PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 3960 Howard Hughes Parkway, Suite 1400 Las Vegas, NV 89169
December 19, 2022
MEMORANDUM
TO: Board of Directors of Redstone Gaming Corp.
Attention: Diane K. Sheridan, Board Chair
James Delacroix, Special Committee Chair Carmen Vasquez, Special Committee Member Randall Morse, Special Committee Member
CC: Patricia "Trish" Nakamura, General Counsel & Corporate Secretary
FROM: Douglas Fairchild, Engagement Partner Claire Dempsey, Lead Associate Calderwood & Harkness LLP
RE: Analysis of Potential Adoption of a Limited-Duration Stockholder Rights Plan ("Poison Pill") in Connection with the Activist Campaign by Pinnacle Harbor Capital Partners, LP
Matter No.: 1033-00003
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I. Executive Summary
The purpose of this memorandum is to provide the Board of Directors of Redstone Gaming Corp. ("RGC" or the "Company") with a comprehensive analysis of whether the Board should adopt a limited-duration stockholder rights plan — commonly known as a "poison pill" — as a defensive measure in response to the activist board-seat campaign initiated by Pinnacle Harbor Capital Partners, LP ("Pinnacle Harbor"). This memorandum addresses the legal framework governing rights plans under Delaware law, the specific parameters of a rights plan tailored to the current threat, the fiduciary duty considerations applicable to the Board's decision, the expected reactions of proxy advisory firms and key institutional shareholders, and the strategic risks associated with both adoption and non-adoption.
As background, Pinnacle Harbor currently holds approximately 6.8% of RGC's issued and outstanding shares of common stock, representing 7,119,600 shares out of 104,700,000 shares outstanding. Pinnacle Harbor disclosed this position in a preliminary Schedule 13D filed with the U.S. Securities and Exchange Commission ("SEC") on November 10, 2022. Pinnacle Harbor's stated objectives include the appointment of two nominees — Dr. Sandra Trevelyan and Hugh Desmond Grayson — to the RGC Board of Directors, a comprehensive strategic review of the Company's interactive gaming division, and a $300 million capital return program to shareholders. In a public open letter dated November 30, 2022, Pinnacle Harbor threatened to initiate a proxy contest at the Company's 2023 annual meeting of stockholders if its demands were not met.
A stockholder rights plan, if adopted, would establish a specified ownership threshold above which further accumulation of RGC common stock by Pinnacle Harbor — or by any other activist investor, hostile acquiror, or group — would trigger the issuance of dilutive rights to all other stockholders, rendering further accumulation economically prohibitive. The plan would serve as a deterrent against creeping accumulation and would provide the Board with additional time and negotiating leverage in responding to the activist campaign.
Calderwood & Harkness presents this analysis for the Board's consideration and deliberation. While a stockholder rights plan is a legally permissible defensive measure under well-established Delaware law, the Board should carefully weigh the defensive benefits of adoption against the significant governance and reputational risks that accompany such a measure, particularly in the context of an activist board-seat campaign as distinguished from a hostile takeover attempt. Proxy advisory firms, including Centurion Governance Services, Inc. ("Centurion") and the Hartley Shareholder Advisory Group, LLC ("Hartley"), have well-documented policies that generally disfavor unilateral rights plan adoptions, and the negative recommendations that could follow adoption may undermine the Board's position in any contested election at the 2023 annual meeting.
Board Decision. We note that the Board of Directors, at its meeting on December 19, 2022, considered this analysis and the recommendations of Calderwood & Harkness, Calloway Pinnacle Trust Bank (the Company's financial advisor), and management, and declined to adopt a stockholder rights plan at this time. The Board has reserved the right to revisit this decision should circumstances change materially, including but not limited to a material increase in Pinnacle Harbor's ownership stake or evidence of coordinated accumulation by a "wolf pack" of activist or event-driven investors. The Board directed Calderwood & Harkness to prepare a fully documented "shelf" rights plan that can be deployed on an expedited basis if warranted by future developments.
II. Background and Current Threat Assessment
A. The Pinnacle Harbor Campaign
Pinnacle Harbor Capital Partners, LP is a Delaware limited partnership whose general partner is Pinnacle Harbor Capital Management, LLC, also a Delaware limited liability company. Pinnacle Harbor is an event-driven activist hedge fund with approximately $4.2 billion in assets under management as of its most recently available disclosure. The fund was founded in 2014 and is headquartered at 590 Madison Avenue, 34th Floor, New York, NY 10022. Its Managing Partner and Chief Investment Officer is Viktor S. Kessler, and its Head of Activism and Portfolio Manager is Nadia Johar. Pinnacle Harbor's investment strategy focuses on mid-cap companies in the gaming, hospitality, and consumer-discretionary sectors, and the fund has a documented track record of initiating activist campaigns, including public proxy contests, at companies within these sectors.
Pinnacle Harbor accumulated its position in RGC common stock over a period of approximately five months, beginning in June 2022 and continuing through November 2022. Based on the information disclosed in Pinnacle Harbor's Schedule 13D filing and supplemental trading data obtained by Calderwood & Harkness, the weighted-average purchase price for the 7,119,600 shares accumulated was approximately $26.42 per share, reflecting a total cost basis of approximately $188.1 million. At the time Calderwood & Harkness was formally engaged on November 15, 2022, RGC common stock was trading at approximately $30.00 per share, giving Pinnacle Harbor's position a mark-to-market value of approximately $213.6 million and an unrealized gain of approximately $25.5 million, or approximately 13.5%.
The timeline of Pinnacle Harbor's campaign to date is as follows:
• June 2022 through November 2022: Pinnacle Harbor accumulated shares of RGC common stock through open-market purchases.
• October 28, 2022: Pinnacle Harbor, through its Managing Partner Viktor S. Kessler, delivered a private demand letter to Board Chair Diane K. Sheridan. The letter outlined Pinnacle Harbor's concerns regarding the Company's capital allocation, the perceived underperformance of the interactive gaming division, and the fund's belief that the Board would benefit from the addition of directors with specific industry expertise and capital markets experience. The letter requested private engagement with the Board and the Special Committee.
• November 10, 2022: Pinnacle Harbor filed a preliminary Schedule 13D with the SEC, publicly disclosing its 6.8% stake in RGC and its intent to seek changes at the Company. The Schedule 13D identified Pinnacle Harbor's nominees as Dr. Sandra Trevelyan, a former executive with experience in digital gaming platforms, and Hugh Desmond Grayson, a former investment banker with experience in gaming-sector capital markets transactions. The filing stated that Pinnacle Harbor intended to engage in discussions with the Board regarding the composition of the Board, the strategic direction of the interactive gaming division, and the return of capital to shareholders.
• November 30, 2022: Pinnacle Harbor issued a public open letter addressed to the Board of Directors and shareholders of RGC. The letter criticized the Board's capital allocation decisions, the performance trajectory of the interactive gaming division, and what Pinnacle Harbor characterized as a "governance deficit" resulting from the absence of directors with deep digital gaming and capital markets experience. The letter demanded the appointment of Dr. Trevelyan and Mr. Grayson to the Board, a comprehensive strategic review of the interactive gaming division (including consideration of a sale, spin-off, or other separation transaction), and a $300 million capital return program. The letter stated that if the Board did not engage constructively, Pinnacle Harbor intended to nominate its candidates and solicit proxies at the Company's 2023 annual meeting of stockholders.
• December 8, 2022: Pinnacle Harbor's outside counsel, Hargrove Sloane & Birch LLP (lead partner: Jonathan Birch III), delivered a formal notice of intent to nominate directors at the 2023 annual meeting pursuant to the advance-notice provisions of the Company's Amended and Restated Bylaws. The notice was delivered in advance of the opening of the advance-notice window on December 12, 2022. Calderwood & Harkness is currently reviewing this notice for compliance with the procedural and informational requirements of Article II, Section 2.11 of the Bylaws, and a separate analysis will be provided upon completion of that review.
• Proxy Solicitor: Pinnacle Harbor has retained Garrison Proxy Advisors, LLC (contact: Alicia Trent) as its proxy solicitor for the anticipated proxy contest.
The foregoing timeline establishes a pattern of escalating engagement consistent with the playbook of a well-resourced, experienced activist fund. Pinnacle Harbor's counsel, Hargrove Sloane & Birch LLP, is a nationally recognized firm with extensive experience representing activist investors in contested elections and related litigation. The combination of experienced legal counsel, a sophisticated proxy solicitor, and a significant economic stake in the Company indicates that Pinnacle Harbor is prepared to conduct a full-scale proxy contest at the 2023 annual meeting if a negotiated resolution is not achieved.
B. RGC's Current Defensive Posture
As of the date of this memorandum, RGC has the following defensive measures and governance structures in place:
Bylaws. The Company's Amended and Restated Bylaws were last amended on September 12, 2021. The Bylaws include advance-notice provisions at Article II, Section 2.11, which require any stockholder seeking to nominate directors for election at an annual meeting to deliver written notice to the Corporate Secretary within a specified window. For the 2023 annual meeting, the advance-notice window opens on December 12, 2022 (150 days before the May 11, 2023 anniversary of the 2022 annual meeting) and closes on January 11, 2023 (120 days before the anniversary date). As noted above, Hargrove Sloane & Birch delivered a formal nomination notice on December 8, 2022, prior to the opening of the window, and Calderwood & Harkness is analyzing the timeliness and substantive compliance of that notice.
No Existing Rights Plan. RGC does not currently have a stockholder rights plan in effect. The Company has not previously adopted a rights plan, and no such plan is currently on the shelf in documented form. Calderwood & Harkness has been directed to prepare a shelf plan as part of its current engagement, as discussed further in Section X below.
Board Composition and Special Committee. The Board currently consists of nine directors, of whom seven are independent under the applicable Nasdaq listing standards and the Company's Corporate Governance Guidelines. The two management directors are CEO Richard Whitmore and CFO Elaine Choi. Upon learning of Pinnacle Harbor's private demand letter in October 2022, the Board formed a Special Committee on November 14, 2022, consisting of three independent directors: James Delacroix (Chair), Carmen Vasquez, and Randall Morse. The Special Committee has been charged with overseeing the Company's response to the Pinnacle Harbor campaign and has been granted authority to retain and direct outside advisors.
Outside Advisors. The Company has engaged the following outside advisors in connection with the Pinnacle Harbor campaign:
• Calderwood & Harkness LLP — Outside legal counsel (Douglas Fairchild, Engagement Partner; Claire Dempsey, Lead Associate; Marcus Leung, Working Associate)
• Calloway Pinnacle Trust Bank — Financial advisor (Thomas Ashford, Managing Director, Activism & Corporate Defense)
• Whitfield Morrow Partners, LLC — Proxy solicitor (Denise Cavanaugh)
• Harlan Ridge Communications, LLC — Investor relations advisor (Philip Navarette)
Corporate Charter. The Company's Amended and Restated Certificate of Incorporation is on file with the Delaware Secretary of State under file number 5734821. Calderwood & Harkness delivered a comprehensive bylaw and charter defensive review memorandum on December 5, 2022, analyzing the Company's existing governance documents for defensive provisions, potential vulnerabilities, and recommended amendments.
C. Current Shareholder Base Context
RGC common stock is listed and traded on the Nasdaq Stock Market under the ticker symbol "RGC." As of November 15, 2022, the Company's market capitalization was approximately $3.14 billion, based on 104,700,000 shares outstanding and a closing price of $30.00 per share.
The Company's key institutional shareholders, as disclosed in recent SEC filings and proxy materials, include the following:
For context, the Company's financial profile is summarized as follows: fiscal year 2021 revenue was $2.87 billion, of which the interactive gaming division contributed approximately $412 million, or 14.4% of total revenue. Fiscal year 2022 projected revenue is approximately $3.05 billion, reflecting year-over-year growth. The Company's net debt stands at approximately $1.62 billion, and the current dividend yield is approximately 1.8%. These financial metrics are relevant to the Board's assessment of the Pinnacle Harbor campaign, as they provide the basis for evaluating whether Pinnacle Harbor's criticisms of operational performance and capital allocation have merit, and whether a rights plan is an appropriate or proportionate response.
Institutional shareholder sentiment is a critical factor in evaluating whether a rights plan would be supported or opposed. As discussed in greater detail in Sections VI and VII below, the Company's major institutional holders have varying governance philosophies and investment mandates, and the Board should carefully consider how each key holder is likely to react to the adoption of a rights plan.
III. Overview of Stockholder Rights Plans Under Delaware Law
A. Mechanics of a Rights Plan
A stockholder rights plan, commonly referred to as a "poison pill," operates through the following general mechanism. The board of directors declares a dividend of one right for each outstanding share of common stock. Each right entitles the holder to purchase a fraction of a share of a newly created series of preferred stock (or, in some plans, additional shares of common stock) at a specified exercise price. The rights are initially attached to and trade with the underlying shares of common stock and are not exercisable or separable from the shares. The rights have no independent economic value in this dormant state and do not affect the trading price of the underlying common stock.
The rights become exercisable upon the occurrence of a "triggering event," which is defined in the rights plan agreement as the acquisition by an "acquiring person" (or a group of persons acting in concert) of beneficial ownership of shares of common stock in excess of a specified ownership threshold, typically ranging from 10% to 20% of the outstanding shares. The board of directors retains full discretion to determine whether a particular acquisition or accumulation constitutes a triggering event, subject to the terms of the plan.
Upon the occurrence of a triggering event, the rights "separate" from the underlying common stock and become independently exercisable. At that point, all stockholders other than the acquiring person (and its affiliates and associates) are entitled to exercise their rights to purchase additional shares of common stock at a substantial discount, typically 50% of the then-current market price. This results in massive dilution of the acquiring person's ownership stake and economic interest in the company, rendering further accumulation economically prohibitive and effectively deterring any acquisition or accumulation above the specified threshold without the board's prior approval.
Critically, the rights are redeemable by the board of directors at a nominal price — typically $0.001 per right — at any time prior to the occurrence of a triggering event. This redemption power preserves the board's discretion to remove the pill if the threat abates, if a negotiated settlement is reached, or if the board determines that the plan is no longer in the best interests of the company and its stockholders. The redemption feature is an essential element of the plan's design, as it ensures that the board retains flexibility and that the plan does not function as a permanent barrier to any change of control or shareholder engagement.
Rights plans typically include two principal operative provisions: a "flip-in" provision and a "flip-over" provision. The flip-in provision is the mechanism described above, whereby non-acquiring stockholders may exercise their rights to purchase additional shares of the target company's common stock at a discount, diluting the acquiring person's position in the target. The flip-over provision addresses the scenario in which the acquiring person completes a merger or other business combination with the target: in that event, the rights become exercisable for shares of the acquiring person's common stock at a discount, providing the target's stockholders with a dilutive remedy in the acquiror's equity. In the context of an activist defense, the flip-in provision is the operative mechanism; the flip-over provision is of secondary importance, as the threat being addressed is accumulation of voting power rather than a consummated merger.
B. Foundational Delaware Case Law
The legal validity of stockholder rights plans is well established under Delaware law, as confirmed by a series of seminal decisions of the Delaware Supreme Court and the Delaware Court of Chancery.
Moran v. Household International, Inc. (Del. 1985). In Moran, the Delaware Supreme Court upheld the validity of a stockholder rights plan adopted by the board of directors of Household International as a preventive defensive measure. The Court held that the board had the authority under Section 157 of the Delaware General Corporation Law to issue rights as a dividend on outstanding shares, and that the adoption of a rights plan did not require prior stockholder approval. The Court further held that the adoption of the plan was a valid exercise of business judgment, subject to review under the enhanced scrutiny standard articulated in Unocal Corp. v. Mesa Petroleum Co. The Moran decision established the fundamental principle that a board of directors may adopt a rights plan in advance of any specific threat, as a prophylactic defensive measure, provided that the adoption satisfies the applicable fiduciary duty standards.
Unocal Corp. v. Mesa Petroleum Co. (Del. 1985). In Unocal, decided the same year as Moran, the Delaware Supreme Court established the two-part enhanced scrutiny test that governs judicial review of defensive measures adopted by a board of directors in response to a perceived threat to corporate policy and effectiveness. Under Unocal, the board must demonstrate: (1) that it had reasonable grounds for believing that a danger to corporate policy and effectiveness existed (the "threat identification" prong), and (2) that the defensive measure adopted was reasonable in relation to the threat posed (the "proportionality" prong). The first prong requires the board to show that its perception of the threat was reasonable and was based on a good-faith investigation; the satisfaction of this burden is enhanced where a majority of the board consists of independent, outside directors. The second prong requires the board to show that the defensive response was not disproportionate to the threat — that is, the response must be within the "range of reasonableness" and must not be either coercive or preclusive.
Unitrin, Inc. v. American General Corp. (Del. 1995). In Unitrin, the Delaware Supreme Court refined the proportionality analysis under the second prong of the Unocal test. The Court held that a defensive measure that is neither coercive nor preclusive falls within the "range of reasonableness" if there is a reasonable basis for the board's determination that the measure is necessary to protect the corporation and its stockholders. A measure is "coercive" if it forces stockholders to accept the board's preferred outcome; it is "preclusive" if it renders a successful proxy contest or acquisition strategy realistically unattainable. The Unitrin framework is particularly relevant to the analysis of a rights plan adopted in the context of an activist campaign, as the plan must not preclude Pinnacle Harbor from conducting a proxy contest or acquiring board representation.
Air Products & Chemicals, Inc. v. Airgas, Inc. (Del. Ch. 2011). In Airgas, Chancellor Chandler of the Delaware Court of Chancery sustained a rights plan adopted by the board of Airgas in the face of a hostile tender offer by Air Products, even where the bidder had argued that its offer was fully priced and that the board was using the pill to entrench itself. The Court found that the Airgas board had acted in good faith and on an informed basis, and that it had reasonably perceived a threat of inadequate value — that is, the board's good-faith belief that the offer undervalued the company constituted a legally cognizable threat under Unocal. The Airgas decision represents the high-water mark of judicial deference to board discretion in maintaining a rights plan, though it is important to note that Airgas involved a hostile acquisition context, not an activist board-seat campaign.
It is important for the Board to understand that the adoption of a stockholder rights plan would be reviewed under the Unocal enhanced scrutiny standard, not the more deferential business judgment rule that ordinarily governs board decisions. Under enhanced scrutiny, the burden is on the board — not the plaintiff challenging the measure — to demonstrate that the defensive action satisfies both prongs of the Unocal test. This heightened standard reflects the inherent tension between the board's duty to protect the corporation and its stockholders, on the one hand, and the risk that defensive measures may be motivated by directors' desire to perpetuate their own positions, on the other. The application of the Unocal standard to the specific facts of the Pinnacle Harbor campaign is discussed in Section V below.
C. Limited-Duration vs. Perpetual Plans
Modern corporate governance practice strongly favors limited-duration rights plans over perpetual or indefinite plans. Historically, rights plans were adopted with ten-year terms or no specified expiration date, providing boards with long-term defensive protection. In recent years, however, institutional shareholders, proxy advisory firms, and governance commentators have expressed increasing skepticism toward long-duration plans, leading to a significant shift in market practice toward shorter terms.
In the current governance environment, most newly adopted rights plans have terms ranging from one to three years. In the activist defense context specifically, plans adopted in response to a particular campaign are frequently structured with even shorter durations — six months to one year — reflecting the board's intention to address the immediate threat without creating a long-term defensive barrier.
A related concept is the "clear day" or "shelf" rights plan. A shelf plan is a fully documented rights plan agreement that has been negotiated and approved in substantially final form but has not been formally adopted by the board or made effective. The plan remains "on the shelf," ready for immediate deployment if a threat materializes or escalates. The shelf plan approach allows the board to act quickly in response to a rapidly evolving situation while avoiding the governance and reputational costs of maintaining an active pill during periods when no specific threat exists. As discussed in our recommendation below, Calderwood & Harkness believes that a shelf plan is the most appropriate approach for RGC at the present time.
If the Board were to adopt an active rights plan in response to the Pinnacle Harbor campaign, the plan's duration would need to be calibrated to the specific threat timeline. Given that the immediate threat centers on the 2023 annual meeting of stockholders (anticipated to be held on or about May 11, 2023), a plan with a one-year term — expiring on December 19, 2023, or upon the later of the adjournment of the 2023 annual meeting — would address the immediate proxy season while limiting the governance exposure associated with a longer-duration plan. Any renewal or extension of the plan beyond its initial term would require separate board action and would likely be subject to heightened scrutiny from stockholders, proxy advisory firms, and, if challenged, the courts.
IV. Proposed Rights Plan Parameters for RGC
In order to inform the Board's deliberation, Calderwood & Harkness has analyzed the key parameters that would govern a stockholder rights plan tailored to the current Pinnacle Harbor situation. Set forth below are our recommendations regarding the trigger threshold, duration, exemptions, and redemption features of such a plan. These parameters reflect our assessment of the current threat environment, applicable legal standards, market practice, and the views of proxy advisory firms and institutional shareholders.
A. Recommended Trigger Threshold
The trigger threshold — the ownership level at which the rights plan is activated — is the single most important parameter in the design of a rights plan. The threshold must be set at a level that is low enough to deter further accumulation by Pinnacle Harbor (or any other potential acquiror or activist), but high enough to avoid triggering the plan inadvertently or being perceived as unreasonably aggressive.
Calderwood & Harkness considered three potential trigger thresholds:
10% Threshold. A 10% trigger would provide the tightest defensive buffer, requiring Pinnacle Harbor to acquire only an incremental 3.2 percentage points of ownership (approximately 3,350,400 shares) above its current 6.8% position before triggering the plan. While a 10% threshold has been used in some activist-defense pills, it may be viewed as excessively aggressive in the current context, given that Pinnacle Harbor's stake is well below 10% and its campaign is focused on board representation rather than a creeping acquisition. A 10% trigger increases the risk that the plan would be perceived as disproportionate to the threat and would face more rigorous scrutiny under the Unocal standard.
15% Threshold. A 15% trigger represents a more conventional threshold for activist-defense pills and would provide a meaningful buffer between Pinnacle Harbor's current 6.8% position and the trigger level. At a 15% threshold, Pinnacle Harbor would need to acquire an additional 8.2 percentage points of ownership (approximately 8,585,400 shares, at a cost of approximately $272.5 million at current market prices) before triggering the plan. This threshold strikes a reasonable balance between defensive protection and proportionality, and it is consistent with the trigger levels used in a number of recently adopted rights plans that have withstood judicial and governance scrutiny.
20% Threshold. A 20% trigger is more commonly associated with rights plans adopted in the context of hostile M&A transactions, where the threat is a potential change of control rather than an activist campaign for board seats. In the activist defense context, a 20% threshold may be too permissive, as it would allow Pinnacle Harbor (or another activist) to accumulate up to 19.9% of the Company's outstanding shares — a position that would confer significant informal influence over other stockholders and potentially approach effective control — without triggering the plan.
In addition to single-investor accumulation, the Board should consider the risk of "wolf pack" formation — a scenario in which multiple event-driven or activist investors independently accumulate positions in RGC common stock and, while not formally constituting a "group" within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, effectively act in parallel to support Pinnacle Harbor's campaign. The wolf pack dynamic is a well-documented phenomenon in the activist investing landscape, and it can result in a significant aggregation of voting power without any single investor crossing a disclosure or triggering threshold. The rights plan should be drafted to address this risk, including provisions addressing the formation of groups under Section 13(d)(3) and the concept of "acting in concert."
Recommendation. If the Board were to adopt an active rights plan, Calderwood & Harkness would recommend a trigger threshold of 15% of outstanding common stock, which would be equivalent to approximately 15,705,000 shares based on current shares outstanding.
B. Duration
Calderwood & Harkness recommends that any rights plan adopted by the Board have a limited duration of one year from the date of adoption, expiring on December 19, 2023, or upon the later of the adjournment of the 2023 annual meeting of stockholders. This recommended duration reflects the following considerations:
First, a limited-duration plan of one year or less is more likely to receive favorable treatment from proxy advisory firms and institutional shareholders, as it signals the Board's intent to address a specific, time-bound threat rather than to create a permanent defensive barrier. Second, the one-year term is aligned with the timeline of the immediate Pinnacle Harbor campaign, which centers on the 2023 annual meeting and the proxy season leading up to it. Third, the limited duration reduces the risk that the plan would be found disproportionate under the Unocal proportionality analysis.
The Board would retain the authority to redeem the rights at any time prior to a triggering event, providing maximum flexibility to accommodate a negotiated settlement with Pinnacle Harbor, a change in circumstances, or a reassessment of the threat environment. In addition, the plan would include a sunset provision providing for automatic termination if no triggering event has occurred by the expiration date, without any further action required by the Board.
C. Exemptions and Grandfathering
The rights plan would include customary exemptions and grandfathering provisions, as follows:
Grandfathering of Pinnacle Harbor's Existing Position. Pinnacle Harbor's existing 6.8% stake (7,119,600 shares) would be grandfathered under the plan. The plan would not be triggered by Pinnacle Harbor's mere continued ownership of its existing position; rather, the plan would be triggered only if Pinnacle Harbor (or its affiliates, associates, or any group of which Pinnacle Harbor is a member) were to acquire additional shares that, together with its existing position, would cause its aggregate beneficial ownership to exceed the 15% trigger threshold. This grandfathering provision is standard in activist-defense pills and is necessary to avoid any argument that the plan is retroactively punitive.
Passive Institutional Investor Exemption. The plan would include an exemption for passive institutional investors that file beneficial ownership reports on Schedule 13G (as opposed to Schedule 13D) with the SEC. Schedule 13G filers are investors who certify that their shares were acquired in the ordinary course of business and not with the purpose or effect of changing or influencing the control of the issuer. The exemption would be subject to a higher trigger threshold — typically 20% — for Schedule 13G filers, and would be automatically terminated if the investor were to convert its filing to a Schedule 13D, signaling an activist or control-oriented purpose.
Qualified Offer Exception. The Board could consider including a "qualified offer" exception in the rights plan. A qualified offer exception provides that a bona fide tender offer meeting certain stringent conditions — such as an all-cash, fully financed offer for 100% of the outstanding shares, open for a minimum period (e.g., 120 business days), and not conditioned on financing or due diligence — would not trigger the plan, or that the rights would be redeemed in connection with such an offer. The inclusion of a qualified offer exception is controversial: proponents argue that it demonstrates good faith and enhances the plan's defensibility by showing that the plan is targeted at coercive or inadequate offers rather than at all offers; opponents argue that it reduces the plan's defensive power and invites structurally complex bids designed to exploit the exception. Calderwood & Harkness notes this option for the Board's consideration but does not recommend its inclusion at this time, as the Pinnacle Harbor campaign does not involve a tender offer or acquisition proposal.
D. Redemption and Exchange Features
The rights plan would include standard redemption and exchange features that are critical to preserving board flexibility.
Redemption. The Board would have the authority to redeem all outstanding rights at a price of $0.001 per right at any time prior to the occurrence of a triggering event. Redemption would terminate the plan and render the rights null and void. The redemption power provides the Board with the ability to remove the pill if the threat abates, if a negotiated settlement is reached with Pinnacle Harbor, or if the Board determines in its business judgment that the plan is no longer necessary or desirable. The nominal redemption price ensures that the cost of removing the pill is de minimis.
Exchange. The plan would also include an exchange feature permitting the Board, at any time after a triggering event has occurred, to exchange each right held by non-triggering stockholders for one share of RGC common stock (or an equivalent amount of preferred stock). The exchange feature provides an alternative to the exercise mechanism and gives the Board additional flexibility in managing the dilutive consequences of a triggering event.
Together, the redemption and exchange features ensure that the rights plan operates as a tool of board discretion rather than a rigid, self-executing defensive mechanism. The Board's ability to redeem the rights at any time is also relevant to the Unocal proportionality analysis, as it demonstrates that the plan does not preclude any particular outcome but rather preserves the Board's ability to negotiate and deliberate on behalf of all stockholders.
V. Fiduciary Duty Considerations
A. Unocal Analysis Applied to the Pinnacle Harbor Situation
The adoption of a stockholder rights plan by the Board would be subject to enhanced scrutiny under the Unocal standard. The following analysis applies the two prongs of the Unocal test to the specific facts of the Pinnacle Harbor campaign.
Prong 1 — Reasonably Perceived Threat
Under the first prong of Unocal, the Board must identify and articulate a threat to corporate policy and effectiveness that it reasonably perceives to be posed by Pinnacle Harbor's campaign. The Board's threat perception must be based on a good-faith investigation and must be reasonable in light of the totality of the circumstances. Potential threats that the Board could identify include the following:
Creeping Accumulation Toward a Control Position. Pinnacle Harbor's current 6.8% stake, while below any conventional control threshold, could serve as a platform for further accumulation. If Pinnacle Harbor were to increase its position to 10%, 15%, or higher without paying a control premium to the Company's stockholders, it could acquire informal or de facto influence over the Company's strategic direction without providing adequate compensation to the stockholders from whom it is, in effect, extracting a control premium. A rights plan would deter such creeping accumulation by imposing a dilutive penalty on acquisitions above the trigger threshold.
Disruptive Proxy Contest. A full-scale proxy contest at the 2023 annual meeting would impose significant costs on the Company — including legal fees, financial advisory fees, proxy solicitation costs, and investor relations expenditures — and would divert management's attention from the operation of the business. While the costs of a proxy contest are not, by themselves, sufficient to constitute a threat under Unocal, the Board may consider the distraction and disruption that a contested election would impose on a complex, regulated gaming business during a critical period of growth and strategic development.
Pressure for Premature Strategic Action. Pinnacle Harbor's demand for a strategic review of the interactive gaming division — which generated $412 million in revenue in fiscal year 2021 and is projected to grow in fiscal year 2022 — could pressure the Board into a premature sale, spin-off, or other separation transaction that undervalues the division. The Board may reasonably conclude that the interactive gaming division's long-term value exceeds the value that could be realized in a near-term transaction, and that Pinnacle Harbor's time horizon — driven by the economics of an activist hedge fund — is not aligned with the long-term interests of the Company's broader stockholder base.
Short-Term Focused Activism. More broadly, the Board may perceive a threat from the potential imposition of a short-term, return-maximizing agenda that does not adequately account for the Company's long-term strategic interests, including investments in technology, regulatory compliance, employee development, and stakeholder relationships. This category of threat has been recognized by Delaware courts as a legitimate basis for defensive action under Unocal, though it must be supported by specific facts rather than generalized assertions.
Countervailing Considerations. It is important to acknowledge, however, that Pinnacle Harbor's demands — two board seats, a strategic review, and a $300 million capital return — are relatively conventional activist demands. This is not a hostile takeover or creeping acquisition scenario. Pinnacle Harbor is seeking to influence the Company's strategic direction through the election of a minority of directors, which is a fundamental right of stockholders under Delaware law. The Board should be cautious in characterizing a stockholder's exercise of its franchise rights as a "threat" to corporate policy and effectiveness, as an overly aggressive characterization could undermine the Board's credibility with the court, with proxy advisory firms, and with institutional shareholders. The Board should thoroughly document its threat assessment, including the specific factual bases for each perceived threat, and should ensure that its analysis is informed by the advice of its legal and financial advisors.
Prong 2 — Proportionality of Response
Under the second prong of Unocal, the Board must demonstrate that the adoption of a rights plan is a reasonable and proportionate response to the identified threat. The proportionality analysis requires the Board to consider whether the defensive measure is (a) within the "range of reasonableness," and (b) neither coercive nor preclusive.
A rights plan adopted in the context of an activist board-seat campaign — as distinguished from a hostile acquisition or creeping takeover — faces heightened scrutiny under the proportionality prong. Courts and governance commentators have questioned whether a rights plan is a proportionate response to an activist seeking only board representation, on the grounds that such a campaign does not threaten the company's independence or stockholder value in the same manner as a hostile acquisition. The key question for the Board is whether Pinnacle Harbor's 6.8% stake and demand for two out of nine board seats constitute a threat to corporate policy and effectiveness of sufficient magnitude to justify the adoption of a dilutive rights plan.
The plan must not be coercive — that is, it must not force stockholders to accept the Board's preferred outcome in the proxy contest or forgo their right to vote for Pinnacle Harbor's nominees. A rights plan does not directly affect stockholders' voting rights, and stockholders would remain free to vote for or against the Board's slate at the 2023 annual meeting. However, the plan's indirect effects — including the potential chilling effect on investor support for Pinnacle Harbor's campaign and the signal that the Board is resistant to stockholder engagement — must be carefully considered.
The plan must also not be preclusive — that is, it must not render a proxy contest or further accumulation by Pinnacle Harbor realistically unattainable. A limited-duration plan with a 15% trigger threshold and an automatic sunset would not preclude Pinnacle Harbor from conducting a proxy contest, soliciting proxies, or advocating for its nominees. It would, however, prevent Pinnacle Harbor from increasing its economic and voting position above 15% as a means of enhancing its leverage in the contest. Whether this limitation is a proportionate response to the perceived threat is a question that would ultimately be resolved by the court if the plan were challenged.
On balance, a limited-duration plan with a reasonable trigger threshold (15%), an automatic sunset aligned with the proxy season timeline, and a board-redeemable structure is more likely to survive proportionality review than a longer-duration or lower-threshold plan. However, the inherent tension between a rights plan and an activist board-seat campaign means that the proportionality of the response will be closely scrutinized, and the Board should be prepared for the possibility that a court could find the plan disproportionate if Pinnacle Harbor demonstrates that its campaign is focused solely on board representation and stockholder engagement.
B. Good Faith and Process Requirements
Regardless of the specific parameters of the rights plan, the Board must ensure that its decision-making process satisfies the standards of good faith and informed decision-making that are essential to surviving enhanced scrutiny under Unocal. The following process elements are critical:
Fully Informed Decision-Making. The Board should act on the basis of all material information reasonably available to it, including the legal analysis provided by Calderwood & Harkness, the financial analysis provided by Calloway Pinnacle Trust Bank, and the views of management regarding the operational and strategic implications of Pinnacle Harbor's demands. The Board should have the opportunity to review and discuss this memorandum and to ask questions of its advisors before making a decision.
Special Committee Review. The Special Committee (Delacroix, Vasquez, Morse), consisting entirely of independent directors, should review the proposed rights plan and make a recommendation to the full Board. The Special Committee's imprimatur adds to the Board's defensive posture by demonstrating that the decision was driven by independent directors acting in the best interests of all stockholders, rather than by management directors seeking to entrench themselves.
Board Documentation. The minutes of the Board meeting at which the rights plan decision is considered should reflect careful deliberation, including the identification of the specific threat posed by Pinnacle Harbor, the consideration of alternative defensive measures, the rationale for the selected plan parameters (trigger threshold, duration, exemptions), and the Board's conclusion that the plan is a reasonable and proportionate response to the perceived threat. Thorough documentation is essential to the Board's ability to defend its decision if challenged in litigation.
Absence of Conflicts of Interest. The Board should ensure that the directors participating in the decision are free from conflicts of interest that could compromise their ability to act in the best interests of the stockholders. Seven of the nine directors are independent, and the two management directors — CEO Whitmore and CFO Choi — should be mindful of any perception that their support for a rights plan is motivated by a desire to avoid the accountability that Pinnacle Harbor's campaign would impose. The involvement of the fully independent Special Committee mitigates this concern.
C. Revlon Considerations
The Board should be aware that Revlon, Inc. v. MacAndrews & Forbaci Holdings, Inc. (Del. 1986) duties are not implicated in the current situation. Revlon duties arise when the board initiates an active bidding process seeking to sell the company, or when the board approves a transaction resulting in a change of control or a break-up of the company. Because the Board is not currently seeking to sell RGC or engaging in a break-up transaction, the Board's defensive measures are properly analyzed under the Unocal standard, not the Revlon standard.
However, if the Board were to initiate a strategic review process for the interactive gaming division — whether in response to Pinnacle Harbor's demands or of its own initiative — and that process were to result in a sale or spin-off of the division, Revlon duties could attach to that process, requiring the Board to seek the best price reasonably available for the division. The Board should be mindful of this dynamic in any discussions with Pinnacle Harbor regarding a potential strategic review.
Additionally, the rights plan should not be structured or deployed in a manner that entrenches existing management or blocks a value-maximizing transaction that would benefit all stockholders. The plan's redemption feature ensures that the Board retains the ability to remove the pill in connection with a transaction that the Board determines to be in the best interests of the stockholders, and the limited-duration term ensures that the plan does not indefinitely impede market forces.
VI. Proxy Advisory Firm Perspectives
The Board's evaluation of a stockholder rights plan must account for the substantial influence that proxy advisory firms exercise over the voting decisions of institutional shareholders. The two most influential proxy advisory firms — Centurion Governance Services, Inc. and the Hartley Shareholder Advisory Group, LLC — have well-established policies regarding rights plans that are likely to shape the institutional shareholder response to any pill adopted by the Board.
A. Centurion Governance Services, Inc.
Centurion Governance Services, Inc. ("Centurion") is the most widely followed proxy advisory firm, and its vote recommendations are followed, in whole or in part, by a significant percentage of institutional investors. Centurion's published policy framework generally opposes the adoption of stockholder rights plans without prior or concurrent shareholder approval. Centurion has stated that it views the adoption of a rights plan without shareholder ratification as a governance failure that undermines stockholder rights and board accountability.
In cases where a board adopts a rights plan without submitting it to a shareholder vote, Centurion may recommend that shareholders vote "withhold" on the directors responsible for the adoption — typically the members of the board committee that approved the plan or, in some cases, all directors who voted in favor of adoption. This "withhold" recommendation can have a meaningful impact on director vote totals, particularly at companies with a majority-voting standard for uncontested elections. For a company already facing a contested election, a Centurion "withhold" recommendation on the Board's own nominees could be devastating.
Centurion's guidelines provide a limited exception for short-duration plans (one year or less) adopted in response to a genuine threat of a hostile acquisition at an inadequate price. However, this exception is less clearly applicable to an activist board-seat campaign, where the threat is not an unsolicited acquisition but rather a stockholder's exercise of its franchise rights to seek board representation. Centurion has historically taken a skeptical view of rights plans adopted in activist defense contexts, and there is a meaningful risk that Centurion would treat the adoption of a pill by RGC as an entrenchment measure warranting a negative recommendation.
Risk Assessment: If the Board were to adopt a rights plan, Centurion could issue a negative recommendation regarding RGC directors at the 2023 annual meeting. This negative recommendation could shift institutional shareholder votes toward Pinnacle Harbor's nominees, undermining the Board's position in the very proxy contest that the pill is intended to defend against. The defensive benefit of the pill would thus be offset — and potentially outweighed — by the governance cost of the negative proxy advisory recommendation.
B. Hartley Shareholder Advisory Group, LLC
The Hartley Shareholder Advisory Group, LLC ("Hartley") is the second-most-influential proxy advisory firm. Hartley's policies regarding stockholder rights plans are broadly similar to Centurion's but provide somewhat greater deference to boards that adopt limited-duration plans in exigent circumstances.
Hartley evaluates rights plans on a case-by-case basis, considering the following factors: (1) the trigger threshold specified in the plan (lower thresholds are viewed more critically); (2) the duration of the plan (shorter durations are viewed more favorably); (3) whether shareholders have approved or ratified the plan; (4) the nature and severity of the threat that the plan is intended to address; and (5) the overall governance profile of the company, including the independence of its board, the quality of its shareholder engagement, and the existence of other defensive measures.
While Hartley's case-by-case approach provides somewhat more flexibility than Centurion's bright-line opposition, there is a meaningful risk that Hartley would issue an adverse recommendation if the pill is perceived as an anti-activist entrenchment tool rather than a defense against a genuine control threat. The fact that Pinnacle Harbor is seeking only two board seats out of nine, and that its demands include conventional activist proposals (strategic review, capital return), would weigh against a finding that the plan is a proportionate response to a genuine threat.
Risk Assessment: Hartley could issue an adverse recommendation, albeit with somewhat lower probability than Centurion, depending on the specific parameters of the plan and the Board's stated rationale for adoption.
C. Institutional Shareholder Reaction
Beyond the proxy advisory firms, the Board should consider the likely reaction of its major institutional shareholders to the adoption of a rights plan.
Ridgeway Asset Management, LP (8.2%, Franklin Osei, Portfolio Manager). As a long-only value fund, Ridgeway may be generally sympathetic to the Board's long-term strategic perspective and may share the Board's concerns about activist-driven short-termism. However, Ridgeway may also be uncomfortable with the adoption of a rights plan without shareholder approval, particularly if Centurion or Hartley issues a negative recommendation. Ridgeway's voting policies likely include a presumption against unilateral rights plan adoption, and its ultimate position would depend on the specific facts and circumstances.
Stillwater Capital Advisors, LLC (5.4%, Meg Liu, Head of Governance). Stillwater is a growth-oriented fund with an active governance focus. Meg Liu, as Head of Governance, is responsible for evaluating corporate governance practices across Stillwater's portfolio and has a reputation for rigorous engagement on governance issues. Stillwater is likely to scrutinize the pill closely and may oppose it if the Board cannot clearly demonstrate that the plan is a proportionate response to a genuine threat — a challenging showing in the activist board-seat context.
Canfield Municipal Employees' Retirement System (2.1%, David Proulx, CIO). Public pension funds, as a class, have historically followed proxy advisory firm recommendations and have generally opposed unilateral rights plan adoptions. The Canfield MERS is likely to defer to Centurion's and Hartley's recommendations on the rights plan question and would be expected to oppose the plan if either advisory firm issues a negative recommendation.
Calderwood & Harkness recommends that if the Board were to adopt a rights plan, the adoption should be accompanied by a comprehensive, proactive shareholder outreach program coordinated with Whitfield Morrow Partners, LLC (Denise Cavanaugh) and Harlan Ridge Communications, LLC (Philip Navarette). The outreach program should explain the Board's rationale for adopting the plan, the specific threat posed by Pinnacle Harbor's campaign, the limited duration and reasonable parameters of the plan, and the Board's continued commitment to constructive engagement with all stockholders. Without such outreach, the risk of adverse institutional reaction is significantly elevated.
VII. Strategic Risk Assessment
A. Risks of Adoption
The Board should carefully consider the following risks associated with adopting a stockholder rights plan at this time:
1. Proxy Advisory Backlash. As discussed in Section VI, adoption of a rights plan could trigger negative recommendations from Centurion Governance Services, Inc. and the Hartley Shareholder Advisory Group, LLC. Negative recommendations from one or both of these firms could cause the Board to lose votes at the 2023 annual meeting, potentially resulting in Pinnacle Harbor's nominees receiving sufficient support to gain board seats. In this scenario, the rights plan would have undermined the very defense it was intended to provide.
2. Institutional Investor Alienation. Key institutional holders — including Ridgeway Asset Management (8.2%), Stillwater Capital Advisors (5.4%), and the Canfield Municipal Employees' Retirement System (2.1%) — may view the adoption of a rights plan negatively, particularly if it is adopted without shareholder approval and in the context of an activist board-seat campaign rather than a hostile takeover. Institutional alienation could shift support toward Pinnacle Harbor's nominees and away from the Board's slate, eroding the Board's majority support among the shareholder base.
3. Narrative Weaponization by Pinnacle Harbor. Pinnacle Harbor could frame the adoption of a rights plan as evidence that the Board is entrenched, defensive, and unwilling to engage constructively with its stockholders. This narrative is particularly powerful with governance-focused investors and with the financial media, and it could significantly enhance Pinnacle Harbor's ability to generate support for its proxy contest. The open letter of November 30, 2022 already sought to portray the Board as insufficiently responsive to stockholder concerns; the adoption of a pill would provide Pinnacle Harbor with a concrete, visible symbol of board entrenchment to deploy in its public messaging.
4. Litigation Risk. Pinnacle Harbor could challenge the rights plan in the Delaware Court of Chancery under the Unocal standard. While a well-structured, limited-duration plan with a reasonable trigger threshold has a reasonable probability of being upheld under existing Delaware precedent, litigation is expensive, distracting, and creates adverse publicity. Calderwood & Harkness estimates that defending a rights plan challenge in the Court of Chancery could add significant costs to the approximately $1.38 million in total engagement fees already estimated for the current advisory engagement. Moreover, even a favorable outcome in litigation does not eliminate the governance and reputational costs of having adopted the plan.
5. Disproportionality Perception. A rights plan adopted against a 6.8% stockholder seeking only two board seats out of nine may be perceived — by the courts, by proxy advisory firms, by institutional shareholders, and by the financial media — as disproportionate to the threat. The disproportionality perception is the single most significant risk associated with adoption, as it goes directly to the legal standard governing the plan's validity and the practical question of whether the plan will generate more support for or opposition to the Board's position.
B. Risks of Non-Adoption
The Board should also consider the risks associated with declining to adopt a rights plan:
1. Creeping Accumulation. Without a rights plan in place, there is no structural barrier preventing Pinnacle Harbor from increasing its stake above its current 6.8%. Pinnacle Harbor could continue to accumulate shares through open-market purchases, potentially reaching 10%, 15%, or even higher levels. A larger stake would enhance Pinnacle Harbor's voting power, its credibility with other institutional shareholders, and its leverage in settlement negotiations. While Schedule 13D disclosure requirements would provide visibility into Pinnacle Harbor's accumulation activity, disclosure is a transparency mechanism, not a defensive barrier.
2. Wolf Pack Formation. Other activist or event-driven funds could independently acquire positions in RGC common stock, effectively acting in parallel with Pinnacle Harbor without formally constituting a Section 13(d)(3) group. This "wolf pack" dynamic could result in a significant aggregation of voting power in the hands of investors sympathetic to Pinnacle Harbor's agenda, without triggering any disclosure obligations or crossing any regulatory thresholds. A rights plan with group-aggregation provisions would deter this behavior by imposing a dilutive penalty on coordinated accumulation.
3. Loss of Negotiating Leverage. The mere threat of adopting a rights plan — the concept of a "pill on the shelf" — provides the Board with meaningful negotiating leverage in settlement discussions with Pinnacle Harbor. However, if the Board publicly declines to adopt a plan, and if that decision becomes known to Pinnacle Harbor or to the market, the credibility of the pill threat may be diminished. Actual non-adoption does not permanently eliminate the Board's ability to adopt a plan in the future (as the Board would retain authority to do so at any time), but it may signal to Pinnacle Harbor that the Board is reluctant to use this defensive tool, potentially emboldening a more aggressive posture.
4. Precedent Effect. A decision not to adopt a rights plan in response to the current campaign could establish a precedent that emboldens future activist campaigns against RGC. Other activist funds may perceive RGC as a company that is reluctant to deploy aggressive defensive measures, making the Company a more attractive target for future campaigns.
C. Alternative Defensive Measures
The Board has a range of alternative defensive measures available to it that may provide effective protection against the Pinnacle Harbor campaign without incurring the governance and reputational costs associated with a rights plan. These alternatives include:
Enhanced Shareholder Engagement. The Company has already engaged Whitfield Morrow Partners, LLC (Denise Cavanaugh) as its proxy solicitor and Harlan Ridge Communications, LLC (Philip Navarette) as its investor relati