PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 901 Fifth Avenue, Suite 3200 Seattle, Washington 98164 Telephone: (206) 447-8200 Facsimile: (206) 447-8201
INTERNAL MEMORANDUM
FROM: Tiffany Rosenthal, Lead Associate, Mergers & Acquisitions Practice Group, Calderwood & Harkness LLP
TO: Oliver Mackenzie, Responsible Partner, Mergers & Acquisitions Practice Group, Calderwood & Harkness LLP David Tanaka, General Counsel, Cascadia State Infrastructure Authority
DATE: October 16, 2023
RE: Analysis of Buy-Sell Provision (§9.1) — Amended and Restated Limited Liability Company Agreement of Columbia Basin Water Treatment Partners, LLC, dated November 2, 2021
MATTER NO.: 47291.00001
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I. Executive Summary
The purpose of this memorandum is to evaluate the Cascadia State Infrastructure Authority's ("CSIA") rights and strategic considerations under the §9.1 shotgun buy-sell provision of the Amended and Restated Limited Liability Company Agreement (the "JV Agreement") of Columbia Basin Water Treatment Partners, LLC ("CBWTP" or the "JV Entity"). The §9.1 buy-sell mechanism becomes exercisable on November 2, 2023—the second anniversary of CBWTP's formation—and CSIA must determine, in advance of that date, whether and how to invoke this provision, either as a primary strategy or as a supplement to the default remedies already available under §8.2 of the JV Agreement.
By way of brief context, CBWTP is a currently dormant public-private joint venture between CSIA, which holds a 55% membership interest, and Pinnacle Water Solutions, LLC ("Pinnacle"), which holds a 45% membership interest. The JV Entity was formed to design, construct, and operate the Thurston County Advanced Water Treatment Facility (the "Facility"), a $45,000,000 public infrastructure project. The project has been stalled for over a year due to a confluence of adverse developments. Most significantly, Pinnacle is in uncured default of its $4,050,000 Second Tranche capital contribution obligation. The 60-day cure period under §8.2 of the JV Agreement expired on June 13, 2023, without cure. Additionally, the Pacific Cascade Bank, N.A. $27,000,000 project finance commitment (ref. PCB-PF-2022-0417) expired on August 15, 2023, without any draw. Environmental permitting for the project remains stalled at the Thurston County Department of Environmental Health. The JV Entity has not held a Governing Board meeting at which a quorum was present since prior to November 30, 2022.
After thorough review of the JV Agreement, applicable Washington law, and the current factual circumstances, this memorandum reaches the following principal conclusions:
1. CSIA may exercise the §9.1 shotgun provision as of November 2, 2023. The sole temporal condition—passage of the second anniversary of the JV Entity's formation—will be satisfied on that date, and no additional triggering event (such as deadlock or default) is required.
2. The §9.1 mechanism presents distinct advantages and risks compared to the §8.2 default remedies. While the shotgun buy-sell provides CSIA with a unilateral mechanism to force a separation from Pinnacle, it exposes CSIA to the reverse-election risk inherent in any shotgun provision—namely, the possibility that Pinnacle (or its private equity sponsor, Ridgeline Capital Partners, LP) could elect to purchase CSIA's 55% interest rather than sell Pinnacle's 45% interest.
3. CSIA must carefully evaluate the pricing it would set in a §9.1 offer. Given Pinnacle's financial backing from Ridgeline Capital Partners, LP, CSIA cannot assume that Pinnacle will default to the seller position. The price must be one at which CSIA would genuinely accept being the seller if Pinnacle elects to buy.
4. The interplay between §8.2 and §9.1 permits sequential or alternative exercise, but not simultaneous exercise of conflicting remedies. CSIA has the ability to pursue dilution or a default buyout under §8.2 before or instead of the §9.1 shotgun, which may yield a more favorable outcome.
5. We recommend that CSIA consider initiating the shotgun provision with a strategically calibrated price, but only as a secondary strategy. The preferred primary approach is to exercise §8.2 default remedies—particularly the §8.2(ii) buyout at 75% of fair market value—which offers a built-in pricing discount and eliminates the reverse-election risk. The §9.1 shotgun should be held in reserve as leverage or as a backup if §8.2 remedies prove impractical or are delayed by dispute.
The analysis supporting these conclusions is set forth in detail below.
II. Background
A. Formation and Structure of the Joint Venture
CBWTP was formed as a Washington limited liability company on November 2, 2021, under the Washington Limited Liability Company Act (Title 25.15 RCW). The JV Entity's Certificate of Formation was filed with the Washington Secretary of State on the same date (WA UBI No. 604-892-315; federal Employer Identification Number 88-3421076). The registered office of CBWTP is located at 1100 Jefferson Street SE, Suite 400, Olympia, Washington 98501, care of CSIA.
The JV Entity was established as a public-private partnership to design, construct, and operate the Thurston County Advanced Water Treatment Facility, an advanced water treatment plant with a design capacity of 12 million gallons per day ("MGD") to serve the growing population of Thurston County, Washington. The total project cost was budgeted at $45,000,000, consisting of $18,000,000 in equity contributions from the two members and $27,000,000 in project finance debt to be provided by Pacific Cascade Bank, N.A. under a commitment letter dated and executed in 2022.
CSIA holds a 55% membership interest in CBWTP, and Pinnacle holds a 45% membership interest. CSIA's total equity commitment under the JV Agreement is $9,900,000, representing 55% of the $18,000,000 total equity requirement. Pinnacle's total equity commitment is $8,100,000, representing the remaining 45%.
Under the JV Agreement, Pinnacle was designated as the Manager of CBWTP, responsible for the day-to-day management and oversight of the project's design and construction. In consideration of its management role, Pinnacle is entitled to a management fee equal to 3% of total construction costs, which, based on the $45,000,000 total project budget, amounts to $1,350,000.
The governance of CBWTP is vested in a five-member Governing Board. CSIA has the right to appoint three of the five members, and Pinnacle has the right to appoint two. The current composition of the Governing Board is as follows:
CSIA-Appointed Members:
• Margaret Ellsworth, Executive Director, CSIA
• David Tanaka, General Counsel, CSIA
• Patricia Huang, Deputy Director, Capital Projects, CSIA
Pinnacle-Appointed Members:
• Richard Prumvane, Chief Executive Officer, Pinnacle Water Solutions, LLC
• Cynthia Voss, Chief Operating Officer, Pinnacle Water Solutions, LLC
Major decisions of the JV Entity require a supermajority vote of four of the five Governing Board members. The JV Agreement specifies that the following actions, among others, constitute major decisions requiring supermajority approval: commencement of construction, incurrence of debt, admission of new members, dissolution of the JV Entity, and sale of all or substantially all of the JV Entity's assets. This supermajority requirement effectively gives each party a veto over major decisions, since neither CSIA's three appointees nor Pinnacle's two appointees can unilaterally reach the four-vote threshold.
A critical structural element of the joint venture is the ground lease. CSIA, as the fee owner of a 14.7-acre parcel located at 2480 Capitol Boulevard SE, Tumwater, Thurston County, Washington 98501, entered into a 99-year ground lease with CBWTP for the Facility site. The annual rent under the ground lease is $1.00. The ground lease was recorded with the Thurston County Auditor under Recording No. 2021-1102-004788. Significantly, the ground lease contains a reversion clause providing that the leasehold interest reverts to CSIA upon termination of the JV Entity. This reversion clause has important implications for the buy-sell analysis, as discussed in Sections IV and VI below.
B. Capital Contributions and Pinnacle's Default
The JV Agreement contemplated that equity contributions would be funded in two tranches. The First Tranche was funded on November 15, 2021, shortly after the JV Entity's formation. CSIA contributed $4,950,000, and Pinnacle contributed $4,050,000, for a total First Tranche funding of $9,000,000. Both members funded their First Tranche obligations in full and on time.
On March 1, 2023, the Governing Board issued a capital call for the Second Tranche, requiring each member to fund its remaining equity commitment within 30 calendar days—i.e., by March 31, 2023. CSIA funded its Second Tranche contribution of $4,950,000 on March 28, 2023, three days ahead of the deadline. With the funding of the Second Tranche, CSIA has now contributed the entirety of its $9,900,000 equity commitment and is fully funded.
Pinnacle, however, failed to fund its Second Tranche capital contribution of $4,050,000 by the March 31, 2023 deadline. As of the date of this memorandum, Pinnacle has not funded any portion of its Second Tranche obligation. Pinnacle's total contributions to date remain at $4,050,000, representing the First Tranche only.
On April 14, 2023, at CSIA's direction, Calderwood & Harkness delivered a formal notice of default to Pinnacle and its counsel, Whitfield, Aarons & Greer LLP, in accordance with the requirements of §8.2 of the JV Agreement. The notice specified that Pinnacle was in default of its Second Tranche capital contribution obligation and commenced the 60-day cure period provided under §8.2.
On April 28, 2023, Pinnacle's counsel, Elaine Prescott of Whitfield, Aarons & Greer LLP, responded by letter asserting that Pinnacle's failure to fund the Second Tranche was excused under the JV Agreement's force majeure provision. Specifically, Pinnacle contended that the stalled environmental permitting process at the Thurston County Department of Environmental Health constituted a force majeure event that relieved Pinnacle of its obligation to make the capital contribution.
On May 12, 2023, Calderwood & Harkness, on behalf of CSIA, rejected Pinnacle's force majeure defense. Our response noted that §11.4 of the JV Agreement expressly provides that "delays in obtaining governmental approvals, permits, or licenses" are excluded from the definition of force majeure events. The stalled environmental permitting process therefore does not qualify as force majeure under the contractual definition, and Pinnacle's capital contribution obligation remained due and owing.
Pinnacle did not respond further to our May 12, 2023 letter. The 60-day cure period under §8.2 expired on June 13, 2023, without Pinnacle having funded the Second Tranche or taken any steps toward cure. Accordingly, Pinnacle remains in uncured default under §8.2 of the JV Agreement as of the date of this memorandum.
C. Current Financial Position of CBWTP
The most recent financial data available for CBWTP is as of June 30, 2023, the last reporting date. Based on the unaudited financial statements prepared by Hargrove & Tillman, CPAs, the JV Entity's financial position is summarized as follows:
The capital accounts of the two members stand as follows:
Cumulative expenses incurred by CBWTP since formation total approximately $4,317,000. These expenses include environmental consulting and Phase I ESA costs, legal and organizational expenses, accounting fees, and other pre-development costs. The disparity between total funded equity ($13,950,000) and current net equity ($9,633,000) reflects these cumulative expenditures.
It is important to note that the JV Entity has no operating revenue. The Facility has not been constructed, and CBWTP has no contractual revenue stream, service agreements, or customer base. The entity is, for all practical purposes, a cash shell with limited pre-development assets and the benefit of the ground lease.
D. Other Relevant Circumstances
Several additional circumstances bear on the analysis of CSIA's strategic options under §9.1 and §8.2.
Lapsed Project Financing. Pacific Cascade Bank, N.A. issued a $27,000,000 project finance commitment letter (reference PCB-PF-2022-0417) to CBWTP. Thomas Rennick, Senior Vice President, Public Finance Division, served as the lead banker on the engagement. The commitment letter expired on August 15, 2023, without any draw having been made. The expiration of this financing commitment is a significant adverse development, as any reactivation of the project would require negotiation of new or replacement financing, potentially on less favorable terms.
Stalled Environmental Permitting. The Phase I Environmental Site Assessment for the 14.7-acre Facility site was completed on April 22, 2022. The Phase I ESA identified no recognized environmental conditions at the site, which was a favorable result. However, the Phase II Environmental Impact Determination ("EID"), which is required by the Thurston County Department of Environmental Health before construction permits can be issued, remains pending. Karen Lindstrom, Environmental Review Division Manager at the Thurston County Department of Environmental Health, has indicated that the Phase II EID review was paused on July 8, 2022, pending submission of supplemental environmental data. The data request has not been fulfilled, and the review remains in suspended status.
JV Dormancy and Governance Failure. Pinnacle deferred further project expenditures as of September 14, 2022. Since that date, no meaningful project development activity has occurred. A Governing Board meeting scheduled for November 30, 2022, failed for lack of quorum due to the absence of both Pinnacle-appointed members (Prumvane and Voss). Without a quorum, the Governing Board has been unable to take any action. The JV Entity has been functionally dormant for over one year.
Pinnacle's Ownership and Financial Profile. Pinnacle Water Solutions, LLC is a Delaware limited liability company (DE SOS File No. 5847231; EIN 47-2918534) headquartered at 720 SW Quelston Street, Suite 1500, Portland, Oregon 97205. Pinnacle is 62% owned by Ridgeline Capital Partners, LP, a Delaware limited partnership headquartered at 1120 NW Couch Street, Suite 700, Portland, Oregon 97209. Ridgeline is a private equity fund; Jonathan Kreider serves as Managing Partner. Ridgeline acquired its 62% stake in Pinnacle in 2019 for approximately $95,000,000, implying a total equity valuation of Pinnacle at approximately $153,000,000 at the time of acquisition. Pinnacle's 2021 audited financial statements reported revenue of approximately $187,000,000 and EBITDA of approximately $29,000,000. These figures are relevant to the assessment of Pinnacle's (and Ridgeline's) financial capacity to fund a reverse purchase under §9.1, as discussed in Section IV.C below.
Legal Representation. Pinnacle is represented by Whitfield, Aarons & Greer LLP, with Elaine Prescott serving as lead partner and Marcus Delvecchio as senior associate. The firm's offices are located at 1455 SW Broadway, Suite 2100, Portland, Oregon 97201.
III. Overview of the §9.1 Shotgun Buy-Sell Provision
A. Triggering Conditions
Section 9.1 of the JV Agreement establishes a "shotgun" or "Russian roulette" buy-sell provision—a bilateral mechanism under which either member may force a separation by naming a price at which it is willing to either buy or sell membership interests. The provision is subject to a single temporal condition: it may not be exercised until after the second anniversary of the JV Entity's formation. Since CBWTP was formed on November 2, 2021, the §9.1 provision becomes exercisable on November 2, 2023.
Importantly, the §9.1 provision does not require any predicate event beyond the passage of time. Unlike many buy-sell provisions that are triggered only by deadlock, default, or other specified events, the §9.1 mechanism is exercisable at either member's discretion once the temporal condition is satisfied. Neither a default by the other member, a governance deadlock, nor any other dispute or adverse event is required.
The JV Agreement does not appear to condition exercise of the §9.1 provision on the exercising member's good standing under the agreement. This issue is addressed further in Section V.D below, in the context of whether Pinnacle—despite being in uncured default under §8.2—retains the right to invoke §9.1.
The provision is also exercisable regardless of whether §8.2 default remedies have been invoked, are pending, or remain available. The JV Agreement does not contain language precluding exercise of §9.1 during the pendency of a §8.2 default or default remedy process.
B. Mechanics of the Shotgun Provision
The mechanics of the §9.1 shotgun buy-sell operate as follows:
Step 1 — Initiation. The initiating member delivers a written offer (the "Buy-Sell Notice") to the other member (the "Receiving Member"). The Buy-Sell Notice must specify a price per percentage point of membership interest, or alternatively, an aggregate price for the Receiving Member's entire membership interest. For purposes of this memorandum, we will refer to the stated price as the "Offer Price."
Step 2 — Election Period. Upon receipt of the Buy-Sell Notice, the Receiving Member has a defined election period (the specific duration of which is set forth in §9.1 of the JV Agreement) within which to make one of two elections:
(a) Sell Election. The Receiving Member may elect to sell its entire membership interest to the Initiating Member at the Offer Price. In this case, the Initiating Member is obligated to purchase the Receiving Member's interest at the stated price.
(b) Buy Election. Alternatively, the Receiving Member may elect to purchase the Initiating Member's entire membership interest at the same per-unit price (i.e., the same price per percentage point of membership interest). In this case, the Initiating Member is obligated to sell its interest at the stated price.
Step 3 — Default. If the Receiving Member fails to make a timely election within the prescribed election period, the JV Agreement provides for a default mechanism (the specifics of which are set forth in §9.1) that typically results in the Receiving Member being deemed to have elected to sell.
Step 4 — Closing. Following the Receiving Member's election, the parties proceed to close the transaction in accordance with the payment terms, closing mechanics, and transition provisions specified in §9.1.
The fundamental design principle underlying the shotgun mechanism is symmetry. Because the initiating member must be prepared to either buy or sell at the same per-unit price, the provision creates a powerful economic incentive for the initiating member to set a fair price. If the price is set too low, the receiving member will elect to buy at the bargain price. If the price is set too high, the initiating member will overpay for the receiving member's interest. The theoretical equilibrium is a price that reflects the true fair value of the membership interests, such that neither party has an incentive to reverse the expected transaction.
In practice, however, the shotgun mechanism is imperfect. Asymmetries between the parties—in financial resources, information, strategic objectives, or the composition of their respective interests—can distort the incentive structure. These practical considerations are addressed in detail in Section IV below.
C. Applicability to CSIA's 55% vs. Pinnacle's 45% Interest
The shotgun mechanism applies equally to both members, but the asymmetry in their respective ownership percentages creates important practical differences.
If CSIA initiates the §9.1 process, CSIA names an Offer Price stated as a price per percentage point of membership interest. Pinnacle, as the Receiving Member, may then either:
(a) Sell its 45% interest to CSIA at the Offer Price (aggregate payment = Offer Price × 45); or
(b) Purchase CSIA's 55% interest at the same per-unit Offer Price (aggregate payment = Offer Price × 55).
The critical asymmetry is that CSIA's 55% interest is larger than Pinnacle's 45% interest. At any given per-unit price, the aggregate payment required to purchase CSIA's interest is approximately 22.2% larger than the payment required to purchase Pinnacle's interest ($55/45 ≈ 1.222$). This means that if Pinnacle elects to buy (the reverse election), Pinnacle must commit significantly more capital than CSIA would need to commit to buy Pinnacle's interest.
Conversely, if Pinnacle were to initiate the §9.1 process, the same mechanics apply in reverse. Pinnacle would name a per-unit price, and CSIA would have the election to sell its 55% interest or buy Pinnacle's 45% interest at the stated per-unit price.
The practical implication of the ownership asymmetry is that the reverse-election risk is somewhat mitigated for the majority member (CSIA). The cost to Pinnacle of exercising the buy election is proportionally higher, which may deter a reverse election—particularly if the per-unit price is set at a level that makes the aggregate acquisition cost for CSIA's 55% interest a substantial financial commitment.
IV. Pricing Analysis and Valuation Considerations
A. Determining the Appropriate Offer Price
The most critical decision CSIA faces in connection with a potential §9.1 exercise is the determination of the Offer Price. The price must be set with full recognition that it will apply equally to a purchase of Pinnacle's 45% interest and a purchase of CSIA's 55% interest, depending on which election the Receiving Member makes.
The starting point for any pricing analysis is CBWTP's current financial position. As set forth in Section II.C above, as of June 30, 2023, the JV Entity's net equity was approximately $9,633,000. This net equity consists almost entirely of liquid or near-liquid assets: approximately $8,412,000 in cash held in the operating account at Pacific Cascade Bank, N.A., $385,000 in prepaid environmental consulting fees paid to Westmark Environmental Consulting, Inc., and $1,050,000 in capitalized organizational and legal costs, offset by approximately $214,000 in accounts payable. The JV Entity has no debt.
Importantly, there is no operating business to value. The Facility has not been constructed. CBWTP has no contractual revenue stream, no customer base, and no operating history. The entity does not generate revenue or earnings. Traditional valuation methodologies based on revenue multiples, EBITDA multiples, or discounted cash flow analysis have limited applicability to a pre-construction project entity with no revenue.
The primary assets of CBWTP, beyond cash, are:
(i) The 99-Year Ground Lease. The ground lease for the 14.7-acre Facility site at 2480 Capitol Boulevard SE, Tumwater, Washington, at a nominal annual rent of $1.00, is a valuable asset. However, its value is inextricably tied to the project's viability: if the Facility is never constructed, the ground lease has limited standalone value. Moreover, the ground lease contains a reversion clause providing that the leasehold interest reverts to CSIA upon termination of the JV Entity. This reversion effectively means that the ground lease's value cannot be separated from CSIA—if the JV Entity is dissolved, the lease reverts to CSIA regardless.
(ii) The Phase I ESA and Associated Environmental Work Product. The completed Phase I Environmental Site Assessment and related environmental data have some value as pre-development assets, though their value diminishes over time and they would need to be updated for any future project.
(iii) The Organizational Framework and Governmental Relationships. CBWTP possesses the organizational structure, governmental authorizations, and stakeholder relationships necessary to pursue the Facility project. These intangible assets have value to the extent the project is reactivated, but are difficult to quantify.
Several factors significantly diminish the enterprise value of CBWTP beyond its net book value:
• The Pacific Cascade Bank $27,000,000 project finance commitment letter has lapsed and would need to be renegotiated or replaced. There is no assurance that replacement financing would be available on comparable terms, or at all.
• The environmental permit (Phase II EID) remains outstanding. The review has been paused since July 8, 2022, and resolution is uncertain. This creates significant project risk and introduces delay uncertainty that could extend the development timeline by months or years.
• The JV Entity has been functionally dormant for over a year, and project momentum has been lost.
Against this backdrop, we have analyzed several pricing approaches:
Book Value / Capital Account Approach. If CSIA were to price Pinnacle's 45% interest at the book value of Pinnacle's capital account ($4,050,000), the per-unit price would be approximately $90,000 per percentage point of membership interest ($4,050,000 ÷ 45 = $90,000). At this per-unit price, CSIA's 55% interest would be valued at approximately $4,950,000 ($90,000 × 55). This approach has the advantage of simplicity and reflects Pinnacle's actual capital contributions, but it does not account for the JV Entity's net equity, the value of the ground lease, or the project opportunity.
Net Equity Approach. If CSIA prices based on the JV Entity's net equity of approximately $9,633,000, Pinnacle's 45% share would be approximately $4,334,850, and the per-unit price would be approximately $96,330 per percentage point of membership interest ($4,334,850 ÷ 45 ≈ $96,330). At this per-unit price, CSIA's 55% interest would be valued at approximately $5,298,150 ($96,330 × 55). This approach is more defensible as a fair-value measure, since it reflects the actual economic value of the JV Entity's balance sheet.
Adjusted Value Approach. A more sophisticated approach would adjust the net equity figure to account for the value (or lack thereof) of CBWTP's non-cash assets and the project's risk profile. Given that the project is dormant, the financing has lapsed, and the environmental permit remains outstanding, a reasonable argument could be made for a discount to net equity. Conversely, if the permitting issues are ultimately resolved, the Facility could serve 12 MGD capacity for Thurston County, representing significant long-term public infrastructure value—suggesting a potential strategic premium.
CSIA must consider whether the JV Entity's "option value"—i.e., the value of the project opportunity itself, separate from the existing balance sheet assets—warrants a premium above net equity. If the Thurston County water treatment demand is expected to grow (as population projections suggest), and if the permitting obstacles are viewed as temporary, the right to develop the Facility on the existing site under the existing ground lease could have substantial value. However, this option value is speculative and heavily dependent on future events.
We recommend that CSIA analyze the pricing question by identifying the range within which it would be comfortable either buying or selling. The floor of this range should be CSIA's minimum acceptable price for its own 55% interest—the price below which CSIA would not be willing to surrender its interest, its Governing Board control, and the ground lease reversion. The ceiling should be the maximum price CSIA would be willing to pay to acquire Pinnacle's 45% interest and gain full ownership of the JV Entity.
B. Risk of Reverse Election
The defining feature of the shotgun buy-sell mechanism is the reverse-election right: Pinnacle may elect to buy CSIA's interest rather than sell its own. This risk must be central to CSIA's pricing analysis.
If CSIA sets the Offer Price too low, Pinnacle (or more precisely, Ridgeline Capital Partners, LP, which controls Pinnacle and has access to significant capital) could opportunistically elect to purchase CSIA's 55% controlling interest at a bargain price. In doing so, Pinnacle would gain majority control of the Governing Board, control of the JV Entity's management, and the benefit of the ground lease—all at a price that CSIA itself set.
At any given per-unit price, the aggregate cost of Pinnacle's reverse purchase of CSIA's 55% interest would be $55/45$ times the cost of CSIA's purchase of Pinnacle's 45% interest—approximately 22.2% more in absolute dollar terms. For example, at a per-unit price of $96,330 (the net equity approach), the aggregate cost of Pinnacle's purchase of CSIA's interest would be approximately $5,298,150, while the cost of CSIA's purchase of Pinnacle's interest would be approximately $4,334,850—a difference of approximately $963,300. While this difference provides some deterrent to a reverse election, it may not be sufficient if Pinnacle or Ridgeline perceives the project opportunity as significantly undervalued at the stated price.
CSIA must therefore evaluate its minimum acceptable price for its own 55% interest as a floor for the Offer Price. In setting this floor, CSIA should consider the following factors:
• CSIA has contributed $9,900,000 in capital to the JV Entity. Any sale of CSIA's interest at a price below this amount would result in a loss on CSIA's investment.
• CSIA's interest includes majority control of the Governing Board (three of five seats), which confers governance control over major decisions.
• The ground lease for the Facility site reverts to CSIA upon termination of the JV Entity. If CSIA were to sell its interest to Pinnacle, the ground lease would remain with the JV Entity (which Pinnacle would then control), but the reversion clause would need to be addressed. The long-term value of the Facility site as a public infrastructure asset is substantial.
• CSIA has a public-sector mandate to provide water treatment infrastructure to Thurston County. The surrender of CSIA's interest in the JV Entity could impair CSIA's ability to fulfill this mandate, with attendant political and reputational consequences.
• Many of these factors—governance control, the ground lease reversion, and the public-sector mandate—are not easily monetized in a per-unit price calculation. They represent strategic and institutional value that may not be reflected in a financial valuation.
C. Pinnacle's Financial Capacity to Fund a Reverse Purchase
In assessing the reverse-election risk, CSIA must evaluate whether Pinnacle has the financial capacity to fund the purchase of CSIA's 55% interest.
As noted above, Pinnacle's 2021 audited financial statements reported revenue of approximately $187,000,000 and EBITDA of approximately $29,000,000. These figures suggest that Pinnacle is a financially substantial enterprise. Moreover, Ridgeline Capital Partners, LP, which owns 62% of Pinnacle, acquired that stake in 2019 for approximately $95,000,000, implying a total equity valuation of Pinnacle at approximately $153,000,000 at that time. Ridgeline is a private equity fund that typically has access to committed capital for follow-on investments and portfolio company support. Jonathan Kreider, as Managing Partner of Ridgeline, would be the key decision-maker in evaluating whether to fund a reverse purchase.
If the per-unit price under §9.1 is set at a level that values CSIA's 55% interest in the range of $4,000,000 to $6,000,000, this would represent a relatively modest expenditure for an entity of Pinnacle's size and for a private equity fund of Ridgeline's capacity. Ridgeline may view the opportunity to control the JV Entity and the ground lease as strategically valuable, particularly if it believes that the permitting obstacles will be resolved and the project can be reactivated.
However, several countervailing factors must also be considered. Pinnacle currently has an outstanding $4,050,000 unfunded capital call obligation under the JV Agreement. Its failure to fund this obligation—despite having the apparent financial capacity to do so—raises questions about Pinnacle's willingness to invest additional capital in the project. Pinnacle's default may reflect genuine liquidity constraints, or it may reflect a strategic decision to withhold funding pending resolution of the permitting dispute and other project uncertainties. If Pinnacle's default was strategically motivated, it does not necessarily follow that Pinnacle would be unwilling to fund a larger expenditure to acquire CSIA's interest at an attractive price. The decision calculus for a reverse election under §9.1 is fundamentally different from the decision calculus for a capital contribution: a reverse election would give Pinnacle (and Ridgeline) full control of the JV Entity, whereas a capital contribution merely funds a portion of a stalled project.
We therefore recommend that CSIA not assume that Pinnacle lacks the financial capacity or willingness to execute a reverse election.
D. Implications of Pinnacle's Default on Pricing
Pinnacle is in uncured default under §8.2, and its capital account reflects only its $4,050,000 First Tranche contribution. By contrast, CSIA has fully funded $9,900,000. This creates a $5,850,000 capital account disparity between the two members.
The §9.1 shotgun provision does not appear to contain a mechanism for adjusting the per-unit price to account for a member's default status. The shotgun operates on a per-unit basis (price per percentage point of membership interest) regardless of the capital account balances of the respective members. This structural feature of the shotgun creates a potential inequity: Pinnacle would receive credit for its full 45% membership interest in the pricing calculation, even though it has funded only 50% of its total equity commitment.
Consider the following illustration: If CSIA sets the per-unit price at $96,330 (the net equity approach), Pinnacle's 45% interest would be priced at approximately $4,334,850. But Pinnacle has contributed only $4,050,000 in capital, while CSIA has contributed $9,900,000. Under this scenario, Pinnacle would receive $4,334,850 for an interest supported by only $4,050,000 in contributions—effectively receiving a return of its capital plus a modest premium, despite having defaulted on its remaining $4,050,000 obligation. This outcome rewards Pinnacle for its default.
Conversely, if CSIA exercises the §8.2 dilution remedy before triggering §9.1, the effective ownership percentages would change. The dilution would reduce Pinnacle's membership interest from 45% to a lower percentage (the exact figure depending on the JV Agreement's dilution formula), and correspondingly increase CSIA's interest. After dilution, the shotgun per-unit price would apply to Pinnacle's reduced interest, lowering CSIA's total acquisition cost and eliminating the windfall to Pinnacle. This sequential strategy is discussed in greater detail in Section V below.
V. Interplay Between §9.1 (Buy-Sell) and §8.2 (Default Remedies)
A. Availability of Both Provisions
The JV Agreement provides CSIA with two distinct sets of rights that are relevant to the current situation: the §8.2 default remedies (available because of Pinnacle's uncured default) and the §9.1 shotgun buy-sell (available to either member after November 2, 2023, regardless of default). Understanding the interplay between these provisions is essential to formulating CSIA's strategy.
Section 8.2 of the JV Agreement provides three remedies available to the non-defaulting member upon the occurrence and continuation of an uncured default:
(i) Pro Rata Dilution. The non-defaulting member may elect to dilute the defaulting member's membership interest pro rata based on the defaulting member's unfunded capital contribution relative to total contributions.
(ii) Purchase at 75% of Fair Market Value. The non-defaulting member may elect to purchase the defaulting member's membership interest at a price equal to 75% of the fair market value of such interest—i.e., a built-in 25% discount.
(iii) Election to Dissolve. The non-defaulting member may elect to dissolve the JV Entity in accordance with the dissolution provisions of the JV Agreement.
Section 9.1, by contrast, provides a bilateral shotgun buy-sell mechanism that is not conditioned on default, deadlock, or any other triggering event beyond the passage of the second anniversary. The §9.1 mechanism is available to both members.
A critical question is whether these remedies are cumulative or alternative—i.e., whether CSIA may exercise both §8.2 and §9.1 remedies, or must choose between them. The JV Agreement does not contain an express election-of-remedies provision that would require CSIA to choose one path to the exclusion of the other. Under the general provisions of the JV Agreement and principles of Washington contract law, remedies are generally presumed to be cumulative unless the agreement expressly provides otherwise or the remedies are inherently inconsistent. See, e.g., Rekhter v. State, Dep't of Soc. & Health Servs., 180 Wn.2d 102 (2014) (discussing cumulative versus alternative remedies under Washington law).
The remedies under §8.2 and §9.1 are not inherently inconsistent in all combinations. For example, CSIA could exercise §8.2(i) dilution and then subsequently trigger §9.1 to acquire Pinnacle's (now-reduced) interest—these two actions do not conflict. However, CSIA could not simultaneously exercise §8.2(ii) (purchase at 75% of FMV) and §9.1 (shotgun buy-sell) with respect to the same membership interest, as both seek to effect the same result (acquisition of Pinnacle's interest) through different mechanisms and at potentially different prices. Attempting to exercise both simultaneously would create conflicting obligations and pricing terms that could not be reconciled.
Accordingly, our analysis is that the §8.2 and §9.1 remedies may be exercised sequentially or in the alternative, but not simultaneously where they would produce conflicting outcomes.
B. Sequential Exercise Strategy
The sequential exercise strategy—exercising §8.2 dilution first, then triggering §9.1 to acquire Pinnacle's reduced interest—merits careful consideration as it offers the potential to maximize CSIA's financial advantage.
Under §8.2(i), CSIA may elect to dilute Pinnacle's membership interest pro rata based on Pinnacle's unfunded capital contribution. The precise dilution formula depends on the methodology specified in the JV Agreement. Using a straightforward pro rata calculation as an illustration:
• Pinnacle's total equity commitment: $8,100,000
• Pinnacle's funded contributions: $4,050,000
• Pinnacle's funding ratio: $4,050,000 / $8,100,000 = 50%
• CSIA's total equity commitment: $9,900,000
• CSIA's funded contributions: $9,900,000
• CSIA's funding ratio: $9,900,000 / $9,900,000 = 100%
One common dilution methodology would adjust membership interests based on the ratio of each member's actual contributions to total actual contributions:
• Total funded contributions: $9,900,000 (CSIA) + $4,050,000 (Pinnacle) = $13,950,000
• CSIA's adjusted interest: $9,900,000 / $13,950,000 ≈ 70.97%
• Pinnacle's adjusted interest: $4,050,000 / $13,950,000 ≈ 29.03%
Under this calculation, Pinnacle's interest would be diluted from 45% to approximately 29.03%, and CSIA's interest would increase from 55% to approximately 70.97%. The exact dilution formula used in the JV Agreement may differ, and we recommend confirming the precise methodology before implementing this strategy.
Following dilution, if CSIA then triggers the §9.1 shotgun buy-sell, the per-unit price would apply to Pinnacle's reduced interest. At the same per-unit price of $96,330, the aggregate cost of purchasing Pinnacle's diluted 29.03% interest would be approximately $2,796,420 ($96,330 × 29.03)—substantially less than the approximately $4,334,850 cost of purchasing Pinnacle's undiluted 45% interest. The cost savings to CSIA would be approximately $1,538,430.
This sequential approach has significant advantages. It accounts for Pinnacle's default by adjusting ownership percentages before the shotgun mechanism is invoked. It reduces CSIA's total acquisition cost. And it reduces the reverse-election risk, because the aggregate payment Pinnacle would need to make to acquire CSIA's increased 70.97% interest would be correspondingly larger.
However, the sequential approach also carries risks. Pinnacle may challenge the dilution, potentially triggering a dispute that delays the process. More importantly, if Pinnacle becomes aware that CSIA intends to pursue dilution followed by a shotgun, Pinnacle (or Ridgeline) could preemptively trigger §9.1 on or shortly after November 2, 2023—before CSIA has completed the dilution process—to force the shotgun at the pre-dilution ownership percentages.
C. The §8.2(ii) Buyout at 75% of FMV vs. §9.1 Shotgun
Section 8.2(ii) of the JV Agreement provides an alternative to the shotgun that warrants serious consideration. Under §8.2(ii), CSIA has the right to purchase Pinnacle's 45% membership interest at a price equal to 75% of its fair market value—a built-in 25% discount to FMV. This remedy is available now, without waiting for November 2, 2023.
The §8.2(ii) buyout has several significant advantages over the §9.1 shotgun:
• Built-in Pricing discount. The 25% discount to FMV is a contractually guaranteed advantage that reflects the punitive nature of the default remedy. No such discount exists under §9.1.
• No Reverse-Election Risk. The §8.2(ii) buyout is a unilateral right of the non-defaulting member. Pinnacle does not have the option to reverse the transaction and purchase CSIA's interest.
• Directly Addresses the Default. The §8.2(ii) remedy flows from Pinnacle's default, which provides a strong contractual and equitable basis for the discounted purchase.
• No Requirement to Set a Price at Which CSIA Would Sell. Unlike the shotgun, which requires CSIA to name a price at which it would be willing to sell its own interest, the §8.2(ii) buyout requires only a determination of FMV.
The principal disadvantage of the §8.2(ii) buyout is that it requires agreement on, or determination of, "fair market value." If CSIA and Pinnacle cannot agree on FMV, the JV Agreement likely provides for a valuation mechanism—potentially involving independent appraisal, mediation, or arbitration. The JV Agreement's dispute resolution provisions generally mandate resolution through mediation followed by binding arbitration before the Pacific Northwest Arbitration Association ("PNAA") in Seattle, Washington. A contested FMV determination could take months to resolve, during which the JV Entity would remain in limbo.
Nevertheless, the §8.2(ii) buyout may be the superior path if CSIA can establish a low FMV for the dormant JV Entity. Given that CBWTP has no operating revenue, no completed facility, lapsed financing, and stalled environmental permitting, a reasonable FMV for Pinnacle's 45% interest may be in the range of its pro rata share of net equity (approximately $4,334,850) or even less, given the project's risk profile. At 75% of a $4,334,850 FMV, the purchase price would be approximately $3,251,138. If FMV is determined at a discount to net equity—reflecting the dormant project status—the price would be even lower.
D. Risk of Pinnacle Preemptively Triggering §9.1
After November 2, 2023, the §9.1 shotgun provision becomes exercisable by either member. This means that Pinnacle, too, has the right to initiate the buy-sell process. CSIA must consider the possibility that Pinnacle or Ridgeline could preemptively trigger §9.1 to seize the initiative.
If Pinnacle triggers §9.1, it would set the Offer Price. Pinnacle could set a strategically high per-unit price with the following objective: at a high price, CSIA would face the choice of either (a) paying a premium to acquire Pinnacle's 45% interest, or (b) selling CSIA's 55% interest to Pinnacle at a price that Pinnacle considers attractive. If Pinnacle sets the price high enough that the aggregate cost of CSIA's 55% interest exceeds what CSIA would accept, CSIA might elect to buy Pinnacle's interest at the inflated price rather than sell—precisely the outcome Pinnacle would desire if it wants to cash out at a premium.
Alternatively, Pinnacle could set a strategically low price if it genuinely wants to acquire CSIA's interest and believes that CSIA—as a governmental instrumentality with regulatory and political constraints on transferring public infrastructure assets to private parties—would be unable or unwilling to sell. In this scenario, Pinnacle would expect CSIA to elect to buy at the low price, allowing Pinnacle to exit the JV at a modest return rather than face protracted dispute proceedings.
CSIA should evaluate whether preemptive action is warranted. If CSIA intends to use the §9.1 buy-sell, triggering first allows CSIA to control the initial price and frame the transaction on its terms. Waiting allows Pinnacle to seize the initiative, which could result in a less favorable pricing dynamic.
A critical subsidiary question is whether Pinnacle's uncured default under §8.2 affects its right to invoke §9.1. As noted above, the §9.1 provision does not appear to condition exercise on the exercising member's good standing under the JV Agreement. If the provision's language is unqualified—permitting "either member" to trigger the buy-sell after the second anniversary—Pinnacle may retain the right to invoke it even while in default. This is an area where careful review of the precise contract language is essential, and we will confirm our analysis upon further review of the specific provisions.
If Pinnacle's default does not bar its exercise of §9.1, this reinforces our recommendation that CSIA consider triggering §9.1 first if the shotgun path is chosen, to maintain strategic control over the process.
VI. Washington LLC Law Considerations
A. Revised Uniform Limited Liability Company Act (RULLCA) — Title 25.15 RCW
CBWTP is a Washington limited liability company governed by the Washington Revised Uniform Limited Liability Company Act, codified at Title 25.15 RCW (the "RULLCA"). Washington's LLC statute is broadly enabling and generally defers to the terms of the operating agreement with respect to the internal affairs of the LLC, including provisions governing the transfer of membership interests, buy-sell mechanisms, and default remedies.
RCW 25.15.038 provides that "the operating agreement governs... [r]elations among the members as members and between the members and the limited liability company." The statute permits the parties to modify most default rules by agreement, subject to certain mandatory provisions (such as the obligation of good faith and fair dealing, which may not be eliminated, though it may be refined by the operating agreement).
Accordingly, the JV Agreement's buy-sell and default remedy provisions—including the §9.1 shotgun mechanism and the §8.2 default remedies—should be enforceable as written, provided they do not contravene the mandatory provisions of the RULLCA. We have identified no mandatory provision that would invalidate or limit the enforceability of either §9.1 or §8.2.
Washington law does not impose a statutory buy-sell mechanism for LLCs. The parties' contractual buy-sell provision is the exclusive mechanism for forced separation (absent judicial dissolution, discussed below). This means that the specific terms of §9.1—including the election period, payment terms, and closing mechanics—will govern any shotgun transaction.
B. Fiduciary Duties
Under Washington law, LLC members and managers owe fiduciary duties of care and loyalty to the LLC and, in certain circumstances, to the other members. These duties may be modified by the operating agreement under the RULLCA, but they cannot be entirely eliminated.
Pinnacle, as the designated Manager of CBWTP, owes heightened fiduciary duties to the JV Entity and to CSIA as the other member. These duties include the duty of loyalty (which encompasses the duty not to compete with the LLC, the duty not to engage in self-dealing, and the duty to act in the best interests of the LLC) and the duty of care (which requires the manager to act with the care that a person in a like position would reasonably exercise under similar circumstances).
Pinnacle's conduct raises potential fiduciary duty concerns on multiple fronts:
• Failure to Fund Capital Call. Pinnacle's failure to fund its $4,050,000 Second Tranche capital contribution, while serving as Manager of the JV Entity responsible for the project's execution, arguably constitutes a breach of its duty of loyalty. By withholding funding, Pinnacle has effectively stalled the project it was engaged to manage, to the detriment of the JV Entity and CSIA.
• Governing Board Quorum Failure. The failure of the Governing Board to meet on November 30, 2022, due to the absence of both Pinnacle-appointed members (Prumvane and Voss), may constitute a breach of the duty of care. The Governing Board's inability to function has left the JV Entity without governance, contributing to its dormancy.
• Deferral of Project Expenditures. Pinnacle's unilateral decision to defer further project expenditures as of September 14, 2022, was made in its capacity as Manager. This decision—made without Governing Board authorization—may constitute an unauthorized managerial action in breach of Pinnacle's duties under the JV Agreement and Washington law.
While fiduciary duty claims are not the primary focus of this memorandum, they are relevant to the overall strategic analysis for several reasons. First, the existence of potential fiduciary duty claims strengthens CSIA's negotiating position in any discussions with Pinnacle or Ridgeline regarding a buyout or dissolution. Second, if the matter proceeds to arbitration (whether under §8.2 or in connection with a disputed §9.1 transaction), fiduciary duty claims could be asserted as counterclaims or affirmative claims, potentially entitling CSIA to damages beyond the contractual remedies. Third, the threat of fiduciary duty litigation may deter Pinnacle from exercising a reverse election under §9.1 or from contesting CSIA's exercise of §8.2 remedies.
C. Judicial Dissolution Under RCW 25.15.297
As an alternative to the contractual remedies under the JV Agreement, CSIA could seek judicial dissolution of the JV Entity under RCW 25.15.297. Under this provision, a court may decree dissolution of an LLC on application by a member if "it is not reasonably practicable to carry on the business in conformity with the limited liability company agreement."
The current circumstances present a credible case for judicial dissolution. The JV Entity has been functionally dormant for over a year. The Facility has not been constructed, and no meaningful project development activity has occurred. Pinnacle is in uncured default of its capital contribution obligation. The project financing has lapsed. The environmental permit remains stalled. The Governing Board has been unable to meet due to Pinnacle's failure to provide a quorum. Taken together, these facts strongly support a finding that it is not reasonably practicable to carry on CBWTP's business in conformity with the JV Agreement.
However, judicial dissolution involves several complications. The JV Agreement mandates dispute resolution through mediation followed by binding arbitration before the Pacific Northwest Arbitration Association in Seattle, Washington. The question of whether a judicial dissolution petition is encompassed by the arbitration clause—and therefore must be submitted to arbitration rather than filed in court—requires careful analysis. Washington courts have generally held that broad arbitration clauses covering "any dispute arising out of or relating to" the agreement encompass most disputes between the parties, including claims for equitable relief. If the JV Agreement's arbitration clause is sufficiently broad, CSIA may need to pursue dissolution through arbitration rather than by petition to a Washington state court.
Additionally, judicial dissolution may not be the most strategically advantageous path for CSIA. A dissolution would trigger the winding up of the JV Entity's affairs, including liquidation of its assets and distribution to members based on capital account balances. Given that CSIA's capital account ($9,900,000) is substantially larger than Pinnacle's ($4,050,000), a dissolution and liquidation would return a proportionally larger share of the JV Entity's assets to CSIA. However, the ground lease would revert to CSIA upon dissolution (under the reversion clause), and the remaining assets (primarily cash) would be distributed based on the JV Agreement's distribution waterfall. Dissolution may be a satisfactory outcome if CSIA does not wish to continue the project with a new partner, but it would not allow CSIA to capture the value of the project opportunity for reactivation under sole ownership.
D. Restrictions on Transfer — Governmental Authority Considerations
CSIA is a Washington state governmental instrumentality created by Chapter 43.155A RCW. This status introduces additional considerations that may not apply to a private-sector party in a similar position.
If Pinnacle exercises the reverse election under §9.1 and seeks to purchase CSIA's 55% membership interest, there may be statutory or regulatory constraints on CSIA's ability to transfer its interest in a public infrastructure entity to a private party. CSIA's enabling statute and applicable regulations may impose requirements relating to the disposition of public assets, including requirements for public notice, competitive solicitation, or legislative authorization. A forced sale of CSIA's interest pursuant to a contractual shotgun provision might not satisfy these requirements, creating a potential defense to the enforceability of the reverse election as against CSIA.
Furthermore, the ground lease reversion clause introduces additional complexity. If Pinnacle acquires CSIA's membership interest, the ground lease would remain with the JV Entity (which Pinnacle would then control). However, the reversion clause provides that the ground lease reverts to CSIA upon termination of the JV Entity. If the JV Entity continues to exist under Pinnacle's sole ownership, the reversion would not be triggered—but CSIA, no longer a member of the JV Entity, would retain the fee interest in the underlying real property subject to the ground lease. This would create an awkward situation in which a private entity (Pinnacle-controlled CBWTP) holds a 99-year ground lease on publicly owned land, with CSIA as the fee owner but with no membership interest in or control over the JV Entity. The public policy implications of this arrangement could provide grounds for CSIA to resist a forced transfer.
CSIA's public infrastructure mandate and accountability requirements under Chapter 43.155A RCW also limit the practicality of Pinnacle acquiring CSIA's interest. CSIA is accountable to the Washington State Legislature and the public for the management of public infrastructure assets. A transfer of CSIA's interest in a public-private partnership to a private party would raise significant accountability and transparency concerns.
The practical effect of these governmental authority considerations is that the reverse-election risk under §9.1 may be more theoretical than practical. Even if Pinnacle formally elects to buy, the transaction may face legal, regulatory, and practical obstacles that deter or prevent consummation. However, CSIA should not rely on these obstacles as a substitute for careful pricing, as litigation over the enforceability of a reverse election could be costly and time-consuming, and the outcome is not certain.
VII. Strategic Recommendations
Based on the foregoing analysis, we present the following strategic recommendations for CSIA's consideration. Each recommendation is accompanied by an assessment of its advantages, risks, and practical implications.
A. Preferred Approach: §8.2 Remedies Before §9.1
We recommend that CSIA's primary strategy be to exercise the §8.2(ii) default buyout right to acquire Pinnacle's 45% membership interest at 75% of fair market value. This approach offers the most favorable combination of pricing advantage, risk management, and contractual justification.
The rationale for this recommendation is as follows:
(i) Built-in 25% pricing discount. The §8.2(ii) buyout price is contractually set at 75% of FMV, providing CSIA with an automatic 25% discount that is unavailable under §9.1. Given that FMV for a dormant pre-construction JV entity with lapsed financing and stalled permitting is likely to be modest, the 75% discount amplifies CSIA's pricing advantage.
(ii) No reverse-election risk. Unlike the §9.1 shotgun, the §8.2(ii) buyout is a unilateral remedy of the non-defaulting member. Pinnacle has no right to reverse the transaction. CSIA can acquire Pinnacle's interest without any risk of being forced to sell its own interest.
(iii) Directly addresses the default. The §8.2(ii) remedy is a direct consequence of Pinnacle's contractual breach. Invoking it sends a clear signal that CSIA will enforce the JV Agreement and hold Pinnacle accountable for its failure to fund.
(iv) No requirement to set a price at which CSIA would sell. The §8.2(ii) mechanism requires only a determination of FMV—not an exercise in self-valuation. CSIA need not grapple with the question of the minimum price at which it would be willing to surrender its own interest, its governance control, and the ground lease.
If Pinnacle cooperates with the §8.2(ii) process and does not dispute FMV, this is the most efficient and cost-effective path to CSIA's acquisition of full ownership of the JV Entity. CSIA could engage an independent valuation firm to determine FMV, present the valuation to Pinnacle, and close the transaction within a reasonable timeframe.
If Pinnacle disputes the FMV determination—which is a realistic possibility given the magnitude of the financial stakes—CSIA can pursue resolution through the JV Agreement's dispute resolution mechanism: mediation followed by binding arbitration before the PNAA in Seattle. While arbitration introduces delay and cost, the ultimate outcome should be favorable to CSIA given the strong factual basis for a low FMV determination and the 75% discount.
B. Alternative: §9.1 Shotgun as Leverage or Backup