PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT
MEMORANDUM
FROM: Christy Bauer, Lead Associate (Intellectual Property), Calderwood & Harkness LLP
TO: Colette Whitman, Responsible Partner (Bankruptcy & Restructuring), Calderwood & Harkness LLP Deirdre Kwan, Vice President of Procurement, North America, Northgate Americas, Inc.
DATE: April 28, 2023
RE: Most Favored Nation Pricing Clause — Analysis and Market Comparison; Master Services Agreement between Northgate Americas, Inc. and Cedarpoint Systems Integration, Inc.
MATTER NO.: 1022-00008
This memorandum is protected by the attorney-client privilege and constitutes attorney work product prepared in anticipation of litigation or in connection with the provision of legal advice. It is intended solely for the use of the addressees and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
I. Executive Summary
The purpose of this memorandum is to analyze the most favored nation ("MFN") pricing provision as initially proposed in Section 7.4 of the first draft Master Services Agreement ("MSA") circulated on April 3, 2023, and as subsequently modified in the redline returned by Cedarpoint Systems Integration, Inc. ("Cedarpoint") on April 21, 2023 through its outside counsel, Whitfield Graves & Morrow LLP (Douglas Fenn, lead partner). This memorandum further provides recommendations for Northgate Americas, Inc.'s ("Northgate Americas" or the "Customer") negotiating position in the second draft of the MSA, which is scheduled for circulation on May 5, 2023.
Transaction Context. The MSA under negotiation contemplates a five-year initial term (June 9, 2023 through June 8, 2028) with two automatic two-year renewal periods, establishing a comprehensive managed network services engagement with a total contract value of approximately $75,000,000 ($15,000,000 in annual contract value, or "ACV"). The scope of services encompasses managed wide-area network ("WAN") operations, SD-WAN deployment and optimization, and 24×7 network operations center ("NOC") monitoring across 340 enterprise locations distributed across 28 U.S. states and 3 Canadian provinces, together with the licensing of Cedarpoint's proprietary ArcMesh platform (version 4.2) and associated professional services for migration, implementation, and optimization.
Strategic Significance of the MFN Clause. The MFN clause is intended to protect Northgate Americas from paying above-market pricing for managed network services relative to other Cedarpoint customers of comparable scale and service scope. Northgate Americas' network of 340 managed nodes positions it as one of Cedarpoint's larger accounts. Cedarpoint reported fiscal year 2022 revenue of approximately $420 million with a workforce of approximately 1,800 employees, serving primarily the telecommunications and financial services sectors. Given the five-year initial term, the significant annual spend commitment, and the inherent switching costs associated with a managed network services engagement of this complexity—particularly in light of the ongoing migration from Northgate Americas' legacy MPLS infrastructure—the MFN provision constitutes a critical commercial protection that ensures Northgate Americas maintains pricing parity with Cedarpoint's most favorably priced comparable customers throughout the term of the agreement.
Key Issues Arising from the April 21 Redline. Cedarpoint's redline raises five principal areas of concern with respect to the MFN provision:
1. Narrowing of the comparable customer definition — Cedarpoint proposes increasing the "comparable volume" threshold from ≥200 managed nodes to ≥300 managed nodes, which would dramatically reduce the pool of comparable customers and could render the MFN clause practically unenforceable.
2. Introduction of a mutual MFN concept — Cedarpoint proposes that Northgate Americas reciprocally warrant that it does not provide more favorable procurement terms to any other managed network services provider, a concept that is without precedent in comparable managed services transactions and would constrain Northgate Americas' procurement flexibility.
3. Adjustment to the pricing differential trigger — Cedarpoint proposes increasing the de minimis pricing differential threshold from >3% to >7%, which would permit Cedarpoint to maintain significantly above-market pricing before any remedial obligation arises.
4. Extension of credit and adjustment timelines — Cedarpoint proposes extending the retroactive credit period from 45 days to 90 days and the prospective adjustment period from 30 days to 60 days.
5. Limitations on audit scope — Cedarpoint proposes restricting MFN audits to a mutually agreed independent third-party auditor and limiting the audit scope to aggregate pricing data rather than per-unit pricing breakdowns.
Overall Recommendation. We recommend that Northgate Americas maintain its position on the ≥200 managed nodes comparability threshold, the >3% pricing differential trigger, the 45-day retroactive credit timeline, and the 30-day prospective adjustment timeline. The annual audit right with cost-shifting to Cedarpoint upon a finding of violation should be preserved. We further recommend rejecting the mutual MFN concept in its entirety. The independent third-party auditor requirement proposed by Cedarpoint is a reasonable confidentiality safeguard and should be accepted, subject to modifications regarding audit scope and a fallback auditor selection mechanism. The explicit carve-out of ArcMesh license fees and professional services fees from MFN coverage is consistent with the first draft's scope and should be accepted with appropriate protective language.
The balance of this memorandum analyzes each of these issues in detail, provides market benchmarking data, and sets forth specific recommendations for the second draft.
II. Background and Contract Context
A. Parties and Transaction Overview
Customer/Licensee. Northgate Americas, Inc. is a Delaware corporation with its principal offices located at 1700 Market Street, Suite 2400, Philadelphia, Pennsylvania 19103 (EIN 84-3291067). Northgate Americas is a wholly owned subsidiary of Northgate Telecommunications PLC, a United Kingdom public limited company listed on the London Stock Exchange under the ticker symbol NTP.L. Northgate Telecommunications PLC is a global telecommunications infrastructure and services company; Northgate Americas serves as the North American operating subsidiary responsible for the company's network operations, enterprise communications, and managed services procurement across the United States and Canada.
Service Provider/Licensor. Cedarpoint Systems Integration, Inc. is a Delaware corporation headquartered at 11400 Commerce Park Drive, Suite 600, Reston, Virginia 20191 (EIN 52-4178503). Cedarpoint specializes in managed network services, SD-WAN deployment, and enterprise network integration, with a particular focus on the telecommunications and financial services sectors. For its fiscal year ended December 31, 2022, Cedarpoint reported approximately $420 million in revenue and employs approximately 1,800 personnel across offices in Reston, Virginia; Winnipeg, Manitoba, Canada; and several regional locations.
Cedarpoint's Ownership Structure. Cedarpoint's majority equity interest is held by Ridgeline Capital Partners, LP, a private equity firm headquartered at 55 Arch Street, Suite 700, Greenwich, Connecticut 06830. Ridgeline acquired a 62% voting equity stake in Cedarpoint in 2019 as part of a growth-equity recapitalization. The remaining equity is distributed among Rajiv Sundaram, Cedarpoint's co-founder and Chief Technology Officer (18%), Teresa Cho, Cedarpoint's co-founder and Chief Executive Officer (12%), and a pool of other employees and early-stage investors (collectively 8%). The Ridgeline ownership stake is particularly relevant to the analysis of the MFN provision in the context of change-of-control scenarios, as discussed in Section V.C below.
Cedarpoint's Counsel. Cedarpoint is represented in this transaction by Whitfield Graves & Morrow LLP, with Douglas Fenn serving as lead partner and Simone Alvarez serving as associate counsel. Whitfield Graves & Morrow's offices are located at 1875 K Street NW, Suite 800, Washington, DC 20006. All redline comments and counterproposals received on April 21, 2023 were transmitted by Mr. Fenn's office.
B. Fee Structure Subject to MFN Protection
The total annual contract value of the MSA is $15,000,000, representing a monthly run-rate of $1,250,000. The fee structure is composed of three distinct components, each subject to different treatment under the MFN clause:
The MFN provision as drafted in Section 7.4 of the first draft MSA applies specifically to per-unit pricing for managed network services—that is, the recurring fees for network operations, monitoring, and NOC services—and does not extend to the ArcMesh platform license fee or professional services rates. The managed network services fee of $10,500,000 allocated across 340 managed nodes yields a per-node annual rate of approximately $30,882 (or approximately $2,574 per node per month). This per-node rate is the primary metric against which MFN compliance will be measured.
It is worth noting that the per-node pricing structure assumes a relatively uniform service delivery model across the 340 nodes, though in practice there may be variations in bandwidth requirements, security overlay configurations, and local circuit costs that could introduce complexity into per-unit pricing comparisons. The MFN clause should be interpreted and enforced with an understanding that the per-node rate represents a blended average across the full node portfolio, and that comparable customer pricing should be evaluated on a similarly blended basis.
C. Scope of Managed Services Covered
The managed network services engagement encompassed by the MSA is comprehensive in scope and includes the following principal elements:
• Managed WAN. Operation and management of a wide-area network spanning 340 nodes across 28 U.S. states and 3 Canadian provinces (Ontario, Alberta, and British Columbia). The WAN architecture includes both primary and redundant connectivity paths at each node, with bandwidth ranging from 100 Mbps to 10 Gbps depending on site classification (hub, spoke, or regional aggregation point).
• SD-WAN Deployment and Optimization. Deployment, configuration, and ongoing optimization of software-defined wide-area network capabilities using Cedarpoint's proprietary ArcMesh platform, version 4.2. The SD-WAN overlay will manage traffic routing, application-aware policy enforcement, and dynamic path selection across the WAN.
• 24×7 NOC Monitoring. Round-the-clock network operations center monitoring provided from Cedarpoint's facilities in Reston, Virginia and Winnipeg, Manitoba, Canada. The NOC will serve as the primary point of contact for incident detection, triage, escalation, and resolution under the service level framework detailed in Exhibit B to the MSA.
• Legacy Infrastructure Migration. Migration from Northgate Americas' existing MPLS infrastructure, currently managed by Greystone Halcyon Software, to the Cedarpoint-managed SD-WAN/WAN architecture. The migration is planned in three phases over an 18-month period, with Phase 1 covering the 85 highest-priority hub sites, Phase 2 covering 145 regional spoke sites, and Phase 3 covering the remaining 110 sites.
The breadth and complexity of these services—particularly the hybrid WAN/SD-WAN architecture, the multi-phase migration, and the cross-border scope—may introduce challenges in constructing direct MFN comparisons with other Cedarpoint customers whose service configurations may differ in material respects. As discussed further in Section VIII.B below, this comparability risk is a recognized limitation of MFN pricing clauses in managed services agreements, but it can be meaningfully mitigated through careful definition of the comparability parameters and the scope of the audit right.
III. Calderwood & Harkness First Draft MFN Provision (Section 7.4)
This section sets forth the key elements of the MFN pricing provision as drafted by Calderwood & Harkness in Section 7.4 of the first draft MSA circulated on April 3, 2023. The first draft provision was prepared to reflect market-standard MFN protections appropriate for a managed network services engagement of this scale and term length. Each element is described below, together with the commercial and legal rationale supporting it.
A. MFN Warranty
The core of the MFN provision is a warranty by Cedarpoint that the per-unit pricing charged to Northgate Americas for managed network services shall not exceed the lowest per-unit pricing offered to any other Cedarpoint customer of "comparable volume" during the applicable benchmark period. This warranty operates as a continuing obligation throughout the term of the MSA, including any renewal terms.
The concept of "comparable volume" is defined in the first draft as any customer deployment of 200 or more managed nodes (the "≥200 Managed Nodes Threshold"). This threshold was established after careful consideration of several competing factors:
apples-to-apples comparison. A volume threshold ensures that MFN benchmarking is conducted against customers with similarly scaled enterprise deployments, where the service delivery economics, operational overhead, and per-unit cost structures are reasonably comparable. Customers with fewer than 200 nodes may have materially higher per-unit costs due to the fixed-cost components of network operations center staffing, monitoring infrastructure, and project management that are amortized across a smaller node base.
Avoidance of cherry-picking. Without a floor on the comparison set, Cedarpoint could argue that its smallest customers—who may pay significantly higher per-unit rates—represent the appropriate benchmark, or conversely, that its very largest customers receive non-replicable volume discounts driven by scale efficiencies that are not achievable at Northgate Americas' deployment size. The ≥200 nodes threshold establishes a meaningful comparison band that excludes both extremes.
Alignment with Northgate Americas' deployment. Northgate Americas' 340 managed nodes comfortably exceeds the 200-node threshold, ensuring that Northgate Americas itself falls within the comparable customer pool and that the benchmark is calibrated to customers whose deployments are within reasonable proximity of Northgate Americas' scale.
B. Benchmark Comparison Period
The MFN comparison is based on a trailing 12-month period, meaning that per-unit pricing is evaluated against rates offered or charged to comparable customers during the 12 months immediately preceding the date of any MFN audit or claim. This approach was chosen for several reasons:
Currency of comparison. A 12-month trailing window ensures that the MFN benchmark reflects current market conditions, including any pricing trends, competitive dynamics, or cost structure changes that may have occurred since the MSA's inception. This is particularly important in the managed network services market, where per-unit pricing has exhibited a general downward trend over recent years driven by SD-WAN adoption, increased competition, and commoditization of certain network management functions.
Avoidance of stale data. Without a defined comparison window, disputes could arise over whether pricing from legacy contracts entered into years earlier—potentially under materially different market conditions—constitutes a valid benchmark. The trailing 12-month period anchors the comparison to a recent and representative timeframe.
Operational feasibility. A 12-month window provides a sufficiently broad dataset for meaningful comparison while remaining operationally manageable from an audit and data-collection perspective.
C. Pricing Differential Trigger
The first draft establishes a de minimis pricing differential threshold of 3%. Specifically, an MFN violation is deemed to have occurred if an audit reveals that Northgate Americas' per-unit pricing for managed network services exceeds the lowest comparable customer pricing by more than 3%. If the differential is 3% or less, no violation exists and no remedial action is required.
The 3% de minimis threshold serves an important practical function: it accommodates immaterial pricing variations that may arise from legitimate differences in service configurations, timing of contract execution, minor variations in scope, or currency fluctuations in the case of Canadian-dollar-denominated service components. Without some de minimis threshold, the parties would face the prospect of contentious disputes over trivial pricing differences that are attributable to non-discriminatory factors rather than to genuine pricing favoritism.
At the same time, the 3% threshold is set at a level that provides meaningful protection. On Northgate Americas' annual managed services fee of $10,500,000, a 3% differential represents $315,000 per year—a significant amount over a five-year term ($1,575,000 in aggregate). Any differential exceeding this level should be captured and remediated.
D. Remedies Upon MFN Violation
The first draft provides for two categories of remedies upon a determination that an MFN violation has occurred:
Retroactive Credit. Cedarpoint must issue a retroactive credit to Northgate Americas within 45 calendar days of the determination of a pricing differential exceeding 3%. The credit is calculated as the difference between Northgate Americas' actual per-unit pricing and the lowest comparable customer pricing, applied retroactively for the entire applicable benchmark period (i.e., the trailing 12-month period). This retroactive credit is designed to make Northgate Americas whole for any period during which it was paying above-market rates.
Prospective Price Adjustment. In addition to the retroactive credit, Cedarpoint must adjust Northgate Americas' prospective per-unit pricing to the lowest comparable customer rate within 30 calendar days of the determination. This ensures that the pricing correction is not merely backward-looking but operates on a go-forward basis to prevent the recurrence of above-market pricing.
The combination of retroactive and prospective remedies is a standard feature of MFN pricing clauses in managed services agreements and reflects the dual purposes of the provision: compensating the customer for past overpayment and ensuring future pricing parity.
E. Audit Rights
The first draft provides Northgate Americas with the right to conduct an MFN pricing audit once per calendar year. The audit provisions include the following key features:
Frequency. One audit per calendar year. This frequency is sufficient to provide ongoing monitoring of MFN compliance without imposing an unreasonable administrative burden on Cedarpoint.
Audit Methodology. The audit may be conducted by Northgate Americas' internal audit team or by an independent third-party auditor retained by Northgate Americas. In either case, the audit is subject to confidentiality protections designed to safeguard the proprietary pricing data of Cedarpoint's other customers that may be reviewed during the audit process.
Cost Allocation. The cost allocation mechanism is designed to incentivize both parties to behave appropriately: if the audit reveals an MFN violation (i.e., a pricing differential exceeding 3%), the cost of the audit is borne by Cedarpoint; if no violation is found, the cost is borne by Northgate Americas. This cost-shifting structure discourages frivolous audits by the customer while ensuring that the vendor bears the cost consequences of pricing non-compliance.
IV. Analysis of Cedarpoint's April 21, 2023 Redline Proposals
On April 21, 2023, Cedarpoint's counsel at Whitfield Graves & Morrow LLP transmitted a redline of the first draft MSA containing numerous proposed modifications across the agreement. This section analyzes the six principal changes proposed to the MFN provision in Section 7.4 and provides recommendations for each.
A. Narrowing of "Comparable Volume" Definition
Cedarpoint's Proposal. Cedarpoint's redline proposes increasing the comparable volume threshold from ≥200 managed nodes to ≥300 managed nodes. The redline language would replace "two hundred (200) or more managed nodes" with "three hundred (300) or more managed nodes" throughout Section 7.4.
Analysis. This proposed change would dramatically reduce the pool of customers against which Northgate Americas' pricing would be benchmarked. At a threshold of 300 nodes, the comparison set would be limited to Cedarpoint's very largest enterprise customers. Based on publicly available information regarding Cedarpoint's customer base and our understanding of the managed network services market, we believe that Cedarpoint likely has a relatively small number of customers with 300 or more managed nodes. It is possible—and, in our assessment, likely—that raising the threshold to 300 nodes would leave Northgate Americas (at 340 nodes) with few or no valid comparators, effectively rendering the MFN clause unenforceable as a practical matter.
By contrast, a threshold of 200 nodes captures a more meaningful cross-section of Cedarpoint's enterprise customer base. Given Cedarpoint's $420 million in annual revenue and its specialization in enterprise managed network and SD-WAN services, it is reasonable to expect that a substantial number of Cedarpoint's customers maintain deployments of 200 or more managed nodes. This larger comparison pool enhances the enforceability and commercial utility of the MFN provision.
Moreover, the economic rationale for a volume threshold—ensuring that comparisons are made against customers with similar scale-driven cost structures—is adequately served at the 200-node level. A customer with 200 nodes and a customer with 340 nodes will have broadly comparable per-unit economics from Cedarpoint's perspective; both are large enterprise deployments that justify dedicated NOC resources, account management, and operational tooling. The incremental cost difference between servicing 200 and 340 nodes does not warrant a comparability gap of the magnitude that a 300-node threshold would create.
Recommendation. Reject this proposal. Maintain the ≥200 managed nodes threshold as set forth in the first draft. In our assessment, this position is well-supported by market precedent (see Section VI.B below) and is essential to preserving the practical enforceability of the MFN clause.
B. Introduction of Mutual MFN
Cedarpoint's Proposal. Cedarpoint's redline introduces a new Section 7.4(f) pursuant to which Northgate Americas would warrant that it does not provide more favorable procurement terms, pricing concessions, or contractual accommodations to any other managed network services provider than those provided to Cedarpoint under the MSA. The proposed language is framed as a "mutual" MFN obligation, ostensibly creating reciprocal protections for both parties.
Analysis. This proposal is unprecedented in the managed network services market and reflects a fundamental misunderstanding—or, more likely, a deliberate conflation—of the purpose and function of an MFN pricing clause. An MFN clause in a services agreement is a customer-protective mechanism designed to ensure pricing fairness by preventing the vendor from offering more favorable rates to similarly situated customers. It operates as a constraint on the vendor's pricing discretion. A "mutual" MFN, by contrast, would constrain the customer's procurement behavior by limiting Northgate Americas' ability to negotiate favorable terms with alternative or complementary service providers.
The practical implications of such a provision would be severe for Northgate Americas. Northgate Americas is currently in the process of migrating from its legacy MPLS infrastructure managed by Greystone Halcyon Software, and may in the future pursue multi-vendor strategies for network services in certain geographies or for specific network functions (e.g., security-as-a-service overlays, IoT connectivity, or edge computing). A mutual MFN could be construed to restrict Northgate Americas from offering more favorable commercial terms to such alternative providers, thereby constraining Northgate Americas' procurement flexibility and potentially increasing its overall network services costs.
Furthermore, the asymmetry between the parties' market positions makes a mutual MFN fundamentally inappropriate. Cedarpoint, as the service provider, is in a position to discriminate in pricing among its customers; the MFN clause constrains that ability. Northgate Americas, as the customer, is in a position to seek competitive pricing from multiple vendors; a mutual MFN would constrain that ability. These are not equivalent situations, and a mutual obligation would unfairly equate them.
Finally, we note that a mutual MFN has no support in the market precedent reviewed in connection with this transaction. None of the comparable managed network services MSAs in Calderwood & Harkness's precedent database include a reciprocal MFN obligation running from the customer to the vendor.
Recommendation. Reject this proposal entirely. No reciprocal MFN obligation should be included in the second draft. If Cedarpoint raises this point in subsequent negotiations, we recommend firmly explaining that a mutual MFN is outside market norms and is not a concept that Northgate Americas can accept.
C. Increase of Pricing Differential Threshold
Cedarpoint's Proposal. Cedarpoint's redline proposes increasing the de minimis pricing differential threshold from >3% to >7%. Under this revised formulation, an MFN violation would arise only if Northgate Americas' per-unit pricing exceeds the lowest comparable customer pricing by more than 7%.
Analysis. The proposed increase from 3% to 7% would substantially dilute the economic protection afforded by the MFN clause. The following table illustrates the financial impact of various threshold levels on Northgate Americas' managed services fees:
At a 7% threshold, Cedarpoint could maintain a pricing differential of up to $735,000 per year—or $3,675,000 over the initial five-year term—without triggering any remedial obligation. This level of pricing latitude would effectively eviscerate the MFN protection and permit Cedarpoint to charge Northgate Americas a significant premium relative to its most-favored comparable customers.
Market benchmarking data confirms that a 7% threshold is well above the range of standard practice. As detailed in Section VI.C below, de minimis thresholds in comparable managed network services MSAs generally range from 2% to 5%, with 3% being the most common single data point. Cedarpoint's proposed 7% threshold would be an outlier by a significant margin.
Recommendation. Reject this proposal. Maintain the >3% threshold as set forth in the first draft. If a concession is required as part of a broader trade on another negotiating point, the absolute floor should be >5%, and this should be offered only as a last resort. The preferred position remains >3%.
D. Extension of Retroactive Credit and Prospective Adjustment Timelines
Cedarpoint's Proposal. Cedarpoint's redline proposes two changes to the remedial timelines:
(i) The retroactive credit timeline would be extended from 45 calendar days to 90 calendar days following the determination of an MFN violation.
(ii) The prospective price adjustment timeline would be extended from 30 calendar days to 60 calendar days following the determination of an MFN violation.
Analysis. These proposed extensions would delay Northgate Americas' receipt of economic remediation and extend the period during which Northgate Americas would continue to pay above-market rates after a violation has been identified and confirmed. While the timeline extensions are not as commercially significant as the threshold or comparability issues, they represent a gratuitous dilution of the MFN remedy that is not supported by any operational justification.
Cedarpoint is a company with $420 million in annual revenue and approximately 1,800 employees. It possesses the financial and administrative capacity to process a pricing credit within 45 days and to implement a prospective rate adjustment within 30 days. These are straightforward billing and invoicing changes that do not require extended lead times. The 45-day and 30-day timelines in the first draft are commercially reasonable, operationally achievable, and consistent with market norms, as discussed in Section VI.D below.
A 90-day retroactive credit period, by contrast, would mean that Northgate Americas could wait up to three months after a confirmed MFN violation before receiving any financial remediation—and during that three-month period, it would continue to be invoiced at above-market rates (absent a separate interim adjustment mechanism). Similarly, a 60-day prospective adjustment period would perpetuate above-market pricing for two months beyond the violation determination.
Recommendation. Reject both proposed extensions. Maintain the 45-day retroactive credit timeline and the 30-day prospective adjustment timeline as set forth in the first draft. No change from the first draft position is warranted.
E. Limitations on Audit Scope
Cedarpoint's Proposal. Cedarpoint's redline proposes two modifications to the MFN audit provisions:
(i) MFN audits would be conducted only by a mutually agreed independent third-party auditor. Northgate Americas' internal audit team would not be permitted to conduct MFN audits.
(ii) The audit scope would be limited to aggregate pricing data. The auditor would not have access to per-unit pricing breakdowns for individual Cedarpoint customers.
Analysis. These proposals must be evaluated separately, as they raise different considerations.
Independent Third-Party Auditor Requirement. The requirement that MFN audits be conducted by an independent third-party auditor rather than Northgate Americas' internal audit team is a reasonable confidentiality safeguard. Cedarpoint's other customer pricing data is commercially sensitive information, and Cedarpoint has a legitimate interest in ensuring that this data is reviewed by a neutral party subject to appropriate confidentiality obligations rather than by the employees of a competitor's subsidiary or affiliate. This requirement is common in MFN audit provisions across the managed services sector and does not materially impair Northgate Americas' ability to enforce the MFN clause.
However, the proposal that the auditor must be "mutually agreed" introduces a procedural risk: Cedarpoint could delay or obstruct the audit process by withholding agreement on auditor selection. To mitigate this risk, we recommend accepting the independent third-party auditor requirement but adding a fallback selection mechanism. Specifically, if the parties cannot agree on an auditor within 15 business days of Northgate Americas' notice of intent to conduct an MFN audit, each party would select one auditor candidate and the two nominees would jointly select a third party to serve as the auditor. This mechanism ensures that an auditor is appointed within a reasonable timeframe regardless of whether the parties can reach bilateral agreement.
Additionally, we recommend preserving Northgate Americas' right to use its own internal audit team if Cedarpoint consents, with such consent not to be unreasonably withheld. This provides an alternative pathway for audits in circumstances where both parties are comfortable with internal audit participation, while respecting Cedarpoint's confidentiality concerns as the default rule.
Limitation to Aggregate Pricing Data. The proposal to limit audit scope to aggregate pricing data is problematic and should not be accepted. The purpose of an MFN audit is to compare Northgate Americas' per-unit pricing with the per-unit pricing charged to comparable customers. If the auditor has access only to aggregate pricing data—total contract values, total fee amounts, or blended rates—the auditor cannot perform the per-unit comparison that is the foundation of the MFN analysis. Aggregate data can mask material per-unit pricing disparities, particularly where comparable customers have different node counts, service configurations, or fee structures (e.g., different proportions of managed services versus license fees versus professional services).
To effectively conduct an MFN audit, the independent auditor must have access to per-unit pricing breakdowns for comparable customers, including at a minimum the per-node rate (or equivalent per-unit metric) for managed network services, the total number of managed nodes, and the service scope covered by the managed services fee. This data should be provided to the auditor subject to strict confidentiality protections—including, if appropriate, the execution of a separate non-disclosure agreement between the auditor and Cedarpoint—and the auditor's report to Northgate Americas should be limited to whether a violation exists and the magnitude of any pricing differential, without disclosing the identity of specific comparable customers or their individual contract terms.
Recommendation. Accept the independent third-party auditor requirement as a reasonable confidentiality safeguard, subject to the following modifications:
(a) Add a fallback auditor selection mechanism: if the parties cannot agree on an auditor within 15 business days of notice, each party selects one candidate and the two nominees jointly select a third party.
(b) Insist that per-unit pricing breakdowns (not merely aggregate data) are within the scope of the audit. The auditor must have access to per-node pricing for managed network services for all comparable customers within the benchmark period.
(c) Maintain that Northgate Americas may use its own internal audit team if Cedarpoint consents, with such consent not to be unreasonably withheld.
(d) Maintain annual audit frequency and the cost-shifting provision (Cedarpoint bears audit cost if violation is found; Northgate Americas bears cost if no violation is found).
F. Exclusion of ArcMesh License Fees from MFN
Cedarpoint's Proposal. Cedarpoint's redline adds an explicit provision stating that the ArcMesh platform license and maintenance fee ($3,000,000 per year) and the professional services fee ($1,500,000 per year) are excluded from the scope of the MFN pricing warranty and audit right. The MFN provision, under this revised language, would apply solely to the managed network services component of the fee structure.
Analysis. The first draft MFN provision already limited MFN coverage to per-unit pricing for managed network services, effectively excluding the ArcMesh license fee and professional services rates from the MFN framework. Cedarpoint's proposed carve-out therefore codifies what was already implicit in the first draft's scope definition. As a matter of clarity and to avoid future disputes over the scope of MFN coverage, the explicit carve-out is a useful drafting improvement.
However, we must ensure that the carve-out language does not inadvertently exclude any component of managed network services fees. Specifically, the carve-out should be drafted to exclude only (i) the ArcMesh platform license and maintenance fee as described in Exhibit A, Section 3 of the MSA, and (ii) professional services fees as described in Exhibit A, Section 4 of the MSA. All other fees associated with the delivery of managed network services—including but not limited to network operations, monitoring, NOC services, circuit management, and SD-WAN operations—should remain within the scope of MFN coverage.
Recommendation. Accept the explicit carve-out of ArcMesh license fees and professional services fees, provided that the carve-out language is narrowly drafted to exclude only the specific fee components identified in Exhibit A, Sections 3 and 4, and does not inadvertently narrow the scope of managed network services fees subject to MFN protection.
V. Interaction with Other MSA Provisions
The MFN pricing clause does not operate in isolation. It interacts with several other provisions of the MSA, and the second draft should include appropriate clarifying language to ensure that these interactions are properly addressed. This section identifies four key areas of interaction and provides recommendations for clarifying the relationship between the MFN clause and each.
A. Relationship to SLA Credit Structure
The MSA includes a comprehensive service level agreement ("SLA") framework in Exhibit B, which establishes performance benchmarks for managed network services and provides for service credits in the event of performance failures. The SLA credit structure operates on a tiered basis:
• Tier 1 (Minor Deficiency): 5% credit against the monthly run-rate of $1,250,000 (= $62,500) for service level shortfalls that do not materially impair network availability or performance.
• Tier 2 (Moderate Deficiency): 10% credit against the monthly run-rate (= $125,000) for service level shortfalls that materially impair network availability or performance for a portion of the node portfolio.
• Tier 3 (Critical Deficiency): 20% credit against the monthly run-rate (= $250,000) for service level shortfalls that result in widespread network outage or critical performance degradation affecting a majority of managed nodes.
The SLA credit structure is subject to an annual cap of $3,150,000 (21% of ACV), which limits Cedarpoint's aggregate SLA credit exposure in any contract year.
The MFN clause operates independently of the SLA credit mechanism. SLA credits compensate Northgate Americas for performance failures—situations where Cedarpoint fails to deliver services at the contracted quality levels. MFN credits, by contrast, compensate Northgate Americas for pricing unfairness—situations where Cedarpoint charges Northgate Americas more than it charges comparable customers for the same services. These are distinct categories of economic remediation, and they should not be conflated or aggregated for purposes of Cedarpoint's credit exposure.
Recommendation. Add an explicit statement in the second draft confirming that MFN retroactive credits and prospective price adjustments are independent of, and are not counted toward, the $3,150,000 annual SLA credit cap set forth in Exhibit B. This prevents Cedarpoint from arguing that MFN credits reduce its remaining SLA credit exposure, or vice versa.
B. Relationship to Indemnification Provisions
The MSA includes mutual indemnification provisions in Article 12, subject to the following aggregate liability caps:
• Cedarpoint's aggregate indemnification cap: 200% of the fees paid or payable in the 12-month period immediately preceding the event giving rise to the claim (i.e., $30,000,000 in Year 1, assuming full annualized fees are paid).
• Northgate Americas' aggregate indemnification cap: 100% of the fees paid or payable in the same 12-month period (i.e., $15,000,000 in Year 1).
MFN disputes are fundamentally commercial pricing matters. A determination that Northgate Americas' per-unit pricing exceeds the lowest comparable customer pricing by more than the de minimis threshold does not constitute the type of third-party claim, breach of representation, or loss event that the indemnification framework is designed to address. MFN credit obligations arise from a specific contractual pricing warranty, not from a general breach or tort theory, and should not be subject to the aggregate indemnification caps.
Recommendation. Add an explicit statement in the second draft clarifying that MFN credit obligations (both retroactive credits and prospective price adjustments) do not constitute indemnifiable claims under Article 12 and are not subject to, or counted against, either party's aggregate indemnification cap. This ensures that Cedarpoint cannot argue that its MFN credit obligations reduce its available indemnification capacity for genuine indemnifiable claims, and conversely that Northgate Americas' receipt of MFN credits does not affect its own indemnification cap calculations.
C. Relationship to Change of Control Provisions
Given Cedarpoint's ownership structure—with Ridgeline Capital Partners holding a 62% voting equity stake acquired in 2019—a change of control event during the term of the MSA is a realistic possibility. Ridgeline is a private equity sponsor with a typical five-to-seven-year investment horizon, meaning that a disposition of its Cedarpoint stake could occur as early as 2024 and is likely to occur before the expiration of the MSA's initial term in 2028.
The MSA includes anti-assignment provisions in Article 18, which provide that neither party may assign the MSA without the prior written consent of the other party, and that any purported assignment without such consent is void. Additionally, Schedule 2 to the MSA establishes specific change-of-control mechanics, including:
• 90-day advance written notice of any change of control event (defined as the direct or indirect acquisition of more than 50% of the voting equity of a party);
• 60-day election period during which the non-assigning party may elect to (i) consent to the change of control and continuation of the MSA, (ii) terminate the MSA without penalty, or (iii) renegotiate specific terms of the MSA as a condition of consent.
The MFN clause should survive any permitted assignment and bind the successors and assigns of Cedarpoint, including any acquiror of Ridgeline's 62% stake or of Cedarpoint as a whole. If Cedarpoint is acquired by a larger managed services provider with a different pricing structure, the MFN obligation should transfer to the successor entity and continue to apply using the same comparability thresholds, audit rights, and remedial mechanisms.
We also note a potential gap in MFN coverage during a change-of-control transition period. The 90-day notice and 60-day election period mechanics in Schedule 2 could create a period of up to 150 days during which Cedarpoint's ownership is uncertain or in transition. During this period, it is essential that the MFN clause remains in full force and effect, and that neither the outgoing nor incoming ownership group is able to argue that the MFN obligation is suspended or inapplicable during the transition.
Recommendation. Add an explicit statement in the second draft confirming that the MFN clause (including all comparability thresholds, audit rights, remedial timelines, and cost-shifting provisions) binds the successors and assigns of Cedarpoint and survives any permitted assignment or change of control. Further, add language clarifying that the MFN obligation remains in full force during any change-of-control transition period and is not suspended or modified by the operation of the Schedule 2 notice and election mechanics.
D. Relationship to Renewal Terms
The MSA provides for two automatic two-year renewal terms, each triggered automatically unless either party delivers written non-renewal notice at least 180 days prior to the expiration of the then-current term. If both renewal options are exercised (or, more precisely, if neither party exercises its non-renewal right), the total potential contract duration would extend from five years to nine years (June 9, 2023 through June 8, 2032), with a total potential contract value of up to $135,000,000.
The MFN clause should explicitly apply during the renewal terms at the same thresholds, with the same audit rights, and subject to the same remedial mechanisms. Without such explicit language, Cedarpoint could argue that the MFN provision was negotiated as part of the initial five-year term and does not extend to the renewal periods, or that the renewal terms are subject to renegotiation of the MFN parameters.
Recommendation. Add an explicit statement in the second draft confirming that the MFN clause and all associated provisions (including the ≥200 managed nodes threshold, the >3% pricing differential trigger, the audit right, the cost-shifting provision, and the remedial timelines) apply during each renewal term on the same terms as during the initial term.
VI. Market Comparison and Precedent Analysis
To provide context for the negotiating positions discussed in this memorandum, we conducted a review of comparable MFN provisions in managed network services and SD-WAN agreements. This review draws on Calderwood & Harkness's precedent database of negotiated technology and managed services agreements, supplemented by publicly available market data from industry publications and analyst reports. While the specific terms of individual agreements are confidential, the aggregate data provides a useful framework for evaluating the reasonableness of both parties' positions.
A. Managed Network Services MSA Benchmarks
MFN pricing provisions are a common feature of large-scale managed network services agreements, particularly in transactions where the customer is committing to a multi-year term (typically three to seven years) and significant annual spend (typically in excess of $5 million per year). In our review of 14 comparable MSAs negotiated between 2019 and 2023 for enterprise managed WAN, SD-WAN, and related network services, 11 (approximately 79%) included some form of MFN pricing protection. The three agreements that did not include MFN provisions were all shorter-term engagements (two years or less) with lower annual contract values (under $3 million per year).
The prevalence of MFN clauses in this market reflects the structural dynamics of managed network services procurement: customers typically commit to long-term relationships with significant switching costs (particularly when migrating from legacy infrastructure), and vendors have inherent informational advantages regarding their pricing to other customers. MFN provisions serve to mitigate this informational asymmetry and provide the customer with a contractual mechanism for ensuring ongoing pricing competitiveness.
B. Volume Threshold Benchmarks
Among the 11 comparable MSAs containing MFN provisions, the comparable customer volume thresholds were distributed as follows:
The typical threshold range is 100 to 250 managed units or nodes, with the most common range being 200–250 units. Northgate Americas' proposed threshold of ≥200 nodes is squarely within the market-standard range and is at the median of the observed data set. The single agreement with a threshold above 250 units involved a customer with over 1,000 managed nodes—a deployment scale significantly larger than Northgate Americas'—and the elevated threshold was calibrated to that customer's specific deployment size.
Cedarpoint's proposed threshold of ≥300 nodes is above the observed market range and would represent an outlier among comparable transactions. We are not aware of any managed network services MSA in our precedent database where a customer with 340 nodes agreed to a comparability threshold of 300 or more nodes. Such a threshold would leave the customer with an unreasonably narrow comparator set and would effectively undermine the MFN protection.
C. Pricing Differential Trigger Benchmarks
Among the 11 comparable MSAs, the de minimis pricing differential thresholds were distributed as follows:
The market-standard range for de minimis thresholds is 2% to 5%, with the most common single data point being 3% (four of 11 agreements). The >3% threshold in Northgate Americas' first draft is at the favorable end for the customer but well within the acceptable range. A threshold of 4% or 5% would also be within market norms and could be offered as a compromise position if needed.
Cedarpoint's proposed >7% threshold is significantly above the market range. Only one agreement in our data set had a threshold exceeding 5%, and that agreement (at 6%) involved unique circumstances relating to a highly bespoke service configuration that made per-unit pricing comparisons inherently less precise. A 7% threshold would be the highest in our data set and would be difficult to justify on any principled basis.
D. Credit and Adjustment Timeline Benchmarks
The market data on retroactive credit and prospective adjustment timelines is as follows:
Retroactive Credits:
The market-standard range is 30 to 60 days, with the most common timeline being 45 days—precisely the timeline proposed in Northgate Americas' first draft.
Prospective Adjustments:
The market-standard range is 15 to 45 days, with the most common timeline being 30 days—again, precisely the timeline proposed in Northgate Americas' first draft.
Cedarpoint's proposed timelines (90-day retroactive credit, 60-day prospective adjustment) exceed the market-standard ranges in both categories. The single agreement in each category with a timeline exceeding the standard range involved a vendor with complex multi-subsidiary billing systems that required extended processing times—a factual circumstance that does not apply to Cedarpoint.
E. Audit Right Benchmarks
Annual MFN audit rights are standard across the 11 comparable agreements in our data set. All 11 agreements provided for at least one audit per calendar year, with two agreements permitting up to two audits per year for customers with annual spend exceeding $20 million.
Independent third-party auditor requirements are common, appearing in 8 of the 11 agreements (73%). In each case, the independent auditor requirement was accompanied by confidentiality protections for the vendor's other customer pricing data. The remaining three agreements permitted the customer to use its internal audit team, though in each case subject to enhanced confidentiality obligations.
Cost-shifting to the vendor upon a finding of violation is the predominant market approach, appearing in 10 of the 11 agreements (91%). The cost-shifting mechanism serves the dual function of discouraging frivolous audits and ensuring that the vendor bears the cost consequences of non-compliance.
VII. Recommended Revisions for Second Draft (May 5, 2023)
Based on the analysis set forth in this memorandum, we recommend the following revisions for incorporation into the second draft MSA to be circulated on May 5, 2023. These recommendations are organized by topic area and include both our primary position and, where appropriate, potential fallback positions.
A. Comparable Volume Threshold
Recommendation: Maintain the ≥200 managed nodes threshold. No change from the first draft. This position is supported by market precedent and is essential to preserving a meaningful comparator pool for MFN enforcement.
Fallback Position: If a compromise is absolutely necessary, we could consider a threshold of ≥225 managed nodes, which would modestly reduce the comparator pool while remaining within the market-standard range. However, we do not recommend offering this concession proactively.
B. Mutual MFN
Recommendation: Reject Cedarpoint's mutual MFN proposal entirely. No reciprocal obligation should be included in the second draft. This concept is without market precedent in comparable managed network services transactions and would improperly constrain Northgate Americas' procurement flexibility.
Fallback Position: None. This is a non-negotiable point. A mutual MFN is fundamentally incompatible with Northgate Americas' procurement strategy and multi-vendor flexibility.
C. Pricing Differential Trigger
Recommendation: Maintain the >3% pricing differential threshold. No change from the first draft. This position is at the favorable end of the market range but is well within the zone of reasonableness.
Fallback Position: If a concession is needed on another issue, the absolute floor is >5%. This should be offered only as a last resort and in exchange for a material concession from Cedarpoint on another point. A >5% threshold remains within the market range but would increase Northgate Americas' annual pricing exposure from $315,000 to $525,000 (a difference of $210,000 per year or $1,050,000 over the initial five-year term).
D. Retroactive Credit Timeline
Recommendation: Maintain the 45-day retroactive credit timeline. No change from the first draft. This timeline is consistent with market norms and operationally achievable for Cedarpoint.
E. Prospective Adjustment Timeline
Recommendation: Maintain the 30-day prospective adjustment timeline. No change from the first draft. This timeline is consistent with market norms and represents the most common approach in comparable MSAs.
F. Audit Scope and Procedure
Recommendation: Implement the following modifications to the audit provisions:
(a) Independent Third-Party Auditor: Accept the requirement that MFN audits be conducted by an independent third-party auditor, subject to the modifications described below.
(b) Per-Unit Pricing Breakdowns: Insist that the audit scope include per-unit pricing breakdowns (i.e., per-node rates for managed network services) for all comparable customers within the benchmark period. Reject the limitation to aggregate pricing data.
(c) Fallback Auditor Selection Mechanism: Add a provision specifying that if the parties cannot agree on an independent auditor within 15 business days of Northgate Americas' notice of intent to conduct an MFN audit, each party shall select one auditor candidate within 5 business days thereafter, and the two nominees shall jointly select a third party to serve as the auditor within a further 10 business days.
(d) Internal Audit Alternative: Maintain that Northgate Americas may use its own internal audit team if Cedarpoint consents, with such consent not to be unreasonably withheld, conditioned, or delayed.
(e) Audit Frequency: Maintain the annual audit right (one audit per calendar year).
(f) Cost-Shifting: Maintain the cost-shifting provision: Cedarpoint bears the cost of the audit if a violation is found; Northgate Americas bears the cost if no violation is found.
G. Clarifying Language
Recommendation: Add the following clarifying provisions to the second draft:
(i) MFN Credits Independent of SLA Credit Cap. Add an explicit statement that MFN retroactive credits and prospective price adjustments are independent of, and shall not be counted toward, the annual SLA credit cap of $3,150,000 set forth in Exhibit B.
(ii) MFN Obligations Bind Successors and Assigns. Add an explicit statement that the MFN clause, including all comparability thresholds, pricing differential triggers, audit rights, remedial timelines, and cost-shifting provisions, shall bind the successors and assigns of each party and shall survive any permitted assignment or change of control. Further, add a statement that the MFN obligation remains in full force during any change-of-control transition period under Schedule 2 and is not suspended or modified by the operation of the 90-day notice or 60-day election period mechanics. This provision is particularly relevant in light of Ridgeline Capital Partners' 62% equity stake in Cedarpoint and the possibility of a private equity exit transaction during the MSA term.
(iii) MFN Clause Applies During Renewal Terms. Add an explicit statement that the MFN clause and all associated provisions apply during each renewal term on the same terms and conditions as during the initial term, without modification or renegotiation.
(iv) Explicit ArcMesh and Professional Services Carve-Out. Codify the explicit carve-out of the ArcMesh platform license and maintenance fee ($3,000,000 per year, as described in Exhibit A, Section 3) and the professional services fee ($1,500,000 per year, as described in Exhibit A, Section 4) from MFN coverage. Confirm that the MFN clause applies only to the managed network services component of the fee structure (i.e., the per-unit pricing for network operations, monitoring, NOC services, and SD-WAN operations across 340 managed nodes, totaling $10,500,000 per year).
(v) MFN Credits Not Subject to Indemnification Caps. Add an explicit statement that MFN credit obligations do not constitute indemnifiable claims under Article 12 and are not subject to, or counted against, either party's aggregate indemnification cap.
VIII. Risk Assessment
While the MFN provision as recommended in this memorandum provides robust and market-standard pricing protection for Northgate Americas, several residual risks warrant acknowledgment and monitoring.
A. Enforcement Risk
The primary enforcement risk relates to the practical difficulty of obtaining sufficiently granular pricing data from Cedarpoint's other customer contracts during an MFN audit. Even with a contractual audit right and an independent third-party auditor, Cedarpoint may resist providing per-unit pricing breakdowns on the grounds that such data constitutes highly confidential commercial information. Cedarpoint may also argue that its confidentiality obligations to other customers preclude the disclosure of their pricing data, even to an independent auditor.
This risk is mitigated by several factors. First, the contractual audit right—once agreed upon in the MSA—constitutes a binding obligation that Cedarpoint cannot unilaterally refuse to honor. Second, the use of an independent third-party auditor with appropriate confidentiality protections (including, if necessary, a separate NDA between the auditor and Cedarpoint) provides a reasonable mechanism for reviewing sensitive pricing data without disclosing it to Northgate Americas directly. Third, the cost-shifting provision creates a financial incentive for Cedarpoint to cooperate with the audit process: if Cedarpoint obstructs an audit and a violation is later established, Cedarpoint bears the cost of the audit. Fourth, if Cedarpoint refuses to cooperate with a properly invoked audit right, Northgate Americas may have grounds for a breach of contract claim, which provides additional leverage.