Doug,
Thank you for circulating the initial draft of the Cooperation and Standstill Agreement on February 22. We have reviewed it carefully with our client, and I am attaching Pinnacle Harbor's redline markup to the draft (v1). Please find attached: **Cooperation and Standstill Agreement — Redline Markup (PHCP Comments)** (cooperation-standstill-agreement-redline-v2.docx).
Pinnacle Harbor Capital Partners, LP, Pinnacle Harbor Capital Management, LLC, and Viktor Kessler have each reviewed the draft in detail. Nadia Johar has also provided input on several of the key provisions. While the draft generally tracks the framework term sheet exchanged on February 14, there are several areas where the draft departs from or does not fully capture the parties' understanding, as well as other provisions that we believe require further negotiation. I wanted to flag the key open points here so your team can focus on them in advance of any call.
**1. Standstill Duration**
The draft proposes an 18-month standstill period running from execution through approximately September 10, 2024 (assuming a March 10, 2023 execution date). Pinnacle Harbor's strong preference — reflected in the redline — is for a 12-month standstill from execution. An 18-month period extends well beyond the 2023 annual meeting (which we anticipate will occur in May 2023) and effectively forecloses PHCP from any engagement through the 2024 annual meeting cycle as well. Given PHCP's 6.8% ownership stake — 7,119,600 shares representing a significant economic interest in RGC — we view this as overly restrictive. As you will recall, the duration was discussed at the February 14 session but was not definitively resolved in the framework term sheet, and we believe our proposed 12-month period is the more appropriate landing zone.
**2. Ownership Cap**
The draft includes a 9.9% ownership cap during the standstill period. Pinnacle Harbor proposes raising this cap to 12.5% to allow PHCP flexibility to increase its position if it identifies further value in RGC common stock. At the current share price — stock has been trading in the low $30s range — even the 9.9% cap represents a substantial absolute dollar commitment (9.9% of 104,700,000 shares outstanding equals approximately 10,365,300 shares). A higher cap reflects Pinnacle Harbor's alignment with other long-term shareholders and does not trigger any Delaware statutory thresholds that would concern the Board.
**3. Expense Reimbursement**
The draft includes a $750,000 cap on reimbursement of Pinnacle Harbor's documented legal expenses. Doug, Pinnacle Harbor's actual documented legal costs to date are substantial. Our fees for the 13D filings (preliminary filed November 10, 2022; amended filing January 6, 2023), the nomination notice process (formal notice December 8, 2022; nomination notice received by the company January 9, 2023), preliminary proxy preparation work, and ongoing negotiations have been significant. Pinnacle Harbor proposes increasing the cap to $1.25 million to more accurately reflect the costs incurred. In the alternative, we would request that the cap be structured to cover all documented out-of-pocket expenses — including the fees of Garrison Proxy Advisors, LLC — in addition to legal fees. Pinnacle Harbor is prepared to provide detailed documentation of all expenses upon request.
**4. Mutual Director Nomination Process / Board Seat**
We generally accept the concept of one mutually agreed independent director, rather than either of Pinnacle Harbor's original nominees (Dr. Sandra Trevelyan or Hugh Desmond Grayson). However, we need clarification on the joint selection process. Specifically, the draft is vague on the composition and decision-making procedures of the joint committee that will identify the pool of three candidates. We propose that PHCP have the right to designate one member of the joint committee. Additionally, the agreement should specify that the mutually agreed director will be appointed no later than 30 days after execution and will serve until the 2025 annual meeting. Given the nature of RGC's business, we also think it is important that gaming regulatory licensing considerations be expressly addressed in the candidate selection criteria — this will save everyone time and avoid any situation where a candidate is identified only to encounter licensing complications down the road.
**5. Strategic Review of Interactive Gaming Division**
We accept the 120-day review period (completion by approximately July 8, 2023, assuming a March 10 execution). However, we object to the language in Section 4(c) of the draft stating there is "no obligation to share conclusions with Pinnacle Harbor." As you know, the strategic review of the interactive gaming division was a core element of Pinnacle Harbor's original demands and a central concession motivating this settlement. We believe PHCP is entitled to receive at minimum a summary of the review's conclusions, even if not the full report. The interactive gaming division generated $412 million in revenue in FY 2021, representing approximately 14.4% of RGC's $2.87 billion in total revenue and a significant portion of the company's growth profile. A review conducted without any feedback to the shareholder that prompted it undermines the spirit of the arrangement. The redline proposes language requiring delivery of a written summary within 10 business days of completion.
**6. Voting Commitment Scope**
We accept the obligation to vote in favor of RGC management director nominees during the standstill period. However, we request that the voting commitment on "all other proposals" be narrowed to Board-recommended proposals only. PHCP should retain discretion to vote as it sees fit on shareholder proposals not endorsed by the Board. This is consistent with standard market practice in cooperation agreements, and I expect your team will find it to be a reasonable accommodation.
**7. Termination Triggers**
We accept the material breach trigger (uncured for 15 business days after written notice) and the change-of-control trigger as drafted. We do, however, object to the ownership floor termination trigger set at 3.5%. Pinnacle Harbor proposes lowering this threshold to 2.0%. PHCP should not lose the benefit of the agreement's protections — including the board seat and the strategic review commitment — merely because of a partial position reduction. Even at 3.5%, PHCP would still hold approximately 3,664,500 shares representing a significant economic interest, and we see no principled reason for termination at that level.
**8. Non-Disparagement**
We accept mutual non-disparagement during the standstill period. We propose that the non-disparagement provision survive for an additional 6 months following the expiration or termination of the standstill, which we think serves both parties' interests.
**9. Governing Law**
We confirm acceptance of Delaware law as the governing law, which is consistent with both RGC's state of incorporation and PHCP's formation as a Delaware limited partnership.
**Additional Comments**
The redline contains various conforming changes, defined-term refinements, and notice provision updates. Among these, we have confirmed Pinnacle Harbor's address as 590 Madison Avenue, 34th Floor, New York, NY 10022, and Hargrove Sloane & Birch LLP's address at 1585 Broadway, 40th Floor, New York, NY 10036 for copy notices. We also request that the agreement identify the parties comprehensively: Redstone Gaming Corp. on one side, and Pinnacle Harbor Capital Partners, LP, Pinnacle Harbor Capital Management, LLC, and Viktor S. Kessler individually on the other. You will also find minor drafting comments throughout the representations and warranties sections.
**Next Steps**
I would propose that our teams schedule a call early next week to walk through the open points before the principals meet for what I hope will be a final negotiation session. We should be targeting execution by mid-March to allow sufficient time for the joint press release, 8-K filing, and amended 13D filing before the 2023 annual meeting season. On the communications side, we will need to coordinate nomination withdrawal and press release logistics with Garrison Proxy Advisors — Alicia Trent is our point of contact there — and you may want to loop in Whitfield Morrow Partners and Harlan Ridge Communications on RGC's side to ensure everyone is aligned on timing and messaging.
I am confident we can bridge the remaining gaps. Please let me know your availability for a call, and we will coordinate with Elise and Claire on scheduling.
Best regards,
Jon
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**Jonathan "Jon" Birch III** Partner Hargrove Sloane & Birch LLP 1585 Broadway, 40th Floor New York, NY 10036 T: (212) 554-8200
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