PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
MEMORANDUM
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I. Executive Summary
The purpose of this memorandum is to advise the Special Committee of the Board of Directors of Redstone Gaming Corp. ("RGC" or the "Company") on the relative merits of two principal courses of action available to the Committee and the Board in response to the ongoing activist campaign by Pinnacle Harbor Capital Partners, LP ("Pinnacle Harbor" or the "Activist"): (a) pursuing direct engagement and negotiated settlement with Pinnacle Harbor, or (b) proceeding to a contested proxy election at the Company's 2023 Annual Meeting of Stockholders (the "2023 Annual Meeting"), currently anticipated to take place in May 2023.
After careful analysis of the relevant legal, strategic, financial, and governance considerations, Calderwood & Harkness LLP ("Calderwood & Harkness" or the "Firm") recommends that the Special Committee authorize direct settlement discussions with Pinnacle Harbor, subject to defined parameters established by the Committee and with ongoing Committee oversight of all substantive negotiations. We believe that this course of action best serves the interests of RGC and its stockholders while preserving the Committee's ability to revert to a full contest defense if settlement discussions prove unproductive.
The Pinnacle Harbor activist campaign has been underway since the receipt of a private demand letter on October 28, 2022, addressed to Board Chair Diane K. Sheridan. The campaign escalated with the filing of a preliminary Schedule 13D with the Securities and Exchange Commission (the "SEC") on November 10, 2022, followed by a public open letter on November 30, 2022, and a formal notice of intent to nominate directors on December 8, 2022. On January 6, 2023, Pinnacle Harbor filed an amended Schedule 13D expressly referencing its intention to pursue a proxy contest. On January 9, 2023, Pinnacle Harbor delivered its formal nomination notice to the Company, which was timely under Article II, Section 2.11 of the RGC Amended and Restated Bylaws (the "Bylaws"), as the advance-notice window did not close until January 11, 2023.
The Special Committee was formed on November 14, 2022, by resolution of the full Board of Directors, with authority to oversee the Board's response to the Pinnacle Harbor campaign and to engage legal, financial, and other advisors as appropriate. Calderwood & Harkness was retained the following day, and the Firm has since delivered a series of memoranda and analyses addressing the legal and strategic dimensions of the campaign, including the Initial Situational Assessment Memorandum (November 18, 2022), the Bylaw/Charter Defensive Review Memorandum (December 5, 2022), the Advance-Notice Compliance Analysis (December 14, 2022), the Limited-Duration Stockholder Rights Plan Analysis (December 19, 2022), and the Nominee Qualification and Deficiency Review (January 13, 2023).
This memorandum is intended to support the Special Committee's anticipated deliberations and action at its meeting scheduled for January 20, 2023.
II. Background and Current Posture
A. Pinnacle Harbor's Position and Demands
Pinnacle Harbor Capital Partners, LP is a Delaware limited partnership with its principal offices located at 590 Madison Avenue, 34th Floor, New York, New York 10022. The general partner of Pinnacle Harbor is Pinnacle Harbor Capital Management, LLC, also a Delaware limited liability company. Pinnacle Harbor manages assets under management ("AUM") of approximately $4.2 billion and pursues an event-driven and activist equity strategy focused primarily on mid-cap companies in the gaming, hospitality, and consumer-discretionary sectors.
The key personnel directing the Pinnacle Harbor campaign are Viktor S. Kessler, age 47, who serves as Managing Partner and Chief Investment Officer, and Nadia Johar, age 39, who serves as Head of Activism and Portfolio Manager. Both Kessler and Johar have substantial experience in activist campaigns targeting companies in the gaming and hospitality sectors and have led successful and unsuccessful campaigns at other publicly traded companies in recent years. Kessler, in particular, is well-known in the activist investing community and has been profiled in major financial publications for his approach to governance-focused activist campaigns.
Pinnacle Harbor has retained the following advisors in connection with its campaign against RGC:
• Legal Counsel: Hargrove Sloane & Birch LLP, 1585 Broadway, 40th Floor, New York, New York 10036. The lead partner on the engagement is Jonathan "Jon" Birch III, with Elise Marchetti serving as the associate on the team. Hargrove Sloane & Birch is a well-regarded firm with a substantial shareholder activism practice.
• Proxy Solicitor: Garrison Proxy Advisors, LLC, with Alicia Trent, Managing Director, leading the engagement. Garrison is a full-service proxy solicitation firm with experience in contested elections in the gaming sector.
As of its most recent amended Schedule 13D filing on January 6, 2023, Pinnacle Harbor beneficially owns 7,119,600 shares of RGC common stock, representing approximately 6.8% of the Company's 104,700,000 shares of common stock outstanding. The shares were accumulated between June 2022 and November 2022, at a weighted-average purchase price of approximately $26.42 per share, reflecting a total cost basis of approximately $188.1 million.
Based on available market data, the mark-to-market value of Pinnacle Harbor's position as of the opening of the Calderwood & Harkness engagement on November 15, 2022, when RGC common stock closed at $30.00 per share, was approximately $213.6 million, reflecting an unrealized gain of approximately $25.5 million, or approximately 13.5%. As of the date of the amended Schedule 13D filing on January 6, 2023, RGC common stock closed at $32.90 per share, indicating that Pinnacle Harbor's unrealized gains have increased materially since the accumulation period. This price appreciation, while benefiting Pinnacle Harbor, is a factor the Company can point to in any discussions regarding the urgency of the Activist's demands, as discussed further in Section III below.
B. Summary of Demands
Pinnacle Harbor's demands, as articulated in its October 28, 2022 private demand letter, its November 30, 2022 public open letter, and its December 8, 2022 formal notice of intent to nominate directors, may be summarized as follows:
1. Board Representation. Pinnacle Harbor demands the appointment of two Pinnacle Harbor-nominated candidates to the RGC Board of Directors (the "Board"):
• Dr. Sandra Trevelyan, age 55, the former Chief Operating Officer of Meridian Interactive Holdings, Inc., a mid-cap interactive gaming company that was acquired in 2020. Dr. Trevelyan has a background in interactive gaming operations, digital platform development, and strategic planning.
• Hugh Desmond Grayson, age 61, the former Chief Financial Officer of Atlas Leisure Group, Inc., a hospitality and leisure company. Mr. Grayson has a background in corporate finance, capital allocation, and financial restructuring.
2. Strategic Review of the Interactive Gaming Division. Pinnacle Harbor demands a formal strategic review of RGC's interactive gaming division (the "Interactive Gaming Division"), which generated revenue of approximately $412 million in fiscal year 2021, representing approximately 14.4% of RGC's total revenue of $2.87 billion. Pinnacle Harbor has publicly stated that it believes the Interactive Gaming Division is undervalued within the Company's current portfolio and that a sale, spin-off, or other strategic transaction could unlock significant stockholder value.
3. Return of Capital. Pinnacle Harbor demands the return of $300 million to shareholders through either a special dividend or an accelerated share repurchase program. Pinnacle Harbor has argued that the Company's balance sheet is over-capitalized and that the current capital allocation strategy does not optimize returns for stockholders.
C. Procedural Status
The following is a summary of the key events and milestones in the Pinnacle Harbor campaign and the Company's response to date. A more detailed timeline is set forth in Exhibit A, attached hereto.
• October 28, 2022: Pinnacle Harbor delivered a private demand letter to Board Chair Diane K. Sheridan, outlining its concerns regarding the Company's governance, strategic direction, and capital allocation, and requesting a meeting with the Board to discuss the demands summarized in Section II.B above.
• November 10, 2022: Pinnacle Harbor filed a preliminary Schedule 13D with the SEC, disclosing its 6.8% ownership stake and its intention to engage with the Board regarding governance and strategic matters. The filing was widely reported in financial media and brought public attention to the campaign.
• November 14, 2022: The RGC Board held an emergency meeting at which it resolved to form a Special Committee, consisting of independent directors James Delacroix (Chair), Carmen Vasquez, and Randall Morse, with authority to oversee the Board's response to the Pinnacle Harbor campaign and to engage such legal, financial, and other advisors as the Committee deemed appropriate. At the same meeting, the Board authorized the Special Committee to retain Calderwood & Harkness LLP as outside legal counsel.
• November 15, 2022: The Calderwood & Harkness engagement formally opened. The Firm immediately began a comprehensive review of the Company's governance documents, shareholder base, and the legal and strategic landscape for the campaign.
• November 18, 2022: Calderwood & Harkness delivered its Initial Situational Assessment Memorandum to the Special Committee, providing an overview of the Activist's position, the applicable legal framework, and preliminary strategic recommendations.
• November 30, 2022: Pinnacle Harbor published a public open letter addressed to the Board and all RGC stockholders, reiterating its demands and escalating its rhetoric. The letter demanded the immediate appointment of Dr. Trevelyan and Mr. Grayson to the Board and warned that Pinnacle Harbor would pursue a proxy contest at the 2023 Annual Meeting if its demands were not met.
• December 5, 2022: Calderwood & Harkness delivered the Bylaw/Charter Defensive Review Memorandum to the Special Committee, analyzing the Company's existing governance documents for defensive provisions and identifying potential areas for amendment.
• December 8, 2022: Hargrove Sloane & Birch LLP, on behalf of Pinnacle Harbor, delivered a formal notice of intent to nominate directors at the 2023 Annual Meeting.
• December 12, 2022: The advance-notice window for stockholder nominations opened, being 150 days before the anniversary of the Company's 2022 Annual Meeting of Stockholders held on May 11, 2022, as specified in Article II, Section 2.11 of the Bylaws.
• December 14, 2022: Calderwood & Harkness delivered its Advance-Notice Compliance Analysis to the Special Committee, confirming the procedural requirements under the Bylaws and identifying potential deficiency arguments.
• December 19, 2022: Calderwood & Harkness delivered its Limited-Duration Stockholder Rights Plan (Poison Pill) Analysis to the Special Committee, examining the feasibility and advisability of adopting a rights plan as a defensive measure. After careful deliberation, the Board declined to adopt a rights plan, concluding that such a measure would be premature and could be perceived negatively by institutional stockholders and proxy advisory firms.
• January 6, 2023: Pinnacle Harbor filed an amended Schedule 13D with the SEC, expressly referencing its intention to pursue a proxy contest at the 2023 Annual Meeting if the Board did not accede to its demands.
• January 9, 2023: Pinnacle Harbor delivered its formal nomination notice to the Company, nominating Dr. Sandra Trevelyan and Hugh Desmond Grayson for election to the Board at the 2023 Annual Meeting. The nomination notice was received two days before the close of the advance-notice window and was therefore timely under Article II, Section 2.11 of the Bylaws.
• January 11, 2023: The advance-notice window for stockholder nominations closed.
• January 13, 2023: Calderwood & Harkness delivered its Nominee Qualification and Deficiency Review to the Special Committee, analyzing the nomination notice for compliance with the Bylaws' informational and procedural requirements and identifying certain deficiencies, as discussed further in Section III.D below.
D. RGC Advisor Team
The Company has assembled a comprehensive team of advisors to support the Special Committee and the Board in responding to the Pinnacle Harbor campaign:
• Outside Legal Counsel: Calderwood & Harkness LLP. Engagement Partner: Douglas Fairchild. Billing Partner: Angela Fontaine. Lead Associate: Claire Dempsey. Additional Team Member: Marcus Leung. The Firm's offices relevant to this engagement are located at 3960 Howard Hughes Parkway, Suite 1400, Las Vegas, Nevada 89169, and 1200 Market Street, Suite 3100, Wilmington, Delaware 19801. Calderwood & Harkness's Wilmington office provides Delaware corporate law expertise, which is critical given that RGC is incorporated in Delaware.
• Financial Advisor: Calloway Pinnacle Trust Bank Managing Director: Thomas V. Ashford, Activism & Corporate Defense Practice. Offices at 200 Park Avenue, 28th Floor, New York, New York 10166. Calloway Wainwright has been engaged to provide financial advisory services in connection with the Company's response to the activist campaign, including shareholder base analysis, vote projection, cost-benefit analysis, and strategic advisory services.
• Proxy Solicitor: Whitfield Morrow Partners, LLC. Senior Vice President: Denise Cavanaugh. Offices at 501 Madison Avenue, 14th Floor, New York, New York 10022. Whitfield Morrow has been engaged to provide proxy solicitation services, including shareholder identification, engagement support, and, if necessary, full-scale proxy solicitation in a contested election.
• Investor Relations Advisor: Harlan Ridge Communications, LLC. Partner: Philip Navarette. Offices at 712 Fifth Avenue, Suite 900, New York, New York 10019. Harlan Ridge has been engaged to provide investor relations and communications advisory services, including messaging strategy, media relations, and stakeholder communications.
III. Analysis: Contested Proxy Election Scenario
A. Probability Assessment — Outcome of a Contested Election
In assessing the likely outcome of a contested proxy election at the 2023 Annual Meeting, Calderwood & Harkness has considered the following factors, in consultation with Calloway Pinnacle Trust Bank and Whitfield Morrow Partners:
Board Composition and Governance Profile. The RGC Board currently consists of nine directors, of whom seven are independent under applicable stock exchange listing standards and SEC rules. The two management directors are Gerald R. Whitmore, the Company's Chief Executive Officer, and Raymond Choi, the Company's Chief Financial Officer. Board Chair Diane K. Sheridan is independent and has served on the Board since 2016. The Company maintains separate Chair and CEO positions, has active and well-functioning Audit, Compensation, and Nominating & Corporate Governance committees, and has generally received favorable governance ratings from the major proxy advisory firms. This governance profile is a meaningful asset in any contested election, as it makes it more difficult for the Activist to argue that the Board is insufficiently independent or lacks effective oversight.
Nature of the Short-Slate Campaign. Pinnacle Harbor is seeking only two of nine Board seats — a "short slate" campaign. This is a critical consideration. Empirical data from recent proxy seasons indicates that activists pursuing short-slate campaigns have a materially higher success rate than those seeking majority control of a board. The reasons for this are intuitive: stockholders are generally more willing to add one or two new voices to a board than to replace a majority of directors, particularly where the board otherwise has a strong governance profile. Short-slate campaigns are perceived as less disruptive and more collaborative, which makes them more palatable to institutional stockholders and proxy advisory firms. This dynamic weighs against RGC's ability to prevail in a contested election.
Pinnacle Harbor's Sophistication and Resources. Pinnacle Harbor is a sophisticated, well-funded activist investor with approximately $4.2 billion in AUM and a demonstrated track record in the gaming and consumer-discretionary sectors. The firm is led by experienced principals (Kessler and Johar) and is advised by capable counsel and proxy solicitation professionals. Pinnacle Harbor has the financial resources and organizational capability to execute a sustained and professional proxy campaign. This is not a situation in which the Company is facing an underfunded or inexperienced activist; the Committee should assume that Pinnacle Harbor will prosecute its campaign competently and aggressively.
Proxy Advisory Firm Considerations. The two principal proxy advisory firms — Centurion Governance Services, Inc. and Hartley Shareholder Advisory Group, LLC — have not yet issued recommendations with respect to the 2023 Annual Meeting, as the Company has not yet filed its definitive proxy statement and the contest has not formally commenced. The timing of any proxy advisory firm recommendation would depend on the filing timeline and the firms' internal review processes. However, based on our review of recent proxy advisory firm reports in analogous situations involving activist short-slate campaigns in the gaming sector, we note the following:
Proxy advisory firm support for activist short-slate nominees has been somewhat favorable in recent proxy seasons, particularly where the activist articulates a clear value-creation thesis and identifies specific governance concerns, such as the need for board refreshment, strategic review of underperforming business segments, or enhanced capital return. Pinnacle Harbor's demands — board refreshment, a strategic review of the Interactive Gaming Division, and a capital return program — align with themes that proxy advisory firms have historically found persuasive. While the Company's strong governance profile and recent stock price performance provide meaningful counterarguments, the outcome of any proxy advisory firm recommendation is uncertain and could go either way.
Overall Probability Assessment. Based on the totality of these factors, Calderwood & Harkness and Calloway Wainwright assess the probability of Pinnacle Harbor electing at least one of its nominees in a contested election as moderate to moderately high, in the range of approximately 40% to 55%. The probability of Pinnacle Harbor electing both nominees is lower but not negligible, estimated at approximately 20% to 30%. These estimates are necessarily imprecise and are subject to significant variability depending on the proxy advisory firms' recommendations, the effectiveness of the respective campaigns, market conditions, and other factors that cannot be predicted with certainty.
B. Shareholder Base Analysis
A detailed analysis of the Company's shareholder base is critical to any assessment of the likely outcome of a contested election. Whitfield Morrow Partners has conducted a comprehensive shareholder identification and analysis, the results of which are summarized below for the key institutional holders. A more complete shareholder ownership summary is set forth in Exhibit B, attached hereto.
Ridgeway Asset Management, LP. Ridgeway is the Company's largest institutional stockholder (excluding Pinnacle Harbor), holding 8,585,400 shares, or approximately 8.2% of shares outstanding. Ridgeway is a long-only value fund based in Boston; the principal contact is Franklin Osei, Portfolio Manager. Ridgeway has historically been supportive of management at RGC and at other portfolio companies. However, Whitfield Morrow's intelligence indicates that Ridgeway has voted with activists in analogous situations at other companies where the fund perceived a genuine need for board refreshment and where the activist presented a credible value-creation thesis. Ridgeway is not a guaranteed management vote and would require active and early engagement by the Company's IR team and proxy solicitor. We understand that Denise Cavanaugh at Whitfield Morrow has already begun outreach to Franklin Osei to assess Ridgeway's preliminary disposition.
Stillwater Capital Advisors, LLC. Stillwater holds 5,653,800 shares, or approximately 5.4% of shares outstanding. Stillwater is a growth-oriented investment manager based in Chicago; the principal governance contact is Margaret "Meg" Liu, Head of Governance. Stillwater is known for its governance-focused approach to voting decisions and has a well-established policy of relying heavily on proxy advisory firm recommendations, particularly recommendations from Centurion Governance Services. Stillwater should be considered a swing vote that is likely to follow the prevailing proxy advisory firm recommendation. If Centurion or Hartley recommends in favor of Pinnacle Harbor's nominees, Stillwater's shares would likely be voted in favor of the Activist's slate. If the proxy advisory firms recommend in favor of the management slate, Stillwater is expected to support management.
Canfield Municipal Employees' Retirement System. Canfield MERS holds 2,198,700 shares, or approximately 2.1% of shares outstanding. Canfield MERS is a public pension fund based in Canfield, Ohio; the principal contact is David Proulx, Chief Investment Officer. As a public pension fund, Canfield MERS is subject to fiduciary guidelines that generally lead it to follow proxy advisory firm recommendations. While its position is relatively modest, its voting behavior is indicative of the broader institutional pension fund segment of the Company's shareholder base, which collectively holds a meaningful percentage of outstanding shares.
Combined Holdings and Voting Dynamics. The combined holdings of the top three institutional stockholders (excluding Pinnacle Harbor) represent approximately 15.7% of outstanding shares. Pinnacle Harbor's own 6.8% stake provides a significant base for the Activist. If Pinnacle Harbor were to secure the support of even a portion of the institutional shareholder base — whether through direct engagement or through favorable proxy advisory firm recommendations — it could assemble a meaningful voting bloc sufficient to elect one or both of its nominees.
Stock Price Trajectory. The Company's stock price has followed an upward trajectory since the period during which Pinnacle Harbor accumulated its position. RGC common stock traded at approximately $24.18 on June 1, 2022, rose to approximately $27.55 on September 30, 2022, and has continued to appreciate through the campaign period, reaching approximately $32.90 as of the January 6, 2023 amended Schedule 13D filing date. This price appreciation somewhat undermines the urgency of Pinnacle Harbor's thesis that the Company's current strategy and governance are failing to deliver value for stockholders. However, the share price performance does not eliminate the Activist's argument entirely, as Pinnacle Harbor may contend that the appreciation is partly attributable to the market's anticipation of activist-driven changes and that additional value can be realized through the strategic and governance actions it has proposed. A chart of the Company's stock price performance during the relevant period is attached hereto as Exhibit C.
C. Costs and Distractions of a Contested Election
A contested proxy election would impose significant direct costs, management distraction, and reputational risks on the Company.
Estimated Direct Costs. Based on Calloway Wainwright's analysis of comparable contested elections in the gaming and mid-cap sectors, the estimated direct costs to RGC of a full proxy contest are in the range of $5 million to $8 million. This estimate is inclusive of financial advisor fees, proxy solicitation costs (including the engagement of Whitfield Morrow Partners for full-scale solicitation), printing and mailing costs for proxy materials, legal fees (including fees for Calderwood & Harkness, which are currently estimated at approximately $1.38 million through the present phase and would increase significantly if the engagement extends through a full proxy contest), investor relations advisory fees, and other related expenses. A comparison of the estimated costs of a contested election versus a settlement is set forth in Exhibit D, attached hereto.
Management Distraction. A contested proxy election would require CEO Gerald R. Whitmore, CFO Raymond Choi, General Counsel Patricia Nakamura, and multiple Board members to devote substantial time to shareholder outreach, campaign messaging, preparation of proxy materials, review and response to the Activist's proxy filings, and ongoing coordination with advisors. This diversion of management attention comes at a particularly inopportune time, as the Company is in the midst of executing its growth strategy for the Interactive Gaming Division and preparing for the upcoming fiscal year. The time demands of a contested election should not be underestimated; based on experience in comparable situations, senior management can expect to devote a significant portion of their working time to the contest during the weeks leading up to the annual meeting.
Reputational Risk. A public proxy fight could damage the Company's reputation with gaming regulators, key state gaming commissions, and commercial partners. The gaming industry is heavily regulated, and gaming regulators place significant emphasis on the character, reputation, and stability of the individuals and entities associated with licensed gaming operations. A contested and public dispute over the composition of the Board could raise concerns among regulators about the stability and effectiveness of the Company's governance, potentially complicating pending or future licensing matters. Additionally, a public proxy fight could create uncertainty among commercial partners, suppliers, and customers, potentially affecting business relationships and negotiations.
Gaming Regulatory Complication. Dr. Trevelyan and Mr. Grayson, if elected to the Board through a contested election, would need to undergo gaming regulatory suitability investigations in multiple jurisdictions in which RGC holds gaming licenses. These investigations can be lengthy (often lasting several months), intrusive, and expensive. If either nominee were found unsuitable or if the investigation revealed issues of concern, the Company could face the disruptive situation of having a sitting director who is unable to obtain or maintain gaming regulatory clearance. This risk is more difficult to manage in the context of a contested election, where the Company would have no ability to screen the Activist's nominees through the Company's own governance and regulatory review processes.
D. Potential Deficiencies in Pinnacle Harbor's Nomination Notice
As set forth in the Nominee Qualification and Deficiency Review delivered to the Special Committee on January 13, 2023, Calderwood & Harkness's analysis of the nomination notice received on January 9, 2023 identified certain informational deficiencies in the notice. Specifically, the notice failed to include certain disclosures required by Article II, Section 2.11(b)(iii) of the Bylaws regarding arrangements or understandings between Pinnacle Harbor and its nominees with respect to compensation, indemnification, and reimbursement. Additionally, certain biographical disclosures regarding Mr. Grayson's prior board service appeared to be incomplete.
However, these deficiencies are of a technical nature and are likely curable by Pinnacle Harbor upon notice from the Company. Delaware courts have generally been reluctant to disenfranchise stockholders based on technical bylaw notice deficiencies where the activist has made a good-faith effort to comply and the deficiencies are readily curable. Reliance on these technical deficiencies as a primary defense strategy carries significant litigation risk, as Pinnacle Harbor could be expected to seek relief in the Delaware Court of Chancery and would likely argue that the Company is improperly using its advance-notice bylaw provisions to deny stockholders their franchise rights. A challenge of this nature could result in adverse publicity and could be viewed negatively by proxy advisory firms, institutional stockholders, and the Court itself.
Accordingly, Calderwood & Harkness does not recommend reliance on technical notice deficiencies as a primary defense strategy. However, the existence of these deficiencies should be preserved as a potential leverage point in settlement negotiations, as they provide some basis for the Company to assert that the nomination process was not without procedural issues.
IV. Analysis: Settlement / Direct Engagement Scenario
A. Strategic Rationale for Settlement
Calderwood & Harkness believes that there are compelling strategic reasons for the Special Committee to authorize direct engagement and settlement discussions with Pinnacle Harbor, subject to the parameters set forth in Section V below. The principal benefits of a negotiated settlement include the following:
Avoidance of Costs, Distraction, and Uncertainty. As detailed in Section III.C above, a contested proxy election would impose substantial direct costs ($5–8 million estimated), significant management distraction, and the inherent uncertainty of any contested election. A negotiated settlement eliminates these costs and allows the Company's management and Board to focus their time and attention on the Company's business operations and strategic priorities.
Preservation of Narrative Control. A settlement allows the Board to control the narrative with stockholders, gaming regulators, and the market. Rather than having the Company's governance and strategy debated in a public proxy fight — where the Activist's messaging would compete with the Company's messaging for stockholder attention — a settlement allows the Company to present a unified and constructive story of engaged corporate governance.
Opportunity to Address Legitimate Governance Concerns on the Company's Terms. Pinnacle Harbor's demand for board refreshment, while motivated by the Activist's own financial interests, touches on a governance concern that has some legitimacy. Several of the Company's current directors have served for extended tenures, and the addition of a director with fresh perspectives and relevant industry experience could enhance the Board's effectiveness. A settlement allows the Company to address this concern on its own terms — selecting a mutually agreeable candidate with the desired qualifications — rather than having the Activist's chosen nominees potentially imposed through a contested election.
Removal of Proxy Contest Overhang. The pendency of an activist campaign and the prospect of a contested election can create an "overhang" on the Company's stock price and can introduce uncertainty into business operations and strategic planning. A settlement removes this overhang and provides a period of stability during which the Company can execute its strategic plan without the distraction of an ongoing governance dispute.
Demonstration of Constructive Shareholder Engagement. Proxy advisory firms and institutional stockholders increasingly view constructive engagement with stockholders — including activist stockholders — as a hallmark of good corporate governance. A settlement that demonstrates the Board's willingness to listen to stockholder concerns and make appropriate adjustments to board composition and strategic priorities is likely to be viewed favorably by the governance community and could enhance the Company's governance profile.
Opportunity to Secure Meaningful Concessions from Pinnacle Harbor. A settlement provides the opportunity to secure valuable concessions from Pinnacle Harbor that would not be available if the Company simply prevails in a contested election. These concessions include a standstill agreement (restricting Pinnacle Harbor's ability to pursue further activist campaigns during the standstill period), voting commitments (requiring Pinnacle Harbor to vote in favor of management's nominees and proposals), non-disparagement obligations, and the withdrawal of the Activist's director nominations. These concessions provide tangible, ongoing value to the Company and its stockholders.
B. Risks of Settlement
Calderwood & Harkness also recognizes that a settlement carries certain risks that the Committee should carefully consider:
Perception of Capitulation. If the terms of a settlement are perceived by certain stockholders, analysts, or media commentators as overly generous to the Activist, the settlement could be characterized as a capitulation by the Board. This risk can be mitigated through careful structuring of the settlement terms (ensuring that the Company receives meaningful concessions in exchange for any concessions it makes) and through effective communications strategy (framing the settlement as a constructive governance outcome rather than a concession to activist pressure).
Shift in Board Dynamics. Any concession involving changes to Board composition — whether the appointment of Pinnacle Harbor's nominees or a mutually agreed new director — has the potential to shift Board dynamics. A new director who is sympathetic to the Activist's strategic views could influence Board deliberations on capital allocation, strategic transactions, or other matters. This risk is substantially mitigated by the approach we recommend in Section V.C below, which involves the appointment of a mutually agreed independent director who is neither a Pinnacle Harbor nominee nor a current RGC insider.
Precedent Effect. A settlement with Pinnacle Harbor may be perceived by other potential activist investors as evidence that the Company is willing to settle rather than fight a proxy contest, potentially encouraging future activist campaigns. This risk is inherent in any settlement and cannot be entirely eliminated. However, it can be mitigated by structuring the settlement terms in a manner that does not appear disproportionately favorable to the Activist and by communicating that the Board's decision to settle was based on the specific facts and circumstances of this particular situation rather than a general policy of accommodation.
Entrenchment Concerns. The settlement must be carefully structured to avoid any appearance that the Board is sacrificing stockholder value or making concessions to the Activist in exchange for the Activist's agreement not to challenge incumbent directors. Under Delaware law, a settlement that is motivated by the Board's desire to protect its own incumbency, rather than by a genuine assessment of the best interests of the corporation and its stockholders, could be subject to enhanced judicial scrutiny and could expose directors to fiduciary duty liability. The settlement parameters we recommend are designed to serve stockholder interests and to withstand scrutiny under applicable Delaware law standards, as discussed in Section VIII below.
V. Proposed Settlement Parameters
Based on our analysis of the relevant considerations, Calderwood & Harkness recommends that the Special Committee authorize settlement discussions with Pinnacle Harbor within the following parameters. Each parameter is discussed in detail below.
A. Standstill Period
We recommend an eighteen (18) month standstill period commencing on the date of execution of the settlement agreement (the "Standstill Period"). Assuming execution in early to mid-March 2023, the Standstill Period would expire approximately in September 2024.
During the Standstill Period, Pinnacle Harbor and its affiliates and associates would be prohibited from:
(i) nominating, recommending, or supporting the nomination of any person for election to the RGC Board, or proposing any change in the size or composition of the Board;
(ii) soliciting proxies, consents, or authorizations from RGC stockholders, or otherwise seeking to influence the voting of RGC stockholders;
(iii) making any public statement or filing any public document criticizing the Board, management, or strategic direction of the Company;
(iv) acquiring, directly or indirectly, beneficial ownership of any additional shares of RGC common stock in excess of the Ownership Cap described in Section V.B below;
(v) seeking to influence, advise, or encourage any other person or entity to take any of the foregoing actions, or entering into any arrangement or understanding with any other person or entity for the purpose of taking any of the foregoing actions; and
(vi) making or supporting any proposal for any extraordinary transaction involving the Company (including any merger, acquisition, recapitalization, restructuring, or similar transaction) without the prior written consent of the Board.
We anticipate that Pinnacle Harbor will seek to negotiate a shorter standstill period. Based on our experience in comparable situations, activists typically prefer standstill periods of twelve months or shorter, while companies generally seek periods of eighteen months or longer. We believe eighteen months is a reasonable and defensible starting position for the Company. A standstill period of less than twelve months would lack meaningful value for the Company, as it would allow Pinnacle Harbor to resume its activist campaign relatively quickly after execution of the agreement. Twelve months should be treated as a floor below which the Committee should not agree without a corresponding increase in the value of other concessions.
B. Ownership Cap
We recommend that the settlement agreement include an ownership cap of 9.9% of the Company's outstanding common stock during the Standstill Period. Pinnacle Harbor currently owns approximately 6.8% (7,119,600 shares of 104,700,000 outstanding), so a cap at 9.9% provides some headroom for modest additional accumulation (approximately 3,246,300 additional shares at the current share count) but prevents Pinnacle Harbor from building a controlling-block position during the period of the standstill.
The 9.9% cap level is strategically significant for several reasons:
• It prevents Pinnacle Harbor from crossing the 10% beneficial ownership threshold that would subject Pinnacle Harbor to the short-swing profit recovery provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended. While this may be viewed as a benefit to Pinnacle Harbor, it also limits the Activist's ability to accumulate a large position that could be used as leverage in future campaigns.
• It avoids triggering potential "group" concerns under Section 13(d) of the Exchange Act, which could arise if Pinnacle Harbor, at a higher ownership level, were to align informally with other institutional stockholders for the purpose of influencing corporate governance or strategic matters.
• It is consistent with ownership caps commonly negotiated in comparable standstill agreements involving activist investors in the gaming and mid-cap sectors.
C. Board Composition Compromise
Pinnacle Harbor has demanded the appointment of two of its own nominees — Dr. Sandra Trevelyan and Hugh Desmond Grayson — to the Board. Calderwood & Harkness recommends that the Committee reject the appointment of Pinnacle Harbor's named nominees and instead propose the following board composition compromise:
The Company would agree to the appointment of one (1) new mutually agreed independent director to the Board. The new director would be neither a Pinnacle Harbor nominee nor a current RGC insider, but rather an individual identified through a joint selection process and agreed upon by both the Company and Pinnacle Harbor. The selection process could take the form of a joint committee or mutual agreement procedure in which both parties identify a pool of qualified candidates with relevant industry experience in the gaming, hospitality, technology, or finance sectors, and then agree on a single candidate from that pool.
The new director would serve on the Board until the Company's 2025 Annual Meeting of Stockholders, providing a two-year initial term for board continuity. This initial term ensures that the new director has sufficient time to contribute meaningfully to the Board's work and provides stability during the implementation of any strategic initiatives arising from the Board-level review of the Interactive Gaming Division (discussed in Section V.D below).
Upon the appointment of the new director, the Board would increase in size from nine to ten directors.
This approach achieves several important objectives:
• Addresses the Activist's Governance Concern. The appointment of a new independent director responds to Pinnacle Harbor's stated concern regarding board refreshment. The Company can present this concession as evidence of its commitment to effective governance and its willingness to consider stockholder input on Board composition.
• Prevents Activist-Aligned Representation on the Board. By rejecting Pinnacle Harbor's named nominees and insisting on a mutually agreed candidate, the Company prevents the Activist from placing individuals on the Board who may be perceived as aligned with or beholden to Pinnacle Harbor's investment thesis. This preserves the Board's independence and its ability to exercise independent judgment on strategic and governance matters.
• Mitigates Gaming Regulatory Risk. As noted in Section III.C above, any new director of RGC would need to undergo gaming regulatory suitability investigations in multiple jurisdictions. By selecting a mutually agreed candidate through a joint process, the Company retains the ability to ensure that the candidate has been pre-screened for potential gaming regulatory issues. This mitigates the risk that a Pinnacle Harbor nominee might encounter suitability issues post-appointment, which could create board instability and regulatory complications.
• Provides a Credible "Win" for the Activist. The appointment of a new director, while not the specific relief Pinnacle Harbor has demanded, provides the Activist with a tangible outcome that can be presented to its limited partners and the market as evidence of a successful engagement. This face-saving element is important to facilitate agreement, as activist investors are typically reluctant to enter into standstill agreements without some demonstrable achievement.
D. Strategic Review of Interactive Gaming Division
Pinnacle Harbor's demand for a formal strategic review of the Interactive Gaming Division has some credibility with certain institutional stockholders, who have expressed interest in understanding the Company's long-term plans for the division. The Interactive Gaming Division generated revenue of approximately $412 million in fiscal year 2021, representing approximately 14.4% of the Company's total revenue of $2.87 billion. The division has experienced growth in recent periods but has also faced competitive pressures and margin compression.
Calderwood & Harkness recommends that the Company agree to conduct an internal Board-level review of strategic alternatives for the Interactive Gaming Division, to be completed within 120 days of the execution date of any settlement agreement.
This concession should be subject to the following critical safeguards:
• The review would be conducted at the Board's sole discretion and would be an internal Board-level process, utilizing the Company's existing management team and financial advisors as the Board deems appropriate.
• The Company would have no obligation to share the conclusions or recommendations of the review with Pinnacle Harbor. The review is for the Board's own deliberative purposes.
• The conclusions of the review would be non-binding — the Board would retain full discretion to pursue, modify, or decline any strategic alternative identified through the review.
• The settlement agreement would not specify or constrain the scope, methodology, or outcome of the review.
This concession is, in substance, modest. We understand from discussions with management and the Committee that the Board was already considering strategic options for the Interactive Gaming Division as part of its ongoing strategic planning process. Formalizing a review and committing to a timeline costs the Company nothing materially but provides Pinnacle Harbor with a significant face-saving element to present to its stakeholders as evidence that its engagement produced meaningful action.
E. Voting Commitments
During the Standstill Period, Pinnacle Harbor would commit to vote all of its shares — currently 7,119,600 shares, and any additional shares acquired during the Standstill Period up to the Ownership Cap — in favor of the RGC management-recommended director nominees and in accordance with the Board's recommendations on all other proposals presented to stockholders, including:
• Say-on-pay advisory vote;
• Ratification of the appointment of Kettering Marsh & Associates LLP as the Company's independent registered public accounting firm;
• Any other management-sponsored proposals; and
• Any stockholder proposals, to the extent the Board has made a recommendation thereon.
This voting commitment effectively neutralizes Pinnacle Harbor's shares as an opposition bloc for two annual meeting cycles — the 2023 Annual Meeting and, if the Standstill Period extends through September 2024 as anticipated, potentially the 2024 Annual Meeting as well. At the current ownership level, this means 7,119,600 shares (6.8% of outstanding) would be committed to vote with management, providing a reliable base of support.
F. Withdrawal of Director Nominations
As a fundamental term of any settlement agreement, Pinnacle Harbor would be required to withdraw all director nominations for the 2023 Annual Meeting, including the nominations of Dr. Sandra Trevelyan and Hugh Desmond Grayson, and to agree not to nominate any directors during the Standstill Period. This requirement would extend to nominations made by Pinnacle Harbor directly or by any person or entity acting at Pinnacle Harbor's direction or on its behalf.
The withdrawal of the nominations would eliminate the contested election and allow the Company to proceed with a management-slate election at the 2023 Annual Meeting, substantially reducing costs, management distraction, and the other risks associated with a contested election as described in Section III.C above.
G. Mutual Non-Disparagement
The settlement agreement would include a standard mutual non-disparagement clause effective during the Standstill Period. The non-disparagement clause would prohibit both parties from making or causing to be made any public statements, filings, or communications that disparage, criticize, or reflect negatively upon the other party or its respective directors, officers, employees, agents, or affiliates.
This provision prevents Pinnacle Harbor from making public statements critical of the Company's Board, management, or strategic direction during the Standstill Period, even if Pinnacle Harbor privately disagrees with actions taken by the Company. Equally, the provision binds the Company and its directors and officers from publicly criticizing Pinnacle Harbor or its principals during the same period.
Non-disparagement clauses of this nature are standard in negotiated standstill agreements and are generally well-understood by the parties and their advisors. The provision should include customary exceptions for statements made in compliance with applicable law or legal process, statements made in connection with the enforcement of the settlement agreement itself, and private communications between the parties.
H. Expense Reimbursement
Industry practice for negotiated standstill agreements often involves some level of expense reimbursement to the activist for legal and advisory fees incurred in connection with the campaign. This is a common negotiating point, and activists frequently seek reimbursement of a substantial portion of their out-of-pocket expenses as a condition of entering into a standstill agreement.
Calderwood & Harkness recommends offering reimbursement of Pinnacle Harbor's documented legal expenses (specifically, fees and expenses of Hargrove Sloane & Birch LLP) up to a cap of $750,000. This recommendation is based on the following considerations:
• The proposed cap of $750,000 is a modest sum relative to the estimated costs the Company would incur in a contested election ($5–8 million estimated). From a cost-benefit perspective, the reimbursement represents a fraction of the savings the Company would realize by avoiding a full proxy contest.
• The reimbursement is limited to documented legal expenses only. We recommend against reimbursing Pinnacle Harbor's proxy solicitor fees (Garrison Proxy Advisors), financial advisory fees, or other advisory costs. Limiting reimbursement to legal expenses is consistent with the rationale that the activist has incurred costs in good-faith pursuit of its governance-related objectives.
• The cap should be firm and should not be subject to adjustment or increase.
• The reimbursement serves as a goodwill gesture that facilitates agreement and reduces the likelihood of prolonged negotiation over expense-related issues. In our experience, expense reimbursement is often a sticking point in standstill negotiations, and establishing a reasonable cap early in discussions can avoid unnecessary delays.
I. Termination Triggers
The settlement agreement should include customary termination provisions, allowing either party to terminate the agreement upon the occurrence of specified triggering events. We recommend the following termination triggers:
• Material Breach. Either party may terminate the agreement upon a material breach by the other party that remains uncured for fifteen (15) business days after written notice of the breach is delivered to the breaching party. This provides a reasonable cure period and ensures that inadvertent or minor violations do not result in immediate termination of the agreement.
• Change of Control. The agreement would terminate automatically upon the consummation of a change of control of the Company (e.g., a merger, acquisition, or similar transaction in which a third party acquires a majority of the Company's outstanding voting securities or substantially all of the Company's assets). A change of control would render the standstill provisions moot and would fundamentally alter the context in which the agreement was entered into.
• Ownership Threshold. The agreement would terminate automatically if Pinnacle Harbor's beneficial ownership drops below 3.5% of the Company's outstanding shares. This threshold is appropriate because it reflects a level of ownership at which Pinnacle Harbor is no longer a significant stockholder and the standstill and other provisions of the agreement no longer serve a meaningful purpose for either party. If Pinnacle Harbor is exiting its position, the Company should not be bound by obligations that restrict its flexibility for the benefit of a departing stockholder.
J. Governing Law
The settlement agreement should be governed by and construed in accordance with the laws of the State of Delaware, without regard to conflict-of-laws principles. This governing law provision is consistent with the Company's state of incorporation and ensures that the interpretation and enforcement of the agreement are governed by the same body of law that governs the Company's Certificate of Incorporation, Bylaws, and other governance documents. Additionally, Delaware courts have extensive experience with corporate governance disputes, including disputes arising from activist campaigns and standstill agreements, which provides certainty and predictability in the event of any future dispute regarding the interpretation or enforcement of the agreement.
VI. Process Recommendations
A. Negotiation Team and Authority
Calderwood & Harkness recommends that Douglas Fairchild of Calderwood & Harkness LLP and Patricia "Trish" Nakamura, General Counsel and Corporate Secretary of RGC, serve as the primary negotiators on behalf of the Company and the Special Committee in settlement discussions with Pinnacle Harbor. Mr. Fairchild brings deep experience in activist defense engagements and familiarity with the full arc of the Pinnacle Harbor campaign, and Ms. Nakamura, as General Counsel, has the authority and institutional knowledge necessary to negotiate credibly on behalf of the Company.
The anticipated counterparties in the negotiation would be Jonathan "Jon" Birch III of Hargrove Sloane & Birch LLP, as lead counsel for Pinnacle Harbor, and Viktor S. Kessler, Managing Partner and CIO of Pinnacle Harbor. While it is expected that the principal negotiations would occur between outside counsel (Fairchild and Birch), direct engagement between Kessler and Nakamura (or Kessler and the Committee Chair, if appropriate) may be necessary at key junctures to resolve substantive disagreements.
All material terms proposed to be offered to or accepted from Pinnacle Harbor must be approved by the Special Committee before being communicated to Pinnacle Harbor or its representatives. The Committee's oversight of the negotiation process is essential both to ensure that the terms of any settlement reflect the Committee's informed judgment and to create a clear record of the Committee's deliberative process for purposes of any future fiduciary duty analysis.
Thomas V. Ashford of Calloway Pinnacle Trust Bank should be consulted on valuation and market-perception issues that arise during the negotiation, including the financial implications of various settlement concessions. However, Calloway Wainwright should not participate directly in the legal negotiations; the financial advisor's role is advisory to the Committee and should remain behind the scenes.
B. Timeline
We recommend the following target timeline for settlement discussions:
• Week of January 23, 2023: Initial outreach from Douglas Fairchild to Jonathan Birch III to propose direct settlement discussions. This outreach should be informal and off the record, framed as the Company's willingness to explore constructive engagement with Pinnacle Harbor in advance of the proxy season.
• Late January 2023: Target date for the first substantive settlement discussion between counsel for the parties.
• January through mid-March 2023: Negotiation period. We anticipate approximately six to eight weeks of negotiation, during which the parties would exchange proposals, negotiate term sheets, and ultimately negotiate definitive documentation.
• Early to mid-March 2023: Target execution date for the settlement agreement. This timeline positions the agreement well in advance of the 2023 Annual Meeting, anticipated in May 2023, and allows sufficient time for the preparation of a joint press release and any necessary SEC filings.
It is important to emphasize that the Committee retains full authority to terminate discussions and revert to a contested election defense at any time during the negotiation process. If negotiations fail or stall, the Company's advisor team — Calderwood & Harkness, Calloway Wainwright, Whitfield Morrow, and Harlan Ridge — must be prepared to pivot quickly to a full contest posture. The parallel workstreams described in Section VI.D below are designed to ensure this readiness.
C. Confidentiality
Settlement discussions should be conducted under a mutual nondisclosure agreement or, at a minimum, with an express understanding between the parties and their counsel that the discussions are confidential and will not be disclosed publicly or in any SEC filing unless and until a definitive agreement is reached.
No public disclosures of the substance or existence of settlement discussions should be made unless and until the parties have executed a definitive settlement agreement. Premature disclosure of ongoing negotiations could destabilize the process, create market volatility, and potentially undermine the Company's negotiating position.
Upon execution of a definitive agreement, the parties should coordinate a joint press release announcing the settlement. Input on the press release should be solicited from Philip Navarette of Harlan Ridge Communications (on behalf of the Company) and the relevant Pinnacle Harbor communications advisors. The joint press release should be carefully crafted to present the settlement as a constructive governance outcome achieved through good-faith engagement between the Company and a significant stockholder.
D. Coordination with Advisors
Throughout the settlement negotiation process, the Company's advisor team should continue its respective workstreams in parallel, to maintain leverage, ensure readiness for a contested election if settlement discussions fail, and provide ongoing support to the Special Committee.
• Whitfield Morrow Partners (Denise Cavanaugh): Should continue shareholder outreach and engagement with key institutional stockholders, including Ridgeway Asset Management, Stillwater Capital Advisors, and Canfield MERS. This ongoing engagement serves a dual purpose: it maintains relationships with key stockholders and provides intelligence on stockholder sentiment that is valuable both in the settlement negotiation context and in preparing for a potential contested election. Additionally, the fact that the Company is actively engaging with stockholders provides leverage in settlement discussions, as it demonstrates that the Company is prepared to campaign if necessary.
• Harlan Ridge Communications (Philip Navarette): Should prepare messaging strategies and draft communications materials for both scenarios — a settlement announcement and a contested election continuation. Having both sets of materials prepared in advance ensures that the Company can respond quickly and effectively regardless of the outcome of settlement discussions.
• Calloway Wainwright (Thomas Ashford): Should model the financial impact of the various settlement concessions under consideration, including the implications of an increased board size, the potential outcomes of a strategic review of the Interactive Gaming Division, and the financial impact of the proposed expense reimbursement. Calloway Wainwright's analysis will be essential to the Committee's evaluation of any specific terms that emerge during negotiations.
VII. D&O Insurance Considerations
Calderwood & Harkness notes the following considerations related to the Company's directors' and officers' liability insurance program in connection with the Pinnacle Harbor campaign and any settlement thereof.
Notice of Circumstances. A notice of circumstances was submitted on November 16, 2022 — promptly following the formation of the Special Committee and the commencement of the Calderwood & Harkness engagement — to the following carriers:
• Primary D&O Policy: Northbridge Indemnity Company, Policy No. NBI-DOP-1025-00008, with a limit of liability of $15,000,000 and a self-insured retention (SIR) of $500,000.
• First Excess D&O Policy: Creston National Insurance Co., Policy No. CNI-XS-2022-31004, providing $10,000,000 of coverage excess of the $15,000,000 primary limit.
The notice was submitted through the Company's insurance broker, Glenmore Caulfield Insurance Brokers, Inc. (Sarah Voss, Account Executive). The Company's D&O policy was renewed effective January 1, 2023.