PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION This memorandum is a privileged and confidential attorney-client communication prepared by Calderwood & Harkness LLP at the request of Redstone Gaming Corp. for the purpose of providing legal advice. This document and its contents are protected by the attorney-client privilege and the work product doctrine. Any unauthorized disclosure, distribution, or copying of this memorandum or its contents is strictly prohibited.
CALDERWOOD & HARKNESS LLP 3900 Howard Hughes Parkway, Suite 800 Las Vegas, NV 89169 Telephone: (702) 555-8400
MEMORANDUM
TO: Priya Narasimhan, General Counsel, Redstone Gaming Corp. (for submission to the Compensation Committee of the Board of Directors, chaired by Theodore S. Iglesias)
FROM: Renata Vasquez, Partner, and Nadia Petrov, Senior Associate — Calderwood & Harkness LLP
DATE: January 11, 2024
RE: Enhanced Compensation Package Recommendation — CFO Candidate Marcus J. Ellender
MATTER NO.: 1033-00005
I. Executive Summary
The purpose of this memorandum is to advise Priya Narasimhan, in her capacity as General Counsel of Redstone Gaming Corp. ("RGC" or the "Company"), and through her the Compensation Committee of the Board of Directors (the "Compensation Committee" or the "Committee"), chaired by Theodore S. Iglesias, regarding a recommended enhanced compensation package for Chief Financial Officer candidate Marcus J. Ellender ("Ellender" or the "Candidate") in light of a competing offer that has materially altered the negotiation landscape.
On January 10, 2024, the Candidate's legal counsel, Victoria R. Saldana of Harlan & Mosley LLP, informed Calderwood & Harkness LLP ("C&H" or the "Firm") that Ellender has received a competing employment offer from Pinnacle Crest Entertainment, Inc. ("Pinnacle Crest" or "PCEI"), a publicly traded gaming and hospitality company listed on the New York Stock Exchange under the ticker symbol "PCEI," for the position of Executive Vice President & Chief Financial Officer. According to Ms. Saldana, the competing offer carries reported total annual compensation of approximately $3,800,000, a figure that, if accurate, represents a substantial premium over RGC's current offer to Ellender. No detailed component-level breakdown of the Pinnacle Crest offer was provided by Ms. Saldana, and we have not independently verified the reported figure.
Despite the competing offer, Ellender has expressed continued interest in the RGC opportunity. Through his counsel, however, Ellender has requested that RGC reconsider several elements of its compensation package, with particular focus on base salary, equity grant size and acceleration terms, and the scope and duration of the restrictive covenant obligations contained in the proposed Executive Employment Agreement.
This memorandum addresses the following matters:
(a) an analysis of the competitive gap between RGC's initial offer to Ellender, as set forth in the November 17, 2023 term sheet and accompanying draft Executive Employment Agreement, and the reported Pinnacle Crest offer;
(b) specific recommended enhancements to the compensation package, including adjustments to base salary, annual bonus structure, signing bonus, and equity grant levels, designed to bring RGC's offer within a defensible competitive range;
(c) an analysis of Section 280G implications arising from the enhanced change-in-control severance provisions and the interaction of those provisions with the Candidate's anticipated "base amount" under the Internal Revenue Code;
(d) a discussion of the restrictive covenant posture and our recommendation regarding the Candidate's request to reduce the duration and geographic scope of the non-competition obligation; and
(e) a request for Compensation Committee authorization of the enhanced compensation package through the adoption of proposed Resolution CC-2024-002, which is attached hereto as Appendix B.
We note at the outset that this matter is time-sensitive. Ms. Saldana indicated during the January 10, 2024 communication that Ellender faces a compressed decision timeline and cannot maintain both offers open indefinitely. We therefore recommend that the Compensation Committee act promptly — ideally no later than January 12, 2024 — to authorize the enhanced package so that C&H can prepare and deliver a revised Executive Employment Agreement to Harlan & Mosley LLP by January 15, 2024.
II. Background
A. CFO Search Process
The need for the current executive recruitment effort arose following the departure of Richard Halvorsen, who served as RGC's Chief Financial Officer from March 2019 until his resignation, effective September 15, 2023. Mr. Halvorsen departed to accept a position as Chief Executive Officer of a privately held hospitality venture, and his departure, while amicable, left a significant leadership gap within RGC's finance organization.
On September 18, 2023 — three days after Mr. Halvorsen's departure — the Board of Directors, upon the recommendation of CEO Gavin T. Ashford, appointed Sandra K. Ouellet as Interim Chief Financial Officer and Vice President of Finance. Ms. Ouellet, who had served as RGC's Senior Vice President of Financial Planning and Analysis since 2020, has capably managed the CFO function in the interim period. However, both management and the Board have recognized the need to recruit a permanent, externally credentialed CFO with deep gaming industry experience to lead the Company's finance organization through its next phase of growth, including RGC's planned expansion into regulated online gaming markets and the anticipated refinancing of its $1.35 billion senior secured credit facility.
To facilitate the search, RGC retained Kensington Brace Partners, a nationally recognized executive search firm headquartered at 375 Park Avenue, Suite 2800, New York, NY 10152, pursuant to an engagement letter dated September 25, 2023. Kensington Brace conducted a comprehensive national search, evaluating more than forty prospective candidates with relevant gaming, hospitality, and public-company finance backgrounds.
Following an extensive evaluation process that included preliminary screenings, detailed interviews with members of RGC's senior leadership team, and presentations to the Compensation Committee and the full Board, Marcus J. Ellender was identified as the finalist candidate on October 20, 2023. Ellender's candidacy was unanimously endorsed by the members of the executive leadership team who participated in the interview process, and the Compensation Committee authorized the commencement of formal offer negotiations.
By way of background, Ellender possesses the following professional and personal profile:
• Age: 47
• Current Position: Executive Vice President & Chief Accounting Officer, Grandview Resorts International, Inc. ("Grandview"), a privately held hospitality and gaming company headquartered in Reno, Nevada. Ellender has served in this role since 2018, overseeing Grandview's accounting, financial reporting, tax, and treasury functions across a portfolio of eight casino resorts and seventeen hotel properties.
• Education: Bachelor of Science in Accounting, University of Nevada, Reno (1999); Master of Business Administration, The Wharton School, University of Pennsylvania (2005).
• Professional Licensure: Active Certified Public Accountant, State of Nevada (License No. CPA-NV-041882).
• Residence: 2288 Bristlecone Pines Drive, Reno, NV 89511.
• Current Compensation at Grandview: Base salary of $485,000 per year; total annual compensation of approximately $1,250,000 per year, inclusive of annual cash bonus, equity incentive awards, and other benefits.
Ellender's qualifications are well-suited to RGC's needs. His extensive experience in the gaming and hospitality sector, his familiarity with Nevada Gaming Control Board regulatory requirements, and his demonstrated ability to manage complex financial operations at scale make him a compelling candidate for the CFO role.
B. Initial Offer and Negotiation History
Following the identification of Ellender as the finalist candidate, the Compensation Committee approved an offer framework for the CFO position pursuant to Resolution CC-2023-014, adopted on November 3, 2023. The resolution authorized management and outside counsel to negotiate an employment agreement with Ellender within specified parameters for base salary, bonus targets, equity grants, and severance terms.
Calderwood & Harkness LLP was formally engaged to represent RGC in connection with the negotiation and drafting of the Executive Employment Agreement on November 8, 2023, under Engagement Reference 1033-00005. Since that date, this Firm has served as lead outside counsel for the employment transaction, coordinating as appropriate with RGC's internal legal team and the Company's executive compensation consultants at Halcyon Meridian Advisors LLC.
The negotiation history to date has proceeded as follows:
November 17, 2023: C&H delivered to Ellender's counsel, Victoria R. Saldana of Harlan & Mosley LLP, a comprehensive term sheet outlining the principal terms of the proposed employment arrangement, accompanied by the first full draft of the Executive Employment Agreement. The term sheet and draft agreement reflected the parameters authorized by the Compensation Committee in Resolution CC-2023-014.
December 1, 2023: Harlan & Mosley delivered its first redline and counterproposal to C&H. The counterproposal sought, among other things, a higher base salary, a guaranteed minimum annual bonus for the first year of employment, full (rather than pro-rata) acceleration of equity awards upon termination without cause, a reduction in the non-competition period from 18 months to 12 months, a narrowing of the non-competition geographic scope to Nevada and New Jersey only, and an expansion of the Good Reason definition to include changes in reporting structure.
December 15, 2023: C&H delivered the second draft of the Executive Employment Agreement to Harlan & Mosley. This draft reflected certain compromises that had been authorized by Ms. Narasimhan in consultation with the Committee Chair, including a reduction in the signing bonus clawback period from 36 months to 24 months and a modest expansion of the Good Reason definition to include material diminution of duties, authority, or responsibilities (in addition to salary and relocation triggers already included). However, the second draft maintained RGC's positions on several key issues, including the 18-month non-competition duration, U.S.-wide non-competition geographic scope, and pro-rata (rather than full) equity acceleration upon involuntary termination.
January 3, 2024: Harlan & Mosley delivered its second redline to C&H. This counterproposal continued to press on the remaining open issues, including the non-competition duration, geographic scope, equity acceleration terms, Good Reason definition breadth, and the request for a guaranteed minimum annual bonus in year one.
At the time the competing offer was disclosed on January 10, 2024, the following key issues remained unresolved between the parties:
(1) Restrictive Covenant Duration: RGC proposed an 18-month post-termination non-competition period; Ellender's counsel sought a reduction to 12 months.
(2) Restrictive Covenant Geographic Scope: RGC proposed a United States-wide non-competition restriction, plus any jurisdiction in which RGC operates or has filed gaming license applications; Ellender's counsel sought a narrowing of the restriction to Nevada and New Jersey only.
(3) Equity Acceleration on Termination Without Cause: RGC proposed pro-rata acceleration of unvested equity awards based on time elapsed in the applicable vesting period; Ellender's counsel sought full acceleration of all unvested awards.
(4) Good Reason Definition Breadth: Ellender's counsel sought inclusion of a "material adverse change in reporting structure" trigger (i.e., the Candidate would have the right to resign for Good Reason if he were no longer reporting directly to the CEO); RGC's second draft did not include this provision.
(5) Guaranteed Minimum Bonus in Year One: Ellender's counsel requested that the employment agreement guarantee a minimum annual bonus equal to 75% of target for the Candidate's first year of employment; RGC's second draft did not include a guaranteed bonus floor.
C. The Competing Offer
On January 10, 2024, Victoria R. Saldana of Harlan & Mosley LLP contacted this Firm by telephone to communicate that Ellender had received an unsolicited competing offer from Pinnacle Crest Entertainment, Inc. Ms. Saldana provided the following information regarding the competing offer:
• Offering Entity: Pinnacle Crest Entertainment, Inc., a Delaware corporation listed on the New York Stock Exchange (NYSE: PCEI). Pinnacle Crest is headquartered at 7700 Paradise Road, Suite 300, Las Vegas, NV 89123, and is led by Chief Executive Officer Franklin D. Moreau. The Company's outside employment counsel is Blakely Chambers & Wright LLP, Los Angeles, California.
• Offered Position: Executive Vice President & Chief Financial Officer.
• Reported Total Annual Compensation: Approximately $3,800,000. Ms. Saldana did not provide a component-level breakdown of this figure (i.e., she did not specify the allocation among base salary, annual bonus target, equity compensation, or other elements). We have not independently verified the accuracy of the reported total compensation figure, and we note the possibility that the figure may include one-time elements such as a signing bonus or make-whole equity grants that would inflate the apparent annualized value.
• Pinnacle Crest Financial Profile: Pinnacle Crest reported estimated fiscal year 2023 revenue of approximately $4.1 billion, compared to RGC's fiscal year 2023 revenue of $2.87 billion. Pinnacle Crest is therefore a meaningfully larger company than RGC, which is a relevant factor in evaluating the comparability of the two compensation packages.
Ms. Saldana stated that Ellender remains interested in the RGC opportunity and views RGC as an attractive platform. However, she emphasized that Ellender cannot wait indefinitely and that the existence of a credible and economically superior alternative necessarily influences the Candidate's expectations for the RGC package. Ms. Saldana did not specify a hard deadline but conveyed a clear sense of urgency.
We have reviewed publicly available information regarding Pinnacle Crest's executive compensation practices, including the company's most recent proxy statement filed with the Securities and Exchange Commission. A summary of this review is provided in Appendix C. Based on that review, a total annual compensation package of approximately $3,800,000 for a CFO at Pinnacle Crest would be broadly consistent with the company's historical compensation levels for its named executive officers, lending some credibility to the figure reported by Ms. Saldana.
III. Gap Analysis: RGC Initial Offer vs. Pinnacle Crest Reported Offer
A. Summary of RGC Initial Offer (November 17, 2023 Term Sheet)
The RGC initial offer, as reflected in the November 17, 2023 term sheet and first draft Executive Employment Agreement, included the following principal compensation elements:
Base Salary: $650,000 per year.
Annual Cash Bonus: Target of 85% of base salary, yielding a target bonus of $552,500. Maximum payout of 170% of base salary, yielding a maximum bonus of $1,105,000. Bonus to be determined annually by the Compensation Committee based on achievement of pre-established performance metrics.
Signing Bonus: $300,000, payable within thirty (30) days of the Candidate's commencement of employment, subject to pro-rata repayment if the Candidate voluntarily terminates employment within the clawback period (initially proposed at 36 months; reduced to 24 months in the second draft).
Restricted Stock Units ("RSUs"): 35,000 shares of RGC common stock (NASDAQ: RDGM), vesting ratably over three (3) years (11,667 shares per year, with the final tranche adjusted to reflect rounding). At a grant date fair value of $38.20 per share (based on the closing price of RDGM common stock on the date the term sheet was prepared), the total RSU grant value was $1,337,000.
Performance Stock Units ("PSUs"): 20,000 target shares of RGC common stock, cliff-vesting at the end of a three (3)-year performance period. The number of shares actually earned would range from 0% to 200% of target based on achievement of performance metrics to be established by the Compensation Committee. At a grant date fair value of $38.20 per share at target, the total PSU grant value at target was $764,000.
Total Initial Equity Grant Value: $1,337,000 (RSUs) + $764,000 (PSUs at target) = $2,101,000.
Annualized Equity Value: $2,101,000 ÷ 3 years = $700,333 per year.
Total Annual Compensation at Target (excluding signing bonus): $650,000 (base salary) + $552,500 (target bonus) + $700,333 (annualized equity) = $1,902,833 per year.
Year-One Total Compensation (including signing bonus): $1,902,833 + $300,000 = $2,202,833.
B. Pinnacle Crest Reported Package
As noted in Section II.C above, the Pinnacle Crest offer carries reported total annual compensation of approximately $3,800,000. Because no specific component-level breakdown was disclosed by Ellender's counsel, we are unable to conduct a line-item comparison between the two offers. The analysis in this Section is therefore based on the aggregate reported figure as communicated by Ms. Saldana.
We note that the absence of component-level detail introduces uncertainty into the comparison. It is possible, for example, that the reported $3,800,000 figure includes one-time elements (such as a signing bonus or make-whole equity grant) that inflate the apparent annualized value, or that it reflects an equity valuation methodology that differs from the grant date fair value approach used by RGC. Notwithstanding these caveats, the reported figure provides a meaningful reference point for evaluating the competitiveness of RGC's offer.
C. Competitive Gap
The gap between RGC's initial offer and the reported Pinnacle Crest offer is significant by any measure:
• Annual Compensation Gap: $3,800,000 − $1,902,833 = $1,897,167, representing an approximately 99.7% premium of the Pinnacle Crest package over RGC's initial offer at target.
• Percentage Comparison: RGC's initial offer of $1,902,833 in total annual compensation at target represents approximately 50.1% of the reported Pinnacle Crest offer of $3,800,000. Stated differently, the Pinnacle Crest offer is approximately twice the value of RGC's initial offer.
• Year-One Comparison: Even when the RGC signing bonus of $300,000 is included, the year-one total compensation of $2,202,833 represents only approximately 58.0% of the reported Pinnacle Crest annual figure.
Even accounting for the possibility that the reported Pinnacle Crest figure may be somewhat inflated — whether through the inclusion of one-time elements, aggressive equity valuation assumptions, or negotiation posturing by Ellender's counsel — the competitive gap is substantial and, if the reported figure is reasonably accurate, renders RGC's initial offer non-competitive for a candidate of Ellender's caliber and experience.
This assessment is supported by external benchmarking data. Halcyon Meridian Advisors LLC (Anita G. Prescott, Managing Director), which has been engaged by the Compensation Committee to provide independent executive compensation consulting services, has provided benchmarking data indicating that total annual compensation for chief financial officers at comparable publicly traded gaming and hospitality companies with revenues in the $2 billion to $5 billion range typically falls within a range of $2.0 million to $3.5 million. RGC's initial offer of approximately $1.9 million falls below the bottom of this peer group range, further underscoring the need for an enhanced package. A summary of the Halcyon Meridian benchmarking analysis is provided under separate cover as Appendix A.
IV. Recommended Enhanced Compensation Package
Based on our analysis of the competitive gap, the Halcyon Meridian benchmarking data, and the practical realities of the negotiation, we recommend the following enhancements to the compensation package for the Compensation Committee's consideration and approval.
A. Base Salary
Recommendation: Increase the annual base salary from $650,000 to $725,000.
This represents an increase of $75,000, or approximately 11.5%, over the initial offer. The recommended base salary of $725,000 represents a significant premium over Ellender's current base salary at Grandview of $485,000 (a 49.5% increase) and is well within the competitive range for CFOs at publicly traded gaming companies of RGC's size, as indicated by the Halcyon Meridian benchmarking data.
We note that the base salary is a foundational element of the compensation package, as it directly affects the value of the annual bonus (which is expressed as a percentage of base salary), the change-in-control severance calculation, and the non-CIC severance amount. The increase in base salary therefore has a compounding effect on several other components of the package, which has been taken into account in the recommendations that follow.
While we recognize that the Candidate may seek a higher base salary — and the Pinnacle Crest offer may include a base salary well in excess of $725,000 — we believe this level appropriately reflects RGC's compensation philosophy and internal pay equity considerations, particularly in relation to the base salaries of other members of the Company's executive leadership team.
B. Annual Cash Bonus
Recommendation: Increase the annual bonus target from 85% to 100% of base salary, and increase the maximum bonus payout from 170% to 200% of base salary.
Under the enhanced structure:
• New Target Bonus: 100% × $725,000 = $725,000
• New Maximum Bonus: 200% × $725,000 = $1,450,000
• Increase in Target Bonus: The target bonus increases from $552,500 (under the initial offer) to $725,000, an increase of $172,500 or approximately 31.2%.
• Increase in Maximum Bonus: The maximum bonus increases from $1,105,000 to $1,450,000, an increase of $345,000 or approximately 31.2%.
The increase in the bonus target from 85% to 100% of base salary brings the annual incentive opportunity into alignment with market practice for CFO-level executives at comparable gaming companies, where a 100% target bonus is commonly observed.
With respect to the Candidate's request for a guaranteed minimum bonus of 75% of target in year one (which would equate to $543,750 under the enhanced structure), we recommend that the Compensation Committee maintain its discretion over annual bonus determinations and decline to include a guaranteed floor in the employment agreement. Guaranteed bonuses are disfavored by proxy advisory firms and may draw adverse attention in the Company's proxy statement. However, we recognize that this may need to be revisited as a final concession point if the guaranteed bonus proves to be a material impediment to closing the deal. If the Committee wishes to consider a compromise, one approach would be to provide for a discretionary supplemental payment in year one that is separate from the annual bonus plan, thereby preserving the integrity of the performance-based bonus structure while providing the Candidate with additional economic assurance in the transitional first year.
C. Signing Bonus
Recommendation: Increase the signing bonus from $300,000 to $500,000.
This represents an increase of $200,000, or approximately 66.7%, over the initial offer. The signing bonus would remain payable within thirty (30) days of the Candidate's commencement of employment and would be subject to pro-rata repayment if the Candidate voluntarily terminates employment within twenty-four (24) months following the commencement date, consistent with the clawback provision negotiated in the second draft of the Executive Employment Agreement.
The clawback rate under the enhanced signing bonus would be calculated as follows:
$500,000 ÷ 24 months = $20,833.33 per month
For each full month of employment completed by the Candidate prior to voluntary termination, the repayment obligation would be reduced by $20,833.33.
The increased signing bonus serves a dual purpose. First, it compensates Ellender for the anticipated forfeiture of unvested equity awards and deferred compensation at Grandview that would be triggered by his departure from that company. Second, it provides a meaningful economic bridge that enhances the overall competitiveness of RGC's year-one compensation package relative to the Pinnacle Crest offer.
D. Equity Grants
Restricted Stock Units (RSUs)
Recommendation: Increase the initial RSU grant from 35,000 shares to 45,000 shares of RDGM common stock.
• Vesting: Ratably over three (3) years (15,000 shares per year).
• Grant Date Fair Value: At $38.20 per share, the total RSU grant value would be 45,000 × $38.20 = $1,719,000.
• Increase: From $1,337,000 (initial offer) to $1,719,000, an increase of $382,000 or approximately 28.6%.
Performance Stock Units (PSUs)
Recommendation: Increase the initial PSU grant from 20,000 target shares to 30,000 target shares.
• Vesting: Cliff-vesting at the end of a three (3)-year performance period.
• Payout Range: 0% to 200% of target, resulting in a potential payout range of 0 to 60,000 shares, depending on achievement of performance metrics to be established by the Compensation Committee.
• Grant Date Fair Value at Target: At $38.20 per share, the PSU grant value at target would be 30,000 × $38.20 = $1,146,000.
• Increase: From $764,000 (initial offer) to $1,146,000, an increase of $382,000 or approximately 50.0%.
Total Initial Equity Grant Value (Enhanced)
The total initial equity grant value under the enhanced package would be:
$1,719,000 (RSUs) + $1,146,000 (PSUs at target) = $2,865,000
This represents an increase of $764,000, or approximately 36.4%, over the initial equity grant value of $2,101,000.
Annualized Equity Value
The annualized equity value under the enhanced package would be:
$2,865,000 ÷ 3 years = $955,000 per year
This represents an increase of $254,667 per year, or approximately 36.4%, over the initial annualized equity value of $700,333.
Equity Acceleration Upon Termination Without Cause
We recommend maintaining the pro-rata acceleration position set forth in the first and second drafts of the Executive Employment Agreement. Under this approach, if Ellender is terminated without Cause (outside of a change-in-control context), he would be entitled to accelerated vesting of a pro-rata portion of his unvested equity awards, calculated based on the number of full months of employment completed during the applicable vesting period divided by the total number of months in the vesting period.
The Candidate's counsel has consistently pressed for full acceleration of all unvested equity awards upon any involuntary termination, but we believe the pro-rata approach is more appropriate for several reasons. Full acceleration would create significant cost exposure for the Company, particularly in a scenario where termination occurs shortly after grant. Moreover, full acceleration would require prominent disclosure in RGC's proxy statement under the "Potential Payments Upon Termination or Change in Control" table, and the magnitude of the potential accelerated equity value could draw adverse attention from proxy advisory firms and institutional shareholders. The enhanced equity grant sizes amplify these concerns, making it even more important to maintain the pro-rata acceleration structure.
E. Total Compensation Summary (Enhanced Offer at Target)
The following table summarizes the enhanced compensation package in comparison to the initial offer:
The enhanced total annual compensation of $2,405,000 (at target, excluding the one-time signing bonus) represents approximately 63.3% of Pinnacle Crest's reported $3,800,000 package. The year-one total compensation of $2,905,000, inclusive of the $500,000 signing bonus, represents approximately 76.4% of the reported Pinnacle Crest figure.
While a gap between the RGC enhanced offer and the reported Pinnacle Crest offer remains, the enhanced package is positioned within the competitive range identified by Halcyon Meridian Advisors for chief financial officers at comparable publicly traded gaming companies with revenues in the $2 billion to $5 billion range. Importantly, the remaining gap is largely attributable to the difference in scale between the two companies: Pinnacle Crest's estimated fiscal year 2023 revenue of $4.1 billion is approximately 43% larger than RGC's revenue of $2.87 billion, and Pinnacle Crest's market capitalization is correspondingly larger. It would not be appropriate or defensible for RGC to fully match the compensation levels of a materially larger competitor, and the Compensation Committee should not feel compelled to do so. Rather, the enhanced offer should be viewed as competitive for a company of RGC's size and financial profile, and the Company's growth trajectory, culture, leadership opportunity, and other non-economic factors should be positioned to bridge the remaining gap.
V. Severance and Change-in-Control Provisions
A. Change-in-Control Severance (Enhanced)
The Executive Employment Agreement will include a change-in-control severance provision structured on a "double-trigger" basis, meaning that severance is payable only upon the occurrence of both (i) a change in control of the Company and (ii) a qualifying termination of the executive's employment (i.e., termination without Cause or resignation for Good Reason) within twenty-four (24) months following the consummation of the change in control.
Under the enhanced package, the change-in-control severance amount would be calculated as follows:
CIC Severance = 2× (Base Salary + Target Bonus)
2 × ($725,000 + $725,000) = 2 × $1,450,000 = $2,900,000
This represents an increase from the CIC severance amount that would have been calculated under the initial offer terms (which were based on the prior base salary and bonus target figures). The 2× multiple is consistent with prevailing market practice for CFO-level executives at publicly traded gaming and hospitality companies, as confirmed by the Halcyon Meridian benchmarking analysis.
In addition to the cash severance, the CIC severance provision will include full acceleration of all unvested equity awards upon a qualifying termination within the 24-month period following a change in control. This is a standard double-trigger acceleration provision and is distinct from the pro-rata acceleration that would apply in a non-CIC involuntary termination scenario.
The double-trigger structure is important from both a governance and a tax perspective. From a governance standpoint, the double-trigger approach avoids the windfall that would result from automatic acceleration upon a change in control (even if the executive's employment continues), and it is strongly preferred by proxy advisory firms, including Thackeray Health IT (ISS) and Tarrant Partners LLC. From a tax standpoint, the double-trigger structure helps to manage the Company's exposure under Section 280G of the Internal Revenue Code, as discussed in Section VI below.
B. Non-CIC Severance (Termination Without Cause or for Good Reason)
In the event that Ellender's employment is terminated by the Company without Cause (other than in connection with a change in control) or by Ellender for Good Reason, the following severance benefits would be payable:
• Cash Severance: 1.5× base salary = $725,000 × 1.5 = $1,087,500, payable in installments in accordance with the Company's regular payroll schedule over the eighteen (18)-month period following the date of termination.
• Pro-Rata Annual Bonus: A pro-rata annual bonus for the fiscal year in which the termination occurs, based on actual performance and calculated by multiplying the full-year bonus that would have been earned (based on achievement of performance metrics) by a fraction, the numerator of which is the number of days elapsed in the fiscal year through the date of termination and the denominator of which is 365.
• Continued Health Insurance: Eighteen (18) months of continued group health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), with the Company paying the employer-portion of the premium during such period, subject to applicable tax treatment and any required imputed income.
• Pro-Rata Equity Acceleration: As discussed in Section IV.D above, pro-rata acceleration of unvested equity awards based on time elapsed in the applicable vesting period.
All severance payments and benefits would be conditioned upon Ellender's execution and non-revocation of a general release of claims in a form acceptable to the Company and his continued compliance with the restrictive covenant obligations set forth in the Executive Employment Agreement.
C. Good Reason Definition
We recommend modestly expanding the Good Reason definition in the third draft of the Executive Employment Agreement, consistent with the approach taken in the second draft (December 15, 2023). The Good Reason definition would include the following triggers:
(i) a material diminution in the executive's duties, authority, or responsibilities;
(ii) a material reduction in the executive's base salary or annual bonus target (with a "material reduction" defined as a reduction of 10% or more);
(iii) a relocation of the executive's principal place of employment to a location more than fifty (50) miles from the current principal place of employment; and
(iv) any material breach by the Company of the Executive Employment Agreement.
Each Good Reason trigger would be subject to customary notice and cure provisions, requiring the executive to provide written notice to the Company within thirty (30) days of the initial occurrence of the Good Reason event and the Company to have a thirty (30)-day cure period.
The Candidate's counsel continues to seek inclusion of a fifth trigger: "material adverse change in reporting structure," which would give Ellender the right to resign for Good Reason if he were no longer reporting directly to the Chief Executive Officer. We recommend that the Committee maintain RGC's current position of not including this trigger in the third draft. This provision would effectively give the executive a veto over any future organizational restructuring that might affect the reporting line, and it could prove problematic in the event of a CEO succession or an organizational realignment. However, we recommend holding this concession in reserve as a potential "last-dollar" negotiation point that could be deployed if needed to close the deal.
VI. Section 280G Analysis and Best-Net Cutback
Section 280G Overview and Approach
Consistent with RGC's current executive compensation philosophy and the terms of the Company's existing executive employment agreements, the Executive Employment Agreement with Ellender will not include a Section 280G excise tax gross-up. The elimination of 280G gross-ups has become standard practice among publicly traded companies and is strongly disfavored by proxy advisory firms, institutional shareholders, and corporate governance advocates. RGC discontinued the use of 280G gross-ups in new executive agreements in 2019, and we do not recommend deviating from that policy.
Instead, the agreement will include a "best net" cutback provision. Under this structure, if any payments or benefits payable to Ellender in connection with a change in control would constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), such payments and benefits will be reduced to the extent necessary to avoid triggering the excise tax imposed by Section 4999 of the Code — but only if such reduction results in a greater after-tax benefit to the executive than would be realized if the full payments were made and the excise tax were borne by the executive. In other words, the agreement will provide for a comparison of two scenarios:
Scenario 1: Full payment, with the executive bearing the 20% Section 4999 excise tax on the amount of the excess parachute payment.
Scenario 2: Reduced payment (to the "safe harbor" amount of 2.99× the executive's "base amount"), with no excise tax.
The agreement will provide that whichever scenario yields the greater after-tax benefit to the executive will be applied.
Preliminary 280G Modeling
With the enhanced CIC severance of $2,900,000 and the potential for significant equity acceleration upon a qualifying termination following a change in control, the total "parachute payments" that could be triggered in a change-in-control scenario are substantial. Whether those payments would exceed the Section 280G threshold (i.e., three times the executive's "base amount") will depend on Ellender's actual base amount, which is determined by his average annualized includible compensation (as reported on Form W-2) for the five taxable years preceding the taxable year in which the change in control occurs.
As a preliminary reference, Ellender's current total compensation at Grandview is approximately $1,250,000 per year, with a base salary of $485,000. If Ellender's historical W-2 compensation has been relatively stable at approximately this level over the past five years, his base amount would be in the range of approximately $1,200,000 to $1,300,000. In that case, the Section 280G threshold (3× the base amount) would be approximately $3,600,000 to $3,900,000, and the safe harbor limit (2.99× the base amount) would be approximately $3,588,000 to $3,887,000.
A formal 280G calculation will require Ellender's actual historical W-2 data for the relevant tax years, which we have not yet obtained. We recommend that the Company, through its tax advisors at Calloway Firth & Associates LLP (Douglas H. Seibert, engagement partner), coordinate with Halcyon Meridian Advisors to conduct a preliminary 280G analysis once the enhanced compensation terms are finalized and Ellender's historical compensation data is available. This analysis should be completed before the Executive Employment Agreement is executed, so that both parties have a clear understanding of the potential 280G exposure.
It should be noted that Ellender's base amount will increase over time as his RGC compensation (which will be significantly higher than his Grandview compensation) is included in the five-year averaging period. Accordingly, the 280G exposure may be higher in the early years of his employment and may diminish over time as his base amount increases.
VII. Restrictive Covenant Terms
The restrictive covenant provisions in the Executive Employment Agreement remain a central and contentious negotiation point. The following summarizes RGC's position, the Candidate's position, and our recommendation.
Non-Competition Period. We recommend that the Compensation Committee maintain the eighteen (18)-month post-termination non-competition period as proposed in all prior drafts of the Executive Employment Agreement. Ellender's counsel has consistently sought a reduction to twelve (12) months, arguing that an 18-month restriction is excessive and commercially unreasonable. We respectfully disagree. RGC operates in a highly competitive, heavily regulated gaming industry in which the protection of confidential information, proprietary financial strategies, and relationships with gaming regulators is of paramount importance. As CFO, Ellender will have access to the Company's most sensitive financial data, including capital allocation plans, acquisition pipeline information, debt financing strategies, gaming license application data, and proprietary financial models. An 18-month post-termination non-competition period is necessary to ensure that this information does not inure to the benefit of a direct competitor during the period immediately following Ellender's departure. Moreover, 18-month non-competition periods are commonly observed in executive employment agreements for CFO-level positions in the gaming industry and have been upheld by Nevada courts where supported by adequate consideration.
Geographic Scope. The geographic scope of the non-competition restriction should remain the United States and any jurisdiction in which RGC operates or has filed gaming license applications. Ellender's counsel has sought to narrow the restriction to Nevada and New Jersey only. This proposed limitation is insufficient given the breadth of RGC's operations and strategic initiatives. RGC currently holds gaming licenses in Nevada, New Jersey, Pennsylvania, and Mississippi, and has pending applications in Indiana and Maryland. Additionally, RGC's emerging digital and online gaming operations are not confined to any single state jurisdiction. Narrowing the non-competition restriction to Nevada and New Jersey would leave substantial portions of RGC's business unprotected and would permit Ellender to accept employment with a direct competitor operating in any of the other states where RGC conducts business.
Non-Solicitation of Employees. The agreement will include a twenty-four (24)-month post-termination prohibition on the direct or indirect solicitation, recruitment, or hiring of RGC employees. This provision is important to protect RGC's human capital, particularly within the finance and accounting organization, where the departure of a CFO to a competitor could create a risk of follow-on departures of key team members. We recommend maintaining this provision as proposed.
Non-Solicitation of Customers and Business Partners. The agreement will include an eighteen (18)-month post-termination prohibition on the direct or indirect solicitation of RGC's customers, vendors, and business partners. We recommend maintaining this provision as proposed.
Confidentiality. The agreement will include a perpetual confidentiality obligation covering all proprietary and confidential information of the Company. This is a standard provision and is not subject to negotiation.
Nevada Law Enforceability. Nevada courts have generally upheld post-employment restrictive covenants of the type and duration proposed here, provided that the restrictions are supported by adequate consideration and are reasonable in scope and duration in light of the employer's legitimate business interests. See, e.g., NRS 613.195 (governing non-competition agreements in Nevada). The significant increase in compensation, signing bonus, and severance payments under the enhanced package provides ample additional consideration for the restrictive covenant obligations, strengthening the enforceability of these provisions under Nevada law.
We recognize that the restrictive covenant terms remain a high-priority issue for Ellender's counsel and that resolution of this issue will likely be necessary to close the transaction. However, we believe that the 18-month duration is a reasonable and defensible position, particularly in the context of the significantly enhanced compensation package now being offered. We recommend that the Compensation Committee authorize C&H to hold firm on the 18-month non-competition period as part of the enhanced package, while communicating to Ellender's counsel that the substantial increase in total compensation and severance protections should be viewed as directly responsive to the Candidate's request for an improved overall package.
VIII. Other Terms
A. Title and Reporting
Ellender will hold the title of Executive Vice President & Chief Financial Officer and will report directly to Chief Executive Officer Gavin T. Ashford. The reporting relationship will be specified in the Executive Employment Agreement. As noted in Section V.C above, the Candidate's request to include a "change in reporting structure" Good Reason trigger is being held in reserve as a potential final concession point.
B. Term
The Executive Employment Agreement will provide for an initial term of three (3) years commencing on February 15, 2024, which is the proposed start date for Ellender's employment. Following the expiration of the initial term, the agreement will automatically renew for successive one (1)-year periods unless either party provides written notice of non-renewal at least ninety (90) days prior to the expiration of the then-current term. This evergreen renewal structure is consistent with RGC's existing executive employment agreements and provides stability and continuity for both parties.
C. Relocation Allowance
The Executive Employment Agreement will provide for a relocation allowance of up to $150,000 to cover the costs of Ellender's relocation from his current residence in Reno, Nevada to the Las Vegas metropolitan area, where RGC's corporate headquarters is located. This allowance is unchanged from the initial offer and is consistent with the relocation benefits provided to other recently hired members of RGC's executive leadership team. Eligible expenses will include moving costs, temporary housing, real estate transaction costs, and other customary relocation expenses, subject to documentation requirements and the Company's relocation expense policy. Any tax gross-up on the relocation allowance will be handled in accordance with the Company's standard relocation tax equalization policy.
D. D&O Insurance Coverage
Ellender will be covered under RGC's existing directors and officers liability insurance policy, which is maintained with Pinnacle Investors Indemnity Group. The current policy provides $50 million in aggregate coverage with a $25 million excess layer. Concurrently with the execution of the Executive Employment Agreement, Ellender will execute the Company's standard form of indemnification agreement, which provides for indemnification and advancement of expenses to the fullest extent permitted by Nevada law in connection with any proceeding arising out of his service as an officer of the Company.
E. Section 280G Best-Net Cutback
As discussed in detail in Section VI above, the agreement will include a "best net" cutback provision in lieu of a Section 280G excise tax gross-up. No additional discussion of this provision is necessary here.
F. Governing Law
The Executive Employment Agreement will be governed by and construed in accordance with the laws of the State of Nevada, without regard to principles of conflicts of law that would require the application of the laws of another jurisdiction. Any disputes arising under the agreement will be subject to the exclusive jurisdiction of the state and federal courts located in Clark County, Nevada.
IX. Budgetary and Proxy Disclosure Considerations
The Compensation Committee should be aware of the following budgetary and disclosure implications of the enhanced compensation package.
Proxy Statement Disclosure. If Ellender joins the Company and serves as CFO through the end of fiscal year 2024 (or is otherwise determined to be one of the Company's "named executive officers" as defined by SEC regulations), his compensation will be disclosed in RGC's definitive proxy statement filed in connection with the Company's 2025 annual meeting of shareholders. Specifically:
• The enhanced total annual compensation of $2,405,000 (at target) will be reported in the Summary Compensation Table.
• The signing bonus of $500,000 will be reported as "All Other Compensation" or as a separate line item, depending on the applicable disclosure rules.
• The RSU grant date fair value of $1,719,000 and the PSU grant date fair value of $1,146,000 (at target) will be reported in the "Stock Awards" column of the Summary Compensation Table.
• The CIC severance multiple of 2× and the associated severance amount of $2,900,000 will be disclosed in the "Potential Payments Upon Termination or Change in Control" table.
• The restrictive covenant terms, including the 18-month non-competition period, will be described in the narrative discussion accompanying the executive compensation tables.
Compensation Discussion and Analysis (CD&A). The Compensation Committee's rationale for approving the enhanced package will need to be discussed in the CD&A section of the proxy statement. It is important that the Committee's deliberations and decision-making process be thoroughly documented in the minutes of the meeting at which Resolution CC-2024-002 is adopted. Specifically, the minutes should reference the following:
• The competitive recruiting environment and the existence of a competing offer from a larger publicly traded gaming company;
• The Halcyon Meridian benchmarking analysis and the positioning of the enhanced package within the competitive market range for CFOs at comparable gaming companies;
• The business rationale for the enhanced compensation, including the importance of the CFO role to RGC's strategic initiatives (including the planned expansion into online gaming and the anticipated credit facility refinancing); and
• The Committee's exercise of business judgment in determining that the enhanced package is reasonable, competitive, and in the best interests of the Company and its shareholders.
Budgetary Impact. The approximately 26.4% increase in total annual compensation from the initial offer ($1,902,833) to the enhanced offer ($2,405,000) represents an incremental annual cost of approximately $502,167. The incremental year-one cost, including the additional $200,000 in signing bonus, is approximately $702,167. These amounts are within the budgetary parameters previously discussed with the Company's finance team and do not require revision of the Company's fiscal year 2024 operating budget.
X. Requested Action: Compensation Committee Authorization