PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
To: Douglas Fairchild, Engagement Partner Angela Fontaine, Billing Partner Claire Dempsey, Lead Associate
From: Marcus Leung, Associate, Banking & Finance Practice Group
Date: December 2, 2022
Re: D&O Insurance Coverage Review — Defense Costs Arising from Pinnacle Harbor Capital Partners, LP Activist Campaign
Matter No.: 1033-00003
Client: Redstone Gaming Corp.
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I. Executive Summary
This memorandum analyzes the directors' and officers' liability insurance program maintained by Redstone Gaming Corp. ("RGC" or the "Company") and assesses coverage availability for defense costs and potential liabilities arising from the activist board-seat campaign initiated by Pinnacle Harbor Capital Partners, LP ("Pinnacle Harbor" or "PHCP"). The purpose of this review is to provide the engagement team with a comprehensive understanding of the Company's D&O insurance architecture, the relevant insuring agreements and policy terms, the notice posture, and the potential coverage issues that may arise as the activist campaign continues to develop. This analysis is intended to inform both the defense strategy and the Company's financial planning for costs associated with the campaign.
RGC maintains a two-layer D&O insurance tower consisting of the following policies:
• Primary Layer: Northbridge Indemnity Company, Policy No. NBI-DOP-1025-00008, with an aggregate limit of liability of $15,000,000 and a self-insured retention ("SIR") of $500,000 applicable to Side B and Side C claims.
• First Excess Layer: Creston National Insurance Co., Policy No. CNI-XS-2022-31004, providing $10,000,000 in coverage excess of $15,000,000, following form and following the terms and conditions of the Northbridge primary policy except as otherwise specifically stated.
The total available tower capacity is $25,000,000 in the aggregate.
On November 16, 2022, one day after the Calderwood & Harkness LLP engagement opened, notice of circumstances was submitted to both carriers through RGC's insurance broker, Glenmore Caulfield Insurance Brokers, Inc. ("Glenmore Caulfield"). The notice was coordinated by Sarah Voss, Senior Vice President at Glenmore Caulfield, and was delivered via both email and overnight courier to the claims departments of Northbridge Indemnity Company and Creston National Insurance Co. As of the date of this memorandum, an acknowledgment of receipt has been received from Northbridge Indemnity Company, and a corresponding acknowledgment from Creston National Insurance Co. is expected shortly. No reservation of rights letters have been received from either carrier.
Conclusion: Based on the review of the applicable policy language, endorsements, and current factual circumstances, coverage under the Side A (individual director and officer coverage for non-indemnifiable loss), Side B (corporate reimbursement coverage), and Side C (entity securities claim coverage) insuring agreements is expected to be available for qualifying defense costs arising from the Pinnacle Harbor activist campaign. Coverage availability is subject to satisfaction of the $500,000 SIR (applicable to Side B and Side C), compliance with policy conditions (including notice and consent-to-incur provisions), and the absence of applicable exclusions. No exclusions appear likely to apply based on the current facts. The primary layer limit of $15,000,000 should be more than sufficient to cover anticipated defense costs from the activist campaign alone, and the excess layer provides meaningful additional cushion should the campaign escalate to formal litigation.
The current policy period runs from January 1, 2022 through January 1, 2023. Renewal discussions are underway via Glenmore Caulfield. The policy is expected to be renewed effective January 1, 2023. The notice of circumstances filed under the expiring policy should serve to anchor coverage for the activist campaign under the 2022 policy year, with continuity provisions protecting against coverage gaps across policy periods. It is critical that the renewal application and any renewal questionnaire accurately and fully disclose the Pinnacle Harbor activist campaign and all related circumstances to avoid any future rescission or coverage-denial arguments.
II. Background
A. The Activist Campaign
Between approximately June 2022 and November 2022, Pinnacle Harbor Capital Partners, LP accumulated a stake of approximately 6.8% in RGC common stock, representing 7,119,600 shares out of 104,700,000 shares outstanding. Based on publicly available information and the data reflected in Pinnacle Harbor's preliminary Schedule 13D filing, the weighted-average purchase price was approximately $26.42 per share, yielding a total cost basis of approximately $188.1 million. This accumulation was conducted through open-market purchases and was not preceded by any prior public or private engagement between Pinnacle Harbor and the Company or its Board.
On October 28, 2022, Pinnacle Harbor sent a private demand letter to Board Chair Diane K. Sheridan at RGC's principal executive offices. The demand letter set forth three primary requests: (1) the appointment of two Pinnacle Harbor-designated nominees — Dr. Sandra Trevelyan and Hugh Desmond Grayson — to the RGC Board of Directors; (2) the initiation of a formal strategic review of the Company's interactive gaming division, which generated approximately $412 million in revenue for fiscal year 2021 and which Pinnacle Harbor characterized as undervalued and strategically mismanaged; and (3) the return of approximately $300 million to shareholders through a combination of share repurchases and special dividends. The letter was addressed to Chair Sheridan personally but was delivered to the Company's registered offices and was provided to RGC's General Counsel, Patricia "Trish" Nakamura, who distributed the letter to the full Board.
On November 10, 2022, Pinnacle Harbor filed a preliminary Schedule 13D with the U.S. Securities and Exchange Commission (the "SEC"), publicly disclosing its accumulated stake in RGC and its activist intentions. The 13D filing contained substantially similar content to the private demand letter but included additional detail regarding Pinnacle Harbor's proposed nominees and its assessment of the Company's operational and strategic shortcomings. The filing attracted immediate media attention and analyst commentary and triggered a decline of approximately 4.2% in the Company's share price on the trading day following the filing, before recovering partially in subsequent sessions.
On November 14, 2022, the RGC Board held an emergency meeting by videoconference. At that meeting, the Board formally resolved to form a Special Committee of independent directors to oversee the Company's response to the activist campaign. The Special Committee consists of three independent directors: Jim Delacroix (Chair of the Special Committee and member of the Audit Committee), Carmen Vasquez (Chair of the Compensation Committee), and Randall Morse (member of the Nominating and Corporate Governance Committee). The Special Committee was granted broad authority to engage outside counsel, financial advisors, proxy solicitors, and other professionals as it deemed necessary and appropriate, and to direct the Company's strategic response to Pinnacle Harbor's demands.
On November 15, 2022, Calderwood & Harkness LLP was formally engaged as outside counsel to RGC and the Special Committee in connection with the activist defense. The engagement was memorialized in an engagement letter countersigned by Patricia Nakamura on behalf of the Company and by Jim Delacroix on behalf of the Special Committee.
As of the date of this memorandum, the campaign remains active. The advance-notice window for director nominations at RGC's 2023 Annual Meeting of Stockholders opens on December 12, 2022 and closes on January 11, 2023, pursuant to the applicable provisions of the Company's Amended & Restated Bylaws. It is anticipated that Pinnacle Harbor will submit a formal nomination notice within this window, at which point the campaign will transition from a private engagement to a public proxy contest.
B. RGC Board and Management
The RGC Board of Directors consists of nine (9) directors, seven (7) of whom are independent under the applicable Nasdaq listing standards, and two (2) of whom are members of management:
• Diane K. Sheridan — Board Chair (independent)
• Gerald R. Whitmore — Chief Executive Officer (management director)
• Raymond Choi — Chief Financial Officer (management director)
• Lawrence Kaplan — Independent Director
• Victoria Barlowe — Independent Director
• Kenneth Fujikawa — Independent Director
• Jim Delacroix — Independent Director; Chair, Special Committee; member, Audit Committee
• Carmen Vasquez — Independent Director; Chair, Compensation Committee; member, Special Committee
• Randall Morse — Independent Director; member, Nominating and Corporate Governance Committee; member, Special Committee
The Company's General Counsel and Corporate Secretary is Patricia "Trish" Nakamura. Ms. Nakamura has served as General Counsel since 2018 and has been the primary point of contact for the Company's insurance program administration.
RGC is a Delaware corporation organized under the laws of the State of Delaware, with its principal executive offices located at 8700 Las Vegas Boulevard South, Suite 2200, Las Vegas, Nevada 89123. The Company's common stock is listed on The Nasdaq Global Select Market under the ticker symbol "RGC." As of November 15, 2022, the Company's market capitalization was approximately $3.14 billion, based on a closing stock price of approximately $29.98 per share and 104,700,000 shares outstanding.
C. Defense Team and Advisors
The following professionals have been engaged by RGC and/or the Special Committee in connection with the activist defense:
Company Advisors:
• Outside Counsel: Calderwood & Harkness LLP — Douglas Fairchild (engagement partner and responsible partner), Angela Fontaine (billing partner), Claire Dempsey (lead associate), and Marcus Leung (working associate, Banking & Finance Practice Group).
• Financial Advisor: Calloway Pinnacle Trust Bank — Thomas V. Ashford, Managing Director, Activism & Corporate Defense Group. Calloway Wainwright has been retained to advise the Special Committee and the Board on strategic alternatives, shareholder engagement, and valuation matters in connection with the activist campaign.
• Proxy Solicitor: Whitfield Morrow Partners, LLC — Denise Cavanaugh, Senior Vice President. Whitfield Morrow has been engaged to advise on proxy strategy, shareholder outreach, vote projection, and solicitation logistics in the event that the campaign escalates to a contested election.
• Investor Relations Advisor: Harlan Ridge Communications, LLC — Philip Navarette, Partner. Harlan Ridge has been engaged to assist with investor communications, messaging, and media relations in connection with the activist campaign.
Activist's Advisors (as identified through public filings and market intelligence):
• Outside Counsel: Hargrove Sloane & Birch LLP — Jonathan "Jon" Birch III, lead partner. Hargrove Sloane is a prominent activist-side advisory firm with significant experience in contested board elections and shareholder campaigns.
• Proxy Solicitor: Garrison Proxy Advisors, LLC — Alicia Trent, Managing Director. Garrison is a well-known proxy solicitation firm frequently retained by activist investors in contested situations.
III. D&O Insurance Program Overview
A. Program Structure
RGC's directors' and officers' liability insurance program is placed and administered through Glenmore Caulfield Insurance Brokers, Inc. ("Glenmore Caulfield"), a national specialty insurance brokerage firm. The primary broker contact is Sarah Voss, Senior Vice President, who has handled the RGC D&O placement for the past three policy cycles.
The program currently consists of a two-layer tower, with a primary policy and a single excess policy, as described below:
Primary Layer:
• Carrier: Northbridge Indemnity Company (domiciled in the State of Connecticut; A.M. Best rating: A (Excellent), Financial Size Category XIV)
• Policy Number: NBI-DOP-1025-00008
• Policy Period: January 1, 2022 – January 1, 2023 (twelve-month claims-made policy)
• Aggregate Limit of Liability: $15,000,000 (inclusive of defense costs)
• Self-Insured Retention: $500,000 per claim, applicable to Side B (Corporate Reimbursement) and Side C (Entity Securities) insuring agreements. The SIR is not applicable to Side A (Individual Director and Officer) claims — Side A provides first-dollar coverage.
• Named Insured: Redstone Gaming Corp.
• Insured Persons: All past, present, and future directors and officers of RGC and its subsidiaries, as defined in the policy
• Annual Premium: Approximately $287,000 (inclusive of taxes and broker fees)
• Retroactive Date: January 1, 2017 (providing five years of prior-acts coverage)
First Excess Layer:
• Carrier: Creston National Insurance Co. (domiciled in the State of Illinois; A.M. Best rating: A- (Excellent), Financial Size Category XII)
• Policy Number: CNI-XS-2022-31004
• Policy Period: Follows form and follows the policy period of the Northbridge primary policy (January 1, 2022 – January 1, 2023)
• Limit of Liability: $10,000,000 excess of $15,000,000 (i.e., the Creston National excess policy attaches only upon the complete exhaustion of the Northbridge primary policy's aggregate limit)
• Attachment Point: $15,000,000 (exhaustion of primary limit)
• Terms and Conditions: Follows form of the Northbridge primary policy (Policy No. NBI-DOP-1025-00008) except as otherwise specifically stated in the Creston National excess policy
• Annual Premium: Approximately $104,000 (inclusive of taxes and broker fees)
Total Tower Capacity: $25,000,000
The program does not currently include any additional excess layers or any standalone Side A difference-in-conditions ("DIC") policy. As discussed in the Recommendations section below, the engagement team should consider whether additional limits or a Side A DIC policy should be procured at renewal in light of the activist campaign.
B. Policy Renewal
The current policy period expires on January 1, 2023. Renewal discussions are underway through Sarah Voss at Glenmore Caulfield, who is coordinating with both carriers and with the Company's General Counsel, Patricia Nakamura, on the renewal submission. The renewal application is expected to be submitted in mid-December 2022.
Recommendation: It is critical that the renewal application and any renewal questionnaire accurately and completely disclose the Pinnacle Harbor activist campaign and all related circumstances, including the October 28, 2022 private demand letter, the November 10, 2022 preliminary Schedule 13D filing, the formation of the Special Committee, the engagement of outside counsel and advisors, and the notice of circumstances filed with both carriers on November 16, 2022. Any failure to disclose material information on the renewal application could provide the carriers with a basis for rescission of the renewal policy or denial of coverage for claims arising from the activist campaign. Full disclosure also protects the Company against arguments that the renewal policy's prior knowledge or prior notice exclusions bar coverage for circumstances known to the insured at the time of renewal.
The D&O policy is expected to be renewed effective January 1, 2023, and Sarah Voss has indicated that both Northbridge and Creston National have expressed preliminary willingness to renew on substantially similar terms, although there may be a moderate premium increase given the reported circumstances. The notice of circumstances filed under the expiring 2022 policy should serve to anchor coverage for the activist campaign — and any claims arising therefrom — under the 2022 policy year. This is a standard and well-established mechanism under claims-made D&O policies: by filing a timely notice of circumstances during the current policy period, the Company preserves its right to report any formal claim that subsequently arises from the noticed circumstances under the current policy, even if the claim is first made during a future policy period. The continuity provisions of the renewal policy should also protect against gaps, provided that proper disclosure is made on the renewal application.
IV. Insuring Agreements — Coverage Analysis
The Northbridge primary policy contains three separate insuring agreements, commonly referred to as Side A, Side B, and Side C. Each insuring agreement has distinct coverage triggers, conditions, and applicability to the facts of the Pinnacle Harbor activist campaign. This section analyzes each insuring agreement in turn.
A. Side A — Individual Director and Officer Coverage (Non-Indemnifiable Loss)
The Side A insuring agreement obligates the insurer to pay, on behalf of any individual insured person (i.e., any past, present, or future director or officer of RGC), any loss — including defense costs — arising from any claim first made against such insured person during the policy period for any wrongful act committed in his or her capacity as a director or officer, but only to the extent that the Company has not indemnified and is not permitted or required to indemnify such insured person for such loss.
Side A coverage is designed to serve as a "safety net" for individual directors and officers in situations where the Company is unable to provide indemnification (e.g., due to insolvency or legal prohibition) or is unwilling to do so. Because Side A is intended to protect individuals directly, it is not subject to the $500,000 SIR — Side A provides first-dollar coverage to the insured individual.
Relevance to the Activist Campaign: If any individual director or officer of RGC is personally named as a defendant in litigation or regulatory proceedings arising from the activist contest, Side A would provide direct coverage for that individual's defense costs and any resulting liability, to the extent that RGC does not or cannot indemnify the individual. Potential scenarios in which Side A coverage could be triggered include:
• Pinnacle Harbor bringing a books-and-records demand against the Company and its directors under Section 220 of the Delaware General Corporation Law ("DGCL"), in which individual directors could be named;
• A breach of fiduciary duty claim asserted against individual directors in connection with the Board's response to the activist campaign (e.g., allegations that defensive measures, such as a poison pill or bylaw amendments, were implemented in bad faith or for entrenchment purposes);
• A shareholder derivative action brought nominally on behalf of the Company against individual directors; or
• A securities fraud claim naming individual officers in connection with alleged misstatements or omissions in proxy materials, press releases, or SEC filings related to the activist campaign.
Current Assessment: As of the date of this memorandum, no individual claims have been asserted against any director or officer of RGC in connection with the Pinnacle Harbor activist campaign. However, the activist campaign creates circumstances that could give rise to such claims, and Side A coverage should be available if and when any such claim materializes. The filing of the notice of circumstances on November 16, 2022 preserves the right to report individual claims under the current policy year.
B. Side B — Corporate Reimbursement Coverage
The Side B insuring agreement obligates the insurer to reimburse RGC for amounts that the Company pays to indemnify its directors and officers for covered losses (including defense costs) arising from claims made against the insured persons during the policy period for wrongful acts committed in their capacities as directors or officers. In other words, when the Company indemnifies its directors and officers — as it is permitted and, in many cases, required to do under Delaware law and its own governance documents — the Company can in turn seek reimbursement from the D&O insurer under Side B.
Side B coverage is subject to the $500,000 self-insured retention per claim. This means that RGC must bear the first $500,000 of indemnification costs before Side B coverage is triggered.
Relevance to the Activist Campaign: Side B is the insuring agreement most likely to be invoked in the current context. To the extent that RGC indemnifies its directors and officers for defense costs incurred in connection with the activist campaign — including, potentially, legal fees for counsel retained by the Special Committee or individual directors — Side B would reimburse RGC for such indemnification payments after satisfaction of the SIR. This is the typical recovery mechanism in D&O claims: the Company indemnifies the individual directors and officers, and then the D&O insurer reimburses the Company under Side B.
Indemnification Framework: RGC's Amended & Restated Certificate of Incorporation (Delaware Secretary of State file no. 5734821) and Amended & Restated Bylaws contain broad indemnification and advancement provisions for directors and officers, consistent with Sections 102(b)(7) and 145 of the Delaware General Corporation Law. Specifically:
• Article VII of the Amended & Restated Certificate of Incorporation eliminates director personal liability for monetary damages for breach of fiduciary duty to the fullest extent permitted by DGCL § 102(b)(7).
• Article IX of the Amended & Restated Bylaws provides for mandatory indemnification of directors and officers to the fullest extent permitted by Delaware law, including advancement of expenses upon receipt of an undertaking to repay if it is ultimately determined that the indemnified person is not entitled to indemnification.
These provisions create a robust framework for indemnification that, in turn, supports the availability of Side B coverage.
C. Side C — Entity Coverage (Securities Claims)
The Side C insuring agreement covers RGC itself — as the corporate entity, rather than its individual directors and officers — for loss arising from securities claims. Side C coverage was introduced in D&O policies in the late 1990s and is designed to address the entity's own exposure in securities litigation, where the company is often named as a co-defendant alongside its officers and directors.
Side C coverage is subject to the $500,000 SIR and is limited to securities claims, which are typically defined as claims alleging violations of federal or state securities laws, including claims brought under Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 and the rules promulgated thereunder.
Relevance to the Activist Campaign: If any securities claim is brought against RGC in connection with its response to the activist campaign, Side C would potentially provide coverage for the Company's own defense costs and liability. Potential scenarios include:
• A claim alleging misleading disclosure in proxy materials distributed by the Company in connection with a contested election;
• A claim under Section 14(a) of the Exchange Act alleging material misstatements or omissions in the Company's definitive proxy statement;
• A claim under Section 10(b) and Rule 10b-5 alleging that the Company made material misstatements or omissions in press releases or other public communications issued in response to the activist campaign; or
• A state-law securities claim alleging fraud or negligent misrepresentation in connection with the Company's investor communications.
Key Question — "Claim" vs. "Circumstance": A threshold question is whether the activist campaign, in its current posture — absent actual securities litigation — constitutes a "claim" under the policy or only a "circumstance" that could give rise to a claim. This distinction is significant because different policy provisions and procedures apply to the reporting of claims versus circumstances. As discussed in greater detail in Section V below, the notice filed on November 16, 2022 was properly framed as a notice of circumstances rather than a notice of claim, preserving the Company's right to later report any formal claim that arises from these circumstances under the current policy year. This approach is consistent with standard practice in D&O insurance and was coordinated with Glenmore Caulfield.
V. Definition of "Claim" and "Loss" Under the Policies
A. Definition of "Claim"
The Northbridge primary policy defines "Claim" broadly to include: (i) any written demand for monetary damages or non-monetary or injunctive relief; (ii) any civil, criminal, administrative, regulatory, or arbitration proceeding commenced by the filing of a complaint, information, indictment, or similar pleading; (iii) any formal or informal investigation of an insured person by a governmental body, regulatory authority, or self-regulatory organization, commenced by the filing of a notice of charges, formal investigative order, or similar document; and (iv) any written request to toll or waive any applicable statute of limitations.
Analysis of Current Campaign: The question presented is whether Pinnacle Harbor's October 28, 2022 private demand letter and its November 10, 2022 preliminary Schedule 13D filing constitute a "Claim" as defined in the Northbridge policy. This analysis turns on whether these communications constitute a "written demand for monetary damages or non-monetary or injunctive relief" within the meaning of the policy definition.
The October 28 demand letter requests: (1) appointment of two Pinnacle Harbor nominees to the Board; (2) a formal strategic review of the interactive gaming division; and (3) a return of $300 million to shareholders. While these are demands in the colloquial sense, they are demands directed at the Company as a corporate entity regarding its governance and strategic direction — they are not demands for monetary damages or injunctive relief against individual directors or officers, nor do they assert legal claims or threaten legal proceedings. Similarly, the Schedule 13D filing discloses Pinnacle Harbor's stake and its activist intentions but does not assert legal claims against any insured person or the Company.
Conclusion: The demand letter and Schedule 13D, standing alone, likely do not constitute a "Claim" as defined in the Northbridge policy. They are more properly characterized as pre-claim communications or corporate governance demands that do not invoke the formal claims-reporting procedures of the policy. However, they clearly constitute reportable "circumstances" that could give rise to a claim — and the notice of circumstances mechanism is the appropriate vehicle for reporting them to the carriers, which is precisely what was done on November 16, 2022. If and when a formal legal proceeding, demand for monetary relief, or regulatory investigation is commenced in connection with these circumstances, a supplemental notice of claim should be filed at that time.
B. Definition of "Loss"
The Northbridge primary policy defines "Loss" to include: (i) defense costs (including attorneys' fees, expert fees, and other costs of investigation and defense); (ii) judgments (including pre-judgment and post-judgment interest); (iii) settlements; and (iv) in some formulations, pre-claim inquiry costs incurred with the prior written consent of the insurer. The policy expressly provides that defense costs are included within the definition of Loss and are subject to the aggregate limit of liability (i.e., defense costs erode the policy limit — this is standard in D&O insurance).
Duty to Advance Defense Costs: It is important to note that D&O policies are generally structured as "non-duty-to-defend" policies. Unlike commercial general liability policies, under which the insurer has a duty to defend the insured and to select and retain counsel, D&O policies leave the selection and retention of counsel to the insured. The insurer's obligation is to reimburse or advance defense costs as they are incurred (or, in some policy forms, after the insured has paid them). The Northbridge primary policy contains an advancement provision requiring the insurer to advance defense costs on a current basis (i.e., as invoices are submitted), subject to the insured's obligation to repay such amounts if it is ultimately determined that the loss is not covered under the policy.
This structure means that Calderwood & Harkness LLP's engagement and fees, as the insured's selected outside counsel, constitute defense costs that would be reimbursable under the policy, subject to the reasonableness of fees and compliance with policy terms (including any consent-to-incur provisions, discussed below). The fact that the insured — rather than the insurer — selects counsel is a fundamental feature of the D&O insurance product and is consistent with the professional autonomy that directors and officers require in defending against claims.
C. Defense Costs
Calderwood & Harkness LLP Fee Structure:
• Partners: $1,450 per hour
• Senior Associates: $1,050 per hour
• Associates: $850 per hour
Based on the current pace of the engagement and the anticipated scope of work through the conclusion of the activist campaign (including a potential contested proxy), the estimated total Calderwood & Harkness fees are approximately $1,380,000. This estimate assumes a full proxy contest scenario, including preparation and review of definitive proxy materials, SEC filings, shareholder communications, engagement with proxy advisory firms (ISS and Tarrant Partners LLC), and potential preliminary injunction proceedings if the contest escalates to litigation. The estimate would be subject to upward revision if significant litigation (e.g., a fiduciary duty challenge or Section 220 action) is commenced.
Non-Legal Advisor Costs: In addition to legal fees, the Company has engaged several non-legal advisors whose fees may or may not qualify as "defense costs" under the D&O policy:
• Calloway Pinnacle Trust Bank (Financial Advisor): The fee structure for the Calloway Wainwright engagement is not fully within the scope of this memorandum, as it has been negotiated separately by the Special Committee with the assistance of Calderwood & Harkness. However, financial advisor fees in activist defense engagements can be significant, often including a monthly retainer (typically in the range of $125,000–$200,000 per month) and a success or transaction fee. Whether such fees qualify as "defense costs" under the D&O policy depends on the policy's specific definitions. Some D&O policies define defense costs broadly enough to encompass fees for financial advisors retained in connection with a covered claim; others limit defense costs to legal fees and expenses. A careful review of the Northbridge policy's definitions and any relevant endorsements is necessary to determine coverage.
• Whitfield Morrow Partners, LLC (Proxy Solicitor): Proxy solicitor fees in a contested election can range from approximately $200,000 to $400,000 or more, depending on the complexity and duration of the contest. Coverage for proxy solicitor fees is similarly uncertain and depends on the policy definition of defense costs.
• Harlan Ridge Communications, LLC (Investor Relations Advisor): IR advisory fees are generally less likely to be considered "defense costs" under a D&O policy, as they relate to general corporate communications and investor relations rather than the defense of a legal claim. These fees are more likely to be treated as ordinary business expenses of the Company.
Recommendation: The engagement team should review the Northbridge policy definitions and any relevant endorsements in detail, in coordination with Sarah Voss at Glenmore Caulfield, to confirm the scope of covered "defense costs" as applied to non-legal advisor fees. If the policy definitions are ambiguous, consideration should be given to seeking the carrier's advance agreement (in writing) to treat financial advisor and proxy solicitor fees as covered defense costs, or, alternatively, to negotiating an endorsement at renewal that expressly provides such coverage.
VI. Notice of Circumstances
A. Timing and Method
Notice of circumstances was submitted to both Northbridge Indemnity Company and Creston National Insurance Co. on November 16, 2022, one day after the Calderwood & Harkness engagement letter was fully executed. The notice was prepared with input from the Calderwood & Harkness team and was submitted through the Company's insurance broker, Glenmore Caulfield Insurance Brokers, Inc. The submission was coordinated by Sarah Voss, Senior Vice President at Glenmore Caulfield, who serves as the primary broker contact for the RGC D&O placement.
The notice was delivered via two methods to ensure both proof of delivery and speed of communication: (1) email to the designated claims contacts at each carrier, and (2) overnight courier (Severin Partners LLC Priority Overnight) to the mailing addresses specified in the policy notice provisions. Both methods of delivery are authorized under the policy's notice provisions, which require that notice be given "as soon as practicable" after the Company or any insured person becomes aware of circumstances that may give rise to a claim.
The timing of the notice — November 16, 2022, within the current policy period and within approximately six days of the Schedule 13D filing and two days of the Board's emergency meeting — is well within the "as soon as practicable" standard and should not give rise to any late-notice defense by either carrier.
B. Content of Notice
The notice of circumstances letter described the Pinnacle Harbor activist campaign in detail, including the following material facts and developments:
• The accumulation by Pinnacle Harbor Capital Partners, LP of an approximately 6.8% stake in RGC common stock;
• The October 28, 2022 private demand letter from Pinnacle Harbor to Board Chair Diane K. Sheridan, setting forth demands for board representation, a strategic review of the interactive gaming division, and a $300 million capital return;
• The November 10, 2022 filing by Pinnacle Harbor of a preliminary Schedule 13D with the SEC disclosing its stake and activist intentions;
• The November 14, 2022 emergency meeting of the RGC Board of Directors and the formation of the Special Committee (Jim Delacroix, Chair; Carmen Vasquez; Randall Morse) to oversee the Company's response;
• The November 15, 2022 engagement of Calderwood & Harkness LLP as outside counsel; and
• The anticipated advance-notice window for director nominations (opening December 12, 2022 and closing January 11, 2023), during which Pinnacle Harbor is expected to submit a formal nomination notice.
The notice identified all nine current directors and officers of RGC — Diane K. Sheridan, Gerald R. Whitmore, Raymond Choi, Lawrence Kaplan, Victoria Barlowe, Kenneth Fujikawa, Jim Delacroix, Carmen Vasquez, and Randall Morse — as potential insured persons whose interests may be affected by the circumstances being reported.
The notice also identified Pinnacle Harbor Capital Partners, LP and its general partner, Pinnacle Harbor Capital Management, LLC, as the parties whose actions give rise to the reported circumstances. The notice included relevant identifying information for these entities based on public filings.
Finally, the notice expressly preserved the Company's right to submit a formal notice of claim at a later date if and when a claim (as defined in the policy) arises from the reported circumstances, and stated that the filing of the notice of circumstances was intended to anchor coverage under the current policy period for any such future claim.
C. Carrier Responses
As of the date of this memorandum, an acknowledgment of receipt has been received from Northbridge Indemnity Company. The acknowledgment letter, dated November 21, 2022 and signed by Janet M. Phelan, Vice President of Claims, confirmed receipt of the notice of circumstances and assigned a claim reference number (NBI-CLM-2022-87432) for tracking purposes. The Northbridge acknowledgment letter did not include a reservation of rights and did not raise any coverage issues or defenses at this stage.
An acknowledgment from Creston National Insurance Co. has not yet been received as of the date of this memorandum. Sarah Voss at Glenmore Caulfield has confirmed that the notice was delivered to Creston National and has followed up with the Creston National claims department. An acknowledgment is expected shortly, and any carrier correspondence will be promptly communicated to the engagement team.
No reservation of rights letters have been received from either carrier to date. This is a favorable development, although it should be noted that the absence of a reservation of rights at this early stage does not constitute a waiver of the carriers' right to assert coverage defenses at a later date if circumstances change.
Glenmore Caulfield (Sarah Voss) is actively monitoring the matter and will promptly communicate any carrier correspondence, inquiries, or requests for additional information to Calderwood & Harkness and to RGC's General Counsel, Patricia Nakamura.
VII. Potential Coverage Issues and Exclusions
This section identifies and analyzes the principal exclusions and potential coverage issues that could affect the availability of coverage under the RGC D&O insurance program in connection with the Pinnacle Harbor activist campaign. Based on the current facts, no exclusions appear likely to apply. However, this analysis should be revisited as circumstances develop.
A. Insured vs. Insured Exclusion
Most D&O policies contain an "insured vs. insured" exclusion, which excludes coverage for claims brought by one insured person (or by the Company) against another insured person. The purpose of this exclusion is to prevent collusive or friendly suits in which the Company or an affiliated insured brings a claim against a director or officer with the intent to trigger D&O coverage for what would otherwise be an uninsured corporate loss.
Relevance: If the activist campaign were to evolve into intra-board disputes — for example, if one director were to bring a claim against other directors alleging breach of fiduciary duty in connection with the Board's response to the activist campaign — the insured vs. insured exclusion could potentially bar coverage. Similarly, if the Company were to bring a claim against a director who cooperated with or facilitated the activist campaign, the exclusion could apply.
Standard Carve-Backs: The insured vs. insured exclusion in most modern D&O policies contains important carve-backs that limit its scope. Most significantly, derivative claims — that is, claims brought by shareholders derivatively on behalf of the Company — are typically carved out of the exclusion, even though the Company is technically the named plaintiff in a derivative action. This carve-back ensures that derivative suits remain covered under the D&O policy, which is consistent with the fundamental purpose of D&O insurance. Additionally, many policies carve out claims brought by a bankruptcy trustee or debtor-in-possession, and claims brought by former insured persons acting independently and without the solicitation, assistance, or participation of any current insured person.
Assessment: The risk of the insured vs. insured exclusion applying in the current context is low. The activist campaign is being waged by Pinnacle Harbor, an external stockholder, against the Company and its Board. Pinnacle Harbor is not an insured person under the RGC D&O policy. To the extent that any future litigation arises from the activist campaign, it is most likely to involve claims by Pinnacle Harbor (or other shareholders) against the Company or its directors — such claims would not be barred by the insured vs. insured exclusion. If the campaign were to result in derivative litigation brought by shareholders, the standard carve-back would preserve coverage.
B. Prior Knowledge / Prior Acts Exclusion
D&O policies typically contain a prior knowledge exclusion (sometimes called a "prior or pending" or "known circumstances" exclusion), which excludes coverage for claims arising from wrongful acts that the insured knew about, or had reason to know about, prior to the inception of the current policy period. The purpose of this exclusion is to prevent insureds from purchasing insurance after they are already aware of circumstances likely to give rise to a claim — the D&O policy is intended to cover unknown and unanticipated risks, not pre-existing problems.
Relevance: The question is whether any director, officer, or the Company itself had knowledge of the circumstances giving rise to the Pinnacle Harbor activist campaign prior to the inception of the current policy period on January 1, 2022.
Analysis: Pinnacle Harbor did not begin accumulating its position in RGC common stock until approximately June 2022, well after the inception of the current policy period. The private demand letter was sent on October 28, 2022, and the Schedule 13D was filed on November 10, 2022 — both dates falling squarely within the current policy period. There is no indication that any director, officer, or the Company was aware of Pinnacle Harbor's intentions or its accumulation of RGC stock prior to the current policy period. The current policy has a retroactive date of January 1, 2017, meaning that coverage extends to wrongful acts committed on or after that date, provided the insured was not aware of the circumstances giving rise to the claim prior to the policy's inception.
Assessment: No prior knowledge issues are apparent based on the current facts. The entirety of the activist campaign has occurred within the current policy period, and there is no basis for either carrier to assert a prior knowledge defense.
C. Fraud / Illegal Profit Exclusion
The Northbridge primary policy contains a standard exclusion for claims arising from, based upon, or attributable to any insured person having gained any personal profit, remuneration, or advantage to which such insured person was not legally entitled, or from any deliberately fraudulent act, willful violation of law, or intentional misconduct by any insured person.
Application: This exclusion is only triggered upon a final, non-appealable adjudication (or, in some policy forms, a final judgment or admission by the insured) establishing that the insured person in fact committed fraud, gained illegal profit, or engaged in intentional misconduct. The exclusion does not apply merely because fraud or intentional misconduct is alleged — it applies only when such conduct has been conclusively established through the judicial process.
Assessment: There are no facts in the current circumstances suggesting that any director or officer of RGC has engaged in fraud, intentional misconduct, or illegal profit-taking in connection with the Pinnacle Harbor activist campaign. The directors are responding to a stockholder activist campaign in the exercise of their fiduciary duties, and the engagement of outside counsel and advisors reflects a good-faith effort to fulfill those duties. The fraud/illegal profit exclusion has no applicability in the current context.
D. Professional Services Exclusion
Some D&O policies contain an exclusion for claims arising from the rendering of, or failure to render, professional services. This exclusion is designed to carve out claims that are more properly covered under errors and omissions (E&O) or professional liability policies.
Assessment: The professional services exclusion is not applicable to the activist defense context. The claims at issue relate to corporate governance and the directors' and officers' conduct in their capacities as fiduciaries of RGC — they do not involve the rendering of professional services to third-party clients or customers.
E. Bodily Injury / Property Damage Exclusion
The Northbridge primary policy contains a standard exclusion for claims seeking damages arising from bodily injury, sickness, disease, death, or damage to or destruction of tangible property. This is a standard exclusion in D&O policies that is designed to prevent overlap with commercial general liability insurance.
Assessment: This exclusion has no applicability to the activist defense context. No claims involving bodily injury or property damage are anticipated in connection with the Pinnacle Harbor campaign.
F. Pending and Prior Litigation Exclusion
The Northbridge primary policy excludes coverage for claims arising from, based upon, or attributable to any litigation, proceeding, demand, or investigation that was pending against any insured person or the Company as of the policy's inception date or continuity date, or that was based upon, arising from, or attributable to the same or related facts, circumstances, or wrongful acts underlying such pending matters.
Assessment: A review of RGC's litigation docket and the Company's representations in its most recent renewal application does not reveal any relevant prior or pending litigation that would trigger this exclusion in connection with the Pinnacle Harbor activist campaign. The activist campaign is a new set of circumstances that arose within the current policy period, and there are no prior legal proceedings involving Pinnacle Harbor or any related parties that would implicate this exclusion.
VIII. Communications with Broker and Carriers
A. Summary of Discussions with Glenmore Caulfield
Marcus Leung spoke with Sarah Voss, Senior Vice President at Glenmore Caulfield Insurance Brokers, Inc., on November 16, 2022, to coordinate the filing of the notice of circumstances with both carriers. During that conversation, Ms. Voss confirmed the following:
• The notice of circumstances would be delivered by Glenmore Caulfield on behalf of RGC to both Northbridge Indemnity Company and Creston National Insurance Co. via email and overnight courier on November 16, 2022.
• Glenmore Caulfield had reviewed the draft notice prepared by Calderwood & Harkness and had no substantive comments or revisions; the notice was consistent with the policy's notice requirements in form and content.
• Ms. Voss confirmed delivery of the notice to both carriers on November 16, 2022 and provided tracking numbers for the overnight courier packages.
• Based on her experience with activist defense claims across her D&O portfolio, Ms. Voss stated that activist defense costs are a well-established category of covered loss under Side A and Side B insuring agreements in modern D&O policies. She noted that carriers have generally been responsive to such claims and that coverage disputes in this area are relatively uncommon, provided that the insured complies with policy conditions regarding notice, consent to incur costs, and reasonableness of fees.
• Ms. Voss recommended that RGC and Calderwood & Harkness keep the broker informed of all material developments in the activist campaign so that supplemental notices of circumstances can be filed with the carriers as needed. She specifically noted that the filing of a formal nomination notice by Pinnacle Harbor, the commencement of a proxy contest, and the filing of any litigation would each constitute material developments warranting supplemental notice.
A follow-up call between Marcus Leung and Sarah Voss has been scheduled for early December 2022 to discuss renewal implications and the potential need for increased limits in light of the activist campaign. Ms. Voss has also indicated that she will arrange a call between the Calderwood & Harkness team and the Northbridge claims contact, Janet M. Phelan, if requested, to discuss the scope of covered defense costs and any consent-to-incur requirements.
B. Renewal Considerations
As noted above, the current policy period expires on January 1, 2023, and renewal discussions are underway. Several renewal-related considerations merit attention:
Disclosure: Full and accurate disclosure of the Pinnacle Harbor activist campaign and all related circumstances on the renewal application is essential. The renewal application will likely include questions regarding pending or threatened litigation, shareholder activism, demand letters, regulatory investigations, and known circumstances that could give rise to claims. All such questions must be answered truthfully and completely. Ms. Voss at Glenmore Caulfield is coordinating with RGC's General Counsel, Patricia Nakamura, on the preparation of the renewal application to ensure appropriate disclosure.
Underwriting Response: It is expected that underwriters at Northbridge and Creston National may inquire about the activist campaign during the renewal process. The carriers may request copies of the demand letter, the Schedule 13D, the Board resolutions, and other relevant documents. RGC and its counsel should be prepared to provide such materials, subject to appropriate confidentiality protections and without waiving any applicable privileges.
Premium Impact: Ms. Voss has noted that there is a potential for a moderate premium increase at renewal, reflecting the increased risk profile associated with the reported activist campaign. The magnitude of any increase will depend on the carriers' assessment of the likelihood and potential severity of claims arising from the campaign, as well as broader market conditions in the D&O insurance market.
Limit Adequacy: The renewal presents an opportunity to reassess the adequacy of the Company's D&O limits in light of the activist campaign. As discussed in Section IX below, the current $25 million tower is expected to be sufficient for the defense costs anticipated in connection with the activist campaign, but the Special Committee and the Board should consider whether additional limits or a standalone Side A DIC policy would be prudent.
IX. Estimated Exposure and Adequacy of Limits
A. Estimated Defense Cost Exposure
The following is an estimate of defense costs that may be incurred in connection with the Pinnacle Harbor activist campaign:
The estimated total legal defense costs (Calderwood & Harkness fees) of approximately $1,380,000 are well within the $15 million primary layer limit and are unlikely to approach, let alone exhaust, the primary layer — much less the $25 million total tower. Even if financial advisor and proxy solicitor fees were ultimately determined to be covered defense costs, the aggregate defense cost exposure is not expected to exceed $2,000,000–$3,000,000, assuming a full proxy contest without significant litigation.
Assessment: The primary layer from Northbridge Indemnity Company, with a $15 million aggregate limit, should be more than sufficient to cover anticipated defense costs from the activist campaign alone. The first excess layer from Creston National Insurance Co. ($10 million excess of $15 million) provides an additional cushion and would only be implicated in a scenario involving significant litigation exposure beyond defense costs (e.g., a large judgment or settlement in fiduciary duty or securities litigation). The current two-layer, $25 million tower provides adequate coverage for the anticipated scope of the activist campaign.
B. Retention Analysis
The $500,000 self-insured retention applies to Side B and Side C claims. Side A claims — covering individual directors and officers for non-indemnifiable losses — are not subject to the SIR and provide first-dollar coverage.
In the expected scenario, the Company will indemnify its directors and officers for defense costs incurred in connection with the activist campaign, and will seek reimbursement from Northbridge under the Side B insuring agreement. Under this scenario, the SIR would need to be satisfied before Side B coverage is triggered. At the projected fee level of approximately $1,380,000 for Calderwood & Harkness fees alone:
• The first $500,000 of indemnification payments would be borne by RGC as self-insured retention, with no reimbursement from the insurer;
• The remaining approximately $880,000 in indemnification payments would be potentially recoverable from Northbridge under Side B, subject to policy terms, conditions, and any applicable sub-limits or endorsements; and
• If additional defense costs (financial advisor fees, proxy solicitor fees) are determined to be covered, the recoverable amount would increase accordingly.
It should be noted that all covered defense costs are aggregated for purposes of determining whether the SIR has been satisfied — the SIR applies "per claim," and all defense costs arising from the Pinnacle Harbor activist campaign would likely be treated as a single claim (or, if a notice of circumstances was filed, a single noticed set of circumstances giving rise to one or more claims).
C. Litigation Risk