MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT
TO: Theodore Langston, Partner, Capital Markets, Calderwood & Harkness LLP
FROM: Natasha Forbes, Lead Associate, Capital Markets, Calderwood & Harkness LLP
DATE: October 14, 2022
RE: Solstice Biomedical Devices Limited — Corporate Governance Gap Analysis and Pre-Filing Action Items in Connection with Proposed $85,000,000 Nasdaq Global Market IPO
CC: Vivienne St. Claire (Billing Partner); Eric Johannsen (Working Associate); Sylvia Hartwell (Tax Specialist Partner)
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I. EXECUTIVE SUMMARY
Calderwood & Harkness LLP was engaged on September 19, 2022 to serve as issuer's counsel to Solstice Biomedical Devices Limited ("Solstice," "SBD," or the "Company"), an Irish private company limited by shares (Companies Registration Office ("CRO") No. 587412), in connection with its proposed initial public offering (the "IPO" or the "Offering") of American Depositary Shares ("ADSs") on the Nasdaq Global Market (the "Nasdaq") under the proposed ticker symbol "SBDX."
The Offering targets aggregate gross proceeds of approximately $85,000,000 through the sale of newly issued ADSs, with each ADS representing one (1) ordinary share, nominal value €0.01 per share, of Solstice (the "Ordinary Shares"). There are no selling shareholders in the proposed transaction; all proceeds (net of underwriting discounts, commissions, and offering expenses) will flow directly to the Company to fund ongoing clinical development, commercial expansion, and general corporate purposes. Keystone Mercer & Co., LLC has been engaged as the lead bookrunning manager and representative of the underwriters.
The purpose of this memorandum is to identify key corporate governance gaps between Solstice's current governance framework — that of an Irish private limited company with no public market obligations — and the requirements applicable to a Nasdaq-listed public company subject to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"), the Nasdaq Listing Rules, the Sarbanes-Oxley Act of 2002 ("SOX"), and, to the extent applicable, the Irish Companies Act 2014 (the "Act"). This memorandum further sets forth a comprehensive schedule of pre-filing action items that must be completed before the confidential submission of the Draft Registration Statement on Form S-1 (the "DRS") to the SEC, which is targeted for on or about November 14, 2022.
For organizational clarity, the memorandum is structured as follows:
(1) a current corporate structure overview of Solstice and its subsidiaries;
(2) a detailed Nasdaq Listing Standards gap analysis identifying deficiencies in Solstice's current board composition, committee structure, and governance policies;
(3) an analysis of key provisions of the Irish Companies Act 2014 relevant to the IPO process, including considerations regarding public company conversion and constitutional document amendments;
(4) a discussion of the proposed share capital restructuring necessary to accommodate the IPO share issuance and provide adequate headroom for future capital needs;
(5) an overview of the proposed ADS structure and depositary arrangements, including Irish withholding tax implications;
(6) a summary of directors' and officers' liability insurance requirements and proposed coverage;
(7) a detailed outline of lock-up agreement coordination and registration rights considerations; and
(8) a consolidated pre-filing action item checklist, organized by responsible party and target completion date, together with a proposed deal timeline.
We note at the outset that several workstreams identified in this memorandum — most notably, the independent director recruitment process, the negotiation of the Deposit Agreement, and the parallel preparation of the Registration Statement itself — are time-sensitive and will require close coordination among the Calderwood & Harkness deal team, Solstice's in-house legal and management teams, the underwriters, underwriters' counsel, and the Company's auditors. We respectfully request Theodore's review and approval of the action items and proposed timeline set forth herein at his earliest convenience so that we may circulate a finalized version of this memorandum to the client.
II. CURRENT CORPORATE STRUCTURE OVERVIEW
A. Entity and Jurisdiction
Solstice Biomedical Devices Limited is an Irish private company limited by shares, incorporated and registered under the Irish Companies Act 2014 with CRO No. 587412. The Company's registered office is located at Unit 7, Lakeview Technology Campus, Parkmore East, Galway, H91 XK72, Ireland. Solstice was originally incorporated on March 8, 2016, and has operated continuously since that date as a medical device development and commercialization company.
Solstice's sole subsidiary is Solstice Surgical Inc., a corporation organized and existing under the laws of the State of Delaware (Employer Identification Number 87-4231568), with its principal offices located at 200 West Adams Street, Suite 1100, Chicago, Illinois 60606. Solstice Surgical Inc. is a wholly owned direct subsidiary of Solstice, serving as the Company's U.S. commercial and regulatory operations hub. The intercompany relationship between Solstice and Solstice Surgical Inc. is governed by a cost-plus intercompany services agreement (the "Intercompany Services Agreement"), pursuant to which Solstice Surgical Inc. provides U.S.-based commercial, regulatory, and administrative support services to Solstice in exchange for reimbursement of all direct and indirect costs incurred, plus a markup of 7.5%. This arrangement will require review and disclosure as a related-party transaction in the Registration Statement and will be subject to ongoing oversight by the Audit Committee once constituted (as discussed in Section III.B below). We have also flagged this arrangement for Sylvia Hartwell's review from a transfer pricing perspective.
B. Business Overview
Solstice designs, manufactures, and commercializes minimally invasive surgical navigation devices for orthopedic and spinal procedures. The Company's technology platform combines proprietary sensor arrays, real-time imaging integration, and machine learning-enhanced guidance algorithms to enable surgeons to perform complex orthopedic and spinal interventions with greater precision and reduced procedure times.
The Company's lead product is the NeuroPath™ Guided Navigation System, a Class II medical device that received 510(k) clearance from the U.S. Food and Drug Administration ("FDA") under clearance number K211847, granted June 14, 2021. In the European Union, the NeuroPath™ system bears a CE Mark issued under the Medical Devices Directive (93/42/EEC) / Medical Devices Regulation (EU 2017/745) transition framework, with validity through May 2025. The NeuroPath™ system is Solstice's primary revenue-generating product and is currently installed at over 85 hospital and ambulatory surgery center sites across the United States and the European Union.
Solstice's clinical-stage pipeline includes the OrthoSync™ Intraoperative Imaging Platform, an advanced imaging device designed to provide real-time 3D visualization during orthopedic procedures. The OrthoSync™ platform received an Investigational Device Exemption ("IDE") from the FDA under IDE No. G220035, approved on September 2, 2022. A pivotal clinical trial for the OrthoSync™ platform is currently enrolling patients at six (6) U.S. clinical sites, with an expected enrollment target of approximately 300 patients. The Company anticipates that enrollment will be completed in the second half of 2023, with a premarket approval ("PMA") submission to the FDA expected thereafter.
Key Financial Highlights. The Company's audited financial statements for the fiscal year ended December 31, 2022 (auditor: Calderwood & Associates LLP, a PCAOB-registered independent public accounting firm; engagement partner: Patricia Yuen) reflect the following:
The Company's revenue trajectory and gross margin profile are consistent with those of comparable Nasdaq-listed medical device companies at a similar stage of commercial maturity. The net loss is attributable primarily to the Company's ongoing investment in the OrthoSync™ clinical program and U.S. commercial infrastructure buildout through Solstice Surgical Inc. The relatively modest cash position of $11.8 million underscores the capital-raising imperative of the proposed IPO.
C. Current Capitalization
As of the date of this memorandum, Solstice has 28,000,000 Ordinary Shares issued and outstanding. The Company's current authorized share capital, as set forth in the Company's memorandum of association, is insufficient to accommodate the issuance of the new Ordinary Shares underlying the ADSs to be sold in the IPO, including the overallotment option. The need to increase the authorized share capital is addressed in detail in Section V below.
The following table sets forth the current beneficial ownership of the Company's issued and outstanding Ordinary Shares as of the date of this memorandum:
The institutional venture capital holders — Greystone Ventures Fund III, L.P. (Julian Reyes Linley CPAs LLP, Managing Partner), Pinnacle Health Innovation Fund, L.P. (Dr. Amara Osei, Managing Partner), and Elkridge Growth Partners II, L.P. (Henrik Johansson, Managing Partner) — collectively hold 12,880,000 Ordinary Shares, representing approximately 46.0% of the pre-IPO outstanding shares. We note that Elkridge Growth Partners II, L.P. is organized as a Cayman Islands exempted limited partnership, which will require confirmation that no additional Cayman Islands regulatory approvals are needed in connection with the execution of the lock-up agreement (discussed in Section VIII below).
D. Current Board and Officers
Board of Directors. The Solstice board of directors currently consists of five (5) members:
(1) Dr. Cormac Tierney — CEO and Co-Founder (non-independent);
(2) Dr. Siobhán Kelleher — CTO and Co-Founder (non-independent);
(3) Julian Reyes Linley CPAs LLP — representative of Greystone Ventures Fund III, L.P. (non-independent; affiliated with a greater-than-5% shareholder);
(4) Dr. Amara Osei — representative of Pinnacle Health Innovation Fund, L.P. (non-independent; affiliated with a greater-than-5% shareholder); and
(5) Declan Whitfield — Board Chair (independent; former CEO of Synapta Medical Technologies plc, a FTSE 250-listed medical technology company; no material relationship with Solstice other than his nominal equity holding).
The current board composition presents a significant governance gap relative to Nasdaq requirements: of the five current directors, only one (Declan Whitfield) qualifies as an "independent director" under Nasdaq Listing Rule 5605(a)(2). As discussed in Section III.A below, the Company must have a board composed of a majority of independent directors at the time of listing. With a target post-IPO board of seven (7) directors, at least four (4) must be independent. This means the Company must identify and appoint at least three (3) additional independent directors in addition to Mr. Whitfield.
Officers. The Company's current executive officers are as follows:
• Dr. Cormac Tierney — Chief Executive Officer
• Dr. Siobhán Kelleher — Chief Technology Officer
• Ronan McBride — Chief Financial Officer
• Fiona Drennan — General Counsel and Corporate Secretary
Committees. No formal board committees — including an Audit Committee, Compensation Committee, or Nominating and Corporate Governance Committee — have been constituted. Executive compensation decisions have historically been made by the full board, and the Company has relied on ad hoc governance procedures typical of a privately held company. This deficiency represents one of the most significant governance gaps identified in our analysis and is addressed at length in Section III below.
III. NASDAQ LISTING STANDARDS — GAP ANALYSIS
This section identifies the principal Nasdaq corporate governance standards applicable to Solstice in connection with the listing of its ADSs and evaluates the Company's current compliance posture against each requirement. For each deficiency identified, we set forth a recommended remediation path and corresponding action items.
A. Board Composition Requirements
Applicable Rule. Nasdaq Listing Rule 5605(b)(1) requires that a majority of the board of directors of a Nasdaq-listed company be comprised of "independent directors" as defined by Nasdaq Listing Rule 5605(a)(2). An "independent director" is a person other than an officer or employee of the company or its subsidiaries, or any other individual having a relationship which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The rule further identifies specific disqualifying relationships (e.g., employment by the company within the prior three years, receipt of compensation in excess of $120,000 during any period of twelve consecutive months within the prior three years other than for board service, affiliation with the company's auditor, etc.).
Current State. As detailed in Section II.D, the Company's board currently consists of five (5) directors, of whom only one (1) — Declan Whitfield — qualifies as independent. Dr. Tierney and Dr. Kelleher are disqualified by virtue of their executive officer positions. Julian Reyes Linley CPAs LLP and Dr. Amara Osei are disqualified due to their affiliation with Greystone Ventures Fund III, L.P. and Pinnacle Health Innovation Fund, L.P., respectively, each of which is a significant shareholder of the Company and has a material financial relationship with Solstice through prior investment rounds.
Target Post-IPO Board. The Company's management has indicated that the target post-IPO board size is seven (7) directors. To satisfy the majority-independence requirement, at least four (4) of the seven directors must be independent. Given that only Mr. Whitfield currently qualifies, the Company must recruit and appoint a minimum of three (3) additional independent directors.
Controlled Company Exemption Analysis. Under Nasdaq Listing Rule 5615(c), a company of which more than 50% of the voting power for the election of directors is held by an individual, a group, or another company is a "controlled company" and may elect to be exempt from the majority-independent-board requirement and from the requirements to maintain fully independent audit, compensation, and nominating committees. We have analyzed the post-IPO voting power distribution and have concluded that the controlled company exemption is not applicable to Solstice. No single shareholder or identified group of shareholders will hold more than 50% of the Company's voting power following the Offering. Greystone, Pinnacle, and Elkridge will collectively hold approximately 38.0% of the post-IPO outstanding shares (assuming full overallotment exercise and no purchases in the Offering), and there is no shareholders' agreement, voting agreement, or other arrangement among them that would constitute a "group" for purposes of this analysis.
Foreign Private Issuer (FPI) Home Country Exemption. An important threshold question is whether Solstice qualifies as a "foreign private issuer" under SEC rules, which would permit reliance on certain home country governance exemptions. Under Rule 3b-4(c) of the Securities Exchange Act of 1934, a company incorporated outside the United States qualifies as an FPI unless (i) more than 50% of its outstanding voting securities are directly or indirectly held of record by residents of the United States, and (ii) any of the following conditions is met: (a) the majority of its executive officers or directors are U.S. citizens or residents; (b) more than 50% of its assets are located in the United States; or (c) its business is administered principally in the United States.
Solstice is incorporated in Ireland. Based on our preliminary analysis, it is likely that fewer than 50% of the Company's outstanding voting securities are held of record by U.S. residents — the institutional holders are organized in the Cayman Islands (Elkridge) and Delaware (Greystone and Pinnacle), but the record ownership of the underlying Ordinary Shares by the ADS depositary complicates the analysis. We will need to confirm the FPI determination with precision as of the relevant testing date. However, even if Solstice qualifies as an FPI, the Company's management — particularly Dr. Tierney and Fiona Drennan — has expressed a strong preference to comply voluntarily with U.S. governance standards rather than relying on home country exemptions. This decision is consistent with market practice for Irish and other European issuers seeking to maximize U.S. institutional investor confidence. Any FPI exemptions upon which the Company does not rely must nonetheless be disclosed in the prospectus.
Recommendation and Action Items. We recommend that the Company, under the leadership of Declan Whitfield (Board Chair), promptly initiate a structured board recruitment process to identify and appoint at least three (3) additional independent directors. Ideal candidates should have relevant industry expertise in medical devices, healthcare, or life sciences, as well as public company board experience and, in at least one case, the qualifications necessary to serve as an "audit committee financial expert" under SEC rules. We further recommend engagement of a board recruitment firm (e.g., Adriatic Management Consulting, Dunmore Advisory Group, or Penrose Advisors) to assist in the search process. Target completion for the recruitment and appointment of new independent directors is early January 2023, in order to permit the newly constituted board and committees to be in place well in advance of the public filing of the Registration Statement.
B. Audit Committee
Applicable Rule. Nasdaq Listing Rule 5605(c) requires that each Nasdaq-listed company maintain an Audit Committee of at least three (3) members, each of whom must satisfy the independence requirements of Nasdaq Listing Rule 5605(c)(2)(A) and SEC Rule 10A-3 under the Securities Exchange Act of 1934. All members must be "financially literate" as determined by the company's board of directors, and at least one member must have "accounting or related financial management expertise." Additionally, SEC regulations require that the company disclose in its annual proxy statement (or, for FPIs, in its annual report on Form 20-F) whether at least one member of the Audit Committee qualifies as an "audit committee financial expert" as defined by Item 407(d)(5) of Regulation S-K.
The Audit Committee must have a written charter that specifies, among other things, the committee's purpose, authority, and responsibilities, including the committee's direct responsibility for the appointment, compensation, retention, and oversight of the work of the company's independent auditors.
Current State. No Audit Committee exists at Solstice. Historically, the full board has exercised informal oversight over financial reporting matters, and the relationship with Calderwood & Associates LLP has been managed primarily by Ronan McBride (CFO) and Dr. Tierney (CEO).
Recommendation. We recommend the following composition for the Audit Committee upon formation:
(1) Declan Whitfield (Chair) — Mr. Whitfield qualifies as an "audit committee financial expert" based on his prior executive experience as CEO of Synapta Medical Technologies plc, where he had direct supervisory responsibility for the company's principal financial officer and oversaw the preparation and audit of the company's IFRS-compliant financial statements. He also served on the Audit Committee of Synapta prior to his appointment as CEO.
(2) Independent Director Appointee No. 1 — to be identified through the board recruitment process; should have financial literacy and preferably direct experience with U.S. GAAP and SEC reporting requirements.
(3) Independent Director Appointee No. 2 — to be identified through the board recruitment process; should have financial literacy.
Charter. We will prepare a draft Audit Committee Charter that complies with Nasdaq Listing Rule 5605(c)(1) and SEC Rule 10A-3, incorporating the following key provisions:
• Direct responsibility for the appointment, compensation, retention, and oversight of the independent auditors (Calderwood & Associates LLP);
• Pre-approval of all audit and permissible non-audit services;
• Review and discussion with management and the independent auditors of the Company's annual and quarterly financial statements;
• Review of the Company's internal controls over financial reporting;
• Oversight of the Company's compliance with legal and regulatory requirements;
• Review and approval (or ratification) of all related-party transactions, including the Solstice Surgical Inc. Intercompany Services Agreement (7.5% markup);
• Establishment of procedures for the receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, or auditing matters, including procedures for the confidential, anonymous submission of concerns by employees;
• Authority to retain independent legal, accounting, and other advisors; and
• Waiver disclosure procedures under the code of business conduct and ethics.
Action Item: Natasha Forbes to draft the Audit Committee Charter and circulate to Fiona Drennan for review. Target completion: prior to or concurrent with the initial S-1 filing, with formal board adoption upon committee constitution in January 2023.
C. Compensation Committee
Applicable Rule. Nasdaq Listing Rule 5605(d) requires that each Nasdaq-listed company maintain a Compensation Committee of at least two (2) members, each of whom must be an independent director as defined by Nasdaq Listing Rule 5605(a)(2). In addition, each Compensation Committee member must satisfy the additional independence criteria set forth in Nasdaq Listing Rule 5605(d)(2), which take into account the sources of compensation of, and any affiliations of, the director. The committee must have a written charter specifying its purpose, authority, and responsibilities.
Current State. No Compensation Committee exists at Solstice. Executive compensation decisions have historically been made on an informal basis by the full board, without a formal charter, benchmarking process, or independent compensation consultant.
Recommendation. We recommend that the Compensation Committee be composed of at least two (2) of the newly appointed independent directors, with one designated as Chair. Given the significance of equity compensation matters in the IPO context — including the adoption of the new equity incentive plan discussed in Section IX.A — it is advisable to constitute a three-member committee if qualified candidates are available.
The Compensation Committee's primary responsibilities will include:
• Oversight of executive compensation philosophy, policies, and programs;
• Review and approval of compensation for the CEO and other named executive officers;
• Administration of the Company's equity incentive plan(s);
• Review of compensation-related risk;
• Oversight of compensation disclosures in the Registration Statement and subsequent proxy statements; and
• Authority to engage independent compensation consultants.
Action Item: Natasha Forbes to draft the Compensation Committee Charter and coordinate with Solstice management on the design of the new equity incentive plan to be adopted in connection with the IPO (see Section IX.A). Target completion for charter: January 2023.
D. Nominating / Corporate Governance Committee
Applicable Rule. Nasdaq Listing Rule 5605(e) requires that director nominees be selected or recommended for the board's selection either by (i) a Nominating Committee composed solely of independent directors, or (ii) a majority of the independent directors, in either case acting pursuant to a formal written charter or board resolution addressing the nominations process. Most Nasdaq-listed companies opt to establish a standing Nominating and Corporate Governance Committee.
Current State. No Nominating Committee or Nominating and Corporate Governance Committee exists at Solstice. Director appointments have historically been made informally by the founders in consultation with the venture capital investors.
Recommendation. We recommend that Solstice establish a Nominating and Corporate Governance Committee composed of at least two (2) independent directors. The committee's responsibilities will include:
• Identification and evaluation of candidates for election to the board of directors;
• Recommendation of director nominees for approval by the full board and, where applicable, for presentation to shareholders;
• Development and recommendation of corporate governance guidelines and policies;
• Oversight of the annual board and committee self-evaluation process; and
• Consideration of shareholder proposals related to governance matters.
Action Item: Natasha Forbes to draft the Nominating and Corporate Governance Committee Charter. Target completion: January 2023, concurrent with the formation of the other standing committees.
E. Code of Business Conduct and Ethics
Applicable Rule. Nasdaq Listing Rule 5610 requires each Nasdaq-listed company to adopt a code of conduct applicable to all directors, officers, and employees. The code must be publicly available and must provide for an enforcement mechanism. Any waivers of the code for directors or executive officers must be publicly disclosed in a filing with the SEC on Form 8-K (or, for FPIs, on Form 6-K) or by posting on the Company's website.
Additionally, SOX Section 406 and Item 406 of Regulation S-K require disclosure regarding whether the company has adopted a code of ethics that applies to the company's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
Current State. Solstice maintains an informal employee handbook that addresses certain workplace conduct matters but does not constitute a formal code of business conduct and ethics meeting Nasdaq or SEC requirements. The existing handbook does not cover directors, does not address conflicts of interest, corporate opportunities, or insider trading, and does not include a waiver disclosure mechanism.
Action Item: Eric Johannsen to draft a comprehensive code of business conduct and ethics addressing, at a minimum, the following topics: conflicts of interest; corporate opportunities; confidentiality; protection of company assets; fair dealing; compliance with laws, rules, and regulations; insider trading prohibitions; reporting and enforcement procedures; and waiver provisions. The code should be presented to the board for adoption prior to the S-1 filing. Target completion: November 2022.
F. Other Nasdaq Listing Requirements
Shareholder Approval Requirements. Nasdaq Listing Rule 5635 requires shareholder approval for certain transactions, including issuances of securities (i) in connection with acquisitions representing 20% or more of outstanding shares, (ii) to related parties, and (iii) that result in a change of control. We do not anticipate that the IPO itself will trigger any of these shareholder approval requirements, as the primary share issuance will be authorized by the shareholders through the allotment authority and pre-emption dis-application resolutions discussed in Section IV.C. However, this rule should be borne in mind for any future transactions, and appropriate provisions should be incorporated into the Company's governance framework.
Annual Meeting Requirements. Under the Irish Companies Act 2014, Irish companies are required to hold an annual general meeting ("AGM") each calendar year, with not more than fifteen months elapsing between one AGM and the next. This existing requirement under Irish law is consistent with the Nasdaq requirement under Listing Rule 5620(a) that listed companies hold an annual meeting of shareholders. No gap exists on this point, though Solstice will need to ensure that the procedures for ADS holder voting at annual meetings are clearly established in the Deposit Agreement.
Market Capitalization and Financial Eligibility. Based on the anticipated IPO valuation and the Company's FY2022 financial statements, Solstice appears to satisfy the Nasdaq Global Market initial listing standards. The Nasdaq Global Market requires, among other things, that the company meet the Market Value of Listed Securities Standard (market value of listed securities of at least $75 million), that the company have a minimum bid price of $4.00 per share, that the company have at least three registered and active market makers, and that the company meet applicable financial standards relating to income, equity, or total assets/revenue. Given the anticipated offering price of approximately $11.08 per ADS and the projected post-IPO market capitalization, we believe the Company will comfortably satisfy these thresholds. We will confirm eligibility in coordination with Keystone Mercer's capital markets team and the Nasdaq Listing Qualifications Department.
Timely Disclosure Requirements. Nasdaq Listing Rule 5250 requires prompt disclosure of material events, including the issuance of press releases concerning material news. The Company will need to establish disclosure controls and procedures to comply with this rule and with SEC Regulation FD. We will address this in the context of the Company's disclosure committee formation and insider trading policy.
IV. IRISH COMPANIES ACT 2014 CONSIDERATIONS
A. Public Company Conversion
A threshold question in any IPO by an Irish-incorporated company is whether the entity must convert from its current company type — in this case, a private company limited by shares ("LTD") under Part 2 of the Irish Companies Act 2014 — to a public limited company ("PLC") under Part 17 of the Act, or to another company type such as a designated activity company ("DAC") under Part 16.
Under Irish law, a private company limited by shares is generally prohibited from offering its shares to the public. Section 68(1) of the Act provides that a private company shall not offer shares to the public unless specifically authorized to do so by or under the Act. However, this prohibition must be analyzed in the context of the ADS structure. In the proposed IPO, Solstice will not be offering its Ordinary Shares directly to the public. Rather, the Ordinary Shares will be deposited with the depositary (Meridian Trust Company, N.A.) and the depositary will issue ADSs — which are U.S. securities — to the public investors. The traded securities on the Nasdaq will be the ADSs, not the underlying Ordinary Shares. The Ordinary Shares themselves will be held in registered form on the Company's share register in the name of the depositary (or its nominee).
This structure is well-established in practice. Numerous Irish private limited companies have listed ADSs on U.S. exchanges (including Nasdaq and the NYSE) without converting to PLC status. The key legal basis for this approach is that the depositary's subscription for the Ordinary Shares underlying the ADSs constitutes a private placement to a single sophisticated investor (the depositary), not an offer to the public within the meaning of the Act. Accordingly, the prohibition on public offerings by private companies does not apply.
Recommendation. We recommend that Solstice retain its current LTD company type and not convert to a PLC or DAC. This approach avoids the significant administrative burden, cost, and time associated with a conversion (including the requirement to have a minimum authorized share capital of €25,000, compliance with the more onerous governance requirements applicable to PLCs under Part 17 of the Act, and the need for a compliance statement under Section 225 of the Act as modified for PLCs). The Registration Statement on Form S-1 will disclose that the Company is an Irish private limited company and that the ADSs (not the underlying Ordinary Shares) are the listed securities. This structure and its associated risks (including the inability of ADS holders to directly exercise shareholder rights) will be addressed in the risk factor disclosures.
B. Constitutional Documents
The Company's governing document is its Constitution, which for a private company limited by shares under Part 2 of the Act consists of a single-document constitution incorporating the provisions previously found in the memorandum of association and articles of association. We have completed an initial review of Solstice's current Constitution and have identified the following amendments that will be necessary or advisable in connection with the IPO:
(i) Increase in Authorized Share Capital. The current authorized share capital is insufficient to accommodate the issuance of up to 7,666,667 new Ordinary Shares in connection with the IPO (including the overallotment option), plus any shares reserved for the new equity incentive plan and future issuances. As discussed in Section V.A below, we recommend increasing the authorized share capital to 100,000,000 Ordinary Shares of €0.01 nominal value each.
(ii) Enhanced Indemnification Provisions. The current Constitution does not contain indemnification provisions of the breadth customary for a company with U.S.-listed securities. We recommend amending the Constitution to provide for the indemnification and advancement of expenses of directors and officers to the fullest extent permitted by Irish law. We note that Irish law imposes certain restrictions on the ability of a company to indemnify its directors (e.g., Section 235 of the Act prohibits exemption from liability for negligence, default, breach of duty, or breach of trust), but permits the company to purchase and maintain insurance against such liability. The amended Constitution should also include provisions permitting the Company to enter into separate indemnification agreements with its directors and officers, which is standard practice for U.S.-listed companies.
(iii) Removal of Restrictive Provisions. The current Constitution may contain provisions that are inconsistent with public company governance expectations, including transfer restrictions on Ordinary Shares (which are common in private company constitutions but must be modified to permit the deposit and withdrawal of shares under the Deposit Agreement), rights of first refusal or tag-along/drag-along provisions (which may conflict with the lock-up arrangements and ADS program), and any other bespoke private company provisions that are no longer appropriate. A thorough review and clean-up of these provisions will be required.
(iv) Pre-Emption Rights. Under Section 1022 of the Act, existing shareholders of an Irish limited company have statutory pre-emption rights (i.e., the right to subscribe for new shares in proportion to their existing holdings) when the company proposes to allot shares for cash. These pre-emption rights must be dis-applied with respect to the Ordinary Shares to be issued in the IPO. The mechanism for dis-application is a special resolution of the shareholders under Section 1023 of the Act, as discussed in Section IV.C below.
(v) Alignment with Deposit Agreement. The amended Constitution should include provisions that facilitate the operation of the ADS program, including mechanics for the payment of dividends (if and when declared) through the depositary, provisions addressing voting by the depositary on behalf of ADS holders (or instructed by ADS holders), and provisions addressing the cancellation and withdrawal of shares from the ADS facility.
Action Item: Natasha Forbes to prepare an amended and restated Constitution reflecting the foregoing amendments. The draft will be circulated to Fiona Drennan for review and to the Company's Irish solicitors (if local counsel engagement is warranted) for confirmation of compliance with the Act. The amended and restated Constitution must be approved by the shareholders by special resolution (75% majority) and filed with the CRO. Target for shareholder approval: mid-December 2022.
C. Shareholder Approvals
The following shareholder resolutions will be required in connection with the IPO and the related corporate actions:
1. Authority to Allot Shares (Section 68/69 of the Act). Under Section 68 of the Act, the directors of an Irish private limited company may not allot shares unless they have been granted authority to do so by the company's Constitution or by an ordinary resolution of the shareholders. Section 69 provides that such authority may be granted for a specified period not exceeding five years. We recommend that the shareholders adopt an ordinary resolution granting the directors authority to allot up to 7,666,667 new Ordinary Shares (representing the firm offering of 6,666,667 shares plus the overallotment option of 1,000,000 shares) in connection with the IPO, plus a general allotment authority for shares to be issued under the new equity incentive plan and for other future purposes, up to the new authorized share capital of 100,000,000 shares.
2. Dis-Application of Pre-Emption Rights (Section 1023 of the Act). As noted in Section IV.B(iv) above, the shareholders must adopt a special resolution (requiring a 75% majority) to dis-apply the statutory pre-emption rights under Section 1022 with respect to the allotment of the IPO shares. This resolution should be drafted broadly enough to cover the firm offering, the overallotment option, and any shares to be issued under the equity incentive plan for cash consideration.
3. Amendment of Authorized Share Capital (Ordinary Resolution). An ordinary resolution (simple majority) is required to increase the authorized share capital from its current level to 100,000,000 Ordinary Shares of €0.01 nominal value each.
4. Adoption of Amended and Restated Constitution (Special Resolution). A special resolution (75% majority) is required to adopt the amended and restated Constitution.
Timeline and Mechanism. Given that Solstice is a private company with a relatively concentrated shareholder base, the most efficient mechanism for obtaining the required shareholder approvals is by written resolution under Section 194 of the Act, which permits the shareholders of a private limited company to pass resolutions without holding a general meeting, provided that the resolution is signed by all shareholders entitled to vote (or, in the case of a special resolution, by shareholders holding not less than 75% of the shares carrying voting rights). We anticipate that the cooperation of the major shareholders (Dr. Tierney, Dr. Kelleher, Greystone, Pinnacle, and Elkridge, collectively holding approximately 73.0% of the outstanding shares) can be secured. To the extent that 75% shareholder approval cannot be obtained by written resolution, an extraordinary general meeting will need to be convened on not less than twenty-one days' notice.
Action Item: Natasha Forbes to prepare the form of written shareholder resolutions and circulate to Fiona Drennan for distribution to the shareholders. Target for adoption: mid-December 2022. We recommend engaging the cooperation of the institutional holders' counsel early in the process to ensure timely execution.
D. CRO Filings
All amendments to the Constitution, increases in authorized share capital, and other filings required under the Act must be submitted to the Irish Companies Registration Office within the timeframes prescribed by the Act (generally twenty-one days from the date of the relevant resolution). Applicable filing fees will need to be confirmed with the CRO. We recommend that Calderwood & Harkness coordinate with Irish local counsel, if engagement is deemed necessary, to ensure that all CRO filings are completed accurately and on a timely basis. If local Irish counsel is not separately engaged, Fiona Drennan, as an Irish-qualified solicitor, may be able to handle the CRO filings directly.
Action Item: Natasha Forbes to coordinate with Fiona Drennan on CRO filing requirements and timeline, and to determine whether engagement of separate Irish local counsel is necessary.
V. SHARE CAPITAL RESTRUCTURING
A. Authorized Share Capital Amendment
Current State. The Company's current authorized share capital, as set forth in the Constitution, is insufficient to accommodate the post-IPO capitalization needs. Based on our review of the Constitution, the current authorized share capital permits the issuance of a maximum number of shares that is less than the sum of (i) the 28,000,000 currently outstanding Ordinary Shares, (ii) the up to 7,666,667 new Ordinary Shares to be issued in the IPO (including the overallotment option), and (iii) a reasonable reserve for the equity incentive plan and future corporate actions.
Proposed Amendment. We recommend that the authorized share capital be increased to 100,000,000 Ordinary Shares of €0.01 nominal value each (total nominal authorized share capital of €1,000,000). This level of authorized capital is based on the following considerations:
(a) Post-IPO shares outstanding (assuming full overallotment exercise): 35,666,667 Ordinary Shares;
(b) Anticipated equity incentive plan reserve: approximately 3,566,667 shares (10% of post-IPO outstanding, which is within the range customary for medical device companies at the IPO stage);
(c) Headroom for future equity issuances, including potential follow-on offerings, acquisition-related issuances, and other corporate purposes: approximately 60,766,666 shares; and
(d) Total: 100,000,000 shares, providing substantial flexibility without being so large as to raise dilution concerns among investors.
Mechanism. The increase in authorized share capital requires an ordinary resolution of the shareholders amending the relevant provisions of the Constitution. As discussed in Section IV.C above, this can be accomplished by written resolution.
Action Item: Natasha Forbes to draft the shareholder resolution authorizing the increase in authorized share capital and to incorporate the corresponding amendment into the amended and restated Constitution. Target completion: mid-December 2022.
B. Post-IPO Capitalization Summary
The following table summarizes the anticipated post-IPO capitalization of Solstice, assuming both a firm offering only and a full overallotment exercise scenario:
Based on the target gross proceeds of $85,000,000 and assuming full exercise of the overallotment option, the implied public offering price per ADS is approximately $11.08 ($85,000,000 ÷ 7,666,667 shares = $11.0769 per ADS, rounded). The final offering price will be determined at the time of pricing based on market conditions, the results of the bookbuilding process, and negotiations between the Company and the underwriters.
We note that the underwriting discount of 6.5% of gross proceeds (as discussed in Section IX.E) would result in net proceeds to the Company of approximately $79,475,000 before deducting other offering expenses (estimated at approximately $2.5–$3.5 million for legal, accounting, printing, filing fees, listing fees, and other transaction costs).
VI. ADS STRUCTURE AND DEPOSITARY ARRANGEMENTS
A. ADS Program Design
The Company proposes to establish a Level III sponsored ADS program for the listing and trading of its securities on the Nasdaq Global Market. Each ADS will represent one (1) Ordinary Share, on a 1:1 basis. This ratio has been selected for simplicity and transparency and is consistent with the ADS programs of other similarly situated Irish medical device companies listed on U.S. exchanges. The ADSs will be listed on the Nasdaq Global Market under the ticker symbol "SBDX" and will be assigned CUSIP number 83472R 109.
The ADS program will be established pursuant to a Deposit Agreement (the "Deposit Agreement") among Solstice, the depositary, and all holders and beneficial owners of ADSs from time to time. The Deposit Agreement will be filed as an exhibit to the Registration Statement on Form S-1 and will be described in detail in the prospectus.
B. Depositary
The Company has selected Meridian Trust Company, N.A., a national banking association chartered by the Office of the Comptroller of the Currency ("OCC"), to serve as depositary and transfer agent for the ADS program. Meridian Trust's principal office for depositary receipt matters is located at 500 Ross Street, Pittsburgh, Pennsylvania 15219. The key relationship contact at Meridian Trust is Thomas Crenna, Vice President, Depositary Receipts.
Calderwood & Harkness will negotiate and finalize the Deposit Agreement on behalf of the Company with Meridian Trust's legal team. The key terms to be negotiated include:
(i) Depositary Fees. The Deposit Agreement will specify the fees payable by ADS holders to the depositary for issuance and cancellation of ADSs, distribution of dividends and other distributions, and other services. These fees are customarily borne by the ADS holders, though certain fees (e.g., the annual depositary servicing fee) may be reimbursed by the Company.
(ii) Dividend Distribution Mechanics. The Deposit Agreement must set forth the procedures by which the depositary will convert any dividends declared and paid in euros by Solstice into U.S. dollars and distribute them to ADS holders, net of applicable taxes, depositary fees, and currency conversion expenses. The Irish withholding tax implications of the dividend distribution process are discussed in Section VI.C below.
(iii) Voting Procedures. The Deposit Agreement will establish the mechanism by which ADS holders may instruct the depositary on how to vote the underlying Ordinary Shares at general meetings of the Company. Under the standard form of Deposit Agreement, the depositary distributes voting instruction cards to ADS holders and votes the underlying shares in accordance with the instructions received. Shares for which no instructions are received may be voted by the depositary at its discretion (subject to applicable Nasdaq and SEC rules).
(iv) Cancellation and Withdrawal Rights. ADS holders will have the right to surrender their ADSs to the depositary and receive delivery of the underlying Ordinary Shares, subject to the terms of the Deposit Agreement, applicable law, and any applicable depositary fees.
(v) Indemnification. The Deposit Agreement will contain customary mutual indemnification provisions between the Company and the depositary.
C. Irish Withholding Tax Implications for ADS Structure
Ireland imposes a dividend withholding tax ("DWT") at a standard rate of 25% on dividends paid by Irish-resident companies. This rate may be reduced under applicable double taxation treaties. Under the U.S.–Ireland Double Taxation Convention (as amended by the 1999 Protocol), the DWT rate on dividends paid to qualifying U.S. residents is reduced to 15% (or 5% for corporate shareholders holding at least 10% of the voting stock of the distributing company).
The Deposit Agreement must include detailed provisions addressing the mechanics of DWT withholding and treaty rate claims, including:
• The depositary's obligation to withhold DWT at the applicable rate on dividends distributed through the ADS facility;
• Procedures for ADS holders to claim the reduced treaty rate by providing appropriate documentation (e.g., IRS Form W-8BEN or W-8BEN-E) to the depositary;
• The Company's obligations under Irish Revenue Commissioners' guidelines regarding the provision of relevant information to the depositary to facilitate withholding at the correct rate; and
• Provisions for refund claims where excess withholding has occurred.
These matters will be addressed in detail in a separate tax memorandum to be prepared by Sylvia Hartwell (Tax Specialist Partner), which will also cover the Company's passive foreign investment company ("PFIC") status analysis and transfer pricing considerations for the Solstice Surgical Inc. intercompany arrangement.
D. Action Items
(1) Eric Johannsen to engage Meridian Trust Company, N.A. and execute the depositary engagement letter. Target: November 2022.
(2) Eric Johannsen to begin drafting the Deposit Agreement in coordination with Meridian Trust's legal team. Target: initial draft to be circulated by late November 2022.
(3) Natasha Forbes to coordinate with Sylvia Hartwell on Irish withholding tax provisions in the Deposit Agreement, including PFIC analysis and treaty rate mechanics. Target: December 2022.
VII. DIRECTORS' AND OFFICERS' INSURANCE
A. D&O Insurance Requirement
It is standard market practice — and a practical necessity — for Nasdaq-listed companies to maintain directors' and officers' ("D&O") liability insurance. D&O insurance provides coverage for claims made against directors and officers arising out of their service in such capacities, including claims alleging violations of securities laws, breaches of fiduciary duty, and other corporate governance failures. The availability of D&O insurance is a critical factor in the Company's ability to attract and retain qualified independent directors and is also typically a condition of the Underwriting Agreement, which will contain representations and warranties by the Company regarding the maintenance of adequate insurance coverage.
Current State. Solstice does not currently maintain a D&O insurance policy of the scope or limits appropriate for a publicly listed company. Any existing coverage is limited to a general commercial liability policy that does not provide the specialized protections required for public company directors and officers.
B. Proposed Insurance Program
The Company, through its General Counsel Fiona Drennan, has been in preliminary discussions with Ashford Wren & Co. (insurance broker), regarding the placement of a D&O insurance program. The key details of the proposed program are as follows:
• Carrier: Ironclad Specialty Insurance Co.
• Broker: Ashford Wren & Co. (key contact: Lydia Carver, Senior Vice President)
• Primary Layer Coverage: $20,000,000
• Expected Premium: To be determined following completion of the underwriting process; preliminary indications suggest a premium in the range of $450,000 to $600,000 per annum for the primary layer, which is consistent with market rates for IPO-stage medical device companies of Solstice's size and risk profile
• Excess / Layered Program: Depending on the results of the primary layer placement, the Company may wish to consider one or more excess layers to bring total coverage to $30,000,000 or $40,000,000. This will be evaluated in consultation with Ashford Wren.
• Tail Coverage: A six-year run-off ("tail") policy should be considered to protect current pre-IPO directors and officers for claims arising from pre-IPO acts or omissions.
• Timing: The D&O policy is to be bound at IPO pricing — i.e., on or about the date the Underwriting Agreement is signed. This is standard practice, as the policy inception typically coincides with the Company's transition to public company status.
Action Item: Fiona Drennan to work with Lydia Carver at Ashford Wren & Co. to finalize the D&O placement application, including the completion of the underwriting questionnaire and the provision of financial and corporate information to the carrier. Calderwood & Harkness (Natasha Forbes) to review the policy terms upon receipt of the binder and ensure alignment with the representations and warranties contained in the Underwriting Agreement. We will also confirm that the policy terms are consistent with the indemnification provisions of the amended and restated Constitution.
VIII. LOCK-UP AGREEMENT COORDINATION
A. Lock-Up Terms
Consistent with market practice for IPOs on the Nasdaq Global Market, all directors, officers, and holders of one percent (1%) or more of the Company's pre-IPO outstanding shares will be required to execute lock-up agreements restricting the transfer of their securities for a period following the Offering. The material terms of the proposed lock-up agreements are as follows:
• Lock-Up Period: 180 days commencing on the date of the final prospectus forming part of the Registration Statement.
• Restricted Activities: During the lock-up period, the signatory will be prohibited from, directly or indirectly: (a) offering, selling, contracting to sell, pledging, granting any option to purchase, or otherwise disposing of any Ordinary Shares, ADSs, or any securities convertible into or exercisable or exchangeable for Ordinary Shares or ADSs; (b) entering into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Ordinary Shares or ADSs; or (c) making any demand for, or exercising any right with respect to, the registration of any Ordinary Shares or ADSs or any securities convertible into or exercisable or exchangeable for Ordinary Shares or ADSs.
• Exceptions: Customary exceptions will apply, including (i) transfers by gift, will, or intestacy, (ii) distributions to partners, members, or shareholders of a signatory, (iii) transfers to affiliates, and (iv) sales pursuant to a Rule 10b5-1 plan adopted prior to the date of the lock-up agreement, in each case subject to the requirement that the transferee enter into a lock-up agreement on substantially identical terms.
• Release: The lock-up agreements will provide that the restrictions may be waived, in whole or in part, with the prior written consent of Keystone Mercer & Co., LLC, as lead bookrunning manager and representative of the underwriters.
The key contact at Keystone Mercer for lock-up matters is Margaret "Meg" Hollister, Managing Director, Healthcare Investment Banking, whose office is located at 280 Park Avenue, 14th Floor, New York, New York 10017. The underwriters' counsel for this transaction is Pellwick Raine LLP (Harrison Blake, Partner), located at 51 West 52nd Street, New York, New York 10019.
B. Covered Persons and Share Counts
The following table identifies all persons and entities expected to execute lock-up agreements, together with their respective share holdings:
The total number of shares subject to lock-up represents approximately 83.9% of the pre-IPO outstanding shares and approximately 65.8% of the post-IPO outstanding shares (assuming full overallotment exercise). This level of lock-up coverage is consistent with market expectations for healthcare and medical device IPOs.
C. Coordination Process