Catherine,
Thank you for the thorough mark-up of the Merger Agreement that your team circulated on December 18. We have reviewed the revised draft carefully, and I wanted to follow up specifically on two areas that we view as critical to bridging the remaining gap between the parties: (1) the definition of "material adverse effect" in Article I and (2) the indemnification and escrow provisions in Article IX.
As you know, we circulated our Second Revised Draft of the full agreement on January 4, which reflects Solara's revised positions across all open provisions. The attached letter is intended to supplement that draft by setting out in detail the rationale behind our positions on the MAE definition and indemnification mechanics — areas where we believe a more fulsome explanation will be productive in narrowing the open issues ahead of our planned final negotiation session.
I would welcome the opportunity to walk through these points by phone with you and Alistair at your convenience later this week. My sense is that we are not far apart on several of the MAE carveout issues, and a focused conversation could go a long way toward getting us to a clean execution draft on the timeline we have discussed.
Please do not hesitate to reach out if you would like to discuss in advance of a more formal call.
Best regards,
Harrison
Harrison Wexford Partner Calderwood & Harkness LLP 599 Lexington Avenue New York, NY 10022 T: (212) 506-7100 hwexford@calderwoodharkness.com
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**Attachment: Project Stratos — C&H Response Letter re MAE and Indemnification (January 7, 2024).pdf**
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CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, NY 10022 T: (212) 506-7100 F: (212) 506-7200
January 7, 2024
VIA EMAIL
Catherine Answorth, Esq. Ridgeway Phelps & Sato LLP 375 Park Avenue New York, NY 10152
> Re: Agreement and Plan of Merger — Cloudium Technologies plc / Solara Digital Infrastructure Fund VI LP / Stratos Merger Sub Inc. — Response to Target's Comments on "Material Adverse Effect" Definition and Indemnification Provisions > Matter No. 1041-00003
Dear Catherine:
We write on behalf of our client, Solara Digital Infrastructure Fund VI LP ("Solara" or the "Buyer"), in connection with the Agreement and Plan of Merger (the "Merger Agreement") among Cloudium Technologies plc ("Cloudium" or the "Company"), Stratos Merger Sub Inc. ("Merger Sub"), and Solara. This letter responds to the comments set forth in the revised draft (mark-up) of the Merger Agreement received from Ridgeway Phelps & Sato LLP on December 18, 2023, specifically as they relate to (A) the definition of "Material Adverse Effect" in Article I of the Merger Agreement and (B) the indemnification, escrow, and related provisions in Article IX.
Solara's revised positions on these matters are reflected in the Second Revised Draft of the Merger Agreement circulated on January 4, 2024. This letter provides the context and rationale underlying those positions with the aim of facilitating a productive resolution of the remaining open points.
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**PART A: "MATERIAL ADVERSE EFFECT" DEFINITION**
**1. General Standard / Materiality Qualifier**
We acknowledge your request to revise the operative standard in the MAE definition from "has had or would have" to "has had or would reasonably be expected to have" a Material Adverse Effect. The Second Revised Draft accepts this change. We agree that the "would reasonably be expected to" formulation is consistent with Delaware market practice in large-cap take-private transactions and appropriately introduces an objective reasonableness standard. We consider this point closed.
As set forth below, however, the definition of "Material Adverse Effect" remains a heavily negotiated provision, and we set out the Buyer's positions on the enumerated carveouts and related matters in detail.
**2. Carveouts — Pandemics, War, Changes in Law**
The Buyer's draft includes, and continues to include, carveouts for:
(i) pandemics, epidemics, and public health emergencies (including any COVID-19-related measures);
(ii) hostilities, acts of war, sabotage, terrorism, or military action (whether or not declared); and
(iii) changes in law, regulation, or authoritative interpretation thereof (including changes in GAAP or other applicable accounting standards).
These three carveouts are standard and the Buyer has agreed to retain them in the Second Revised Draft. We note, however, that each of these carveouts remains subject to the "disproportionate impact" exception — that is, the relevant matter is carved out from the MAE definition only to the extent it does not disproportionately affect Cloudium and its subsidiaries, taken as a whole, relative to other companies operating in the same industry. The Buyer's position is that the disproportionate-impact qualifier must be retained for all three carveouts. This is a market-standard formulation and ensures that industry-neutral events cannot be used to shield genuinely company-specific harm from the MAE analysis.
**3. Target's Proposed Additional Carveouts — Buyer's Response**
Your December 18 mark-up proposed several additional carveouts beyond those described above. We address each in turn:
**(a) Industry-Wide Conditions / General Economic Conditions.** The Company proposed broad carveouts for (x) general economic and financial market conditions and (y) conditions generally affecting the "cloud software / SaaS industry or the broader technology sector." The Buyer accepts a carveout for general economic and financial market conditions, subject to the disproportionate-impact exception. With respect to industry-wide conditions, however, we believe the proposed formulation is overbroad. A carveout referencing the "broader technology sector" could sweep in developments specific to Cloudium's competitive position. We propose instead limiting this carveout to conditions affecting the "enterprise software industry generally," which more precisely reflects the market in which Cloudium principally operates, while still protecting the Company from adverse effects attributable to genuine industry-wide headwinds. This carveout would also be subject to the disproportionate-impact exception.
**(b) Seasonality.** The Company requested a carveout for seasonal fluctuations consistent with past practice. The Buyer accepts this carveout, provided that it is expressly tied to historical seasonal patterns as disclosed in Cloudium's filings with the U.S. Securities and Exchange Commission (Cloudium is listed on the Nasdaq Global Select Market under the ticker symbol "CLDM"). We have revised the language accordingly in the Second Revised Draft to reference "seasonal fluctuations in the Company's business consistent with those reflected in the Company SEC Reports."
**(c) Customer/Supplier Reactions to Announcement of the Merger.** The Company proposed carving out any adverse effects arising from the announcement or pendency of the transactions contemplated by the Merger Agreement, including the loss of, or adverse change in the relationship with, any customers, suppliers, employees, or other business partners. The Buyer agrees to include this carveout for purposes of the Material Adverse Effect closing condition set forth in Section 7.2 of the Merger Agreement. However, the Buyer does not agree to extend this carveout to the bring-down of representations and warranties for purposes of indemnification under Article IX. This distinction is important: the representation and warranty insurance policy issued by Northfield Assurance Ltd. (Policy No. NFA-TRI-2024-00487) underwrites the accuracy of the Company's representations as of signing and closing, and the indemnification mechanics must preserve the insured scope of those representations. Extending the announcement-effects carveout into the indemnification context would create a gap in the insured coverage and is not consistent with the structure negotiated with Northfield.
**(d) Failure to Meet Projections.** The Company proposed carving out any failure by Cloudium to meet internal projections, forecasts, budgets, or estimates of revenue, earnings, or other financial metrics. The Buyer accepts that the mere failure to meet projections does not, in and of itself, constitute a Material Adverse Effect. However, the Buyer reserves the right to examine and rely upon the underlying facts, events, or circumstances giving rise to such failure, which themselves may constitute a Material Adverse Effect to the extent they are not otherwise subject to an applicable carveout. The Second Revised Draft includes customary "underlying causes" savings language to this effect.
**4. Buyer's Requested Inclusions / Exclusions from Carveouts**
The Buyer requires that the following matters remain expressly outside the scope of any carveout (i.e., they are capable of constituting or contributing to a Material Adverse Effect notwithstanding the existence of any carveout):
(i) any material breach of the Merger Agreement by the Company;
(ii) any event, circumstance, or condition relating to fraud or willful misconduct by the Company or any of its officers or directors; and
(iii) any material adverse change in the Company's relationships with its top 20 customers measured by annual recurring revenue ("ARR") (the Company's aggregate ARR as of December 31, 2023 is approximately $1,740,000,000) or with any individual customer representing more than 3% of ARR. For the avoidance of doubt, this would include the Company's Master SaaS Agreement with Aegis Federal Solutions Inc. (approximately $84,000,000 in ARR).
We note that the change-of-control provisions in certain key contracts — including the agreements with Aegis Federal Solutions Inc. and Helix Data Systems GmbH — have been identified during the due diligence process, and the workstream to obtain the requisite third-party consents is being addressed separately by the transaction teams.
**5. "Material Adverse Effect" — Forward-Looking Scope**
Your December 18 mark-up proposed limiting the temporal scope of the MAE definition such that it would apply only to effects measured as of a specified date. The Buyer does not accept this limitation. The MAE definition should encompass effects on the business, assets, liabilities, financial condition, or results of operations of the Company and its subsidiaries, taken as a whole. The Company's global subsidiary structure — including Cloudium Technologies UK Ltd. (Company No. 11287456; approximately £312,000,000 / $390,000,000 in revenue), Cloudium Technologies India Pvt. Ltd. (approximately 2,400 employees), and Cloudium Solutions GmbH (approximately 400 employees) — requires a definition that captures both present and prospective effects on the consolidated enterprise. Restricting the MAE to effects measured only at a single point in time would not adequately protect the Buyer against developments that are ongoing or reasonably foreseeable at the relevant measurement dates.
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**PART B: INDEMNIFICATION AND ESCROW PROVISIONS**
**1. Indemnification Cap**
Your draft proposed reducing the general indemnification cap from 15% to 10% of the aggregate deal value. The Buyer's position is that the cap must remain at 15% of the $6,800,000,000 deal value, i.e., $1,020,000,000.
A 15% cap is appropriate in light of the scale and complexity of this transaction, including the cross-border nature of Cloudium's operations across the United Kingdom, India, Germany, and the United States, the approximately 6,800-person global workforce, and the extensive contract portfolio containing change-of-control and consent provisions. A 15% cap is within the market range for transactions of this size and profile.
Importantly, the availability of the representation and warranty insurance policy — with a $680,000,000 policy limit (10% of deal value) issued by Northfield Assurance — provides Solara with recourse above the escrow amount without imposing additional economic burden on the selling stockholders beyond the escrow. The R&W insurance retention is set at $544,000,000 (equal to the escrow amount), which means that from the selling stockholders' perspective, their maximum direct exposure for breaches of general representations and warranties is effectively limited to the escrow fund. Claims above the retention are borne by the R&W insurer at the Buyer's cost. We believe this structure is balanced and fair, and it is a key reason the 15% cap is both justified and workable.
**2. Escrow Amount**
Your draft proposed reducing the escrow from 8% to 5% of the aggregate deal value. The Buyer's position is that the escrow must remain at 8% of $6,800,000,000, i.e., $544,000,000.
The escrow serves as the primary source of recovery for post-closing indemnification claims and, critically, constitutes the retention under the R&W insurance policy with Northfield Assurance. Reducing the escrow amount would require a renegotiation of the R&W policy terms — a process we have discussed with both Peregrine Advisory Group LLC (our R&W insurance broker; contact Timothy Gallagher) and Northfield Assurance (contact Patrick Graves). Any reduction in the escrow below the current retention level would create a retention gap that is not acceptable to Solara or, we expect, to Northfield. The alignment of the escrow and the R&W retention at $544,000,000 was specifically negotiated to ensure seamless coverage and should not be disturbed.
**3. Escrow Release Schedule**
Your draft proposed a single release of the entire escrow fund 12 months after the Closing Date. The Buyer's position is that the escrow should be released in two tranches, as follows:
- **First Release:** 50% of the escrow ($272,000,000) to be released on the date that is 12 months after the Closing Date (i.e., July 9, 2025, assuming a July 9, 2024 closing), less any amounts subject to then-pending or unresolved claims.
- **Second Release:** The remaining 50% of the escrow ($272,000,000) to be released on the date that is 18 months after the Closing Date (i.e., January 9, 2026), less any amounts subject to then-pending or unresolved claims.
This two-tranche structure aligns with the 18-month survival period for representations and warranties (discussed below) and with the R&W insurance retention drop-down mechanics. The escrow agent for these purposes is Cobalt Trust Company (contact: Laura Ng, Vice President, Escrow Services), and Douglas Pemberton will serve as the Stockholder Representative in connection with escrow claims and related indemnification matters.
**4. Survival Period**
Your draft proposed reducing the survival period for representations and warranties from 18 months to 12 months post-closing. The Buyer's position is that the survival period must remain at 18 months post-closing.
An 18-month survival period is necessary to allow adequate time for post-closing integration activities, during which potential breaches — particularly in areas such as intellectual property, tax compliance, and government contracts — may first come to light. A 12-month period would, in our experience, be insufficient for a transaction of this complexity. The 18-month period also aligns with both the escrow release schedule described above and the R&W insurance retention mechanics: the R&W policy provides for a 50% retention drop-down from $544,000,000 to $272,000,000 at the 12-month anniversary (assuming no pending claims), with the full survival and retention running to the 18-month mark. Reducing the survival period would disrupt this coordinated structure and, again, would likely require renegotiation of the R&W insurance terms.
**5. Basket / Deductible Mechanism**
Your draft proposed converting the 0.75% basket from a tipping basket (first-dollar recovery once the threshold is exceeded) to a true deductible. The Buyer's position is that the basket must remain a tipping basket at 0.75% of the aggregate deal value, i.e., $51,000,000.
Under the tipping-basket structure, once aggregate indemnifiable losses exceed $51,000,000, Solara is entitled to recover from the first dollar of loss — not merely the amount in excess of $51,000,000. This mechanism is appropriate given the overall buyer-favorable indemnification structure and the availability of R&W insurance above the escrow. We note that the Buyer has accepted the de minimis threshold of $500,000 proposed by the Company — individual claims below $500,000 will not count toward the basket, which provides the sellers with meaningful protection against nuisance or immaterial claims.
**6. Special Indemnities (Uncapped)**
The Buyer's position is that the following categories of indemnification obligations must remain uncapped and outside the scope of the general indemnification framework described above:
(i) losses arising from or relating to fraud;
(ii) losses arising from or relating to willful breach;
(iii) tax indemnities (the terms of which are being coordinated with Leonard Cross on our side); and
(iv) certain specified litigation matters to be identified and set forth in the disclosure schedules.
We understand that your December 18 mark-up objected to the breadth of the "willful breach" carve-out. The Buyer is willing to define "Willful Breach" as a breach that is the consequence of an act or omission undertaken by the breaching party with actual knowledge that the taking of such act or failure to take such act would constitute or result in a breach of the Merger Agreement. However, claims arising from Willful Breach, as so defined, must remain uncapped. This is a fundamental protection and is not subject to further negotiation.
**7. Interplay with R&W Insurance**
For clarity, the layered recovery structure available to Solara under the Merger Agreement and the R&W insurance policy is as follows:
- **First Recourse:** The escrow fund ($544,000,000), held by Cobalt Trust Company, plus direct indemnification from the rollover participants (Jonathan Hargrove and Pinnacle Growth Ventures LLC) up to the 15% cap ($1,020,000,000).
- **Second Recourse:** The R&W insurance policy issued by Northfield Assurance Ltd. (Policy No. NFA-TRI-2024-00487), with a $680,000,000 policy limit, for covered losses in excess of the $544,000,000 retention.
- **Theoretical Maximum Recovery:** $1,020,000,000 (indemnity cap) plus $680,000,000 (R&W excess coverage) = $1,700,000,000, although practical recovery will depend on the nature, amount, and coverage of specific claims.
We note that the R&W policy includes a known-loss exclusion and that subrogation rights are waived against Cloudium and its current officers and directors except in cases of fraud. We also note — and this is a point on which we must insist — that the indemnification provisions of the Merger Agreement must not contain any language that would void, impair, or otherwise adversely affect the coverage available under the R&W insurance policy.
**8. Per-Share Merger Consideration and Escrow Holdback Mechanics**
For completeness, we confirm that the per-share merger consideration of $36.92 (based on approximately 184,200,000 shares outstanding) will be reduced by each selling stockholder's pro rata share of the escrow holdback. The escrow holdback does not apply to shares that are subject to the rollover agreements. Specifically, Jonathan Hargrove is rolling over 50% of his 7,736,400 shares (approximately $142,814,544 in implied rollover equity value), and Pinnacle Growth Ventures LLC is rolling over 60% of its 21,367,200 shares (approximately $473,241,408 in implied rollover equity value). The rollover participants have separate indemnification obligations under the rollover agreements, which are being finalized on a parallel track.
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**CLOSING**
We are hopeful that the foregoing provides sufficient context for the Buyer's positions and that it will enable us to narrow the remaining open issues efficiently. We understand that a final negotiation session is being planned for the week of January 15, 2024 in New York, and we believe that session should aim to resolve all remaining open items on the MAE definition and indemnification provisions — as well as any other outstanding points — so that execution-version documents can be finalized by the target signing date of January 22, 2024.
We would welcome the opportunity to schedule a call with you and Alistair Fenn to discuss these matters in advance of that session. Please let us know your availability.
We note that separate workstreams on the debt commitment letter (with Meridian Atlantic Bank, N.A. and Ironclad Capital Markets LLC, and Winthrop & Hale LLP as lenders' counsel), the regulatory filings (HSR Act and CMA), and the R&W insurance placement (Northfield Assurance / Peregrine Advisory Group) are all proceeding in parallel, and we will continue to coordinate with your team on each.
Very truly yours,
CALDERWOOD & HARKNESS LLP
Harrison Wexford Partner Calderwood & Harkness LLP 599 Lexington Avenue New York, NY 10022 T: (212) 506-7100 D: (212) 506-7142 hwexford@calderwoodharkness.com