1041-00003 · Solara Digital Infrastructure LP · R&W Insurance

memo-rwi-coverage-analysis.docx DOCUMENT M&A / Corporate

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP MEMORANDUM

This memorandum is a privileged and confidential attorney work product prepared by Calderwood & Harkness LLP in connection with the representation of Solara Digital Infrastructure LP and its affiliates. This memorandum is protected by the attorney-client privilege and the work product doctrine. Distribution of this memorandum outside of the Calderwood & Harkness deal team and authorized client representatives is strictly prohibited without the prior written consent of the author.

I. Executive Summary

The purpose of this memorandum is to analyze the total indemnification and insurance coverage framework available to Solara Digital Infrastructure Fund VI LP ("Fund VI" or "Solara") in connection with the $6,800,000,000 acquisition of Cloudium Technologies plc ("Cloudium"), and specifically the interplay among three distinct layers of protection that, taken together, constitute Solara's primary risk mitigation architecture for post-closing breaches of seller representations and warranties. These three layers are:

(1) the contractual indemnification provisions under the Merger Agreement (including the indemnity escrow deposited with Cobalt Trust Company);

(2) the buyer-side representation and warranty insurance ("R&WI") policy issued by Northfield Assurance Ltd. (Policy No. NFA-TRI-2024-00487); and

(3) the indemnification obligations of the rollover equity participants (Jonathan Hargrove and Pinnacle Growth Ventures LLC) that survive as direct contractual claims against parties who retain an economic interest in the surviving entity.

Key Conclusion. Solara's aggregate maximum recovery for breaches of seller representations and warranties (excluding fraud, willful breach, and special indemnities) is approximately $1,020,000,000 through the contractual indemnification framework, with an additional $680,000,000 available under the R&WI policy. Because the R&WI retention equals the escrow amount, the practical maximum aggregate recovery for a non-fraud breach of seller representations is the indemnity cap ($1,020,000,000) plus the R&WI limit ($680,000,000), totaling $1,700,000,000, subject to the layering mechanics, policy exclusions, and timing constraints described in detail herein. This $1,700,000,000 figure represents approximately 25% of the total deal value, which is a robust and market-standard coverage profile for a transaction of this magnitude and complexity.

This memorandum further addresses the retention drop-down mechanics embedded in the R&WI policy, whereby the self-insured retention reduces by 50% at the 12-month anniversary of closing (subject to there being no pending claims), and analyzes how this drop-down interacts with the parallel escrow release schedule under the Merger Agreement. As described in Section III.C below, the alignment of the drop-down and escrow release dates creates a streamlined recovery mechanism but also gives rise to certain gap scenarios that Solara's deal team should understand and monitor.

Note Regarding Policy Status. The R&WI policy was bound on January 19, 2024 (one day after the date of this memorandum). This analysis is based on the Non-Binding Indication ("NBI") from Northfield Assurance dated January 14, 2024, and the Binder Agreement is expected to conform to the NBI terms in all material respects. The final policy will be issued at or around the closing of the transaction. To the extent the Binder Agreement or final policy deviates from the NBI terms analyzed herein, this memorandum should be supplemented accordingly.

R&WI Broker. The R&WI process has been managed by Peregrine Advisory Group LLC, with Timothy Gallagher serving as lead broker. The broker fee is $680,000, payable by Solara at binding.

This memorandum is organized as follows: Section II summarizes the key coverage parameters under each of the three recovery layers. Section III provides a detailed analysis of the layering and interplay among these layers, including the retention drop-down mechanics and scenario analysis. Section IV identifies key considerations and risk factors. Section V addresses premium and cost analysis. Section VI compares the coverage parameters to the overall deal economics and market benchmarks. Section VII sets forth our recommendations. Section VIII provides a brief conclusion. Appendix A contains key defined terms and cross-references to related deal documents.

II. Summary of Key Coverage Parameters

This Section provides a detailed summary of the key parameters governing each of the three principal recovery layers: (A) the contractual indemnification provisions under the Merger Agreement, (B) the indemnity escrow fund, and (C) the R&WI policy.

A. Indemnification Provisions Under the Merger Agreement

The Merger Agreement is the Agreement and Plan of Merger, dated as of January 22, 2024 (the anticipated signing date; currently in near-final form as of the Third Revised Draft dated January 17, 2024), among Cloudium Technologies plc, as the target company, Stratos Merger Sub Inc., as the acquisition subsidiary and a wholly owned subsidiary of Fund VI, and Solara Digital Infrastructure Fund VI LP, as the buyer. The indemnification provisions are set forth in Article IX of the Merger Agreement. The key terms are as follows:

General Indemnification Cap. The aggregate liability of the seller indemnifying parties for breaches of seller representations and warranties (other than fraud, willful breach, and special indemnities) is capped at 15% of the deal value, which equals 15% × $6,800,000,000 = $1,020,000,000. This cap applies to the aggregate of all claims made by the buyer indemnified parties (which includes Fund VI, Stratos Merger Sub Inc., and the surviving corporation and their respective affiliates, officers, directors, employees, and agents) against the seller indemnifying parties (which includes the former stockholders of Cloudium, including the rollover equity participants).

Indemnity Basket (Tipping). The indemnifying parties have no obligation to indemnify the buyer indemnified parties for breaches of seller representations and warranties unless and until the aggregate losses incurred by the buyer indemnified parties exceed 0.75% of the deal value, which equals 0.75% × $6,800,000,000 = $51,000,000. The basket is structured as a tipping basket (sometimes referred to as a "first-dollar" basket), meaning that once aggregate losses exceed the $51,000,000 threshold, the indemnifying parties are liable for the full amount of losses from dollar one, and not merely for the excess above $51,000,000. This is a meaningful distinction from a deductible-style basket, as it maximizes recovery once the threshold is crossed.

De Minimis Threshold. Individual claims for losses of less than $500,000 are excluded from the basket calculation entirely and are not recoverable through the contractual indemnification mechanism. This provision prevents the aggregation of nuisance claims and ensures that the indemnification process is reserved for claims of material significance.

Survival Period. The representations and warranties of the sellers set forth in Article IV of the Merger Agreement survive for a period of 18 months following the closing date. Assuming a closing date of July 9, 2024 (which is the current estimated closing date), the survival period for general representations and warranties would expire on January 9, 2026. Claims for breaches of representations and warranties must be asserted (by delivery of a written indemnification claim notice to the Stockholder Representative) prior to the expiration of the applicable survival period. Certain representations and warranties — including fundamental representations (organization, authority, capitalization, and no undisclosed liabilities) and tax representations — survive for a longer period, as set forth in Section 9.01(b) of the Merger Agreement, which typically tracks the applicable statute of limitations plus 60 days.

Special Indemnities (Uncapped). Certain indemnification obligations fall outside the general cap and basket. These include: (i) losses arising from fraud or intentional misrepresentation by the sellers; (ii) losses arising from willful breach of any covenant or agreement contained in the Merger Agreement; (iii) certain specified tax indemnities set forth in Section 9.02(a)(iii) of the Merger Agreement; and (iv) indemnification for certain specified litigation matters identified on Schedule 9.02(a)(iv). These special indemnities are not subject to the general cap, the basket, or the de minimis threshold, and they sit outside the escrow and R&WI analysis described in this memorandum.

Source of Indemnification Recovery. Solara's recovery for indemnifiable losses is available from two primary sources: (i) the indemnity escrow fund held by Cobalt Trust Company (described in Section II.B below), which constitutes the primary source of recovery and the first recourse for all indemnification claims; and (ii) direct claims against the rollover equity participants — specifically, Jonathan Hargrove and Pinnacle Growth Ventures LLC — who, because they are rolling over a portion of their equity consideration into the surviving entity, remain as identifiable and economically motivated counterparties against whom direct claims may be pursued, subject to the overall indemnification cap.

B. Escrow Fund

The escrow fund is established pursuant to the Escrow Agreement (the form of which is attached as Exhibit E to the Merger Agreement), among Fund VI, Cobalt Trust Company (as escrow agent), and the Stockholder Representative. The key terms are as follows:

Escrow Amount. The escrow amount is equal to 8% of the deal value, which equals 8% × $6,800,000,000 = $544,000,000.

Escrow Agent. The escrow agent is Cobalt Trust Company (contact: Laura Ng, VP, Escrow Services), located at 100 Wall Street, New York, NY 10005. Cobalt Trust Company is an established escrow agent with significant experience in large-cap M&A transactions and has served as escrow agent in multiple prior Solara transactions.

Escrow Deposit. The escrow amount is funded at closing from the merger consideration. Specifically, $544,000,000 is withheld from amounts otherwise payable to Cloudium stockholders at closing and deposited directly into the escrow account. The escrow deposit does not represent an additional cost to Solara; it is carved out of the aggregate merger consideration payable to target stockholders.

Escrow Release Schedule. The escrow is released in two tranches, as follows:

First Release. Fifty percent (50%) of the escrow amount (i.e., $272,000,000) is released to the former Cloudium stockholders (through the Stockholder Representative) on the date that is 12 months after the closing date (i.e., July 9, 2025, assuming a July 9, 2024 closing), less the aggregate amount of any pending or unresolved indemnification claims as of such date. "Pending or unresolved indemnification claims" includes any claims for which Fund VI has delivered an indemnification claim notice to the Stockholder Representative that have not been finally resolved (whether by settlement, arbitration, or the expiration of the dispute resolution procedures set forth in Section 9.04 of the Merger Agreement).

Second Release. The remaining escrow balance — which, absent any claims, would be $272,000,000 — is released on the date that is 18 months after the closing date (i.e., January 9, 2026, assuming a July 9, 2024 closing), less the aggregate amount of any pending or unresolved indemnification claims as of such date. This second release date coincides with the expiration of the general survival period.

Stockholder Representative. The Stockholder Representative is Douglas Pemberton, who serves as the independent board chair of Cloudium, appointed under the Stockholder Representative Agreement to act on behalf of the former Cloudium stockholders in all matters relating to post-closing indemnification. Mr. Pemberton is authorized to negotiate, settle, and resolve indemnification claims, to consent to disbursements from the escrow fund, and to take all other actions necessary or appropriate in connection with the indemnification provisions of the Merger Agreement. Communications regarding indemnification claims are directed to Mr. Pemberton (with a copy to Ridgeway Phelps & Sato LLP as counsel to the Stockholder Representative).

C. Representation and Warranty Insurance Policy

The R&WI policy is a buyer-side representation and warranty insurance policy being procured by Fund VI from Northfield Assurance Ltd. The key terms, based on the NBI dated January 14, 2024, are as follows:

Carrier. Northfield Assurance Ltd., 30 St Mary Axe, London EC3A 8BF. Northfield is a well-established transactional risk insurer with a strong track record in large-cap M&A transactions in the technology sector.

Policy Number. NFA-TRI-2024-00487.

Policy Type. Buyer-side representation and warranty insurance. This is a critical structural feature: the policy is procured by and for the benefit of Solara (the buyer), and the insurer's obligation to pay runs directly to Solara. The policy is not a seller-side policy and does not create any payment obligation on the part of Cloudium or its former stockholders.

Policy Limit. $680,000,000, which equals 10% of the deal value. This is the maximum amount that Northfield will pay under the policy in respect of all covered losses in the aggregate.

Retention (Self-Insured Retention / SIR). $544,000,000, which is equal to the escrow amount and represents 8% of the deal value. The retention is the amount of losses that Solara must absorb (or recover from other sources, such as the escrow or direct contractual indemnification) before the R&WI policy responds. This alignment of the retention with the escrow amount is intentional and represents a common structuring approach: the escrow effectively "funds" the retention.

Retention Drop-Down. The retention includes a drop-down feature: 50% of the retention drops down to $272,000,000 after 12 months post-closing (i.e., after July 9, 2025), provided that there are no pending claims against the policy at that time. The mechanics and implications of this drop-down are analyzed in detail in Section III.C below.

Premium. $13,600,000, calculated at a rate of 2.0% on the policy limit ($680,000,000 × 2.0% = $13,600,000). The premium is payable by Solara at binding (i.e., on or about January 19, 2024). The premium is a one-time payment and is non-refundable, regardless of whether the transaction closes or any claims are made under the policy.

Broker Fee. $680,000, payable to Peregrine Advisory Group LLC, which serves as the R&WI broker for this transaction. The broker fee is payable by Solara at binding.

Binding Date. January 19, 2024 (expected). The Binder Agreement is being finalized between Solara and Northfield, with Peregrine Advisory Group acting as intermediary.

Effective Date. The policy becomes effective on the closing date of the transaction (expected July 9, 2024). No coverage is provided prior to closing.

Coverage Scope. The policy covers losses arising from breaches of the seller's representations and warranties as set forth in Article IV of the Merger Agreement. The NBI indicates that Northfield is willing to cover the entirety of the Article IV representations, subject to standard exclusions and the terms of the final policy. The covered representations include, among others, representations regarding organization and existence, authority, capitalization, financial statements, absence of undisclosed liabilities, absence of certain changes, compliance with laws, litigation, tax matters, intellectual property, material contracts, employee benefits, environmental matters, and data privacy.

Survival / Policy Period. The policy period for general representations and warranties is intended to mirror the survival period in the Merger Agreement — i.e., 18 months from the closing date. For certain fundamental representations (organization, authority, capitalization) and tax representations, the policy is expected to provide a longer coverage period, consistent with market practice: typically 3 years for fundamental representations and 6 years for tax representations. The precise policy periods for each category of representation will be confirmed in the final policy form.

Known-Loss Exclusion. The policy contains a standard known-loss exclusion. Losses arising from matters known to the insured (Solara) prior to binding of the policy are excluded from coverage. "Known" matters include those disclosed in the disclosure schedules to the Merger Agreement and any matters identified during Solara's due diligence process that would give rise to a breach of a seller representation or warranty. This exclusion underscores the importance of the no-claims declaration at closing (discussed below) and the careful management of the disclosure schedules.

No-Claims Declaration. As a condition to the effectiveness of the policy at closing, Solara is required to deliver a no-claims declaration certifying that, as of the closing date, Solara has no knowledge of any breach of seller representations and warranties that would give rise to a claim under the policy. This declaration is a standard feature of buyer-side R&WI policies and serves to protect the insurer against adverse selection.

Subrogation. Northfield waives its subrogation rights against Cloudium and its officers and directors, except in cases of fraud. This means that if Northfield pays a claim to Solara under the R&WI policy, Northfield will not seek recovery from Cloudium's former stockholders, officers, or directors (other than in cases of fraud by such persons). This is a market-standard provision and is discussed further in Section IV.E below.

Underwriter Contact. The primary underwriter contact at Northfield is Patrick Graves, SVP, Transactional Risk, Northfield Assurance Ltd.

III. Layering and Interplay Analysis

This Section provides a detailed analysis of the layering of Solara's three recovery layers, the interplay among them, and the mechanics of the retention drop-down feature in the R&WI policy.

A. Diagram of Coverage Layers (Described Textually)

Solara's indemnification and insurance coverage framework for breaches of seller representations and warranties (other than fraud, willful breach, and special indemnities) operates in three sequential layers. Each layer is described below, from first recourse to last.

Layer 1 — Contractual Indemnification / Escrow (First Dollar through $544,000,000). Solara's first recourse for any breach of seller representations and warranties is to the indemnity escrow fund. Claims are submitted through the Stockholder Representative (Douglas Pemberton) pursuant to the indemnification claim procedures set forth in Section 9.04 of the Merger Agreement, and recoveries are drawn from the $544,000,000 escrow held by Cobalt Trust Company. This layer represents the primary and most accessible source of recovery, as the escrow is funded with cash at closing and is subject to Solara's claims without the need to pursue individual stockholders. In parallel with or in addition to the escrow, Solara may also pursue direct indemnification from the rollover equity participants (Jonathan Hargrove and Pinnacle Growth Ventures LLC), who have contractual indemnification obligations under the Merger Agreement up to the general indemnity cap of $1,020,000,000. However, as a practical matter, the escrow is the first port of call.

Layer 2 — R&WI Policy (Excess Above $544,000,000 Retention, up to $680,000,000 Policy Limit). Once Solara's covered losses exceed the $544,000,000 retention (i.e., after the escrow is exhausted or losses exceed the escrow amount), the R&WI policy issued by Northfield Assurance responds for the next $680,000,000 of covered losses. The R&WI policy is excess coverage: it does not respond until the retention is satisfied. The total of retention plus policy limit is $544,000,000 + $680,000,000 = $1,224,000,000. This represents the maximum amount recoverable through the combined escrow and R&WI structure (without considering additional contractual indemnification above the escrow).

Layer 3 — Contractual Indemnification Above R&WI Policy Limit (up to the $1,020,000,000 Cap). To the extent that Solara's losses exceed $1,224,000,000, Solara may continue to pursue direct contractual indemnification claims against the rollover participants and other indemnifying stockholders, subject to the overall $1,020,000,000 indemnification cap. Because the escrow ($544,000,000) is a subset of the overall indemnity cap ($1,020,000,000), the remaining contractual indemnification headroom above the escrow is $1,020,000,000 − $544,000,000 = $476,000,000. This third layer is the least "bankable" source of recovery, as it requires pursuing direct claims against identified counterparties.

Note on Overlap and Aggregate Recovery. The indemnification cap of $1,020,000,000 is the maximum contractual recovery from the sellers (inclusive of the escrow). The R&WI policy sits above this contractual recovery — it is a buyer-side policy, meaning the insurer pays Solara directly; it is not a payment obligation of the sellers and does not count against the indemnification cap. Therefore, the theoretical maximum aggregate recovery for a non-fraud breach is the sum of the indemnification cap ($1,020,000,000) plus the R&WI policy limit ($680,000,000) = $1,700,000,000, provided that:

(a) the retention is satisfied (through escrow claims and/or direct indemnification from sellers);

(b) the loss is a covered loss under the R&WI policy (i.e., it arises from a breach of an Article IV representation and warranty and does not fall within a policy exclusion);

(d) the claims are submitted within the applicable survival periods and policy periods.

It is important to understand that the $1,700,000,000 figure represents the theoretical aggregate maximum across all three layers operating simultaneously. In practice, a loss scenario in which Solara exhausts all three layers would require a catastrophic breach resulting in more than $1.2 billion in covered losses, which, while not inconceivable in a transaction of this size, would represent a highly adverse outcome.

B. Basket Interaction

The interaction between the contractual indemnification basket and the R&WI retention merits specific attention, as these two thresholds operate in parallel but serve distinct functions.

The $51,000,000 tipping basket applies to contractual indemnification claims under the Merger Agreement. No recovery is available under the contractual indemnification provisions until aggregate losses exceed $51,000,000, at which point the sellers are liable from dollar one. Under the R&WI policy, the retention of $544,000,000 functions as the relevant threshold. Because the retention ($544,000,000) substantially exceeds the basket ($51,000,000), the R&WI retention effectively supersedes the basket in the context of the R&WI policy — any loss that satisfies the retention necessarily exceeds the basket by a wide margin.

The practical implications of this interaction are as follows:

For losses below $51,000,000: Neither contractual indemnification (basket not met) nor R&WI (retention not met) provides any recovery. Solara bears these losses entirely. However, individual claims below $500,000 do not count toward the basket calculation, so only claims of $500,000 or more are aggregated for purposes of determining whether the $51,000,000 threshold has been crossed.

For losses between $51,000,000 and $544,000,000: The tipping basket is satisfied, and Solara recovers from the escrow fund through the contractual indemnification mechanism. The R&WI policy does not respond because the retention has not been satisfied. Recovery from the escrow is available for the full amount of losses from dollar one (because the basket is a tipping basket, not a deductible).

For losses exceeding $544,000,000: The retention is satisfied, and the R&WI policy responds for covered losses in excess of the retention, up to the $680,000,000 policy limit. Contractual indemnification from the escrow and direct claims against sellers may also be pursued concurrently, subject to the $1,020,000,000 cap.

De Minimis Claims. Individual claims below $500,000 are excluded from the basket calculation entirely. This means that a series of small claims, each below $500,000, cannot be aggregated to reach the $51,000,000 basket threshold. However, once the basket is satisfied by larger claims, de minimis claims remain excluded — they are not recoverable regardless of whether the basket has been met. This provision should be taken into account in evaluating the recoverability of smaller post-closing losses.

C. Retention Drop-Down Mechanics

One of the most significant features of the R&WI policy structure for this transaction is the retention drop-down mechanism, which reduces the self-insured retention by 50% at the 12-month anniversary of closing, subject to certain conditions. The mechanics and practical implications are as follows:

Initial Retention (Closing through 12 Months Post-Closing). From the closing date through the 12-month anniversary of closing, the retention is $544,000,000. During this period, the R&WI policy responds only to losses in excess of $544,000,000.

Post-12-Month Retention. If no claims are pending against the R&WI policy as of the 12-month anniversary of closing (i.e., July 9, 2025, assuming a July 9, 2024 closing), the retention drops by 50% to $272,000,000. "Pending claims" for this purpose means any claims that have been formally submitted to Northfield Assurance under the notice provisions of the policy and that remain unresolved. Claims submitted under the Merger Agreement to the Stockholder Representative (but not to Northfield) should not, in our view, constitute "pending claims" against the policy for purposes of the drop-down trigger, although this should be confirmed in the final policy language.

Practical Significance. The drop-down is deliberately aligned with the first escrow release date. At 12 months post-closing, $272,000,000 of the escrow is released to former stockholders (assuming no pending claims under the Merger Agreement), leaving a remaining escrow balance of $272,000,000. If the retention simultaneously drops to $272,000,000, the remaining escrow continues to match — and effectively fund — the reduced retention. This alignment ensures that, at all times during the survival period, the escrow balance is sufficient to satisfy the applicable retention, thereby preserving Solara's ability to access the R&WI policy without self-funding any portion of the retention.

Scenario Analysis. To illustrate the practical operation of the drop-down, we consider three scenarios:

Scenario 1 — No Claims at 12 Months. This is the baseline scenario. At the 12-month anniversary (July 9, 2025), no indemnification claims have been asserted under either the Merger Agreement or the R&WI policy. The following occurs: (i) the first escrow tranche of $272,000,000 is released to the former Cloudium stockholders through the Stockholder Representative; (ii) the remaining escrow balance is $272,000,000; (iii) the R&WI retention drops to $272,000,000. From that point forward (i.e., for any claims brought between 12 and 18 months post-closing), the R&WI policy would respond for losses in excess of $272,000,000 (rather than $544,000,000), up to the $680,000,000 policy limit. The remaining escrow of $272,000,000 continues to fund the retention. This is the most favorable scenario for Solara, as it maximizes the R&WI coverage available during the second half of the survival period.

Scenario 2 — Pending Claim at 12 Months. At the 12-month anniversary, one or more indemnification claims have been asserted and remain pending. In this scenario: (i) the retention remains at $544,000,000 (the drop-down does not occur because there are pending claims against the policy); (ii) the release of the first escrow tranche is reduced by the amount of the pending claims — for example, if a claim for $75,000,000 is pending, only $197,000,000 of the first tranche ($272,000,000 − $75,000,000) is released; (iii) the remaining escrow balance is correspondingly higher than $272,000,000; (iv) the drop-down does not occur until the pending claims are fully resolved and there are no longer any pending claims against the policy. The practical consequence is that Solara must satisfy the full $544,000,000 retention for any new claims brought while the prior claims remain pending. This is less favorable but ensures that the full retention backstop remains in place while claims are being resolved.

Scenario 3 — Claim Made and Paid Before 12 Months. A claim was made within the first 12 months, was fully resolved and paid from the escrow before the 12-month anniversary, and no further claims are pending as of the 12-month date. In this scenario: (i) the retention should still drop to $272,000,000, because there are no "pending" claims against the policy as of the drop-down date (the prior claim was fully resolved); (ii) however, the escrow balance will have been reduced by the amount of the paid claim — for example, if $100,000,000 was paid from escrow, the remaining escrow balance at the 12-month mark (before the first tranche release) is $444,000,000, and after the release of $272,000,000, the remaining escrow is only $172,000,000. This remaining balance of $172,000,000 is $100,000,000 less than the reduced retention of $272,000,000. The gap between the reduced escrow balance ($172,000,000) and the reduced retention ($272,000,000) creates a potential shortfall of $100,000,000 that Solara would need to self-fund or recover via direct indemnification from the rollover participants in order to satisfy the retention and access the R&WI policy for any subsequent claim. This scenario illustrates a structural risk that Solara should understand: prior escrow draws can erode the escrow's ability to fund the post-drop-down retention, and Solara may need to look to direct contractual indemnification (or self-insurance) to bridge any resulting gap.

We recommend that the deal team discuss Scenario 3 with Peregrine Advisory Group and Northfield Assurance to confirm the policy's treatment of the retention in this circumstance. Specifically, we should confirm whether the retention drop-down is conditioned solely on the absence of pending claims (in which case Scenario 3 works as described above) or whether it is also conditioned on the escrow balance meeting or exceeding the reduced retention (in which case the drop-down might not occur in Scenario 3). The NBI language is ambiguous on this point and should be clarified in the final policy.

D. Total Aggregate Recovery — Summary Table

The following table summarizes Solara's maximum aggregate recovery for a non-fraud breach of seller representations and warranties across all three recovery layers:

Important Qualifications. The $1,700,000,000 figure represents the theoretical maximum aggregate recovery. In practice, actual recovery would depend on a number of factors, including:

(a) the nature and quantum of losses, including whether the losses are direct losses, consequential damages, diminution in value, or some other measure;

(b) whether the R&WI policy covers the particular representation that was breached — certain representations may be subject to policy exclusions or sublimits;

(c) the application of policy exclusions, including the known-loss exclusion, interim period exclusions, and any other standard or negotiated exclusions;

(d) the solvency and willingness of the indemnifying parties (particularly the rollover participants) to pay amounts above the escrow — direct indemnification claims against Hargrove and Pinnacle are subject to collection risk, notwithstanding their ongoing economic interest in the surviving entity;

(e) the timing of claims relative to the survival period, escrow release schedule, and policy period, as claims made after the expiration of the applicable period are unrecoverable; and

(f) any applicable mitigation obligations, contribution rights, or other limitations on recovery under the Merger Agreement, the Escrow Agreement, or the R&WI policy.

IV. Key Considerations and Risk Factors

This Section identifies and discusses the principal risk factors and practical considerations relevant to Solara's indemnification and insurance coverage framework.

A. Escrow as Sole "Assured" Recovery Source

The escrow fund held by Cobalt Trust Company is the primary and, in many respects, the only "bankable" source of indemnification recovery available to Solara for post-closing breaches of seller representations and warranties. The escrow is funded with cash at closing, held by a third-party escrow agent, and subject to release only upon satisfaction of the conditions set forth in the Escrow Agreement. Solara has the contractual right to submit claims against the escrow through the procedures set forth in the Merger Agreement, and disputed claims are resolved through the dispute resolution mechanism in Section 9.04. This makes the escrow a highly reliable source of recovery, subject only to the risk that the aggregate amount of valid claims exceeds the escrow balance.

Direct indemnification claims against former stockholders of Cloudium (other than the rollover participants) will be largely impractical to pursue after closing. Upon consummation of the merger, the former stockholders will have received their merger consideration (net of the escrow withholding), and they will have no continuing relationship with the surviving entity or with Solara. Many stockholders will be institutional investors, funds, or individuals who will have dispersed their merger proceeds. Pursuing individual collection actions against hundreds or thousands of former stockholders — each liable only for their pro rata share of any indemnification obligation — is neither economically viable nor practically feasible.

The rollover equity participants — Jonathan Hargrove (rolling over approximately $142,814,544 in equity consideration) and Pinnacle Growth Ventures LLC (rolling over approximately $473,241,408 in equity consideration) — present a different dynamic. Because Hargrove and Pinnacle retain a meaningful economic interest in the surviving entity post-closing, they have ongoing incentives to cooperate with Solara and to resolve indemnification claims constructively. Their continued involvement in the business also makes them more amenable to direct claims, as Solara has leverage through the ongoing governance and operational relationship. However, their individual exposure is limited by the general indemnification cap ($1,020,000,000) and, as a practical matter, by their respective rollover amounts. While the Merger Agreement does not explicitly limit each rollover participant's liability to their rollover amount, pursuing claims against Hargrove or Pinnacle for amounts substantially in excess of their rollover equity would raise significant practical and relational concerns.

The R&WI policy is therefore the critical backstop above the escrow for any material claim. If Solara suffers a breach of seller representations resulting in losses in excess of $544,000,000, the R&WI policy provides up to $680,000,000 of additional recovery that does not depend on the willingness or ability of any counterparty to pay. The insurer, Northfield Assurance, is a well-capitalized transactional risk insurer, and the payment obligation under the policy is a direct claim against Northfield, not against any seller party. This makes the R&WI policy the second most reliable source of recovery after the escrow.

B. Gap Between Indemnity Cap and R&WI Attachment Point

A favorable structural feature of this transaction's coverage framework is that the indemnity cap ($1,020,000,000) exceeds the R&WI retention ($544,000,000) by a substantial margin ($476,000,000). This means there is no "gap" between the point at which contractual indemnification becomes available and the point at which the R&WI policy attaches. In some transactions, the indemnification cap is set below the R&WI retention, creating a gap in which the buyer has neither contractual indemnification nor insurance coverage — that structural deficiency is not present here.

However, the escrow ($544,000,000) is less than the indemnity cap ($1,020,000,000) by $476,000,000. This means that for losses between $544,000,000 and $1,020,000,000, Solara would need to pursue both sources of recovery simultaneously: the R&WI policy (for losses above the retention) and direct contractual indemnification from rollover participants for any amounts not covered by R&WI or where R&WI exclusions apply. In the event that a particular loss falls within an R&WI policy exclusion — for example, a known matter or an interim period adjustment — Solara would be reliant entirely on direct contractual indemnification for the portion of losses between the escrow and the cap, which brings the collection risk discussed in Section IV.A into play.

C. R&WI Policy Exclusions and Limitations

A detailed review of the anticipated R&WI policy exclusions and limitations is provided in the companion memorandum — C&H Memorandum — R&W Policy Exclusions and Gap Analysis, dated January 20, 2024 — and is not repeated in full here. However, we highlight the key exclusion categories that the deal team should monitor as the transaction progresses toward closing:

Known Matters. The known-loss exclusion is the most significant potential limitation on R&WI coverage. Any matter that Solara knew about at the time of binding (or, in some formulations, at the time of closing) and that constitutes or gives rise to a breach of a seller representation is excluded from coverage. This exclusion operates in conjunction with the no-claims declaration that Solara must deliver at closing. To mitigate the impact of this exclusion, all diligence findings that could constitute known matters should be addressed through one of two mechanisms: (i) disclosure in the disclosure schedules to the Merger Agreement (which would prevent a breach from occurring in the first instance), or (ii) negotiation of specific contractual protections, such as special indemnities or purchase price adjustments, outside the R&WI framework.

Interim Period Matters. Losses arising from events occurring between signing and closing (the "interim period") may be subject to exclusion or limitation under the R&WI policy, depending on the final policy language. The NBI indicates that Northfield is willing to provide coverage for breaches of representations as of both the signing date and the closing date (a "bring-down" structure), but any new matters arising during the interim period that are disclosed to Solara before closing could fall within the known-loss exclusion.

Environmental and Pension Liabilities. Certain environmental liabilities (particularly those arising under CERCLA or analogous statutes) and pension or employee benefit underfunding liabilities may be excluded or subject to sublimits. Given Cloudium's data center infrastructure operations, environmental exposure related to hazardous materials at data center sites should be evaluated.

Transfer Pricing Adjustments. Tax losses arising from transfer pricing adjustments may be excluded or limited, particularly in cross-border contexts. This is relevant given Cloudium's international operations and the transfer pricing structure among its various subsidiaries.

Forward-Looking Financial Projections. Representations regarding financial projections or forecasts are typically excluded from R&WI coverage. The R&WI policy covers representations about historical financial statements and the absence of undisclosed liabilities, but does not cover any representation regarding future performance.

Coverage Breadth. The R&WI policy should cover both fundamental representations (organization, authority, capitalization, no undisclosed liabilities) and operational representations (compliance with laws, tax, contracts, intellectual property, employee benefits, data privacy). The NBI from Northfield indicates a willingness to cover the entirety of Article IV of the Merger Agreement, subject to standard exclusions. This broad coverage scope should be confirmed in the final policy form.

D. Coordination of Claims — Escrow First, Then R&WI

Under the structure of the Merger Agreement and the R&WI policy, Solara must adhere to a specific sequencing of recovery. The R&WI policy is designed as excess coverage above the retention, and the retention is intended to be satisfied primarily through the escrow. Accordingly, Solara must first exhaust the escrow (or demonstrate that escrow funds are unavailable due to prior claims, release, or other circumstances) before submitting a claim to Northfield Assurance under the R&WI policy.

This sequencing requirement has several practical implications:

Preservation of Escrow. Solara should not release escrow funds prematurely. While the Escrow Agreement provides for automatic release at 12 and 18 months (subject to pending claims), Solara should be vigilant about asserting indemnification claims in a timely manner and ensuring that pending claims are properly documented and reserved against the escrow balance. Any escrow funds released to stockholders are no longer available to satisfy the retention, and Solara would need to fund any resulting gap through direct indemnification or self-insurance.

Timing of Claims. Solara should carefully time indemnification claims to preserve the ability to satisfy the retention and access the R&WI policy. In particular, if a significant breach is identified late in the survival period (e.g., in months 14–18 post-closing), Solara should move quickly to assert claims against both the escrow and the R&WI policy before the survival period and policy period expire.

Documentation. All indemnification claims should be meticulously documented, including the nature of the breach, the applicable representation, the quantum of losses, and the calculation of amounts claimed. This documentation will be essential both for the contractual indemnification process (which requires notice to the Stockholder Representative) and for the R&WI claim process (which requires notice to Northfield and submission of supporting documentation in accordance with the policy's claims procedures).

E. Subrogation Considerations

Northfield Assurance's waiver of subrogation rights is an important feature of the R&WI policy that has significant practical implications for the post-closing indemnification process.

Specifically, Northfield waives its subrogation rights against Cloudium and its officers and directors, except in cases of fraud. This means that if Northfield pays a claim to Solara under the R&WI policy, Northfield will not seek recovery from Cloudium's former stockholders, officers, or directors — including, importantly, Jonathan Hargrove (who is serving as CEO of the surviving entity post-closing), Sienna Whitfield (CFO), Nadia Chowdhury (CTO), and Douglas Pemberton (Stockholder Representative and former independent board chair) — unless the underlying breach involved actual fraud by such persons.

This subrogation waiver is market standard for buyer-side R&WI policies and was a significant negotiation point with Cloudium's counsel (Ridgeway Phelps & Sato LLP). Cloudium's board of directors and management team conditioned their support for the transaction, in part, on the availability of this subrogation waiver, which provides them with protection against the risk that an R&WI insurer would pursue claims against them personally following a payout to Solara.

From Solara's perspective, the subrogation waiver has a practical benefit that extends beyond the legal protection it provides to Cloudium's former officers and directors. Because the waiver eliminates the risk of post-closing subrogation actions against Cloudium's management team, it facilitates cooperation from these individuals during the post-closing indemnification process. Key members of Cloudium's management — particularly Hargrove, Whitfield, and Chowdhury — will have operational knowledge that is essential to investigating, documenting, and quantifying potential breaches of representations and warranties. If these individuals feared personal exposure to subrogation claims, they might be reluctant to cooperate fully with Solara's indemnification efforts. The subrogation waiver removes this disincentive and promotes a collaborative approach to claim management.

F. Timing Considerations — Survival Period vs. Policy Period

The interplay between the contractual survival period under the Merger Agreement and the coverage period under the R&WI policy is critical to the overall effectiveness of the coverage framework.

The 18-month contractual survival period for general representations and warranties expires on January 9, 2026 (assuming a July 9, 2024 closing). Claims for breaches of general representations must be asserted — by delivery of written notice to the Stockholder Representative — prior to this date.

The R&WI policy period for general representations should mirror the survival period, expiring on the same date (January 9, 2026). Claims under the R&WI policy must likewise be submitted to Northfield Assurance within the policy period. It is critical that the final policy confirm this alignment; any mismatch between the survival period and the policy period could create a gap in which Solara has a valid contractual indemnification claim but no R&WI coverage (or vice versa).

For fundamental representations (organization, authority, capitalization, and no undisclosed liabilities), the survival period under the Merger Agreement is typically longer — often tied to the applicable statute of limitations plus a specified number of additional days. The R&WI policy is expected to provide a 3-year coverage period for fundamental representations. For tax representations, the Merger Agreement survival period likewise extends beyond the general 18-month period, and the R&WI policy is expected to provide a 6-year coverage period. These extended periods should be confirmed in the final policy form.

Solara's deal team should establish a tickler system or calendar tracking all relevant deadlines, including: (i) the 12-month escrow release date (July 9, 2025); (ii) the retention drop-down date (July 9, 2025); (iii) the 18-month survival period expiration (January 9, 2026); (iv) the second escrow release date (January 9, 2026); and (v) the extended survival periods and policy periods for fundamental and tax representations.

V. Premium and Cost Analysis

The total costs associated with the R&WI policy and related advisory services are summarized in the following table:

Premium Rate. The premium rate of 2.0% on the policy limit ($680,000,000 × 2.0% = $13,600,000) is consistent with current market rates for large-cap technology and software transactions. Market rates for buyer-side R&WI policies in the current environment generally range from 1.5% to 3.0% of the policy limit, depending on deal size, sector, complexity, and the insurer's assessment of the risk profile. The 2.0% rate achieved here reflects the relatively clean diligence profile of Cloudium, the well-established nature of Northfield Assurance's underwriting platform, and the competitive quoting process managed by Peregrine Advisory Group.

Cost as Percentage of Deal Value. The total R&WI-related costs of approximately $14,280,000 represent approximately 0.21% of the $6,800,000,000 deal value. This is within the typical range for R&WI costs in large-cap transactions (generally 0.15% to 0.35% of deal value) and represents a modest cost relative to the significant risk mitigation provided by the $680,000,000 policy limit.

Inclusion in Transaction Expense Budget. The R&WI-related costs are included in the estimated $185,000,000 total transaction expense budget for the Cloudium acquisition, which also covers legal fees, financial advisory fees, financing costs, regulatory filing fees, and other transaction-related expenses. The R&WI costs represent approximately 7.7% of total estimated transaction expenses.

Premium Payment Timing. The premium and broker fee are payable at binding (expected January 19, 2024). Because the premium is payable prior to closing, Solara bears the risk that the transaction does not close and the premium is forfeited. However, this is standard market practice for R&WI policies, and the risk of non-closing is mitigated by the advanced stage of negotiations and the expected signing of the Merger Agreement on January 22, 2024.

VI. Comparison to Deal Economics

To contextualize the indemnification and insurance coverage framework within the broader deal economics, the following table compares key coverage parameters to the overall transaction metrics:

Indemnification Cap. The 15% indemnification cap is at the higher end of market for large-cap private equity acquisitions, where the typical range is 10% to 15% of deal value. This reflects the favorable negotiating position achieved by Solara's deal team and the significance of the representation and warranty package in a transaction of this magnitude. The cap of $1,020,000,000 provides meaningful contractual protection and, when combined with the R&WI policy, offers substantial downside coverage.

Escrow Amount. The 8% escrow is within the typical range for large-cap transactions, where escrows generally range from 5% to 10% of deal value. The 8% escrow was sized to align with the R&WI retention, which is a common structuring approach that ensures the escrow fully funds the self-insured retention under the R&WI policy. This alignment simplifies the recovery mechanics and eliminates the risk that Solara would need to self-fund any portion of the retention.

R&WI Policy Limit. The 10% R&WI policy limit provides meaningful excess coverage above the retention and is consistent with market practice for transactions of this size. For transactions in the $5 billion to $10 billion range, R&WI policy limits typically range from 5% to 15% of deal value, with 10% being the most common benchmark. The $680,000,000 limit represents 1.68x LTM EBITDA, which provides significant protection relative to the target's annual earnings profile.

Theoretical Maximum Aggregate Recovery. The $1,700,000,000 theoretical maximum aggregate recovery (25% of deal value) substantially exceeds the indemnification cap alone and provides a meaningful layer of downside protection for Solara. While a full recovery of $1,700,000,000 would require an extreme loss scenario, the availability of this aggregate coverage demonstrates the robustness of the protection framework and provides comfort to Solara's investment committee and limited partners.

VII. Recommendations

Based on the analysis set forth in this memorandum, we make the following recommendations to the deal team:

A. Confirm Final Policy Terms

We recommend that the deal team verify that the Binder Agreement (expected January 19, 2024) and the final R&WI policy conform to the terms set forth in the NBI. Specifically, the following terms should be confirmed in both the Binder Agreement and the final policy:

(i) $680,000,000 aggregate policy limit;

(ii) $544,000,000 self-insured retention;

(iii) 50% retention drop-down to $272,000,000 at 12 months post-closing, conditioned on no pending claims;

(iv) coverage of all representations and warranties set forth in Article IV of the Merger Agreement;

(v) waiver of subrogation rights against Cloudium and its officers and directors (except in cases of fraud);

(vi) policy period matching the survival periods in the Merger Agreement — 18 months for general representations, 3 years for fundamental representations, and 6 years for tax representations; and

(vii) any changes to the known-loss exclusion, interim period coverage, or other exclusion categories from the terms indicated in the NBI.

Any deviations from the NBI terms should be flagged immediately to the undersigned and to the deal team for evaluation.

B. Coordinate Escrow Release with R&WI Retention Drop-Down

The first escrow release (July 9, 2025) and the retention drop-down are aligned at 12 months post-closing, but they have different triggers. The escrow release under the Escrow Agreement is automatic (less the amount of any pending or unresolved indemnification claims), while the retention drop-down under the R&WI policy requires that there be no pending claims against the policy as of the 12-month anniversary.

We recommend that Solara's deal team actively monitor the 12-month anniversary and evaluate whether any known or anticipated claims should be submitted before the drop-down date. There are two potential strategic considerations:

Preserving the higher retention. In some circumstances, it may be advantageous to submit claims against the R&WI policy before the 12-month anniversary, even if they would have the effect of preventing the retention drop-down. This could be the case if a large claim is identified and the deal team wants to preserve the full $544,000,000 escrow as a funding source for the retention, rather than allowing $272,000,000 to be released.

Allowing the drop-down to occur. In other circumstances, it may be advantageous to defer claim submission (or to resolve pending claims quickly) to allow the drop-down to occur, thereby reducing the retention to $272,000,000 and lowering the threshold at which the R&WI policy responds. This could be the preferred approach if the deal team believes that the risk of material breaches is manageable and that the lower retention will be more beneficial in the event of a subsequent claim.

The optimal strategy will depend on the specific facts and circumstances as they develop post-closing. We recommend that the deal team revisit this analysis at approximately 9 months post-closing (around April 2025) to assess the claim environment and make an informed decision.

C. Establish Claim Protocols

We recommend the development of an internal claim procedures memorandum (to be prepared post-closing, in advance of the closing date) that clearly delineates the following:

(i) the process for identifying and documenting potential breaches of seller representations and warranties, including internal reporting protocols within Solara's portfolio operations team and the surviving entity's management;

(ii) notice requirements under the Merger Agreement — specifically, the form, content, and delivery requirements for indemnification claim notices to the Stockholder Representative (Douglas Pemberton), including the required notice address and the applicable response and dispute resolution timelines under Section 9.04;

(iii) notice requirements under the R&WI policy — specifically, the form, content, and delivery requirements for claims submitted to Northfield Assurance (contact: Patrick Graves, SVP, Transactional Risk), including any specific documentation or proof-of-loss requirements;

(iv) the sequence of recovery — escrow first, then R&WI, then direct indemnification from rollover participants — and the documentation needed to demonstrate exhaustion of prior layers before accessing subsequent layers; and

(v) timing deadlines — a comprehensive calendar of all relevant deadlines, including the survival period expiration, escrow release dates, retention drop-down date, and policy period expiration for each category of representation.

We further recommend coordination with Peregrine Advisory Group LLC (Timothy Gallagher, lead broker) to establish clear R&WI claim submission procedures and to confirm the role of the broker in facilitating claim submissions to Northfield.

D. No-Claims Declaration at Closing

Solara must deliver a no-claims declaration at closing (expected July 9, 2024) certifying that Solara has no knowledge of any breach of seller representations and warranties that would give rise to a claim under the R&WI policy. This declaration is a condition precedent to the effectiveness of the policy and should be treated as a critical closing deliverable.

To ensure that the no-claims declaration can be delivered truthfully and without qualification, all diligence findings that could constitute known matters should be addressed through one or more of the following mechanisms:

(i) disclosure in the disclosure schedules to the Merger Agreement, such that the applicable seller representations are qualified by the disclosed matters and no breach occurs;

(ii) negotiation of specific special indemnities in the Merger Agreement (which sit outside the R&WI framework and are not subject to the general cap or basket) to address identified risks;

(iii) purchase price adjustments to account for identified liabilities or contingencies; or

(iv) in appropriate cases, acceptance of the risk as a known cost of the transaction, with an understanding that such matters will not be eligible for R&WI recovery.

We refer the deal team to the due diligence summary memorandum dated January 5, 2024, which catalogs all material diligence findings to date, and recommend that this memorandum be updated on a rolling basis through closing to ensure comprehensive tracking of known matters. Any new diligence findings identified between signing and closing should be evaluated immediately for their potential impact on the no-claims declaration and the R&WI policy.

E. Consider Supplemental Coverage

At $680,000,000, the R&WI policy provides 10% of deal value in excess coverage above the retention. While this is a market-standard coverage level, it is worth noting that the theoretical maximum aggregate recovery of $1,700,000,000 includes $476,000,000 of Layer 3 recovery that depends on direct contractual claims against sellers — a less reliable source of recovery than either the escrow or the R&WI policy.

If, during the remaining diligence period between signing and closing, the deal team identifies significant risks — for example, material IP ownership disputes, substantial undisclosed tax liabilities, regulatory compliance deficiencies, or pending litigation that could give rise to large losses — the deal team should consider whether an additional layer of excess R&WI coverage should be procured from another carrier. This supplemental coverage would sit above the Northfield policy (i.e., it would attach at $1,224,000,000 — the sum of the Northfield retention and policy limit) and provide an additional layer of insured coverage that does not depend on the solvency or cooperation of the sellers.

The cost of such supplemental coverage would be incremental, but it may be advisable depending on the magnitude and probability of identified risks. Peregrine Advisory Group should be engaged to explore the availability and pricing of supplemental coverage if the deal team determines that it is warranted. Based on preliminary market indications from Peregrine, excess layers for transactions of this size are generally available at premium rates of 1.0% to 1.5% on the excess policy limit.

VIII. Conclusion

The three-layer indemnification and insurance framework negotiated for the Cloudium acquisition — comprising (1) the $544,000,000 indemnity escrow held by Cobalt Trust Company, (2) the $680,000,000 buyer-side R&WI policy issued by Northfield Assurance Ltd., and (3) contractual indemnification rights up to the $1,020,000,000 general cap — provides Solara with a robust and market-standard protection package for a $6,800,000,000 acquisition.

The deliberate alignment of the R&WI retention with the escrow amount, and the 12-month retention drop-do

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP MEMORANDUM
This memorandum is a privileged and confidential attorney work product prepared by Calderwood & Harkness LLP in connection with the representation of Solara Digital Infrastructure LP and its affiliates. This memorandum is protected by the attorney-client privilege and the work product doctrine. Distribution of this memorandum outside of the Calderwood & Harkness deal team and authorized client representatives is strictly prohibited without the prior written consent of the author.
I. Executive Summary
The purpose of this memorandum is to analyze the total indemnification and insurance coverage framework available to Solara Digital Infrastructure Fund VI LP ("Fund VI" or "Solara") in connection with the $6,800,000,000 acquisition of Cloudium Technologies plc ("Cloudium"), and specifically the interplay among three distinct layers of protection that, taken together, constitute Solara's primary risk mitigation architecture for post-closing breaches of seller representations and warranties. These three layers are:
(1) the contractual indemnification provisions under the Merger Agreement (including the indemnity escrow deposited with Cobalt Trust Company);
(2) the buyer-side representation and warranty insurance ("R&WI") policy issued by Northfield Assurance Ltd. (Policy No. NFA-TRI-2024-00487); and
(3) the indemnification obligations of the rollover equity participants (Jonathan Hargrove and Pinnacle Growth Ventures LLC) that survive as direct contractual claims against parties who retain an economic interest in the surviving entity.
Key Conclusion. Solara's aggregate maximum recovery for breaches of seller representations and warranties (excluding fraud, willful breach, and special indemnities) is approximately $1,020,000,000 through the contractual indemnification framework, with an additional $680,000,000 available under the R&WI policy. Because the R&WI retention equals the escrow amount, the practical maximum aggregate recovery for a non-fraud breach of seller representations is the indemnity cap ($1,020,000,000) plus the R&WI limit ($680,000,000), totaling $1,700,000,000, subject to the layering mechanics, policy exclusions, and timing constraints described in detail herein. This $1,700,000,000 figure represents approximately 25% of the total deal value, which is a robust and market-standard coverage profile for a transaction of this magnitude and complexity.
This memorandum further addresses the retention drop-down mechanics embedded in the R&WI policy, whereby the self-insured retention reduces by 50% at the 12-month anniversary of closing (subject to there being no pending claims), and analyzes how this drop-down interacts with the parallel escrow release schedule under the Merger Agreement. As described in Section III.C below, the alignment of the drop-down and escrow release dates creates a streamlined recovery mechanism but also gives rise to certain gap scenarios that Solara's deal team should understand and monitor.
Note Regarding Policy Status. The R&WI policy was bound on January 19, 2024 (one day after the date of this memorandum). This analysis is based on the Non-Binding Indication ("NBI") from Northfield Assurance dated January 14, 2024, and the Binder Agreement is expected to conform to the NBI terms in all material respects. The final policy will be issued at or around the closing of the transaction. To the extent the Binder Agreement or final policy deviates from the NBI terms analyzed herein, this memorandum should be supplemented accordingly.
R&WI Broker. The R&WI process has been managed by Peregrine Advisory Group LLC, with Timothy Gallagher serving as lead broker. The broker fee is $680,000, payable by Solara at binding.
This memorandum is organized as follows: Section II summarizes the key coverage parameters under each of the three recovery layers. Section III provides a detailed analysis of the layering and interplay among these layers, including the retention drop-down mechanics and scenario analysis. Section IV identifies key considerations and risk factors. Section V addresses premium and cost analysis. Section VI compares the coverage parameters to the overall deal economics and market benchmarks. Section VII sets forth our recommendations. Section VIII provides a brief conclusion. Appendix A contains key defined terms and cross-references to related deal documents.
II. Summary of Key Coverage Parameters
This Section provides a detailed summary of the key parameters governing each of the three principal recovery layers: (A) the contractual indemnification provisions under the Merger Agreement, (B) the indemnity escrow fund, and (C) the R&WI policy.
A. Indemnification Provisions Under the Merger Agreement
The Merger Agreement is the Agreement and Plan of Merger, dated as of January 22, 2024 (the anticipated signing date; currently in near-final form as of the Third Revised Draft dated January 17, 2024), among Cloudium Technologies plc, as the target company, Stratos Merger Sub Inc., as the acquisition subsidiary and a wholly owned subsidiary of Fund VI, and Solara Digital Infrastructure Fund VI LP, as the buyer. The indemnification provisions are set forth in Article IX of the Merger Agreement. The key terms are as follows:
General Indemnification Cap. The aggregate liability of the seller indemnifying parties for breaches of seller representations and warranties (other than fraud, willful breach, and special indemnities) is capped at 15% of the deal value, which equals 15% × $6,800,000,000 = $1,020,000,000. This cap applies to the aggregate of all claims made by the buyer indemnified parties (which includes Fund VI, Stratos Merger Sub Inc., and the surviving corporation and their respective affiliates, officers, directors, employees, and agents) against the seller indemnifying parties (which includes the former stockholders of Cloudium, including the rollover equity participants).
Indemnity Basket (Tipping). The indemnifying parties have no obligation to indemnify the buyer indemnified parties for breaches of seller representations and warranties unless and until the aggregate losses incurred by the buyer indemnified parties exceed 0.75% of the deal value, which equals 0.75% × $6,800,000,000 = $51,000,000. The basket is structured as a tipping basket (sometimes referred to as a "first-dollar" basket), meaning that once aggregate losses exceed the $51,000,000 threshold, the indemnifying parties are liable for the full amount of losses from dollar one, and not merely for the excess above $51,000,000. This is a meaningful distinction from a deductible-style basket, as it maximizes recovery once the threshold is crossed.
De Minimis Threshold. Individual claims for losses of less than $500,000 are excluded from the basket calculation entirely and are not recoverable through the contractual indemnification mechanism. This provision prevents the aggregation of nuisance claims and ensures that the indemnification process is reserved for claims of material significance.
Survival Period. The representations and warranties of the sellers set forth in Article IV of the Merger Agreement survive for a period of 18 months following the closing date. Assuming a closing date of July 9, 2024 (which is the current estimated closing date), the survival period for general representations and warranties would expire on January 9, 2026. Claims for breaches of representations and warranties must be asserted (by delivery of a written indemnification claim notice to the Stockholder Representative) prior to the expiration of the applicable survival period. Certain representations and warranties — including fundamental representations (organization, authority, capitalization, and no undisclosed liabilities) and tax representations — survive for a longer period, as set forth in Section 9.01(b) of the Merger Agreement, which typically tracks the applicable statute of limitations plus 60 days.
Special Indemnities (Uncapped). Certain indemnification obligations fall outside the general cap and basket. These include: (i) losses arising from fraud or intentional misrepresentation by the sellers; (ii) losses arising from willful breach of any covenant or agreement contained in the Merger Agreement; (iii) certain specified tax indemnities set forth in Section 9.02(a)(iii) of the Merger Agreement; and (iv) indemnification for certain specified litigation matters identified on Schedule 9.02(a)(iv). These special indemnities are not subject to the general cap, the basket, or the de minimis threshold, and they sit outside the escrow and R&WI analysis described in this memorandum.
Source of Indemnification Recovery. Solara's recovery for indemnifiable losses is available from two primary sources: (i) the indemnity escrow fund held by Cobalt Trust Company (described in Section II.B below), which constitutes the primary source of recovery and the first recourse for all indemnification claims; and (ii) direct claims against the rollover equity participants — specifically, Jonathan Hargrove and Pinnacle Growth Ventures LLC — who, because they are rolling over a portion of their equity consideration into the surviving entity, remain as identifiable and economically motivated counterparties against whom direct claims may be pursued, subject to the overall indemnification cap.
B. Escrow Fund
The escrow fund is established pursuant to the Escrow Agreement (the form of which is attached as Exhibit E to the Merger Agreement), among Fund VI, Cobalt Trust Company (as escrow agent), and the Stockholder Representative. The key terms are as follows:
Escrow Amount. The escrow amount is equal to 8% of the deal value, which equals 8% × $6,800,000,000 = $544,000,000.
Escrow Agent. The escrow agent is Cobalt Trust Company (contact: Laura Ng, VP, Escrow Services), located at 100 Wall Street, New York, NY 10005. Cobalt Trust Company is an established escrow agent with significant experience in large-cap M&A transactions and has served as escrow agent in multiple prior Solara transactions.
Escrow Deposit. The escrow amount is funded at closing from the merger consideration. Specifically, $544,000,000 is withheld from amounts otherwise payable to Cloudium stockholders at closing and deposited directly into the escrow account. The escrow deposit does not represent an additional cost to Solara; it is carved out of the aggregate merger consideration payable to target stockholders.
Escrow Release Schedule. The escrow is released in two tranches, as follows:
First Release. Fifty percent (50%) of the escrow amount (i.e., $272,000,000) is released to the former Cloudium stockholders (through the Stockholder Representative) on the date that is 12 months after the closing date (i.e., July 9, 2025, assuming a July 9, 2024 closing), less the aggregate amount of any pending or unresolved indemnification claims as of such date. "Pending or unresolved indemnification claims" includes any claims for which Fund VI has delivered an indemnification claim notice to the Stockholder Representative that have not been finally resolved (whether by settlement, arbitration, or the expiration of the dispute resolution procedures set forth in Section 9.04 of the Merger Agreement).
Second Release. The remaining escrow balance — which, absent any claims, would be $272,000,000 — is released on the date that is 18 months after the closing date (i.e., January 9, 2026, assuming a July 9, 2024 closing), less the aggregate amount of any pending or unresolved indemnification claims as of such date. This second release date coincides with the expiration of the general survival period.
Stockholder Representative. The Stockholder Representative is Douglas Pemberton, who serves as the independent board chair of Cloudium, appointed under the Stockholder Representative Agreement to act on behalf of the former Cloudium stockholders in all matters relating to post-closing indemnification. Mr. Pemberton is authorized to negotiate, settle, and resolve indemnification claims, to consent to disbursements from the escrow fund, and to take all other actions necessary or appropriate in connection with the indemnification provisions of the Merger Agreement. Communications regarding indemnification claims are directed to Mr. Pemberton (with a copy to Ridgeway Phelps & Sato LLP as counsel to the Stockholder Representative).
C. Representation and Warranty Insurance Policy
The R&WI policy is a buyer-side representation and warranty insurance policy being procured by Fund VI from Northfield Assurance Ltd. The key terms, based on the NBI dated January 14, 2024, are as follows:
Carrier. Northfield Assurance Ltd., 30 St Mary Axe, London EC3A 8BF. Northfield is a well-established transactional risk insurer with a strong track record in large-cap M&A transactions in the technology sector.
Policy Number. NFA-TRI-2024-00487.
Policy Type. Buyer-side representation and warranty insurance. This is a critical structural feature: the policy is procured by and for the benefit of Solara (the buyer), and the insurer's obligation to pay runs directly to Solara. The policy is not a seller-side policy and does not create any payment obligation on the part of Cloudium or its former stockholders.
Policy Limit. $680,000,000, which equals 10% of the deal value. This is the maximum amount that Northfield will pay under the policy in respect of all covered losses in the aggregate.
Retention (Self-Insured Retention / SIR). $544,000,000, which is equal to the escrow amount and represents 8% of the deal value. The retention is the amount of losses that Solara must absorb (or recover from other sources, such as the escrow or direct contractual indemnification) before the R&WI policy responds. This alignment of the retention with the escrow amount is intentional and represents a common structuring approach: the escrow effectively "funds" the retention.
Retention Drop-Down. The retention includes a drop-down feature: 50% of the retention drops down to $272,000,000 after 12 months post-closing (i.e., after July 9, 2025), provided that there are no pending claims against the policy at that time. The mechanics and implications of this drop-down are analyzed in detail in Section III.C below.
Premium. $13,600,000, calculated at a rate of 2.0% on the policy limit ($680,000,000 × 2.0% = $13,600,000). The premium is payable by Solara at binding (i.e., on or about January 19, 2024). The premium is a one-time payment and is non-refundable, regardless of whether the transaction closes or any claims are made under the policy.
Broker Fee. $680,000, payable to Peregrine Advisory Group LLC, which serves as the R&WI broker for this transaction. The broker fee is payable by Solara at binding.
Binding Date. January 19, 2024 (expected). The Binder Agreement is being finalized between Solara and Northfield, with Peregrine Advisory Group acting as intermediary.
Effective Date. The policy becomes effective on the closing date of the transaction (expected July 9, 2024). No coverage is provided prior to closing.
Coverage Scope. The policy covers losses arising from breaches of the seller's representations and warranties as set forth in Article IV of the Merger Agreement. The NBI indicates that Northfield is willing to cover the entirety of the Article IV representations, subject to standard exclusions and the terms of the final policy. The covered representations include, among others, representations regarding organization and existence, authority, capitalization, financial statements, absence of undisclosed liabilities, absence of certain changes, compliance with laws, litigation, tax matters, intellectual property, material contracts, employee benefits, environmental matters, and data privacy.
Survival / Policy Period. The policy period for general representations and warranties is intended to mirror the survival period in the Merger Agreement — i.e., 18 months from the closing date. For certain fundamental representations (organization, authority, capitalization) and tax representations, the policy is expected to provide a longer coverage period, consistent with market practice: typically 3 years for fundamental representations and 6 years for tax representations. The precise policy periods for each category of representation will be confirmed in the final policy form.
Known-Loss Exclusion. The policy contains a standard known-loss exclusion. Losses arising from matters known to the insured (Solara) prior to binding of the policy are excluded from coverage. "Known" matters include those disclosed in the disclosure schedules to the Merger Agreement and any matters identified during Solara's due diligence process that would give rise to a breach of a seller representation or warranty. This exclusion underscores the importance of the no-claims declaration at closing (discussed below) and the careful management of the disclosure schedules.
No-Claims Declaration. As a condition to the effectiveness of the policy at closing, Solara is required to deliver a no-claims declaration certifying that, as of the closing date, Solara has no knowledge of any breach of seller representations and warranties that would give rise to a claim under the policy. This declaration is a standard feature of buyer-side R&WI policies and serves to protect the insurer against adverse selection.
Subrogation. Northfield waives its subrogation rights against Cloudium and its officers and directors, except in cases of fraud. This means that if Northfield pays a claim to Solara under the R&WI policy, Northfield will not seek recovery from Cloudium's former stockholders, officers, or directors (other than in cases of fraud by such persons). This is a market-standard provision and is discussed further in Section IV.E below.
Underwriter Contact. The primary underwriter contact at Northfield is Patrick Graves, SVP, Transactional Risk, Northfield Assurance Ltd.
III. Layering and Interplay Analysis
This Section provides a detailed analysis of the layering of Solara's three recovery layers, the interplay among them, and the mechanics of the retention drop-down feature in the R&WI policy.
A. Diagram of Coverage Layers (Described Textually)
Solara's indemnification and insurance coverage framework for breaches of seller representations and warranties (other than fraud, willful breach, and special indemnities) operates in three sequential layers. Each layer is described below, from first recourse to last.
Layer 1 — Contractual Indemnification / Escrow (First Dollar through $544,000,000). Solara's first recourse for any breach of seller representations and warranties is to the indemnity escrow fund. Claims are submitted through the Stockholder Representative (Douglas Pemberton) pursuant to the indemnification claim procedures set forth in Section 9.04 of the Merger Agreement, and recoveries are drawn from the $544,000,000 escrow held by Cobalt Trust Company. This layer represents the primary and most accessible source of recovery, as the escrow is funded with cash at closing and is subject to Solara's claims without the need to pursue individual stockholders. In parallel with or in addition to the escrow, Solara may also pursue direct indemnification from the rollover equity participants (Jonathan Hargrove and Pinnacle Growth Ventures LLC), who have contractual indemnification obligations under the Merger Agreement up to the general indemnity cap of $1,020,000,000. However, as a practical matter, the escrow is the first port of call.
Layer 2 — R&WI Policy (Excess Above $544,000,000 Retention, up to $680,000,000 Policy Limit). Once Solara's covered losses exceed the $544,000,000 retention (i.e., after the escrow is exhausted or losses exceed the escrow amount), the R&WI policy issued by Northfield Assurance responds for the next $680,000,000 of covered losses. The R&WI policy is excess coverage: it does not respond until the retention is satisfied. The total of retention plus policy limit is $544,000,000 + $680,000,000 = $1,224,000,000. This represents the maximum amount recoverable through the combined escrow and R&WI structure (without considering additional contractual indemnification above the escrow).
Layer 3 — Contractual Indemnification Above R&WI Policy Limit (up to the $1,020,000,000 Cap). To the extent that Solara's losses exceed $1,224,000,000, Solara may continue to pursue direct contractual indemnification claims against the rollover participants and other indemnifying stockholders, subject to the overall $1,020,000,000 indemnification cap. Because the escrow ($544,000,000) is a subset of the overall indemnity cap ($1,020,000,000), the remaining contractual indemnification headroom above the escrow is $1,020,000,000 − $544,000,000 = $476,000,000. This third layer is the least "bankable" source of recovery, as it requires pursuing direct claims against identified counterparties.
Note on Overlap and Aggregate Recovery. The indemnification cap of $1,020,000,000 is the maximum contractual recovery from the sellers (inclusive of the escrow). The R&WI policy sits above this contractual recovery — it is a buyer-side policy, meaning the insurer pays Solara directly; it is not a payment obligation of the sellers and does not count against the indemnification cap. Therefore, the theoretical maximum aggregate recovery for a non-fraud breach is the sum of the indemnification cap ($1,020,000,000) plus the R&WI policy limit ($680,000,000) = $1,700,000,000, provided that:
(a) the retention is satisfied (through escrow claims and/or direct indemnification from sellers);
(b) the loss is a covered loss under the R&WI policy (i.e., it arises from a breach of an Article IV representation and warranty and does not fall within a policy exclusion);
(c) the loss exceeds the $51,000,000 tipping basket (for purposes of contractual indemnification recovery); and
(d) the claims are submitted within the applicable survival periods and policy periods.
It is important to understand that the $1,700,000,000 figure represents the theoretical aggregate maximum across all three layers operating simultaneously. In practice, a loss scenario in which Solara exhausts all three layers would require a catastrophic breach resulting in more than $1.2 billion in covered losses, which, while not inconceivable in a transaction of this size, would represent a highly adverse outcome.
B. Basket Interaction
The interaction between the contractual indemnification basket and the R&WI retention merits specific attention, as these two thresholds operate in parallel but serve distinct functions.
The $51,000,000 tipping basket applies to contractual indemnification claims under the Merger Agreement. No recovery is available under the contractual indemnification provisions until aggregate losses exceed $51,000,000, at which point the sellers are liable from dollar one. Under the R&WI policy, the retention of $544,000,000 functions as the relevant threshold. Because the retention ($544,000,000) substantially exceeds the basket ($51,000,000), the R&WI retention effectively supersedes the basket in the context of the R&WI policy — any loss that satisfies the retention necessarily exceeds the basket by a wide margin.
The practical implications of this interaction are as follows:
For losses below $51,000,000: Neither contractual indemnification (basket not met) nor R&WI (retention not met) provides any recovery. Solara bears these losses entirely. However, individual claims below $500,000 do not count toward the basket calculation, so only claims of $500,000 or more are aggregated for purposes of determining whether the $51,000,000 threshold has been crossed.
For losses between $51,000,000 and $544,000,000: The tipping basket is satisfied, and Solara recovers from the escrow fund through the contractual indemnification mechanism. The R&WI policy does not respond because the retention has not been satisfied. Recovery from the escrow is available for the full amount of losses from dollar one (because the basket is a tipping basket, not a deductible).
For losses exceeding $544,000,000: The retention is satisfied, and the R&WI policy responds for covered losses in excess of the retention, up to the $680,000,000 policy limit. Contractual indemnification from the escrow and direct claims against sellers may also be pursued concurrently, subject to the $1,020,000,000 cap.
De Minimis Claims. Individual claims below $500,000 are excluded from the basket calculation entirely. This means that a series of small claims, each below $500,000, cannot be aggregated to reach the $51,000,000 basket threshold. However, once the basket is satisfied by larger claims, de minimis claims remain excluded — they are not recoverable regardless of whether the basket has been met. This provision should be taken into account in evaluating the recoverability of smaller post-closing losses.
C. Retention Drop-Down Mechanics
One of the most significant features of the R&WI policy structure for this transaction is the retention drop-down mechanism, which reduces the self-insured retention by 50% at the 12-month anniversary of closing, subject to certain conditions. The mechanics and practical implications are as follows:
Initial Retention (Closing through 12 Months Post-Closing). From the closing date through the 12-month anniversary of closing, the retention is $544,000,000. During this period, the R&WI policy responds only to losses in excess of $544,000,000.
Post-12-Month Retention. If no claims are pending against the R&WI policy as of the 12-month anniversary of closing (i.e., July 9, 2025, assuming a July 9, 2024 closing), the retention drops by 50% to $272,000,000. "Pending claims" for this purpose means any claims that have been formally submitted to Northfield Assurance under the notice provisions of the policy and that remain unresolved. Claims submitted under the Merger Agreement to the Stockholder Representative (but not to Northfield) should not, in our view, constitute "pending claims" against the policy for purposes of the drop-down trigger, although this should be confirmed in the final policy language.
Practical Significance. The drop-down is deliberately aligned with the first escrow release date. At 12 months post-closing, $272,000,000 of the escrow is released to former stockholders (assuming no pending claims under the Merger Agreement), leaving a remaining escrow balance of $272,000,000. If the retention simultaneously drops to $272,000,000, the remaining escrow continues to match — and effectively fund — the reduced retention. This alignment ensures that, at all times during the survival period, the escrow balance is sufficient to satisfy the applicable retention, thereby preserving Solara's ability to access the R&WI policy without self-funding any portion of the retention.
Scenario Analysis. To illustrate the practical operation of the drop-down, we consider three scenarios:
Scenario 1 — No Claims at 12 Months. This is the baseline scenario. At the 12-month anniversary (July 9, 2025), no indemnification claims have been asserted under either the Merger Agreement or the R&WI policy. The following occurs: (i) the first escrow tranche of $272,000,000 is released to the former Cloudium stockholders through the Stockholder Representative; (ii) the remaining escrow balance is $272,000,000; (iii) the R&WI retention drops to $272,000,000. From that point forward (i.e., for any claims brought between 12 and 18 months post-closing), the R&WI policy would respond for losses in excess of $272,000,000 (rather than $544,000,000), up to the $680,000,000 policy limit. The remaining escrow of $272,000,000 continues to fund the retention. This is the most favorable scenario for Solara, as it maximizes the R&WI coverage available during the second half of the survival period.
Scenario 2 — Pending Claim at 12 Months. At the 12-month anniversary, one or more indemnification claims have been asserted and remain pending. In this scenario: (i) the retention remains at $544,000,000 (the drop-down does not occur because there are pending claims against the policy); (ii) the release of the first escrow tranche is reduced by the amount of the pending claims — for example, if a claim for $75,000,000 is pending, only $197,000,000 of the first tranche ($272,000,000 − $75,000,000) is released; (iii) the remaining escrow balance is correspondingly higher than $272,000,000; (iv) the drop-down does not occur until the pending claims are fully resolved and there are no longer any pending claims against the policy. The practical consequence is that Solara must satisfy the full $544,000,000 retention for any new claims brought while the prior claims remain pending. This is less favorable but ensures that the full retention backstop remains in place while claims are being resolved.
Scenario 3 — Claim Made and Paid Before 12 Months. A claim was made within the first 12 months, was fully resolved and paid from the escrow before the 12-month anniversary, and no further claims are pending as of the 12-month date. In this scenario: (i) the retention should still drop to $272,000,000, because there are no "pending" claims against the policy as of the drop-down date (the prior claim was fully resolved); (ii) however, the escrow balance will have been reduced by the amount of the paid claim — for example, if $100,000,000 was paid from escrow, the remaining escrow balance at the 12-month mark (before the first tranche release) is $444,000,000, and after the release of $272,000,000, the remaining escrow is only $172,000,000. This remaining balance of $172,000,000 is $100,000,000 less than the reduced retention of $272,000,000. The gap between the reduced escrow balance ($172,000,000) and the reduced retention ($272,000,000) creates a potential shortfall of $100,000,000 that Solara would need to self-fund or recover via direct indemnification from the rollover participants in order to satisfy the retention and access the R&WI policy for any subsequent claim. This scenario illustrates a structural risk that Solara should understand: prior escrow draws can erode the escrow's ability to fund the post-drop-down retention, and Solara may need to look to direct contractual indemnification (or self-insurance) to bridge any resulting gap.
We recommend that the deal team discuss Scenario 3 with Peregrine Advisory Group and Northfield Assurance to confirm the policy's treatment of the retention in this circumstance. Specifically, we should confirm whether the retention drop-down is conditioned solely on the absence of pending claims (in which case Scenario 3 works as described above) or whether it is also conditioned on the escrow balance meeting or exceeding the reduced retention (in which case the drop-down might not occur in Scenario 3). The NBI language is ambiguous on this point and should be clarified in the final policy.
D. Total Aggregate Recovery — Summary Table
The following table summarizes Solara's maximum aggregate recovery for a non-fraud breach of seller representations and warranties across all three recovery layers:
Important Qualifications. The $1,700,000,000 figure represents the theoretical maximum aggregate recovery. In practice, actual recovery would depend on a number of factors, including:
(a) the nature and quantum of losses, including whether the losses are direct losses, consequential damages, diminution in value, or some other measure;
(b) whether the R&WI policy covers the particular representation that was breached — certain representations may be subject to policy exclusions or sublimits;
(c) the application of policy exclusions, including the known-loss exclusion, interim period exclusions, and any other standard or negotiated exclusions;
(d) the solvency and willingness of the indemnifying parties (particularly the rollover participants) to pay amounts above the escrow — direct indemnification claims against Hargrove and Pinnacle are subject to collection risk, notwithstanding their ongoing economic interest in the surviving entity;
(e) the timing of claims relative to the survival period, escrow release schedule, and policy period, as claims made after the expiration of the applicable period are unrecoverable; and
(f) any applicable mitigation obligations, contribution rights, or other limitations on recovery under the Merger Agreement, the Escrow Agreement, or the R&WI policy.
IV. Key Considerations and Risk Factors
This Section identifies and discusses the principal risk factors and practical considerations relevant to Solara's indemnification and insurance coverage framework.
A. Escrow as Sole "Assured" Recovery Source
The escrow fund held by Cobalt Trust Company is the primary and, in many respects, the only "bankable" source of indemnification recovery available to Solara for post-closing breaches of seller representations and warranties. The escrow is funded with cash at closing, held by a third-party escrow agent, and subject to release only upon satisfaction of the conditions set forth in the Escrow Agreement. Solara has the contractual right to submit claims against the escrow through the procedures set forth in the Merger Agreement, and disputed claims are resolved through the dispute resolution mechanism in Section 9.04. This makes the escrow a highly reliable source of recovery, subject only to the risk that the aggregate amount of valid claims exceeds the escrow balance.
Direct indemnification claims against former stockholders of Cloudium (other than the rollover participants) will be largely impractical to pursue after closing. Upon consummation of the merger, the former stockholders will have received their merger consideration (net of the escrow withholding), and they will have no continuing relationship with the surviving entity or with Solara. Many stockholders will be institutional investors, funds, or individuals who will have dispersed their merger proceeds. Pursuing individual collection actions against hundreds or thousands of former stockholders — each liable only for their pro rata share of any indemnification obligation — is neither economically viable nor practically feasible.
The rollover equity participants — Jonathan Hargrove (rolling over approximately $142,814,544 in equity consideration) and Pinnacle Growth Ventures LLC (rolling over approximately $473,241,408 in equity consideration) — present a different dynamic. Because Hargrove and Pinnacle retain a meaningful economic interest in the surviving entity post-closing, they have ongoing incentives to cooperate with Solara and to resolve indemnification claims constructively. Their continued involvement in the business also makes them more amenable to direct claims, as Solara has leverage through the ongoing governance and operational relationship. However, their individual exposure is limited by the general indemnification cap ($1,020,000,000) and, as a practical matter, by their respective rollover amounts. While the Merger Agreement does not explicitly limit each rollover participant's liability to their rollover amount, pursuing claims against Hargrove or Pinnacle for amounts substantially in excess of their rollover equity would raise significant practical and relational concerns.
The R&WI policy is therefore the critical backstop above the escrow for any material claim. If Solara suffers a breach of seller representations resulting in losses in excess of $544,000,000, the R&WI policy provides up to $680,000,000 of additional recovery that does not depend on the willingness or ability of any counterparty to pay. The insurer, Northfield Assurance, is a well-capitalized transactional risk insurer, and the payment obligation under the policy is a direct claim against Northfield, not against any seller party. This makes the R&WI policy the second most reliable source of recovery after the escrow.
B. Gap Between Indemnity Cap and R&WI Attachment Point
A favorable structural feature of this transaction's coverage framework is that the indemnity cap ($1,020,000,000) exceeds the R&WI retention ($544,000,000) by a substantial margin ($476,000,000). This means there is no "gap" between the point at which contractual indemnification becomes available and the point at which the R&WI policy attaches. In some transactions, the indemnification cap is set below the R&WI retention, creating a gap in which the buyer has neither contractual indemnification nor insurance coverage — that structural deficiency is not present here.
However, the escrow ($544,000,000) is less than the indemnity cap ($1,020,000,000) by $476,000,000. This means that for losses between $544,000,000 and $1,020,000,000, Solara would need to pursue both sources of recovery simultaneously: the R&WI policy (for losses above the retention) and direct contractual indemnification from rollover participants for any amounts not covered by R&WI or where R&WI exclusions apply. In the event that a particular loss falls within an R&WI policy exclusion — for example, a known matter or an interim period adjustment — Solara would be reliant entirely on direct contractual indemnification for the portion of losses between the escrow and the cap, which brings the collection risk discussed in Section IV.A into play.
C. R&WI Policy Exclusions and Limitations
A detailed review of the anticipated R&WI policy exclusions and limitations is provided in the companion memorandum — C&H Memorandum — R&W Policy Exclusions and Gap Analysis, dated January 20, 2024 — and is not repeated in full here. However, we highlight the key exclusion categories that the deal team should monitor as the transaction progresses toward closing:
Known Matters. The known-loss exclusion is the most significant potential limitation on R&WI coverage. Any matter that Solara knew about at the time of binding (or, in some formulations, at the time of closing) and that constitutes or gives rise to a breach of a seller representation is excluded from coverage. This exclusion operates in conjunction with the no-claims declaration that Solara must deliver at closing. To mitigate the impact of this exclusion, all diligence findings that could constitute known matters should be addressed through one of two mechanisms: (i) disclosure in the disclosure schedules to the Merger Agreement (which would prevent a breach from occurring in the first instance), or (ii) negotiation of specific contractual protections, such as special indemnities or purchase price adjustments, outside the R&WI framework.
Interim Period Matters. Losses arising from events occurring between signing and closing (the "interim period") may be subject to exclusion or limitation under the R&WI policy, depending on the final policy language. The NBI indicates that Northfield is willing to provide coverage for breaches of representations as of both the signing date and the closing date (a "bring-down" structure), but any new matters arising during the interim period that are disclosed to Solara before closing could fall within the known-loss exclusion.
Environmental and Pension Liabilities. Certain environmental liabilities (particularly those arising under CERCLA or analogous statutes) and pension or employee benefit underfunding liabilities may be excluded or subject to sublimits. Given Cloudium's data center infrastructure operations, environmental exposure related to hazardous materials at data center sites should be evaluated.
Transfer Pricing Adjustments. Tax losses arising from transfer pricing adjustments may be excluded or limited, particularly in cross-border contexts. This is relevant given Cloudium's international operations and the transfer pricing structure among its various subsidiaries.
Forward-Looking Financial Projections. Representations regarding financial projections or forecasts are typically excluded from R&WI coverage. The R&WI policy covers representations about historical financial statements and the absence of undisclosed liabilities, but does not cover any representation regarding future performance.
Coverage Breadth. The R&WI policy should cover both fundamental representations (organization, authority, capitalization, no undisclosed liabilities) and operational representations (compliance with laws, tax, contracts, intellectual property, employee benefits, data privacy). The NBI from Northfield indicates a willingness to cover the entirety of Article IV of the Merger Agreement, subject to standard exclusions. This broad coverage scope should be confirmed in the final policy form.
D. Coordination of Claims — Escrow First, Then R&WI
Under the structure of the Merger Agreement and the R&WI policy, Solara must adhere to a specific sequencing of recovery. The R&WI policy is designed as excess coverage above the retention, and the retention is intended to be satisfied primarily through the escrow. Accordingly, Solara must first exhaust the escrow (or demonstrate that escrow funds are unavailable due to prior claims, release, or other circumstances) before submitting a claim to Northfield Assurance under the R&WI policy.
This sequencing requirement has several practical implications:
Preservation of Escrow. Solara should not release escrow funds prematurely. While the Escrow Agreement provides for automatic release at 12 and 18 months (subject to pending claims), Solara should be vigilant about asserting indemnification claims in a timely manner and ensuring that pending claims are properly documented and reserved against the escrow balance. Any escrow funds released to stockholders are no longer available to satisfy the retention, and Solara would need to fund any resulting gap through direct indemnification or self-insurance.
Timing of Claims. Solara should carefully time indemnification claims to preserve the ability to satisfy the retention and access the R&WI policy. In particular, if a significant breach is identified late in the survival period (e.g., in months 14–18 post-closing), Solara should move quickly to assert claims against both the escrow and the R&WI policy before the survival period and policy period expire.
Documentation. All indemnification claims should be meticulously documented, including the nature of the breach, the applicable representation, the quantum of losses, and the calculation of amounts claimed. This documentation will be essential both for the contractual indemnification process (which requires notice to the Stockholder Representative) and for the R&WI claim process (which requires notice to Northfield and submission of supporting documentation in accordance with the policy's claims procedures).
E. Subrogation Considerations
Northfield Assurance's waiver of subrogation rights is an important feature of the R&WI policy that has significant practical implications for the post-closing indemnification process.
Specifically, Northfield waives its subrogation rights against Cloudium and its officers and directors, except in cases of fraud. This means that if Northfield pays a claim to Solara under the R&WI policy, Northfield will not seek recovery from Cloudium's former stockholders, officers, or directors — including, importantly, Jonathan Hargrove (who is serving as CEO of the surviving entity post-closing), Sienna Whitfield (CFO), Nadia Chowdhury (CTO), and Douglas Pemberton (Stockholder Representative and former independent board chair) — unless the underlying breach involved actual fraud by such persons.
This subrogation waiver is market standard for buyer-side R&WI policies and was a significant negotiation point with Cloudium's counsel (Ridgeway Phelps & Sato LLP). Cloudium's board of directors and management team conditioned their support for the transaction, in part, on the availability of this subrogation waiver, which provides them with protection against the risk that an R&WI insurer would pursue claims against them personally following a payout to Solara.
From Solara's perspective, the subrogation waiver has a practical benefit that extends beyond the legal protection it provides to Cloudium's former officers and directors. Because the waiver eliminates the risk of post-closing subrogation actions against Cloudium's management team, it facilitates cooperation from these individuals during the post-closing indemnification process. Key members of Cloudium's management — particularly Hargrove, Whitfield, and Chowdhury — will have operational knowledge that is essential to investigating, documenting, and quantifying potential breaches of representations and warranties. If these individuals feared personal exposure to subrogation claims, they might be reluctant to cooperate fully with Solara's indemnification efforts. The subrogation waiver removes this disincentive and promotes a collaborative approach to claim management.
F. Timing Considerations — Survival Period vs. Policy Period
The interplay between the contractual survival period under the Merger Agreement and the coverage period under the R&WI policy is critical to the overall effectiveness of the coverage framework.
The 18-month contractual survival period for general representations and warranties expires on January 9, 2026 (assuming a July 9, 2024 closing). Claims for breaches of general representations must be asserted — by delivery of written notice to the Stockholder Representative — prior to this date.
The R&WI policy period for general representations should mirror the survival period, expiring on the same date (January 9, 2026). Claims under the R&WI policy must likewise be submitted to Northfield Assurance within the policy period. It is critical that the final policy confirm this alignment; any mismatch between the survival period and the policy period could create a gap in which Solara has a valid contractual indemnification claim but no R&WI coverage (or vice versa).
For fundamental representations (organization, authority, capitalization, and no undisclosed liabilities), the survival period under the Merger Agreement is typically longer — often tied to the applicable statute of limitations plus a specified number of additional days. The R&WI policy is expected to provide a 3-year coverage period for fundamental representations. For tax representations, the Merger Agreement survival period likewise extends beyond the general 18-month period, and the R&WI policy is expected to provide a 6-year coverage period. These extended periods should be confirmed in the final policy form.
Solara's deal team should establish a tickler system or calendar tracking all relevant deadlines, including: (i) the 12-month escrow release date (July 9, 2025); (ii) the retention drop-down date (July 9, 2025); (iii) the 18-month survival period expiration (January 9, 2026); (iv) the second escrow release date (January 9, 2026); and (v) the extended survival periods and policy periods for fundamental and tax representations.
V. Premium and Cost Analysis
The total costs associated with the R&WI policy and related advisory services are summarized in the following table:
Premium Rate. The premium rate of 2.0% on the policy limit ($680,000,000 × 2.0% = $13,600,000) is consistent with current market rates for large-cap technology and software transactions. Market rates for buyer-side R&WI policies in the current environment generally range from 1.5% to 3.0% of the policy limit, depending on deal size, sector, complexity, and the insurer's assessment of the risk profile. The 2.0% rate achieved here reflects the relatively clean diligence profile of Cloudium, the well-established nature of Northfield Assurance's underwriting platform, and the competitive quoting process managed by Peregrine Advisory Group.
Cost as Percentage of Deal Value. The total R&WI-related costs of approximately $14,280,000 represent approximately 0.21% of the $6,800,000,000 deal value. This is within the typical range for R&WI costs in large-cap transactions (generally 0.15% to 0.35% of deal value) and represents a modest cost relative to the significant risk mitigation provided by the $680,000,000 policy limit.
Inclusion in Transaction Expense Budget. The R&WI-related costs are included in the estimated $185,000,000 total transaction expense budget for the Cloudium acquisition, which also covers legal fees, financial advisory fees, financing costs, regulatory filing fees, and other transaction-related expenses. The R&WI costs represent approximately 7.7% of total estimated transaction expenses.
Premium Payment Timing. The premium and broker fee are payable at binding (expected January 19, 2024). Because the premium is payable prior to closing, Solara bears the risk that the transaction does not close and the premium is forfeited. However, this is standard market practice for R&WI policies, and the risk of non-closing is mitigated by the advanced stage of negotiations and the expected signing of the Merger Agreement on January 22, 2024.
VI. Comparison to Deal Economics
To contextualize the indemnification and insurance coverage framework within the broader deal economics, the following table compares key coverage parameters to the overall transaction metrics:
Indemnification Cap. The 15% indemnification cap is at the higher end of market for large-cap private equity acquisitions, where the typical range is 10% to 15% of deal value. This reflects the favorable negotiating position achieved by Solara's deal team and the significance of the representation and warranty package in a transaction of this magnitude. The cap of $1,020,000,000 provides meaningful contractual protection and, when combined with the R&WI policy, offers substantial downside coverage.
Escrow Amount. The 8% escrow is within the typical range for large-cap transactions, where escrows generally range from 5% to 10% of deal value. The 8% escrow was sized to align with the R&WI retention, which is a common structuring approach that ensures the escrow fully funds the self-insured retention under the R&WI policy. This alignment simplifies the recovery mechanics and eliminates the risk that Solara would need to self-fund any portion of the retention.
R&WI Policy Limit. The 10% R&WI policy limit provides meaningful excess coverage above the retention and is consistent with market practice for transactions of this size. For transactions in the $5 billion to $10 billion range, R&WI policy limits typically range from 5% to 15% of deal value, with 10% being the most common benchmark. The $680,000,000 limit represents 1.68x LTM EBITDA, which provides significant protection relative to the target's annual earnings profile.
Theoretical Maximum Aggregate Recovery. The $1,700,000,000 theoretical maximum aggregate recovery (25% of deal value) substantially exceeds the indemnification cap alone and provides a meaningful layer of downside protection for Solara. While a full recovery of $1,700,000,000 would require an extreme loss scenario, the availability of this aggregate coverage demonstrates the robustness of the protection framework and provides comfort to Solara's investment committee and limited partners.
VII. Recommendations
Based on the analysis set forth in this memorandum, we make the following recommendations to the deal team:
A. Confirm Final Policy Terms
We recommend that the deal team verify that the Binder Agreement (expected January 19, 2024) and the final R&WI policy conform to the terms set forth in the NBI. Specifically, the following terms should be confirmed in both the Binder Agreement and the final policy:
(i) $680,000,000 aggregate policy limit;
(ii) $544,000,000 self-insured retention;
(iii) 50% retention drop-down to $272,000,000 at 12 months post-closing, conditioned on no pending claims;
(iv) coverage of all representations and warranties set forth in Article IV of the Merger Agreement;
(v) waiver of subrogation rights against Cloudium and its officers and directors (except in cases of fraud);
(vi) policy period matching the survival periods in the Merger Agreement — 18 months for general representations, 3 years for fundamental representations, and 6 years for tax representations; and
(vii) any changes to the known-loss exclusion, interim period coverage, or other exclusion categories from the terms indicated in the NBI.
Any deviations from the NBI terms should be flagged immediately to the undersigned and to the deal team for evaluation.
B. Coordinate Escrow Release with R&WI Retention Drop-Down
The first escrow release (July 9, 2025) and the retention drop-down are aligned at 12 months post-closing, but they have different triggers. The escrow release under the Escrow Agreement is automatic (less the amount of any pending or unresolved indemnification claims), while the retention drop-down under the R&WI policy requires that there be no pending claims against the policy as of the 12-month anniversary.
We recommend that Solara's deal team actively monitor the 12-month anniversary and evaluate whether any known or anticipated claims should be submitted before the drop-down date. There are two potential strategic considerations:
Preserving the higher retention. In some circumstances, it may be advantageous to submit claims against the R&WI policy before the 12-month anniversary, even if they would have the effect of preventing the retention drop-down. This could be the case if a large claim is identified and the deal team wants to preserve the full $544,000,000 escrow as a funding source for the retention, rather than allowing $272,000,000 to be released.
Allowing the drop-down to occur. In other circumstances, it may be advantageous to defer claim submission (or to resolve pending claims quickly) to allow the drop-down to occur, thereby reducing the retention to $272,000,000 and lowering the threshold at which the R&WI policy responds. This could be the preferred approach if the deal team believes that the risk of material breaches is manageable and that the lower retention will be more beneficial in the event of a subsequent claim.
The optimal strategy will depend on the specific facts and circumstances as they develop post-closing. We recommend that the deal team revisit this analysis at approximately 9 months post-closing (around April 2025) to assess the claim environment and make an informed decision.
C. Establish Claim Protocols
We recommend the development of an internal claim procedures memorandum (to be prepared post-closing, in advance of the closing date) that clearly delineates the following:
(i) the process for identifying and documenting potential breaches of seller representations and warranties, including internal reporting protocols within Solara's portfolio operations team and the surviving entity's management;
(ii) notice requirements under the Merger Agreement — specifically, the form, content, and delivery requirements for indemnification claim notices to the Stockholder Representative (Douglas Pemberton), including the required notice address and the applicable response and dispute resolution timelines under Section 9.04;
(iii) notice requirements under the R&WI policy — specifically, the form, content, and delivery requirements for claims submitted to Northfield Assurance (contact: Patrick Graves, SVP, Transactional Risk), including any specific documentation or proof-of-loss requirements;
(iv) the sequence of recovery — escrow first, then R&WI, then direct indemnification from rollover participants — and the documentation needed to demonstrate exhaustion of prior layers before accessing subsequent layers; and
(v) timing deadlines — a comprehensive calendar of all relevant deadlines, including the survival period expiration, escrow release dates, retention drop-down date, and policy period expiration for each category of representation.
We further recommend coordination with Peregrine Advisory Group LLC (Timothy Gallagher, lead broker) to establish clear R&WI claim submission procedures and to confirm the role of the broker in facilitating claim submissions to Northfield.
D. No-Claims Declaration at Closing
Solara must deliver a no-claims declaration at closing (expected July 9, 2024) certifying that Solara has no knowledge of any breach of seller representations and warranties that would give rise to a claim under the R&WI policy. This declaration is a condition precedent to the effectiveness of the policy and should be treated as a critical closing deliverable.
To ensure that the no-claims declaration can be delivered truthfully and without qualification, all diligence findings that could constitute known matters should be addressed through one or more of the following mechanisms:
(i) disclosure in the disclosure schedules to the Merger Agreement, such that the applicable seller representations are qualified by the disclosed matters and no breach occurs;
(ii) negotiation of specific special indemnities in the Merger Agreement (which sit outside the R&WI framework and are not subject to the general cap or basket) to address identified risks;
(iii) purchase price adjustments to account for identified liabilities or contingencies; or
(iv) in appropriate cases, acceptance of the risk as a known cost of the transaction, with an understanding that such matters will not be eligible for R&WI recovery.
We refer the deal team to the due diligence summary memorandum dated January 5, 2024, which catalogs all material diligence findings to date, and recommend that this memorandum be updated on a rolling basis through closing to ensure comprehensive tracking of known matters. Any new diligence findings identified between signing and closing should be evaluated immediately for their potential impact on the no-claims declaration and the R&WI policy.
E. Consider Supplemental Coverage
At $680,000,000, the R&WI policy provides 10% of deal value in excess coverage above the retention. While this is a market-standard coverage level, it is worth noting that the theoretical maximum aggregate recovery of $1,700,000,000 includes $476,000,000 of Layer 3 recovery that depends on direct contractual claims against sellers — a less reliable source of recovery than either the escrow or the R&WI policy.
If, during the remaining diligence period between signing and closing, the deal team identifies significant risks — for example, material IP ownership disputes, substantial undisclosed tax liabilities, regulatory compliance deficiencies, or pending litigation that could give rise to large losses — the deal team should consider whether an additional layer of excess R&WI coverage should be procured from another carrier. This supplemental coverage would sit above the Northfield policy (i.e., it would attach at $1,224,000,000 — the sum of the Northfield retention and policy limit) and provide an additional layer of insured coverage that does not depend on the solvency or cooperation of the sellers.
The cost of such supplemental coverage would be incremental, but it may be advisable depending on the magnitude and probability of identified risks. Peregrine Advisory Group should be engaged to explore the availability and pricing of supplemental coverage if the deal team determines that it is warranted. Based on preliminary market indications from Peregrine, excess layers for transactions of this size are generally available at premium rates of 1.0% to 1.5% on the excess policy limit.
VIII. Conclusion
The three-layer indemnification and insurance framework negotiated for the Cloudium acquisition — comprising (1) the $544,000,000 indemnity escrow held by Cobalt Trust Company, (2) the $680,000,000 buyer-side R&WI policy issued by Northfield Assurance Ltd., and (3) contractual indemnification rights up to the $1,020,000,000 general cap — provides Solara with a robust and market-standard protection package for a $6,800,000,000 acquisition.
The deliberate alignment of the R&WI retention with the escrow amount, and the 12-month retention drop-do

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