or a tax-free reorganization. As set forth below, we conclude that the Merger will be treated as a fully taxable acquisition for federal income tax purposes.

A. Taxable Transaction vs. Tax-Free Reorganization Analysis

Section 368 Reorganization Overview. The Code provides for nonrecognition treatment in certain corporate acquisitions that satisfy the requirements of one or more of the reorganization provisions set forth in Section 368(a)(1). The relevant provision for a reverse triangular merger is Section 368(a)(1)(A) (statutory merger or consolidation), as applied through Section 368(a)(2)(E), which extends reorganization treatment to certain reverse subsidiary mergers. Section 368(a)(2)(E) was enacted to accommodate acquisitions in which the target survives as a subsidiary of the acquiring corporation, which is the structural form employed here.

Requirements of Section 368(a)(2)(E). For a reverse triangular merger to qualify as a reorganization under Section 368(a)(2)(E), the following requirements must be satisfied:

(i) The transaction must otherwise qualify as a statutory merger or consolidation under applicable state law and under Section 368(a)(1)(A);

(ii) After the transaction, the surviving corporation (here, Pennfield) must hold "substantially all" of its properties and the properties of the merged corporation (here, Merger Sub);

(iii) In the transaction, the former stockholders of the surviving corporation (here, Pennfield's public stockholders) must exchange, for voting stock of the controlling corporation (here, HPE Fund IV or an entity that could serve as the "controlling corporation"), an amount of stock of the surviving corporation constituting "control" within the meaning of Section 368(c); and

(iv) The "control" requirement under Section 368(c) requires ownership of at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock.

Application to the Proposed Merger. We analyze each of the foregoing requirements as applied to the proposed transaction:

Substantially All Properties. After the Merger, Pennfield (the surviving corporation) will hold substantially all of its pre-merger properties as well as any properties held by Merger Sub (which are de minimis, as Merger Sub was newly formed and capitalized solely for the purpose of the transaction). This requirement would be satisfied.

Voting Stock Requirement — Failure. The core deficiency in the reorganization analysis lies in the nature of the merger consideration and the identity of the acquiring entity. The merger consideration paid to Pennfield's public stockholders is overwhelmingly cash — approximately $908.5 million in cash out of $980 million in total equity value, representing approximately 97.8% of the aggregate consideration. The only equity component is the $21.5 million management rollover, which represents approximately 2.2% of total equity value.

Under Section 368(a)(2)(E), the former stockholders of Pennfield must exchange, in the transaction, an amount of Pennfield stock constituting "control" (80%) solely for "voting stock" of the controlling corporation. This requirement fails on multiple independent grounds:

First, HPE Fund IV is a Delaware limited partnership, not a corporation. Limited partnership interests are not "stock," and a limited partnership cannot issue "voting stock" as required by Section 368(a)(2)(E). The Code's reorganization provisions are premised on corporate transactions, and the use of partnership equity as consideration cannot satisfy the statutory requirements. See Treas. Reg. § 1.368-2(b)(1) (requiring that the acquiring entity be a corporation for purposes of the reorganization provisions). Even if the post-closing holding entity were interposed as a corporation, the consideration actually received by the vast majority of Pennfield stockholders is cash, not stock of any entity.

Second, even if the partnership characterization issue were set aside and the rollover equity were treated as an exchange of Pennfield stock for equity of the controlling entity, the approximately 2.2% equity continuity falls dramatically short of the 80% threshold required by Section 368(c). The Service has consistently held that the former stockholders of the surviving corporation must exchange stock representing "control" for voting stock of the acquiring entity; here, only 2.2% of Pennfield's equity (by value) is being exchanged for equity interests rather than cash.

Third, even under the broader "continuity of interest" standard (discussed in Section III.B below), which applies as a judicial and administrative overlay to all reorganization provisions, 2.2% continuity is far below any recognized threshold. Revenue Procedure 77-37, 1977-1 C.B. 568, establishes a 40% continuity threshold for advance ruling purposes, and while case law has sustained reorganization treatment at levels below 40%, no court or administrative guidance has sustained a continuity of interest as low as 2.2%.

Control Requirement — Failure. For the reasons stated above, the "control" requirement of Section 368(a)(2)(E), read together with Section 368(c), is not satisfied.

Conclusion. The Merger does not qualify as a reorganization under Section 368(a)(1)(A) by reason of Section 368(a)(2)(E) or under any other provision of Section 368. The transaction will be treated as a fully taxable acquisition for federal income tax purposes, with consequences as described in the remaining sections of this memorandum.

B. Continuity of Interest Doctrine

The judicial continuity of interest ("COI") doctrine, codified in Treasury Regulations Section 1.368-1(e), requires that in connection with a reorganization, a substantial part of the value of the proprietary interests in the target be preserved in the form of a proprietary interest in the reorganized entity. The purpose of the COI requirement is to ensure that a reorganization effects only a readjustment of continuing interests in property under modified corporate forms, rather than a sale of property for cash.

Under the Treasury Regulations, COI is measured by reference to the value of the consideration received by the target stockholders that consists of stock or other proprietary interests in the issuing corporation, relative to the total value of consideration received. See Treas. Reg. § 1.368-1(e)(1)(i). The regulations confirm that the COI requirement is not satisfied if the consideration received by the target stockholders consists overwhelmingly of cash or other non-equity consideration.

In this transaction, even under the most lenient judicial standard, the 2.2% equity continuity ($21.5 million of $980 million in total equity value) is far below any recognized threshold for satisfying the COI requirement. Courts have sustained reorganization treatment in certain cases with continuity percentages in the range of 25% to 40%, and in exceptional cases as low as approximately 20%, but no authority supports the proposition that a 2.2% equity continuity would satisfy the COI requirement. See, e.g., John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935) (38% continuity upheld); Kass v. Commissioner, 60 T.C. 218 (1973), aff'd 491 F.2d 749 (3d Cir. 1974) (approximately 50% continuity upheld). The Service's advance ruling threshold of 40% under Revenue Procedure 77-37 provides further administrative guidance, though it is not a statutory minimum.

Moreover, the management rollover equity is not structured as an exchange of Pennfield stock for acquirer stock within the mechanics of the merger itself. Rather, it is structured as a separately negotiated contribution and rollover arrangement pursuant to individual Rollover Agreements between HPE Fund IV and each of the three management participants (Catherine Langford, Derek Simmons, and Maxwell Dunn). The rollover participants are not receiving "stock" of the acquiring corporation (HPE Fund IV is not a corporation) in exchange for their Pennfield shares; they are receiving limited partnership interests or LLC interests in the post-closing holding entity. This structural feature further undermines any argument that the COI requirement is satisfied.

We therefore confirm that the Merger fails the continuity of interest requirement by a wide margin, and this conclusion independently supports the treatment of the transaction as a fully taxable acquisition.

C. Step Transaction and Substance Over Form Considerations

We have considered whether the Internal Revenue Service could invoke the step transaction doctrine, the substance over form doctrine, or related judicial doctrines to recharacterize any aspect of the proposed transaction in a manner that would alter the tax consequences described herein.

Step Transaction Doctrine. The step transaction doctrine allows the IRS (and the courts) to treat a series of formally separate steps as a single integrated transaction if the steps are in substance so interdependent that the legal relations created by one step would be fruitless without a completion of the remaining steps. See Commissioner v. Clark, 489 U.S. 726 (1989); Penrod v. Commissioner, 88 T.C. 1415 (1987). In the present transaction, the principal steps are (i) the formation and capitalization of Merger Sub, (ii) the execution of the merger, (iii) the payment of cash consideration to public stockholders, and (iv) the rollover of management equity.

We note that the Rollover Agreements are separately negotiated agreements between HPE Fund IV and each of the three management participants, and are dated April 7, 2025 — contemporaneous with the execution of the definitive Merger Agreement. The Rollover Agreements are, however, clearly interrelated with and contingent upon the consummation of the Merger, and the step transaction doctrine would likely treat the rollover and the Merger as a single integrated transaction. This integration, however, does not change the tax analysis: even if all steps are collapsed into a single transaction, the aggregate consideration to all former Pennfield stockholders remains approximately 97.8% cash and 2.2% equity, which is insufficient to qualify the transaction as a reorganization under Section 368.

The step transaction doctrine typically is invoked by the IRS to recharacterize purportedly tax-free transactions as taxable, or to collapse a series of steps that artificially create nonrecognition treatment. Here, the transaction is already structured as a taxable acquisition, and there is no risk that the step transaction doctrine would convert a taxable acquisition into a tax-free reorganization. The opposite recharacterization — i.e., the IRS treating a purported tax-free exchange as taxable — is the more common application of the doctrine and is not relevant here.

Substance Over Form. The substance over form doctrine permits the IRS to disregard the form of a transaction and instead tax the parties based on the economic substance of their arrangement. See Gregory v. Helvering, 293 U.S. 465 (1935). In this case, the substance of the transaction is a leveraged buyout in which a private equity sponsor acquires all of the outstanding equity of a public company for cash, funded by a combination of debt financing and sponsor equity, with a small management rollover component. This economic substance is fully consistent with the form of the transaction as a taxable stock acquisition effected through a reverse triangular merger. No recharacterization risk under the substance over form doctrine is identified.

We note that the management rollover, while structured as a contribution of shares in exchange for equity interests in the post-closing entity, could potentially be recharacterized by the IRS as a sale if the rollover participants were viewed as receiving economic value equivalent to cash in exchange for their shares. However, as discussed in Section V below, the rollover participants will receive only equity interests (not cash or cash-equivalent consideration) in the post-closing entity, and the rollover is structured to satisfy the requirements of Section 721 (or Section 351, as applicable) for nonrecognition treatment. The risk of recharacterization of the rollover as a taxable sale is addressed in the disguised sale analysis in Section V.C below.

IV. Tax Treatment of Pennfield Public Stockholders

A. Gain or Loss Recognition

Each holder of Pennfield common stock (other than management rollover participants with respect to their rollover shares, and dissenting stockholders who perfect their appraisal rights) who receives the $15.95 per-share cash merger consideration in the Merger will be treated as having sold their shares in a taxable exchange. Pursuant to Sections 1001(a) and (b) of the Code, each such stockholder will recognize gain or loss equal to the difference between the amount realized ($15.95 per share) and the stockholder's adjusted tax basis in each share of Pennfield common stock surrendered in the Merger.

Gain or loss will be computed on a share-by-share, lot-by-lot basis for stockholders who acquired their shares at different times or at different prices. Each identifiable lot of shares (as determined under the stockholder's chosen cost basis method, such as specific identification, FIFO, or average cost for shares held through a mutual fund) is treated as a separate unit for purposes of the gain or loss computation.

The amount realized by each stockholder will be $15.95 per share in cash. No additional consideration is payable to stockholders, and no contingent consideration, earnout, or escrow holdback is applicable to public stockholders under the terms of the Merger Agreement. The simplicity of the all-cash consideration structure provides certainty to stockholders as to the tax consequences of the Merger.

B. Character of Gain or Loss

For stockholders who hold their Pennfield shares as "capital assets" within the meaning of Section 1221 of the Code (which encompasses property held by a taxpayer other than inventory, property held for sale to customers, depreciable or real property used in a trade or business, and certain other categories), gain or loss recognized in the Merger will be capital in nature.

The applicable rate of federal income taxation on any capital gain recognized by an individual stockholder depends upon the stockholder's holding period for the shares surrendered:

(a) Long-term capital gain. If the stockholder held the Pennfield shares for more than one year as of the effective date of the Merger, any gain recognized will be long-term capital gain. Under current law (as of the date of this memorandum), the maximum federal income tax rate on long-term capital gains recognized by individual taxpayers is 20%. In addition, individual taxpayers with modified adjusted gross income exceeding certain thresholds ($200,000 for single filers, $250,000 for married filing jointly) are subject to the 3.8% net investment income tax ("NIIT") under Section 1411 of the Code, resulting in a combined maximum federal rate of 23.8% on long-term capital gains.

(b) Short-term capital gain. If the stockholder held the Pennfield shares for one year or less as of the effective date of the Merger, any gain recognized will be short-term capital gain, which is taxed at ordinary income rates. The maximum federal ordinary income tax rate for individual taxpayers is currently 37%, plus the 3.8% NIIT for applicable taxpayers, resulting in a combined maximum federal rate of 40.8%.

(c) Capital losses. Capital losses recognized by individual taxpayers may be used to offset capital gains dollar-for-dollar, and any excess capital losses may be deducted against ordinary income up to $3,000 per year (for individuals), with unused capital losses carried forward to subsequent taxable years.

Corporate stockholders will recognize capital gain or loss on the exchange of their Pennfield shares, with such gain or loss included in the corporation's taxable income and taxed at the applicable corporate rate (currently 21%). Corporate stockholders are not subject to the NIIT.

We note that the qualified dividend treatment analysis is not applicable to the Merger consideration. The $15.95 per-share payment to stockholders is structured as merger consideration received in exchange for their shares — that is, an amount received in a sale or exchange under Section 1001 — and not as a dividend distribution from Pennfield to its stockholders. Accordingly, the qualified dividend tax rate under Section 1(h)(11) is not relevant.

C. Withholding and Reporting

Information Reporting. Payments of the Per-Share Merger Consideration to stockholders will be reported by the paying agent on IRS Form 1099-B (Proceeds from Broker and Barter Exchange Transactions). We understand that Marlowe Asset Management Stock Transfer, Inc. (contact: Daniel Roth) is serving as Pennfield's transfer agent and will act as the paying agent for the Merger consideration, or such duties may be assigned to another institution as designated in the Merger Agreement. The paying agent will report to both the recipient stockholder and the IRS the gross proceeds received by each stockholder in the Merger, as required by Section 6045 of the Code and the regulations thereunder. For "covered securities" (generally, shares acquired after January 1, 2011, and held in brokerage accounts), the paying agent or broker will also report the stockholder's adjusted basis and the character of any gain or loss (long-term or short-term) to the IRS.

Backup Withholding. Under the backup withholding rules set forth in Section 3406 of the Code, the paying agent is required to withhold backup withholding tax at a rate of 24% from the merger consideration payable to any stockholder who (i) fails to furnish a correct taxpayer identification number ("TIN") to the paying agent, (ii) is notified by the IRS that the TIN furnished is incorrect, (iii) fails to certify under penalties of perjury that the TIN furnished is correct and that the stockholder is not subject to backup withholding, or (iv) is otherwise subject to backup withholding. Stockholders should be instructed to complete and submit an IRS Form W-9 (or applicable substitute form) to the paying agent in connection with their submission of the letter of transmittal. Backup withholding is not an additional tax; amounts withheld may be credited against the stockholder's federal income tax liability and may be refundable if the withholding exceeds the stockholder's tax liability.

Foreign Stockholders / FIRPTA. The tax treatment of foreign stockholders (i.e., nonresident alien individuals, foreign corporations, and other non-U.S. persons) receiving the merger consideration, including the application of the Foreign Investment in Real Property Tax Act ("FIRPTA"), is discussed in Section VIII below.

Dissenting Stockholders. Stockholders who properly exercise and perfect their appraisal rights under DGCL Section 262 will not receive the $15.95 per-share merger consideration but will instead receive such consideration as the Delaware Court of Chancery determines to be the "fair value" of their shares. The amount received by a dissenting stockholder in a judicially determined appraisal proceeding (other than any interest component) will be treated as received in exchange for their Pennfield shares, and the stockholder will recognize gain or loss equal to the difference between the fair value payment and their adjusted basis in the shares. Any interest awarded by the Court of Chancery on the appraised value of the shares for the period between the effective time of the Merger and the payment date will be taxable to the stockholder as ordinary income.

D. Section 302 Analysis (Not Applicable)

We have considered whether the cash merger consideration paid to Pennfield public stockholders could be recharacterized as a distribution under Section 301 of the Code (and thus potentially taxable as a dividend to the extent of Pennfield's earnings and profits), rather than as an amount received in exchange for stock.

Under Section 302(a) and (b) of the Code, a redemption of stock by a corporation is treated as a payment in exchange for stock (rather than as a Section 301 distribution) if the redemption satisfies one of several tests, including a complete termination of the stockholder's interest under Section 302(b)(3). In the context of the Merger, the cash consideration received by public stockholders is properly characterized as received "in exchange for" their stock, resulting in gain or loss recognition under Sections 1001 and 1031 principles (as applicable to corporate reorganizations and taxable mergers). More precisely, the Merger is not a "redemption" under Section 302 but rather a taxable exchange of stock for cash in connection with a merger governed by Section 1001 and the principles of Section 331 (to the extent applicable by analogy to a complete acquisition).

No Section 302 recharacterization risk exists because Pennfield is being entirely acquired; no continuing stockholder interest will exist for any public holder post-closing (other than the three management rollover participants, whose treatment is separately addressed). The complete elimination of public stockholder interests in Pennfield ensures that the exchange treatment is clear and unambiguous.

V. Tax Treatment of Management Rollover Equity

A. Overview of Rollover Structure

Three members of Pennfield's senior management team have agreed to "roll over" a portion of their existing equity in Pennfield in connection with the Merger, in exchange for equity interests in the post-closing entity. The rollover participants and their respective rollover amounts are as follows:

The total management rollover of $21,500,000 represents approximately 2.2% of the $980,000,000 aggregate equity value of the transaction.

The mechanics of the rollover are governed by individual Rollover Agreements to be entered into between HPE Fund IV and each management participant, with an execution date of April 7, 2025 (contemporaneous with the signing of the definitive Merger Agreement). Under each Rollover Agreement, the management participant agrees to contribute a specified number of Pennfield shares (having an aggregate fair market value, at $15.95 per share, equal to the participant's rollover amount) to the post-closing holding entity. In exchange, the management participant receives equity interests (limited partnership interests or LLC membership interests, depending on the final entity structure) in the post-closing holding entity.

The remaining Pennfield shares held by each management participant — that is, all shares not subject to the rollover — are treated identically to shares held by all other public stockholders and are cashed out at $15.95 per share in the Merger. The cash-out shares generate gain or loss recognition to each management participant under the same principles applicable to all public stockholders, as described in Section IV above.

B. Tax-Deferred Rollover Treatment — Section 351 Analysis

If the post-closing holding entity is structured as a corporation (or an entity treated as a corporation for federal income tax purposes), the management rollover is intended to qualify as a tax-deferred contribution under Section 351 of the Code. Section 351(a) provides, in relevant part, that no gain or loss shall be recognized if one or more persons transfer property to a corporation solely in exchange for stock of such corporation, and immediately after the exchange, the transferor or transferors are in "control" (within the meaning of Section 368(c)) of the transferee corporation.

Control Requirement. Under Section 368(c), "control" means the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. In the context of the Merger, the relevant "exchange" for Section 351 purposes encompasses all transfers to the post-closing corporate entity made as part of the same plan or arrangement. If HPE Fund IV contributes cash (or property) and the management participants contribute Pennfield shares to the same corporate entity as part of a single integrated plan, all transferors are treated as a single "transferor group" for purposes of the 80% control test.

Application. HPE Fund IV (together with Ashford Growth Partners) will own approximately 97.8% of the equity of the post-closing entity, and the management rollover participants will own approximately 2.2%. Together, the transferor group will own 100% of the post-closing entity immediately after the exchange, which easily satisfies the 80% control test. Assuming no "boot" (i.e., cash or other non-stock consideration) is received by the rollover participants in connection with the exchange, the Section 351 requirements are satisfied, and the following tax consequences would apply:

(i) The management rollover participants would recognize no gain or loss on the contribution of their Pennfield shares to the post-closing corporate entity;

(ii) Each management participant's adjusted basis in the equity received in the post-closing entity would equal the participant's adjusted basis in the Pennfield shares contributed (a "substituted basis" under Section 358(a));

(iii) The post-closing entity's basis in the contributed Pennfield shares would equal the management participant's adjusted basis in such shares immediately before the contribution (a "transferred basis" under Section 362(a)); and

(iv) The management participant's holding period in the equity of the post-closing entity would include the holding period of the contributed Pennfield shares (a "tacked" holding period under Section 1223(1)), provided the Pennfield shares were capital assets in the hands of the participant.

Potential Issues. The primary concern with the Section 351 analysis is the "solely for stock" requirement. If any management participant receives anything other than stock of the post-closing corporate entity (for example, if the Rollover Agreement provides for a cash payment, a promissory note, or any other consideration in addition to equity), the participant would recognize gain to the extent of the boot received under Section 351(b). It is critical that the Rollover Agreements be drafted to ensure that the only consideration received by each management participant in exchange for the contributed Pennfield shares is equity of the post-closing entity.

Additionally, the "immediately after the exchange" requirement under Section 351(a) must be satisfied, meaning that the transferor group must be in control of the post-closing entity immediately after the exchange. Because HPE Fund IV and Ashford will together contribute substantially all of the equity capital, and the management participants will contribute their rollover shares, all as part of the same integrated plan, this requirement should be satisfied without difficulty.

C. Tax-Deferred Rollover — Section 721 Analysis (Partnership/LLC Alternative)

If the post-closing holding entity is structured as a partnership or as an LLC that is treated as a partnership for federal income tax purposes (which we recommend, as discussed in Section V.E below), the management rollover would be governed by Section 721 of the Code rather than Section 351.

Section 721(a) provides, in relevant part, that no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership. This rule is significantly more flexible than Section 351 in several important respects:

(i) No "Control" Requirement. Unlike Section 351, Section 721 does not impose any ownership percentage threshold that must be satisfied by the contributing partner or group of partners. A single partner contributing property in exchange for even a de minimis partnership interest qualifies for nonrecognition treatment. This eliminates any concern about the management participants' relatively small 2.2% ownership percentage.

(ii) Broad Scope of Nonrecognition. Section 721 applies to all contributions of property to a partnership in exchange for a partnership interest, regardless of whether the contribution is made at the time of formation or at a later date, and regardless of the nature of the property contributed (subject to certain exceptions for "investment company" partnerships under Section 721(b), which is not applicable here).

(iii) Basis and Holding Period. Under Section 722, each contributing partner's basis in the partnership interest received equals the adjusted basis of the property contributed. Under Section 723, the partnership's basis in the contributed property equals the contributing partner's adjusted basis in such property immediately before the contribution. Under Section 1223(1), the partner's holding period in the partnership interest includes the holding period of the contributed property, provided the property was a capital asset or a Section 1231 asset in the hands of the contributing partner.

Applying these principles to the management rollover, each of the three management participants would contribute their rollover Pennfield shares to the post-closing partnership entity (or LLC taxed as a partnership) in exchange for a partnership interest (or LLC membership interest). No gain or loss would be recognized on the contribution. Each participant's basis in the partnership interest would equal the participant's adjusted basis in the contributed Pennfield shares, and the holding period of the partnership interest would include the holding period of the contributed shares.

Disguised Sale Risk (Section 707(a)(2)(B)). We have analyzed whether the management rollover, when considered in conjunction with the overall Merger and any contemporaneous or subsequent cash distributions, could be recharacterized as a "disguised sale" under Section 707(a)(2)(B) of the Code and the regulations thereunder.

Under Treasury Regulations Section 1.707-3, a transfer of property by a partner to a partnership and a transfer of money or other consideration by the partnership to the partner are treated as a sale of property if, based on all the facts and circumstances, the transfers are properly characterized as a sale. The regulations establish a rebuttable presumption that transfers occurring within a two-year period are part of a sale. See Treas. Reg. § 1.707-3(c)(1).

In this transaction, the management participants are contributing Pennfield shares to the partnership and receiving only equity interests in return. No contemporaneous cash distributions to the management participants are contemplated. As long as no distributions are made to the rollover participants within the two-year window following the contribution, the presumption under Treasury Regulations Section 1.707-3(c)(1) will be that the contribution is not a disguised sale. We strongly recommend that HPE Fund IV and the post-closing partnership entity refrain from making any distributions to the management rollover participants for at least two years following the closing date to avoid triggering the disguised sale presumption.

We also note that the management participants' allocated share of partnership liabilities under Section 752 of the Code may provide additional tax basis in their partnership interests, which is a benefit of the partnership structure. However, liability allocations do not, standing alone, create disguised sale risk if the allocation is consistent with the economic arrangement of the parties and is not part of a plan to distribute cash to the contributing partners in connection with their contributions. See Treas. Reg. § 1.707-5.

Section 704(c) Considerations. Under Section 704(c)(1)(A), if the contributed Pennfield shares have a fair market value that differs from the contributing partner's adjusted basis at the time of contribution, the partnership must allocate income, gain, loss, and deductions with respect to the contributed property so as to take into account the variation between the property's fair market value and the contributing partner's adjusted basis. The management participants' Pennfield shares likely have an adjusted basis that is lower than the $15.95 per-share fair market value at the time of contribution (assuming the participants acquired their shares through compensation arrangements or at lower historical prices), which would create a "built-in gain" that must be allocated to the contributing partner under Section 704(c) when the partnership subsequently sells or disposes of the contributed shares. The partnership agreement should include appropriate Section 704(c) allocation provisions, and the partnership should select a permissible allocation method (traditional method, traditional method with curative allocations, or remedial allocation method) as set forth in Treasury Regulations Section 1.704-3.

D. Interaction of Rollover with Merger Mechanics

Timing. The management rollover is structured to occur simultaneously with the closing of the Merger. At the effective time of the Merger, the rollover shares are cancelled in the Merger but are not converted into the right to receive the $15.95 per-share cash consideration. Instead, they are contributed to the post-closing holding entity in exchange for equity interests. The Rollover Agreement provides for this treatment, and the Merger Agreement must include appropriate provisions to exclude the rollover shares from the per-share cash consideration payable to other stockholders.

Merger Agreement Coordination. To ensure the proper tax treatment of the rollover, the Merger Agreement must clearly provide that the rollover shares are "Excluded Shares" (or equivalent defined term) that are not entitled to receive the Per-Share Merger Consideration. The Rollover Agreement should be cross-referenced in the Merger Agreement as a "Company Support Agreement" or similar ancillary agreement. Careful drafting is required to ensure that the rollover shares are neither cancelled for cash nor treated as dissenting shares, but are instead converted into (or exchanged for) equity interests in the post-closing entity as contemplated by the rollover structure.

Voting and Support Agreement. Each management rollover participant has agreed, pursuant to the Rollover Agreement and/or a separate Voting and Support Agreement, to vote all of their Pennfield shares (including both rollover shares and non-rollover shares) in favor of the Merger and against any competing proposals. This voting commitment does not, by itself, create any adverse tax consequences, as it is a contractual obligation that does not constitute a taxable event.

Appraisal Rights. Each management rollover participant is expected to waive their appraisal rights under DGCL Section 262 with respect to the rollover shares. This waiver is appropriate because the rollover participants are not receiving cash in the Merger but are instead receiving equity in the post-closing entity, and the exercise of appraisal rights would be inconsistent with the rollover arrangement. With respect to their non-rollover shares (which are cashed out at $15.95 per share), the management participants are likewise expected to waive appraisal rights as a condition of the Rollover Agreement.

E. Recommended Rollover Structure

Based on the foregoing analysis, we recommend that the post-closing holding entity be structured as a Delaware limited partnership or a Delaware limited liability company that is treated as a partnership for federal income tax purposes. This recommendation is based on the following considerations:

(i) Section 721 Nonrecognition. The partnership structure provides tax-deferred treatment under Section 721 without the need to satisfy the Section 351 "control" requirement. While the control test would be satisfied in this transaction (because HPE Fund IV and the management participants together own 100% of the post-closing entity), the partnership structure provides a simpler and more robust path to nonrecognition treatment and eliminates any risk that a technical failure of the Section 351 requirements would result in taxable gain recognition to the management participants.

(ii) Avoidance of Double Taxation. A partnership or LLC taxed as a partnership is not subject to entity-level federal income tax. Income, gain, loss, and deductions flow through to the partners and are taxed only at the partner level. This avoids the double taxation (corporate-level tax plus stockholder-level tax on distributions) that would apply if the post-closing entity were a C corporation.

(iii) Flexible Income Allocation. The partnership structure enables flexible allocation of income, gain, loss, and deductions among the partners under Section 704(b) and the regulations thereunder, subject to the requirement that allocations have "substantial economic effect" or be "in accordance with the partners' interests in the partnership." This flexibility is particularly valuable in the private equity context, where carried interest arrangements, preferred return structures, and management incentive equity allocations are common.

(iv) Consistency with HPE Fund IV Structure. HPE Fund IV itself is a Delaware limited partnership. Holding Pennfield through a pass-through entity is consistent with HPE Fund IV's fund structure and allows HPE Fund IV's limited partners (the fund's investors) to benefit from pass-through treatment without an additional layer of corporate tax.

(v) Industry Standard. The use of a partnership or LLC holding structure is the standard practice in the private equity industry for portfolio company acquisitions, and is the structure most commonly employed by sponsors of comparable fund size and investment strategy.

If a "corporate blocker" is required for certain investors in HPE Fund IV (for example, tax-exempt investors or foreign investors who wish to avoid unrelated business taxable income ("UBTI") or effectively connected income ("ECI") exposure), a hybrid structure may be employed in which a corporate subsidiary is interposed between the partnership holding entity and Pennfield. This hybrid structure would require additional analysis and is discussed further in the companion State & Local Tax Considerations Memorandum dated March 30, 2025. We recommend that this issue be addressed in the final structuring discussions with Nathaniel Cross and Jonah Whitfield.

VI. Tax Treatment of Equity Commitment and Co-Investment Structures

A. Equity Commitment Letter — HPE Fund IV

HPE Fund IV has committed to contribute an aggregate of $340,000,000 in total equity (inclusive of $21,500,000 in management rollover equity) to Pinnacle Merger Sub, Inc. or the post-closing holding entity, pursuant to the Equity Commitment Letter dated March 27, 2025. After accounting for the management rollover and the Ashford co-investment, HPE Fund IV's net equity contribution is $258,500,000.

For federal income tax purposes, HPE Fund IV's cash equity contribution to the post-closing entity will be treated as a tax-free capital contribution. If the post-closing entity is a corporation, the contribution qualifies for nonrecognition treatment under Section 351 (as part of the same integrated plan of capitalization in which the management participants also contribute property). If the post-closing entity is a partnership or LLC taxed as a partnership, the contribution qualifies for nonrecognition treatment under Section 721(a). In either case, HPE Fund IV recognizes no gain or loss on the capital contribution.

HPE Fund IV's tax basis in its equity interest in the post-closing entity will equal the amount of cash contributed — i.e., $258,500,000 — under Section 358(a) (for corporate entities) or Section 722 (for partnership entities). HPE Fund IV's holding period in its equity interest will commence on the date of the contribution.

B. Ashford Growth Partners LP Co-Investment

Ashford Growth Partners LP has committed $60,000,000 to the transaction pursuant to the Co-Investment Agreement dated March 27, 2025. Ashford will contribute cash in exchange for an equity interest in the post-closing holding entity, with terms and conditions specified in the Co-Investment Agreement, including tag-along rights, drag-along rights, information rights, and transfer restrictions.

The federal income tax treatment of Ashford's co-investment is identical in principle to that of HPE Fund IV's equity contribution. Ashford's cash contribution to the post-closing entity will qualify for nonrecognition treatment under either Section 351 (if the entity is a corporation) or Section 721 (if the entity is a partnership). Ashford will recognize no gain or loss on the contribution, and Ashford's basis in its equity interest will equal the $60,000,000 of cash contributed.

The tag-along and drag-along rights provided to Ashford under the Co-Investment Agreement are contractual rights that do not have any present value for federal income tax purposes and do not create any current tax consequences upon grant. These rights will become relevant for tax purposes only if and when they are exercised in connection with a future liquidity event (e.g., a sale of the portfolio company, an IPO, or a secondary sale of equity interests), at which time the tax consequences will depend on the specific terms and circumstances of the transaction.

C. No Partnership Disguised Sale or Mixing Bowl Issues

The equity commitments by HPE Fund IV and Ashford Growth Partners involve only cash contributions to the post-closing entity. Cash contributions to a partnership generally do not raise disguised sale concerns under Section 707(a)(2)(B) and the regulations thereunder, because the contributing partner is not transferring "property" that has a built-in gain or loss. The regulations define "property" for disguised sale purposes broadly but focus on the transfer of appreciated property followed by a related distribution of cash or other property; a contribution of cash does not implicate the same concerns.

Similarly, the "mixing bowl" transaction rules under Sections 704(c)(1)(B) and 737 of the Code are not relevant to the cash contributions by HPE Fund IV and Ashford. Section 704(c)(1)(B) applies when a partnership distributes contributed property to a partner other than the contributing partner within seven years of the contribution. Section 737 applies when a partnership distributes property (other than cash) to a contributing partner who previously contributed appreciated property to the partnership. Because HPE Fund IV and Ashford are contributing only cash (not appreciated property), neither Section 704(c)(1)(B) nor Section 737 is triggered with respect to their contributions.

The only appreciated property contribution in the transaction is the management rollover of Pennfield shares by Langford, Simmons, and Dunn. The Section 704(c) and disguised sale considerations applicable to that contribution are addressed in Section V.C above.

VII. Tax Basis and Depreciation/Amortization Considerations

A. Buyer's Tax Basis in Pennfield Assets

Because the Merger is structured as a taxable acquisition of Pennfield's stock (through the reverse triangular merger mechanism), and not as an acquisition of Pennfield's underlying assets, the buyer does not receive a "cost" or "stepped-up" basis in Pennfield's underlying assets. This is a fundamental distinction between stock acquisitions and asset acquisitions for federal income tax purposes.

Following the Merger, Pennfield will continue as a wholly owned subsidiary of the post-closing holding entity. Pennfield's existing tax attributes — including its historical tax basis in its assets (inventory, property and equipment, intangible assets, leasehold improvements, etc.), its accumulated depreciation and amortization schedules, and any net operating loss carryforwards, tax credit carryforwards, and other tax attributes — will carry over without adjustment. The buyer (HPE Fund IV, through the post-closing entity) will have a cost basis in the stock of Pennfield equal to the purchase price paid (approximately $980 million less the rollover equity component), but this stock basis does not translate into any increase in the basis of Pennfield's underlying assets.

This lack of asset basis step-up means that Pennfield will not be entitled to claim any new depreciation or amortization deductions attributable to the purchase price paid by the buyer. Existing depreciation and amortization schedules for Pennfield's assets will continue on their historical basis. Over the holding period of the investment, this results in a lower tax shield compared to an asset acquisition in which the full purchase price is allocated among the target's assets and amortized or depreciated over their useful lives.

Section 338(h)(10) Election. A Section 338(h)(10) election, which would permit the buyer to treat the stock acquisition as a deemed asset acquisition for tax purposes (thereby obtaining a stepped-up basis in Pennfield's assets), is not available in this transaction. As analyzed in detail in the companion Section 338(h)(10) Election Analysis Memorandum dated March 29, 2025, a Section 338(h)(10) election requires a "qualified stock purchase" (within the meaning of Section 338(d)(3)) by a "purchasing corporation" from either (i) a selling consolidated group parent corporation or (ii) the stockholders of an S corporation. Neither condition is met here: Pennfield is a widely held public company with no single corporate parent, and Pennfield is a C corporation (not an S corporation). Additionally, the "purchasing corporation" requirement under Section 338 requires the acquirer to be a corporation, and HPE Fund IV is a limited partnership. Accordingly, a Section 338(h)(10) election is not available, and no further analysis of that ele

MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED WORK PRODUCT
To:
Oliver Mackenzie, Responsible Partner, M&A, Calderwood & Harkness LLP
Harrison Wexford, Billing Partner, M&A, Calderwood & Harkness LLP
Ryan Kowalski, Lead Associate, M&A, Calderwood & Harkness LLP
Megan Chu, Working Associate, M&A, Calderwood & Harkness LLP
Jonah Whitfield, Principal, Harrowgate Capital Partners LLC
Rebecca Talmadge, Partner, Harrowgate Capital Partners LLC
From:
Sylvia Hartwell, Specialist Partner, Tax, Calderwood & Harkness LLP
Date: March 28, 2025
Re: Federal Income Tax Analysis of Reverse Triangular Merger Structure — Acquisition of Pennfield Holdings, Inc. (Nasdaq: PNFD) by Harrowgate Private Equity Fund IV LP (Project Summit)
Matter No.: 1003-00004
CONFIDENTIALITY LEGEND: This memorandum constitutes attorney-client privileged and attorney work product. It is prepared for the exclusive use of Harrowgate Private Equity Fund IV LP and its affiliates and is not intended for distribution to, or reliance by, any third party without the prior written consent of Calderwood & Harkness LLP. Any unauthorized disclosure, reproduction, or distribution of this memorandum, in whole or in part, is strictly prohibited.
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I. Executive Summary
This memorandum sets forth our analysis of the principal federal income tax considerations arising from the proposed take-private acquisition of Pennfield Holdings, Inc. ("Pennfield" or the "Target"), a publicly traded Delaware corporation listed on the Nasdaq Global Select Market under the ticker symbol PNFD, by Harrowgate Private Equity Fund IV LP ("HPE Fund IV" or the "Sponsor"). The acquisition will be structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law ("DGCL"), whereby Pinnacle Merger Sub, Inc. ("Merger Sub"), a newly formed, wholly owned Delaware corporation subsidiary of HPE Fund IV (Employer Identification Number ("EIN"): 93-4081562), will merge with and into Pennfield (EIN: 82-4917305), with Pennfield surviving as a wholly owned subsidiary of HPE Fund IV (the "Merger").
The aggregate merger consideration is $980,000,000. The per-share consideration to be received by Pennfield's public stockholders is $15.95 in cash, calculated on a fully diluted basis reflecting 61,450,000 shares outstanding (comprised of approximately 58,200,000 basic shares of common stock and approximately 3,250,000 shares underlying outstanding stock options and restricted stock units ("RSUs")).
The sources of funding for the Merger are as follows: (a) $490,000,000 in senior secured Term Loan B credit facilities provided by Falconer National Bank, N.A. and arranged by Dunmore Capital Markets LLC; (b) $340,000,000 in total equity, consisting of $258,500,000 in net equity from HPE Fund IV, $60,000,000 from Ashford Growth Partners LP as a co-investor, and $21,500,000 in management rollover equity from three members of Pennfield's senior management team; and (c) $90,000,000 of cash on Pennfield's balance sheet available at closing.
Set forth below is a summary of our principal federal income tax conclusions, each of which is discussed in detail in the sections that follow:
1.  Taxable Acquisition. The Merger will be treated as a fully taxable acquisition for federal income tax purposes and will not qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). The transaction fails to satisfy the requirements of Section 368(a)(2)(E) (reverse triangular merger reorganization) because (i) the merger consideration is overwhelmingly cash, with only approximately 2.2% equity continuity attributable to the management rollover, which is far below any recognized continuity of interest threshold; and (ii) HPE Fund IV is a limited partnership and cannot issue "voting stock" as required by the statute.
2.  Public Stockholder Gain or Loss Recognition. Each Pennfield public stockholder receiving the $15.95 per-share cash consideration will recognize gain or loss equal to the difference between the cash received and the stockholder's adjusted tax basis in their Pennfield common stock. The character of such gain or loss will be capital (long-term or short-term depending on the stockholder's holding period) for stockholders who hold their shares as capital assets.
3.  Tax-Deferred Management Rollover. The management rollover participants — Catherine Langford (Chief Executive Officer), Derek Simmons (Chief Financial Officer), and Maxwell Dunn (Chief Operating Officer) — can achieve tax-deferred treatment on their respective rollover contributions if the rollover is properly structured under either Section 351 of the Code (if the post-closing holding entity is a corporation) or Section 721 of the Code (if the post-closing holding entity is a partnership or LLC treated as a partnership). We recommend the partnership/LLC structure for the reasons detailed in Section V.E below.
4.  Section 338(h)(10) Election Not Available. A Section 338(h)(10) election to treat the stock acquisition as a deemed asset acquisition is not available for this transaction. The conditions for such an election are not met in the context of a take-private merger of a widely held public company. A detailed analysis is set forth in a companion memorandum dated March 29, 2025.
5.  Equity Commitment and Co-Investment Structures. The equity commitment letter from HPE Fund IV and the co-investment arrangement with Ashford Growth Partners LP do not create adverse federal income tax consequences for HPE Fund IV, Ashford Growth Partners, or the post-closing entity. The contributions are straightforward capital contributions subject to nonrecognition treatment.
The conclusions set forth herein are subject to the assumptions, qualifications, and open items described throughout this memorandum. Several items require further analysis prior to the signing of the definitive Merger Agreement, currently targeted for April 7, 2025, as described in Section XV below.
II. Transaction Structure Overview
A. Description of Parties
Harrowgate Private Equity Fund IV LP (HPE Fund IV). HPE Fund IV is a Delaware limited partnership formed for the purpose of making private equity investments in middle-market companies across a range of industries, with a particular emphasis on consumer, retail, healthcare, and business services sectors. HPE Fund IV's general partner is Harrowgate Capital Partners IV GP LLC, a Delaware limited liability company. The investment manager of the Fund is Harrowgate Capital Partners LLC, a Delaware limited liability company. HPE Fund IV has aggregate committed capital of approximately $4.8 billion (2023 vintage) and is one of four active funds managed by the Harrowgate platform, which has firm-wide assets under management of approximately $14.2 billion. HPE Fund IV's principal office is located at 1200 Market Street, Suite 3100, Wilmington, Delaware 19801. HPE Fund IV's EIN is 87-2263148. For purposes of this memorandum, unless the context indicates otherwise, references to "HPE Fund IV" include Harrowgate Capital Partners IV GP LLC in its capacity as general partner.
Pinnacle Merger Sub, Inc. (Merger Sub). Merger Sub is a newly formed Delaware corporation organized solely for the purpose of effecting the Merger. Merger Sub is, and at all times prior to the effective time of the Merger will be, a direct, wholly owned subsidiary of HPE Fund IV (or of a holding entity owned by HPE Fund IV, depending on the final post-closing holding structure). The sole incorporator of Merger Sub is Jonah Whitfield, Principal at Harrowgate Capital Partners LLC. Merger Sub's EIN is 93-4081562, and its registered office is located at 1200 Market Street, Suite 3100, Wilmington, Delaware 19801. Merger Sub has not engaged in any business activities other than those incidental to its formation and the transactions contemplated by the Merger Agreement. At the effective time of the Merger, Merger Sub will cease to exist, having merged with and into Pennfield.
Pennfield Holdings, Inc. (Pennfield or Target). Pennfield is a Delaware corporation that is publicly traded on the Nasdaq Global Select Market under the ticker symbol PNFD (CUSIP: 708234109). Pennfield is a specialty retailer focused on outdoor lifestyle, sporting goods, and adventure apparel, operating 187 company-owned stores and 22 outlet locations across 34 states. The company employs approximately 8,400 individuals. Pennfield's corporate headquarters are located at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202. Pennfield's EIN is 82-4917305. Pennfield operates on a fiscal year ending January 31 (a retail fiscal calendar). For its most recently completed fiscal year ended January 31, 2025 ("FY 2024"), Pennfield reported revenue of $1.62 billion, EBITDA of $142 million, and net income of $54.3 million, in each case as reported in Pennfield's Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Ashford Growth Partners LP (Ashford or Co-Investor). Ashford Growth Partners LP is a Delaware limited partnership that will participate in the transaction as a co-investor alongside HPE Fund IV. Ashford has committed $60,000,000 to the acquisition pursuant to the Co-Investment Agreement described below. Ashford's principal office is located at 150 North Riverside Plaza, Suite 2200, Chicago, Illinois 60606. The primary contact for Ashford is David Nakamura, Partner. Ashford is a growth-oriented private equity fund with a track record of investing alongside larger sponsors in consumer-facing transactions.
B. Merger Mechanics
The Merger will be structured as a reverse triangular merger pursuant to Section 251 of the DGCL. The key mechanics are as follows:
(a) Merger of Merger Sub with and into Pennfield. At the effective time of the Merger, Pinnacle Merger Sub, Inc. will merge with and into Pennfield Holdings, Inc. Pennfield will be the surviving corporation in the Merger and will continue its separate corporate existence as a wholly owned subsidiary of HPE Fund IV (or of the post-closing holding entity, as applicable). The separate corporate existence of Merger Sub will cease upon consummation of the Merger.
(b) Treatment of Public Stockholder Shares. Each share of Pennfield common stock issued and outstanding immediately prior to the effective time of the Merger (other than (i) shares owned by HPE Fund IV, Merger Sub, or any of their respective wholly owned subsidiaries, (ii) shares subject to the management rollover described below, and (iii) dissenting shares held by stockholders who have properly exercised and perfected their appraisal rights under Section 262 of the DGCL and have not withdrawn or otherwise lost such rights) will be converted into the right to receive $15.95 per share in cash, without interest (the "Per-Share Merger Consideration").
(c) Treatment of Merger Sub Shares. At the effective time, each share of common stock of Merger Sub issued and outstanding immediately prior to the effective time will be converted into one share of common stock of the surviving corporation. Following the Merger, HPE Fund IV (or the post-closing holding entity) will hold all outstanding shares of Pennfield.
(d) Treasury Shares and Acquirer-Owned Shares. Any shares held in the treasury of Pennfield or owned by HPE Fund IV, Merger Sub, or any of their respective wholly owned subsidiaries immediately prior to the effective time will be cancelled without payment of any consideration.
(e) Dissenting Shares. Shares held by stockholders who properly exercise and perfect appraisal rights under DGCL Section 262 will not be converted into the right to receive the Per-Share Merger Consideration, but instead will be entitled to receive the fair value of such shares as determined by the Delaware Court of Chancery. If any stockholder who demands appraisal subsequently withdraws such demand or fails to perfect appraisal rights, such stockholder's shares will be treated as though they were converted into the right to receive the Per-Share Merger Consideration as of the effective time.
(f) Stockholder Approval. The Merger will be submitted to a vote of Pennfield's stockholders and will require the affirmative vote of a majority of the outstanding shares of Pennfield common stock entitled to vote thereon, in accordance with DGCL Section 251 and Pennfield's certificate of incorporation and bylaws.
(g) Timing. The estimated closing date for the Merger is June 30, 2025, subject to satisfaction or waiver of all closing conditions, including stockholder approval, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), and the absence of any restraining order or injunction prohibiting the consummation of the Merger. The outside date for the Merger, beyond which either party may terminate the Merger Agreement if closing has not occurred, is September 30, 2025 (the "Outside Date").
C. Sources and Uses Summary (Tax-Relevant)
For purposes of the federal income tax analysis set forth in this memorandum, the relevant sources and uses of funds are summarized in the following table:
Sources of Funds
Uses of Funds
The revolving credit facility of $150,000,000 (bearing interest at SOFR + 350 basis points) is expected to be undrawn at closing but available to Pennfield as a post-closing working capital facility. From a tax perspective, the revolver does not create interest expense until drawn and is therefore not included in the closing sources analysis, but it is relevant to the post-closing Section 163(j) interest deduction limitation analysis set forth in Section XI.A below.
III. Federal Income Tax Classification of the Merger
The threshold federal income tax question presented by the Merger is whether the reverse triangular merger constitutes a taxable acquisition or a tax-free reorganization. As set forth below, we conclude that the Merger will be treated as a fully taxable acquisition for federal income tax purposes.
A. Taxable Transaction vs. Tax-Free Reorganization Analysis
Section 368 Reorganization Overview. The Code provides for nonrecognition treatment in certain corporate acquisitions that satisfy the requirements of one or more of the reorganization provisions set forth in Section 368(a)(1). The relevant provision for a reverse triangular merger is Section 368(a)(1)(A) (statutory merger or consolidation), as applied through Section 368(a)(2)(E), which extends reorganization treatment to certain reverse subsidiary mergers. Section 368(a)(2)(E) was enacted to accommodate acquisitions in which the target survives as a subsidiary of the acquiring corporation, which is the structural form employed here.
Requirements of Section 368(a)(2)(E). For a reverse triangular merger to qualify as a reorganization under Section 368(a)(2)(E), the following requirements must be satisfied:
(i) The transaction must otherwise qualify as a statutory merger or consolidation under applicable state law and under Section 368(a)(1)(A);
(ii) After the transaction, the surviving corporation (here, Pennfield) must hold "substantially all" of its properties and the properties of the merged corporation (here, Merger Sub);
(iii) In the transaction, the former stockholders of the surviving corporation (here, Pennfield's public stockholders) must exchange, for voting stock of the controlling corporation (here, HPE Fund IV or an entity that could serve as the "controlling corporation"), an amount of stock of the surviving corporation constituting "control" within the meaning of Section 368(c); and
(iv) The "control" requirement under Section 368(c) requires ownership of at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock.
Application to the Proposed Merger. We analyze each of the foregoing requirements as applied to the proposed transaction:
Substantially All Properties. After the Merger, Pennfield (the surviving corporation) will hold substantially all of its pre-merger properties as well as any properties held by Merger Sub (which are de minimis, as Merger Sub was newly formed and capitalized solely for the purpose of the transaction). This requirement would be satisfied.
Voting Stock Requirement — Failure. The core deficiency in the reorganization analysis lies in the nature of the merger consideration and the identity of the acquiring entity. The merger consideration paid to Pennfield's public stockholders is overwhelmingly cash — approximately $908.5 million in cash out of $980 million in total equity value, representing approximately 97.8% of the aggregate consideration. The only equity component is the $21.5 million management rollover, which represents approximately 2.2% of total equity value.
Under Section 368(a)(2)(E), the former stockholders of Pennfield must exchange, in the transaction, an amount of Pennfield stock constituting "control" (80%) solely for "voting stock" of the controlling corporation. This requirement fails on multiple independent grounds:
First, HPE Fund IV is a Delaware limited partnership, not a corporation. Limited partnership interests are not "stock," and a limited partnership cannot issue "voting stock" as required by Section 368(a)(2)(E). The Code's reorganization provisions are premised on corporate transactions, and the use of partnership equity as consideration cannot satisfy the statutory requirements. See Treas. Reg. § 1.368-2(b)(1) (requiring that the acquiring entity be a corporation for purposes of the reorganization provisions). Even if the post-closing holding entity were interposed as a corporation, the consideration actually received by the vast majority of Pennfield stockholders is cash, not stock of any entity.
Second, even if the partnership characterization issue were set aside and the rollover equity were treated as an exchange of Pennfield stock for equity of the controlling entity, the approximately 2.2% equity continuity falls dramatically short of the 80% threshold required by Section 368(c). The Service has consistently held that the former stockholders of the surviving corporation must exchange stock representing "control" for voting stock of the acquiring entity; here, only 2.2% of Pennfield's equity (by value) is being exchanged for equity interests rather than cash.
Third, even under the broader "continuity of interest" standard (discussed in Section III.B below), which applies as a judicial and administrative overlay to all reorganization provisions, 2.2% continuity is far below any recognized threshold. Revenue Procedure 77-37, 1977-1 C.B. 568, establishes a 40% continuity threshold for advance ruling purposes, and while case law has sustained reorganization treatment at levels below 40%, no court or administrative guidance has sustained a continuity of interest as low as 2.2%.
Control Requirement — Failure. For the reasons stated above, the "control" requirement of Section 368(a)(2)(E), read together with Section 368(c), is not satisfied.
Conclusion. The Merger does not qualify as a reorganization under Section 368(a)(1)(A) by reason of Section 368(a)(2)(E) or under any other provision of Section 368. The transaction will be treated as a fully taxable acquisition for federal income tax purposes, with consequences as described in the remaining sections of this memorandum.
B. Continuity of Interest Doctrine
The judicial continuity of interest ("COI") doctrine, codified in Treasury Regulations Section 1.368-1(e), requires that in connection with a reorganization, a substantial part of the value of the proprietary interests in the target be preserved in the form of a proprietary interest in the reorganized entity. The purpose of the COI requirement is to ensure that a reorganization effects only a readjustment of continuing interests in property under modified corporate forms, rather than a sale of property for cash.
Under the Treasury Regulations, COI is measured by reference to the value of the consideration received by the target stockholders that consists of stock or other proprietary interests in the issuing corporation, relative to the total value of consideration received. See Treas. Reg. § 1.368-1(e)(1)(i). The regulations confirm that the COI requirement is not satisfied if the consideration received by the target stockholders consists overwhelmingly of cash or other non-equity consideration.
In this transaction, even under the most lenient judicial standard, the 2.2% equity continuity ($21.5 million of $980 million in total equity value) is far below any recognized threshold for satisfying the COI requirement. Courts have sustained reorganization treatment in certain cases with continuity percentages in the range of 25% to 40%, and in exceptional cases as low as approximately 20%, but no authority supports the proposition that a 2.2% equity continuity would satisfy the COI requirement. See, e.g., John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935) (38% continuity upheld); Kass v. Commissioner, 60 T.C. 218 (1973), aff'd 491 F.2d 749 (3d Cir. 1974) (approximately 50% continuity upheld). The Service's advance ruling threshold of 40% under Revenue Procedure 77-37 provides further administrative guidance, though it is not a statutory minimum.
Moreover, the management rollover equity is not structured as an exchange of Pennfield stock for acquirer stock within the mechanics of the merger itself. Rather, it is structured as a separately negotiated contribution and rollover arrangement pursuant to individual Rollover Agreements between HPE Fund IV and each of the three management participants (Catherine Langford, Derek Simmons, and Maxwell Dunn). The rollover participants are not receiving "stock" of the acquiring corporation (HPE Fund IV is not a corporation) in exchange for their Pennfield shares; they are receiving limited partnership interests or LLC interests in the post-closing holding entity. This structural feature further undermines any argument that the COI requirement is satisfied.
We therefore confirm that the Merger fails the continuity of interest requirement by a wide margin, and this conclusion independently supports the treatment of the transaction as a fully taxable acquisition.
C. Step Transaction and Substance Over Form Considerations
We have considered whether the Internal Revenue Service could invoke the step transaction doctrine, the substance over form doctrine, or related judicial doctrines to recharacterize any aspect of the proposed transaction in a manner that would alter the tax consequences described herein.
Step Transaction Doctrine. The step transaction doctrine allows the IRS (and the courts) to treat a series of formally separate steps as a single integrated transaction if the steps are in substance so interdependent that the legal relations created by one step would be fruitless without a completion of the remaining steps. See Commissioner v. Clark, 489 U.S. 726 (1989); Penrod v. Commissioner, 88 T.C. 1415 (1987). In the present transaction, the principal steps are (i) the formation and capitalization of Merger Sub, (ii) the execution of the merger, (iii) the payment of cash consideration to public stockholders, and (iv) the rollover of management equity.
We note that the Rollover Agreements are separately negotiated agreements between HPE Fund IV and each of the three management participants, and are dated April 7, 2025 — contemporaneous with the execution of the definitive Merger Agreement. The Rollover Agreements are, however, clearly interrelated with and contingent upon the consummation of the Merger, and the step transaction doctrine would likely treat the rollover and the Merger as a single integrated transaction. This integration, however, does not change the tax analysis: even if all steps are collapsed into a single transaction, the aggregate consideration to all former Pennfield stockholders remains approximately 97.8% cash and 2.2% equity, which is insufficient to qualify the transaction as a reorganization under Section 368.
The step transaction doctrine typically is invoked by the IRS to recharacterize purportedly tax-free transactions as taxable, or to collapse a series of steps that artificially create nonrecognition treatment. Here, the transaction is already structured as a taxable acquisition, and there is no risk that the step transaction doctrine would convert a taxable acquisition into a tax-free reorganization. The opposite recharacterization — i.e., the IRS treating a purported tax-free exchange as taxable — is the more common application of the doctrine and is not relevant here.
Substance Over Form. The substance over form doctrine permits the IRS to disregard the form of a transaction and instead tax the parties based on the economic substance of their arrangement. See Gregory v. Helvering, 293 U.S. 465 (1935). In this case, the substance of the transaction is a leveraged buyout in which a private equity sponsor acquires all of the outstanding equity of a public company for cash, funded by a combination of debt financing and sponsor equity, with a small management rollover component. This economic substance is fully consistent with the form of the transaction as a taxable stock acquisition effected through a reverse triangular merger. No recharacterization risk under the substance over form doctrine is identified.
We note that the management rollover, while structured as a contribution of shares in exchange for equity interests in the post-closing entity, could potentially be recharacterized by the IRS as a sale if the rollover participants were viewed as receiving economic value equivalent to cash in exchange for their shares. However, as discussed in Section V below, the rollover participants will receive only equity interests (not cash or cash-equivalent consideration) in the post-closing entity, and the rollover is structured to satisfy the requirements of Section 721 (or Section 351, as applicable) for nonrecognition treatment. The risk of recharacterization of the rollover as a taxable sale is addressed in the disguised sale analysis in Section V.C below.
IV. Tax Treatment of Pennfield Public Stockholders
A. Gain or Loss Recognition
Each holder of Pennfield common stock (other than management rollover participants with respect to their rollover shares, and dissenting stockholders who perfect their appraisal rights) who receives the $15.95 per-share cash merger consideration in the Merger will be treated as having sold their shares in a taxable exchange. Pursuant to Sections 1001(a) and (b) of the Code, each such stockholder will recognize gain or loss equal to the difference between the amount realized ($15.95 per share) and the stockholder's adjusted tax basis in each share of Pennfield common stock surrendered in the Merger.
Gain or loss will be computed on a share-by-share, lot-by-lot basis for stockholders who acquired their shares at different times or at different prices. Each identifiable lot of shares (as determined under the stockholder's chosen cost basis method, such as specific identification, FIFO, or average cost for shares held through a mutual fund) is treated as a separate unit for purposes of the gain or loss computation.
The amount realized by each stockholder will be $15.95 per share in cash. No additional consideration is payable to stockholders, and no contingent consideration, earnout, or escrow holdback is applicable to public stockholders under the terms of the Merger Agreement. The simplicity of the all-cash consideration structure provides certainty to stockholders as to the tax consequences of the Merger.
B. Character of Gain or Loss
For stockholders who hold their Pennfield shares as "capital assets" within the meaning of Section 1221 of the Code (which encompasses property held by a taxpayer other than inventory, property held for sale to customers, depreciable or real property used in a trade or business, and certain other categories), gain or loss recognized in the Merger will be capital in nature.
The applicable rate of federal income taxation on any capital gain recognized by an individual stockholder depends upon the stockholder's holding period for the shares surrendered:
(a) Long-term capital gain. If the stockholder held the Pennfield shares for more than one year as of the effective date of the Merger, any gain recognized will be long-term capital gain. Under current law (as of the date of this memorandum), the maximum federal income tax rate on long-term capital gains recognized by individual taxpayers is 20%. In addition, individual taxpayers with modified adjusted gross income exceeding certain thresholds ($200,000 for single filers, $250,000 for married filing jointly) are subject to the 3.8% net investment income tax ("NIIT") under Section 1411 of the Code, resulting in a combined maximum federal rate of 23.8% on long-term capital gains.
(b) Short-term capital gain. If the stockholder held the Pennfield shares for one year or less as of the effective date of the Merger, any gain recognized will be short-term capital gain, which is taxed at ordinary income rates. The maximum federal ordinary income tax rate for individual taxpayers is currently 37%, plus the 3.8% NIIT for applicable taxpayers, resulting in a combined maximum federal rate of 40.8%.
(c) Capital losses. Capital losses recognized by individual taxpayers may be used to offset capital gains dollar-for-dollar, and any excess capital losses may be deducted against ordinary income up to $3,000 per year (for individuals), with unused capital losses carried forward to subsequent taxable years.
Corporate stockholders will recognize capital gain or loss on the exchange of their Pennfield shares, with such gain or loss included in the corporation's taxable income and taxed at the applicable corporate rate (currently 21%). Corporate stockholders are not subject to the NIIT.
We note that the qualified dividend treatment analysis is not applicable to the Merger consideration. The $15.95 per-share payment to stockholders is structured as merger consideration received in exchange for their shares — that is, an amount received in a sale or exchange under Section 1001 — and not as a dividend distribution from Pennfield to its stockholders. Accordingly, the qualified dividend tax rate under Section 1(h)(11) is not relevant.
C. Withholding and Reporting
Information Reporting. Payments of the Per-Share Merger Consideration to stockholders will be reported by the paying agent on IRS Form 1099-B (Proceeds from Broker and Barter Exchange Transactions). We understand that Marlowe Asset Management Stock Transfer, Inc. (contact: Daniel Roth) is serving as Pennfield's transfer agent and will act as the paying agent for the Merger consideration, or such duties may be assigned to another institution as designated in the Merger Agreement. The paying agent will report to both the recipient stockholder and the IRS the gross proceeds received by each stockholder in the Merger, as required by Section 6045 of the Code and the regulations thereunder. For "covered securities" (generally, shares acquired after January 1, 2011, and held in brokerage accounts), the paying agent or broker will also report the stockholder's adjusted basis and the character of any gain or loss (long-term or short-term) to the IRS.
Backup Withholding. Under the backup withholding rules set forth in Section 3406 of the Code, the paying agent is required to withhold backup withholding tax at a rate of 24% from the merger consideration payable to any stockholder who (i) fails to furnish a correct taxpayer identification number ("TIN") to the paying agent, (ii) is notified by the IRS that the TIN furnished is incorrect, (iii) fails to certify under penalties of perjury that the TIN furnished is correct and that the stockholder is not subject to backup withholding, or (iv) is otherwise subject to backup withholding. Stockholders should be instructed to complete and submit an IRS Form W-9 (or applicable substitute form) to the paying agent in connection with their submission of the letter of transmittal. Backup withholding is not an additional tax; amounts withheld may be credited against the stockholder's federal income tax liability and may be refundable if the withholding exceeds the stockholder's tax liability.
Foreign Stockholders / FIRPTA. The tax treatment of foreign stockholders (i.e., nonresident alien individuals, foreign corporations, and other non-U.S. persons) receiving the merger consideration, including the application of the Foreign Investment in Real Property Tax Act ("FIRPTA"), is discussed in Section VIII below.
Dissenting Stockholders. Stockholders who properly exercise and perfect their appraisal rights under DGCL Section 262 will not receive the $15.95 per-share merger consideration but will instead receive such consideration as the Delaware Court of Chancery determines to be the "fair value" of their shares. The amount received by a dissenting stockholder in a judicially determined appraisal proceeding (other than any interest component) will be treated as received in exchange for their Pennfield shares, and the stockholder will recognize gain or loss equal to the difference between the fair value payment and their adjusted basis in the shares. Any interest awarded by the Court of Chancery on the appraised value of the shares for the period between the effective time of the Merger and the payment date will be taxable to the stockholder as ordinary income.
D. Section 302 Analysis (Not Applicable)
We have considered whether the cash merger consideration paid to Pennfield public stockholders could be recharacterized as a distribution under Section 301 of the Code (and thus potentially taxable as a dividend to the extent of Pennfield's earnings and profits), rather than as an amount received in exchange for stock.
Under Section 302(a) and (b) of the Code, a redemption of stock by a corporation is treated as a payment in exchange for stock (rather than as a Section 301 distribution) if the redemption satisfies one of several tests, including a complete termination of the stockholder's interest under Section 302(b)(3). In the context of the Merger, the cash consideration received by public stockholders is properly characterized as received "in exchange for" their stock, resulting in gain or loss recognition under Sections 1001 and 1031 principles (as applicable to corporate reorganizations and taxable mergers). More precisely, the Merger is not a "redemption" under Section 302 but rather a taxable exchange of stock for cash in connection with a merger governed by Section 1001 and the principles of Section 331 (to the extent applicable by analogy to a complete acquisition).
No Section 302 recharacterization risk exists because Pennfield is being entirely acquired; no continuing stockholder interest will exist for any public holder post-closing (other than the three management rollover participants, whose treatment is separately addressed). The complete elimination of public stockholder interests in Pennfield ensures that the exchange treatment is clear and unambiguous.
V. Tax Treatment of Management Rollover Equity
A. Overview of Rollover Structure
Three members of Pennfield's senior management team have agreed to "roll over" a portion of their existing equity in Pennfield in connection with the Merger, in exchange for equity interests in the post-closing entity. The rollover participants and their respective rollover amounts are as follows:
The total management rollover of $21,500,000 represents approximately 2.2% of the $980,000,000 aggregate equity value of the transaction.
The mechanics of the rollover are governed by individual Rollover Agreements to be entered into between HPE Fund IV and each management participant, with an execution date of April 7, 2025 (contemporaneous with the signing of the definitive Merger Agreement). Under each Rollover Agreement, the management participant agrees to contribute a specified number of Pennfield shares (having an aggregate fair market value, at $15.95 per share, equal to the participant's rollover amount) to the post-closing holding entity. In exchange, the management participant receives equity interests (limited partnership interests or LLC membership interests, depending on the final entity structure) in the post-closing holding entity.
The remaining Pennfield shares held by each management participant — that is, all shares not subject to the rollover — are treated identically to shares held by all other public stockholders and are cashed out at $15.95 per share in the Merger. The cash-out shares generate gain or loss recognition to each management participant under the same principles applicable to all public stockholders, as described in Section IV above.
B. Tax-Deferred Rollover Treatment — Section 351 Analysis
If the post-closing holding entity is structured as a corporation (or an entity treated as a corporation for federal income tax purposes), the management rollover is intended to qualify as a tax-deferred contribution under Section 351 of the Code. Section 351(a) provides, in relevant part, that no gain or loss shall be recognized if one or more persons transfer property to a corporation solely in exchange for stock of such corporation, and immediately after the exchange, the transferor or transferors are in "control" (within the meaning of Section 368(c)) of the transferee corporation.
Control Requirement. Under Section 368(c), "control" means the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. In the context of the Merger, the relevant "exchange" for Section 351 purposes encompasses all transfers to the post-closing corporate entity made as part of the same plan or arrangement. If HPE Fund IV contributes cash (or property) and the management participants contribute Pennfield shares to the same corporate entity as part of a single integrated plan, all transferors are treated as a single "transferor group" for purposes of the 80% control test.
Application. HPE Fund IV (together with Ashford Growth Partners) will own approximately 97.8% of the equity of the post-closing entity, and the management rollover participants will own approximately 2.2%. Together, the transferor group will own 100% of the post-closing entity immediately after the exchange, which easily satisfies the 80% control test. Assuming no "boot" (i.e., cash or other non-stock consideration) is received by the rollover participants in connection with the exchange, the Section 351 requirements are satisfied, and the following tax consequences would apply:
(i) The management rollover participants would recognize no gain or loss on the contribution of their Pennfield shares to the post-closing corporate entity;
(ii) Each management participant's adjusted basis in the equity received in the post-closing entity would equal the participant's adjusted basis in the Pennfield shares contributed (a "substituted basis" under Section 358(a));
(iii) The post-closing entity's basis in the contributed Pennfield shares would equal the management participant's adjusted basis in such shares immediately before the contribution (a "transferred basis" under Section 362(a)); and
(iv) The management participant's holding period in the equity of the post-closing entity would include the holding period of the contributed Pennfield shares (a "tacked" holding period under Section 1223(1)), provided the Pennfield shares were capital assets in the hands of the participant.
Potential Issues. The primary concern with the Section 351 analysis is the "solely for stock" requirement. If any management participant receives anything other than stock of the post-closing corporate entity (for example, if the Rollover Agreement provides for a cash payment, a promissory note, or any other consideration in addition to equity), the participant would recognize gain to the extent of the boot received under Section 351(b). It is critical that the Rollover Agreements be drafted to ensure that the only consideration received by each management participant in exchange for the contributed Pennfield shares is equity of the post-closing entity.
Additionally, the "immediately after the exchange" requirement under Section 351(a) must be satisfied, meaning that the transferor group must be in control of the post-closing entity immediately after the exchange. Because HPE Fund IV and Ashford will together contribute substantially all of the equity capital, and the management participants will contribute their rollover shares, all as part of the same integrated plan, this requirement should be satisfied without difficulty.
C. Tax-Deferred Rollover — Section 721 Analysis (Partnership/LLC Alternative)
If the post-closing holding entity is structured as a partnership or as an LLC that is treated as a partnership for federal income tax purposes (which we recommend, as discussed in Section V.E below), the management rollover would be governed by Section 721 of the Code rather than Section 351.
Section 721(a) provides, in relevant part, that no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership. This rule is significantly more flexible than Section 351 in several important respects:
(i) No "Control" Requirement. Unlike Section 351, Section 721 does not impose any ownership percentage threshold that must be satisfied by the contributing partner or group of partners. A single partner contributing property in exchange for even a de minimis partnership interest qualifies for nonrecognition treatment. This eliminates any concern about the management participants' relatively small 2.2% ownership percentage.
(ii) Broad Scope of Nonrecognition. Section 721 applies to all contributions of property to a partnership in exchange for a partnership interest, regardless of whether the contribution is made at the time of formation or at a later date, and regardless of the nature of the property contributed (subject to certain exceptions for "investment company" partnerships under Section 721(b), which is not applicable here).
(iii) Basis and Holding Period. Under Section 722, each contributing partner's basis in the partnership interest received equals the adjusted basis of the property contributed. Under Section 723, the partnership's basis in the contributed property equals the contributing partner's adjusted basis in such property immediately before the contribution. Under Section 1223(1), the partner's holding period in the partnership interest includes the holding period of the contributed property, provided the property was a capital asset or a Section 1231 asset in the hands of the contributing partner.
Applying these principles to the management rollover, each of the three management participants would contribute their rollover Pennfield shares to the post-closing partnership entity (or LLC taxed as a partnership) in exchange for a partnership interest (or LLC membership interest). No gain or loss would be recognized on the contribution. Each participant's basis in the partnership interest would equal the participant's adjusted basis in the contributed Pennfield shares, and the holding period of the partnership interest would include the holding period of the contributed shares.
Disguised Sale Risk (Section 707(a)(2)(B)). We have analyzed whether the management rollover, when considered in conjunction with the overall Merger and any contemporaneous or subsequent cash distributions, could be recharacterized as a "disguised sale" under Section 707(a)(2)(B) of the Code and the regulations thereunder.
Under Treasury Regulations Section 1.707-3, a transfer of property by a partner to a partnership and a transfer of money or other consideration by the partnership to the partner are treated as a sale of property if, based on all the facts and circumstances, the transfers are properly characterized as a sale. The regulations establish a rebuttable presumption that transfers occurring within a two-year period are part of a sale. See Treas. Reg. § 1.707-3(c)(1).
In this transaction, the management participants are contributing Pennfield shares to the partnership and receiving only equity interests in return. No contemporaneous cash distributions to the management participants are contemplated. As long as no distributions are made to the rollover participants within the two-year window following the contribution, the presumption under Treasury Regulations Section 1.707-3(c)(1) will be that the contribution is not a disguised sale. We strongly recommend that HPE Fund IV and the post-closing partnership entity refrain from making any distributions to the management rollover participants for at least two years following the closing date to avoid triggering the disguised sale presumption.
We also note that the management participants' allocated share of partnership liabilities under Section 752 of the Code may provide additional tax basis in their partnership interests, which is a benefit of the partnership structure. However, liability allocations do not, standing alone, create disguised sale risk if the allocation is consistent with the economic arrangement of the parties and is not part of a plan to distribute cash to the contributing partners in connection with their contributions. See Treas. Reg. § 1.707-5.
Section 704(c) Considerations. Under Section 704(c)(1)(A), if the contributed Pennfield shares have a fair market value that differs from the contributing partner's adjusted basis at the time of contribution, the partnership must allocate income, gain, loss, and deductions with respect to the contributed property so as to take into account the variation between the property's fair market value and the contributing partner's adjusted basis. The management participants' Pennfield shares likely have an adjusted basis that is lower than the $15.95 per-share fair market value at the time of contribution (assuming the participants acquired their shares through compensation arrangements or at lower historical prices), which would create a "built-in gain" that must be allocated to the contributing partner under Section 704(c) when the partnership subsequently sells or disposes of the contributed shares. The partnership agreement should include appropriate Section 704(c) allocation provisions, and the partnership should select a permissible allocation method (traditional method, traditional method with curative allocations, or remedial allocation method) as set forth in Treasury Regulations Section 1.704-3.
D. Interaction of Rollover with Merger Mechanics
Timing. The management rollover is structured to occur simultaneously with the closing of the Merger. At the effective time of the Merger, the rollover shares are cancelled in the Merger but are not converted into the right to receive the $15.95 per-share cash consideration. Instead, they are contributed to the post-closing holding entity in exchange for equity interests. The Rollover Agreement provides for this treatment, and the Merger Agreement must include appropriate provisions to exclude the rollover shares from the per-share cash consideration payable to other stockholders.
Merger Agreement Coordination. To ensure the proper tax treatment of the rollover, the Merger Agreement must clearly provide that the rollover shares are "Excluded Shares" (or equivalent defined term) that are not entitled to receive the Per-Share Merger Consideration. The Rollover Agreement should be cross-referenced in the Merger Agreement as a "Company Support Agreement" or similar ancillary agreement. Careful drafting is required to ensure that the rollover shares are neither cancelled for cash nor treated as dissenting shares, but are instead converted into (or exchanged for) equity interests in the post-closing entity as contemplated by the rollover structure.
Voting and Support Agreement. Each management rollover participant has agreed, pursuant to the Rollover Agreement and/or a separate Voting and Support Agreement, to vote all of their Pennfield shares (including both rollover shares and non-rollover shares) in favor of the Merger and against any competing proposals. This voting commitment does not, by itself, create any adverse tax consequences, as it is a contractual obligation that does not constitute a taxable event.
Appraisal Rights. Each management rollover participant is expected to waive their appraisal rights under DGCL Section 262 with respect to the rollover shares. This waiver is appropriate because the rollover participants are not receiving cash in the Merger but are instead receiving equity in the post-closing entity, and the exercise of appraisal rights would be inconsistent with the rollover arrangement. With respect to their non-rollover shares (which are cashed out at $15.95 per share), the management participants are likewise expected to waive appraisal rights as a condition of the Rollover Agreement.
E. Recommended Rollover Structure
Based on the foregoing analysis, we recommend that the post-closing holding entity be structured as a Delaware limited partnership or a Delaware limited liability company that is treated as a partnership for federal income tax purposes. This recommendation is based on the following considerations:
(i) Section 721 Nonrecognition. The partnership structure provides tax-deferred treatment under Section 721 without the need to satisfy the Section 351 "control" requirement. While the control test would be satisfied in this transaction (because HPE Fund IV and the management participants together own 100% of the post-closing entity), the partnership structure provides a simpler and more robust path to nonrecognition treatment and eliminates any risk that a technical failure of the Section 351 requirements would result in taxable gain recognition to the management participants.
(ii) Avoidance of Double Taxation. A partnership or LLC taxed as a partnership is not subject to entity-level federal income tax. Income, gain, loss, and deductions flow through to the partners and are taxed only at the partner level. This avoids the double taxation (corporate-level tax plus stockholder-level tax on distributions) that would apply if the post-closing entity were a C corporation.
(iii) Flexible Income Allocation. The partnership structure enables flexible allocation of income, gain, loss, and deductions among the partners under Section 704(b) and the regulations thereunder, subject to the requirement that allocations have "substantial economic effect" or be "in accordance with the partners' interests in the partnership." This flexibility is particularly valuable in the private equity context, where carried interest arrangements, preferred return structures, and management incentive equity allocations are common.
(iv) Consistency with HPE Fund IV Structure. HPE Fund IV itself is a Delaware limited partnership. Holding Pennfield through a pass-through entity is consistent with HPE Fund IV's fund structure and allows HPE Fund IV's limited partners (the fund's investors) to benefit from pass-through treatment without an additional layer of corporate tax.
(v) Industry Standard. The use of a partnership or LLC holding structure is the standard practice in the private equity industry for portfolio company acquisitions, and is the structure most commonly employed by sponsors of comparable fund size and investment strategy.
If a "corporate blocker" is required for certain investors in HPE Fund IV (for example, tax-exempt investors or foreign investors who wish to avoid unrelated business taxable income ("UBTI") or effectively connected income ("ECI") exposure), a hybrid structure may be employed in which a corporate subsidiary is interposed between the partnership holding entity and Pennfield. This hybrid structure would require additional analysis and is discussed further in the companion State & Local Tax Considerations Memorandum dated March 30, 2025. We recommend that this issue be addressed in the final structuring discussions with Nathaniel Cross and Jonah Whitfield.
VI. Tax Treatment of Equity Commitment and Co-Investment Structures
A. Equity Commitment Letter — HPE Fund IV
HPE Fund IV has committed to contribute an aggregate of $340,000,000 in total equity (inclusive of $21,500,000 in management rollover equity) to Pinnacle Merger Sub, Inc. or the post-closing holding entity, pursuant to the Equity Commitment Letter dated March 27, 2025. After accounting for the management rollover and the Ashford co-investment, HPE Fund IV's net equity contribution is $258,500,000.
For federal income tax purposes, HPE Fund IV's cash equity contribution to the post-closing entity will be treated as a tax-free capital contribution. If the post-closing entity is a corporation, the contribution qualifies for nonrecognition treatment under Section 351 (as part of the same integrated plan of capitalization in which the management participants also contribute property). If the post-closing entity is a partnership or LLC taxed as a partnership, the contribution qualifies for nonrecognition treatment under Section 721(a). In either case, HPE Fund IV recognizes no gain or loss on the capital contribution.
HPE Fund IV's tax basis in its equity interest in the post-closing entity will equal the amount of cash contributed — i.e., $258,500,000 — under Section 358(a) (for corporate entities) or Section 722 (for partnership entities). HPE Fund IV's holding period in its equity interest will commence on the date of the contribution.
B. Ashford Growth Partners LP Co-Investment
Ashford Growth Partners LP has committed $60,000,000 to the transaction pursuant to the Co-Investment Agreement dated March 27, 2025. Ashford will contribute cash in exchange for an equity interest in the post-closing holding entity, with terms and conditions specified in the Co-Investment Agreement, including tag-along rights, drag-along rights, information rights, and transfer restrictions.
The federal income tax treatment of Ashford's co-investment is identical in principle to that of HPE Fund IV's equity contribution. Ashford's cash contribution to the post-closing entity will qualify for nonrecognition treatment under either Section 351 (if the entity is a corporation) or Section 721 (if the entity is a partnership). Ashford will recognize no gain or loss on the contribution, and Ashford's basis in its equity interest will equal the $60,000,000 of cash contributed.
The tag-along and drag-along rights provided to Ashford under the Co-Investment Agreement are contractual rights that do not have any present value for federal income tax purposes and do not create any current tax consequences upon grant. These rights will become relevant for tax purposes only if and when they are exercised in connection with a future liquidity event (e.g., a sale of the portfolio company, an IPO, or a secondary sale of equity interests), at which time the tax consequences will depend on the specific terms and circumstances of the transaction.
C. No Partnership Disguised Sale or Mixing Bowl Issues
The equity commitments by HPE Fund IV and Ashford Growth Partners involve only cash contributions to the post-closing entity. Cash contributions to a partnership generally do not raise disguised sale concerns under Section 707(a)(2)(B) and the regulations thereunder, because the contributing partner is not transferring "property" that has a built-in gain or loss. The regulations define "property" for disguised sale purposes broadly but focus on the transfer of appreciated property followed by a related distribution of cash or other property; a contribution of cash does not implicate the same concerns.
Similarly, the "mixing bowl" transaction rules under Sections 704(c)(1)(B) and 737 of the Code are not relevant to the cash contributions by HPE Fund IV and Ashford. Section 704(c)(1)(B) applies when a partnership distributes contributed property to a partner other than the contributing partner within seven years of the contribution. Section 737 applies when a partnership distributes property (other than cash) to a contributing partner who previously contributed appreciated property to the partnership. Because HPE Fund IV and Ashford are contributing only cash (not appreciated property), neither Section 704(c)(1)(B) nor Section 737 is triggered with respect to their contributions.
The only appreciated property contribution in the transaction is the management rollover of Pennfield shares by Langford, Simmons, and Dunn. The Section 704(c) and disguised sale considerations applicable to that contribution are addressed in Section V.C above.
VII. Tax Basis and Depreciation/Amortization Considerations
A. Buyer's Tax Basis in Pennfield Assets
Because the Merger is structured as a taxable acquisition of Pennfield's stock (through the reverse triangular merger mechanism), and not as an acquisition of Pennfield's underlying assets, the buyer does not receive a "cost" or "stepped-up" basis in Pennfield's underlying assets. This is a fundamental distinction between stock acquisitions and asset acquisitions for federal income tax purposes.
Following the Merger, Pennfield will continue as a wholly owned subsidiary of the post-closing holding entity. Pennfield's existing tax attributes — including its historical tax basis in its assets (inventory, property and equipment, intangible assets, leasehold improvements, etc.), its accumulated depreciation and amortization schedules, and any net operating loss carryforwards, tax credit carryforwards, and other tax attributes — will carry over without adjustment. The buyer (HPE Fund IV, through the post-closing entity) will have a cost basis in the stock of Pennfield equal to the purchase price paid (approximately $980 million less the rollover equity component), but this stock basis does not translate into any increase in the basis of Pennfield's underlying assets.
This lack of asset basis step-up means that Pennfield will not be entitled to claim any new depreciation or amortization deductions attributable to the purchase price paid by the buyer. Existing depreciation and amortization schedules for Pennfield's assets will continue on their historical basis. Over the holding period of the investment, this results in a lower tax shield compared to an asset acquisition in which the full purchase price is allocated among the target's assets and amortized or depreciated over their useful lives.
Section 338(h)(10) Election. A Section 338(h)(10) election, which would permit the buyer to treat the stock acquisition as a deemed asset acquisition for tax purposes (thereby obtaining a stepped-up basis in Pennfield's assets), is not available in this transaction. As analyzed in detail in the companion Section 338(h)(10) Election Analysis Memorandum dated March 29, 2025, a Section 338(h)(10) election requires a "qualified stock purchase" (within the meaning of Section 338(d)(3)) by a "purchasing corporation" from either (i) a selling consolidated group parent corporation or (ii) the stockholders of an S corporation. Neither condition is met here: Pennfield is a widely held public company with no single corporate parent, and Pennfield is a C corporation (not an S corporation). Additionally, the "purchasing corporation" requirement under Section 338 requires the acquirer to be a corporation, and HPE Fund IV is a limited partnership. Accordingly, a Section 338(h)(10) election is not available, and no further analysis of that ele

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