PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Beatrice Holloway, Responsible Partner, Mergers & Acquisitions, Calderwood & Harkness LLP Helena Byrne, Executive Vice President, Corporate Development & Strategy, Solstice Biomedical Devices Ltd. Patrick Lennox, General Counsel & Company Secretary, Solstice Biomedical Devices Ltd.
FROM: Robert Wainwright, Associate, Employment & Benefits, Calderwood & Harkness LLP
DATE: July 22, 2024
RE: Employment and Benefits Due Diligence — Meridian Surgical Technologies, Inc.
MATTER NO.: 1037-00006
PURPOSE: This memorandum summarizes the findings of our employment and employee benefits due diligence review conducted in connection with Solstice Biomedical Devices Ltd.'s ("Solstice" or "Buyer") proposed acquisition of one hundred percent (100%) of the outstanding capital stock of Meridian Surgical Technologies, Inc. ("Meridian" or the "Company") for a total equity purchase price of $220,000,000 (the "Transaction"), structured as a stock purchase pursuant to a Stock Purchase Agreement (the "SPA"). This memorandum is intended solely for the use of the addressees and is protected by the attorney-client privilege and work product doctrine.
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I. Executive Summary
Calderwood & Harkness LLP has conducted a comprehensive review of Meridian's employment arrangements, employee benefit plans, equity compensation program, and related labor and workforce matters in connection with the proposed stock purchase Transaction. Our review encompassed the full spectrum of employment-related due diligence customarily undertaken in a transaction of this nature, including analysis of executive employment agreements, the Company's equity incentive program, retirement and health and welfare benefit plans, labor relations, workforce classification, immigration compliance, employment litigation exposure, and WARN Act considerations.
Meridian currently employs approximately 312 employees across two facilities in southeastern Pennsylvania: its corporate headquarters located at 780 Keystone Boulevard, Suite 200, King of Prussia, Pennsylvania 19406, and its manufacturing facility located at 45 Forge Creek Road, Exton, Pennsylvania 19341. All employees are based in the United States. Meridian does not maintain any international workforce, and none of its employees are subject to collective bargaining agreements.
Our key findings are as follows:
(a) Equity Incentive Plan. The Meridian Surgical Technologies, Inc. 2019 Equity Incentive Plan (the "2019 Plan") has 550,000 fully vested stock options outstanding as of the anticipated Closing Date of October 31, 2024, which will require cancellation at closing in exchange for aggregate cash cancellation payments of approximately $12,485,000. The options were granted at fair market value based on contemporaneous Section 409A valuations, and no compliance issues have been identified.
(b) 401(k) Plan. The Meridian Surgical Technologies 401(k) Plan is in good standing with no material compliance issues, no pending or threatened audits or investigations, and no identified prohibited transactions. The plan is administered by Cornerstone Retirement Plan Services, Inc., and has passed annual nondiscrimination testing for both the 2022 and 2023 plan years.
(c) Defined Benefit and Post-Retirement Obligations. Meridian does not sponsor, maintain, or contribute to any defined benefit pension plan, multiemployer pension plan, or other pension arrangement. There are no unfunded post-retirement healthcare or life insurance liabilities. This eliminates a significant category of potential liability.
(d) Executive Employment Agreements. Four senior executives hold employment agreements with change-of-control provisions that will be triggered by the Transaction. These agreements contain "double-trigger" severance provisions, meaning that the change of control alone does not trigger severance payments; rather, a qualifying termination (without cause or for good reason) within a specified window following the closing is required. We recommend that Buyer enter into new employment agreements with three of these executives (Dr. Marcus Ellsworth, Catherine Pryor, and Dr. Raj Subramanian) at closing to supersede the existing arrangements and establish new terms aligned with Buyer's organizational structure.
(e) Retention. We recommend implementing a $3,500,000 retention bonus pool for approximately 25–30 key employees, particularly members of the ArthroNav development team, quality and regulatory personnel, and manufacturing leadership, to protect the earnout value and ensure business continuity during the post-closing integration period.
Risk Rating. Based on our review, we assign an overall risk rating of low to moderate to Meridian's employment and benefits profile. No material showstoppers have been identified that would impede the Transaction. The key action items requiring attention prior to and following closing relate to option cancellation mechanics, execution of new employment agreements, implementation of the retention bonus pool, and a limited number of post-closing compliance matters (including an I-9 audit and independent contractor classification review).
Documents Reviewed. In conducting our review, we examined the following categories of materials, provided primarily through the Whitmore Crane & Pfeiffer LLP virtual data room (the "VDR") and through supplemental document requests directed to Meridian's counsel:
• Executive employment agreements and offer letters for all C-suite officers;
• Standard form offer letters used for non-executive hires;
• Employee Handbook (revised January 2024);
• The 2019 Equity Incentive Plan, together with form stock option award agreements and individual award letters for all outstanding option holders;
• 401(k) plan documents, including the basic plan document, adoption agreement, summary plan description, and most recent Form 5500 filings (plan years ending December 31, 2022 and December 31, 2023);
• IRS determination letter for the 401(k) plan;
• Benefits summary plan descriptions for all health and welfare plans;
• Group insurance contracts and certificates of coverage with Crestpoint Health Insurance Co.;
• Section 125 cafeteria plan document;
• Complete personnel roster, including hire dates, job titles, compensation, and benefit elections;
• WARN Act compliance records and correspondence;
• Independent contractor agreements (eight active agreements);
• Form confidentiality, non-competition, and non-solicitation agreements;
• OSHA 300 logs, inspection records, and correspondence for the Exton manufacturing facility;
• I-9 documentation summaries;
• Workers' compensation claims history and current open claims detail;
• Staffing agency contract with Keystone Staffing Solutions, LLC; and
• Miscellaneous correspondence and filings related to employment matters.
Where our review identified areas warranting further attention or follow-up, we have noted specific recommendations throughout this memorandum and have consolidated all action items in Section X below.
II. Workforce Overview
II.A. Employee Headcount and Locations
As of the most recent payroll date reviewed, Meridian employs a total of approximately 312 employees. All employees are based in the United States. The Company does not maintain any international operations, foreign subsidiaries, or overseas workforce. The geographic distribution of the workforce is as follows:
Headquarters — King of Prussia, Pennsylvania. Approximately 85 employees are based at the Company's corporate headquarters located at 780 Keystone Boulevard, Suite 200, King of Prussia, Pennsylvania 19406. This facility houses the Company's corporate, finance, sales, marketing, regulatory affairs, and R&D/engineering functions. The headquarters leasehold encompasses approximately 28,000 square feet of Class A office and laboratory space.
Manufacturing Facility — Exton, Pennsylvania. Approximately 215 employees are based at the Company's manufacturing and distribution facility located at 45 Forge Creek Road, Exton, Pennsylvania 19341. This facility supports the Company's manufacturing operations, quality control and quality assurance functions, warehouse and logistics operations, and facility maintenance. The Exton facility is the sole manufacturing location for Meridian's commercial product portfolio and the anticipated production site for the ArthroNav system upon receipt of FDA clearance.
Field-Based Employees. Approximately 12 employees are classified as field-based personnel, including field sales representatives and clinical support personnel stationed across various locations in the United States. These employees report into the sales and marketing organization based at the King of Prussia headquarters and work remotely from their home offices or in the field at customer sites. Based on the personnel roster, field-based employees are located in Pennsylvania, New Jersey, Massachusetts, Florida, Texas, California, and Illinois.
No International Employees. We confirmed through our review of the personnel roster and through management representations provided in the VDR that Meridian does not employ any individuals outside of the United States. There are no secondment arrangements, foreign national payroll arrangements, or expatriate programs in place.
Labor Relations. Meridian is not a party to any collective bargaining agreement, labor union agreement, or works council arrangement. None of the Company's employees are represented by a labor organization. Based on our review of the data room materials and management's representations, there is no pending union organizing activity, no petitions for representation elections, and no pending unfair labor practice charges or other proceedings before the National Labor Relations Board ("NLRB"). We did not identify any history of prior organizing efforts or NLRB proceedings. This is a favorable finding that eliminates a significant category of employment-related risk and complexity that can arise in acquisition transactions.
II.B. Employee Classification
The Company's workforce is composed of the following categories:
Full-Time Employees. Approximately 295 employees are classified as full-time, defined under the Company's policies as employees who are regularly scheduled to work 30 or more hours per week. Full-time employees are eligible for the Company's full suite of benefits, including medical, dental, vision, life insurance, disability coverage, the 401(k) plan, and paid time off.
Part-Time Employees. Approximately 17 employees are classified as part-time, defined as employees regularly scheduled to work fewer than 30 hours per week. Part-time employees are primarily employed in administrative support roles at the King of Prussia headquarters and warehouse support roles at the Exton facility. Part-time employees are eligible for participation in the 401(k) plan (subject to eligibility requirements) but are generally not eligible for the Company's health and welfare benefits.
Independent Contractors. We identified eight (8) active independent contractor agreements in the VDR. The independent contractors provide services in the following areas: (i) clinical consulting (3 individuals, providing advisory services related to product development and clinical evaluation); (ii) IT support and systems administration (2 individuals); and (iii) specialized engineering consulting (3 individuals, providing project-based technical services). The independent contractor agreements are generally structured as fixed-term or project-based engagements with defined scopes of work, hourly or project-based compensation, and standard independent contractor representations. We recommend that Buyer conduct a post-closing review of these eight arrangements to evaluate potential misclassification risk under the IRS common-law test (examining factors such as behavioral control, financial control, and the type of relationship) and applicable state standards, including the Pennsylvania worker classification standards and the New Jersey "ABC" test (to the extent any contractors provide services in New Jersey). While we did not identify any obvious red flags in our initial review, independent contractor misclassification is an area of heightened regulatory scrutiny, and a more detailed factual analysis of the working relationships would be prudent.
Temporary and Staffing Agency Workers. Meridian utilizes approximately 15 to 20 temporary workers through a staffing agency arrangement with Keystone Staffing Solutions, LLC to address seasonal demand peaks in the Company's manufacturing operations at the Exton facility. The temporary workers are employed by Keystone Staffing Solutions, LLC and are not employees of Meridian. We reviewed the staffing services agreement between Meridian and Keystone Staffing Solutions, LLC. The agreement contains standard provisions regarding Keystone's responsibility for payroll taxes, workers' compensation insurance, and compliance with employment laws. The agreement is terminable by either party upon 30 days' written notice. We did not identify any material issues with this arrangement, though Buyer should be aware of the staffing relationship for purposes of headcount planning and operational continuity.
II.C. Key Departments
The following provides a departmental overview of Meridian's workforce, based on our review of the personnel roster and organizational charts provided in the VDR:
R&D / Engineering (approximately 42 employees). The R&D and engineering department is led by Dr. Raj Subramanian, Chief Technology Officer. This department is responsible for all product development activities, including the ArthroNav robotic-assisted surgical navigation platform, which represents the most significant component of the Company's development pipeline and is the primary driver of the earnout provisions in the SPA. The ArthroNav development team consists of approximately 18 engineers and scientists who are directly involved in the design, development, testing, and regulatory submission preparation for the ArthroNav system. The retention of this team is critical to the achievement of the earnout milestones, as discussed further in Section IX below.
Quality & Regulatory (approximately 28 employees). The quality and regulatory affairs department is led by Linda Fontaine, Vice President of Quality & Regulatory Compliance. This department is responsible for the Company's quality management system, FDA compliance, product complaint handling, and regulatory submissions, including the anticipated 510(k) premarket notification submission for the ArthroNav system. Given the importance of the 510(k) clearance to the earnout milestones, the quality and regulatory team represents another critical retention priority.
Manufacturing / Operations (approximately 160 employees). The manufacturing and operations function constitutes the largest portion of Meridian's workforce and is based entirely at the Exton facility. This includes line supervisors, manufacturing technicians, machine operators, warehouse and logistics personnel, and facility maintenance staff. The manufacturing team is responsible for the production of the Company's existing commercial products, including its orthopedic surgical instruments and implant delivery systems.
Sales & Marketing (approximately 35 employees). The sales and marketing organization includes both office-based marketing and sales operations personnel at the King of Prussia headquarters and field-based sales representatives and clinical support personnel located across the United States. The sales team is responsible for commercial distribution of the Company's existing product lines.
Finance & Administration (approximately 25 employees). The finance and administration department is led by David Hensley, Chief Financial Officer. This department encompasses finance, accounting, human resources, legal, and information technology functions.
Executive / C-Suite (5 individuals). The Company's executive leadership team consists of:
• Dr. Marcus Ellsworth, Founder & Chief Executive Officer
• Catherine Pryor, President & Chief Operating Officer
• David Hensley, Chief Financial Officer
• Dr. Raj Subramanian, Chief Technology Officer
• Linda Fontaine, Vice President, Quality & Regulatory Compliance
III. Employment Agreements and Key Personnel
III.A. Existing Employment Agreements
We reviewed the employment agreements and offer letters for all five members of the Company's executive leadership team. Four of the five executives have formal employment agreements with the Company; the fifth (Linda Fontaine) is employed pursuant to an offer letter on an at-will basis. The material terms of each arrangement are summarized below.
Dr. Marcus Ellsworth — Founder & Chief Executive Officer
Dr. Ellsworth's employment is governed by an employment agreement dated January 15, 2020, between Dr. Ellsworth and the Company. The material terms of the agreement include:
• Base Salary: $475,000 per annum, subject to annual review by the Board of Directors.
• Annual Bonus: Discretionary annual performance bonus of up to 50% of base salary ($237,500 at maximum), based on achievement of individual and Company-level performance objectives established by the Board.
• Severance — Without Cause / Good Reason (absent Change of Control): In the event of a termination by the Company without "Cause" or a resignation by Dr. Ellsworth for "Good Reason" (each as defined in the agreement), Dr. Ellsworth is entitled to twelve (12) months of continued base salary, payable in accordance with the Company's regular payroll schedule, plus a pro-rated bonus for the year of termination, subject to execution of a general release of claims.
• Change-of-Control Severance (Double-Trigger): In the event of a termination by the Company without Cause or a resignation by Dr. Ellsworth for Good Reason within twelve (12) months following a "Change of Control" (as defined), Dr. Ellsworth is entitled to (a) eighteen (18) months of continued base salary, (b) a lump-sum payment equal to 1.5 times his target bonus, and (c) accelerated vesting of all outstanding equity awards. This provision is a "double-trigger" structure, meaning that the Change of Control alone does not trigger the enhanced severance; a qualifying termination event must also occur.
• Restrictive Covenants: Eighteen (18) months post-termination non-competition covenant and twenty-four (24) months post-termination non-solicitation covenant (covering both employees and customers), each subject to geographic and scope limitations customary for the medical device industry in the greater Philadelphia metropolitan area.
• Other Provisions: Standard confidentiality, assignment-of-inventions, and return-of-property provisions.
Catherine Pryor — President & Chief Operating Officer
Ms. Pryor's employment is governed by an employment agreement dated March 9, 2020. The material terms include:
• Base Salary: $340,000 per annum.
• Annual Bonus: Discretionary annual performance bonus of up to 40% of base salary ($136,000 at maximum).
• Severance — Without Cause / Good Reason (absent Change of Control): Nine (9) months of continued base salary plus pro-rated bonus, subject to execution of a release.
• Change-of-Control Severance (Double-Trigger): Upon a qualifying termination within twelve (12) months following a Change of Control: twelve (12) months of continued base salary, a lump-sum payment equal to 1.0 times target bonus, and accelerated vesting of all outstanding equity awards.
• Restrictive Covenants: Twelve (12) months post-termination non-competition and eighteen (18) months post-termination non-solicitation.
• Other Provisions: Standard confidentiality, assignment-of-inventions, and return-of-property provisions.
David Hensley — Chief Financial Officer
Mr. Hensley's employment is governed by an employment agreement dated June 14, 2021. The material terms include:
• Base Salary: $310,000 per annum.
• Annual Bonus: Discretionary annual performance bonus of up to 35% of base salary ($108,500 at maximum).
• Severance — Without Cause / Good Reason (absent Change of Control): Nine (9) months of continued base salary plus pro-rated bonus, subject to execution of a release.
• Change-of-Control Severance (Double-Trigger): Upon a qualifying termination within twelve (12) months following a Change of Control: nine (9) months of continued base salary, a lump-sum payment equal to 0.75 times target bonus, and accelerated vesting of all outstanding equity awards.
• Restrictive Covenants: Twelve (12) months post-termination non-competition and twelve (12) months post-termination non-solicitation.
• Other Provisions: Standard confidentiality, assignment-of-inventions, and return-of-property provisions.
Dr. Raj Subramanian — Chief Technology Officer
Dr. Subramanian's employment is governed by an employment agreement dated April 3, 2019, entered into at the time of the founding of the ArthroNav development program. The material terms include:
• Base Salary: $365,000 per annum.
• Annual Bonus: Discretionary annual performance bonus of up to 40% of base salary ($146,000 at maximum).
• Severance — Without Cause / Good Reason (absent Change of Control): Twelve (12) months of continued base salary plus pro-rated bonus, subject to execution of a release.
• Change-of-Control Severance (Double-Trigger): Upon a qualifying termination within twelve (12) months following a Change of Control: twelve (12) months of continued base salary, a lump-sum payment equal to 1.0 times target bonus, and accelerated vesting of all outstanding equity awards.
• Restrictive Covenants: Eighteen (18) months post-termination non-competition and twenty-four (24) months post-termination non-solicitation.
• Assignment of Inventions: Dr. Subramanian's agreement includes a specific and detailed assignment-of-inventions clause that covers all inventions, discoveries, improvements, and intellectual property conceived or developed by Dr. Subramanian in connection with the ArthroNav platform and related surgical navigation technologies. This clause is broader and more specific than the standard form used in the Company's other employment agreements and was negotiated at the time of Dr. Subramanian's hiring in connection with the inception of the ArthroNav program. The enforceability and scope of this clause are significant to the intellectual property profile of the Transaction and should be coordinated with the IP due diligence workstream.
• Other Provisions: Standard confidentiality and return-of-property provisions.
Linda Fontaine — Vice President, Quality & Regulatory Compliance
Ms. Fontaine's employment is governed by an offer letter dated September 21, 2020. The offer letter provides:
• Base Salary: $265,000 per annum.
• Annual Bonus: Discretionary annual performance bonus of up to 30% of base salary ($79,500 at maximum).
• Severance / Change of Control: The offer letter does not contain any specific severance or change-of-control provisions. Ms. Fontaine's employment is at-will.
• Restrictive Covenants: Ms. Fontaine executed the Company's standard form confidentiality, non-competition, and non-solicitation agreement as a condition of employment, which includes a twelve (12) month post-termination non-competition and non-solicitation covenant.
• Other Provisions: Standard at-will disclaimer, confidentiality, and IP assignment provisions.
A summary comparison of the key terms of each executive's employment arrangement is attached as Appendix B.
III.B. Change-of-Control Implications
The proposed Transaction, structured as a stock purchase in which Solstice will acquire 100% of the outstanding capital stock of Meridian, will constitute a "Change of Control" as defined in each of the four employment agreements described above (Ellsworth, Pryor, Hensley, and Subramanian). Each of the four agreements defines "Change of Control" to include, among other things, the acquisition by any person or group of beneficial ownership of more than 50% of the outstanding voting securities of the Company, which will occur upon consummation of the stock purchase.
Importantly, all four agreements employ a "double-trigger" structure. Under this structure, the occurrence of the Change of Control alone does not trigger the enhanced severance payments or accelerated vesting. Rather, a qualifying termination event — specifically, a termination by the Company without Cause or a resignation by the executive for Good Reason — must also occur within the specified post-Change of Control window (twelve months for Ellsworth, Pryor, and Subramanian; twelve months for Hensley as well, based on our review of his agreement) for the enhanced benefits to become payable. This double-trigger structure is favorable from the Buyer's perspective, as it avoids the immediate cash outlay that would result from a single-trigger arrangement.
However, the existence of the double-trigger provisions creates a latent liability: if any of the four executives were to experience a qualifying termination within the post-closing window, the resulting severance obligations could be material. To mitigate this risk and to establish a clear employment framework for the post-closing period, we recommend the following approach:
New Employment Agreements at Closing. Buyer should enter into new employment agreements with the three executives whom Solstice intends to retain in senior leadership roles, to be executed simultaneously with the closing of the Transaction. These new agreements will supersede and replace the existing employment agreements in their entirety, thereby eliminating the double-trigger severance exposure under the prior agreements. The contemplated terms for the new agreements, which have been negotiated as part of the SPA process, are as follows:
• Dr. Marcus Ellsworth — Division President, Orthopedic Instruments; three (3) year initial term commencing on the Closing Date; annual base salary of $525,000; annual bonus opportunity and other terms to be finalized.
• Catherine Pryor — Senior Vice President, Operations; three (3) year initial term commencing on the Closing Date; annual base salary of $375,000; annual bonus opportunity and other terms to be finalized.
• Dr. Raj Subramanian — Senior Vice President, ArthroNav Development; three (3) year initial term commencing on the Closing Date; annual base salary of $410,000; annual bonus opportunity and other terms to be finalized.
Each new employment agreement will include two (2) year post-termination non-competition and non-solicitation covenants, which will replace and supersede the existing restrictive covenants in the prior agreements. The enhanced non-competition period (24 months, compared to the existing 12–18 month terms) provides Buyer with greater protection, particularly during the critical earnout period.
David Hensley and Linda Fontaine. New employment agreements for Mr. Hensley and Ms. Fontaine are not currently contemplated as part of the closing deliverables. Mr. Hensley's existing employment agreement will remain in place following the stock purchase closing unless separately superseded. Ms. Fontaine's at-will offer letter will similarly continue. We recommend that Buyer evaluate the retention considerations for both Mr. Hensley and Ms. Fontaine, particularly given Mr. Hensley's role in the financial management and reporting functions during the integration period and Ms. Fontaine's critical role in the ArthroNav 510(k) regulatory submission process. Inclusion of both individuals in the retention bonus pool described in Section IX below would be advisable.
III.C. Non-Competition and Non-Solicitation Agreements
In addition to the restrictive covenant provisions contained in the executive employment agreements described above, approximately forty-five (45) additional employees have executed standalone Confidentiality, Non-Competition, and Non-Solicitation Agreements with the Company. These employees are primarily in the R&D/engineering, sales, and senior operations functions — roles where the Company determined that protection of confidential information, trade secrets, and customer relationships warranted the imposition of post-termination restrictive covenants.
The standalone agreements are based on a standard form agreement prepared under Pennsylvania law. The non-competition terms range from six (6) to eighteen (18) months post-termination, with the duration generally correlated to the seniority and role of the employee. The non-solicitation provisions (covering both employees and customers/business partners) are generally co-terminus with or slightly longer than the non-competition period. The agreements also include standard confidentiality and non-disclosure provisions that survive indefinitely.
Under Pennsylvania law, non-competition agreements are generally enforceable provided they are supported by adequate consideration, are reasonably limited in scope and duration, and are necessary to protect legitimate business interests (such as trade secrets, confidential information, or customer goodwill). Based on our review of the form agreement and the applicable terms, we believe the Company's non-competition agreements are, in the main, reasonable in scope and duration and should be enforceable under Pennsylvania law. However, enforceability is always a fact-specific inquiry and individual agreements may present unique issues.
Because the Transaction is structured as a stock purchase, Meridian will remain the same legal entity following the closing. The non-competition and non-solicitation agreements were entered into between the employees and Meridian, and as such, these agreements should continue in full force and effect following the closing without any need for re-execution, novation, or consent. This is a significant advantage of the stock purchase structure as compared to an asset purchase, where the assignability and enforceability of restrictive covenants can be uncertain.
III.D. At-Will Employment
All non-executive employees — that is, all employees other than the five C-suite officers described in Section III.A — are employed on an at-will basis. We did not identify any additional formal employment agreements, severance agreements, or guaranteed employment arrangements beyond those described above.
The Company uses a standard form offer letter for all non-executive hires. We reviewed the current form offer letter, which contains the following key provisions: (i) a clear at-will employment disclaimer stating that employment is not for a specified term and may be terminated by either party at any time, with or without cause or notice; (ii) a confidentiality and non-disclosure undertaking; (iii) an assignment-of-inventions clause covering work product created during employment; and (iv) a statement that the offer is contingent upon satisfactory completion of background checks and eligibility to work in the United States. The form offer letter is adequate for its purpose and does not create any unintended contractual commitments or implied employment guarantees.
IV. Equity Compensation — 2019 Equity Incentive Plan
IV.A. Plan Overview
The Company maintains the Meridian Surgical Technologies, Inc. 2019 Equity Incentive Plan (the "2019 Plan"), which was adopted by the Meridian Board of Directors and approved by the Company's stockholders in 2019. The 2019 Plan is the sole equity compensation plan maintained by the Company.
The 2019 Plan authorizes the Company to grant the following types of equity awards to eligible participants: (i) incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) non-qualified stock options ("NQSOs"); (iii) restricted stock awards; and (iv) restricted stock units ("RSUs"). The 2019 Plan is administered by the Board of Directors of the Company (or a committee thereof designated by the Board). Eligible participants include employees, directors, and consultants of the Company, although in practice, awards have been granted exclusively to employees.
The total number of shares of common stock of the Company reserved for issuance under the 2019 Plan is 550,000 shares. As of the date of this memorandum, all 550,000 shares are subject to outstanding, fully vested stock options. No shares remain available for future grants under the 2019 Plan, and no shares have been issued upon the exercise of options (all options remain outstanding and unexercised). No restricted stock awards or RSUs have been granted under the 2019 Plan.
IV.B. Outstanding Awards
Based on our review of the 2019 Plan, the individual stock option award agreements, and the Company's capitalization records, the outstanding equity awards under the 2019 Plan are as follows:
• Total options outstanding: 550,000 shares of the Company's common stock.
• Vesting status: All 550,000 options are fully vested as of the anticipated Closing Date of October 31, 2024. No unvested options will remain outstanding at closing.
• Weighted-average exercise price: $4.80 per share across all outstanding options.
• Option type breakdown: Approximately 350,000 options were granted as ISOs and approximately 200,000 options were granted as NQSOs, based on the classifications set forth in the individual award agreements.
• Expiration dates: The options have various expiration dates ranging from 2029 to 2031, reflecting the ten (10) year term from the date of grant that is standard under the 2019 Plan.
• Outstanding restricted stock awards and RSUs: None. No restricted stock awards or RSUs have been granted under the 2019 Plan.
A complete schedule of all outstanding options, broken down by individual holder, grant date, number of options, exercise price, vesting status, and ISO/NQSO classification, is set forth in Appendix A.
IV.C. Treatment at Closing
Pursuant to the contemplated Transaction structure, all outstanding vested options under the 2019 Plan will be cancelled at the closing of the Transaction in exchange for a cash payment to each option holder. The mechanics of the option cancellation and the calculation of the cash consideration are as follows:
Per-Share Merger Consideration. The total equity purchase price for the Transaction is $220,000,000. The Company's fully diluted capitalization consists of 7,450,000 shares of common stock outstanding plus 550,000 in-the-money stock options, for a total of 8,000,000 fully diluted shares. The resulting per-share value is:
$220,000,000 ÷ 8,000,000 fully diluted shares = $27.50 per share
Net Per-Option Cancellation Payment. Each option holder will receive a cash payment equal to the excess of the per-share value over the exercise price of the option:
$27.50 per share – $4.80 exercise price = $22.70 per option (net)
Aggregate Option Cancellation Payments. The total cash consideration payable to all option holders at closing is:
550,000 options × $22.70 per option = $12,485,000
It is important to note that the $220,000,000 base purchase price represents the total equity value inclusive of option cancellation payments. The per-share price payable to common stockholders and the net per-option consideration payable to option holders together exhaust the full $220,000,000 purchase price. Accordingly, the per-share consideration payable to common stockholders (before escrow holdback and other SPA adjustments) is calculated as follows:
($220,000,000 – $12,485,000) ÷ 7,450,000 common shares = $207,515,000 ÷ 7,450,000 ≈ $27.8545 per share
(Note: The slight difference between the $27.50 per-share value used for option cancellation purposes and the approximately $27.85 per-share amount payable to common stockholders reflects the standard treasury stock method mechanics inherent in the calculation, whereby the "spread" between the exercise price and the per-share value is allocated to option holders, with the balance of the purchase price allocated to common stockholders. The final per-share amount payable to common stockholders will be subject to the escrow holdback, working capital adjustments, and other closing adjustments set forth in the SPA.)
Tax Withholding Obligations. The cancellation of stock options in exchange for cash payments at closing will give rise to tax withholding obligations as follows:
• Non-Qualified Stock Options (NQSOs): The cash cancellation payments in respect of NQSOs will constitute ordinary compensation income to the option holders. The Company (as the employer) will be required to withhold federal income tax, applicable state income tax, and FICA taxes (Social Security and Medicare) from the NQSO cancellation payments. The Company will also be responsible for the employer's share of FICA taxes on these amounts.
• Incentive Stock Options (ISOs): The tax treatment of the cash cancellation of ISOs is more complex. In general, the cancellation of an ISO in exchange for cash at closing will likely be treated as a "disqualifying disposition" if the option holder has not satisfied the applicable holding period requirements under Section 422 of the Code (i.e., the option holder has not held the shares acquired upon exercise for at least two years from the date of grant and one year from the date of exercise). Since no options have been exercised, the cancellation at closing will be treated as a taxable event. While the precise characterization may depend on individual facts, we recommend as a protective measure that the Company withhold on all option cancellation payments — including ISO cancellation payments — and advise all option holders to consult their own tax advisors regarding the tax consequences of the cancellation payments.
Section 409A Compliance. We reviewed the 2019 Plan, the form award agreements, and the contemporaneous Section 409A valuation reports relied upon by the Company in establishing the exercise prices for stock option grants. Based on our review, all options were granted with an exercise price equal to or greater than the fair market value of the Company's common stock on the date of grant, as determined by a qualified independent valuation firm. The options qualify for the stock option exemption from Section 409A of the Code, and we did not identify any compliance issues. The cancellation of the options at closing in exchange for cash should not trigger any additional tax penalties or excise taxes under Section 409A.
Plan Termination. The 2019 Plan should be formally terminated effective as of the Closing Date. We recommend that the Board of Directors of Meridian adopt resolutions prior to or at closing (i) approving the cancellation of all outstanding options in exchange for the cash consideration described above, and (ii) terminating the 2019 Plan in its entirety, effective as of the Closing Date. No further awards should be granted under the 2019 Plan between the date of this memorandum and the Closing Date.
IV.D. Option Holder Breakdown
As of the date of this memorandum, options under the 2019 Plan are held by approximately 38 current employees and 4 former employees of the Company. The former employee option holders separated from the Company during the applicable post-termination exercise period specified in their award agreements, and their vested options remain exercisable in accordance with the terms of those agreements.
The largest individual option holders are as follows:
It should be noted that Dr. Marcus Ellsworth and Catherine Pryor hold their equity interests in the Company in the form of common stock, not stock options. Their interests will be addressed through the share purchase mechanics of the SPA and are not subject to the option cancellation provisions described above.
V. Employee Benefit Plans
V.A. 401(k) Plan
Plan Name and Sponsor. The Company sponsors the Meridian Surgical Technologies 401(k) Plan (the "401(k) Plan"), a tax-qualified defined contribution retirement plan under Section 401(a) of the Internal Revenue Code. The Company serves as both the plan sponsor and the plan administrator.
Third-Party Administrator. The 401(k) Plan is administered by Cornerstone Retirement Plan Services, Inc., located at 500 Office Center Drive, Suite 200, Fort Washington, Pennsylvania 19034. Cornerstone provides recordkeeping, compliance testing, Form 5500 preparation, and participant services for the plan.
Plan Type. The 401(k) Plan is a Section 401(k) defined contribution plan — an individual account plan in which the value of each participant's benefit is determined solely by reference to the amount in the participant's individual account, which is based on contributions, investment returns, and forfeitures allocated to the account.
Eligibility. All employees of the Company who have attained age twenty-one (21) and have completed at least three (3) months of service are eligible to participate in the 401(k) Plan. Part-time employees are eligible to participate subject to the same eligibility requirements.
Employee Contributions. Participants may make pre-tax elective deferrals and designated Roth contributions up to the applicable IRS limits. For the 2024 plan year, the maximum employee deferral limit is $23,000, with an additional $7,500 in catch-up contributions available for participants aged 50 and older.
Employer Matching Contributions. The Company makes matching contributions equal to 50% of the first 6% of each participant's eligible compensation that is deferred to the plan. This results in an effective employer match rate of 3% of compensation for participants who defer at least 6% of their eligible compensation. The employer match is a significant benefit and is in line with or slightly above median match rates for companies of comparable size in the medical device industry.
Vesting. Employee contributions are always 100% vested. Employer matching contributions are subject to a three (3) year graded vesting schedule, with participants vesting at a rate of 33⅓% per year of service. Participants become 100% vested in employer matching contributions after completing three (3) years of service. Participants also become 100% vested in employer matching contributions upon attaining normal retirement age, death, or disability.
Plan Assets. As of the most recent Form 5500 filing (for the plan year ending December 31, 2023), total plan assets were approximately $8.2 million. Plan assets are invested in a diversified menu of mutual funds and target-date retirement funds selected by the plan fiduciary.
IRS Determination Letter. The Company has received a favorable IRS determination letter with respect to the tax-qualified status of the 401(k) Plan. The plan utilizes a pre-approved prototype plan document, which provides an additional layer of assurance regarding the plan's compliance with Code requirements.
Compliance. Based on our review of the plan documents, Form 5500 filings, nondiscrimination testing results, and management's representations, we note the following:
• No pending or threatened IRS or Department of Labor ("DOL") audits, investigations, or enforcement actions relating to the 401(k) Plan.
• The most recent Form 5500 (for the plan year ending December 31, 2023) was filed timely with the DOL.
• No prohibited transactions within the meaning of Section 4975 of the Code or Section 406 of ERISA have been identified.
• Annual nondiscrimination testing, including the Actual Deferral Percentage ("ADP") test and the Actual Contribution Percentage ("ACP") test, was performed for the 2022 and 2023 plan years, and the plan passed both tests for both years.
• An independent audit of the plan's financial statements is not currently required, as the plan has not yet reached the 100-participant threshold (measured at the beginning of the plan year) that triggers the audit requirement under ERISA. As of the beginning of the 2023 plan year, the plan had approximately 92 participants with account balances. Given the Company's current headcount of 312 employees, it is possible that the plan may reach the 100-participant threshold in the near term, at which point an independent audit will be required for the first applicable plan year.
Post-Closing Considerations. Because the Transaction is structured as a stock purchase, the 401(k) Plan will continue as-is following the closing, with Meridian remaining the same legal entity and continuing as the plan sponsor. No mandatory plan action is required at closing. However, Buyer may consider one of the following options during the post-closing integration period:
• Continuation. Maintain the 401(k) Plan as a standalone plan for Meridian employees, at least during an initial transition period.
• Merger. Merge the 401(k) Plan into a Solstice-sponsored 401(k) plan, subject to applicable plan merger requirements under ERISA and the Code, including the requirement that each participant's benefit under the merged plan be at least equal to the benefit the participant would have received had the plan been terminated immediately prior to the merger.
• Termination. Terminate the 401(k) Plan and distribute or roll over participant account balances, subject to a determination that the plan termination is not in connection with the establishment of a successor plan (which would require a 12-month gap under IRS guidance).
The decision regarding post-closing plan treatment should be coordinated with Buyer's benefits and human resources teams, taking into account operational efficiency, employee relations, and integration planning considerations.
V.B. Health and Welfare Plans
Meridian provides a comprehensive suite of health and welfare benefits to its eligible employees. The following summarizes the material health and welfare plans offered by the Company:
Medical Insurance. The Company offers a group medical plan with two options: a Preferred Provider Organization ("PPO") plan and a High Deductible Health Plan ("HDHP"). Both medical plan options are insured through Crestpoint Health Insurance Co. The Company contributes approximately 75% of the monthly premium for employee-only coverage and approximately 60% of the monthly premium for dependent coverage (employee plus spouse, employee plus child(ren), and family tiers). These contribution levels are competitive within the medical device industry and should be considered in the context of retention and employee relations planning.
Dental and Vision Insurance. The Company offers separate dental and vision insurance plans, also insured through Crestpoint Health Insurance Co. Dental coverage includes preventive, basic, and major restorative services. Vision coverage includes annual eye exams, lens and frame allowances, and contact lens benefits. The Company contributes a portion of the premiums for both dental and vision coverage.
Life Insurance and Accidental Death & Dismemberment (AD&D). The Company provides basic group term life insurance and AD&D coverage to all eligible employees, insured through Crestpoint Health Insurance Co. The basic life insurance benefit is equal to one times (1x) the employee's annual base salary, subject to a maximum benefit of $250,000. The AD&D benefit mirrors the basic life insurance benefit amount. Supplemental voluntary life insurance is available for employees who wish to purchase additional coverage at their own expense.
Short-Term Disability (STD). The Company provides a Company-paid short-term disability benefit, insured through Crestpoint Health Insurance Co. The STD benefit provides 60% of the employee's pre-disability base salary for a maximum benefit period of 26 weeks, subject to a seven (7) calendar day elimination period.
Long-Term Disability (LTD). The Company provides a Company-paid long-term disability benefit, also insured through Crestpoint Health Insurance Co. The LTD benefit provides 60% of the employee's pre-disability base salary following a 180-day elimination period (which aligns with the expiration of the STD benefit period). The LTD benefit is payable to age 65 or Social Security Normal Retirement Age, subject to the terms and conditions of the group LTD policy.
Flexible Spending Accounts. The Company maintains a Section 125 cafeteria plan that offers employees the opportunity to participate in a Medical Flexible Spending Account ("Medical FSA") and a Dependent Care Flexible Spending Account ("Dependent Care FSA"). The Medical FSA allows employees to set aside pre-tax dollars for eligible medical, dental, and vision expenses not covered by insurance. The Dependent Care FSA allows employees to set aside pre-tax dollars for eligible dependent care expenses.
COBRA Administration. The Company has been administering its obligations under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") through Cornerstone Retirement Plan Services, Inc., which serves as the COBRA administrator in addition to its role as the 401(k) plan TPA. Based on our review of COBRA notices, election forms, and premium collection records, COBRA administration appears to be current and in compliance with applicable requirements. We did not identify any pending COBRA-related claims, inquiries, or enforcement actions.
Affordable Care Act (ACA) Compliance. Meridian is an "applicable large employer" ("ALE") within the meaning of Section 4980H of the Code, as the Company employs more than 50 full-time employees (or full-time equivalent employees). With 312 employees, the Company well exceeds the 50 FTE threshold. The Company has filed the required Forms 1094-C (transmittal) and 1095-C (individual employee statements) with the IRS for the 2022 and 2023 tax years. We confirmed that no IRS Letter 226J notices (proposing employer shared responsibility penalties under Section 4980H) have been received for any tax year. Based on our review, the Company's offer of coverage to full-time employees through its medical plan appears to satisfy the ACA's minimum essential coverage, minimum value, and affordability requirements.
Post-Closing Considerations. Because the Transaction is structured as a stock purchase, all health and welfare plans will continue following the closing without interruption. No immediate changes to the health and welfare plans are required at closing. However, Buyer may wish to evaluate the harmonization of Meridian's health and welfare benefits with Solstice's benefit programs during a post-closing transition period. Any transition or harmonization should be carefully planned and communicated to employees to minimize disruption and address employee relations considerations.
V.C. Absence of Defined Benefit Plans and Post-Retirement Obligations
Based on our comprehensive review of the employee benefit plan documents, the Company's financial statements, management's representations in the VDR, and our independent analysis, we confirm the following:
• Meridian does not sponsor, maintain, contribute to, or have any obligation to contribute to any defined benefit pension plan (whether or not subject to ERISA Title IV), any multiemployer pension plan (within the meaning of ERISA Section 3(37)), or any other pension arrangement.
• Meridian has no ERISA Title IV liability, including no underfunded pension benefit obligations, no liability to the Pension Benefit Guaranty Corporation ("PBGC"), and no PBGC premium obligations.
• Meridian has no post-retirement healthcare or life insurance obligations (commonly referred to as other post-employment benefits or "OPEB" obligations under ASC 715). The Company does not provide any retiree medical, dental, vision, or life insurance benefits.