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MEMORANDUM

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

TO: Elaine Forsythe, Responsible Partner, Antitrust & Competition Practice Group

FROM: Monica Reyes, Associate, Antitrust & Competition Practice Group

DATE: March 20, 2022

RE: D&O Insurance Coverage Analysis — Torchlight Mining Corp. — DOJ Antitrust Division Grand Jury Investigation (GJ-22-0194, N.D. Cal.)

MATTER NO.: 1039-00001

This memorandum is protected by the attorney-client privilege and the attorney work product doctrine. It has been prepared in connection with Calderwood & Harkness LLP's representation of Torchlight Mining Corp. and its directors and officers in Grand Jury Investigation No. GJ-22-0194 (N.D. Cal., San Francisco Division). This memorandum is not intended for disclosure to any third party and should not be disclosed without the express authorization of the undersigned or the Responsible Partner. Any inadvertent disclosure does not constitute a waiver of privilege.

I. Executive Summary

The purpose of this memorandum is to analyze the directors-and-officers ("D&O") liability insurance coverage available to Torchlight Mining Corp. ("TMC" or the "Company") and its current and former directors and officers in connection with the United States Department of Justice, Antitrust Division ("DOJ") grand jury investigation designated Grand Jury No. GJ-22-0194, pending before the U.S. District Court for the Northern District of California, San Francisco Division. The investigation concerns suspected price-fixing, market allocation, and bid-rigging in the North American specialty-minerals sector, specifically with respect to high-purity feldspar, industrial talc, and rare-earth concentrates. These are serious allegations implicating potential per se violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, and carry significant criminal penalties for both entities and individuals.

TMC, acting through this firm, tendered notice of the investigation to Northland Mutual Insurance Co. ("Northland") on March 4, 2022, under D&O Policy No. NMI-DO-2021-5547 (the "Northland Policy" or the "Primary Policy"). The notice was timely and conformed to the notice provisions of the Primary Policy. Subsequently, on or about March 8, 2022, notice was also provided to the two excess-layer carriers in the D&O tower: Greystone Specialty Insurance Ltd. ("Greystone") and Sentinel Re Ltd. ("Sentinel Re").

Northland has acknowledged the notice and has confirmed that defense costs incurred by individual directors and officers in connection with the investigation will be covered under the policy's Side A and Side B insuring agreements, subject to the applicable terms, conditions, and exclusions. However, Northland has issued a reservation-of-rights letter (received on or about March 15, 2022) in which it reserves the right to deny coverage on two principal grounds: (i) entity coverage under the policy's Side C insuring agreement, which Northland contends may not extend to the present investigation; and (ii) the regulatory/criminal-act exclusion (Section IV.17 of the Primary Policy), which Northland asserts could apply to bar coverage if the investigation results in a finding of criminal conduct. These reservations are significant and must be addressed promptly.

This memorandum addresses the following issues in detail:

(a) The structure of TMC's D&O insurance tower, including the primary layer and two excess layers, providing total aggregate coverage of USD 100 million;

(b) The scope of coverage under the Side A (non-indemnifiable loss), Side B (corporate reimbursement), and Side C (entity) insuring agreements and the applicability of each to the DOJ investigation;

(c) The regulatory/criminal-act exclusion contained in the Primary Policy, its standard formulation requiring "final adjudication" before the exclusion can be invoked, and its inapplicability at the present pre-adjudication stage of the investigation;

(d) Excess-layer coverage under the Greystone and Sentinel Re policies, both of which follow form to the Northland Primary Policy;

(e) Special coverage considerations applicable to Gavin Holt, TMC's former Vice President of U.S. Specialty Minerals Sales, who is the individual most directly implicated in the alleged conduct; and

(f) Recommendations for preserving TMC's coverage rights throughout the investigation, including specific guidance on responding to Northland's reservation of rights, billing and allocation practices, and the insurance implications of any future non-prosecution agreement ("NPA") or deferred prosecution agreement ("DPA") resolution.

Overall Conclusion. Based on my analysis of the Primary Policy, applicable case law, and industry practice, I conclude as follows: Defense costs for individual directors and officers should be covered under Side A and Side B of the Northland Policy, subject to the USD 2.5 million self-insured retention ("SIR"). Entity coverage under Side C is more vulnerable to the regulatory/criminal-act exclusion but is defensible at the pre-adjudication stage, and TMC should vigorously contest any attempt by Northland to deny or limit entity coverage at this time. The excess layers provided by Greystone and Sentinel Re should respond on a follow-form basis once the primary layer is exhausted. Any monetary penalty imposed through an NPA, DPA, or plea agreement is likely uninsurable as a matter of public policy and would fall outside the definition of covered "Loss." Calderwood & Harkness should promptly respond to Northland's reservation-of-rights letter and implement the recommendations set forth in Section XI of this memorandum.

II. Background

A. The DOJ Investigation

The DOJ Antitrust Division formally opened a grand jury investigation on approximately February 10, 2022, designated Grand Jury No. GJ-22-0194, before the U.S. District Court for the Northern District of California, San Francisco Division. The grand jury sits in San Francisco and is expected to hear testimony and receive documentary evidence over a period of several months or longer. As of the date of this memorandum, the investigation remains in its early stages, and no indictments have been returned.

The investigation is being conducted by the DOJ Antitrust Division's San Francisco Field Office, under the supervision of Deputy Assistant Attorney General Julia Stafford-Hayes, who is based in Washington, D.C. The lead prosecutors assigned to the matter are Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves. Both are experienced antitrust prosecutors; Reeves, in particular, has been involved in several recent criminal antitrust enforcement actions in the extractive-industries and industrial-chemicals sectors.

TMC received Grand Jury Subpoena Duces Tecum No. GJ-22-0194-SD-003 on February 14, 2022, at its U.S. subsidiary's principal office in Reno, Nevada. The subpoena requires the production of a broad range of documents and electronically stored information relating to TMC's pricing, sales, customer allocation, and competitive bidding practices for high-purity feldspar, industrial talc, and rare-earth concentrates sold to U.S. industrial and chemical-manufacturing customers, covering the period from January 1, 2015, through the date of the subpoena. The relevant conduct period identified in the subpoena and in related DOJ communications is approximately January 2017 through at least August 2021, although the document requests extend earlier to capture background and contextual materials.

The investigation concerns a suspected conspiracy among competing specialty-minerals producers to fix prices, allocate customers and geographic markets, and rig bids for contracts to supply high-purity feldspar, industrial talc, and rare-earth concentrates. These products are essential inputs for the ceramics, glass, paint, plastics, and advanced-materials industries. The North American specialty-minerals market is concentrated, with a small number of producers supplying the majority of domestic demand.

Based on information available to us at this time, the following entities and individuals are co-subjects or co-targets of the investigation:

• Ridgecrest Minerals Inc., a Delaware corporation headquartered in Denver, Colorado. Key individuals: Brian Novotny (CEO) and Carl Edgerton (Vice President of Sales). Ridgecrest is represented by Davenport, Kline & Archer LLP, with Helen Marchetti serving as lead counsel.

• Pinnacle Earth Resources Ltd., an Ontario corporation headquartered in Sudbury, Ontario, Canada. Key individuals: Douglas Harlowe (CEO) and Kevin Tsang (former Senior Vice President, who departed the company in approximately December 2020). Pinnacle is represented by Ashford Whitmore LLP, with George Nakamura serving as lead counsel.

In addition, the DOJ has secured the cooperation of at least one entity:

• Cascade Chemical Supply Co., a Washington corporation headquartered in Spokane, Washington. Key individual: Leonard Massey (President). Cascade is represented by Whitfield, Strauss & Tully LLP, with Rebecca Ostrander serving as lead counsel. Cascade entered into a cooperation agreement with the DOJ on or about September 15, 2021. The terms of the cooperation agreement are not publicly available, but it is believed that Cascade has agreed to provide proffer testimony, produce documents, and cooperate fully with the investigation in exchange for favorable treatment in any subsequent prosecution. Cascade's cooperation appears to have been the catalyst for the formal opening of the grand jury investigation.

The DOJ's theory of the case, based on the subpoena specifications and initial communications with prosecutors, appears to be that senior sales executives at TMC, Ridgecrest, and Pinnacle participated in a series of pricing, allocation, and bid-rigging discussions at industry events — particularly the annual conferences and regional meetings of the North American Specialty Minerals Conference ("NASMC") — as well as through encrypted messaging applications and in-person meetings. The alleged conduct, if proven, would constitute per se violations of Section 1 of the Sherman Act, carrying maximum criminal penalties of USD 100 million per count for corporations and up to ten years' imprisonment and USD 1 million in fines for individuals. The DOJ has increasingly sought penalties well in excess of these statutory maximums under the alternative fine provision of 18 U.S.C. § 3571(d), which permits fines of up to twice the gross gain or gross loss from the offense.

B. TMC Corporate Structure and Key Individuals

Torchlight Mining Corp. is a corporation organized under the Canada Business Corporations Act ("CBCA"), with its registered office at 200 Bay Street, Suite 3400, Toronto, Ontario M5J 2J2, Canada. The Company's common shares are dually listed on the Toronto Stock Exchange (ticker: TRCL) and the New York Stock Exchange (ticker: TMC). TMC is a major producer of specialty minerals, including feldspar, talc, and rare-earth concentrates, with mining and processing operations in Canada, the United States, and Australia.

TMC conducts its U.S. operations through Torchlight Mining (U.S.) Inc. ("TMC U.S."), a wholly owned subsidiary incorporated in the State of Nevada, with its principal office at 8750 West Sahara Avenue, Suite 210, Reno, Nevada 89117. TMC U.S. holds the Company's U.S. mining leases, operates its U.S. processing facilities, and employs the Company's U.S.-based sales and marketing personnel. TMC U.S. is the entity through which the conduct at issue in the DOJ investigation was allegedly carried out.

The following individuals are the key directors and officers of TMC relevant to this coverage analysis:

• Margaret Caldwell, Board Chair. Ms. Caldwell has served as non-executive Chair of the Board since 2016. There is no evidence that Ms. Caldwell was aware of or participated in any of the alleged conduct.

• Søren Dalmqvist, Chief Executive Officer. Mr. Dalmqvist was appointed CEO in 2018 and has served in that capacity throughout the relevant conduct period. The internal investigation to date has not identified evidence of Mr. Dalmqvist's direct participation in the alleged conduct, although his supervisory responsibilities may be examined by the DOJ.

• Priya Anand, General Counsel. Ms. Anand has served as General Counsel since 2019. She is coordinating TMC's response to the investigation and is the primary point of contact for privilege and coverage matters.

• Richard Fong, Chief Financial Officer. Mr. Fong has served as CFO since 2017. He is responsible for TMC's financial reporting and disclosures related to the investigation, including the establishment of the litigation reserve discussed in Section X below.

• Janet Moreau-Shaw, Audit Committee Chair. Ms. Moreau-Shaw chairs the Board's Audit and Risk Committee and is overseeing the Board-level response to the investigation.

The individual most directly implicated in the alleged conduct is:

• Gavin Holt, former Vice President, U.S. Specialty Minerals Sales. Mr. Holt resigned from TMC effective September 30, 2021, approximately two weeks after the Company became aware that Cascade Chemical Supply Co. had entered into a cooperation agreement with the DOJ. Mr. Holt was responsible for TMC's U.S. sales of feldspar, talc, and rare-earth concentrates throughout the alleged conduct period. He has retained personal counsel, Patrick Dunleavy of Briarcliff Law Group PLLC, San Francisco, California. Mr. Holt's coverage situation is analyzed separately in Section VII below.

Two additional TMC employees have been identified as persons of interest in the investigation:

• Sandra Chu, Director of Pricing Analytics. Ms. Chu reported to Gavin Holt and was responsible for developing and implementing pricing models for TMC's U.S. specialty-minerals products. Evidence reviewed in the internal investigation indicates that Ms. Chu received pricing-adjustment instructions from Holt, some of which may have reflected agreements reached with competitors, but there is no direct evidence at this time that Ms. Chu was aware of the inter-competitor communications or participated in them.

• Thomas Eriksen, Regional Sales Manager, Western Region. Mr. Eriksen attended at least four NASMC conferences between 2017 and 2021 at which the alleged side meetings between TMC, Ridgecrest, and Pinnacle personnel are believed to have occurred. Evidence of Mr. Eriksen's direct participation in any price-fixing, allocation, or bid-rigging discussions is ambiguous; he attended certain social events at which competitors were present but may not have been involved in substantive discussions.

Both Ms. Chu and Mr. Eriksen remain employed by TMC as of the date of this memorandum.

As of this memorandum's date, TMC has not received a target letter from the DOJ Antitrust Division. The Company is currently classified as a "subject" of the investigation — that is, the DOJ has identified TMC as a person or entity whose conduct is within the scope of the grand jury's investigation. A target letter may be forthcoming as the investigation progresses; target letters are typically issued when the prosecutor has substantial evidence linking the target to criminal activity and believes that the target is a putative defendant. For purposes of this coverage analysis, I note that the receipt of a target letter would constitute a material development that should be promptly reported to Northland and the excess carriers. [Note: TMC subsequently received a target letter on May 20, 2022.]

C. Notice of Claim

Calderwood & Harkness LLP ("C&H"), acting on behalf of TMC, tendered formal notice of the DOJ investigation to Northland Mutual Insurance Co. on March 4, 2022. The notice letter was transmitted by overnight courier and electronic mail to Northland's claims department at 55 Yonge Street, Suite 2100, Toronto, Ontario M5E 1J4, Canada, addressed to Northland's Vice President of Claims, Katherine Hargrove. The notice letter described the investigation, identified the relevant policy, summarized the known facts, and requested coverage for defense costs incurred by TMC and its insured persons.

Notice letters were also transmitted to the excess-layer carriers on or about March 8, 2022, as confirmed by a separate memorandum of that date prepared by C&H's Insurance Recovery practice group. Specifically:

• Greystone Specialty Insurance Ltd. was notified at its registered office in Hamilton, Bermuda.

• Sentinel Re Ltd. was notified at its registered office in Hamilton, Bermuda.

Both excess carriers acknowledged receipt of the notice. Neither has issued a substantive coverage position or reservation-of-rights letter as of the date of this memorandum, which is consistent with standard practice for excess carriers at this early stage.

Northland acknowledged receipt of the notice on or about March 10, 2022, and subsequently issued a reservation-of-rights letter dated approximately March 15, 2022, in which it (i) confirmed coverage for defense costs of individual directors and officers under Sides A and B, subject to applicable terms, conditions, and exclusions; (ii) reserved the right to deny entity coverage under Side C; and (iii) reserved the right to invoke the criminal-act exclusion (Section IV.17 of the Primary Policy) if the investigation results in a finding or admission of criminal conduct. The reservation-of-rights letter is analyzed in detail in Sections V and XI below.

III. TMC's D&O Insurance Program — Structure

TMC maintains a D&O insurance program consisting of a primary layer and two excess layers, providing total aggregate coverage of USD 100 million. The structure of the program is summarized below and set forth in detail in Attachment A to this memorandum.

A. Primary Layer: Northland Mutual Insurance Co.

The primary layer of TMC's D&O insurance program is provided by Northland Mutual Insurance Co., a Canadian insurer domiciled in Ontario. The key terms of the Primary Policy are as follows:

Policy Number: NMI-DO-2021-5547

Policy Period: July 1, 2021, through July 1, 2022 (renewed annually; the current policy period covers the date on which the investigation was opened and the date on which notice was tendered)

Aggregate Limit of Liability: USD 50,000,000 (Fifty Million Dollars), inclusive of defense costs

Self-Insured Retention (SIR): USD 2,500,000 (Two Million Five Hundred Thousand Dollars), applicable to Side B and Side C claims; no SIR for Side A claims

Named Insured: Torchlight Mining Corp. and all subsidiaries, including but not limited to Torchlight Mining (U.S.) Inc.

Insured Persons: All current and former directors and officers of the Named Insured and its subsidiaries, as defined in the policy

Insurer: Northland Mutual Insurance Co., 55 Yonge Street, Suite 2100, Toronto, Ontario M5E 1J4, Canada

Broker of Record: Stratton Willis & Co. Ltd. (contact: Jonathan Mercier, Senior Vice President, Executive Risk Practice)

The Primary Policy is a claims-made-and-reported policy; coverage is triggered by the making of a claim against an insured during the policy period and the reporting of that claim to the insurer within the time specified in the policy (typically during the policy period or within an extended reporting period). TMC's notice on March 4, 2022, was made within the current policy period and satisfies the policy's notice requirements.

B. Excess Layer 2: Greystone Specialty Insurance Ltd.

The first excess layer of TMC's D&O insurance program is provided by Greystone Specialty Insurance Ltd., a Bermuda-domiciled specialty insurer. The key terms are as follows:

Coverage: USD 25,000,000 (Twenty-Five Million Dollars) in excess of USD 50,000,000 (i.e., the Greystone layer attaches at USD 50 million and provides coverage up to a total of USD 75 million in aggregate)

Insurer: Greystone Specialty Insurance Ltd., registered office in Hamilton, Bermuda

Terms: Follow-form to the Northland Primary Policy (NMI-DO-2021-5547); the same insuring agreements, definitions, conditions, and exclusions apply. The Greystone policy contains a drop-down provision that would cause it to respond as if it were the primary policy in the event of Northland's insolvency.

C. Excess Layer 3: Sentinel Re Ltd.

The second excess layer is provided by Sentinel Re Ltd., also domiciled in Bermuda. The key terms are as follows:

Coverage: USD 25,000,000 (Twenty-Five Million Dollars) in excess of USD 75,000,000 (i.e., the Sentinel Re layer attaches at USD 75 million and provides coverage up to a total of USD 100 million in aggregate)

Insurer: Sentinel Re Ltd., registered office in Hamilton, Bermuda

Terms: Follow-form to the Northland Primary Policy (NMI-DO-2021-5547); the same insuring agreements, definitions, conditions, and exclusions apply.

D. Total Available Tower

The total aggregate D&O insurance tower available to TMC and its insured persons is USD 100,000,000 (One Hundred Million Dollars), structured as follows:

All coverage is subject to the terms, conditions, and exclusions of the Northland Primary Policy (which controls as the follow-form lead policy), including the self-insured retention, the criminal-act exclusion, the consent-to-settle provision, and other material terms analyzed in this memorandum.

IV. Coverage Analysis — Insuring Agreements

The Northland Primary Policy contains three separate insuring agreements, commonly referred to as Side A, Side B, and Side C. Each insuring agreement addresses a different category of covered loss and has distinct implications for the DOJ investigation. This Section analyzes each insuring agreement in turn.

A. Side A Coverage (Non-Indemnifiable Loss)

Side A of the Northland Policy covers "Loss" (including defense costs) incurred by "Insured Persons" — that is, individual directors and officers — where TMC is unable or not legally permitted to indemnify those persons. Side A is designed to protect individual directors and officers in situations where the corporate indemnity is unavailable, such as derivative claims, bankruptcy, or regulatory proceedings where indemnification is legally prohibited.

Side A is particularly relevant at this stage of the investigation for the following reasons:

Gavin Holt. Holt is a former officer who departed TMC on September 30, 2021. He has retained personal counsel, Patrick Dunleavy of Briarcliff Law Group PLLC in San Francisco, to represent him in connection with the DOJ investigation. Holt qualifies as an "Insured Person" under the Northland Policy by virtue of his prior service as Vice President, U.S. Specialty Minerals Sales. The policy's definition of "Insured Person" expressly includes former directors and officers for acts committed during their tenure with the Company.

Holt's defense costs through Briarcliff Law Group should be covered under Side A if TMC does not or cannot indemnify him. TMC's indemnification obligations to Holt under his employment agreement and the CBCA remain subject to separate analysis, but there are substantial grounds for TMC to decline to indemnify Holt given the nature of the allegations, Holt's departure from the Company, and the potential that indemnification could be challenged as contrary to public policy or the CBCA's limitations on indemnification in criminal or administrative proceedings. If TMC elects not to indemnify Holt — which is the likely course based on preliminary discussions with Priya Anand — Side A would be the primary source of coverage for Holt's defense costs.

Current Directors and Officers. Current directors and officers — including Søren Dalmqvist (CEO), Priya Anand (General Counsel), Margaret Caldwell (Board Chair), Richard Fong (CFO), Janet Moreau-Shaw (Audit Committee Chair), Sandra Chu (Director, Pricing Analytics), and Thomas Eriksen (Regional Sales Manager, Western Region) — should be covered under Side A to the extent that TMC cannot indemnify them. At this stage, TMC is expected to indemnify its current directors and officers for defense costs in the investigation (with such indemnification reimbursed under Side B, as discussed below), and Side A's role for current personnel is therefore limited. However, if circumstances change — for example, if TMC were to become insolvent or if indemnification were legally prohibited with respect to a particular individual — Side A would provide a critical backstop.

It is important to note that Side A coverage under the Northland Policy is not subject to the USD 2.5 million SIR. The SIR applies only to Side B and Side C claims. This means that Holt's defense costs, if covered under Side A, would be payable from the first dollar incurred (after application of any applicable policy deductible, which is separate from the SIR).

B. Side B Coverage (Corporate Reimbursement)

Side B of the Northland Policy reimburses TMC for indemnification payments it makes to insured persons for covered "Loss." In other words, when TMC advances defense costs to its directors and officers pursuant to its corporate indemnification obligations, Side B operates to reimburse the Company for those expenditures.

TMC is likely obligated under the CBCA, its corporate bylaws, and the individual indemnification agreements it has entered into with its directors and officers to indemnify current directors and officers for defense costs incurred in connection with the grand jury investigation. Under the CBCA and TMC's bylaws, indemnification is mandatory for directors and officers who have been "substantially successful on the merits" of a defense in a civil, criminal, administrative, or investigative proceeding, and permissive (at the Board's discretion) in other circumstances, subject to certain limitations. TMC's standard form of indemnification agreement, which has been executed with each of its current directors and officers, provides for mandatory advancement of defense costs, subject to an undertaking to repay if the director or officer is ultimately found not to have met the applicable standard of conduct.

The USD 2.5 million self-insured retention applies to Side B claims. This means that TMC must bear the first USD 2.5 million of indemnification payments before Northland's coverage obligation is triggered. Given the anticipated scope and duration of the investigation, the SIR is likely to be exhausted relatively early in the process; C&H's initial budget estimate for defense costs is approximately USD 12 million, and additional costs for forensic and expert services will be incurred.

Analysis. Side B should respond to reimburse TMC for defense costs it advances to current insured persons, up to the USD 50 million policy limit (less the SIR), subject to the exclusions analyzed in Section V below. Northland has acknowledged Side B coverage in its initial response, subject to its reservation of rights regarding the criminal-act exclusion. At the pre-adjudication stage, the criminal-act exclusion should not limit Side B coverage, as discussed in detail in Section V.

C. Side C / Entity Coverage

Side C of the Northland Policy covers TMC as an entity for claims made against TMC itself. In many D&O policies, entity coverage is limited to "securities claims" — i.e., claims brought against the company in connection with the purchase or sale of its securities. However, certain modern D&O policies, including the Northland Policy, contain broader entity coverage provisions that extend to governmental investigations and regulatory proceedings.

Key Question. The central coverage question for Side C is whether the Northland Policy's entity coverage extends to a criminal antitrust investigation by the DOJ, or whether entity coverage is limited to securities-related claims.

Analysis of Policy Language. A review of Policy No. NMI-DO-2021-5547 indicates that the entity coverage insuring agreement includes an "Investigation Coverage Extension" that applies to "formal governmental investigations" of the Named Insured or any subsidiary. The Investigation Coverage Extension provides coverage for "Loss" incurred by the entity in connection with a "formal investigation" by a governmental authority, defined to include grand jury proceedings, formal orders of investigation, and similar compulsory governmental inquiries. Based on this language, the DOJ grand jury investigation should fall within the scope of the entity coverage grant.

However, Northland's reservation-of-rights letter specifically challenges entity coverage on two grounds. First, Northland contends that the Investigation Coverage Extension was primarily intended to address regulatory investigations (e.g., SEC enforcement proceedings) rather than criminal antitrust investigations, and that the extension should be narrowly construed. Second, Northland invokes the criminal-act exclusion, arguing that entity coverage is particularly vulnerable to the exclusion because the entity itself (as opposed to individual directors and officers) may ultimately be found to have engaged in criminal conduct.

TMC's position should be that the Investigation Coverage Extension is clear and unambiguous in its scope, that it covers formal governmental investigations including criminal grand jury proceedings, and that any ambiguity should be construed in favor of coverage consistent with well-established principles of insurance contract interpretation. The criminal-act exclusion, which is analyzed in detail below, should not apply at the pre-adjudication stage and cannot be used prospectively to deny entity coverage for defense costs.

This is the primary area of dispute between TMC and Northland, and it should be addressed directly and forcefully in C&H's response to the reservation-of-rights letter.

V. The Regulatory / Criminal-Act Exclusion

A. Policy Language

Section IV.17 of the Northland Primary Policy (NMI-DO-2021-5547) contains a criminal-act exclusion, which is commonly referred to in the D&O insurance industry as a "Conduct Exclusion" or "Regulatory/Criminal Exclusion." The exclusion, in relevant part, provides:

The Insurer shall not be liable for Loss arising from any Claim or Investigation based upon, arising out of, or attributable to any deliberately dishonest, fraudulent, or criminal act or omission by an Insured, or any willful violation of any statute, rule, or regulation by an Insured.

This exclusion shall apply only in the event that such conduct is established by a final adjudication in the underlying action or proceeding, including but not limited to a judgment, verdict, plea of guilty or nolo contendere, or admission by the Insured.

The key operative limitation on the exclusion is the "final adjudication" requirement. The exclusion does not apply upon the mere allegation, investigation, or indictment of criminal conduct; rather, it is triggered only when the insured's criminal conduct has been "established by a final adjudication." This is a critical distinction and is the foundation of TMC's coverage position.

Northland's reservation-of-rights letter, received on or about March 15, 2022, expressly reserves the right to invoke this exclusion. The letter states, in substance, that Northland "reserves all rights under Section IV.17 of the Policy to deny coverage for any Loss arising from deliberately dishonest, fraudulent, or criminal acts or omissions, if such conduct is established by a final adjudication, and further reserves the right to seek recoupment of any defense costs advanced in the event the exclusion is triggered." The reservation-of-rights letter also notes that the exclusion applies with particular force to entity coverage under Side C, because the entity's conduct — rather than the conduct of any individual insured person — is the subject of the DOJ investigation.

B. Applicability at the Pre-Adjudication Stage

The critical issue for purposes of the current coverage analysis is whether the criminal-act exclusion can be invoked at the present stage of the investigation to deny or limit coverage for defense costs. The answer, under well-established D&O insurance law and industry practice, is clearly no.

At this stage of the DOJ investigation, the following facts are undisputed:

• No charges have been filed against TMC or any of its directors or officers.

• No indictment has been returned by the grand jury.

• No plea of guilty or nolo contendere has been entered by any insured.

• No conviction has been obtained against any insured.

• No "final adjudication" of criminal conduct has occurred within the meaning of the policy exclusion.

• The investigation remains at the subpoena-response stage; TMC has not even received a target letter (as of the date of this memorandum).

Under these circumstances, the criminal-act exclusion is inapplicable. The exclusion, by its express terms, applies "only in the event that such conduct is established by a final adjudication." No final adjudication has occurred, and none is imminent. Defense costs are incurred precisely in situations where the insured's conduct has not yet been determined — that is the very purpose of D&O insurance coverage for investigation and defense costs. If the exclusion could be invoked prospectively, at the stage of a mere investigation, D&O coverage for defense costs would be rendered illusory, because coverage would be denied precisely when it is most needed.

This position is supported by a substantial body of case law and industry authority. Courts have consistently held that criminal-act exclusions with "final adjudication" triggers cannot be applied to deny defense costs at the pre-adjudication stage. Representative authorities include:

• Levy v. Northgate Indemnity Co., where the court held that a conduct exclusion requiring "final adjudication" could not be invoked to deny defense-cost coverage during the pendency of criminal proceedings, because the insured's conduct had not yet been finally determined.

• ALLI v. Aldermere Life Insurance, in which the court emphasized that the "final adjudication" requirement is a substantive limitation on the exclusion's applicability and not merely a procedural timing mechanism.

• Industry guidance from the Hollowell Industries (IRMI) and the American Bar Association's D&O Liability and Insurance Committee, both of which confirm that conduct exclusions with final-adjudication triggers are not operative during the investigation or pre-trial phase of a proceeding.

TMC's Position. In its planned response to Northland's reservation of rights, C&H should take the unequivocal position that Northland is obligated to cover defense costs now, without reference to the criminal-act exclusion. The exclusion can only be invoked retroactively, if and when a final adjudication of criminal conduct occurs. Until that time, Northland must advance defense costs in accordance with the policy's insuring agreements. Northland's reservation of rights, while procedurally permissible, does not relieve it of its present obligation to pay covered claims.

C. Impact of Potential NPA Resolution

A significant strategic consideration in this coverage analysis is the possibility that the DOJ investigation may ultimately be resolved through a non-prosecution agreement ("NPA") or a deferred prosecution agreement ("DPA") rather than through an indictment, trial, and conviction. NPAs and DPAs have become the dominant resolution mechanism for corporate criminal antitrust investigations in recent years, and the DOJ Antitrust Division has increasingly employed these instruments as alternatives to contested criminal proceedings.

If TMC resolves the investigation through an NPA without admission of criminal liability, the criminal-act exclusion should remain inapplicable for the duration of the coverage period. An NPA is not a conviction, a guilty plea, or a plea of nolo contendere. It is not a "final adjudication" within the meaning of the policy exclusion. Rather, an NPA is a contractual agreement between the government and the entity in which the government agrees not to prosecute in exchange for certain undertakings by the entity (typically including a monetary payment, compliance commitments, and cooperation obligations). The entity does not plead guilty, is not convicted, and does not make a formal admission of criminal liability.

However, a significant caveat must be noted. NPAs typically include an "agreed statement of facts" or "statement of offense conduct" in which the entity acknowledges certain factual matters. Depending on the language of the agreed statement, Northland could argue that the factual acknowledgments constitute an implicit or constructive "admission" of criminal conduct sufficient to trigger the exclusion. While this argument is not well-supported by the policy language or case law — which requires a "final adjudication," not merely a factual acknowledgment — it is a risk that must be managed.

Recommendation. Throughout any negotiations with the DOJ regarding an NPA or DPA, C&H should be mindful of the insurance implications of the agreed statement of facts and should take care to negotiate language that does not constitute an admission of criminal liability. Specifically, the agreed statement should, to the extent consistent with DOJ requirements, use passive or neutral language (e.g., "the investigation revealed evidence that certain TMC employees engaged in communications with competitors regarding pricing") rather than admissions of corporate criminal intent (e.g., "TMC knowingly and willfully conspired to fix prices"). This approach is consistent with the practice in recent NPA resolutions in the antitrust context and should be achievable in negotiations with the DOJ.

A DPA, by contrast, involves the filing of a criminal information and a formal agreement to defer prosecution for a specified period. While a DPA is not a conviction, it is a closer question whether a DPA constitutes a "final adjudication" within the meaning of the exclusion. Some insurers have argued that the filing of a criminal information and the entity's acknowledgment of facts in a DPA amount to an adjudication of criminal conduct. C&H should analyze this issue further if the resolution trajectory moves toward a DPA rather than an NPA.

D. Severability / Individual vs. Entity Analysis

The Northland Policy contains a severability clause (Section VII.3) that provides, in substance, that the criminal-act exclusion and other conduct-based exclusions shall be applied separately and independently to each insured person. The severability clause ensures that a finding of wrongdoing by one insured does not taint or impair coverage for other insureds whose conduct has not been adjudicated.

This severability provision has important practical implications:

• Gavin Holt. If Holt is ultimately charged with and convicted of a criminal antitrust violation, or if he pleads guilty, the criminal-act exclusion could be invoked retroactively as to Holt individually. However, such a finding as to Holt would not affect coverage for other insured persons — including TMC itself, Dalmqvist, Anand, Caldwell, Fong, Moreau-Shaw, Chu, Eriksen, and any other current or former directors and officers — whose conduct has not been finally adjudicated.

• TMC as Entity. If TMC resolves the investigation through an NPA without admission of criminal liability (as discussed above), the exclusion should not apply to TMC's entity coverage under Side C, even if individual insured persons are subsequently found to have engaged in criminal conduct.

• Other Insured Persons. Coverage for the defense costs of current directors and officers who are not individually implicated — i.e., those for whom there is no evidence of personal participation in the alleged conduct — should be fully available and unaffected by the exclusion.

The severability clause is a standard feature of modern D&O policies and has been upheld by courts in numerous coverage disputes. C&H should emphasize the severability clause in its response to Northland's reservation of rights.

VI. Scope of Covered "Loss" — Defense Costs

A. Definition of Defense Costs

The Northland Policy defines "Loss" broadly to include, among other things, defense costs — that is, "reasonable and necessary attorneys' fees, expert fees, and other costs and expenses incurred in the investigation, defense, or settlement of a covered Claim or Investigation." The policy's definition of "Loss" is inclusive and is designed to encompass the full range of costs incurred by insureds in responding to the types of proceedings covered by the policy.

Critically, the policy defines "Claim" and "Investigation" in terms that encompass a grand jury investigation. The definition of "Investigation" includes "any formal governmental investigation of an Insured, including without limitation a grand jury investigation, formal order of investigation, subpoena, civil investigative demand, or similar compulsory governmental inquiry." The DOJ grand jury investigation, designated GJ-22-0194, plainly falls within this definition. The issuance of Grand Jury Subpoena Duces Tecum No. GJ-22-0194-SD-003 to TMC on February 14, 2022, constitutes a triggering event under the policy's coverage for "Investigations."

The policy further provides for the advancement of defense costs on an ongoing basis, as incurred, rather than requiring the insured to fund its defense and seek reimbursement after the conclusion of the proceeding. This advancement obligation is a critical feature of the coverage and is the mechanism by which TMC's defense costs will be funded during the investigation.

B. Categories of Defense Costs at Issue

The following categories of defense costs are currently at issue or anticipated in connection with the DOJ investigation:

1. Calderwood & Harkness Legal Fees. C&H's legal fees for the defense of TMC and its current directors and officers in the DOJ investigation constitute the largest single category of defense costs. C&H's billing rates for this matter are as follows: Partners at USD 1,450 per hour; Senior Associates at USD 950 per hour; Associates at USD 725 per hour. C&H's initial budget estimate for the investigation through the anticipated NPA resolution (assuming a twelve-to-eighteen-month timeline) is approximately USD 12 million. This estimate is subject to revision based on the scope and duration of the investigation, the volume of discovery, and the complexity of DOJ negotiations.

2. Forensic and Expert Fees. TMC has retained or anticipates retaining the following forensic and expert service providers:

• Hargrove Forensic Advisory LLC — engaged to provide economic analysis of the specialty-minerals market, including pricing trends, market concentration, and competitive dynamics. Hargrove's work product will be used to support TMC's defense in the investigation and in any subsequent proceedings.

• Redstone Digital Forensics Inc. — engaged to provide e-discovery and forensic data collection services, including the identification, preservation, collection, processing, and review of electronically stored information responsive to the grand jury subpoena. Redstone's fees are significant and ongoing; the volume of data at issue is substantial, encompassing email archives, messaging-application data (including VaultChat communications), and structured data from TMC's pricing and sales systems.

3. Compliance Consultant Fees. TMC may in the future retain Meridian Compliance Partners LLC to assist with the development and implementation of enhanced antitrust compliance programs, which may be required as part of any NPA or DPA resolution. Whether compliance-consultant fees are covered as "defense costs" under the policy is a question that requires careful analysis. Many modern D&O policies cover compliance and remediation costs when they are reasonably connected to a covered claim or investigation; however, some insurers take the position that forward-looking compliance costs are operational expenses rather than defense costs.

4. Personal Counsel Fees. The fees of Patrick Dunleavy of Briarcliff Law Group PLLC for the representation of Gavin Holt are covered defense costs to the extent Holt is entitled to coverage under Side A (as discussed in Section VII below). The fees of any personal counsel retained by other insured persons would similarly be covered.

Question: Internal Investigation and Compliance Remediation Costs. A question arises as to whether the Northland Policy covers fees incurred in connection with TMC's internal investigation — that is, the investigation conducted by C&H at the direction of the Audit Committee to identify the scope of the alleged conduct and the Company's potential exposure. The internal investigation is a predicate to and integral part of TMC's defense in the DOJ investigation; the information developed through the internal investigation is used to respond to the grand jury subpoena, prepare witnesses, and inform the Company's defense strategy. Under many modern D&O policies, internal investigation costs are covered as defense costs when the investigation is "reasonably connected to" or "undertaken in response to" a covered claim or investigation. The Northland Policy should be reviewed to confirm that this is the case; based on a preliminary review, the policy language appears broad enough to support coverage for internal investigation costs, but this issue should be confirmed with Northland.

C. Allocation Issues

In any D&O coverage dispute, allocation of defense costs between covered and non-covered matters is a potential source of contention. TMC should anticipate that Northland may seek to allocate defense costs in the following respects:

• Individual vs. Entity Defense Costs. Northland may argue that a portion of C&H's fees is attributable to the defense of TMC as an entity (which Northland contends may not be covered under Side C) rather than to the defense of individual insured persons (which Northland has acknowledged is covered under Sides A and B). While in practice it is often difficult to draw a clear line between entity defense costs and individual defense costs — because the defense of the entity and the defense of its directors and officers are inextricably intertwined — the potential for allocation disputes should be anticipated.

• Covered vs. Non-Covered Activities. Northland may also seek to distinguish between costs attributable to covered defense activities (e.g., responding to the grand jury subpoena, preparing for witness testimony, negotiating with the DOJ) and non-covered activities (e.g., general corporate compliance improvements, public-relations consulting, or lobbying activities). While TMC should resist overly narrow allocations, it is prudent to maintain clear billing records that support the allocation of costs to covered activities.

Recommendation. C&H should implement billing protocols that distinguish between defense costs of individual insured persons and entity operational expenses. All timekeepers should use task-based billing codes that identify the nature of each activity (e.g., subpoena response, witness preparation, DOJ negotiation, internal investigation, document review, economic analysis) and the insured person or entity on whose behalf the work is being performed. These records will be essential in any allocation discussions with Northland. Coordination with Howard Bellamy (C&H Billing Partner) and Richard Fong (TMC CFO) should be established immediately.

VII. Gavin Holt — Special Coverage Considerations

Gavin Holt presents the most complex coverage issue in the D&O analysis, and his situation merits separate treatment. The following summarizes the key facts and coverage considerations specific to Holt.

Background. Holt served as TMC's Vice President, U.S. Specialty Minerals Sales, from approximately January 2015 until his resignation effective September 30, 2021. Throughout the relevant conduct period (approximately January 2017 through August 2021), Holt was responsible for TMC's U.S. sales of high-purity feldspar, industrial talc, and rare-earth concentrates. Holt's resignation occurred approximately two weeks after TMC became aware, through informal channels, that Cascade Chemical Supply Co. had entered into a cooperation agreement with the DOJ.

Holt retained personal counsel, Patrick Dunleavy of Briarcliff Law Group PLLC in San Francisco, on approximately June 10, 2022, after the DOJ indicated its interest in Holt's testimony. On June 14, 2022, Holt asserted his Fifth Amendment privilege against self-incrimination before the grand jury, declining to testify. Holt's invocation of the Fifth Amendment, while legally proper, is a strong signal that he faces significant individual criminal exposure.

Evidence of Holt's Involvement. Based on materials reviewed in TMC's internal investigation, Holt is the individual most directly implicated in the alleged price-fixing, customer-allocation, and bid-rigging conspiracy. The internal investigation has identified at least thirty-seven (37) documented occasions on which Holt communicated with Carl Edgerton (Ridgecrest Minerals, VP Sales) and Kevin Tsang (Pinnacle Earth Resources, former SVP) regarding pricing, customer assignments, and bid coordination. These communications occurred through the encrypted messaging application VaultChat (which Holt installed on his personal mobile device, outside TMC's corporate IT infrastructure) and in person at NASMC conferences and regional industry events between approximately March 2017 and July 2021.

Coverage Analysis.

Side A. Holt qualifies as an "Insured Person" under the Northland Policy by virtue of his prior service as a TMC officer. His defense costs through Briarcliff Law Group PLLC should be covered under Side A if TMC does not or cannot indemnify him. As noted above, TMC is unlikely to indemnify Holt given the nature of the allegations, his departure from the Company, and the potential that indemnification would be contrary to the public interest or the CBCA's limitations on indemnification in criminal proceedings. If TMC declines to indemnify Holt, Side A coverage would apply from the first dollar, without application of the SIR.

Criminal-Act Exclusion for Holt Individually. If Holt is ultimately charged with a criminal antitrust violation and convicted, or if he pleads guilty, the criminal-act exclusion could be invoked retroactively as to Holt individually. At that point, Northland could seek to deny further coverage and potentially to recoup defense costs previously advanced. However, until a final adjudication occurs, Holt's defense costs should be advanced. This is consistent with the pre-adjudication analysis set forth in Section V.B above.

NPA Carve-Out. If TMC resolves the DOJ investigation through an NPA that carves out Holt individually — that is, if the NPA reserves the DOJ's right to prosecute Holt personally, while resolving the corporate investigation — Holt's exposure would continue beyond the resolution of the corporate matter. In that scenario, Holt's defense costs would continue to accrue, and coverage should remain available to Holt under Side A pending final adjudication of his individual matter. The severability clause ensures that the resolution of the corporate matter does not affect Holt's individual coverage rights.

Potential for Advancement with Repayment Obligation. Northland may seek to impose a repayment obligation on Holt as a condition of advancing defense costs — that is, a requirement that Holt repay any defense costs advanced by Northland if the criminal-act exclusion is later triggered by a conviction or guilty plea. Repayment obligations of this type are controversial and may not be enforceable in all jurisdictions, but they are sometimes agreed to as a pragmatic compromise between the insurer and the insured. TMC should monitor any communications between Northland and Holt's counsel regarding repayment obligations and should ensure that any such arrangement does not adversely affect TMC's own coverage rights.

Coordination with Holt's Counsel. While TMC and Holt have potentially divergent interests — TMC will likely cooperate with the DOJ and seek an NPA, while Holt faces individual criminal exposure and has asserted his Fifth Amendment rights — it is important that coverage issues be coordinated to the extent possible. C&H should maintain communication with Patrick Dunleavy of Briarcliff Law Group PLLC regarding coverage matters, while being mindful of the potential for conflicts of interest between TMC and Holt.

VIII. Other Current Directors and Officers — Coverage Posture

In addition to Gavin Holt, the following current directors and officers have potential exposure or involvement in the DOJ investigation. This Section summarizes the coverage posture for each.

Søren Dalmqvist (CEO). Mr. Dalmqvist has served as TMC's CEO since 2018 and held that position throughout a substantial portion of the relevant conduct period. However, the internal investigation to date has not identified evidence of Mr. Dalmqvist's direct participation in the alleged pricing, allocation, or bid-rigging conduct. Mr. Dalmqvist's exposure, if any, would arise from supervisory liability — i.e., the theory that he failed to detect or prevent the alleged conduct occurring within his organization. Defense costs incurred by Mr. Dalmqvist individually, if any, should be fully covered under Side B (if TMC indemnifies) or Side A (if TMC does not indemnify), without exclusion issues. The criminal-act exclusion should not apply absent evidence of direct personal involvement in criminal conduct.

Priya Anand (General Counsel). Ms. Anand has served as General Counsel since 2019 and is coordinating TMC's response to the investigation. There is no evidence that Ms. Anand was aware of or participated in the alleged conduct. Her coverage posture is the same as Mr. Dalmqvist's: defense costs should be fully covered without exclusion issues.

Margaret Caldwell (Board Chair). Ms. Caldwell is a non-executive Board Chair who has served in that capacity since 2016. There is no evidence of her involvement in operational matters or the alleged conduct. Her coverage posture is the same as above.

Richard Fong (CFO). Mr. Fong has served as CFO since 2017. His involvement in the investigation relates primarily to financial reporting and disclosure obligations. There is no evidence of personal participation in the alleged conduct. Defense costs should be fully covered.

Janet Moreau-Shaw (Audit Committee Chair). Ms. Moreau-Shaw chairs the Audit and Risk Committee and is overseeing the Board-level response to the investigation. There is no evidence of personal participation in the alleged conduct. Defense costs should be fully covered.

Sandra Chu (Director, Pricing Analytics). Ms. Chu reported to Gavin Holt and was responsible for developing and implementing pricing models for TMC's U.S. specialty-minerals products. Evidence reviewed in the internal investigation indicates that Ms. Chu received pricing-adjustment instructions from Holt on multiple occasions during the relevant conduct period. Some of these instructions may have reflected agreements reached between Holt and his counterparts at Ridgecrest and Pinnacle. However, there is no direct evidence at this time that Ms. Chu was aware that the pricing adjustments originated from inter-competitor communications or that she participated in or had knowledge of the alleged conspiracy.

Ms. Chu's coverage posture is as follows: Defense costs should be covered under Side B (if TMC indemnifies) or Side A (if TMC does not indemnify). The criminal-act exclusion risk is low absent evidence of intentional wrongdoing or knowledge of the conspiracy. Ms. Chu is most likely a fact witness rather than a target or subject, and her defense costs — which will primarily consist of costs associated with witness preparation and any individual representation — should be relatively modest.

Thomas Eriksen (Regional Sales Manager, Western Region). Mr. Eriksen attended at least four NASMC conferences between 2017 and 2021 at which the alleged side meetings between TMC, Ridgecrest, and Pinnacle personnel are believed to have occurred. The evidence of Mr. Eriksen's direct participation in the alleged substantive discussions is ambiguous. He attended certain social events at which competitors were present, and he may have been aware that Holt was meeting separately with competitor representatives, but there is no direct evidence that he participated in price-fixing, allocation, or bid-rigging discussions.

Mr. Eriksen's coverage posture is similar to Ms. Chu's: defense costs should be covered, and the criminal-act exclusion risk is low. Like Ms. Chu, Mr. Eriksen is more likely a fact witness than a subject or target, and his defense costs should be relatively modest.

For all of the foregoing individuals, it is important to note that the internal investigation is ongoing, and additional evidence may emerge that alters the coverage analysis. C&H should monitor developments and update the coverage analysis as warranted.

IX. Excess-Layer Coverage Considerations

A. Greystone Specialty Insurance Ltd. (Layer 2)

The first excess layer of TMC's D&O tower is provided by Greystone Specialty Insurance Ltd. ("Greystone"), which provides USD 25 million in coverage in excess of the USD 50 million Northland primary layer. Greystone's policy is a follow-form policy, meaning that it incorporates by reference the same insuring agreements, definitions, conditions, and exclusions as the Northland Primary Policy. Accordingly, the coverage analysis set forth above with respect to the Northland Policy applies with equal force to the Greystone excess layer.

Greystone's coverage will attach only if the USD 50 million aggregate limit of the Northland primary layer is exhausted by covered claims. At current projected defense costs — C&H's initial estimate is approximately USD 12 million for legal fees, with additional costs for forensic and expert services that could bring the total to USD 15–20 million — exhaustion of the primary layer from defense costs alone appears unlikely. However, if the investigation results in a significant monetary penalty or settlement, or if the defense costs substantially exceed initial estimates (as is common in complex criminal antitrust investigations), aggregate costs could approach or exceed the USD 50 million primary limit.

It is important to note, however, that any monetary payment under a future NPA or plea agreement would likely be characterized as a "fine or penalty" and would be uninsurable as a matter of public policy (as discussed in Section X below). Such a payment would not erode the policy limits and would not count toward exhaustion of the primary layer. Accordingly, the question of whether the Greystone layer will be triggered depends primarily on the magnitude of defense costs, which are insurable.

Notice was provided to Greystone on or about March 8, 2022, as confirmed by the separate memorandum of that date. Greystone acknowledged receipt of the notice but has not issued a coverage position or reservation of rights. This is consistent with standard practice for excess carriers, which typically defer to the primary carrier's coverage determination until the primary layer is approaching exhaustion.

B. Sentinel Re Ltd. (Layer 3)

The second excess layer is provided by Sentinel Re Ltd. ("Sentinel Re"), which provides USD 25 million in coverage in excess of USD 75 million (i.e., in excess of the combined Northland and Greystone layers). Like Greystone, Sentinel Re's policy is a follow-form policy that incorporates the terms of the Northland Primary Policy.

Sentinel Re's coverage will attach only upon exhaustion of both the Northland primary layer and the Greystone first excess layer — a total of USD 75 million in underlying limits. Based on current projections, exhaustion of these underlying layers is unlikely. However, notice was provided

MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
TO: Elaine Forsythe, Responsible Partner, Antitrust & Competition Practice Group
FROM: Monica Reyes, Associate, Antitrust & Competition Practice Group
DATE: March 20, 2022
RE: D&O Insurance Coverage Analysis — Torchlight Mining Corp. — DOJ Antitrust Division Grand Jury Investigation (GJ-22-0194, N.D. Cal.)
MATTER NO.: 1039-00001
This memorandum is protected by the attorney-client privilege and the attorney work product doctrine. It has been prepared in connection with Calderwood & Harkness LLP's representation of Torchlight Mining Corp. and its directors and officers in Grand Jury Investigation No. GJ-22-0194 (N.D. Cal., San Francisco Division). This memorandum is not intended for disclosure to any third party and should not be disclosed without the express authorization of the undersigned or the Responsible Partner. Any inadvertent disclosure does not constitute a waiver of privilege.
I. Executive Summary
The purpose of this memorandum is to analyze the directors-and-officers ("D&O") liability insurance coverage available to Torchlight Mining Corp. ("TMC" or the "Company") and its current and former directors and officers in connection with the United States Department of Justice, Antitrust Division ("DOJ") grand jury investigation designated Grand Jury No. GJ-22-0194, pending before the U.S. District Court for the Northern District of California, San Francisco Division. The investigation concerns suspected price-fixing, market allocation, and bid-rigging in the North American specialty-minerals sector, specifically with respect to high-purity feldspar, industrial talc, and rare-earth concentrates. These are serious allegations implicating potential per se violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, and carry significant criminal penalties for both entities and individuals.
TMC, acting through this firm, tendered notice of the investigation to Northland Mutual Insurance Co. ("Northland") on March 4, 2022, under D&O Policy No. NMI-DO-2021-5547 (the "Northland Policy" or the "Primary Policy"). The notice was timely and conformed to the notice provisions of the Primary Policy. Subsequently, on or about March 8, 2022, notice was also provided to the two excess-layer carriers in the D&O tower: Greystone Specialty Insurance Ltd. ("Greystone") and Sentinel Re Ltd. ("Sentinel Re").
Northland has acknowledged the notice and has confirmed that defense costs incurred by individual directors and officers in connection with the investigation will be covered under the policy's Side A and Side B insuring agreements, subject to the applicable terms, conditions, and exclusions. However, Northland has issued a reservation-of-rights letter (received on or about March 15, 2022) in which it reserves the right to deny coverage on two principal grounds: (i) entity coverage under the policy's Side C insuring agreement, which Northland contends may not extend to the present investigation; and (ii) the regulatory/criminal-act exclusion (Section IV.17 of the Primary Policy), which Northland asserts could apply to bar coverage if the investigation results in a finding of criminal conduct. These reservations are significant and must be addressed promptly.
This memorandum addresses the following issues in detail:
(a) The structure of TMC's D&O insurance tower, including the primary layer and two excess layers, providing total aggregate coverage of USD 100 million;
(b) The scope of coverage under the Side A (non-indemnifiable loss), Side B (corporate reimbursement), and Side C (entity) insuring agreements and the applicability of each to the DOJ investigation;
(c) The regulatory/criminal-act exclusion contained in the Primary Policy, its standard formulation requiring "final adjudication" before the exclusion can be invoked, and its inapplicability at the present pre-adjudication stage of the investigation;
(d) Excess-layer coverage under the Greystone and Sentinel Re policies, both of which follow form to the Northland Primary Policy;
(e) Special coverage considerations applicable to Gavin Holt, TMC's former Vice President of U.S. Specialty Minerals Sales, who is the individual most directly implicated in the alleged conduct; and
(f) Recommendations for preserving TMC's coverage rights throughout the investigation, including specific guidance on responding to Northland's reservation of rights, billing and allocation practices, and the insurance implications of any future non-prosecution agreement ("NPA") or deferred prosecution agreement ("DPA") resolution.
Overall Conclusion. Based on my analysis of the Primary Policy, applicable case law, and industry practice, I conclude as follows: Defense costs for individual directors and officers should be covered under Side A and Side B of the Northland Policy, subject to the USD 2.5 million self-insured retention ("SIR"). Entity coverage under Side C is more vulnerable to the regulatory/criminal-act exclusion but is defensible at the pre-adjudication stage, and TMC should vigorously contest any attempt by Northland to deny or limit entity coverage at this time. The excess layers provided by Greystone and Sentinel Re should respond on a follow-form basis once the primary layer is exhausted. Any monetary penalty imposed through an NPA, DPA, or plea agreement is likely uninsurable as a matter of public policy and would fall outside the definition of covered "Loss." Calderwood & Harkness should promptly respond to Northland's reservation-of-rights letter and implement the recommendations set forth in Section XI of this memorandum.
II. Background
A. The DOJ Investigation
The DOJ Antitrust Division formally opened a grand jury investigation on approximately February 10, 2022, designated Grand Jury No. GJ-22-0194, before the U.S. District Court for the Northern District of California, San Francisco Division. The grand jury sits in San Francisco and is expected to hear testimony and receive documentary evidence over a period of several months or longer. As of the date of this memorandum, the investigation remains in its early stages, and no indictments have been returned.
The investigation is being conducted by the DOJ Antitrust Division's San Francisco Field Office, under the supervision of Deputy Assistant Attorney General Julia Stafford-Hayes, who is based in Washington, D.C. The lead prosecutors assigned to the matter are Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves. Both are experienced antitrust prosecutors; Reeves, in particular, has been involved in several recent criminal antitrust enforcement actions in the extractive-industries and industrial-chemicals sectors.
TMC received Grand Jury Subpoena Duces Tecum No. GJ-22-0194-SD-003 on February 14, 2022, at its U.S. subsidiary's principal office in Reno, Nevada. The subpoena requires the production of a broad range of documents and electronically stored information relating to TMC's pricing, sales, customer allocation, and competitive bidding practices for high-purity feldspar, industrial talc, and rare-earth concentrates sold to U.S. industrial and chemical-manufacturing customers, covering the period from January 1, 2015, through the date of the subpoena. The relevant conduct period identified in the subpoena and in related DOJ communications is approximately January 2017 through at least August 2021, although the document requests extend earlier to capture background and contextual materials.
The investigation concerns a suspected conspiracy among competing specialty-minerals producers to fix prices, allocate customers and geographic markets, and rig bids for contracts to supply high-purity feldspar, industrial talc, and rare-earth concentrates. These products are essential inputs for the ceramics, glass, paint, plastics, and advanced-materials industries. The North American specialty-minerals market is concentrated, with a small number of producers supplying the majority of domestic demand.
Based on information available to us at this time, the following entities and individuals are co-subjects or co-targets of the investigation:
• Ridgecrest Minerals Inc., a Delaware corporation headquartered in Denver, Colorado. Key individuals: Brian Novotny (CEO) and Carl Edgerton (Vice President of Sales). Ridgecrest is represented by Davenport, Kline & Archer LLP, with Helen Marchetti serving as lead counsel.
• Pinnacle Earth Resources Ltd., an Ontario corporation headquartered in Sudbury, Ontario, Canada. Key individuals: Douglas Harlowe (CEO) and Kevin Tsang (former Senior Vice President, who departed the company in approximately December 2020). Pinnacle is represented by Ashford Whitmore LLP, with George Nakamura serving as lead counsel.
In addition, the DOJ has secured the cooperation of at least one entity:
• Cascade Chemical Supply Co., a Washington corporation headquartered in Spokane, Washington. Key individual: Leonard Massey (President). Cascade is represented by Whitfield, Strauss & Tully LLP, with Rebecca Ostrander serving as lead counsel. Cascade entered into a cooperation agreement with the DOJ on or about September 15, 2021. The terms of the cooperation agreement are not publicly available, but it is believed that Cascade has agreed to provide proffer testimony, produce documents, and cooperate fully with the investigation in exchange for favorable treatment in any subsequent prosecution. Cascade's cooperation appears to have been the catalyst for the formal opening of the grand jury investigation.
The DOJ's theory of the case, based on the subpoena specifications and initial communications with prosecutors, appears to be that senior sales executives at TMC, Ridgecrest, and Pinnacle participated in a series of pricing, allocation, and bid-rigging discussions at industry events — particularly the annual conferences and regional meetings of the North American Specialty Minerals Conference ("NASMC") — as well as through encrypted messaging applications and in-person meetings. The alleged conduct, if proven, would constitute per se violations of Section 1 of the Sherman Act, carrying maximum criminal penalties of USD 100 million per count for corporations and up to ten years' imprisonment and USD 1 million in fines for individuals. The DOJ has increasingly sought penalties well in excess of these statutory maximums under the alternative fine provision of 18 U.S.C. § 3571(d), which permits fines of up to twice the gross gain or gross loss from the offense.
B. TMC Corporate Structure and Key Individuals
Torchlight Mining Corp. is a corporation organized under the Canada Business Corporations Act ("CBCA"), with its registered office at 200 Bay Street, Suite 3400, Toronto, Ontario M5J 2J2, Canada. The Company's common shares are dually listed on the Toronto Stock Exchange (ticker: TRCL) and the New York Stock Exchange (ticker: TMC). TMC is a major producer of specialty minerals, including feldspar, talc, and rare-earth concentrates, with mining and processing operations in Canada, the United States, and Australia.
TMC conducts its U.S. operations through Torchlight Mining (U.S.) Inc. ("TMC U.S."), a wholly owned subsidiary incorporated in the State of Nevada, with its principal office at 8750 West Sahara Avenue, Suite 210, Reno, Nevada 89117. TMC U.S. holds the Company's U.S. mining leases, operates its U.S. processing facilities, and employs the Company's U.S.-based sales and marketing personnel. TMC U.S. is the entity through which the conduct at issue in the DOJ investigation was allegedly carried out.
The following individuals are the key directors and officers of TMC relevant to this coverage analysis:
• Margaret Caldwell, Board Chair. Ms. Caldwell has served as non-executive Chair of the Board since 2016. There is no evidence that Ms. Caldwell was aware of or participated in any of the alleged conduct.
• Søren Dalmqvist, Chief Executive Officer. Mr. Dalmqvist was appointed CEO in 2018 and has served in that capacity throughout the relevant conduct period. The internal investigation to date has not identified evidence of Mr. Dalmqvist's direct participation in the alleged conduct, although his supervisory responsibilities may be examined by the DOJ.
• Priya Anand, General Counsel. Ms. Anand has served as General Counsel since 2019. She is coordinating TMC's response to the investigation and is the primary point of contact for privilege and coverage matters.
• Richard Fong, Chief Financial Officer. Mr. Fong has served as CFO since 2017. He is responsible for TMC's financial reporting and disclosures related to the investigation, including the establishment of the litigation reserve discussed in Section X below.
• Janet Moreau-Shaw, Audit Committee Chair. Ms. Moreau-Shaw chairs the Board's Audit and Risk Committee and is overseeing the Board-level response to the investigation.
The individual most directly implicated in the alleged conduct is:
• Gavin Holt, former Vice President, U.S. Specialty Minerals Sales. Mr. Holt resigned from TMC effective September 30, 2021, approximately two weeks after the Company became aware that Cascade Chemical Supply Co. had entered into a cooperation agreement with the DOJ. Mr. Holt was responsible for TMC's U.S. sales of feldspar, talc, and rare-earth concentrates throughout the alleged conduct period. He has retained personal counsel, Patrick Dunleavy of Briarcliff Law Group PLLC, San Francisco, California. Mr. Holt's coverage situation is analyzed separately in Section VII below.
Two additional TMC employees have been identified as persons of interest in the investigation:
• Sandra Chu, Director of Pricing Analytics. Ms. Chu reported to Gavin Holt and was responsible for developing and implementing pricing models for TMC's U.S. specialty-minerals products. Evidence reviewed in the internal investigation indicates that Ms. Chu received pricing-adjustment instructions from Holt, some of which may have reflected agreements reached with competitors, but there is no direct evidence at this time that Ms. Chu was aware of the inter-competitor communications or participated in them.
• Thomas Eriksen, Regional Sales Manager, Western Region. Mr. Eriksen attended at least four NASMC conferences between 2017 and 2021 at which the alleged side meetings between TMC, Ridgecrest, and Pinnacle personnel are believed to have occurred. Evidence of Mr. Eriksen's direct participation in any price-fixing, allocation, or bid-rigging discussions is ambiguous; he attended certain social events at which competitors were present but may not have been involved in substantive discussions.
Both Ms. Chu and Mr. Eriksen remain employed by TMC as of the date of this memorandum.
As of this memorandum's date, TMC has not received a target letter from the DOJ Antitrust Division. The Company is currently classified as a "subject" of the investigation — that is, the DOJ has identified TMC as a person or entity whose conduct is within the scope of the grand jury's investigation. A target letter may be forthcoming as the investigation progresses; target letters are typically issued when the prosecutor has substantial evidence linking the target to criminal activity and believes that the target is a putative defendant. For purposes of this coverage analysis, I note that the receipt of a target letter would constitute a material development that should be promptly reported to Northland and the excess carriers. [Note: TMC subsequently received a target letter on May 20, 2022.]
C. Notice of Claim
Calderwood & Harkness LLP ("C&H"), acting on behalf of TMC, tendered formal notice of the DOJ investigation to Northland Mutual Insurance Co. on March 4, 2022. The notice letter was transmitted by overnight courier and electronic mail to Northland's claims department at 55 Yonge Street, Suite 2100, Toronto, Ontario M5E 1J4, Canada, addressed to Northland's Vice President of Claims, Katherine Hargrove. The notice letter described the investigation, identified the relevant policy, summarized the known facts, and requested coverage for defense costs incurred by TMC and its insured persons.
Notice letters were also transmitted to the excess-layer carriers on or about March 8, 2022, as confirmed by a separate memorandum of that date prepared by C&H's Insurance Recovery practice group. Specifically:
• Greystone Specialty Insurance Ltd. was notified at its registered office in Hamilton, Bermuda.
• Sentinel Re Ltd. was notified at its registered office in Hamilton, Bermuda.
Both excess carriers acknowledged receipt of the notice. Neither has issued a substantive coverage position or reservation-of-rights letter as of the date of this memorandum, which is consistent with standard practice for excess carriers at this early stage.
Northland acknowledged receipt of the notice on or about March 10, 2022, and subsequently issued a reservation-of-rights letter dated approximately March 15, 2022, in which it (i) confirmed coverage for defense costs of individual directors and officers under Sides A and B, subject to applicable terms, conditions, and exclusions; (ii) reserved the right to deny entity coverage under Side C; and (iii) reserved the right to invoke the criminal-act exclusion (Section IV.17 of the Primary Policy) if the investigation results in a finding or admission of criminal conduct. The reservation-of-rights letter is analyzed in detail in Sections V and XI below.
III. TMC's D&O Insurance Program — Structure
TMC maintains a D&O insurance program consisting of a primary layer and two excess layers, providing total aggregate coverage of USD 100 million. The structure of the program is summarized below and set forth in detail in Attachment A to this memorandum.
A. Primary Layer: Northland Mutual Insurance Co.
The primary layer of TMC's D&O insurance program is provided by Northland Mutual Insurance Co., a Canadian insurer domiciled in Ontario. The key terms of the Primary Policy are as follows:
Policy Number: NMI-DO-2021-5547
Policy Period: July 1, 2021, through July 1, 2022 (renewed annually; the current policy period covers the date on which the investigation was opened and the date on which notice was tendered)
Aggregate Limit of Liability: USD 50,000,000 (Fifty Million Dollars), inclusive of defense costs
Self-Insured Retention (SIR): USD 2,500,000 (Two Million Five Hundred Thousand Dollars), applicable to Side B and Side C claims; no SIR for Side A claims
Named Insured: Torchlight Mining Corp. and all subsidiaries, including but not limited to Torchlight Mining (U.S.) Inc.
Insured Persons: All current and former directors and officers of the Named Insured and its subsidiaries, as defined in the policy
Insurer: Northland Mutual Insurance Co., 55 Yonge Street, Suite 2100, Toronto, Ontario M5E 1J4, Canada
Broker of Record: Stratton Willis & Co. Ltd. (contact: Jonathan Mercier, Senior Vice President, Executive Risk Practice)
The Primary Policy is a claims-made-and-reported policy; coverage is triggered by the making of a claim against an insured during the policy period and the reporting of that claim to the insurer within the time specified in the policy (typically during the policy period or within an extended reporting period). TMC's notice on March 4, 2022, was made within the current policy period and satisfies the policy's notice requirements.
B. Excess Layer 2: Greystone Specialty Insurance Ltd.
The first excess layer of TMC's D&O insurance program is provided by Greystone Specialty Insurance Ltd., a Bermuda-domiciled specialty insurer. The key terms are as follows:
Coverage: USD 25,000,000 (Twenty-Five Million Dollars) in excess of USD 50,000,000 (i.e., the Greystone layer attaches at USD 50 million and provides coverage up to a total of USD 75 million in aggregate)
Insurer: Greystone Specialty Insurance Ltd., registered office in Hamilton, Bermuda
Terms: Follow-form to the Northland Primary Policy (NMI-DO-2021-5547); the same insuring agreements, definitions, conditions, and exclusions apply. The Greystone policy contains a drop-down provision that would cause it to respond as if it were the primary policy in the event of Northland's insolvency.
C. Excess Layer 3: Sentinel Re Ltd.
The second excess layer is provided by Sentinel Re Ltd., also domiciled in Bermuda. The key terms are as follows:
Coverage: USD 25,000,000 (Twenty-Five Million Dollars) in excess of USD 75,000,000 (i.e., the Sentinel Re layer attaches at USD 75 million and provides coverage up to a total of USD 100 million in aggregate)
Insurer: Sentinel Re Ltd., registered office in Hamilton, Bermuda
Terms: Follow-form to the Northland Primary Policy (NMI-DO-2021-5547); the same insuring agreements, definitions, conditions, and exclusions apply.
D. Total Available Tower
The total aggregate D&O insurance tower available to TMC and its insured persons is USD 100,000,000 (One Hundred Million Dollars), structured as follows:
All coverage is subject to the terms, conditions, and exclusions of the Northland Primary Policy (which controls as the follow-form lead policy), including the self-insured retention, the criminal-act exclusion, the consent-to-settle provision, and other material terms analyzed in this memorandum.
IV. Coverage Analysis — Insuring Agreements
The Northland Primary Policy contains three separate insuring agreements, commonly referred to as Side A, Side B, and Side C. Each insuring agreement addresses a different category of covered loss and has distinct implications for the DOJ investigation. This Section analyzes each insuring agreement in turn.
A. Side A Coverage (Non-Indemnifiable Loss)
Side A of the Northland Policy covers "Loss" (including defense costs) incurred by "Insured Persons" — that is, individual directors and officers — where TMC is unable or not legally permitted to indemnify those persons. Side A is designed to protect individual directors and officers in situations where the corporate indemnity is unavailable, such as derivative claims, bankruptcy, or regulatory proceedings where indemnification is legally prohibited.
Side A is particularly relevant at this stage of the investigation for the following reasons:
Gavin Holt. Holt is a former officer who departed TMC on September 30, 2021. He has retained personal counsel, Patrick Dunleavy of Briarcliff Law Group PLLC in San Francisco, to represent him in connection with the DOJ investigation. Holt qualifies as an "Insured Person" under the Northland Policy by virtue of his prior service as Vice President, U.S. Specialty Minerals Sales. The policy's definition of "Insured Person" expressly includes former directors and officers for acts committed during their tenure with the Company.
Holt's defense costs through Briarcliff Law Group should be covered under Side A if TMC does not or cannot indemnify him. TMC's indemnification obligations to Holt under his employment agreement and the CBCA remain subject to separate analysis, but there are substantial grounds for TMC to decline to indemnify Holt given the nature of the allegations, Holt's departure from the Company, and the potential that indemnification could be challenged as contrary to public policy or the CBCA's limitations on indemnification in criminal or administrative proceedings. If TMC elects not to indemnify Holt — which is the likely course based on preliminary discussions with Priya Anand — Side A would be the primary source of coverage for Holt's defense costs.
Current Directors and Officers. Current directors and officers — including Søren Dalmqvist (CEO), Priya Anand (General Counsel), Margaret Caldwell (Board Chair), Richard Fong (CFO), Janet Moreau-Shaw (Audit Committee Chair), Sandra Chu (Director, Pricing Analytics), and Thomas Eriksen (Regional Sales Manager, Western Region) — should be covered under Side A to the extent that TMC cannot indemnify them. At this stage, TMC is expected to indemnify its current directors and officers for defense costs in the investigation (with such indemnification reimbursed under Side B, as discussed below), and Side A's role for current personnel is therefore limited. However, if circumstances change — for example, if TMC were to become insolvent or if indemnification were legally prohibited with respect to a particular individual — Side A would provide a critical backstop.
It is important to note that Side A coverage under the Northland Policy is not subject to the USD 2.5 million SIR. The SIR applies only to Side B and Side C claims. This means that Holt's defense costs, if covered under Side A, would be payable from the first dollar incurred (after application of any applicable policy deductible, which is separate from the SIR).
B. Side B Coverage (Corporate Reimbursement)
Side B of the Northland Policy reimburses TMC for indemnification payments it makes to insured persons for covered "Loss." In other words, when TMC advances defense costs to its directors and officers pursuant to its corporate indemnification obligations, Side B operates to reimburse the Company for those expenditures.
TMC is likely obligated under the CBCA, its corporate bylaws, and the individual indemnification agreements it has entered into with its directors and officers to indemnify current directors and officers for defense costs incurred in connection with the grand jury investigation. Under the CBCA and TMC's bylaws, indemnification is mandatory for directors and officers who have been "substantially successful on the merits" of a defense in a civil, criminal, administrative, or investigative proceeding, and permissive (at the Board's discretion) in other circumstances, subject to certain limitations. TMC's standard form of indemnification agreement, which has been executed with each of its current directors and officers, provides for mandatory advancement of defense costs, subject to an undertaking to repay if the director or officer is ultimately found not to have met the applicable standard of conduct.
The USD 2.5 million self-insured retention applies to Side B claims. This means that TMC must bear the first USD 2.5 million of indemnification payments before Northland's coverage obligation is triggered. Given the anticipated scope and duration of the investigation, the SIR is likely to be exhausted relatively early in the process; C&H's initial budget estimate for defense costs is approximately USD 12 million, and additional costs for forensic and expert services will be incurred.
Analysis. Side B should respond to reimburse TMC for defense costs it advances to current insured persons, up to the USD 50 million policy limit (less the SIR), subject to the exclusions analyzed in Section V below. Northland has acknowledged Side B coverage in its initial response, subject to its reservation of rights regarding the criminal-act exclusion. At the pre-adjudication stage, the criminal-act exclusion should not limit Side B coverage, as discussed in detail in Section V.
C. Side C / Entity Coverage
Side C of the Northland Policy covers TMC as an entity for claims made against TMC itself. In many D&O policies, entity coverage is limited to "securities claims" — i.e., claims brought against the company in connection with the purchase or sale of its securities. However, certain modern D&O policies, including the Northland Policy, contain broader entity coverage provisions that extend to governmental investigations and regulatory proceedings.
Key Question. The central coverage question for Side C is whether the Northland Policy's entity coverage extends to a criminal antitrust investigation by the DOJ, or whether entity coverage is limited to securities-related claims.
Analysis of Policy Language. A review of Policy No. NMI-DO-2021-5547 indicates that the entity coverage insuring agreement includes an "Investigation Coverage Extension" that applies to "formal governmental investigations" of the Named Insured or any subsidiary. The Investigation Coverage Extension provides coverage for "Loss" incurred by the entity in connection with a "formal investigation" by a governmental authority, defined to include grand jury proceedings, formal orders of investigation, and similar compulsory governmental inquiries. Based on this language, the DOJ grand jury investigation should fall within the scope of the entity coverage grant.
However, Northland's reservation-of-rights letter specifically challenges entity coverage on two grounds. First, Northland contends that the Investigation Coverage Extension was primarily intended to address regulatory investigations (e.g., SEC enforcement proceedings) rather than criminal antitrust investigations, and that the extension should be narrowly construed. Second, Northland invokes the criminal-act exclusion, arguing that entity coverage is particularly vulnerable to the exclusion because the entity itself (as opposed to individual directors and officers) may ultimately be found to have engaged in criminal conduct.
TMC's position should be that the Investigation Coverage Extension is clear and unambiguous in its scope, that it covers formal governmental investigations including criminal grand jury proceedings, and that any ambiguity should be construed in favor of coverage consistent with well-established principles of insurance contract interpretation. The criminal-act exclusion, which is analyzed in detail below, should not apply at the pre-adjudication stage and cannot be used prospectively to deny entity coverage for defense costs.
This is the primary area of dispute between TMC and Northland, and it should be addressed directly and forcefully in C&H's response to the reservation-of-rights letter.
V. The Regulatory / Criminal-Act Exclusion
A. Policy Language
Section IV.17 of the Northland Primary Policy (NMI-DO-2021-5547) contains a criminal-act exclusion, which is commonly referred to in the D&O insurance industry as a "Conduct Exclusion" or "Regulatory/Criminal Exclusion." The exclusion, in relevant part, provides:
The Insurer shall not be liable for Loss arising from any Claim or Investigation based upon, arising out of, or attributable to any deliberately dishonest, fraudulent, or criminal act or omission by an Insured, or any willful violation of any statute, rule, or regulation by an Insured.
This exclusion shall apply only in the event that such conduct is established by a final adjudication in the underlying action or proceeding, including but not limited to a judgment, verdict, plea of guilty or nolo contendere, or admission by the Insured.
The key operative limitation on the exclusion is the "final adjudication" requirement. The exclusion does not apply upon the mere allegation, investigation, or indictment of criminal conduct; rather, it is triggered only when the insured's criminal conduct has been "established by a final adjudication." This is a critical distinction and is the foundation of TMC's coverage position.
Northland's reservation-of-rights letter, received on or about March 15, 2022, expressly reserves the right to invoke this exclusion. The letter states, in substance, that Northland "reserves all rights under Section IV.17 of the Policy to deny coverage for any Loss arising from deliberately dishonest, fraudulent, or criminal acts or omissions, if such conduct is established by a final adjudication, and further reserves the right to seek recoupment of any defense costs advanced in the event the exclusion is triggered." The reservation-of-rights letter also notes that the exclusion applies with particular force to entity coverage under Side C, because the entity's conduct — rather than the conduct of any individual insured person — is the subject of the DOJ investigation.
B. Applicability at the Pre-Adjudication Stage
The critical issue for purposes of the current coverage analysis is whether the criminal-act exclusion can be invoked at the present stage of the investigation to deny or limit coverage for defense costs. The answer, under well-established D&O insurance law and industry practice, is clearly no.
At this stage of the DOJ investigation, the following facts are undisputed:
• No charges have been filed against TMC or any of its directors or officers.
• No indictment has been returned by the grand jury.
• No plea of guilty or nolo contendere has been entered by any insured.
• No conviction has been obtained against any insured.
• No "final adjudication" of criminal conduct has occurred within the meaning of the policy exclusion.
• The investigation remains at the subpoena-response stage; TMC has not even received a target letter (as of the date of this memorandum).
Under these circumstances, the criminal-act exclusion is inapplicable. The exclusion, by its express terms, applies "only in the event that such conduct is established by a final adjudication." No final adjudication has occurred, and none is imminent. Defense costs are incurred precisely in situations where the insured's conduct has not yet been determined — that is the very purpose of D&O insurance coverage for investigation and defense costs. If the exclusion could be invoked prospectively, at the stage of a mere investigation, D&O coverage for defense costs would be rendered illusory, because coverage would be denied precisely when it is most needed.
This position is supported by a substantial body of case law and industry authority. Courts have consistently held that criminal-act exclusions with "final adjudication" triggers cannot be applied to deny defense costs at the pre-adjudication stage. Representative authorities include:
• Levy v. Northgate Indemnity Co., where the court held that a conduct exclusion requiring "final adjudication" could not be invoked to deny defense-cost coverage during the pendency of criminal proceedings, because the insured's conduct had not yet been finally determined.
• ALLI v. Aldermere Life Insurance, in which the court emphasized that the "final adjudication" requirement is a substantive limitation on the exclusion's applicability and not merely a procedural timing mechanism.
• Industry guidance from the Hollowell Industries (IRMI) and the American Bar Association's D&O Liability and Insurance Committee, both of which confirm that conduct exclusions with final-adjudication triggers are not operative during the investigation or pre-trial phase of a proceeding.
TMC's Position. In its planned response to Northland's reservation of rights, C&H should take the unequivocal position that Northland is obligated to cover defense costs now, without reference to the criminal-act exclusion. The exclusion can only be invoked retroactively, if and when a final adjudication of criminal conduct occurs. Until that time, Northland must advance defense costs in accordance with the policy's insuring agreements. Northland's reservation of rights, while procedurally permissible, does not relieve it of its present obligation to pay covered claims.
C. Impact of Potential NPA Resolution
A significant strategic consideration in this coverage analysis is the possibility that the DOJ investigation may ultimately be resolved through a non-prosecution agreement ("NPA") or a deferred prosecution agreement ("DPA") rather than through an indictment, trial, and conviction. NPAs and DPAs have become the dominant resolution mechanism for corporate criminal antitrust investigations in recent years, and the DOJ Antitrust Division has increasingly employed these instruments as alternatives to contested criminal proceedings.
If TMC resolves the investigation through an NPA without admission of criminal liability, the criminal-act exclusion should remain inapplicable for the duration of the coverage period. An NPA is not a conviction, a guilty plea, or a plea of nolo contendere. It is not a "final adjudication" within the meaning of the policy exclusion. Rather, an NPA is a contractual agreement between the government and the entity in which the government agrees not to prosecute in exchange for certain undertakings by the entity (typically including a monetary payment, compliance commitments, and cooperation obligations). The entity does not plead guilty, is not convicted, and does not make a formal admission of criminal liability.
However, a significant caveat must be noted. NPAs typically include an "agreed statement of facts" or "statement of offense conduct" in which the entity acknowledges certain factual matters. Depending on the language of the agreed statement, Northland could argue that the factual acknowledgments constitute an implicit or constructive "admission" of criminal conduct sufficient to trigger the exclusion. While this argument is not well-supported by the policy language or case law — which requires a "final adjudication," not merely a factual acknowledgment — it is a risk that must be managed.
Recommendation. Throughout any negotiations with the DOJ regarding an NPA or DPA, C&H should be mindful of the insurance implications of the agreed statement of facts and should take care to negotiate language that does not constitute an admission of criminal liability. Specifically, the agreed statement should, to the extent consistent with DOJ requirements, use passive or neutral language (e.g., "the investigation revealed evidence that certain TMC employees engaged in communications with competitors regarding pricing") rather than admissions of corporate criminal intent (e.g., "TMC knowingly and willfully conspired to fix prices"). This approach is consistent with the practice in recent NPA resolutions in the antitrust context and should be achievable in negotiations with the DOJ.
A DPA, by contrast, involves the filing of a criminal information and a formal agreement to defer prosecution for a specified period. While a DPA is not a conviction, it is a closer question whether a DPA constitutes a "final adjudication" within the meaning of the exclusion. Some insurers have argued that the filing of a criminal information and the entity's acknowledgment of facts in a DPA amount to an adjudication of criminal conduct. C&H should analyze this issue further if the resolution trajectory moves toward a DPA rather than an NPA.
D. Severability / Individual vs. Entity Analysis
The Northland Policy contains a severability clause (Section VII.3) that provides, in substance, that the criminal-act exclusion and other conduct-based exclusions shall be applied separately and independently to each insured person. The severability clause ensures that a finding of wrongdoing by one insured does not taint or impair coverage for other insureds whose conduct has not been adjudicated.
This severability provision has important practical implications:
• Gavin Holt. If Holt is ultimately charged with and convicted of a criminal antitrust violation, or if he pleads guilty, the criminal-act exclusion could be invoked retroactively as to Holt individually. However, such a finding as to Holt would not affect coverage for other insured persons — including TMC itself, Dalmqvist, Anand, Caldwell, Fong, Moreau-Shaw, Chu, Eriksen, and any other current or former directors and officers — whose conduct has not been finally adjudicated.
• TMC as Entity. If TMC resolves the investigation through an NPA without admission of criminal liability (as discussed above), the exclusion should not apply to TMC's entity coverage under Side C, even if individual insured persons are subsequently found to have engaged in criminal conduct.
• Other Insured Persons. Coverage for the defense costs of current directors and officers who are not individually implicated — i.e., those for whom there is no evidence of personal participation in the alleged conduct — should be fully available and unaffected by the exclusion.
The severability clause is a standard feature of modern D&O policies and has been upheld by courts in numerous coverage disputes. C&H should emphasize the severability clause in its response to Northland's reservation of rights.
VI. Scope of Covered "Loss" — Defense Costs
A. Definition of Defense Costs
The Northland Policy defines "Loss" broadly to include, among other things, defense costs — that is, "reasonable and necessary attorneys' fees, expert fees, and other costs and expenses incurred in the investigation, defense, or settlement of a covered Claim or Investigation." The policy's definition of "Loss" is inclusive and is designed to encompass the full range of costs incurred by insureds in responding to the types of proceedings covered by the policy.
Critically, the policy defines "Claim" and "Investigation" in terms that encompass a grand jury investigation. The definition of "Investigation" includes "any formal governmental investigation of an Insured, including without limitation a grand jury investigation, formal order of investigation, subpoena, civil investigative demand, or similar compulsory governmental inquiry." The DOJ grand jury investigation, designated GJ-22-0194, plainly falls within this definition. The issuance of Grand Jury Subpoena Duces Tecum No. GJ-22-0194-SD-003 to TMC on February 14, 2022, constitutes a triggering event under the policy's coverage for "Investigations."
The policy further provides for the advancement of defense costs on an ongoing basis, as incurred, rather than requiring the insured to fund its defense and seek reimbursement after the conclusion of the proceeding. This advancement obligation is a critical feature of the coverage and is the mechanism by which TMC's defense costs will be funded during the investigation.
B. Categories of Defense Costs at Issue
The following categories of defense costs are currently at issue or anticipated in connection with the DOJ investigation:
1. Calderwood & Harkness Legal Fees. C&H's legal fees for the defense of TMC and its current directors and officers in the DOJ investigation constitute the largest single category of defense costs. C&H's billing rates for this matter are as follows: Partners at USD 1,450 per hour; Senior Associates at USD 950 per hour; Associates at USD 725 per hour. C&H's initial budget estimate for the investigation through the anticipated NPA resolution (assuming a twelve-to-eighteen-month timeline) is approximately USD 12 million. This estimate is subject to revision based on the scope and duration of the investigation, the volume of discovery, and the complexity of DOJ negotiations.
2. Forensic and Expert Fees. TMC has retained or anticipates retaining the following forensic and expert service providers:
• Hargrove Forensic Advisory LLC — engaged to provide economic analysis of the specialty-minerals market, including pricing trends, market concentration, and competitive dynamics. Hargrove's work product will be used to support TMC's defense in the investigation and in any subsequent proceedings.
• Redstone Digital Forensics Inc. — engaged to provide e-discovery and forensic data collection services, including the identification, preservation, collection, processing, and review of electronically stored information responsive to the grand jury subpoena. Redstone's fees are significant and ongoing; the volume of data at issue is substantial, encompassing email archives, messaging-application data (including VaultChat communications), and structured data from TMC's pricing and sales systems.
3. Compliance Consultant Fees. TMC may in the future retain Meridian Compliance Partners LLC to assist with the development and implementation of enhanced antitrust compliance programs, which may be required as part of any NPA or DPA resolution. Whether compliance-consultant fees are covered as "defense costs" under the policy is a question that requires careful analysis. Many modern D&O policies cover compliance and remediation costs when they are reasonably connected to a covered claim or investigation; however, some insurers take the position that forward-looking compliance costs are operational expenses rather than defense costs.
4. Personal Counsel Fees. The fees of Patrick Dunleavy of Briarcliff Law Group PLLC for the representation of Gavin Holt are covered defense costs to the extent Holt is entitled to coverage under Side A (as discussed in Section VII below). The fees of any personal counsel retained by other insured persons would similarly be covered.
Question: Internal Investigation and Compliance Remediation Costs. A question arises as to whether the Northland Policy covers fees incurred in connection with TMC's internal investigation — that is, the investigation conducted by C&H at the direction of the Audit Committee to identify the scope of the alleged conduct and the Company's potential exposure. The internal investigation is a predicate to and integral part of TMC's defense in the DOJ investigation; the information developed through the internal investigation is used to respond to the grand jury subpoena, prepare witnesses, and inform the Company's defense strategy. Under many modern D&O policies, internal investigation costs are covered as defense costs when the investigation is "reasonably connected to" or "undertaken in response to" a covered claim or investigation. The Northland Policy should be reviewed to confirm that this is the case; based on a preliminary review, the policy language appears broad enough to support coverage for internal investigation costs, but this issue should be confirmed with Northland.
C. Allocation Issues
In any D&O coverage dispute, allocation of defense costs between covered and non-covered matters is a potential source of contention. TMC should anticipate that Northland may seek to allocate defense costs in the following respects:
• Individual vs. Entity Defense Costs. Northland may argue that a portion of C&H's fees is attributable to the defense of TMC as an entity (which Northland contends may not be covered under Side C) rather than to the defense of individual insured persons (which Northland has acknowledged is covered under Sides A and B). While in practice it is often difficult to draw a clear line between entity defense costs and individual defense costs — because the defense of the entity and the defense of its directors and officers are inextricably intertwined — the potential for allocation disputes should be anticipated.
• Covered vs. Non-Covered Activities. Northland may also seek to distinguish between costs attributable to covered defense activities (e.g., responding to the grand jury subpoena, preparing for witness testimony, negotiating with the DOJ) and non-covered activities (e.g., general corporate compliance improvements, public-relations consulting, or lobbying activities). While TMC should resist overly narrow allocations, it is prudent to maintain clear billing records that support the allocation of costs to covered activities.
Recommendation. C&H should implement billing protocols that distinguish between defense costs of individual insured persons and entity operational expenses. All timekeepers should use task-based billing codes that identify the nature of each activity (e.g., subpoena response, witness preparation, DOJ negotiation, internal investigation, document review, economic analysis) and the insured person or entity on whose behalf the work is being performed. These records will be essential in any allocation discussions with Northland. Coordination with Howard Bellamy (C&H Billing Partner) and Richard Fong (TMC CFO) should be established immediately.
VII. Gavin Holt — Special Coverage Considerations
Gavin Holt presents the most complex coverage issue in the D&O analysis, and his situation merits separate treatment. The following summarizes the key facts and coverage considerations specific to Holt.
Background. Holt served as TMC's Vice President, U.S. Specialty Minerals Sales, from approximately January 2015 until his resignation effective September 30, 2021. Throughout the relevant conduct period (approximately January 2017 through August 2021), Holt was responsible for TMC's U.S. sales of high-purity feldspar, industrial talc, and rare-earth concentrates. Holt's resignation occurred approximately two weeks after TMC became aware, through informal channels, that Cascade Chemical Supply Co. had entered into a cooperation agreement with the DOJ.
Holt retained personal counsel, Patrick Dunleavy of Briarcliff Law Group PLLC in San Francisco, on approximately June 10, 2022, after the DOJ indicated its interest in Holt's testimony. On June 14, 2022, Holt asserted his Fifth Amendment privilege against self-incrimination before the grand jury, declining to testify. Holt's invocation of the Fifth Amendment, while legally proper, is a strong signal that he faces significant individual criminal exposure.
Evidence of Holt's Involvement. Based on materials reviewed in TMC's internal investigation, Holt is the individual most directly implicated in the alleged price-fixing, customer-allocation, and bid-rigging conspiracy. The internal investigation has identified at least thirty-seven (37) documented occasions on which Holt communicated with Carl Edgerton (Ridgecrest Minerals, VP Sales) and Kevin Tsang (Pinnacle Earth Resources, former SVP) regarding pricing, customer assignments, and bid coordination. These communications occurred through the encrypted messaging application VaultChat (which Holt installed on his personal mobile device, outside TMC's corporate IT infrastructure) and in person at NASMC conferences and regional industry events between approximately March 2017 and July 2021.
Coverage Analysis.
Side A. Holt qualifies as an "Insured Person" under the Northland Policy by virtue of his prior service as a TMC officer. His defense costs through Briarcliff Law Group PLLC should be covered under Side A if TMC does not or cannot indemnify him. As noted above, TMC is unlikely to indemnify Holt given the nature of the allegations, his departure from the Company, and the potential that indemnification would be contrary to the public interest or the CBCA's limitations on indemnification in criminal proceedings. If TMC declines to indemnify Holt, Side A coverage would apply from the first dollar, without application of the SIR.
Criminal-Act Exclusion for Holt Individually. If Holt is ultimately charged with a criminal antitrust violation and convicted, or if he pleads guilty, the criminal-act exclusion could be invoked retroactively as to Holt individually. At that point, Northland could seek to deny further coverage and potentially to recoup defense costs previously advanced. However, until a final adjudication occurs, Holt's defense costs should be advanced. This is consistent with the pre-adjudication analysis set forth in Section V.B above.
NPA Carve-Out. If TMC resolves the DOJ investigation through an NPA that carves out Holt individually — that is, if the NPA reserves the DOJ's right to prosecute Holt personally, while resolving the corporate investigation — Holt's exposure would continue beyond the resolution of the corporate matter. In that scenario, Holt's defense costs would continue to accrue, and coverage should remain available to Holt under Side A pending final adjudication of his individual matter. The severability clause ensures that the resolution of the corporate matter does not affect Holt's individual coverage rights.
Potential for Advancement with Repayment Obligation. Northland may seek to impose a repayment obligation on Holt as a condition of advancing defense costs — that is, a requirement that Holt repay any defense costs advanced by Northland if the criminal-act exclusion is later triggered by a conviction or guilty plea. Repayment obligations of this type are controversial and may not be enforceable in all jurisdictions, but they are sometimes agreed to as a pragmatic compromise between the insurer and the insured. TMC should monitor any communications between Northland and Holt's counsel regarding repayment obligations and should ensure that any such arrangement does not adversely affect TMC's own coverage rights.
Coordination with Holt's Counsel. While TMC and Holt have potentially divergent interests — TMC will likely cooperate with the DOJ and seek an NPA, while Holt faces individual criminal exposure and has asserted his Fifth Amendment rights — it is important that coverage issues be coordinated to the extent possible. C&H should maintain communication with Patrick Dunleavy of Briarcliff Law Group PLLC regarding coverage matters, while being mindful of the potential for conflicts of interest between TMC and Holt.
VIII. Other Current Directors and Officers — Coverage Posture
In addition to Gavin Holt, the following current directors and officers have potential exposure or involvement in the DOJ investigation. This Section summarizes the coverage posture for each.
Søren Dalmqvist (CEO). Mr. Dalmqvist has served as TMC's CEO since 2018 and held that position throughout a substantial portion of the relevant conduct period. However, the internal investigation to date has not identified evidence of Mr. Dalmqvist's direct participation in the alleged pricing, allocation, or bid-rigging conduct. Mr. Dalmqvist's exposure, if any, would arise from supervisory liability — i.e., the theory that he failed to detect or prevent the alleged conduct occurring within his organization. Defense costs incurred by Mr. Dalmqvist individually, if any, should be fully covered under Side B (if TMC indemnifies) or Side A (if TMC does not indemnify), without exclusion issues. The criminal-act exclusion should not apply absent evidence of direct personal involvement in criminal conduct.
Priya Anand (General Counsel). Ms. Anand has served as General Counsel since 2019 and is coordinating TMC's response to the investigation. There is no evidence that Ms. Anand was aware of or participated in the alleged conduct. Her coverage posture is the same as Mr. Dalmqvist's: defense costs should be fully covered without exclusion issues.
Margaret Caldwell (Board Chair). Ms. Caldwell is a non-executive Board Chair who has served in that capacity since 2016. There is no evidence of her involvement in operational matters or the alleged conduct. Her coverage posture is the same as above.
Richard Fong (CFO). Mr. Fong has served as CFO since 2017. His involvement in the investigation relates primarily to financial reporting and disclosure obligations. There is no evidence of personal participation in the alleged conduct. Defense costs should be fully covered.
Janet Moreau-Shaw (Audit Committee Chair). Ms. Moreau-Shaw chairs the Audit and Risk Committee and is overseeing the Board-level response to the investigation. There is no evidence of personal participation in the alleged conduct. Defense costs should be fully covered.
Sandra Chu (Director, Pricing Analytics). Ms. Chu reported to Gavin Holt and was responsible for developing and implementing pricing models for TMC's U.S. specialty-minerals products. Evidence reviewed in the internal investigation indicates that Ms. Chu received pricing-adjustment instructions from Holt on multiple occasions during the relevant conduct period. Some of these instructions may have reflected agreements reached between Holt and his counterparts at Ridgecrest and Pinnacle. However, there is no direct evidence at this time that Ms. Chu was aware that the pricing adjustments originated from inter-competitor communications or that she participated in or had knowledge of the alleged conspiracy.
Ms. Chu's coverage posture is as follows: Defense costs should be covered under Side B (if TMC indemnifies) or Side A (if TMC does not indemnify). The criminal-act exclusion risk is low absent evidence of intentional wrongdoing or knowledge of the conspiracy. Ms. Chu is most likely a fact witness rather than a target or subject, and her defense costs — which will primarily consist of costs associated with witness preparation and any individual representation — should be relatively modest.
Thomas Eriksen (Regional Sales Manager, Western Region). Mr. Eriksen attended at least four NASMC conferences between 2017 and 2021 at which the alleged side meetings between TMC, Ridgecrest, and Pinnacle personnel are believed to have occurred. The evidence of Mr. Eriksen's direct participation in the alleged substantive discussions is ambiguous. He attended certain social events at which competitors were present, and he may have been aware that Holt was meeting separately with competitor representatives, but there is no direct evidence that he participated in price-fixing, allocation, or bid-rigging discussions.
Mr. Eriksen's coverage posture is similar to Ms. Chu's: defense costs should be covered, and the criminal-act exclusion risk is low. Like Ms. Chu, Mr. Eriksen is more likely a fact witness than a subject or target, and his defense costs should be relatively modest.
For all of the foregoing individuals, it is important to note that the internal investigation is ongoing, and additional evidence may emerge that alters the coverage analysis. C&H should monitor developments and update the coverage analysis as warranted.
IX. Excess-Layer Coverage Considerations
A. Greystone Specialty Insurance Ltd. (Layer 2)
The first excess layer of TMC's D&O tower is provided by Greystone Specialty Insurance Ltd. ("Greystone"), which provides USD 25 million in coverage in excess of the USD 50 million Northland primary layer. Greystone's policy is a follow-form policy, meaning that it incorporates by reference the same insuring agreements, definitions, conditions, and exclusions as the Northland Primary Policy. Accordingly, the coverage analysis set forth above with respect to the Northland Policy applies with equal force to the Greystone excess layer.
Greystone's coverage will attach only if the USD 50 million aggregate limit of the Northland primary layer is exhausted by covered claims. At current projected defense costs — C&H's initial estimate is approximately USD 12 million for legal fees, with additional costs for forensic and expert services that could bring the total to USD 15–20 million — exhaustion of the primary layer from defense costs alone appears unlikely. However, if the investigation results in a significant monetary penalty or settlement, or if the defense costs substantially exceed initial estimates (as is common in complex criminal antitrust investigations), aggregate costs could approach or exceed the USD 50 million primary limit.
It is important to note, however, that any monetary payment under a future NPA or plea agreement would likely be characterized as a "fine or penalty" and would be uninsurable as a matter of public policy (as discussed in Section X below). Such a payment would not erode the policy limits and would not count toward exhaustion of the primary layer. Accordingly, the question of whether the Greystone layer will be triggered depends primarily on the magnitude of defense costs, which are insurable.
Notice was provided to Greystone on or about March 8, 2022, as confirmed by the separate memorandum of that date. Greystone acknowledged receipt of the notice but has not issued a coverage position or reservation of rights. This is consistent with standard practice for excess carriers, which typically defer to the primary carrier's coverage determination until the primary layer is approaching exhaustion.
B. Sentinel Re Ltd. (Layer 3)
The second excess layer is provided by Sentinel Re Ltd. ("Sentinel Re"), which provides USD 25 million in coverage in excess of USD 75 million (i.e., in excess of the combined Northland and Greystone layers). Like Greystone, Sentinel Re's policy is a follow-form policy that incorporates the terms of the Northland Primary Policy.
Sentinel Re's coverage will attach only upon exhaustion of both the Northland primary layer and the Greystone first excess layer — a total of USD 75 million in underlying limits. Based on current projections, exhaustion of these underlying layers is unlikely. However, notice was provided

MEMORANDUM

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MATTER NO.: 1039-00001

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