Trish and Jim,
Thank you both for making yourselves available on the call last evening following yesterday's session. I know Friday evenings are never ideal, and I appreciate your engagement on short notice. I wanted to follow up this morning with a written summary of the final negotiation session held on March 3 with Pinnacle Harbor Capital Partners, LP and its counsel at Hargrove Sloane & Birch LLP (Jonathan Birch III and Elise Marchetti), and to outline recommended next steps toward Board approval.
As background, Viktor Kessler and Nadia Johar participated on Pinnacle Harbor's side, and I was joined by Claire Dempsey from our team. As you know, the Special Committee (Jim as Chair, along with Carmen Vasquez and Randall Morse) authorized settlement discussions on January 20, 2023. This session was the culmination of direct engagement that has unfolded over the past several weeks: the initial settlement discussion on January 30, followed by the second discussion and exchange of a framework term sheet on February 14, our initial draft of the Cooperation & Standstill Agreement circulated on February 22, and Hargrove Sloane & Birch's markup received around February 28.
I'm pleased to report that the key terms are now substantially agreed. Below is a walkthrough of where we landed.
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**1. SUMMARY OF SUBSTANTIALLY AGREED TERMS**
**Parties.** Redstone Gaming Corp. ("RGC"), Pinnacle Harbor Capital Partners, LP, Pinnacle Harbor Capital Management, LLC (as general partner), and Viktor S. Kessler (individually).
**Standstill Period.** 18 months from execution. We are targeting execution on or about March 10, 2023, which would place the standstill expiration at September 10, 2024.
**Ownership Cap.** Pinnacle Harbor may not acquire shares exceeding 9.9% of outstanding common stock during the standstill period. This was a negotiated point — Pinnacle Harbor initially sought a 12.5% cap. We held firm at 9.9%, which sits comfortably below any customary poison pill trigger threshold and provides the Company with meaningful protection against further accumulation.
**Board Concession — Mutually Agreed Independent Director.** RGC will appoint one new independent director, to be mutually agreed upon by the Company and Pinnacle Harbor. Importantly, this individual will be neither a Pinnacle Harbor designee (i.e., not Dr. Sandra Trevelyan or Hugh Desmond Grayson, the two nominees Pinnacle Harbor had put forward) nor a current RGC insider. The director will be selected from a pool of three candidates identified by a joint committee. Both sides have informally discussed Franklin Chu — age 52, former CEO of Prism Digital Entertainment, LLC — as a strong candidate. Franklin has the right blend of digital entertainment operating experience and genuine independence from both camps. The appointment would be effective April 1, 2023, with the director serving until the 2025 annual meeting. This increases Board size from 9 to 10 directors.
**Strategic Review of Interactive Gaming Division.** The Board agrees to conduct an internal review of the interactive gaming division's strategic alternatives, to be completed within 120 days of execution (i.e., by approximately July 8, 2023), with a summary report delivered to the Board. Crucially — and this was a key concession we secured — there is no obligation to share the conclusions of that review with Pinnacle Harbor. For context, the interactive gaming division generated $412 million in FY 2021 revenue, representing approximately 14.4% of the Company's $2.87 billion in total revenue. The review will consider the full range of strategic alternatives. This satisfies Pinnacle Harbor's core demand for a strategic review without committing the Company to any particular outcome, whether that be a sale, spin-off, or maintenance of the status quo.
**Voting Commitment.** Pinnacle Harbor agrees to vote all of its shares — currently 7,119,600 shares, representing approximately 6.8% of 104,700,000 shares outstanding — in favor of RGC management's director nominees and in accordance with Board recommendations on all other proposals during the standstill period.
**Withdrawal of Nominations.** Pinnacle Harbor will withdraw its director nominations (Dr. Sandra Trevelyan and Hugh Desmond Grayson) and agrees not to solicit proxies during the standstill period. This means the 2023 annual meeting, anticipated for May 2023, will proceed as an uncontested election.
**Non-Disparagement.** Mutual non-disparagement obligation during the standstill period.
**Expense Reimbursement.** RGC reimburses Pinnacle Harbor's documented legal expenses up to a cap of $750,000. This was Pinnacle Harbor's original ask. While we explored reducing it, Birch was firm on this point, and we recommend accepting it as the cost of avoiding a contested election — which would have been significantly more expensive to the Company in proxy solicitation, advisory, and legal fees.
**Termination Triggers.** Three specified triggers: (1) material breach by either party uncured for 15 business days after written notice; (2) a change-of-control of RGC; and (3) Pinnacle Harbor's ownership drops below 3.5% of outstanding shares.
**Governing Law.** State of Delaware.
**Capital Return Demand — Not Included.** I want to flag this separately because it is significant. Pinnacle Harbor's original demand for a $300 million return to shareholders — whether via special dividend or accelerated buyback — is NOT included in the agreement. This demand was effectively dropped during negotiations as the quid pro quo for the board seat and strategic review concessions. This is a meaningful win for management's capital allocation flexibility going forward.
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**2. REMAINING OPEN ITEMS / MECHANICS**
A few conforming edits remain in the draft agreement (v3, which we circulated around March 1 incorporating our responses to Hargrove Sloane's markup). These are largely mechanical — cross-references, defined term consistency, and notice provisions. I expect Claire and Elise Marchetti will finalize these early next week.
Beyond the agreement itself, the following items will need to be coordinated:
- **Joint Press Release:** Will need to be coordinated among Calderwood & Harkness, Harlan Ridge Communications (Philip Navarette), and Pinnacle Harbor's side prior to public announcement. I anticipate announcement on or about March 13, 2023.
- **Form 8-K:** Will need to be prepared and filed promptly after execution to report entry into the agreement and the director appointment (Items 1.01, 5.02, and 8.01). Claire and Marcus Leung are beginning to draft.
- **Amended Schedule 13D:** Pinnacle Harbor will need to file an amended Schedule 13D reflecting the standstill and withdrawal of nominations. This is on Hargrove Sloane, but we will want to review it before it goes out.
- **Institutional Shareholder Messaging:** We should coordinate with Calloway Wainwright (Thomas Ashford) and Whitfield Morrow Partners (Denise Cavanaugh) on messaging to institutional shareholders. We should also ensure Harlan Ridge is prepared for any media inquiries that may follow the announcement.
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**3. RECOMMENDATION**
I recommend that the Special Committee and full Board approve the Cooperation and Standstill Agreement at the earliest practicable meeting. I would suggest scheduling a Board meeting for Thursday, March 9, or Friday, March 10, to consider and approve the agreement, with targeted execution on March 10.
From a fiduciary perspective, this settlement is well within the range of outcomes the Special Committee authorized and represents a favorable resolution for the Company:
- RGC avoids a costly and distracting proxy contest; - Pinnacle Harbor's most aggressive demands — the $300 million capital return and two designated board seats — are off the table; - The 9.9% ownership cap and voting commitment effectively neutralize Pinnacle Harbor as an adversary through the standstill period; and - The addition of a mutually agreed independent director — particularly someone of Franklin Chu's caliber — can be credibly presented as a governance enhancement rather than a concession.
Trish, could you coordinate with Diane Sheridan on scheduling the Board meeting? Jim, it would be helpful if you could confirm alignment with Carmen and Randall on the Special Committee's recommendation to the full Board ahead of that session.
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**4. NEXT STEPS FROM OUR SIDE**
We will circulate the near-final draft of the Cooperation & Standstill Agreement early next week, along with draft Board resolutions approving the agreement and the Chu appointment. The draft joint press release and Form 8-K will follow shortly thereafter.
I am happy to schedule a call Monday or Tuesday to walk through any remaining questions either of you may have, or to discuss any of the above in more detail.
I'm confident this is a strong outcome for the Company. Thank you both — and to the full Special Committee — for your trust and engagement throughout this process. It made a real difference at the table.
Best regards,
Doug
Douglas R. Fairchild Partner Calderwood & Harkness LLP 1900 Avenue of the Stars, Suite 2800 Los Angeles, CA 90067 T: (310) 555-4100
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