CALDERWOOD & HARKNESS LLP Attorneys at Law 590 Lexington Avenue, 35th Floor New York, NY 10022 Tel: (212) 554-8000
MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
TO:
Dr. Fiona Gallagher, Chief Executive Officer — Solstice Biomedical Devices Ltd. Conor Muldoon, Chief Financial Officer — Solstice Biomedical Devices Ltd. Helena Byrne, EVP, Corporate Development & Strategy — Solstice Biomedical Devices Ltd. Patrick Lennox, General Counsel & Company Secretary — Solstice Biomedical Devices Ltd.
FROM:
Beatrice Holloway, Partner — Calderwood & Harkness LLP Tiffany Rosenthal, Senior Associate — Calderwood & Harkness LLP
DATE: August 16, 2024
RE: Summary of Buy-Side Representations and Warranties Insurance Policy — Acquisition of Meridian Surgical Technologies, Inc.
MATTER NO.: 1037-00006
This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees named above. Any disclosure, distribution, or copying of this memorandum, in whole or in part, without the prior written consent of Calderwood & Harkness LLP is strictly prohibited.
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I. Executive Summary
This memorandum summarizes the material terms, conditions, exclusions, and practical implications of the buy-side representations and warranties insurance ("RWI") policy obtained in connection with Solstice Biomedical, Inc.'s acquisition of one hundred percent (100%) of the outstanding common stock and all vested options of Meridian Surgical Technologies, Inc. (the "Transaction"). The Transaction is being consummated pursuant to the Stock Purchase Agreement dated August 20, 2024 (the "SPA"), by and among Solstice Biomedical, Inc. ("Buyer" or "Solstice"), Meridian Surgical Technologies, Inc. (the "Company" or "Meridian"), the stockholders of Meridian listed on Exhibit A thereto (collectively, the "Sellers"), and Dr. Marcus Ellsworth, in his capacity as the Sellers' Representative.
The RWI policy (Policy No. RMI-RWI-2024-08172) has been issued by Ridgeline Mutual Insurance Company ("Ridgeline" or the "Insurer"), a Connecticut mutual insurance company headquartered at 55 Asylum Street, Hartford, CT 06103. The policy was bound on August 14, 2024, which is six (6) calendar days prior to the anticipated SPA signing date of August 20, 2024. The primary contact at Ridgeline for all matters relating to this policy is Dennis Hargrave, Senior Vice President, Transactional Risk.
The purpose of the RWI policy is to provide Solstice with insurance coverage for Losses (as defined in the SPA) arising from breaches of the Sellers' representations and warranties contained in Article IV of the SPA. The policy is designed to supplement the contractual indemnification framework negotiated in the SPA and, importantly, to provide the Buyer with a recovery mechanism that extends beyond the escrow amount and the contractual indemnification caps applicable to non-Fundamental Representation claims. By obtaining this coverage, Solstice has secured an independent source of recovery that does not depend on the financial capacity or willingness of the Sellers to satisfy indemnification obligations following the Closing.
The Base Purchase Price for the Transaction is Two Hundred Twenty Million Dollars ($220,000,000), with Maximum Aggregate Consideration (including contingent earnout payments) of up to Two Hundred Fifty-Five Million Dollars ($255,000,000). The RWI policy provides an aggregate coverage limit of Forty Million Dollars ($40,000,000), representing approximately 18.2% of the Base Purchase Price.
The RWI policy is structured as a "buy-side" policy, meaning that Solstice Biomedical, Inc. is the Named Insured and has a direct contractual relationship with, and right of recovery against, Ridgeline. This structure was selected in preference to a "sell-side" policy (which would have insured the Sellers) to ensure that Solstice has direct recourse to the insurer and to avoid any dependency on the Sellers' post-closing financial capacity or cooperation in the claims process. Solstice Biomedical Devices Ltd., the Irish parent company, has been added as an additional insured under the policy.
This memorandum addresses the following topics: (i) the parties and structure of the policy (Section II); (ii) the coverage terms, including the aggregate limit, premium, retention, policy period, and covered representations (Section III); (iii) key exclusions from coverage (Section IV); (iv) the interplay between the RWI policy and the SPA's indemnification framework, including the layered recovery structure (Section V); (v) the claims process and notice requirements (Section VI); (vi) subrogation rights and the fraud carve-out (Section VII); (vii) practical considerations and recommendations for the management team (Section VIII); (viii) a quick reference table of key policy terms (Section IX); and (ix) contact information (Section X).
We recommend that each addressee review this memorandum carefully and contact us with any questions. The original policy document, which governs in all cases of discrepancy with this summary, should be maintained in the Transaction's permanent closing binder.
II. Policy Parties and Structure
A. Named Insured
The Named Insured under the RWI policy is Solstice Biomedical, Inc., a Delaware corporation that serves as the acquisition subsidiary and the U.S. borrower in connection with the Transaction. Solstice Biomedical, Inc. is located at 1200 Innovation Drive, Suite 400, Wilmington, DE 19801.
As the Named Insured, Solstice Biomedical, Inc. has the primary right to submit claims, receive payments, and interact with Ridgeline in all matters arising under the policy. It is also the entity that bears the obligations of the Insured, including notice requirements, cooperation obligations, and the obligation to pay the premium.
Importantly, Solstice Biomedical Devices Ltd., the Irish parent company and the ultimate acquirer of Meridian for purposes of the group's corporate structure, has been designated as an additional insured under the policy. This ensures that the parent entity has standing to assert claims and receive payments under the policy should the need arise, and provides flexibility in the event that Losses are incurred at the parent level or that claims are coordinated at the group level. The inclusion of the Irish parent as an additional insured was negotiated during the underwriting process and is reflected in Endorsement No. 1 to the policy.
B. Insurer
The Insurer is Ridgeline Mutual Insurance Company, a Connecticut mutual insurance company with its principal offices at 55 Asylum Street, Hartford, CT 06103. Ridgeline is a well-established transactional risk insurer with significant experience in the RWI market, particularly in the life sciences and medical device sectors. Ridgeline maintains an A.M. Best financial strength rating of "A" (Excellent), which was a factor in Solstice's selection of this carrier.
The policy number assigned to this coverage is RMI-RWI-2024-08172.
Our primary point of contact at Ridgeline is Dennis Hargrave, Senior Vice President, Transactional Risk, who has managed the underwriting process from initial submission through binding. Mr. Hargrave's contact information is provided in Section X of this memorandum.
C. Transaction Covered
The policy covers losses arising in connection with the Transaction as defined in the SPA. Specifically, the Transaction consists of the following:
The SPA, dated as of August 20, 2024, is entered into among Solstice Biomedical, Inc. (as Buyer), Meridian Surgical Technologies, Inc. (as the Company), the Sellers named therein, and Dr. Marcus Ellsworth (as Sellers' Representative). Pursuant to the SPA, Buyer will acquire one hundred percent (100%) of the outstanding common stock of Meridian, consisting of 7,450,000 issued and outstanding shares, together with all vested stock options, consisting of 550,000 shares subject to vested options under Meridian's 2019 Equity Incentive Plan. The acquisition structure is a stock purchase, and the Company will become a wholly-owned subsidiary of Buyer at Closing.
The enterprise value of the Transaction consists of a Base Purchase Price of $220,000,000, payable in cash at Closing (subject to customary adjustments for cash, debt, transaction expenses, and Net Working Capital), plus contingent earnout payments of up to $35,000,000, for a Maximum Aggregate Consideration of $255,000,000. The earnout payments are contingent upon the achievement of specified revenue milestones and regulatory milestones related to the Company's ArthroNav product line, as more fully described in Article II, Section 2.7 of the SPA.
The policy is tied to the SPA as executed, including all schedules, exhibits, and disclosure schedules thereto, and any amendments or modifications to the SPA require notice to and, in certain circumstances, the consent of Ridgeline.
D. Policy Type
The RWI policy is a buy-side policy. Under this structure, the Buyer (Solstice Biomedical, Inc.) is the policyholder and has a direct contractual right to claim against the Insurer for Losses resulting from breaches of the Sellers' representations and warranties in the SPA.
This structure is distinguishable from a "sell-side" RWI policy, which would have been procured by the Sellers and would have insured the Sellers' indemnification obligations to the Buyer. The buy-side structure was selected for several important reasons:
(a) Direct Recourse. Under a buy-side policy, Solstice has a direct claim against Ridgeline and does not need to first obtain an indemnification determination against the Sellers before seeking insurance recovery (subject to the Retention requirements discussed below). This is particularly valuable given that the Sellers are individual stockholders and a private equity fund whose assets may be distributed to limited partners following the Closing.
(b) Independence from Sellers' Financial Capacity. A buy-side policy insulates Solstice from the risk that Sellers lack the financial resources to satisfy indemnification obligations beyond the Indemnity Escrow. This concern was specifically identified during our risk assessment given that the Sellers' primary source of indemnification for non-Fundamental claims is limited to the $26,400,000 Indemnity Escrow.
(c) Negotiating Leverage and Deal Certainty. The procurement of a buy-side RWI policy facilitated the negotiation of a transaction structure in which the Sellers accepted a lower indemnification cap and escrow amount, while Solstice secured a broader and more durable source of recovery. This allocation of risk was a key element of the overall commercial terms of the Transaction.
(d) Market Standard. Buy-side RWI policies are the predominant structure in the current M&A insurance market, representing approximately 95% of all transactional RWI policies placed in 2023 and 2024, according to industry data. Ridgeline and other carriers are highly experienced in underwriting and administering buy-side policies.
III. Coverage Terms
A. Aggregate Coverage Limit
The aggregate limit of liability under the RWI policy is Forty Million Dollars ($40,000,000). This limit represents the maximum total amount payable by Ridgeline under the policy across all covered claims during the policy period, regardless of the number of individual claims made or the nature of the breached representations.
Relative to the Transaction economics, the $40,000,000 aggregate limit represents approximately 18.2% of the Base Purchase Price of $220,000,000. This coverage level is within the range typically observed in buy-side RWI policies for transactions of this size in the medical device industry, where aggregate limits typically range from 10% to 25% of enterprise value depending on the risk profile of the target and the scope of the seller indemnification.
The policy is structured as a single policy layer — there is no excess or umbrella layer of coverage above the $40,000,000 primary limit. During the underwriting and placement process, we evaluated the option of procuring an additional excess layer of $20,000,000 to bring total coverage to $60,000,000. However, after consultation with Caldwell Risk Advisors, Inc., the Transaction's insurance broker, and in light of the deal team's assessment of the risk profile of Meridian, the decision was made that a single $40,000,000 layer provides adequate protection, particularly given the availability of direct Seller recourse for Fundamental Representation claims (up to the $61,600,000 cap under the SPA).
It is important to note that the aggregate limit is not reinstated after a claim is paid. Each dollar paid by Ridgeline under the policy reduces the remaining aggregate limit available for future claims on a dollar-for-dollar basis.
B. Policy Premium
The premium for the RWI policy is One Million Two Hundred Thirty-Two Thousand Dollars ($1,232,000). This premium was determined during the underwriting process based on the following key factors:
• The premium represents approximately 0.56% of the $220,000,000 Base Purchase Price, which is within the market range for buy-side RWI policies in the life sciences sector (typically 0.40% to 0.75% of enterprise value for transactions with comparable risk profiles).
• Expressed as a rate-on-line (i.e., premium as a percentage of the coverage limit), the $1,232,000 premium represents approximately 3.08% of the $40,000,000 aggregate limit.
• The premium is a one-time, non-refundable payment. It is payable by Buyer at the Closing on October 31, 2024, and will be reflected as a Buyer closing cost in the Funds Flow Memorandum. Regardless of whether any claims are made during the policy period, the premium is fully earned by Ridgeline upon payment and is not subject to refund, cancellation, or adjustment.
• Under the terms negotiated in the SPA, the Buyer bears the full cost of the RWI premium. This allocation was part of the broader commercial negotiation, in which the Sellers' willingness to accept the escrow-only limitation for non-Fundamental claims and a lower overall indemnification cap was conditioned on the Buyer's agreement to procure and pay for the RWI policy at its sole expense.
The premium amount was confirmed in the binding indication letter from Ridgeline dated August 12, 2024, and formalized in the policy as bound on August 14, 2024. No additional premiums, installments, or policy maintenance fees are payable during the policy period.
C. Retention (Self-Insured Retention / Deductible)
The Retention under the RWI policy functions as a self-insured retention (analogous to a deductible) that must be fully exhausted before the policy will respond to any covered Loss. The Retention terms are as follows:
Total Retention: The initial Retention amount is Four Million Four Hundred Thousand Dollars ($4,400,000), representing 2.0% of the $220,000,000 Base Purchase Price. This Retention level is consistent with current market standards for buy-side RWI policies in transactions of this size, where retentions typically range from 1.5% to 3.0% of enterprise value.
Allocation of Retention: The Retention is allocated equally between the Buyer and the Sellers as follows:
• Sellers' Share of Retention: $2,200,000. This amount is recoverable from the Sellers through the $26,400,000 Indemnity Escrow established under the SPA, subject to the SPA's indemnification provisions, including the basket and de minimis thresholds. The SPA's $1,650,000 tipping basket counts toward and is applied against the Sellers' portion of the Retention.
• Buyer's Share of Retention: $2,200,000. This amount represents the Buyer's self-insured risk. Losses within the Buyer's share of the Retention are borne by the Buyer and are not recoverable from either the Sellers or Ridgeline.
Exhaustion Requirement: The full $4,400,000 Retention (combining both the Sellers' share and the Buyer's share) must be exhausted before the policy responds to any covered Loss. This means that Buyer must demonstrate aggregate Losses of at least $4,400,000 from covered breaches of representations and warranties before Ridgeline has any payment obligation under the policy.
Retention Drop-Down: The policy includes a "drop-down" feature pursuant to which the Retention is reduced on the twelve-month anniversary of the Closing Date. Specifically:
• Effective October 31, 2025, the Retention will reduce to fifty percent (50%) of the initial Retention, or $2,200,000.
• The drop-down is subject to the condition that there are no material pending claims under the policy as of the drop-down date. A "material pending claim" is defined in the policy as any noticed claim or circumstance for which the aggregate potential Losses exceed $1,000,000.
• Following the drop-down, the Buyer's share and the Sellers' share of the reduced Retention are each $1,100,000. This reduced retention will apply to new claims arising after the drop-down date; claims noticed prior to the drop-down date remain subject to the original $4,400,000 Retention.
The Retention drop-down feature is a significant benefit for Solstice, as it reduces the Buyer's out-of-pocket exposure for claims arising in the second and third years of the policy period, when post-closing integration issues and previously undiscovered liabilities are most likely to surface.
D. Policy Period
The RWI policy has a dual-track policy period that is keyed to the nature of the representations and warranties at issue:
Policy Inception: The policy incepts on the Closing Date, which is anticipated to be October 31, 2024. No coverage attaches prior to the Closing. If the Transaction does not close for any reason, the policy will not incept and the premium (if paid in advance) will be refunded.
General Representations — 36-Month Policy Period: For breaches of general (non-Fundamental) representations and warranties, the policy period is thirty-six (36) months from the Closing Date, expiring on October 31, 2027. This is a critically important feature of the coverage because the SPA's survival period for general representations is only twenty-four (24) months (expiring on October 31, 2026). The RWI policy therefore provides an additional twelve (12) months of insurance coverage beyond the expiration of the Buyer's contractual indemnification rights against the Sellers for general representation breaches. During this twelve-month "tail" period (November 1, 2026 through October 31, 2027), the RWI policy will be the Buyer's sole source of recovery for breaches of general representations.
Fundamental Representations and Tax Representations — 72-Month Policy Period: For breaches of Fundamental Representations (as defined in the SPA to include representations regarding organization, authorization, capitalization, and brokers' fees) and Tax representations, the policy period is seventy-two (72) months from the Closing Date, expiring on October 31, 2030. This extended period aligns with market practice for Fundamental and Tax representations, which carry longer survival periods under the SPA (the statute of limitations plus sixty (60) days) due to the heightened significance of these representations to the overall transaction structure and the Buyer's title to the acquired securities.
Claims-Made Basis: The policy operates on a claims-made basis. A claim must be noticed to Ridgeline during the applicable policy period in order to be covered. Claims noticed after the expiration of the applicable policy period will not be covered, regardless of when the underlying breach occurred. However, claims that are properly noticed during the policy period will continue to be processed and paid after the policy period expires, subject to the aggregate coverage limit.
E. Covered Representations and Warranties
The RWI policy provides coverage for all of the Sellers' representations and warranties as set forth in Article IV of the SPA, subject to the exclusions described in Section IV of this memorandum. The breadth of coverage is an important feature of the policy and was a key focus during the underwriting process, during which Ridgeline reviewed the specific representations and warranties in the SPA and assessed the associated risk profile.
The covered representations and warranties include, but are not limited to, the following:
(a) Organization and Good Standing. Representations that Meridian is duly organized, validly existing, and in good standing under the laws of the State of Delaware, and is qualified to do business in each jurisdiction where the nature of its business requires such qualification, including Pennsylvania (the location of its principal manufacturing facility) and California (the location of its West Coast sales office).
(b) Authorization and Enforceability. Representations that the execution, delivery, and performance of the SPA by the Company and each Seller have been duly authorized, and that the SPA constitutes a valid and binding obligation enforceable in accordance with its terms.
(c) Capitalization. Representations that the authorized, issued, and outstanding capital stock of Meridian consists of 7,450,000 shares of common stock, and that 550,000 shares are subject to vested stock options under the 2019 Equity Incentive Plan, with no other options, warrants, convertible securities, or rights to acquire equity outstanding.
(d) Financial Statements. Representations regarding the accuracy and completeness of Meridian's audited financial statements for the fiscal years ended December 31, 2021, 2022, and 2023, and the unaudited interim financial statements for the six-month period ended June 30, 2024, including that such statements were prepared in accordance with GAAP applied on a consistent basis and fairly present the financial condition and results of operations of the Company.
(e) Absence of Undisclosed Liabilities. Representations that the Company has no liabilities or obligations (whether accrued, absolute, contingent, or otherwise) other than those reflected or reserved against in the financial statements or incurred in the ordinary course of business since the most recent balance sheet date.
(f) Compliance with Laws. Representations that the Company is, and has been during the three-year period prior to the Closing, in material compliance with all applicable laws, regulations, and orders, including, critically, regulations administered by the U.S. Food and Drug Administration ("FDA") applicable to the manufacture, labeling, distribution, and marketing of medical devices.
(g) intellectual Property. Representations regarding the Company's ownership of, and rights in, its intellectual property portfolio, which includes fourteen (14) issued U.S. utility patents, three (3) pending U.S. patent applications, six (6) European patents (issued in Germany, France, and the United Kingdom under the European Patent Convention), trademarks including "Meridian Surgical," "ArthroNav," and "PrecisionBlade" (each registered with the U.S. Patent and Trademark Office), and material trade secrets relating to the Company's proprietary surgical instrument manufacturing processes.
(h) Material Contracts. Representations regarding the Company's material contracts, including customer contracts, supplier agreements, distribution agreements, licensing agreements, and equipment leases, and that all such contracts are in full force and effect and that neither the Company nor, to the Sellers' knowledge, any counterparty is in material breach thereof.
(i) Tax Matters. Representations that all Tax returns required to be filed by the Company have been timely filed and are true, correct, and complete in all material respects; that all Taxes owed have been paid or adequately reserved for; and that there are no pending or threatened Tax audits, assessments, or disputes.
(j) Environmental Matters. Representations regarding compliance with environmental laws at the Company's facilities, including the Exton, Pennsylvania manufacturing facility located at 45 Forge Creek Road, Exton, PA 19341, and the absence of Hazardous Materials releases, contamination, or environmental liabilities.
(k) Employee and Labor Matters. Representations regarding the Company's workforce of 312 employees, compliance with employment laws, the terms and funding status of the Company's 401(k) retirement plan, the terms of the 2019 Equity Incentive Plan, and the absence of any collective bargaining agreements, labor disputes, or unfair labor practice charges.
(l) Regulatory Compliance. Representations regarding the Company's FDA 510(k) clearances for its existing commercial products, the status of the Company's facility registrations and device listings with the FDA, compliance with Quality System Regulation (21 C.F.R. Part 820), and the absence of any warning letters, consent decrees, or enforcement actions by the FDA or comparable foreign regulatory authorities.
(m) Real Property. Representations regarding the Company's owned and leased real property, including the Exton manufacturing facility and the Company's leased office and R&D space.
(n) Insurance. Representations regarding the Company's existing insurance coverage, including product liability, general liability, and property insurance, and that all such policies are in full force and effect.
(o) Litigation. Representations regarding pending and threatened litigation, subject to the exclusions noted in Section IV below. The representations confirm that, except as disclosed in the Disclosure Schedules, there are no pending or threatened actions, suits, claims, or proceedings against the Company that would reasonably be expected to result in a material adverse effect.
IV. Key Exclusions
The RWI policy contains a number of exclusions from coverage, some of which are deal-specific and some of which are standard market exclusions. An understanding of these exclusions is critical to assessing the scope and limitations of the coverage provided by the policy. The following is a summary of the most significant exclusions.
A. Known Breaches / Deal-Specific Exclusions
Disclosure Schedule Exclusion. Matters that have been specifically and fairly disclosed in the Disclosure Schedules to the SPA (dated August 20, 2024) are excluded from coverage under the RWI policy to the extent of such disclosure. This is a fundamental feature of all RWI policies: the insurance covers unknown breaches of representations and warranties — that is, inaccuracies in the representations that are not identified in the Disclosure Schedules. If a matter is disclosed in the schedules, it is deemed "known" and the Buyer has accepted the associated risk as part of the purchase price and deal structure, and such matter falls outside the scope of the policy.
It is important to note that the exclusion applies only to the extent a matter is "specifically and fairly disclosed" in the schedules. General or vague disclosures that do not provide sufficient detail to put the Buyer on notice of a particular issue may not be sufficient to trigger the exclusion. The application of this standard will be assessed on a claim-by-claim basis.
Hartwell Litigation Exclusion. The policy specifically excludes from coverage the pending litigation captioned Hartwell Orthopedic Solutions, Inc. v. Meridian Surgical Technologies, Inc., Civil Action No. 2:23-cv-04817 (E.D. Pa.). This matter, which involves allegations of patent infringement relating to certain arthroscopic instrumentation components, has been identified in Schedule 3.17 (Litigation) to the SPA as a Known Matter. The damages exposure in this case has been estimated at between $2,500,000 and $5,000,000 based on the Company's assessment and preliminary expert analysis. Because this litigation was known to both parties at the time of the Transaction, it is excluded from the RWI policy and is instead subject to specific indemnification provisions under the SPA, pursuant to which the Sellers have agreed to indemnify the Buyer for Losses arising from this matter, subject to a separate specific indemnification escrow of $3,000,000 (the "Hartwell Escrow"), as provided in Section 9.2(c) of the SPA.
B. Pre-Closing Knowledge Exclusion
The policy excludes any Loss arising from a breach of any representation or warranty of which any member of the Buyer's Deal Team had actual knowledge as of the date the policy was bound, August 14, 2024. This exclusion is standard in all buy-side RWI policies and reflects the principle that insurance is intended to cover unknown risks, not risks that the Buyer has identified and chosen to accept.
The "Buyer's Deal Team" is defined in the policy to include the following individuals:
• Dr. Fiona Gallagher, Chief Executive Officer, Solstice Biomedical Devices Ltd.
• Helena Byrne, EVP, Corporate Development & Strategy, Solstice Biomedical Devices Ltd.
• Patrick Lennox, General Counsel & Company Secretary, Solstice Biomedical Devices Ltd.
• Dr. Niamh Cassidy, VP, Regulatory Affairs, Solstice Biomedical Devices Ltd.
• Beatrice Holloway, Partner, Calderwood & Harkness LLP
• Tiffany Rosenthal, Senior Associate, Calderwood & Harkness LLP
The knowledge standard is actual knowledge only. This means the exclusion applies only if one of the named individuals actually knew of a breach at the time of binding. The policy does not impose constructive or imputed knowledge — there is no requirement that the Buyer's Deal Team "should have known" of a breach based on available information or the scope of diligence conducted. Furthermore, the policy does not impose a duty to investigate beyond the due diligence actually conducted by the Buyer and its advisors. This is a favorable provision for the Buyer, as it means that Ridgeline cannot deny a claim on the basis that additional diligence would have revealed the breach.
We note, however, that the knowledge exclusion applies to the actual knowledge of all members of the Buyer's Deal Team, including Calderwood & Harkness LLP attorneys. Accordingly, any material issues identified during our legal due diligence that constitute or indicate a breach of a representation or warranty in the SPA should be understood to be within the scope of this exclusion.
C. Forward-Looking / Covenant Exclusions
The RWI policy covers only breaches of representations and warranties — it does not cover breaches of covenants, agreements, or other obligations of the parties under the SPA. This is a standard and fundamental limitation of all RWI policies. Representations and warranties are backward-looking statements of fact as of a specified date (typically the signing date and/or the Closing date); covenants, by contrast, are forward-looking obligations to take or refrain from certain actions.
The following specific exclusions under this category are particularly noteworthy in the context of this Transaction:
(a) Earnout Exclusion. The policy specifically excludes any Loss arising from the earnout provisions set forth in Article II, Section 2.7 of the SPA. This includes, without limitation, any disputes regarding:
• Whether the Buyer has used commercially reasonable efforts to pursue 510(k) submissions for the ArthroNav product line extensions;
• Whether the Buyer has maintained the $6,000,000 annual ArthroNav R&D budget commitment during the earnout period;
• The calculation or achievement of the revenue milestones or regulatory milestones that trigger earnout payments; or
• Any other matter relating to the earnout structure, including accounting methodologies, the treatment of certain revenue items, or the impact of Buyer's post-closing operational decisions on earnout achievement.
This exclusion is consistent with market practice, as earnout disputes relate to post-closing performance and Buyer conduct rather than the accuracy of pre-closing representations and warranties.
(b) Purchase Price Adjustment Exclusion. The policy excludes any Loss arising from or relating to the post-closing Net Working Capital true-up mechanism set forth in Section 2.5 of the SPA, including any dispute regarding the determination of Closing Date Net Working Capital relative to the Target NWC of $11,500,000. Purchase price adjustments are treated as pricing mechanisms rather than indemnification matters and are therefore not within the scope of RWI coverage.
D. Tax-Related Exclusions
While Tax representations and warranties are covered by the policy (subject to the 72-month extended policy period for Fundamental and Tax representations), certain specific Tax-related matters are excluded from coverage:
(a) Section 338(h)(10) Election. The policy excludes any Loss arising from the Section 338(h)(10) election that is being jointly made by Buyer and Sellers in connection with the Transaction, or any recharacterization of or challenge to such election by the Internal Revenue Service or any state or local taxing authority. The 338(h)(10) election, which treats the stock acquisition as an asset acquisition for federal income tax purposes, is a structural element of the Transaction that was negotiated between the parties and is not a representation or warranty matter.
(b) Transfer Pricing Adjustments. The policy excludes any Loss arising from transfer pricing adjustments or challenges relating to Solstice's Irish holding company structure, including any adjustment to the allocation of income, expenses, or intellectual property rights between Solstice Biomedical Devices Ltd. (Ireland), Solstice Biomedical, Inc. (United States), and their affiliates. This exclusion reflects the Insurer's unwillingness to underwrite transfer pricing risk associated with the Buyer's existing corporate structure, which is outside the scope of Meridian's pre-closing operations and representations.
It is important to reiterate that, notwithstanding these specific Tax exclusions, the Tax representations and warranties themselves (e.g., representations regarding the filing and accuracy of Tax returns, the payment of Taxes, and the absence of Tax audits or disputes with respect to Meridian) remain covered under the policy, subject to the 72-month Fundamental Representations policy period.
E. Other Standard Exclusions
The policy contains a number of additional exclusions that are standard in the RWI market:
(a) Asbestos and PFAS Contamination. The policy excludes any Loss arising from or relating to asbestos-containing materials or per- and polyfluoroalkyl substances ("PFAS") contamination. This is an environmental carve-out that is standard in virtually all RWI policies issued in the current market, reflecting the potentially open-ended and catastrophic liability exposure associated with these substances. We note that no asbestos or PFAS issues were identified during the environmental due diligence of the Exton manufacturing facility, but this exclusion applies regardless.
(b) Pension Underfunding. The policy excludes any Loss arising from pension underfunding or liabilities related to defined benefit pension plans. This exclusion is not applicable to the Transaction, as Meridian does not maintain or sponsor any defined benefit or pension plan. Meridian's sole employee retirement benefit is a 401(k) defined contribution plan, which is not subject to this exclusion.
(c) Criminal Fines and Penalties. The policy excludes any criminal fines or penalties assessed against the Insured (Solstice). This is a standard exclusion based on public policy considerations prohibiting the insuring of criminal liability.
(d) Consequential, Punitive, and Multiplied Damages. The policy excludes consequential, punitive, exemplary, and multiplied damages, except to the extent such damages are awarded to a third party in a Third-Party Claim (i.e., a claim brought against the Insured or the Company by a person or entity other than the Insured). This means that in a direct (first-party) claim by Solstice under the policy, recovery is limited to actual damages; however, if a third party obtains a judgment or settlement that includes consequential or punitive damages, those amounts may be recoverable under the policy as part of a covered Third-Party Claim Loss.
(e) Seller Fraud — Subrogation Preservation. Although not technically an "exclusion" from coverage, the policy preserves Ridgeline's subrogation rights against any Seller who has committed fraud. This means that while Losses attributable to fraud by a Seller are covered by the policy (Solstice would receive payment from Ridgeline), Ridgeline retains the right to seek reimbursement directly from the fraudulent Seller. This is discussed in greater detail in Section VII below.
V. Interplay with the SPA Indemnification Framework
One of the most important aspects of the RWI policy is its interaction with the indemnification provisions of the SPA. The RWI policy was procured as an integral component of the Transaction's overall risk allocation framework, and the two mechanisms — contractual indemnification and insurance — are designed to work in concert to provide Solstice with layered protection against Losses arising from breaches of the Sellers' representations and warranties.
A. SPA Indemnification Overview
The following is a summary of the key indemnification terms in the SPA, as they relate to the RWI policy:
Indemnification Cap: The aggregate cap on the Sellers' indemnification obligations for breaches of representations and warranties (other than Fundamental Representations, Tax representations, and fraud) is 28% of the Base Purchase Price, or $61,600,000. For Fundamental Representation and Tax claims, the cap is the total consideration received by the Sellers (including any earnout payments actually paid).
Indemnity Escrow: At Closing, 12% of the Base Purchase Price, or $26,400,000, will be deposited into an escrow account with Keystone Escrow Services, Inc. (the "Indemnity Escrow") to secure the Sellers' indemnification obligations. The Indemnity Escrow is held pursuant to the Escrow Agreement among Buyer, Sellers' Representative, and Keystone Escrow Services, Inc.
De Minimis Threshold: Individual claims for Losses of less than $75,000 per claim do not count toward the basket and are not recoverable under the SPA's indemnification provisions or, correspondingly, under the RWI policy.
Basket (Tipping/Deductible): The SPA contains a tipping basket equal to 0.75% of the Base Purchase Price, or $1,650,000. No indemnification is payable until aggregate qualifying Losses exceed the $1,650,000 basket amount; however, once the basket is exceeded, the Sellers' indemnification obligation applies from the first dollar (i.e., the basket "tips" and is not a true deductible).
Survival Period: The SPA provides for the following survival periods for representations and warranties:
• General representations: 24 months from Closing (through October 31, 2026)
• Environmental representations: 36 months from Closing (through October 31, 2027)
• Fundamental Representations and Tax representations: statute of limitations plus 60 days
Escrow as Sole Recourse for Non-Fundamental Claims: For claims arising from breaches of non-Fundamental representations and warranties, the Indemnity Escrow is the Sellers' sole and exclusive source of indemnification recovery. The Buyer may not pursue the Sellers personally or seek recovery from other Seller assets for such claims. This escrow-only limitation was a key negotiation point in the SPA and was the primary driver for the procurement of the RWI policy, as it limits the Buyer's recovery from the Sellers for non-Fundamental claims to $26,400,000.
Fundamental Representation Claims: For claims arising from breaches of Fundamental Representations (organization, authorization, capitalization, and brokers' fees) and Tax representations, the Buyer may recover directly against the Sellers (not limited to the Indemnity Escrow), subject to the overall indemnification cap of $61,600,000.
B. Coordination of Recovery — Layered Structure
The RWI policy and the SPA's indemnification provisions are integrated into a four-layer recovery structure. The following describes the order and mechanics of recovery for a covered Loss:
First Layer — SPA Basket ($1,650,000): The Buyer must satisfy the $1,650,000 tipping basket before any indemnification claim is payable, whether from the Indemnity Escrow or under the RWI policy. Qualifying Losses (i.e., individual claims equal to or exceeding the $75,000 de minimis threshold) are aggregated until they exceed the $1,650,000 basket. Once the basket is exceeded, recovery is available from the first dollar of Loss.
Second Layer — Sellers' Share of Retention ($2,200,000): The $2,200,000 Sellers' share of the Retention under the RWI policy is allocated to the Sellers and is recoverable from the Indemnity Escrow pursuant to the SPA's indemnification provisions. The $1,650,000 SPA basket is applied against, and counts toward, the Sellers' portion of the Retention. This means that once the Buyer has demonstrated $2,200,000 in aggregate qualifying Losses, the Sellers' share of the Retention is fully satisfied (with $1,650,000 coming from the tipping basket amount and $550,000 from additional amounts recovered from the Indemnity Escrow above the basket).
Third Layer — Buyer's Share of Retention ($2,200,000): The remaining $2,200,000 of the Retention is allocated to the Buyer as self-insured risk. This amount is not recoverable from either the Sellers or Ridgeline. The Buyer's share of the Retention is exhausted only after the combined Buyer and Seller portions of the Retention — totaling $4,400,000 — have been fully consumed by qualifying Losses.
Fourth Layer — RWI Policy Coverage ($40,000,000): Once the full $4,400,000 Retention is exhausted, the RWI policy responds and Ridgeline becomes obligated to pay covered Losses up to the $40,000,000 aggregate limit.
The following table illustrates the recovery waterfall:
Maximum Theoretical Recovery for Buyer: Taking into account all available sources of recovery, the Buyer's maximum theoretical recovery for breaches of non-Fundamental representations and warranties is:
• $26,400,000 from the Indemnity Escrow (the maximum amount available from the Sellers for non-Fundamental claims); plus
• $40,000,000 from the RWI policy (after exhaustion of the $4,400,000 Retention);
• for a total of $66,400,000 (noting that $2,200,000 of the Retention is self-insured by the Buyer and reduces the effective recovery).
This total of $66,400,000 effectively exceeds the SPA's 28% indemnification cap of $61,600,000, which is a significant benefit of the RWI policy structure. However, it is important to recognize that the escrow-only limitation for non-Fundamental claims means that total direct recovery from the Sellers for such claims cannot exceed the $26,400,000 Indemnity Escrow amount, with the balance (up to $40,000,000) coming from the RWI policy.
For Fundamental Representation claims, the Buyer may recover directly against the Sellers (up to the $61,600,000 cap) and, in addition, from the RWI policy (up to $40,000,000), for a theoretical maximum of $101,600,000. However, the total recovery from all sources combined cannot exceed the Buyer's actual Losses; there is no right to double recovery.
C. Escrow Release and Impact on Recovery
The Indemnity Escrow is subject to a staggered release schedule that has important implications for the Buyer's recovery options over time:
First Escrow Release (October 31, 2025): Fifty percent (50%) of the remaining Indemnity Escrow balance, or $13,200,000 (assuming no prior claims have been paid from the escrow), is released to the Sellers on the first anniversary of the Closing Date. If claims have been made against the escrow, the release amount is reduced by the amount of any pending or paid claims. Any funds in excess of the $13,200,000 release amount (or adjusted amount, net of pending claims) remain in escrow.
Second Escrow Release (October 31, 2026): The remaining balance of the Indemnity Escrow is released to the Sellers on the second anniversary of the Closing Date (coinciding with the expiration of the 24-month survival period for general representations), less any amounts reserved for pending, unresolved claims.
After the second escrow release, the Buyer's primary recourse for non-Fundamental claims shifts entirely to the RWI policy (subject to the Retention). This transition underscores the importance of the policy's 36-month policy period for general representations, which extends 12 months beyond the SPA's survival period and the second escrow release date.
Critically, the RWI policy does not terminate or reduce upon release of the escrow. The $40,000,000 aggregate limit remains in full force and effect through the end of the applicable policy period, regardless of whether the Indemnity Escrow has been fully released to the Sellers. The policy is a standalone insurance contract, and its terms are not contingent on the continued existence of the escrow.
D. Treatment of the De Minimis Threshold
The SPA's de minimis threshold of $75,000 per individual claim is mirrored in the RWI policy. Accordingly, individual claims for Losses that are less than $75,000 per claim:
• Do not count toward the $1,650,000 tipping basket under the SPA;
• Do not count toward the $4,400,000 Retention under the RWI policy; and
• Are not recoverable under either the SPA's indemnification provisions or the RWI policy.
This means that small-dollar claims must be absorbed by the Buyer without recourse to either the Sellers or Ridgeline. The de minimis threshold is intended to prevent the administrative burden and transactional costs associated with processing numerous immaterial claims.
VI. Claims Process
A. Notice Requirements
Timely and proper notice is essential to preserving coverage under the RWI policy. The policy's notice requirements are as follows:
Timing: The Insured must provide written notice to Ridgeline as soon as practicable, but in no event later than thirty (30) days after the Insured becomes aware of a circumstance, event, or set of facts that could reasonably be expected to give rise to a claim under the policy. This standard applies to both actual claims (where a breach has been identified and Losses have been incurred or are anticipated) and to "circumstance notices" (where the Insured has identified a potential issue that has not yet crystallized into a definitive breach or quantifiable Loss).
Method and Recipients: Notice must be in writing and sent to:
Dennis Hargrave Senior Vice President, Transactional Risk Ridgeline Mutual Insurance Company 55 Asylum Street Hartford, CT 06103
A copy of the notice must also be sent to Ridgeline's designated claims counsel, whose identity and contact information are set forth in the policy and will be provided to the Buyer's legal team separately.
Late Notice: The policy provides that late notice will not void coverage unless Ridgeline can demonstrate that it has suffered material prejudice as a result of the delay. This is a favorable provision for the Insured, as it prevents Ridgeline from denying an otherwise valid claim solely on the basis of a technical notice deficiency. However, we strongly recommend that Solstice implement internal procedures to ensure that notice is provided promptly upon identification of any potential claim or claim circumstance, as a matter of best practice and to avoid any dispute regarding the timeliness of notice.
We recommend that the Buyer's General Counsel, Patrick Lennox, establish a protocol pursuant to which all members of the post-closing integration team and senior management are instructed to promptly report any facts, circumstances, or allegations that may indicate a breach of Meridian's representations and warranties in the SPA.
B. Coordination with SPA Indemnification Claims
The RWI policy requires coordination between insurance claims and SPA indemnification claims. The key principles governing this coordination are:
(a) The Buyer must first pursue recovery under the SPA's indemnification provisions (i.e., submit a claim against the Indemnity Escrow for non-Fundamental claims and/or assert a direct indemnification claim against the Sellers for Fundamental claims) before or concurrently with submitting a claim under the RWI policy. This is consistent with the layered recovery structure described in Section V.B above, under which the Sellers' share of the Retention must be exhausted before the policy responds.
(b) The RWI policy is not formally structured as "excess" insurance over the SPA indemnification in the traditional insurance law sense. Rather, the policy requires exhaustion of the Retention (which includes both the Sellers' share and the Buyer's share) before coverage attaches. The distinction is important: the Buyer does not need to exhaust all available SPA remedies or fully litigate indemnification claims against the Sellers before claiming under the policy. The Buyer need only demonstrate that the aggregate Retention of $4,400,000 has been satisfied through a combination of (i) amounts recovered or recoverable from the Sellers (Sellers' share of the Retention) and (ii) Losses borne by the Buyer (Buyer's share of the Retention).
(c) As a practical matter, we recommend that Solstice submit SPA indemnification claims and RWI policy claims simultaneously whenever a potential breach is identified. This parallel approach preserves the Buyer's rights under both recovery mechanisms, avoids delay, and ensures that Ridgeline receives timely notice of all potential claims.
C. Claims Cooperation
The policy imposes certain cooperation obligations on the Insured in connection with claims:
(a) Access to Documentation. The Buyer must cooperate with Ridgeline's investigation of any claim and provide Ridgeline with access to all relevant documentation, correspondence, and records relating to the claimed breach and resulting Losses. This includes access to the virtual data room materials, diligence reports, and post-closing financial and operational records of Meridian.
(b) Ridgeline's Right to Participate. Ridgeline has the right to participate in (but not control) the defense or resolution of any underlying Third-Party Claim (e.g., a lawsuit, regulatory proceeding, or governmental investigation) that may give rise to a covered Loss under the policy. This participation right means that Ridgeline may attend meetings, review filings, and provide input on strategy, but the Buyer retains control over the defense of the underlying claim.
(c) Settlement Consent. Any settlement of a Third-Party Claim in excess of Five Hundred Thousand Dollars ($500,000) requires the prior written consent of Ridgeline, which consent shall not be unreasonably withheld, conditioned, or delayed. This provision protects Ridgeline from being obligated to pay inflated or unreasonable settlements while preserving the Buyer's ability to resolve matters efficiently. Settlements at or below the $500,000 threshold may be entered into by the Buyer without Ridgeline's consent, although the Buyer should provide notice to Ridgeline of any such settlement that may affect the policy.
We recommend that Solstice involve Calderwood & Harkness LLP and provide notice to Ridgeline at the earliest stages of any potential Third-Party Claim that may implicate the RWI policy, even if the claim has not yet been formally asserted or the potential Losses are uncertain.
VII. Subrogation
A. No Subrogation Against Sellers (General Rule)
The RWI policy includes a waiver of subrogation against the Sellers and the Sellers' Representative, Dr. Marcus Ellsworth. This means that if Ridgeline pays a claim to Solstice under the policy, Ridgeline will not seek reimbursement from the Sellers for the amounts paid, and will not "step into the shoes" of Solstice to pursue indemnification claims against the Sellers for amounts paid under the policy.
This waiver of subrogation is consistent with market practice for buy-side RWI policies and was a key negotiation point during the Transaction. The Sellers and their counsel (Jonathan Whitmore of Whitmore Crane & Pfeiffer LLP) conditioned their agreement to the Transaction's indemnification structure — including the escrow-only limitation for non-Fundamental claims and the relatively tight indemnification caps — on the inclusion of a subrogation waiver in the RWI policy.
The rationale for this waiver is straightforward: the Sellers accepted reduced indemnification exposure (limited to the Indemnity Escrow for non-Fundamental claims, with no personal recourse beyond the escrow) in exchange for the Buyer's procurement of the RWI policy. If Ridgeline were permitted to subrogate against the Sellers after paying a claim, it would effectively undermine the Sellers' negotiated limitation on indemnification exposure, as the Sellers would bear the ultimate economic loss regardless of the insurance coverage. The subrogation waiver ensures that the economic risk is genuinely transferred from the Sellers to the Insurer, consistent with the commercial bargain reflected in the SPA.
B. Fraud Carve-Out
The subrogation waiver described above does not apply in cases of fraud committed by any Seller. This is a standard and important carve-out that is included in virtually all buy-side RWI policies.
Specifically, in the event that Ridgeline pays a claim under the policy and such claim is attributable to intentional fraud by one or more Sellers (including fraudulent misrepresentations, intentional concealment of material facts, or knowing misstatements in the representations and warranties or Disclosure Schedules), Ridgeline retains full subrogation rights against the fraudulent Seller(s) individually. Ridgeline may pursue such Seller(s) directly for reimbursement of the amounts paid under the policy.
The fraud carve-out aligns with the SPA's treatment of fraud. Under Section 9.5(d) of the SPA, the indemnification caps and limitations (including the escrow-only limitation for non-Fundamental claims) do not apply to claims arising from intentional fraud by a Seller. Accordingly, both the SPA and the RWI policy preserve the right to pursue full recovery against a Seller who has committed fraud, without regard to the negotiated limitations on indemnification.
It is important to note that the fraud carve-out applies on an individual Seller basis — subrogation is available only against the specific Seller(s) who committed the fraud, not against all Sellers collectively (unless all Sellers participated in the fraud). Non-participating Sellers continue to benefit from the subrogation waiver.
VIII. Practical Considerations and Recommendations
A. Premium Payment and Cost Allocation