PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
Representations and Warranty Insurance Policy
Bound Policy Summary and Calderwood & Harkness LLP Negotiation Notes
Matter: Harrowgate Private Equity Fund IV LP — Acquisition of Pennfield Holdings, Inc. (Project Summit)
Matter Number: 1003-00004
Prepared by: Ryan Kowalski, Lead Associate, Mergers & Acquisitions Megan Chu, Working Associate, Mergers & Acquisitions Calderwood & Harkness LLP
Reviewed by: Oliver Mackenzie, Responsible Partner, Mergers & Acquisitions Calderwood & Harkness LLP
Date: March 30, 2025
Classification: Attorney-Client Privileged / Attorney Work Product
This memorandum is protected by the attorney-client privilege and constitutes attorney work product prepared in anticipation of litigation and in connection with the provision of legal advice. It is prepared solely for the benefit of Harrowgate Private Equity Fund IV LP and its affiliates and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
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I. Executive Summary
This memorandum summarizes the terms of the buyer-side representations and warranty insurance ("R&W Insurance") policy issued by Meridian Specialty Insurance Company, a Connecticut-domiciled insurer with its principal place of business at One Constitution Plaza, 18th Floor, Hartford, CT 06103 (the "Carrier" or "Meridian"). The policy was bound on March 28, 2025, in connection with the proposed take-private acquisition (the "Transaction" or the "Merger") of Pennfield Holdings, Inc. (Nasdaq: PNFD) (the "Target" or "Pennfield" or the "Company") by Harrowgate Private Equity Fund IV LP ("HPE Fund IV" or the "Buyer") through its wholly owned subsidiary, Pinnacle Merger Sub, Inc. ("Merger Sub").
The Transaction is structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law ("DGCL"), pursuant to which Merger Sub will merge with and into Pennfield, with Pennfield surviving the Merger as a wholly owned subsidiary of HPE Fund IV. The aggregate merger consideration is $980,000,000, representing $15.95 per share on a fully diluted basis of approximately 61,450,000 shares of Pennfield common stock.
The R&W Insurance policy provides an aggregate limit of liability of $100,000,000, representing approximately 10.2% of the total deal value, subject to a retention of $9,800,000 (calculated as 1% of the aggregate merger consideration). The retention includes a negotiated drop-down provision under which the retention decreases by 50% (to $4,900,000) at 12 months following the Closing Date for all representations and warranties other than Fundamental Representations. The policy is written on a "loss" basis and covers losses arising from breaches of the Seller's representations and warranties as set forth in the Agreement and Plan of Merger (the "Merger Agreement"), the execution date of which is anticipated to be April 7, 2025.
The Named Insureds under the policy are Harrowgate Private Equity Fund IV LP and Pinnacle Merger Sub, Inc. and, following the Closing, Pennfield Holdings, Inc. as the surviving entity in the Merger and its subsidiaries. Additional insureds include Harrowgate Capital Partners IV GP LLC, Harrowgate Capital Partners LLC, Ashford Growth Partners LP (as co-investor), and the respective directors, officers, employees, and controlling persons of the foregoing entities.
The R&W Insurance policy was placed through Lockwood Risk Advisors LLC, an insurance brokerage firm with offices at 125 High Street, Suite 900, Boston, MA 02110, with James Fielding, Senior Vice President, serving as the lead broker for the placement. Meridian's underwriting counsel is Winslow & Crane LLP, located at 101 Federal Street, Suite 2600, Boston, MA 02110, with Andrea Shelby, Partner, leading the underwriting diligence review.
The R&W Insurance policy is designed to complement the indemnification provisions set forth in the Merger Agreement, under which the aggregate indemnification cap is 12% of the aggregate merger consideration, or $117,600,000. Importantly, as negotiated by Calderwood & Harkness LLP ("C&H"), the policy does not require exhaustion of Merger Agreement indemnification as a precondition to coverage; the policy responds independently once the self-insured retention is satisfied.
C&H coordinated with Lockwood Risk Advisors throughout the placement process, managed the competitive carrier selection process, and negotiated the terms of the bound policy directly with Meridian and its underwriting counsel, Winslow & Crane LLP. This memorandum sets forth a detailed summary of the bound policy terms, a description of the placement process, C&H's negotiation notes identifying the key issues raised during the policy form negotiation and their resolution, a comparative analysis of the R&W Insurance policy relative to the Merger Agreement indemnification provisions, and a summary of open items and next steps required in advance of the anticipated Closing.
II. Transaction Overview
A. Parties
The following is a summary of the principal parties to the Transaction:
Buyer. Harrowgate Private Equity Fund IV LP ("HPE Fund IV"), a Delaware limited partnership, with its principal office located at 1200 Market Street, Suite 3100, Wilmington, DE 19801 (EIN: 87-2263148). HPE Fund IV is the fourth institutional buyout fund managed by the Harrowgate Capital Partners platform.
General Partner. Harrowgate Capital Partners IV GP LLC, a Delaware limited liability company, serves as the general partner of HPE Fund IV and is responsible for all investment decisions and management activities of the fund.
Investment Manager. Harrowgate Capital Partners LLC, a Delaware limited liability company, serves as the investment manager of HPE Fund IV and the broader Harrowgate platform. Harrowgate Capital Partners LLC manages approximately $14.2 billion in assets under management firm-wide. HPE Fund IV is a 2023 vintage fund with total committed capital of approximately $4.8 billion, focused on control and significant minority investments in consumer, retail, and business services companies in North America.
Merger Sub. Pinnacle Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of HPE Fund IV, formed solely for purposes of effectuating the reverse triangular merger contemplated by the Merger Agreement (EIN: 93-4081562). Merger Sub has no assets, liabilities, or operations other than those incidental to its formation and the Transaction.
Target. Pennfield Holdings, Inc., a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol "PNFD" (CUSIP: 708234109; EIN: 82-4917305), with its corporate headquarters located at 4500 Commerce Boulevard, Suite 800, Charlotte, NC 28202. Pennfield is a specialty retailer focused on outdoor lifestyle, sporting goods, and adventure apparel, operating a total of 209 retail locations across 34 states, comprised of 187 company-owned stores and 22 outlet locations. As of the most recent fiscal year end, Pennfield employed approximately 8,400 employees across its retail, distribution, and corporate operations.
B. Transaction Economics
The key economic terms of the Transaction are as follows:
• Aggregate Merger Consideration: $980,000,000
• Per-Share Merger Consideration: $15.95, calculated on a fully diluted basis of 61,450,000 shares (comprised of 58,200,000 basic shares of Pennfield common stock outstanding and 3,250,000 shares issuable upon exercise or settlement of outstanding stock options and restricted stock units ("RSUs") under Pennfield's equity incentive plans)
• Premium to 30-Day Volume-Weighted Average Price ("VWAP"): 30.95% (based on a 30-day VWAP of $12.18 per share as of the reference date)
• Premium to 52-Week High: 10.0% (based on a 52-week high trading price of $14.50 per share)
• Implied Enterprise Value / EBITDA Multiple: 6.9x (based on Pennfield's fiscal year 2024 EBITDA of $142,000,000)
• Pennfield Fiscal Year 2024 Revenue: $1,620,000,000
• Pennfield Fiscal Year 2024 Net Income: $54,300,000
• Pennfield Fiscal Year 2024 EBITDA Margin: 8.8%
The per-share merger consideration of $15.95 represents a meaningful premium to Pennfield's recent trading levels and was determined through arm's-length negotiations between Harrowgate and the Pennfield board of directors, with the assistance of Pennfield's financial advisor, Whitmore Zanthor & Co.
C. Financing Summary
The Transaction is being financed through a combination of committed debt, sponsor equity, co-investment equity, management rollover equity, and existing Pennfield cash on the balance sheet. The financing structure is summarized below:
Committed Debt: $640,000,000 (Total)
• Senior Secured Term Loan B: $490,000,000 principal amount, with a 7-year maturity and an interest rate of SOFR plus 400 basis points. The Term Loan B is expected to be drawn in full at Closing.
• Senior Secured Revolving Credit Facility: $150,000,000 in committed availability, with a 5-year maturity and an interest rate of SOFR plus 350 basis points. The Revolving Credit Facility is expected to be undrawn at Closing and will be available for post-closing working capital and general corporate purposes.
• Lead Arranger and Administrative Agent: Falconer National Bank, N.A.
• Co-Arranger and Joint Bookrunner: Dunmore Capital Markets LLC
Equity: $340,000,000 (Total)
• HPE Fund IV Direct Equity Contribution: $258,500,000
• Co-Investment — Ashford Growth Partners LP: $60,000,000
• Management Rollover Equity: $21,500,000, comprised of:
• Catherine Langford (Chief Executive Officer): $12,500,000
• Derek Simmons (Chief Financial Officer): $5,000,000
• Maxwell Dunn (Chief Operating Officer): $4,000,000
Other Sources:
• Pennfield Cash on Balance Sheet (Applied at Closing): $90,000,000
• Estimated Transaction Costs: $60,000,000 (inclusive of advisory fees, financing costs, legal fees, R&W insurance premium, and other closing-related expenses)
The total sources of $1,070,000,000 ($640,000,000 debt + $340,000,000 equity + $90,000,000 cash on balance sheet) are expected to fund the $980,000,000 aggregate merger consideration, the $60,000,000 in estimated transaction costs, and the refinancing of approximately $30,000,000 in existing Pennfield indebtedness at Closing.
D. Key Merger Agreement Terms Relevant to R&W Policy
The following provisions of the Merger Agreement are directly relevant to the structure and coverage of the R&W Insurance policy:
• Indemnification Cap: The aggregate indemnification cap under the Merger Agreement is 12% of the aggregate merger consideration, or $117,600,000. This cap applies to all losses arising from breaches of the Seller's representations and warranties, subject to customary exceptions for Fundamental Representations and fraud.
• Company Termination Fee: Pennfield is required to pay a termination fee of 3.5% of the aggregate merger consideration ($34,300,000) to HPE Fund IV in certain circumstances, including termination in connection with a competing superior proposal accepted by the Pennfield board of directors.
• Reverse Termination Fee (Buyer): HPE Fund IV is required to pay a reverse termination fee of 6.0% of the aggregate merger consideration ($58,800,000) to Pennfield in the event the Transaction is terminated due to a financing failure or a willful breach by Buyer or Merger Sub of their obligations under the Merger Agreement.
• Outside Date: The Merger Agreement provides for an Outside Date of September 30, 2025, after which either party may terminate the agreement if the Closing has not occurred, subject to certain exceptions (including extensions in the event of pending regulatory approvals).
• No-Shop Covenant: The Merger Agreement contains a customary no-shop covenant restricting Pennfield from soliciting, initiating, encouraging, or facilitating competing acquisition proposals following execution of the Merger Agreement, subject to a fiduciary-out exception permitting the Pennfield board to consider and respond to unsolicited superior proposals consistent with its fiduciary duties under Delaware law.
• Stockholder Approval: The Merger requires the affirmative vote of the holders of a majority of the outstanding shares of Pennfield common stock entitled to vote at a stockholder meeting duly called for such purpose, in accordance with DGCL § 251.
• Change of Control Provisions: The Merger will trigger change of control provisions in certain of Pennfield's existing agreements, including its credit agreements, executive employment agreements, retail store lease agreements, and equity incentive plans. C&H has prepared a comprehensive Change of Control Analysis (dated March 26, 2025) identifying all such provisions and the consents, waivers, or other actions required in connection with the Closing.
III. Policy Placement Process
A. Broker Engagement
In late February 2025, Harrowgate engaged Lockwood Risk Advisors LLC ("Lockwood"), an insurance brokerage firm specializing in transactional risk insurance, to manage a competitive placement process for buyer-side R&W Insurance in connection with the Transaction. Lockwood maintains its principal office at 125 High Street, Suite 900, Boston, MA 02110. James Fielding, Senior Vice President, served as the lead broker and primary point of contact for the placement.
Lockwood prepared and distributed a Non-Binding Indication ("NBI") package to six prospective carriers in the R&W Insurance market. The NBI package included a summary of the Transaction, a description of the contemplated policy structure and coverage terms, the preliminary draft of the Merger Agreement (subject to redaction of certain commercially sensitive terms), a summary of the buyer's due diligence scope and findings, and other materials customarily provided to underwriters in the R&W Insurance placement process.
C&H coordinated closely with Lockwood throughout the placement process, participated in carrier selection discussions, and assisted in the preparation of the NBI package to ensure that the materials provided to prospective carriers accurately reflected the scope and depth of buyer-side due diligence conducted to date.
B. Carrier Selection
Of the six prospective carriers that received the NBI package, four carriers submitted Non-Binding Indications within the requested timeframe. After a thorough evaluation of the competing NBIs, Lockwood recommended, and Harrowgate selected, Meridian Specialty Insurance Company as the lead carrier for the R&W Insurance placement based on the following factors:
• Competitive Premium: Meridian's quoted premium was competitive relative to the other carriers' indications, particularly when evaluated on a rate-on-line basis relative to the policy limit and retention structure.
• Favorable Retention Terms: Meridian was willing to consider a 50% drop-down in retention at 12 months post-closing, which was not offered by all competing carriers at the NBI stage.
• Breadth of Coverage: Meridian's NBI reflected a willingness to cover all Seller representations and warranties without sublimits on specific representation categories, and with a relatively limited set of transaction-specific exclusions.
• Carrier Financial Strength: Meridian maintains an A.M. Best financial strength rating of A (Excellent) with a stable outlook, providing Harrowgate with confidence in the carrier's ability to pay claims over the multi-year policy period.
• Experienced Underwriting Counsel: Meridian's retention of Winslow & Crane LLP as underwriting counsel, and specifically Andrea Shelby as lead partner, was viewed favorably by C&H based on prior dealings with Ms. Shelby on similar R&W Insurance placements.
Following carrier selection, Meridian's underwriting counsel, Winslow & Crane LLP (101 Federal Street, Suite 2600, Boston, MA 02110; lead partner: Andrea Shelby), conducted its underwriting diligence review. This review included examination of the Pennfield virtual data room (designated "Project Summit" and hosted on the Thackeray Solutions platform), the near-final draft of the Merger Agreement, the buyer-side due diligence reports prepared by C&H and Harrowgate's other advisors, management presentations provided by Pennfield's executive team, and supplemental diligence materials requested by Meridian during the underwriting process.
An underwriting call was held on approximately March 22, 2025, during which Meridian and Winslow & Crane posed questions to the buyer's deal team and counsel regarding the scope and findings of the due diligence investigation, the key risks identified in connection with the Transaction, and the structure of the Merger Agreement's indemnification provisions. Participants in the underwriting call included:
• Calderwood & Harkness LLP: Ryan Kowalski (Lead Associate), Megan Chu (Working Associate)
• Harrowgate Capital Partners LLC: Jonah Whitfield (Principal), Rebecca Talmadge (Partner)
• Lockwood Risk Advisors LLC: James Fielding (Senior Vice President)
• Meridian Specialty Insurance Company / Winslow & Crane LLP: Andrea Shelby (Partner)
During the underwriting call, C&H presented a summary of the diligence findings organized by representation and warranty category, highlighting areas of elevated risk and the manner in which those risks were addressed in the Merger Agreement and the Seller's disclosure schedules. The underwriting call lasted approximately ninety minutes, and Meridian submitted a limited number of follow-up diligence questions, which were addressed by C&H and Harrowgate in writing within 48 hours.
C. Timeline
The R&W Insurance placement process proceeded according to the following timeline:
IV. Summary of Bound Policy Terms
Set forth below is a detailed summary of the principal terms and conditions of the bound R&W Insurance policy. This summary is qualified in its entirety by reference to the full text of the bound policy form, a copy of which is retained in the deal files as Appendix A and is not reproduced in this memorandum.
A. Named Insured
The Named Insureds under the policy are:
1. Harrowgate Private Equity Fund IV LP (Buyer)
2. Pinnacle Merger Sub, Inc. (Merger Sub)
3. Pennfield Holdings, Inc. (as the surviving corporation in the Merger, effective as of the Closing Date) and its subsidiaries
The following entities and individuals are designated as Additional Insureds under the policy:
• Harrowgate Capital Partners IV GP LLC (General Partner of HPE Fund IV)
• Harrowgate Capital Partners LLC (Investment Manager)
• Ashford Growth Partners LP (Co-Investor)
• The respective directors, officers, employees, and controlling persons of each of the foregoing Named Insureds and Additional Insureds
The inclusion of Ashford Growth Partners LP as an Additional Insured was specifically requested by C&H during the policy negotiation to ensure that the co-investment participant has direct rights under the policy commensurate with its $60,000,000 equity contribution to the Transaction.
B. Policy Type
The policy is a buyer-side representations and warranty insurance policy, written on a "loss" basis. The policy covers losses sustained by the Named Insureds and Additional Insureds arising from breaches of the Seller's (Pennfield's) representations and warranties as set forth in the Agreement and Plan of Merger dated April 7, 2025.
The policy is not a "liability" policy and does not insure the Seller against claims brought by the Buyer. Rather, it provides direct, first-party coverage to the Buyer and its affiliates for losses they suffer as a result of inaccuracies in the Seller's representations, regardless of whether the Buyer pursues or recovers indemnification from the Seller under the Merger Agreement.
C. Policy Limit
• Aggregate Limit of Liability: $100,000,000
The aggregate limit of $100,000,000 represents approximately 10.2% of the total deal value of $980,000,000. This limit is inclusive of defense costs, meaning that amounts paid by Meridian in respect of the investigation, defense, and resolution of covered claims will erode the aggregate limit of liability available for indemnity payments.
There are no sublimits applicable to specific representation categories. All representations and warranties covered under the policy are subject to the full aggregate limit of $100,000,000, subject to the exclusions and limitations described in Section V below. C&H specifically negotiated the elimination of sublimits that had appeared in Meridian's initial draft policy form with respect to environmental, tax, and employee benefits representations.
D. Retention
• Self-Insured Retention: $9,800,000
The retention is calculated as 1% of the aggregate merger consideration of $980,000,000. This retention functions as a self-insured retention ("SIR"), meaning that the Named Insureds bear the first $9,800,000 of covered losses before the policy responds. The retention is a single aggregate retention that applies to all covered losses in the aggregate (i.e., it is not a per-claim retention).
The retention is intended to be satisfied, in whole or in part, by recovery under the indemnification provisions of the Merger Agreement to the extent such recovery is available. However, critically, the policy does not require exhaustion of Merger Agreement indemnification as a precondition to coverage under the policy. If the Named Insureds are unable to recover under the Merger Agreement indemnification provisions (whether because the Seller disputes the claim, the indemnification escrow is insufficient, or for any other reason), the Named Insureds may satisfy the retention through their own funds and thereafter access coverage under the policy.
Drop-Down Provision: As negotiated by C&H (see Section VI.B), after 12 months from the Closing Date, the retention drops to 50% ($4,900,000) for all representations and warranties other than Fundamental Representations. For Fundamental Representations (organization, authorization, capitalization, brokers/finders, and tax), the full $9,800,000 retention remains in effect for the entire 6-year survival period applicable to those representations. The drop-down mechanism reflects the expectation that the most significant integration-related issues will surface within the first 12 months following Closing, and that a reduced retention is appropriate thereafter for non-fundamental matters.
E. Policy Period
The policy period is structured as follows:
• Inception Date: The Closing Date of the Merger (currently estimated to be June 30, 2025). The policy does not provide any pre-closing coverage; coverage attaches only upon the consummation of the Merger.
• General Representations and Warranties: The policy provides coverage for a period of 3 years from the Closing Date with respect to all non-Fundamental Representations and non-Tax Representations.
• Fundamental Representations: The policy provides coverage for a period of 6 years from the Closing Date with respect to Fundamental Representations, which are defined to include the Seller's representations regarding organization and good standing, authorization and enforceability, capitalization, and brokers and finders.
• Tax Representations: The policy provides coverage for a period of 6 years from the Closing Date with respect to the Seller's representations regarding tax matters, coterminous with the survival period applicable to Fundamental Representations.
• Extended discovery/Reporting Period: The policy includes an extended discovery and reporting period of 12 months following the expiration of the applicable survival period. Under this provision, any claim that is first discovered during the policy period but is reported to Meridian within the 12-month extended discovery period will be treated as timely reported and will be eligible for coverage under the policy, subject to all other policy terms and conditions.
The survival periods under the policy have been structured to align with the anticipated survival periods under the Merger Agreement. C&H will confirm this alignment upon execution of the Merger Agreement on April 7, 2025, and will flag any discrepancies for resolution through a policy endorsement, if necessary.
F. Premium and Costs
• One-Time Premium: The R&W Insurance policy is subject to a one-time, fully earned premium payable at or prior to the Closing Date. The specific premium amount has been negotiated between Harrowgate and Meridian and is set forth in the fee schedule attached to the bound policy. Pursuant to client instruction, the premium amount is not included in this summary and is subject to separate confidentiality provisions between Harrowgate and Meridian.
• Underwriting Fee: Winslow & Crane LLP's underwriting fee for the diligence review is billed separately by underwriting counsel and is not included in the policy premium.
• Broker Commission: Lockwood Risk Advisors LLC's brokerage commission is embedded in the policy premium and is not separately billed to Harrowgate.
The aggregate cost of the R&W Insurance placement (premium, underwriting fee, and broker commission) is included in the $60,000,000 estimated transaction costs referenced in Section II.C above.
G. Covered Representations and Warranties
The policy covers all representations and warranties made by Pennfield Holdings, Inc. (the Seller) in Article IV of the Agreement and Plan of Merger, including but not limited to the following:
1. Organization, Good Standing, and Qualification. Representations that Pennfield and each of its subsidiaries is duly organized, validly existing, and in good standing under the laws of its jurisdiction of organization, and is duly qualified or licensed to do business in each jurisdiction where the nature of its business or the ownership of its properties requires such qualification.
2. Authorization and Enforceability. Representations that Pennfield has the requisite corporate power and authority to execute, deliver, and perform its obligations under the Merger Agreement and to consummate the Merger, and that the Merger Agreement constitutes a valid and binding obligation of Pennfield enforceable in accordance with its terms.
3. Capitalization. Representations regarding Pennfield's authorized and outstanding capital stock, including 58,200,000 basic shares of common stock outstanding, 3,250,000 shares issuable upon exercise or settlement of outstanding stock options and RSUs, and 61,450,000 fully diluted shares. The capitalization representation also addresses the absence of other outstanding equity securities, warrants, convertible instruments, or agreements to issue any of the foregoing.
4. Financial Statements. Representations that Pennfield's audited consolidated financial statements for the fiscal year ended January 31, 2025 (FY 2024), and the unaudited interim financial statements for the most recently completed fiscal quarter, have been prepared in accordance with GAAP consistently applied and fairly present in all material respects the financial position, results of operations, and cash flows of Pennfield and its subsidiaries for the periods presented. The FY 2024 financial statements were audited by Pemberton & Associates LLP (lead audit partner: Kevin Tarrant Corporation) and reflected revenue of $1,620,000,000, EBITDA of $142,000,000, and net income of $54,300,000.
5. Absence of Undisclosed Liabilities. Representations that neither Pennfield nor any of its subsidiaries has any liabilities of a nature required to be reflected or reserved against in a balance sheet prepared in accordance with GAAP, other than liabilities (a) reflected or reserved against in the most recent balance sheet included in the financial statements, (b) incurred in the ordinary course of business since the date of such balance sheet, or (c) as disclosed in the Seller's disclosure schedules.
6. Absence of Certain Changes (Material Adverse Effect). Representations that, since the date of the most recent balance sheet, there has been no event, development, or circumstance that, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect on Pennfield and its subsidiaries, taken as a whole.
7. Compliance with Laws. Representations that Pennfield and its subsidiaries are, and have been since the applicable look-back date, in material compliance with all applicable federal, state, local, and foreign laws, statutes, regulations, ordinances, and orders.
8. Tax Matters. Representations regarding the timely filing of all required tax returns, the timely payment of all taxes due, the absence of pending or threatened tax audits or disputes, and compliance with tax withholding and reporting obligations.
9. Employee Benefits / ERISA. Representations regarding the establishment, maintenance, and administration of Pennfield's employee benefit plans in compliance with ERISA, the Internal Revenue Code, and applicable law, including representations regarding the funded status of pension plans and the absence of withdrawal liability with respect to multiemployer plans.
10. Environmental Matters. Representations regarding Pennfield's compliance with applicable environmental laws and regulations, the absence of material environmental liabilities, the absence of releases or threatened releases of hazardous substances at or from properties owned, operated, or leased by Pennfield, and the possession of all required environmental permits.
11. Material Contracts. Representations regarding the material contracts to which Pennfield and its subsidiaries are a party, including the accuracy of the schedule of material contracts, the absence of defaults, and the validity and enforceability of such contracts.
12. Real Property. Representations regarding the real property owned or leased by Pennfield, encompassing all 187 company-owned store locations, 22 outlet locations, the corporate headquarters in Charlotte, NC, and distribution and warehouse facilities.
13. intellectual Property. Representations regarding Pennfield's ownership of or right to use its material intellectual property, the absence of infringement claims, and the adequacy of intellectual property protections.
14. Litigation and Proceedings. Representations regarding the absence of pending or, to the knowledge of Pennfield, threatened litigation, arbitration, or governmental proceedings that would reasonably be expected to be material.
15. Insurance. Representations regarding the maintenance of insurance policies customary for businesses of the type and size operated by Pennfield.
16. Brokers and Finders. Representations that no broker, finder, or investment banker (other than Whitmore Zanthor & Co.) is entitled to any brokerage fee, finder's fee, or other commission in connection with the Merger.
17. Anti-Corruption / FCPA. Representations regarding compliance with the U.S. Foreign Corrupt Practices Act and other applicable anti-corruption laws and regulations.
18. Data Privacy and Cybersecurity. Representations regarding Pennfield's compliance with applicable data privacy and data protection laws and regulations, the adequacy of its cybersecurity policies and practices, and the absence of material data breaches or unauthorized access to personal information.
V. Exclusions and Limitations
A. Standard Exclusions
The bound policy contains the following standard exclusions from coverage, which are customary in buyer-side R&W Insurance policies for transactions of this type and size:
1. Known Breaches / Actual Knowledge Exclusion.
The policy does not provide coverage for any breach of a representation or warranty of which any member of the "Deal Team Knowledge Group" had actual knowledge as of the date the policy was bound (March 28, 2025). The Deal Team Knowledge Group is a specifically defined and negotiated list of individuals whose knowledge is attributed to the Named Insureds for purposes of this exclusion. As bound, the Deal Team Knowledge Group consists of:
(a) For Harrowgate: Nathaniel Cross (Managing Partner), Rebecca Talmadge (Partner), and Jonah Whitfield (Principal);
(b) For Calderwood & Harkness LLP: Oliver Mackenzie (Responsible Partner), Ryan Kowalski (Lead Associate), and Megan Chu (Working Associate).
The negotiation of the scope and composition of the Deal Team Knowledge Group was a significant focus of C&H's policy negotiation, as described in detail in Section VI.A below.
2. Forward-Looking Statements and Projections.
The policy does not provide coverage for losses arising from breaches of any forward-looking statements, financial projections, forecasts, budgets, or estimates of Pennfield, whether included in the Merger Agreement, the Seller's disclosure schedules, or any other document provided in connection with the Transaction. This exclusion is standard and reflects the principle that representations and warranty insurance covers historical factual representations, not speculative or predictive statements.
3. Purchase Price Adjustments.
The policy does not provide coverage for losses to the extent they constitute adjustments to the merger consideration that are subject to the purchase price adjustment mechanism (if any) in the Merger Agreement. It is noted that the Merger Agreement provides for a fixed-price deal with no post-closing purchase price adjustment. Accordingly, this exclusion is not expected to have practical significance in the context of this Transaction, but it remains in the policy as a standard market provision.
4. Consequential, Punitive, and Multiplied Damages.
Coverage for consequential damages is available only to the extent such damages are awarded to a third party in a Third-Party Claim (i.e., a claim brought by a person or entity other than the Named Insured or an Additional Insured). The policy does not cover consequential damages suffered directly by the Named Insureds in a first-party claim context. The policy does not provide coverage for punitive or multiplied damages, except to the extent such damages are (a) insurable under applicable law, and (b) awarded to a third party in a Third-Party Claim. This limitation is consistent with market practice and the public policy of most jurisdictions against the insurability of punitive damages.
5. Covenant Breaches.
The policy covers only breaches of representations and warranties as defined in the Merger Agreement. It does not cover breaches of covenants, agreements, or obligations of the parties under the Merger Agreement. This distinction is fundamental to the structure of R&W Insurance: representations and warranties are statements of fact made at a point in time, whereas covenants are forward-looking promises to take or refrain from taking specified actions. Covenant compliance risk must be addressed through other mechanisms.
6. Pension / Multiemployer Plan Underfunding.
The policy does not provide coverage for losses arising from underfunding of defined benefit pension plans or withdrawal liability with respect to multiemployer plans under Title IV of ERISA. This exclusion reflects the significant and often unpredictable magnitude of pension underfunding liabilities, which R&W Insurance carriers generally view as uninsurable on standard terms. C&H notes that Pennfield's diligence materials indicate that Pennfield does not maintain any defined benefit pension plans and does not contribute to any multiemployer plans, so this exclusion is not expected to have practical significance in the context of this Transaction.
7. Transfer Taxes and Fees.
The policy does not provide coverage for transfer taxes, stamp duties, or similar transaction-related taxes or fees incurred in connection with the consummation of the Merger. These costs are transaction expenses borne by the parties pursuant to the tax allocation provisions of the Merger Agreement and are not losses arising from breaches of representations and warranties.
8. Asbestos, Lead Paint, and PFAS Contamination.
The policy excludes coverage for losses arising from asbestos, lead-based paint, or per- and polyfluoroalkyl substances ("PFAS") contamination, except to the extent such matters are specifically addressed in the environmental representations in the Merger Agreement and are not otherwise excluded by the negotiated environmental carve-out described in Section VI.D below. This is a standard environmental carve-out in R&W Insurance policies. C&H negotiated a narrowing of the initial environmental exclusion proposed by Meridian, as described in Section VI.D.
B. Transaction-Specific Exclusions
In addition to the standard exclusions described above, the bound policy contains the following transaction-specific exclusions that were identified and negotiated during the underwriting and policy form negotiation process:
1. Change of Control Consent Costs.
The policy does not cover costs associated with obtaining consents required as a result of the Merger constituting a change of control under Pennfield's contracts, leases, or other agreements. Pennfield's existing agreements contain numerous change of control provisions that are triggered by the Merger, including provisions in its existing credit agreements, executive employment agreements, retail store lease agreements, and equity incentive plans. The costs of obtaining the required consents, waivers, or novations in connection with these provisions are excluded from coverage.
However, this exclusion is subject to an important carve-back: to the extent that the costs associated with a change of control provision arise from a breach of the Seller's representation regarding the accuracy and completeness of the disclosed change of control provisions (e.g., a representation that all material change of control provisions have been identified in the disclosure schedules), such costs will be covered by the policy. In other words, if Pennfield fails to disclose a material change of control provision and the Buyer incurs unanticipated costs as a result of that non-disclosure, the policy will respond.
2. Intercompany Transactions.
The policy does not cover losses arising from intercompany transactions between Pennfield and its subsidiaries to the extent such transactions are eliminated in consolidation. This exclusion addresses the concern that intercompany accounting entries that wash out in the consolidated financial statements should not form the basis for a claim under the policy, as they do not represent a true economic loss to the Named Insureds.
3. Certain Disclosed Matters.
Matters specifically disclosed on the Seller's disclosure schedules delivered with the Merger Agreement are excluded from coverage to the extent of such disclosure. This exclusion is coextensive with the customary principle that a buyer cannot claim a breach of a representation that is qualified by a disclosure schedule item that accurately describes the relevant matter. C&H notes that the alignment between the Seller's disclosure schedules and the policy exclusions must be carefully reviewed upon execution of the Merger Agreement, and this is identified as an open item in Section VIII below.
4. Undisclosed Tax Liabilities Arising from Pre-Closing Restructuring.
The policy does not cover tax liabilities directly attributable to any pre-closing restructuring undertaken by Pennfield at the direction of, or in coordination with, Harrowgate. This exclusion is designed to prevent the Named Insureds from obtaining R&W Insurance coverage for tax consequences of restructuring steps that are within the Buyer's control and are undertaken to optimize the post-closing tax structure of the combined enterprise. C&H views this exclusion as reasonable and appropriate given that the Buyer will have direct knowledge of and control over any pre-closing restructuring transactions directed by Harrowgate.
VI. Calderwood & Harkness Negotiation Notes
The following sections describe the key issues raised during C&H's negotiation of the R&W Insurance policy with Meridian and its underwriting counsel, Winslow & Crane LLP, and the manner in which those issues were resolved. These notes are intended to memorialize the negotiation process for the benefit of the Harrowgate deal team and to provide context for the final policy terms.
A. Knowledge Scraper — Scope and Definition
The scope and composition of the Deal Team Knowledge Group — the group of individuals whose actual knowledge of a breach is attributed to the Named Insureds for purposes of the known breach exclusion — was the most heavily negotiated provision of the policy.
Initial Carrier Position. Meridian's initial draft policy defined the "Deal Team Knowledge Group" broadly to include all attorneys and advisors who participated in due diligence in connection with the Transaction. Under this formulation, the knowledge group would have extended to:
• All members of the C&H engagement team, including not only the three named individuals ultimately included (Oliver Mackenzie, Ryan Kowalski, and Megan Chu), but also Harrison Wexford (billing partner with limited deal-level diligence involvement), Sylvia Hartwell (tax specialist), and Elaine Forsythe (antitrust specialist);
• Ridgepoint Partners LLC (Marcus Hale, Priya Chandrasekaran), the operational due diligence consultant engaged by Harrowgate;
• Crestline Tax Advisors LLC (Alan Fitzgerald), the tax advisory firm engaged by Harrowgate; and
• Lockwood Risk Advisors LLC personnel involved in the insurance placement.
C&H objected to this formulation on the grounds that it was overbroad and inconsistent with market practice for buyer-side R&W Insurance placements in the private equity context.
C&H Negotiated Position. After multiple rounds of comments and two telephonic discussions between Ryan Kowalski and Andrea Shelby, C&H successfully narrowed the Deal Team Knowledge Group to six named individuals organized into two categories:
(a) For Harrowgate (three individuals): Nathaniel Cross (Managing Partner), Rebecca Talmadge (Partner), and Jonah Whitfield (Principal). These individuals comprise the core Harrowgate deal team with direct, substantive involvement in the Transaction, including review of diligence findings, negotiation of the Merger Agreement, and approval of deal terms.
(b) For Calderwood & Harkness LLP (three individuals): Oliver Mackenzie (Responsible Partner), Ryan Kowalski (Lead Associate), and Megan Chu (Working Associate). These individuals are the C&H lawyers with primary responsibility for the conduct of legal due diligence, review of the Seller's representations and warranties, and negotiation of the Merger Agreement.
The following individuals were specifically excluded from the Deal Team Knowledge Group:
• Harrison Wexford (C&H billing partner): Mr. Wexford's involvement in the Transaction has been limited to administrative and supervisory matters; he has not conducted substantive due diligence or participated in the review or negotiation of the Seller's representations.
• Sylvia Hartwell (C&H tax specialist): Ms. Hartwell provided tax structuring advice and reviewed certain tax-related diligence materials, but her involvement was limited to the tax aspects of the Transaction. Her exclusion from the knowledge group was a significant point of negotiation (see below).
• Elaine Forsythe (C&H antitrust specialist): Ms. Forsythe's involvement was limited to the antitrust analysis and HSR filing preparation and did not encompass review of the Seller's representations generally.
• Marcus Hale and Priya Chandrasekaran (Ridgepoint Partners LLC): Ridgepoint's engagement was limited to operational due diligence, including review of Pennfield's supply chain, store operations, and workforce management practices. Ridgepoint personnel did not participate in the review or negotiation of the Merger Agreement.
• Alan Fitzgerald (Crestline Tax Advisors LLC): Mr. Fitzgerald's engagement was limited to tax advisory matters and did not encompass a review of the Seller's representations and warranties beyond those related to tax.
• James Fielding and other Lockwood Risk Advisors LLC personnel: Lockwood's role is limited to insurance brokerage; its personnel did not participate in substantive due diligence on the underlying Transaction.
Rationale. C&H's position was grounded in the principle that the knowledge group for purposes of the known breach exclusion should be limited to those individuals with direct, substantive involvement in the review and negotiation of the Seller's representations and warranties. Individuals with tangential or specialized advisory roles — even if they participated in certain aspects of due diligence — should not be included, because their knowledge of specific diligence findings may be incomplete and their involvement does not extend to the full scope of the Seller's representations. This approach is consistent with recent precedent in buyer-side R&W Insurance placements for PE sponsors, where narrow knowledge groups limited to the deal principal(s) and lead counsel are increasingly the market standard for transactions of this size and complexity.
Remaining Issue — Tax Knowledge Attribution. Winslow & Crane LLP initially pushed back on the exclusion of Sylvia Hartwell from the Deal Team Knowledge Group, arguing that the breadth of the tax representations covered by the policy justified the inclusion of the lead tax advisor in the knowledge group. After further negotiation, C&H and Winslow & Crane reached the following compromise:
Sylvia Hartwell is not included in the Deal Team Knowledge Group as a named individual. However, tax-related knowledge is attributed to the Named Insureds under the known breach exclusion only to the extent that the relevant information was (i) contained in the data room materials reviewed by the named knowledge group members, and (ii) identified in the Due Diligence Summary Memorandum dated March 29, 2025, prepared by C&H. This compromise ensures that the known breach exclusion applies to tax matters only to the extent that the core deal team had access to and reviewed the relevant information, without imputing the specialized knowledge of a tax advisor who was not part of the core deal team.