PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT WORK PRODUCT
MEMORANDUM
TO: Oliver Mackenzie, Responsible Partner, Mergers & Acquisitions, Calderwood & Harkness LLP
FROM: Ryan Kowalski, Lead Associate, Mergers & Acquisitions, Calderwood & Harkness LLP Megan Chu, Working Associate, Mergers & Acquisitions, Calderwood & Harkness LLP
DATE: March 26, 2025
RE: Change of Control Analysis — Pennfield Holdings, Inc. — Contracts, Leases, and Incentive Plans Triggered by Proposed Merger with Pinnacle Merger Sub, Inc. (Project Summit)
MATTER NO.: 1003-00004
CLIENT: Harrowgate Private Equity Fund IV LP
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I. EXECUTIVE SUMMARY
A. Purpose of This Memorandum
The purpose of this memorandum is to identify, analyze, and catalog all provisions in the agreements of Pennfield Holdings, Inc. ("Pennfield," the "Company," or the "Target," Nasdaq: PNFD) that constitute or reference a "change of control" (or analogous concept, including "change in control," "fundamental change," or "transfer of control") and that would be triggered by the consummation of the proposed reverse triangular merger between Pinnacle Merger Sub, Inc. ("Merger Sub"), a newly formed, wholly owned subsidiary of Harrowgate Private Equity Fund IV LP ("HPE Fund IV," "Harrowgate," or the "Sponsor"), and Pennfield (the "Transaction" or the "Merger"), pursuant to the Agreement and Plan of Merger (the "Merger Agreement") expected to be executed on or about April 7, 2025.
This memorandum is intended to provide the deal team — and ultimately the Sponsor — with a comprehensive roadmap of (i) the contractual provisions that will be implicated by the change of control, (ii) the consents, notices, and approvals that must be obtained or delivered as a condition to or in connection with the closing of the Merger, (iii) the financial consequences (including severance obligations, equity acceleration costs, debt repayment obligations, and potential lease termination exposure) arising from the Merger, and (iv) recommended actions and prioritization for each category of affected agreement.
B. Transaction Structure
The proposed Transaction is structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law (the "DGCL"). Under this structure, Merger Sub will merge with and into Pennfield, with Pennfield surviving the Merger as a wholly owned subsidiary of HPE Fund IV. At the Effective Time (as defined in the Merger Agreement), each outstanding share of Pennfield common stock (other than dissenting shares, treasury shares, and shares held by Harrowgate or its affiliates) will be converted into the right to receive $15.95 per share in cash, without interest, representing aggregate merger consideration of approximately $980,000,000 on a fully diluted basis (assuming approximately 61,450,000 fully diluted shares outstanding, inclusive of shares subject to outstanding stock options and restricted stock units).
The reverse triangular merger structure preserves Pennfield as the surviving legal entity, which is significant for the analysis of certain anti-assignment provisions in leases and other contracts (discussed in Section V below). However, because the Transaction will result in a single person (HPE Fund IV, through Merger Sub) acquiring 100% of Pennfield's outstanding voting securities, the Transaction constitutes a "change of control" under every agreement analyzed in this memorandum.
C. Scope of Review
Our review is based on documents made available in the Pennfield virtual data room hosted on the Thackeray Solutions platform under the project name "Project Summit," which was opened on February 10, 2025. As of the date of this memorandum, we have reviewed documents uploaded through March 25, 2025. The categories of agreements reviewed include:
(A) Credit agreements and debt instruments;
(B) Executive employment agreements;
(C) Commercial lease agreements (corporate headquarters, distribution/warehouse facilities, and retail store locations);
(D) Equity incentive plans and related award agreements (including the Pennfield Holdings, Inc. 2019 Omnibus Equity Incentive Plan and the Employee Stock Purchase Plan); and
(E) Other material contracts containing change of control provisions, including supply and vendor agreements, licensing and brand partnership agreements, technology and software agreements, and insurance policies.
D. Summary of Key Findings
Based on our review, the Merger will trigger change of control provisions in the following categories of agreements:
(i) One existing credit agreement (the Senior Secured Credit Agreement governing the $175,000,000 revolving credit facility), which will require full repayment of all outstanding indebtedness at or prior to closing, as well as one equipment financing facility with approximately $15,000,000 outstanding;
(ii) Four executive employment agreements (covering the CEO, CFO, COO, and General Counsel), each of which contains "double trigger" severance and acceleration provisions that will become operative upon a qualifying termination following the change of control;
(iii) Approximately 38 commercial lease agreements (out of a total portfolio of approximately 215 leases), which require landlord consent, notice, or which grant the landlord a recapture right upon a change of control of the tenant;
(iv) The Pennfield Holdings, Inc. 2019 Omnibus Equity Incentive Plan and all outstanding awards thereunder (approximately 3,250,000 shares subject to outstanding options and RSUs), which will accelerate and be cashed out at the Effective Time, as well as the Employee Stock Purchase Plan; and
(v) Certain vendor, supply, licensing, technology, and insurance agreements, totaling approximately 9 additional agreements with change of control provisions.
The key risk areas and required consents are summarized in the table below and discussed in detail in subsequent sections of this memorandum.
E. Summary Table — Change of Control Provisions by Category
II. METHODOLOGY AND SOURCES
A. Data Room Review
All documents referenced in this memorandum were reviewed from the Thackeray Solutions virtual data room established for Project Summit. The data room was opened on February 10, 2025, and our review encompasses all documents uploaded through March 25, 2025. Documents were organized in the data room by category (e.g., "3.0 — Material Contracts," "4.0 — Real Property / Leases," "5.0 — Employee Matters," "6.0 — Debt and Credit Facilities"), and we reviewed the contents of each folder relevant to the scope of this analysis.
B. Public Filings Cross-Reference
In addition to the data room documents, we reviewed all material contracts listed in Pennfield's most recent Annual Report on Form 10-K for fiscal year 2024 (the fiscal year ended January 31, 2025), filed with the Securities and Exchange Commission, including all exhibits thereto. We cross-referenced the material contracts disclosed in the Form 10-K against the documents uploaded to the data room to identify any gaps or omissions. As of the date hereof, no material discrepancies have been identified, though confirmation from Pennfield's counsel is pending (see below).
C. Corporate Secretary Records
We also cross-referenced the data room documents against Pennfield's corporate secretary records, which were provided by Patricia Okafor, General Counsel & Corporate Secretary of Pennfield, at our request. These records include the Company's minute books, board and committee resolutions, and a register of material contracts maintained by the legal department.
D. Definitions and Interpretive Framework
All references to "change of control" in this memorandum refer to the defined terms used in the relevant agreements (which vary in formulation from agreement to agreement, as further detailed in Appendix A). However, notwithstanding the variations in the precise definitional language, the change of control provisions in the agreements reviewed generally capture one or both of the following triggering events:
(a) The acquisition by any person or group (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) of beneficial ownership of more than 50% of Pennfield's outstanding voting securities; and/or
(b) The consummation of a merger, consolidation, or similar business combination transaction in which Pennfield's pre-transaction stockholders cease to hold a majority of the voting stock of the surviving entity (or its ultimate parent).
Because the proposed reverse triangular merger will result in HPE Fund IV (through Merger Sub) acquiring 100% of Pennfield's outstanding voting securities, both of the foregoing triggering events are clearly satisfied. Accordingly, for purposes of this memorandum, we have concluded that the Transaction constitutes a "change of control" (or equivalent) under every agreement analyzed herein, unless otherwise noted.
It bears emphasis that the reverse triangular merger structure — in which Pennfield survives as the same legal entity — is relevant to the analysis of anti-assignment provisions in certain lease agreements. Specifically, because Pennfield (as the surviving entity) is not being "assigned" or transferred to a new legal entity, but rather continues to exist with a change at the stockholder level, certain narrowly drafted anti-assignment provisions may not be triggered. We have analyzed each lease's anti-assignment and change of control provisions individually, and leases whose anti-assignment clauses are broad enough to capture a change of control at the stockholder level have been included in our count of 38 affected leases.
E. Limitations
This analysis is based solely on the documents provided in the Thackeray Solutions data room as of March 25, 2025, supplemented by publicly available filings and the corporate secretary records described above. We have not independently verified the completeness of the data room or the accuracy of the information contained in the documents reviewed. Pennfield's outside counsel, Calloway, Briggs & Harmon LLP (contacts: Janet Alcorn and Linda Chiang), has been asked to confirm that all agreements containing change of control provisions (or analogous concepts) have been uploaded to the data room. As of the date of this memorandum, that confirmation remains pending. We will supplement this memorandum upon receipt of that confirmation or upon identification of any additional agreements.
Additionally, we note that certain agreements may contain provisions that are functionally equivalent to a change of control provision (e.g., material adverse change clauses, "key person" provisions, or approval rights triggered by changes in management or ownership) that are not expressly denominated as "change of control" provisions. While we have endeavored to identify such provisions where they appear in the agreements we reviewed, our primary focus has been on provisions expressly captioned or defined as change of control provisions, and a broader review of indirect trigger provisions may be warranted.
III. EXISTING CREDIT AGREEMENTS
A. Senior Secured Credit Agreement (Revolving Credit Facility)
1. Overview of the Facility
Pennfield is party to that certain Senior Secured Credit Agreement (the "Credit Agreement"), originally dated as of June 15, 2021, by and among Pennfield Holdings, Inc., as borrower, the lenders party thereto from time to time, and Falconer National Bank, N.A. ("Falconer"), as administrative agent and collateral agent (the "Administrative Agent"). The Credit Agreement was amended and restated as of March 1, 2023 (the "Amended and Restated Credit Agreement") to, among other things, extend the maturity date and modify certain financial covenants.
The Amended and Restated Credit Agreement provides for a senior secured revolving credit facility in an aggregate principal amount of $175,000,000 (the "Revolving Facility"). As of the most recent quarterly report available in the data room (for the quarter ended October 31, 2024), the Company had approximately $47,000,000 of borrowings drawn under the Revolving Facility, with approximately $128,000,000 of undrawn availability (subject to applicable borrowing base limitations and outstanding letters of credit). We are requesting an updated outstanding balance as of a date closer to the expected execution of the Merger Agreement.
It is noteworthy that Falconer National Bank is also the proposed Lead Arranger for the acquisition financing contemplated in connection with the Merger (alongside Dunmore Capital Markets LLC). This dual role presents certain practical advantages for the coordination of the payoff of the existing Revolving Facility and the funding of the new acquisition financing, but it also merits attention to potential conflicts of interest, which we understand are being managed by Falconer's separate deal teams.
2. Change of Control Provision
Section 8.01(g) of the Amended and Restated Credit Agreement defines "Change of Control" as:
"(a) any 'person' or 'group' (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act, but excluding any employee benefit plan of the Company or any of its subsidiaries, and any person or entity acting in its capacity as trustee, agent, or other fiduciary or administrator of any such plan) shall become the 'beneficial owner' (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the outstanding Voting Stock of [Pennfield]; or (b) the consummation of a merger, consolidation, or similar transaction involving [Pennfield] after which the holders of [Pennfield's] Voting Stock immediately prior to such transaction do not hold, directly or indirectly, at least a majority of the Voting Stock of the surviving entity or the ultimate parent entity resulting from such transaction."
The proposed reverse triangular merger unambiguously triggers both clauses (a) and (b) of this definition. HPE Fund IV (through Merger Sub) will acquire 100% of Pennfield's outstanding voting stock, and Pennfield's pre-Merger stockholders will receive cash consideration and will hold no voting stock of the surviving entity.
3. Consequences of Triggering
Under Section 8.01 of the Amended and Restated Credit Agreement, the occurrence of a Change of Control constitutes an immediate "Event of Default." Upon the occurrence and during the continuance of an Event of Default, the Administrative Agent may (and at the written direction of the Required Lenders — defined as lenders holding more than 50% of the aggregate commitments — shall):
(i) declare all outstanding obligations under the Revolving Facility immediately due and payable, without presentment, demand, protest, or other notice of any kind;
(ii) terminate all commitments of the lenders under the Revolving Facility; and
(iii) exercise all rights and remedies available under the Credit Agreement, the other loan documents, and applicable law, including enforcement of security interests in the collateral.
In practical terms, this means that unless the outstanding indebtedness under the Revolving Facility is repaid in full and the facility is terminated at or prior to the closing of the Merger, the consummation of the Merger would constitute an Event of Default that could result in the immediate acceleration of approximately $47,000,000 (or such greater or lesser amount as is outstanding at the time of closing) in principal, plus accrued interest, fees, and other obligations.
4. Required Action and Coordination with Acquisition Financing
The acquisition financing structure for the Merger, as set forth in the Debt Commitment Letter from Falconer National Bank and Dunmore Capital Markets LLC, contemplates the full repayment and termination of the existing Revolving Facility at the closing of the Merger. Specifically, the Sources and Uses summary included in the commitment letter provides for:
• A new $490,000,000 Term Loan B facility; and
• A new $150,000,000 revolving credit facility (expected to be undrawn at closing),
the proceeds of which (together with the Sponsor's equity contribution) will be used to fund the aggregate merger consideration, repay the existing Revolving Facility, and pay transaction fees and expenses.
Accordingly, the required action is as follows:
(a) Payoff Letter. A payoff letter must be obtained from the Administrative Agent (Falconer National Bank, contact: Gregory Poole) specifying the exact amount required to discharge all outstanding obligations under the Amended and Restated Credit Agreement, including principal, accrued and unpaid interest, any applicable prepayment premiums (we note that the Revolving Facility does not appear to contain a prepayment premium, but this should be confirmed), breakage costs, and any other fees and expenses.
(b) Funds Flow Coordination. The payoff amount must be incorporated into the Closing Funds Flow Memorandum to ensure that sufficient funds are available at the closing to satisfy the repayment obligation simultaneously with the consummation of the Merger.
(c) Interim Period. If there is any period between the signing of the Merger Agreement and the closing during which the Change of Control could be deemed to have occurred (which should not be the case in a typical two-step process where the Change of Control occurs only at the Effective Time), a waiver from the Required Lenders might be necessary. However, under the anticipated Merger structure, the Change of Control will occur only at the Effective Time, so no interim waiver should be needed. We will confirm this analysis upon review of the final Merger Agreement.
(d) No Separate Consent Required. Because the plan is to repay and terminate the Revolving Facility at closing, no separate lender consent to the Change of Control is required. The lenders will be paid in full, and the facility will be terminated.
Cross-Reference: This item should be coordinated with the Funds Flow Memorandum (to be prepared by Kowalski), the Debt Commitment Letter analysis (separate memorandum), and the Closing Checklist & Conditions Tracker.
B. Equipment Financing Facility
1. Overview. In addition to the Revolving Facility, Pennfield is party to an equipment financing arrangement consisting of multiple promissory notes secured by specified equipment assets used in the Company's distribution and warehouse operations. Based on the documents available in the data room, the aggregate outstanding principal balance under these equipment financing notes is approximately $15,000,000 as of the most recent available reporting date. The lender is a regional financial institution (identified in the data room; name omitted from this memorandum for confidentiality reasons in circulation copies).
2. Change of Control Provision
The equipment financing notes contain an acceleration clause that is triggered upon a "change of control" of the borrower, defined in substantially similar terms to the definition in the Amended and Restated Credit Agreement (i.e., acquisition of more than 50% of voting securities or consummation of a merger in which existing stockholders lose majority control). The proposed Merger clearly triggers this definition.
3. Consequences of Triggering
Upon a change of control, the lender may, at its option, declare all amounts outstanding under the equipment financing notes immediately due and payable. Unlike the Credit Agreement (where the change of control constitutes an automatic Event of Default), the equipment financing notes appear to grant the lender a permissive acceleration right — i.e., the lender may, but is not required to, accelerate the notes.
4. Required Action
The required action is to either (a) repay all outstanding amounts under the equipment financing notes at or prior to closing (using proceeds from the acquisition financing or available cash), or (b) negotiate a waiver or consent from the equipment lender permitting the Merger to occur without triggering acceleration. Given the relatively modest outstanding balance ($15,000,000) and the fact that the surviving entity will continue to operate the equipment, we believe that either approach is viable. We recommend that the deal team discuss with Harrowgate's financing team whether repayment or waiver is preferred from a capital structure perspective. In either event, this item should be incorporated into the Funds Flow Memorandum and the Closing Checklist.
IV. EXECUTIVE EMPLOYMENT AGREEMENTS
A. Overview
Pennfield is party to four executive employment agreements, each of which contains change of control provisions. The executives covered by these agreements are:
1. Catherine Langford, Chief Executive Officer;
2. Derek Simmons, Chief Financial Officer;
3. Maxwell Dunn, Chief Operating Officer; and
4. Patricia Okafor, General Counsel & Corporate Secretary.
Each of the four employment agreements defines "Change of Control" (or, in the case of the Langford agreement, "Change in Control") in substantially similar terms: the acquisition by any person or group of beneficial ownership of more than 50% of Pennfield's outstanding voting securities, or the consummation of a merger, consolidation, or similar transaction in which Pennfield's stockholders do not hold a majority of the voting stock of the surviving entity. As noted above, the proposed reverse triangular merger triggers this definition in all four agreements.
Critically, all four agreements employ a "double trigger" severance structure. This means that the change of control alone does not trigger the severance payments and benefits; rather, the executive must also experience a qualifying termination of employment — specifically, a termination by the Company without "Cause" or a voluntary resignation by the executive for "Good Reason" — within a specified period following the change of control (the "Change of Control Window"). If the executive continues in employment following the change of control and is not terminated without Cause, and does not resign for Good Reason, the enhanced severance provisions are not triggered (although certain equity acceleration provisions may be triggered on a single-trigger basis under the 2019 Omnibus Equity Incentive Plan, as discussed in Section VI).
The financial implications of these agreements are significant. If all four executives were to experience a qualifying termination following the change of control, the aggregate estimated cash severance payments would be approximately $11,959,375, plus the value of accelerated equity awards, continued health and welfare benefits, and pro-rata bonuses. However, because three of the four executives (Langford, Simmons, and Dunn) are expected to roll over equity into the surviving entity and continue in their roles post-closing, the practical likelihood that all four double-trigger severance provisions will be activated is considered to be low — though the contingent liabilities must be accounted for in the Transaction's financial modeling and disclosed in appropriate Transaction documents.
We discuss each executive employment agreement in detail below.
B. Catherine Langford — Chief Executive Officer
1. Agreement Terms
Ms. Langford's employment with Pennfield is governed by an Amended and Restated Employment Agreement dated as of April 1, 2022, as further amended by Amendment No. 1, effective January 15, 2024 (collectively, the "Langford Employment Agreement"). The Langford Employment Agreement provides for an initial employment term through March 31, 2026, with automatic one-year renewal periods thereafter unless either party provides 90 days' written notice of non-renewal.
Ms. Langford's current base salary is $925,000 per annum, and her target annual bonus opportunity is 150% of base salary ($1,387,500), subject to the achievement of performance metrics established annually by the Compensation Committee of the Pennfield Board of Directors.
2. Change of Control Window
The Langford Employment Agreement provides for a Change of Control Window of 24 months following a Change in Control. This is the longest window among the four executive agreements and reflects Ms. Langford's seniority and negotiating leverage at the time the agreement was entered into.
3. Double-Trigger Severance Provisions
If, within the 24-month Change of Control Window, Ms. Langford's employment is terminated by the Company without Cause, or if Ms. Langford resigns for Good Reason (each as defined in the Langford Employment Agreement), she will be entitled to the following severance benefits:
(i) Cash Severance Payment: A lump-sum cash payment equal to 2.5 times the sum of (a) her annual base salary and (b) her target annual bonus, payable within 60 days following the date of termination. Based on current compensation levels, this payment would equal 2.5 × ($925,000 + $1,387,500) = $5,781,250.
(ii) Equity Award Acceleration: Full acceleration of all unvested equity awards held by Ms. Langford as of the date of termination, including stock options and restricted stock units granted under the 2019 Omnibus Equity Incentive Plan.
(iii) Continued Health and Welfare Benefits: Continued participation in the Company's group health and welfare benefit plans (or equivalent coverage) for a period of 24 months following the date of termination, at the Company's cost.
(iv) Pro-Rata Bonus: A pro-rata annual bonus for the year of termination, based on actual performance through the date of termination (or, if actual performance cannot be determined, based on target-level performance), payable at the same time as annual bonuses are paid to other senior executives.
4. Definitions of "Cause" and "Good Reason"
The Langford Employment Agreement defines "Cause" to include (a) willful misconduct or gross negligence in the performance of duties, (b) conviction of, or plea of guilty or nolo contendere to, a felony, (c) fraud, embezzlement, or material dishonesty, (d) material breach of the employment agreement or Company policies, subject to a 30-day cure period, and (e) willful refusal to perform lawful directives of the Board. The definition is narrowly tailored and includes customary procedural protections (Board vote, notice, and cure periods).
"Good Reason" is defined to include (a) a material reduction in base salary or target bonus opportunity (other than an across-the-board reduction applicable to all senior executives), (b) a material diminution in authority, duties, or responsibilities, (c) relocation of principal place of employment by more than 50 miles, (d) a material breach by the Company of the employment agreement, and (e) a failure by a successor entity to assume the employment agreement. The definition includes a notice-and-cure mechanism (30-day notice, 30-day cure period, and resignation must occur within 90 days following the expiration of the cure period).
5. Interaction with Rollover Equity
Ms. Langford is one of three executives who have agreed (or are expected to agree) to roll over a portion of their equity in Pennfield into equity of the surviving entity or a parent holding company. Ms. Langford's expected rollover amount is approximately $12,500,000. She is expected to continue serving as Chief Executive Officer of Pennfield following the closing of the Merger.
If Ms. Langford continues in her role post-closing and is not terminated without Cause, and does not resign for Good Reason, the double-trigger severance provisions of the Langford Employment Agreement will not be activated. However, the following points require attention:
(a) The change of control itself triggers the equity acceleration provisions under the 2019 Omnibus Equity Incentive Plan (which provides for single-trigger acceleration of RSUs — see Section VI below). The Merger Agreement is expected to provide for the cancellation and cash-out of all outstanding equity awards at the Effective Time. The Rollover Agreement must clearly specify whether Ms. Langford's rollover equity ($12,500,000) is in addition to, or in partial substitution for, the cash-out of her accelerated equity awards. Ambiguity on this point could result in double-counting or disputes.
(b) The Rollover Agreement should also address whether Ms. Langford's continued employment post-closing constitutes an assumption of the Langford Employment Agreement by the surviving entity (to avoid a "Good Reason" trigger under clause (e) of the Good Reason definition).
(c) The Rollover Agreement and any new management equity arrangements should be negotiated in tandem with, and cross-referenced to, the treatment of Ms. Langford's existing equity awards and employment agreement.
6. Section 280G Analysis
The change of control payments and benefits under the Langford Employment Agreement, together with the value of accelerated equity awards, may constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). If the aggregate present value of all "parachute payments" to Ms. Langford equals or exceeds three times her "base amount" (generally, her average annual W-2 compensation over the five calendar years preceding the year of the change of control), the excess over one times the base amount would be subject to a 20% excise tax under Section 4999 of the Code, and the Company (or the surviving entity) would lose the corresponding deduction under Section 280G.
The Langford Employment Agreement contains a "best net" cutback provision, which provides that if the aggregate parachute payments to Ms. Langford would be subject to the Section 4999 excise tax, the payments will be reduced to the "safe harbor" amount (i.e., 2.99 times the base amount) if, and only if, such reduction would result in a greater after-tax benefit to Ms. Langford than receiving the full payments and bearing the excise tax. This is in contrast to a "gross-up" provision (which would require the Company to make the executive whole for the excise tax) or an automatic cutback provision.
We recommend that Sylvia Hartwell (Calderwood & Harkness Tax Department) and Crestline Tax Advisors LLC (Alan Fitzgerald) be engaged to prepare preliminary Section 280G calculations for Ms. Langford (and the other three executives) as soon as practicable. Additionally, Harrowgate should consider whether to pursue a stockholder vote to approve the excess parachute payments under Section 280G(b)(5)(B), which, if obtained by the requisite vote of Pennfield's stockholders (75% of the shares entitled to vote, excluding shares held by the "disqualified individual"), would eliminate the 280G penalty. Such a vote is sometimes conducted in connection with the stockholder vote on the Merger Agreement itself, but requires careful structuring and separate disclosure.
7. Restrictive Covenants
The Langford Employment Agreement contains a 12-month post-termination non-competition covenant and an 18-month post-termination non-solicitation covenant (covering both employees and customers/clients). These restrictive covenants apply following any termination of employment, including a termination following a change of control. The enforceability of the non-competition covenant should be confirmed under applicable state law (North Carolina, where Ms. Langford is principally employed). We note that the FTC's proposed rule banning non-compete agreements for most workers remains subject to legal challenge and has not taken effect as of the date of this memorandum, and in any event would not apply to "senior executives" (defined as employees earning more than $151,164 annually who are in policy-making positions).
C. Derek Simmons — Chief Financial Officer
1. Agreement Terms
Mr. Simmons's employment is governed by an Employment Agreement dated as of September 1, 2021, as amended by Amendment No. 1, effective March 1, 2023 (the "Simmons Employment Agreement"). Mr. Simmons's current base salary is $625,000 per annum, with a target annual bonus opportunity of 100% of base salary ($625,000).
2. Change of Control Window
The Simmons Employment Agreement provides for a Change of Control Window of 18 months following a Change of Control.
3. Double-Trigger Severance Provisions
If, within the 18-month Change of Control Window, Mr. Simmons's employment is terminated by the Company without Cause or Mr. Simmons resigns for Good Reason, he will be entitled to:
(i) Cash Severance Payment: A lump-sum cash payment equal to 2.0 times the sum of his annual base salary and his target annual bonus. Based on current compensation levels: 2.0 × ($625,000 + $625,000) = $2,500,000.
(ii) Equity Award Acceleration: Full acceleration of all unvested equity awards.
(iii) Continued Health and Welfare Benefits: 18 months of continued benefits.
(iv) Pro-Rata Bonus: A pro-rata annual bonus for the year of termination.
4. Interaction with Rollover Equity
Mr. Simmons is expected to roll over approximately $5,000,000 of equity and continue as Chief Financial Officer post-closing. The same double-trigger analysis and Rollover Agreement coordination issues described with respect to Ms. Langford apply equally to Mr. Simmons.
5. Section 280G Analysis
The Simmons Employment Agreement contains the same "best net" cutback provision as the Langford Employment Agreement. We recommend that 280G calculations be prepared simultaneously for Mr. Simmons and the other covered executives.
6. Restrictive Covenants
The Simmons Employment Agreement contains a 12-month non-competition covenant and a 12-month non-solicitation covenant, both running from the date of termination.
D. Maxwell Dunn — Chief Operating Officer
1. Agreement Terms
Mr. Dunn's employment is governed by an Employment Agreement dated as of January 15, 2022 (the "Dunn Employment Agreement"). Mr. Dunn's current base salary is $575,000 per annum, with a target annual bonus opportunity of 100% of base salary ($575,000).
2. Change of Control Window
The Dunn Employment Agreement provides for a Change of Control Window of 18 months following a Change of Control.
3. Double-Trigger Severance Provisions
If, within the 18-month Change of Control Window, Mr. Dunn's employment is terminated by the Company without Cause or Mr. Dunn resigns for Good Reason, he will be entitled to:
(i) Cash Severance Payment: 2.0 × ($575,000 + $575,000) = $2,300,000.
(ii) Equity Award Acceleration: Full acceleration of all unvested equity awards.
(iii) Continued Health and Welfare Benefits: 18 months of continued benefits.
(iv) Pro-Rata Bonus: A pro-rata annual bonus for the year of termination.
4. Interaction with Rollover Equity
Mr. Dunn is expected to roll over approximately $4,000,000 of equity and continue as Chief Operating Officer post-closing. The same coordination issues apply.
5. Section 280G Analysis
The Dunn Employment Agreement contains the same "best net" cutback provision. We recommend concurrent 280G analysis.
6. Restrictive Covenants
The Dunn Employment Agreement contains a 12-month non-competition covenant and a 12-month non-solicitation covenant.
E. Patricia Okafor — General Counsel & Corporate Secretary
1. Agreement Terms
Ms. Okafor's employment is governed by an Employment Agreement dated as of July 1, 2020, as amended by Amendment No. 1, effective June 1, 2023 (the "Okafor Employment Agreement"). Ms. Okafor's current base salary is $525,000 per annum, with a target annual bonus opportunity of 75% of base salary ($393,750).
2. Change of Control Window
The Okafor Employment Agreement provides for a Change of Control Window of 12 months following a Change of Control. This is the shortest window among the four executive agreements.
3. Double-Trigger Severance Provisions
If, within the 12-month Change of Control Window, Ms. Okafor's employment is terminated by the Company without Cause or Ms. Okafor resigns for Good Reason, she will be entitled to:
(i) Cash Severance Payment: 1.5 × ($525,000 + $393,750) = $1,378,125.
(ii) Equity Award Acceleration: Partial acceleration — 50% of unvested equity awards (as distinguished from the full acceleration provided to Langford, Simmons, and Dunn). This partial acceleration feature is unique to the Okafor Employment Agreement.
(iii) Continued Health and Welfare Benefits: 12 months of continued benefits.
(iv) Pro-Rata Bonus: A pro-rata annual bonus for the year of termination.
4. Rollover and Post-Closing Status
Importantly, Ms. Okafor is not a rollover participant. She has not been included in the group of executives who will roll over equity into the post-closing entity. This raises the question of whether Ms. Okafor will continue in her role as General Counsel & Corporate Secretary of Pennfield following the closing, or whether Harrowgate intends to install its own legal counsel or restructure the legal function.
If Ms. Okafor is terminated without Cause at or shortly after the closing (or if post-closing changes to her role, reporting structure, or authority constitute "Good Reason" under the Okafor Employment Agreement), the double-trigger severance provisions would be activated, resulting in a cash severance payment of approximately $1,378,125 plus benefits, pro-rata bonus, and partial equity acceleration.
We recommend that the Harrowgate deal team (Jonah Whitfield and Rebecca Talmadge) be consulted regarding post-closing retention plans for Ms. Okafor. If the intention is to retain Ms. Okafor, a communication strategy should be developed to provide her with appropriate assurances. If the intention is to replace her, the severance costs should be budgeted into the Transaction model.
5. Section 280G Analysis
The Okafor Employment Agreement contains the same "best net" cutback provision. We recommend that 280G calculations be prepared for Ms. Okafor as well, noting that the lower severance multiplier (1.5x) and shorter benefits continuation period (12 months) reduce the likelihood that the 280G safe harbor will be exceeded, but this cannot be confirmed without a detailed analysis of Ms. Okafor's base amount.
6. Restrictive Covenants
The Okafor Employment Agreement contains a 12-month non-competition covenant and a 12-month non-solicitation covenant.
F. Summary Table — Executive Employment Agreements
Note: Estimated cash severance amounts reflect base salary plus target bonus multiplied by the applicable multiplier. Amounts do not include the value of accelerated equity awards, continued health and welfare benefits, or pro-rata bonuses, which would increase total severance costs.
V. COMMERCIAL LEASE AGREEMENTS
A. Overview of Lease Portfolio
Pennfield operates an extensive real estate portfolio in connection with its retail, distribution, and corporate operations. Based on the information available in the data room and in Pennfield's public filings, the Company's lease portfolio consists of:
• 187 company-owned store locations across 34 states;
• 22 outlet locations (for a total of 209 retail store locations);
• Corporate headquarters at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202; and
• Distribution and warehouse facilities in multiple locations supporting the Company's supply chain operations.
In total, we reviewed approximately 215 lease agreements (including subleases and ground leases for certain locations) covering the Company's entire real estate portfolio. Each lease was reviewed for the presence of change of control provisions, anti-assignment provisions that might be broad enough to capture a change of control at the stockholder level, and any other provisions that could be triggered by the proposed Merger.
B. Summary of Change of Control Provisions Identified
Of the 215 leases reviewed, approximately 38 leases (representing approximately 38 locations, or roughly 18% of the portfolio) contain express change of control provisions or anti-assignment provisions that are broad enough to capture the proposed reverse triangular merger. The remaining approximately 177 leases either contain no change of control or anti-assignment provisions, or contain anti-assignment provisions that are narrowly drafted and would not be triggered by a change of control at the stockholder level (particularly where the tenant entity — Pennfield — survives as the same legal entity).
The 38 affected leases can be categorized into three types based on the nature of the change of control provision:
1. Consent-Required Provisions (Approximately 24 Leases)
Approximately 24 leases require the tenant to obtain the prior written consent of the landlord before any direct or indirect "change of control" of the tenant may occur. The specific formulation varies from lease to lease, but the typical provision states that any transfer, sale, or other disposition of 50% or more of the voting interests in the tenant (whether in a single transaction or a series of related transactions), or any merger, consolidation, or reorganization of the tenant, shall constitute a "Transfer" (or "Assignment") requiring landlord consent.
The consequences of failing to obtain landlord consent vary by lease but generally include one or more of the following: (a) the landlord may declare a default under the lease, (b) the landlord may terminate the lease upon written notice, (c) the landlord may charge a transfer fee (typically expressed as a percentage of remaining lease value or a flat fee), and (d) the landlord may withhold future consent to modifications, renewals, or subleases. In some leases, the consent requirement is qualified by a "not to be unreasonably withheld, conditioned, or delayed" standard, which provides a degree of comfort that consent will be forthcoming; in other leases, the consent is at the landlord's sole and absolute discretion, which presents a higher risk of consent being withheld or delayed.
2. Notice-Only Provisions (Approximately 9 Leases)
Approximately 9 leases require the tenant to provide written notice to the landlord within a specified period (typically 30 days, and in some cases 15 or 60 days) following a change of control, but do not require the landlord's consent. While the notice obligation is less onerous than a consent requirement, failure to provide timely notice may itself constitute a default under the lease, which could give the landlord the right to pursue default remedies (including, in some cases, lease termination). Accordingly, timely compliance with these notice requirements is important.
3. Recapture Rights (Approximately 5 Leases)
Approximately 5 leases grant the landlord the right to terminate the lease and "recapture" the premises upon a change of control of the tenant. In these leases, upon receiving notice of the change of control (or upon the occurrence of the change of control, if no prior notice is required), the landlord has a specified period — typically 30 to 60 days — within which to exercise the recapture right by delivering written notice to the tenant. If the landlord exercises the recapture right, the lease terminates (typically 60 to 90 days following the landlord's exercise notice), and the tenant is required to vacate the premises and surrender possession.
These recapture rights represent the most significant lease-related risk arising from the Merger, because they could result in the loss of store locations. We have flagged these 5 leases for priority attention and recommend that the Harrowgate deal team assess the revenue contribution and strategic importance of each affected location to determine the appropriate level of concern and landlord outreach.
C. Corporate Headquarters Lease — Charlotte, NC
1. Lease Terms
Pennfield's corporate headquarters is located at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202. The premises comprise approximately 62,000 rentable square feet. The landlord is identified in the data room (name omitted from this circulation copy for confidentiality). The current lease term runs through June 30, 2031, with two successive five-year renewal options exercisable by the tenant. The annual base rent and operating expense pass-throughs are consistent with market rates for Class A office space in the Charlotte central business district.
2. Change of Control Provision
Section 14.3 of the headquarters lease provides that any "Transfer" (defined to include any direct or indirect change of control of the tenant, meaning any transfer, issuance, or other disposition of 50% or more of the voting interests in the tenant entity, whether by sale, merger, consolidation, or otherwise) requires the prior written consent of the landlord. The lease provides that the landlord's consent "shall not be unreasonably withheld, conditioned, or delayed," which is a favorable standard for the tenant.