PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
MEMORANDUM
January 13, 2023
FROM: Douglas Fairchild, Engagement Partner, and Claire Dempsey, Lead Associate, Calderwood & Harkness LLP
TO: Special Committee of the Board of Directors of Redstone Gaming Corp.
James "Jim" Delacroix, Chair Carmen Vasquez Randall Morse
Patricia "Trish" Nakamura, General Counsel & Corporate Secretary
RE: Analysis of Qualifications and Nomination Notice Compliance — Pinnacle Harbor Capital Partners, LP Board Nominees: Dr. Sandra Trevelyan and Hugh Desmond Grayson
C&H MATTER NO.: 1033-00003
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I. Executive Summary
The purpose of this memorandum is to provide the Special Committee of the Board of Directors of Redstone Gaming Corp. ("RGC" or the "Company") with a comprehensive analysis of the qualifications and backgrounds of the two director nominees put forward by Pinnacle Harbor Capital Partners, LP ("Pinnacle Harbor"), and to evaluate the nomination notice submitted on behalf of Pinnacle Harbor for compliance with the advance-notice bylaw provisions set forth in Article II, Section 2.11 of RGC's Amended and Restated Bylaws, as last amended on September 12, 2021 (the "Bylaws"). This memorandum is prepared at the request of the Special Committee and is intended to inform the Committee's deliberations regarding its response to Pinnacle Harbor's activist campaign and proxy contest threat.
On January 9, 2023, RGC received a formal nomination notice (the "Nomination Notice") from Hargrove Sloane & Birch LLP, counsel to Pinnacle Harbor, designating two individuals for election to the Board of Directors at RGC's 2023 Annual Meeting of Stockholders. The Nomination Notice was delivered by Jonathan "Jon" Birch III, lead partner, and Elise Marchetti, associate, of Hargrove Sloane & Birch LLP. The Nomination Notice was received two days before the close of the advance-notice window on January 11, 2023, and is therefore timely under the Bylaws.
Pinnacle Harbor Capital Partners, LP is a Delaware limited partnership managed by its general partner, Pinnacle Harbor Capital Management, LLC. Pinnacle Harbor holds 7,119,600 shares of RGC common stock, representing approximately 6.8% of the Company's 104,700,000 shares of common stock outstanding. These shares were accumulated during the period from June through November 2022 at a weighted-average price of approximately $26.42 per share, reflecting an aggregate cost basis of approximately $188.1 million.
The two nominees proposed by Pinnacle Harbor are:
• Dr. Sandra Trevelyan, age 55, a former Chief Operating Officer of Meridian Interactive Holdings, Inc. and current independent gaming consultant; and
• Hugh Desmond Grayson, age 61, a former Chief Financial Officer of Atlas Leisure Group, Inc. and current director of two private hospitality companies.
Following a thorough review of the Nomination Notice, publicly available information, applicable bylaw provisions, Nasdaq listing requirements, and Nevada gaming regulatory standards, we have reached the following overall conclusions:
1. Timeliness. The Nomination Notice is timely under Article II, Section 2.11 of the Bylaws, having been received within the 150-to-120-day advance-notice window.
2. Informational Deficiencies. The Nomination Notice contains several informational deficiencies under the Bylaws, including incomplete disclosure of derivative positions, lack of clarity regarding compensation arrangements between Pinnacle Harbor and the nominees, incomplete director and officer questionnaire responses, potential issues with the form of nominee consent language, and a discrepancy in beneficial ownership representations relative to Pinnacle Harbor's amended Schedule 13D.
3. Nominee Qualifications. Dr. Trevelyan's experience in interactive gaming operations is relevant to Pinnacle Harbor's demand for a strategic review of RGC's interactive gaming division. Mr. Grayson's financial and capital markets expertise is pertinent to capital allocation strategy and may qualify him as an "audit committee financial expert." However, both nominees' qualifications raise questions regarding gaming regulatory licensing under the Nevada Gaming Control Act.
4. Independence. The independence analysis under Nasdaq Rule 5605(a)(2) yields mixed results. Additional information is needed to determine whether either nominee has material relationships with Pinnacle Harbor or its affiliates that would impair independence.
5. Gaming Regulatory Licensing. Both nominees would be subject to suitability review by the Nevada Gaming Control Board and the Nevada Gaming Commission, and potentially by gaming regulators in other jurisdictions where RGC holds licenses. The timeline for such review (typically six to twelve months) raises significant practical concerns relative to the anticipated May 2023 annual meeting date.
We recommend that the Special Committee authorize the dispatch of a formal deficiency notice to Pinnacle Harbor's counsel, engage a third-party investigative firm to conduct enhanced background checks on both nominees, obtain a preliminary gaming regulatory suitability assessment, and consider the findings of this memorandum in connection with the Special Committee's anticipated authorization of settlement discussions. Each of these recommendations is discussed in greater detail in Section IX below.
II. Procedural Background
A. Timeline of the Activist Campaign Leading to the Nomination
The following timeline summarizes the key events in Pinnacle Harbor's activist campaign against RGC leading to the submission of the Nomination Notice:
October 28, 2022: Pinnacle Harbor sends a private letter to Board Chair Diane K. Sheridan demanding that RGC appoint two new directors designated by Pinnacle Harbor and initiate a strategic review of the Company's interactive gaming division. The letter was delivered by email and overnight courier to Chair Sheridan and was not publicly disclosed at the time of receipt.
November 10, 2022: Pinnacle Harbor files a preliminary Schedule 13D with the Securities and Exchange Commission ("SEC"), disclosing its accumulation of a 6.8% ownership stake in RGC (7,119,600 shares of common stock out of 104,700,000 shares outstanding) and its activist intentions, including demands for board representation and a strategic review. The Schedule 13D identifies Viktor S. Kessler as the managing member and chief investment officer of Pinnacle Harbor Capital Management, LLC, and Nadia Johar as the portfolio manager primarily responsible for the RGC investment.
November 14, 2022: The RGC Board of Directors convenes an emergency meeting to discuss Pinnacle Harbor's demands and the implications of the Schedule 13D filing. Following deliberation, the Board resolves to form a Special Committee composed of three independent directors — James "Jim" Delacroix (Chair), Carmen Vasquez, and Randall Morse — to oversee the Company's response to the activist campaign and to retain outside counsel and advisors.
November 15, 2022: Calderwood & Harkness LLP is engaged by the Special Committee as outside counsel. The engagement letter is executed by Mr. Delacroix on behalf of the Special Committee and by Douglas Fairchild on behalf of Calderwood & Harkness. The engagement covers all matters arising from or relating to Pinnacle Harbor's activist campaign, including bylaw and charter analysis, proxy contest defense, and related corporate governance matters.
November 30, 2022: Pinnacle Harbor issues a public "open letter" to the Board and stockholders of RGC demanding that the Company appoint Dr. Sandra Trevelyan and Hugh Desmond Grayson to the Board of Directors or face a proxy contest at the 2023 Annual Meeting. The letter is published via press release and posted on Pinnacle Harbor's website. The letter characterizes RGC's management as having "failed to unlock the full potential of the interactive gaming platform" and criticizes the Board's capital allocation decisions, including the Company's decision to reinvest free cash flow in property-based resort expansion rather than returning capital to stockholders.
December 5, 2022: Calderwood & Harkness delivers its bylaw and charter defensive review memorandum to the Special Committee. The memorandum analyzes the advance-notice bylaw provisions, supermajority voting requirements, and other structural defenses available to the Company.
December 8, 2022: Hargrove Sloane & Birch LLP, on behalf of Pinnacle Harbor, sends a formal notice of intent to nominate directors pursuant to the advance-notice provisions of Article II, Section 2.11 of the Bylaws. This notice of intent precedes the actual Nomination Notice and indicates that a formal nomination would follow within the advance-notice window.
December 12, 2022: The advance-notice window opens. Under Article II, Section 2.11 of the Bylaws, a nominating stockholder must provide notice not earlier than 150 days before the first anniversary of the prior year's annual meeting. The 2022 Annual Meeting of Stockholders was held on May 11, 2022. Accordingly, 150 days before May 11, 2023 is December 12, 2022.
January 6, 2023: Pinnacle Harbor files an amended Schedule 13D with the SEC, updating its disclosure to reference its intention to conduct a proxy contest at the 2023 Annual Meeting and to nominate Dr. Trevelyan and Mr. Grayson for election as directors. The amended 13D confirms Pinnacle Harbor's beneficial ownership of 7,119,600 shares (6.8%).
January 9, 2023: RGC receives the formal Nomination Notice from Hargrove Sloane & Birch LLP. The Nomination Notice designates Dr. Trevelyan and Mr. Grayson as nominees and includes biographical information, ownership disclosures, and related materials. The Nomination Notice is received via overnight courier at RGC's principal executive offices and via email to Patricia Nakamura, General Counsel and Corporate Secretary.
January 11, 2023: The advance-notice window closes. Under Article II, Section 2.11, a nominating stockholder must provide notice not later than 120 days before the first anniversary of the prior year's annual meeting. Thus, 120 days before May 11, 2023 is January 11, 2023.
B. Advance-Notice Bylaw Requirements — Article II, Section 2.11
We previously analyzed the Company's advance-notice bylaw provisions in our memorandum dated December 14, 2022, and incorporate that analysis by reference. The key elements of the advance-notice framework are summarized below.
Article II, Section 2.11 of the Bylaws provides that a stockholder wishing to nominate one or more persons for election as directors at an annual meeting must provide timely written notice to the Corporate Secretary. To be timely, such notice must be received at the principal executive offices of the Company not earlier than 150 days and not later than 120 days before the first anniversary of the date of the prior year's annual meeting of stockholders.
For the 2023 Annual Meeting, the relevant dates are as follows:
The Nomination Notice was received by RGC on January 9, 2023 — two days before the close of the advance-notice window on January 11, 2023. Accordingly, the Nomination Notice is timely under the Bylaws.
In addition to the timeliness requirement, Article II, Section 2.11 imposes detailed informational requirements on both the nominating stockholder and each nominee. These requirements are designed to ensure that the Company and its stockholders receive sufficient information to evaluate the qualifications, background, and potential conflicts of interest of any proposed director nominee. The specific informational requirements, and the extent to which the Nomination Notice satisfies them, are analyzed in detail in Section V of this memorandum.
A complete text of Article II, Section 2.11 of the Bylaws is attached as Appendix A.
III. Analysis of Nominee #1: Dr. Sandra Trevelyan
A. Biographical and Professional Background
Dr. Sandra Trevelyan is 55 years of age. According to the Nomination Notice and publicly available information, Dr. Trevelyan's most recent significant executive role was as Chief Operating Officer of Meridian Interactive Holdings, Inc. ("Meridian Interactive"), a Nevada-based interactive gaming company that develops and operates online gaming platforms, mobile gaming applications, and real-money wagering products. Dr. Trevelyan served as COO of Meridian Interactive from approximately 2014 to 2020, during which time the company grew its online gaming platform to serve approximately 2.4 million active users across multiple regulated jurisdictions.
Dr. Trevelyan's departure from Meridian Interactive in 2020 coincided with a broader restructuring of that company's senior management team following the acquisition of Meridian Interactive by a larger gaming conglomerate. Publicly available information does not indicate any involuntary termination, regulatory action, or adverse event in connection with her departure, although the Nomination Notice provides limited detail regarding the specific circumstances. We recommend that additional inquiry be made in connection with the background investigation discussed in Section IX.B below.
Since departing Meridian Interactive, Dr. Trevelyan has operated as an independent gaming consultant, advising interactive gaming companies on platform development, regulatory compliance, and market entry strategies. The Nomination Notice describes her current occupation as "independent consultant to gaming and technology companies" but does not identify specific clients or the scope of her current engagements.
Dr. Trevelyan was first publicly identified as a Pinnacle Harbor nominee in the November 30, 2022 open letter and is formally designated in the January 9, 2023 Nomination Notice. The Nomination Notice includes her business address, current occupation, and a brief biographical statement, but as discussed in Section V below, certain informational elements are incomplete.
Regarding academic credentials, the Nomination Notice indicates that Dr. Trevelyan holds a Ph.D., but the specific field of study and conferring institution require confirmation from the supplemental materials accompanying the Nomination Notice. A review of her publicly available professional biography references advanced degrees in applied mathematics and operations research, though we have not independently verified these credentials.
With respect to other board service, the Nomination Notice does not disclose any current or prior public company directorships held by Dr. Trevelyan. If she currently serves on any private company boards or advisory boards, such service is not disclosed in the Nomination Notice, which itself may constitute a deficiency depending on the scope of Section 2.11's requirements.
B. Qualifications Assessment
Dr. Trevelyan's qualifications are most relevant to the interactive and online gaming segment of RGC's business. The Company's interactive gaming division generated $412 million in revenue in fiscal year 2021, representing approximately 14.4% of RGC's total revenue of $2.87 billion. This division has been a focal point of Pinnacle Harbor's activist campaign, with Pinnacle Harbor arguing in its November 30, 2022 open letter that RGC has "chronically underinvested in its interactive gaming platform" and has failed to capitalize on the rapid growth in regulated online sports betting and iGaming markets.
Dr. Trevelyan's operational leadership experience at Meridian Interactive is directly pertinent to the strategic review that Pinnacle Harbor has demanded. Her experience encompasses platform development, user acquisition, regulatory compliance across multiple jurisdictions, and the integration of interactive gaming operations with traditional brick-and-mortar casino offerings. These skill sets are relevant to the challenges and opportunities facing RGC's interactive gaming division.
However, in assessing whether Dr. Trevelyan's candidacy would enhance the overall composition of the Board, it is important to consider the current Board's existing expertise. The RGC Board currently consists of nine directors:
Of the current nine directors, seven are independent and two (Mr. Whitmore and Mr. Choi) are members of management. While several current directors have significant experience in the gaming and hospitality industries broadly, none has a background specifically concentrated in interactive or online gaming operations comparable to Dr. Trevelyan's. In this respect, her skill set would not duplicate capabilities currently represented on the Board, but would instead introduce a specialized perspective that could complement the Board's existing competencies.
That said, the mere fact that a nominee possesses relevant industry experience does not in itself establish that her appointment would be in the best interests of the Company and its stockholders. The Special Committee should weigh Dr. Trevelyan's qualifications against the broader context of the activist campaign, including the question of whether her appointment would function primarily as a vehicle for advancing Pinnacle Harbor's specific strategic agenda from within the boardroom, rather than serving the interests of all stockholders.
C. Independence Analysis Under Nasdaq Listing Rules
Nasdaq Rule 5605(a)(2) defines an "independent director" as a person other than an executive officer or employee of the company or any other individual having a relationship which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The rule identifies several categorical disqualifications, including receipt of compensation from the company in excess of specified thresholds, employment by or affiliation with the company's independent auditor, and interlocking directorships.
With respect to Dr. Trevelyan, the central independence question is whether she has any material relationship with Pinnacle Harbor Capital Partners, LP, Pinnacle Harbor Capital Management, LLC, or Viktor S. Kessler (the managing member and chief investment officer of Pinnacle Harbor Capital Management, LLC) that would impair her ability to exercise independent judgment as a director of RGC.
The Nomination Notice does not clearly disclose the nature and extent of any financial arrangements between Dr. Trevelyan and Pinnacle Harbor. Specifically, the notice does not address whether Dr. Trevelyan has received or is entitled to receive any consulting fees, retainer payments, expense reimbursement, success fees, or other compensation from Pinnacle Harbor or its affiliates in connection with her candidacy for the RGC Board. It is common practice in activist campaigns for the nominating stockholder to enter into arrangements with its director nominees regarding compensation for the nominee's time and expenses during the campaign, and in some cases, ongoing compensation contingent upon election. Such arrangements, if they exist, could raise questions about the nominee's independence — not necessarily under the categorical disqualifications of Nasdaq Rule 5605(a)(2), but under the broader "material relationship" standard.
We also note that the Nomination Notice does not disclose any consulting engagements between Dr. Trevelyan and Pinnacle Harbor or its portfolio companies in her capacity as an independent gaming consultant. If such engagements exist, they would be material to the independence analysis.
With respect to any relationship between Dr. Trevelyan and RGC, its subsidiaries, or its current directors and officers, we have not identified any such relationship based on publicly available information and the disclosures in the Nomination Notice. Dr. Trevelyan does not appear to have been previously employed by RGC or any of its subsidiaries, and there is no indication of any familial or business relationship with any current member of the RGC Board or management team.
Preliminary Conclusion on Independence: Based on the information currently available, we are unable to reach a definitive conclusion regarding Dr. Trevelyan's independence under Nasdaq Rule 5605(a)(2). Additional disclosure from Pinnacle Harbor regarding the nature and extent of any financial or other arrangements between Pinnacle Harbor and Dr. Trevelyan is essential to completing this analysis. This gap in information is reflected in the deficiency analysis set forth in Section V.B below.
D. Gaming Regulatory Licensing Considerations
As a publicly traded company holding gaming licenses in Nevada and other jurisdictions, RGC is subject to comprehensive regulatory oversight. Under the Nevada Gaming Control Act (NRS Chapter 463) and the regulations of the Nevada Gaming Commission ("NGC"), all directors of a publicly traded corporation that holds a Nevada gaming license are required to undergo a suitability review and, in most cases, to apply for and receive an individual finding of suitability from the NGC. This requirement applies to any person who is elected or appointed as a director, and the failure of a director to be found suitable can result in regulatory consequences for the company, including potential conditions on or revocation of its gaming licenses.
Dr. Trevelyan's prior service as COO of Meridian Interactive Holdings, which was a Nevada-based interactive gaming company, suggests that she may have previously undergone gaming suitability review in Nevada or other jurisdictions. If Meridian Interactive held a Nevada gaming license (as appears likely given its Nevada domicile and its operation of real-money wagering products), it is probable that Dr. Trevelyan was subject to some level of regulatory scrutiny during her tenure. However, the Nomination Notice does not disclose whether Dr. Trevelyan currently holds or has previously held any individual gaming licenses, whether she has been found suitable by any gaming regulatory body, or whether she has ever had a gaming license application denied, suspended, or revoked.
This information gap is significant. If Dr. Trevelyan has previously been found suitable in Nevada, her path to regulatory clearance as a director of RGC would be considerably simplified. If she has not, the typical timeline for a suitability determination by the Nevada Gaming Control Board ("NGCB") and NGC is approximately six to twelve months from the date of application, depending on the complexity of the background investigation. Given that the 2023 Annual Meeting is anticipated to occur in May 2023, a new suitability application submitted after Dr. Trevelyan's election (or even prior to the election) would be unlikely to be completed before the meeting, and potentially for several months thereafter.
In addition to Nevada, RGC holds gaming licenses in multiple other states and jurisdictions. Each of these jurisdictions imposes its own director licensing or suitability requirements. While the specific jurisdictions are beyond the scope of this memorandum, we note that the cumulative regulatory burden across multiple jurisdictions is nontrivial and adds to the timeline and cost of onboarding a new director.
Risk Assessment: If Dr. Trevelyan were elected to the Board but were subsequently unable to achieve a finding of suitability in Nevada or any other jurisdiction where RGC holds gaming licenses, the Company could face regulatory action, including the imposition of conditions on its licenses, mandatory removal of the unsuitable director, or — in an extreme case — proceedings that could jeopardize the Company's gaming licenses. While we have not identified any specific disqualifying factors in Dr. Trevelyan's publicly available background, the absence of affirmative disclosure on this point in the Nomination Notice is a matter requiring further investigation.
IV. Analysis of Nominee #2: Hugh Desmond Grayson
A. Biographical and Professional Background
Hugh Desmond Grayson is 61 years of age. According to the Nomination Notice and publicly available information, Mr. Grayson's most recent significant executive role was as Chief Financial Officer of Atlas Leisure Group, Inc. ("Atlas Leisure"), a Delaware-incorporated company operating in the leisure and hospitality sector. Mr. Grayson served as CFO of Atlas Leisure from approximately 2010 to 2019. During this period, Atlas Leisure operated a portfolio of resort properties, hotel assets, and leisure entertainment venues across multiple states.
In his capacity as CFO of Atlas Leisure, Mr. Grayson was responsible for all financial reporting, treasury operations, capital markets activities, and mergers and acquisitions. Publicly available information indicates that during his tenure, Atlas Leisure completed several significant capital markets transactions, including a $450 million senior notes offering and a $275 million revolving credit facility refinancing. Mr. Grayson also oversaw the financial aspects of Atlas Leisure's acquisition of two boutique resort properties in 2016 and the subsequent divestiture of an underperforming hotel portfolio in 2018.
Mr. Grayson departed Atlas Leisure in 2019. The circumstances of his departure appear to have been related to a broader leadership transition following the retirement of Atlas Leisure's founder and CEO. Publicly available sources do not indicate any involuntary termination, regulatory action, or adverse circumstances surrounding his departure, although as with Dr. Trevelyan, we recommend that additional inquiry be made in connection with the enhanced background investigation.
Since departing Atlas Leisure, Mr. Grayson has served as a director of two private hospitality companies. The Nomination Notice identifies these companies by name but provides limited information regarding the nature of Mr. Grayson's roles, the scope of his board service, or the size and operations of each company. We note that the identity and business activities of these private companies are potentially significant to both the independence analysis and the gaming regulatory licensing analysis, as discussed below.
Regarding academic credentials and professional certifications, the Nomination Notice indicates that Mr. Grayson holds a bachelor's degree in accounting and a Master of Business Administration. The Nomination Notice also references professional certifications, though it does not specify whether Mr. Grayson holds an active Certified Public Accountant ("CPA") license, a Chartered Financial Analyst ("CFA") designation, or equivalent credentials. Confirmation of these credentials is relevant to the assessment of whether Mr. Grayson qualifies as an "audit committee financial expert" under SEC rules.
B. Qualifications Assessment
Mr. Grayson's qualifications are most directly relevant to RGC's financial oversight, capital allocation strategy, and capital markets activities. His experience as CFO of a sizable leisure and hospitality company, including oversight of debt financings, acquisitions, and divestitures, is pertinent to several of the strategic issues that Pinnacle Harbor has raised in its activist campaign, particularly the demand for a $300 million capital return to stockholders.
Pinnacle Harbor's November 30, 2022 open letter specifically criticized RGC's capital allocation decisions, arguing that the Company's decision to reinvest free cash flow in property-based resort expansion rather than returning capital to stockholders through dividends or share repurchases had resulted in "a persistent valuation discount relative to gaming industry peers." Mr. Grayson's CFO background and capital markets experience would presumably enable him to contribute substantively to boardroom discussions regarding these capital allocation questions.
With respect to audit committee service, Mr. Grayson's background as a CFO with responsibility for financial reporting, capital markets, and M&A activity suggests that he may qualify as an "audit committee financial expert" within the meaning of Item 407(d)(5) of Regulation S-K. To satisfy this designation, an individual must have, through education and experience as a public accountant, auditor, principal financial officer, comptroller, principal accounting officer, or a position involving the performance of similar functions, the following attributes: (i) an understanding of generally accepted accounting principles and financial statements; (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves; (iii) experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant's financial statements, or experience actively supervising one or more persons engaged in such activities; (iv) an understanding of internal controls and procedures for financial reporting; and (v) an understanding of audit committee functions.
Based on Mr. Grayson's described experience, he appears likely to satisfy these criteria, subject to confirmation of his specific educational background and professional certifications. If he does qualify, his addition to the Board could enhance the Audit Committee's bench of financial expertise, although the Audit Committee is currently well-served by Dr. Miriam Kaplan (Chair), who has extensive experience in corporate finance and accounting, Lorraine Fujikawa, who brings significant financial services industry experience, and Jim Delacroix, who has served on audit committees of other public companies. The current committee composition therefore does not present an acute need for additional financial expertise, though additional depth in this area is not without value.
Mr. Grayson's hospitality sector experience also intersects with RGC's core casino resort operations, which generated the substantial majority of the Company's $2.87 billion in fiscal year 2021 revenue. His familiarity with resort operations, hotel asset management, and leisure entertainment venues could provide relevant perspective on RGC's property-based operations, even if his experience does not include gaming-specific operations.
C. Independence Analysis Under Nasdaq Listing Rules
As with Dr. Trevelyan, the primary independence question with respect to Mr. Grayson under Nasdaq Rule 5605(a)(2) is whether he has any material relationship with Pinnacle Harbor Capital Partners, LP, Pinnacle Harbor Capital Management, LLC, Viktor S. Kessler, or Nadia Johar that would impair his ability to exercise independent judgment as a director of RGC.
The Nomination Notice does not fully address the nature and extent of any financial arrangements between Mr. Grayson and Pinnacle Harbor. Specifically, the notice does not clearly disclose whether Mr. Grayson has received or is entitled to receive any compensation, reimbursement, or indemnification from Pinnacle Harbor or its affiliates in connection with his candidacy or prospective service as a director of RGC.
An additional area of concern relates to Mr. Grayson's current directorships at two private hospitality companies. The Nomination Notice identifies these companies but does not clearly state whether either company is a portfolio company of Pinnacle Harbor or any of its affiliated investment vehicles. If one or both of the private hospitality companies in which Mr. Grayson serves as a director are owned, controlled, or managed by Pinnacle Harbor or its affiliates, this relationship could be material to the independence determination and could also create potential conflicts of interest in connection with any future transactions between RGC and those companies.
We have reviewed publicly available information regarding the two private hospitality companies identified in the Nomination Notice but have not been able to determine with certainty whether either is a Pinnacle Harbor portfolio company. This is an area where supplemental disclosure from Pinnacle Harbor is essential.
With respect to any direct relationship between Mr. Grayson and RGC, its subsidiaries, or its current directors and officers, we have not identified any such relationship based on available information. Mr. Grayson does not appear to have been previously employed by RGC or any of its subsidiaries, and there is no indication of any familial or business relationship with current Board members or management.
Preliminary Conclusion on Independence: As with Dr. Trevelyan, we are unable to reach a definitive conclusion regarding Mr. Grayson's independence under Nasdaq Rule 5605(a)(2) without additional information. The undisclosed nature of any compensation arrangements with Pinnacle Harbor and the uncertain relationship between Mr. Grayson's private company directorships and Pinnacle Harbor's investment portfolio are the primary areas requiring further disclosure.
D. Gaming Regulatory Licensing Considerations
Mr. Grayson's gaming regulatory licensing analysis presents a somewhat different profile than Dr. Trevelyan's. While Dr. Trevelyan has direct experience in the interactive gaming industry and may have previously undergone gaming suitability review, Mr. Grayson's career has been principally in the leisure and hospitality sector. The critical question is whether Atlas Leisure Group, Inc. operated any gaming-regulated facilities during Mr. Grayson's tenure, and if so, whether Mr. Grayson was individually licensed or found suitable by any gaming regulatory authority.
Based on publicly available information, Atlas Leisure's portfolio of resort properties, hotel assets, and leisure entertainment venues does not appear to have included any facilities with Class III gaming operations or other activities requiring state gaming licenses. However, some leisure and hospitality companies operate facilities with limited gaming offerings (such as slot routes, card rooms, or tribal gaming management contracts) that may subject their officers and directors to gaming regulatory oversight. We have been unable to confirm from publicly available sources whether Atlas Leisure held any gaming licenses during Mr. Grayson's tenure.
If Mr. Grayson has not previously undergone gaming suitability review in any jurisdiction, the timeline for a suitability determination by the NGCB and NGC would be approximately six to twelve months from the date of application. As noted in the analysis of Dr. Trevelyan, this timeline raises practical concerns relative to the anticipated May 2023 annual meeting date. If Mr. Grayson were elected to the Board but had not yet been found suitable, the Company would need to explore interim arrangements, such as provisional appointment pending completion of the suitability review, in consultation with the NGCB and NGC. Such arrangements are permissible in certain circumstances but are not guaranteed, and the NGCB retains discretion to impose conditions on the company's licenses pending the completion of the suitability process.
Risk Assessment: The risk profile for Mr. Grayson is somewhat elevated relative to Dr. Trevelyan on the gaming regulatory front, simply because of the greater likelihood that he has not previously undergone gaming suitability review. If elected, his suitability determination could extend well beyond the annual meeting date, creating a period of regulatory uncertainty. As with Dr. Trevelyan, we recommend that the Company's gaming regulatory counsel conduct a preliminary assessment of Mr. Grayson's likelihood of achieving a finding of suitability, and that the deficiency notice to Pinnacle Harbor's counsel request disclosure of Mr. Grayson's gaming regulatory history.
V. Nomination Notice Deficiency Analysis
A. Informational Requirements Under Article II, Section 2.11
Article II, Section 2.11 of the Bylaws imposes detailed informational requirements on any stockholder submitting a nomination notice. These requirements serve the dual purposes of enabling the Company and its stockholders to evaluate the qualifications and suitability of proposed nominees, and of ensuring transparency regarding the nominating stockholder's interests and arrangements. The following is a detailed enumeration of the informational requirements set forth in Section 2.11:
As to each nominee:
(1) The name, age, business address, and residence address of the nominee;
(2) The principal occupation or employment of the nominee;
(3) The class and number of shares of RGC stock beneficially owned by the nominee;
(4) Any other information relating to the nominee that would be required to be disclosed in solicitations of proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including without limitation any information that would be required to be included in a proxy statement filed pursuant to Regulation 14A;
(5) A written consent of the nominee to being named in the proxy statement as a nominee and to serving as a director of the Company if elected; and
(6) A completed and signed questionnaire, representation, and agreement as required by Section 2.11(c) of the Bylaws (the Company's standard director and officer questionnaire).
As to the nominating stockholder:
(1) The name and address of the nominating stockholder, as they appear on the Company's books, and the name and address of any beneficial owner on whose behalf the nomination is made;
(2) The class and number of shares of the Company's stock beneficially owned by the nominating stockholder and any such beneficial owner;
(3) A description of any agreement, arrangement, or understanding (including any derivative or short positions, profit interests, options, warrants, convertible securities, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into by, or on behalf of, the nominating stockholder or any such beneficial owner, the effect or intent of which is to mitigate loss, manage risk, or benefit from changes in the share price of the Company's stock, or to increase or decrease the voting power of such stockholder or beneficial owner with respect to shares of the Company's stock;
(4) A representation that the nominating stockholder is a holder of record of shares of stock of the Company entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice;
(5) A description of any agreements, arrangements, or understandings between the nominating stockholder and each nominee, including without limitation any agreements relating to compensation, reimbursement, indemnification, or other financial arrangements in connection with the nominee's candidacy or service as a director; and
(6) Any other information relating to the nominating stockholder that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies for the election of directors pursuant to Regulation 14A under the Exchange Act.
These requirements are broadly consistent with the informational demands imposed by advance-notice bylaws adopted by similarly situated public companies, and they reflect the heightened informational standards that Delaware courts have endorsed as reasonable conditions for stockholder nominations.
B. Identified Deficiencies in the January 9, 2023 Nomination Notice
We have identified the following deficiencies in the Nomination Notice submitted by Hargrove Sloane & Birch LLP on behalf of Pinnacle Harbor:
Deficiency 1: Incomplete Disclosure of Derivative Positions. Section 2.11(b)(iv) of the Bylaws (as referenced in Section 2.11's derivative disclosure provision, described in paragraph (3) of the nominating stockholder requirements above) requires the nominating stockholder to disclose all derivative positions, hedging transactions, synthetic equity positions, and similar arrangements with respect to shares of RGC stock. The Nomination Notice discloses Pinnacle Harbor's direct ownership of 7,119,600 shares of common stock but does not appear to provide a comprehensive description of any derivative positions, hedging transactions, or synthetic equity arrangements that may have been entered into by Pinnacle Harbor, its affiliates, or any of its managed funds. Given the sophistication of Pinnacle Harbor's investment strategy and the size of its position, it is plausible that Pinnacle Harbor or its affiliates hold derivative instruments (such as total return swaps, call options, or other equity-linked instruments) that augment or modify the economic exposure represented by its direct share ownership. The absence of a clear, affirmative statement either disclosing such positions or confirming that no such positions exist constitutes a deficiency under Section 2.11.
Deficiency 2: Lack of Disclosure Regarding Compensation Arrangements Between Pinnacle Harbor and Nominees. Section 2.11 requires disclosure of any agreements, arrangements, or understandings between the nominating stockholder and each nominee, including any relating to compensation, reimbursement, indemnification, or other financial arrangements. The Nomination Notice does not clearly address whether either Dr. Trevelyan or Mr. Grayson has entered into any such agreement, arrangement, or understanding with Pinnacle Harbor Capital Partners, LP, Pinnacle Harbor Capital Management, LLC, Viktor S. Kessler, Nadia Johar, or any other affiliate of Pinnacle Harbor. As noted in the independence analyses above (Sections III.C and IV.C), the existence or absence of such arrangements is material to the assessment of nominee independence and to the Company's and its stockholders' ability to evaluate potential conflicts of interest. The failure to address this topic — either affirmatively disclosing such arrangements or affirmatively stating that none exist — is a deficiency.
Deficiency 3: Incomplete Questionnaire Responses. In connection with the Nomination Notice, RGC's standard director and officer questionnaire (the "D&O Questionnaire") was provided to each nominee. The D&O Questionnaire solicits information across a range of topics, including legal proceedings (civil and criminal), regulatory history (including gaming regulatory matters), business relationships, family relationships with Company officers and directors, and other matters relevant to the nominee's suitability, independence, and regulatory compliance. Based on our review of the completed questionnaires returned with the Nomination Notice, certain fields pertaining to legal proceedings and regulatory history appear to have been left blank or are otherwise incomplete. Specifically, Dr. Trevelyan's questionnaire does not include a response to the question regarding pending or prior regulatory proceedings (Section IV.B of the D&O Questionnaire), and Mr. Grayson's questionnaire does not include a response to the question regarding prior involvement in any proceeding before a gaming regulatory authority (Section IV.C of the D&O Questionnaire). While it is possible that the blank fields reflect a negative response (i.e., no such proceedings or involvement), the D&O Questionnaire expressly instructs respondents to provide an affirmative "None" response if the answer to a question is negative, rather than leaving the field blank. The incomplete responses constitute a deficiency.
Deficiency 4: Nominee Consent Language. Section 2.11 requires that each nominee provide a written consent to being named in the proxy statement as a nominee and to serving as a director of the Company if elected. The form of consent included with the Nomination Notice for each nominee is a brief statement consenting to nomination and, if elected, to service as a director. However, Section 2.11(c) of the Bylaws specifies that the consent must include a representation and agreement by the nominee that, if elected, the nominee will comply with all applicable corporate governance guidelines, codes of conduct, and other policies of the Company. The consent statements provided by Dr. Trevelyan and Mr. Grayson do not include this specific representation and agreement. While the omission may be characterized as technical rather than substantive, the Bylaws explicitly require this language, and its absence is a deficiency.
Deficiency 5: Representation Regarding Beneficial Ownership. Section 2.11 requires the nominating stockholder to disclose the class and number of shares of the Company's stock beneficially owned by the nominating stockholder and any beneficial owner on whose behalf the nomination is made. The Nomination Notice states that Pinnacle Harbor beneficially owns "approximately 7.1 million shares" of RGC common stock. The amended Schedule 13D filed by Pinnacle Harbor on January 6, 2023, however, discloses beneficial ownership of 7,119,600 shares (6.8% of 104,700,000 shares outstanding). While the difference between "approximately 7.1 million shares" and 7,119,600 shares is not large in absolute terms, the Bylaws require specific disclosure of the class and number of shares — not an approximation. Moreover, the use of an approximate figure raises a question as to whether Pinnacle Harbor's beneficial ownership has changed since the amended 13D filing (which would trigger additional disclosure obligations under the Exchange Act) or whether the approximation is simply imprecise drafting. In either case, the representation in the Nomination Notice is not fully consistent with the amended Schedule 13D, and this inconsistency constitutes a deficiency.
C. Materiality and Curability of Deficiencies
The deficiencies identified above range from arguably technical (Deficiency 4, relating to the form of nominee consent language; Deficiency 5, relating to the approximate beneficial ownership figure) to potentially material (Deficiency 1, relating to derivative positions; Deficiency 2, relating to compensation arrangements; Deficiency 3, relating to incomplete questionnaire responses).
Under Delaware law, the enforceability of advance-notice bylaws and the standard for rejecting nominations based on procedural deficiencies have been addressed in a series of Chancery Court decisions. The general principle emerging from this case law is that advance-notice bylaws are valid and enforceable if they are adopted for a legitimate corporate purpose (such as ensuring the orderly conduct of stockholder meetings and providing the company and stockholders with adequate information about nominees) and if they are applied in a reasonable and even-handed manner. Delaware courts have cautioned, however, that a board's rejection of a stockholder nomination on purely technical or pretextual grounds — particularly where the deficiencies are minor and curable — may be subject to scrutiny under the enhanced standard of review applicable to defensive measures in the context of a proxy contest.
In AB Value Partners, LP v. Kreisler Manufacturing Corp. and related decisions, the Court of Chancery has indicated that boards should exercise caution in rejecting nominations for technical deficiencies, particularly where the stockholder has substantially complied with the bylaw's informational requirements and the deficiencies do not deprive the company or stockholders of material information. At the same time, courts have recognized that stockholders bear the responsibility for complying with advance-notice provisions and that a company is entitled to enforce its bylaws.
Applying these principles, we assess the curability and materiality of each deficiency as follows:
Given the mixed materiality of the deficiencies, and in light of the risk of litigation by Pinnacle Harbor (which is represented by sophisticated activist counsel at Hargrove Sloane & Birch LLP), we recommend that RGC issue a formal deficiency notice identifying each of the above deficiencies and providing Pinnacle Harbor a reasonable opportunity to cure — rather than summarily rejecting the Nomination Notice. This approach preserves the Company's rights under the Bylaws, demonstrates good faith and even-handedness, and reduces the risk that a Delaware court would characterize the Company's response as an improper defensive measure.
The question of cure period is significant. We recommend a cure period of ten (10) business days from the date of the deficiency notice, which is sufficient to permit supplemental disclosure without unduly extending the timeline. If the deficiency notice is dispatched promptly, the cure period would expire well before the anticipated May 2023 annual meeting date, providing adequate time for the Company to evaluate the supplemental disclosures and prepare for the contested election.
Strategic Considerations: We note that the Special Committee is scheduled to consider the authorization of settlement discussions with Pinnacle Harbor at its meeting on January 20, 2023. The existence and resolution of the deficiency issues may inform the settlement dynamic. On one hand, the deficiencies provide the Company with a defensible basis for pressing Pinnacle Harbor for additional disclosure and, potentially, for challenging the Nomination Notice if the deficiencies are not cured. On the other hand, an overly aggressive posture on deficiency issues could escalate the conflict and undermine the prospects for a negotiated resolution. We recommend that the deficiency notice be drafted in measured terms — firm in identifying the specific informational gaps and the Company's rights under the Bylaws, but constructive in tone and designed to elicit compliance rather than provoke litigation.
D. Comparison with SEC Disclosure Requirements
In addition to the bylaw informational requirements, we have cross-referenced the disclosures in the Nomination Notice with the information required under Schedule 14A (proxy statement) and Schedule 13D under the Exchange Act.
With respect to Schedule 14A, if Pinnacle Harbor proceeds with its proxy contest, it will be required to file a definitive proxy statement with the SEC disclosing, among other things, the information specified in Items 5 and 7 of Schedule 14A, including biographical information about the nominees, the nominees' beneficial ownership of RGC stock, any arrangements between the nominating stockholder and the nominees, and any interest of the nominees in transactions with the Company. The informational requirements of the Bylaws' advance-notice provisions substantially overlap with — but are not identical to — the Schedule 14A disclosure requirements. Accordingly, the deficiencies identified in the Nomination Notice may also manifest as disclosure gaps in Pinnacle Harbor's eventual proxy statement, which could be subject to SEC comment or challenge.
With respect to Schedule 13D, we have reviewed both Pinnacle Harbor's preliminary Schedule 13D filed November 10, 2022, and its amended Schedule 13D filed January 6, 2023. The Nomination Notice's ownership disclosures are broadly consistent with the Schedule 13D filings, with the exception of the approximate beneficial ownership figure discussed in Deficiency 5 above. We have not identified any other material inconsistency between the Nomination Notice and the Schedule 13D filings at this time, although we recommend that this cross-referencing exercise be repeated if Pinnacle Harbor files further amendments to its Schedule 13D.
VI. Nasdaq Corporate Governance and Listing Requirements
RGC's common stock is listed on the Nasdaq Global Select Market, and the Company is subject to the corporate governance requirements set forth in the Nasdaq Listing Rules, including Rule 5605 (Board of Directors and Committees).
Majority Independence Requirement. Nasdaq Rule 5605(b)(1) requires that a majority of the board of directors of a listed company be composed of independent directors. RGC's current Board consists of nine directors, seven of whom are independent and two of whom are members of management (CEO Gerald R. Whitmore and CFO Raymond Choi). If the Board were to be expanded to eleven members to accommodate the addition of Dr. Trevelyan and Mr. Grayson, the Company would need at least six independent directors to maintain a majority-independent board (six out of eleven). If both nominees are determined to be independent, the Board would have nine independent directors out of eleven, well in excess of the majority requirement. If, however, one or both nominees are determined to be non-independent, the analysis would need to account for the impact on the majority-independence ratio.
Alternatively, if Pinnacle Harbor's nominees are proposed to replace two existing directors (rather than expanding the Board), the composition analysis would depend on which directors are replaced. If two independent directors are replaced by two non-independent nominees, the Board would have five independent directors out of nine — still a majority, but with a reduced margin. If one independent director is replaced by a non-independent nominee, the Board would have six independent directors out of nine.
In all plausible scenarios, the majority-independence requirement would continue to be satisfied, provided that no more than two of the currently independent directors are replaced by non-independent nominees. Nevertheless, the reduction in the proportion of independent directors could raise governance concerns with institutional stockholders and proxy advisory firms.
Committee Composition Considerations. The Bylaws and Nasdaq rules impose specific composition requirements on the Board's principal standing committees:
• Audit Committee (currently: Dr. Miriam Kaplan (Chair), Lorraine Fujikawa, Jim Delacroix): Nasdaq Rule 5605(c) requires that the Audit Committee consist of at least three independent directors, each of whom must be financially literate, and at least one of whom must have accounting or related financial management expertise. If Mr. Grayson is determined to be independent and qualifies as an "audit committee financial expert," he could potentially serve on the Audit Committee, providing additional depth of financial expertise. However, the current Audit Committee composition is compliant, and there is no existing vacancy.
• Compensation Committee and Nominating and Corporate Governance Committee: Nasdaq Rules 5605(d) and (e) similarly require that these committees be composed entirely of independent directors. If either or both nominees are determined to lack independence, they would be ineligible for service on these committees.
Contested Election Notification. Nasdaq Rule 5250(b)(3) requires listed companies to provide prompt notification to Nasdaq of certain corporate events, including contested director elections. RGC should ensure that it provides timely notification to Nasdaq of the proxy contest, in coordination with its listing counsel.
A copy of the relevant excerpts of Nasdaq Rule 5605 is attached as Appendix D.
VII. Gaming Regulatory Licensing — Comprehensive Assessment
A. Applicable Regulatory Framework
As a publicly traded company holding gaming licenses in Nevada and other jurisdictions, RGC operates within one of the most heavily regulated industries in the United States. The regulatory framework applicable to the Company's directors is summarized below.
Nevada Gaming Control Act (NRS Chapter 463). Nevada law requires that all persons who serve as directors or officers of a publicly traded company holding a Nevada gaming license apply for and receive a finding of suitability from the Nevada Gaming Commission. The suitability determination involves a comprehensive background investigation conducted by the Nevada Gaming Control Board ("NGCB"), covering the applicant's personal history, financial condition, criminal record (if any), business associations, reputation, and any other factors deemed relevant to the applicant's suitability to be associated with a gaming licensee. The NGCB investigation typically takes six to twelve months, depending on the complexity of the applicant's background, and involves substantial costs (borne by the applicant or the licensee company).
Upon completion of the investigation, the NGCB makes a recommendation to the NGC regarding the applicant's suitability. The NGC then holds a public hearing and issues a determination. If the NGC finds the applicant suitable, the applicant may serve as a director. If the NGC finds the applicant unsuitable, or if the applicant fails to apply for a suitability determination within a specified time frame, the gaming licensee is required to sever its relationship with the unsuitable or non-compliant individual. Failure to do so can result in disciplinary action against the licensee, including fines, conditions on its licenses, or — in extreme cases — revocation of its gaming licenses.
Other Jurisdictions. RGC holds gaming licenses in multiple other states and jurisdictions, each of which imposes its own director licensing or suitability requirements. While the specific requirements vary by jurisdiction, the general framework is consistent: directors of licensed gaming companies are subject to background investigations and must demonstrate their suitability to be associated with a gaming licensee. The cumulative regulatory burden across multiple jurisdictions is significant and must be considered in evaluating the practicability of adding new directors to the Board.
An overview of the Nevada Gaming Control Act suitability requirements for directors of publicly traded gaming companies is attached as Appendix E.
B. Application to Dr. Trevelyan
Dr. Trevelyan's prior service as COO of Meridian Interactive Holdings, a Nevada-based interactive gaming company, provides a reasonable basis to believe that she may have previously undergone gaming suitability review in Nevada. If Meridian Interactive held a Nevada gaming license — as is likely, given its Nevada domicile and its operation of real-money wagering products in regulated markets — Dr. Trevelyan would have been required to apply for a finding of suitability in connection with her appointment as an officer of that company.
If Dr. Trevelyan has been previously found suitable by the NGC, the process for extending or transferring her suitability finding to a new association (as a director of RGC) would be significantly streamlined, although a supplemental background investigation would likely still be required. If she has not been previously found suitable — for example, if Meridian Interactive operated exclusively under licenses in other states that did not require individual officer licensing — the full suitability process would apply, with an anticipated timeline of six to twelve months.
Based on currently available public information, we have not identified any risk factors that would suggest Dr. Trevelyan would be unlikely to achieve a finding of suitability. However, we emphasize that the NGCB investigation is comprehensive and may reveal information not available from public sources. The deficiency in the D&O Questionnaire response regarding prior regulatory proceedings (Deficiency 3) is potentially significant in this context and underscores the need for supplemental disclosure.
C. Application to Mr. Grayson
As discussed in Section IV.D above, Mr. Grayson's career has been principally in the non-gaming leisure and hospitality sector. Based on available information, Atlas Leisure Group does not appear to have operated gaming-regulated facilities during Mr. Grayson's tenure as CFO, and it is therefore uncertain whether Mr. Grayson has previously undergone gaming suitability review in any jurisdiction.
If Mr. Grayson has not been previously licensed or found suitable, the full NGCB/NGC suitability process would be required. Given the anticipated six-to-twelve-month timeline, a suit