PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, New York 10022
April 12, 2024
MEMORANDUM
This memorandum sets forth Calderwood & Harkness LLP's final comments on the draft Definitive Proxy Statement (the "Proxy Statement" or "Proxy") prepared by Ridgeway Phelps & Sato LLP (Catherine Answorth / Alistair Fenn) on behalf of Cloudium Technologies plc ("Cloudium" or the "Company"). Comments are organized by section of the Proxy Statement. The Proxy is expected to be filed with the U.S. Securities and Exchange Commission (the "SEC") on or about April 15, 2024, with the special meeting of stockholders (the "Special Meeting") scheduled for May 20, 2024. These comments follow and supplement our earlier comments on the Preliminary Proxy Statement dated March 25, 2024 (the "Preliminary Proxy Comments"), and should be read in conjunction with that prior memorandum.
Unless otherwise indicated, capitalized terms used herein have the meanings ascribed to them in the draft Proxy Statement or the Agreement and Plan of Merger dated January 22, 2024 (the "Merger Agreement"), among Cloudium Technologies plc, Stratos Merger Sub Inc. ("Merger Sub"), and Solara Digital Infrastructure Fund VI LP ("Fund VI" or "Solara"). References to specific sections, pages, and exhibits are to the draft Proxy Statement circulated by Ridgeway Phelps & Sato LLP on April 9, 2024 (the "April 9 Draft"), unless otherwise noted.
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I. General / Global Comments
1.1 Consistency of Deal Terms Throughout the Document
We have performed a targeted review of the April 9 Draft for consistency of the core deal terms as stated throughout the Proxy Statement. We request that Ridgeway Phelps conduct a comprehensive confirmatory review to ensure that the following deal terms are stated consistently in every instance in which they appear, including in the Summary Term Sheet, the Background of the Merger, the description of the Merger Agreement, the Sources and Uses of Funds, the fairness opinion summary, and any other section in which they are referenced:
(a) Aggregate Deal Value. The aggregate deal value should be stated consistently as $6,800,000,000 (six billion eight hundred million dollars). In certain instances in the April 9 Draft, this figure is referred to as "approximately $6.8 billion," while in others it is stated as the precise dollar amount. We recommend standardizing on the precise figure in every instance, with a parenthetical "(approximately $6.8 billion)" included only in the first instance in the Summary Term Sheet and in the cover letter to stockholders.
(b) Per-Share Merger Consideration. The per-share merger consideration should be stated consistently as approximately $36.92 in cash, without interest and subject to applicable withholding taxes. This figure is derived from $6,800,000,000 divided by 184,200,000 shares of common stock outstanding as of the date of execution of the Merger Agreement (January 22, 2024). In certain instances, the April 9 Draft states the per-share consideration as "$36.92" without the qualifier "approximately." Because the precise per-share figure, when carried beyond two decimal places, is $36.9164…, the "approximately" qualifier should be retained in all instances to avoid any suggestion that the figure is exact to the penny. Alternatively, if Ridgeway Phelps prefers to use "$36.92" without "approximately," a footnote should be included in the Summary Term Sheet explaining the basis for the rounding.
(c) Signing Date. The Merger Agreement was executed on January 22, 2024. We have confirmed this against our executed counterparts. All references should specify January 22, 2024. We note one instance on page 47 of the April 9 Draft that references "January 23, 2024" as the execution date; this appears to be an error conflating the signing date with the public announcement date and should be corrected.
(d) Public Announcement Date. The public announcement via joint press release and the filing of the Form 8-K occurred on January 23, 2024. References to the public announcement should consistently use this date.
(e) Identification of the Parties. The parties to the Merger Agreement should be consistently identified as follows throughout the Proxy Statement:
• Cloudium Technologies plc, a public limited company organized under the laws of England and Wales;
• Stratos Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Fund VI; and
• Solara Digital Infrastructure Fund VI LP, a Delaware limited partnership.
The April 9 Draft occasionally refers to Fund VI simply as "Solara" or "Solara Fund VI." While the Summary Term Sheet and the first reference in each major section should use the full legal name with the defined-term parenthetical, subsequent references within the same section may use the defined short form. We request that Ridgeway Phelps confirm uniform usage of the defined terms "Fund VI," "Merger Sub," and "Solara" throughout.
(f) Transaction Structure. The transaction should be consistently described as a reverse triangular merger under the Delaware General Corporation Law (the "DGCL"), pursuant to which Stratos Merger Sub Inc. will merge with and into Cloudium Technologies plc, with Cloudium surviving as a wholly owned subsidiary of Fund VI. We note that on page 12 of the April 9 Draft, the transaction is described as "a merger of Cloudium with and into Merger Sub," which reverses the correct direction of the merger. This should be corrected. In a reverse triangular merger, the acquisition vehicle (Merger Sub) merges with and into the target (Cloudium), not vice versa. This distinction is legally significant and must be accurately stated in every instance.
1.2 Cross-References and Internal Consistency
We request that Ridgeway Phelps verify all internal cross-references throughout the Proxy Statement, including page numbers, section references, and references to annexes and exhibits. Given that the transition from the preliminary proxy to the definitive proxy involved significant additions and revisions — including the insertion of updated regulatory status information (see Sections VIII.1 and VIII.2 below) and revised golden parachute compensation tables — page numbers and section references are likely to have shifted. We recommend that this cross-reference verification be among the last tasks performed before the final version is submitted for filing.
In addition, we have identified the following instances in the April 9 Draft where bracketed placeholder text from the Preliminary Proxy Statement remains unresolved:
(a) Page 3: "[Record Date]" — the record date for the Special Meeting must be inserted. We understand that the record date is expected to be April 8, 2024, but this must be confirmed with Cascade Corporate Services Inc., the Company's transfer agent. See Section XI.1 below.
(b) Page 4: "[Number of shares outstanding as of the Record Date]" — must be completed based on confirmation from the transfer agent.
(c) Page 78: "[Status of Aegis Federal Solutions consent]" — must be updated to reflect the current status of the consent under the Master SaaS Agreement. See Section XIII.2 below.
(d) Page 91: "[Insert virtual meeting URL and passcode]" — if the Special Meeting will be held in a virtual or hybrid format, the URL, passcode, and access instructions must be inserted. If the meeting will be held exclusively in person, the physical address and any applicable attendance instructions must be provided.
We request that Ridgeway Phelps conduct a search for all remaining brackets, placeholders, and editorial notes (including "TBD," "NTD," and "NOTE TO DRAFT") and resolve or remove each before finalization.
1.3 Defined Terms
We have reviewed the use of certain key defined terms in the April 9 Draft and request that Ridgeway Phelps confirm the following:
(a) Material Adverse Effect. The term "material adverse effect" (or "Material Adverse Effect" or "MAE") is a specifically defined term in Section 1.1 of the Merger Agreement. The definition includes carveouts for, among other things, (i) pandemics, epidemics, or public health emergencies (including COVID-19 and any variants thereof), (ii) acts of war, armed hostility, sabotage, or terrorism, and (iii) changes in applicable law or in generally accepted accounting principles. Wherever the Proxy Statement summarizes or paraphrases the MAE standard — including in the Summary Term Sheet, the description of the Merger Agreement, and the description of closing conditions — the summary should be consistent with the actual Merger Agreement definition and should not omit or abbreviate the carveouts in a manner that could mislead stockholders regarding the scope of the MAE standard. We note that on page 58 of the April 9 Draft, the summary of the MAE definition omits the carveout for changes in law; this should be corrected.
(b) Change of Control. The Proxy Statement uses the phrase "change of control" in several contexts: (i) as a defined term under the Merger Agreement, (ii) in connection with triggering events under Cloudium's existing credit agreements and material contracts, and (iii) in connection with the treatment of equity awards. These contexts may involve different definitions. We request that Ridgeway Phelps ensure that each usage is accurate and, where the term is being used in a context other than the Merger Agreement, clarify which definition is being referenced.
1.4 Filing and Timing
The Proxy Statement is to be filed with the SEC as a Definitive Proxy Statement on Schedule 14A on or about April 15, 2024. The Special Meeting of stockholders of Cloudium Technologies plc is scheduled to be held on May 20, 2024, at 10:00 a.m. Eastern Time. The record date for determining stockholders entitled to notice of and to vote at the Special Meeting should be verified with Ridgeway Phelps & Sato LLP and Cascade Corporate Services Inc., as the Company's transfer agent. Based on our discussions with the Company, we understand the record date is expected to be April 8, 2024, but this has not been finally confirmed in writing.
We note that no SEC comments were received on the Preliminary Proxy Statement (filed on March 25, 2024 as a preliminary Schedule 14A). The Staff did not issue a comment letter, and the ten-day review period applicable to preliminary proxy materials under Rule 14a-6(a) has expired. We request that Ridgeway Phelps confirm that this is reflected in the filing history and, to the extent the Proxy Statement includes any disclosure regarding the SEC review process, that it accurately states that no SEC staff comments were received on the Preliminary Proxy Statement.
II. Cover Page and Notice of Special Meeting
2.1 Cover Page
We request that Ridgeway Phelps verify that the cover page of the Proxy Statement correctly identifies the Company as follows:
Cloudium Technologies plc Company No. 09734521 (England and Wales) Registered Office: 45 Broadwick Street, London W1F 0DB, United Kingdom US Headquarters: 600 Townsend Street, Suite 800, San Francisco, California 94103
The cover page should also confirm that the Company's common stock trades on the Nasdaq Global Select Market under the ticker symbol "CLDM." We note that the April 9 Draft identifies the exchange as "Nasdaq" without specifying "Global Select Market." Because the Global Select Market is a distinct tier of the Nasdaq Stock Market with specific listing requirements, the full designation should be used.
The cover page should clearly state the date, time, and location (or virtual meeting details) of the Special Meeting: May 20, 2024, at 10:00 a.m. Eastern Time. If the meeting is to be conducted in a virtual or hybrid format, the cover page must include the URL, passcode, and instructions for accessing the meeting. If the meeting is to be conducted in person, the physical address and any applicable attendance logistics should be stated.
2.2 Notice of Special Meeting
The Notice of Special Meeting should accurately describe the proposal to be submitted to stockholders for approval at the Special Meeting:
Proposal 1: To consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of January 22, 2024, among Cloudium Technologies plc, Stratos Merger Sub Inc., and Solara Digital Infrastructure Fund VI LP, pursuant to which Stratos Merger Sub Inc. will merge with and into Cloudium Technologies plc, with Cloudium Technologies plc surviving as a wholly owned subsidiary of Solara Digital Infrastructure Fund VI LP, and each outstanding share of common stock of Cloudium Technologies plc (other than shares held by Solara, Merger Sub, their affiliates, or stockholders who have validly perfected appraisal rights, and other than shares subject to the Rollover Agreements) will be converted into the right to receive approximately $36.92 per share in cash, without interest and subject to applicable withholding taxes.
The Notice should also reference any adjournment proposal (e.g., a proposal to adjourn the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the Merger Proposal). We request confirmation that such an adjournment proposal is included.
The Notice should confirm the record date for determining stockholders entitled to vote at the Special Meeting. As noted in Section I.4 above, we understand this date is expected to be April 8, 2024, but we await final confirmation.
The Notice should confirm the required vote threshold for approval of the Merger Proposal: the affirmative vote of a majority of the outstanding shares of Cloudium common stock entitled to vote at the Special Meeting. This standard is set forth in the Merger Agreement and is consistent with the requirements of the DGCL for approval of a merger.
Finally, the Notice should reference the stockholders' right to seek appraisal of their shares under Section 262 of the DGCL and should direct stockholders to the section of the Proxy Statement describing appraisal rights (as well as to Annex C, which should contain the full text of DGCL § 262). We note that the April 9 Draft includes a reference to appraisal rights in the Notice but does not include a specific cross-reference to the relevant section of the Proxy Statement. We recommend inserting such a cross-reference for the convenience of stockholders.
III. Summary Term Sheet
3.1 Transaction Overview
The Summary Term Sheet should provide stockholders with a concise and accurate overview of the material terms of the merger. We request that Ridgeway Phelps verify the accuracy of the summary description of the merger structure, the merger consideration, and the treatment of equity awards. Specifically:
(a) Merger Structure. The Summary Term Sheet should describe the transaction as a reverse triangular merger under the DGCL, pursuant to which Stratos Merger Sub Inc. will merge with and into Cloudium Technologies plc, with Cloudium surviving as a wholly owned subsidiary of Solara Digital Infrastructure Fund VI LP. As noted in Section I.1(f) above, we have identified an error in the April 9 Draft that reverses the direction of the merger; this error, if present in the Summary Term Sheet as well, must be corrected.
(b) Merger Consideration. The Summary Term Sheet should state that each stockholder of Cloudium (other than Solara, Merger Sub, and their respective affiliates, and other than stockholders who have validly perfected appraisal rights and other than shares subject to the Rollover Agreements) will receive approximately $36.92 per share in cash, without interest and subject to applicable withholding taxes.
(c) Treatment of Equity Awards. The Summary Term Sheet should accurately summarize the treatment of outstanding stock options, restricted stock units ("RSUs"), and other equity-based awards of Cloudium upon consummation of the merger, consistent with the terms of the Merger Agreement.
(d) Identification of Parties. The Summary Term Sheet should identify all parties to the Merger Agreement: Cloudium Technologies plc, Stratos Merger Sub Inc. (a Delaware corporation and wholly owned subsidiary of Fund VI), and Solara Digital Infrastructure Fund VI LP (a Delaware limited partnership). In addition, the Summary Term Sheet should identify Solara Digital Infrastructure LP as the ultimate private equity sponsor of the transaction. We recommend that the Summary Term Sheet include a brief description of Solara as a Delaware-based private equity sponsor focused on digital infrastructure and enterprise software investments, with approximately $38 billion in assets under management across six flagship funds, and that the investing fund for this transaction is Fund VI (vintage 2022, with $12.4 billion in committed capital). This information provides stockholders with relevant context regarding the financial capacity and investment focus of the acquiror.
3.2 Merger Consideration
The Summary Term Sheet should describe the merger consideration as follows:
(a) Per-Share Price. Approximately $36.92 per share in cash, without interest and subject to applicable withholding taxes.
(b) Aggregate Consideration. Aggregate consideration of $6,800,000,000.
(c) Form of Consideration. All cash, except for shares of Cloudium common stock subject to Rollover Agreements (as described below).
(d) Rollover Equity. The following stockholders have entered into Rollover Agreements, dated January 22, 2024, pursuant to which they will roll over a portion of their equity interests in Cloudium into equity interests in the post-closing surviving entity or its parent:
• Jonathan Hargrove (Chief Executive Officer): holds 7,736,400 shares (approximately 4.2% of outstanding shares); rolling over 50% of his shares, representing an implied rollover value of approximately $142,814,544;
• Pinnacle Growth Ventures LLC (Evelyn Carmichael, Managing Member): holds 21,367,200 shares (approximately 11.6% of outstanding shares); rolling over 60% of its shares, representing an implied rollover value of approximately $473,241,408;
• Total rollover equity: approximately $616,055,952.
(e) Implied Premium. The Summary Term Sheet should disclose the implied premium represented by the $36.92 per-share merger consideration over pre-announcement trading prices of Cloudium common stock. We request that Ridgeway Phelps confirm that the following premiums (or figures consistent with these premiums) are disclosed: the premium over the closing price on the last trading day prior to the public announcement (January 22, 2024), the premium over the volume-weighted average price for the 30-day, 60-day, and 90-day periods ending on that date, and the premium over the 52-week high and 52-week low trading prices. These figures should be consistent with the premiums paid analysis conducted by Veridian Partners LLC in connection with its fairness opinion.
3.3 Financing
The Summary Term Sheet should include a summary of the sources of funds for the transaction. We request that Ridgeway Phelps verify the accuracy of the following information:
(a) Equity Commitment. Fund VI has committed to contribute equity of $2,832,888,096 to Merger Sub pursuant to the Equity Commitment Letter dated January 22, 2024 (the "Equity Commitment Letter"). The Equity Commitment Letter is subject to customary conditions, including the satisfaction or waiver of the conditions to closing under the Merger Agreement.
(b) Debt Financing. Fund VI and Merger Sub have obtained debt financing commitments totaling $4,240,000,000, consisting of (i) a Term Loan B facility in the aggregate principal amount of $3,740,000,000 and (ii) a Revolving Credit Facility in the aggregate principal amount of $500,000,000. The debt financing commitments are set forth in the Debt Commitment Letter dated January 22, 2024 (the "Debt Commitment Letter"), pursuant to which Meridian Atlantic Bank, N.A. (as lead arranger and administrative agent) and Ironclad Capital Markets LLC (as co-arranger) have committed to provide the debt financing, subject to customary conditions. The summary should accurately describe the material terms of the debt financing, including the interest rates, maturity dates, and conditions precedent, to the extent required for stockholder disclosure. See Section XIV below for further detail.
(c) Rollover Equity. Rollover equity of approximately $616,055,952 contributed by Jonathan Hargrove and Pinnacle Growth Ventures LLC pursuant to their respective Rollover Agreements.
(d) Total Funding Requirement. The total funding requirement for the transaction is approximately $7,188,944,048, which is comprised of:
• Cash merger consideration (to non-rolling stockholders): approximately $6,183,944,048;
• Estimated transaction expenses: approximately $185,000,000;
• Repayment of existing Cloudium indebtedness at closing: $820,000,000.
(e) Limited Guarantee. Solara Fund VI GP LLC, the general partner of Fund VI, has delivered a Limited Guarantee dated January 22, 2024 in favor of Cloudium, guaranteeing Fund VI's payment obligations under the Merger Agreement up to a maximum aggregate amount of $246,000,000, consisting of (i) the reverse termination fee of $221,000,000 and (ii) up to $25,000,000 in reimbursement of enforcement costs. The Summary Term Sheet should describe the Limited Guarantee, including the identity of the guarantor, the guaranteed obligations, and the cap on the guarantor's liability.
3.4 Conditions to Closing
The Summary Term Sheet should include a summary of the conditions that must be satisfied or waived prior to the consummation of the merger. We request that Ridgeway Phelps verify that the summary includes each of the following conditions:
(a) Stockholder approval (affirmative vote of a majority of outstanding shares);
(b) Expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act");
(c) Receipt of unconditional clearance from the United Kingdom Competition and Markets Authority (the "CMA");
(d) Absence of any law, injunction, or order prohibiting the consummation of the merger;
(e) Accuracy of representations and warranties at closing (subject to the MAE bring-down standard);
(f) Compliance with covenants in all material respects; and
(g) Receipt of required third-party consents.
Importantly, two of these regulatory conditions have now been satisfied. The HSR Act waiting period expired on March 11, 2024, without the issuance of a Second Request by the Federal Trade Commission or the Antitrust Division of the U.S. Department of Justice. The CMA granted unconditional Phase 1 clearance on April 3, 2024 (CMA Case No. ME/7184/24). Because the Proxy Statement is expected to be filed on or about April 15, 2024 — after both of these regulatory milestones — the Proxy Statement should affirmatively disclose that these conditions have been satisfied. This is material information for stockholders, as it significantly de-risks the path to closing and reduces closing uncertainty.
We further note that no voluntary notice was filed with the Committee on Foreign Investment in the United States ("CFIUS"), as the transaction team determined that there is no identified national-security nexus. No filing was required under the EU Merger Regulation, as the applicable EU turnover thresholds were not met. These determinations should be briefly noted in the regulatory section of the Proxy Statement (see Section VIII.3 below).
3.5 Termination and Fees
The Summary Term Sheet should accurately describe the termination provisions of the Merger Agreement, including the circumstances under which the Merger Agreement may be terminated and the fees payable upon termination:
(a) Company Termination Fee. A termination fee of $221,000,000 (representing approximately 3.25% of the aggregate deal value) is payable by Cloudium to Fund VI in certain circumstances, including (i) if Cloudium terminates the Merger Agreement to accept a Superior Proposal (as defined in the Merger Agreement), (ii) if Fund VI terminates the Merger Agreement following a Change of Recommendation by the Cloudium board, or (iii) in the event of a "tail" termination following stockholder rejection and the subsequent consummation of an alternative transaction within 12 months.
(b) Reverse Termination Fee. A reverse termination fee of $374,000,000 (representing approximately 5.5% of the aggregate deal value) is payable by Fund VI to Cloudium in certain circumstances, including (i) if Cloudium terminates the Merger Agreement due to Fund VI's failure to consummate the closing when all conditions have been satisfied and (ii) if Fund VI fails to obtain the debt financing and the closing does not occur.
We request that Ridgeway Phelps confirm that the description of the triggering events for each fee is accurate and complete, and that the description does not omit any material nuances or conditions applicable to the payment obligations.
3.6 No-Shop / Fiduciary Out
The Summary Term Sheet should accurately describe the no-shop provision contained in the Merger Agreement:
(a) No-Shop. The no-shop provision is effective as of the signing of the Merger Agreement on January 22, 2024. From that date, Cloudium and its representatives may not, directly or indirectly, solicit, initiate, knowingly encourage, or knowingly facilitate any inquiry, proposal, or offer that constitutes or would reasonably be expected to lead to a competing acquisition proposal. Cloudium was also required to immediately cease and cause to be terminated all existing discussions or negotiations with any person (other than Fund VI and its affiliates) regarding any competing acquisition proposal.
(b) Fiduciary Out. Notwithstanding the no-shop restriction, the Merger Agreement provides that the Cloudium board of directors may, at any time prior to obtaining the stockholder approval, (i) engage in discussions or negotiations with a third party that has made an unsolicited bona fide written Acquisition Proposal that the board determines in good faith (after consultation with its outside legal counsel and financial advisor) constitutes or would reasonably be expected to lead to a Superior Proposal, and (ii) change its recommendation to stockholders or terminate the Merger Agreement to accept a Superior Proposal, in each case subject to compliance with the notice and "matching rights" procedures set forth in the Merger Agreement and, in the case of termination, subject to concurrent payment of the $221,000,000 termination fee.
We request that Ridgeway Phelps confirm that the description of the no-shop provision, including the fiduciary-out exception, the matching rights process, and the related procedural requirements, is accurate and fairly presented. This is an area of heightened scrutiny under Rule 14a-9 (see Section XVIII below), and stockholders should be able to understand both the restrictions on the board's ability to pursue alternative transactions and the circumstances under which the board may nonetheless change its recommendation or terminate the Merger Agreement.
3.7 Indemnification and Escrow
The Summary Term Sheet should include a summary of the indemnification and escrow provisions of the Merger Agreement (Article IX). This is material to stockholders because a portion of the merger consideration will be withheld from distribution at closing and deposited into escrow to secure potential indemnification claims by Fund VI. We request that Ridgeway Phelps verify the accuracy of the following:
(a) Indemnification Cap. The aggregate liability of the former Cloudium stockholders for indemnification claims under the Merger Agreement (other than claims for fraud, willful breach, tax indemnities, and certain specified litigation matters, which are uncapped) is limited to 15% of the aggregate deal value, or $1,020,000,000.
(b) Escrow. An amount equal to 8% of the aggregate deal value, or $544,000,000, will be withheld from the merger consideration otherwise distributable to stockholders at closing and deposited with Cobalt Trust Company as escrow agent (the "Escrow Agent") pursuant to the terms of an Escrow Agreement to be entered into at closing. The escrow funds will be released in two installments:
• First Release: 50% of the initial escrow deposit ($272,000,000) will be released at 12 months following the closing date (anticipated to be on or about July 9, 2025, assuming closing on July 9, 2024), less the amount of any pending or unresolved indemnification claims as of that date;
• Second Release: The remaining balance of the escrow fund will be released at 18 months following the closing date (anticipated to be on or about January 9, 2026), less the amount of any pending or unresolved indemnification claims as of that date.
(c) Survival Period. The representations and warranties of Cloudium in the Merger Agreement will survive for 18 months following the closing date. No indemnification claim may be brought after the expiration of the survival period, except for claims for fraud, willful breach, or with respect to the special indemnities.
(d) Basket. No indemnification payments will be made until the aggregate amount of losses exceeds $51,000,000 (representing 0.75% of the aggregate deal value), at which point Fund VI may recover from the first dollar of losses (i.e., a "tipping" basket, not a deductible).
(e) De Minimis Threshold. Individual claims below $500,000 will not be counted toward the basket and will not be recoverable.
(f) Special Indemnities (Uncapped). The indemnification cap does not apply to claims arising from (i) fraud, (ii) willful breach of the Merger Agreement, (iii) tax indemnities set forth in Section 9.5 of the Merger Agreement, and (iv) certain specified litigation matters identified in the Merger Agreement disclosure schedules. Claims for these matters are recoverable without limitation as to amount.
(g) Stockholder Representative. Douglas Pemberton, the Independent Board Chair of Cloudium, has been designated as the Stockholder Representative. Mr. Pemberton will act on behalf of the former stockholders of Cloudium in connection with all matters arising under the indemnification and escrow provisions of the Merger Agreement, including the review and negotiation of indemnification claims asserted by Fund VI and the authorization of releases from escrow. Former stockholders will not have individual rights to negotiate or dispute indemnification claims; these rights are vested exclusively in the Stockholder Representative.
(h) Representations and Warranty Insurance. Fund VI has obtained a buyer-side representations and warranty insurance policy from Northfield Assurance Ltd. (Policy No. NFA-TRI-2024-00487) with a coverage limit of $680,000,000 (representing 10% of the aggregate deal value) and a retention equal to $544,000,000 (which is equal to the escrow amount). The Proxy Statement should describe this policy to the extent it is material to stockholders. While the policy is a buyer-side policy and its existence does not directly reduce the escrow obligation or the indemnification cap, stockholders should understand that Fund VI has an alternative source of recovery above the escrow amount, which may reduce the likelihood of claims being asserted against the escrow in practice. We request that Ridgeway Phelps include a brief description of the R&W insurance policy in the appropriate section.
We emphasize that the escrow arrangement is of particular importance to stockholders because it directly reduces the net merger consideration payable to them at closing. The Proxy Statement should make clear that (i) $544,000,000 of the aggregate merger consideration will be deposited into escrow and will not be distributed to stockholders at closing, (ii) stockholders will receive their pro rata share of released escrow funds (net of any amounts paid or reserved for indemnification claims) at the scheduled release dates, and (iii) there is no guarantee that the full escrow amount will ultimately be released to stockholders.
IV. Background of the Merger
4.1 Chronology
The Background of the Merger section is a critical component of the Proxy Statement and is subject to heightened scrutiny under Rule 14a-9 and the Delaware courts' expectations regarding disclosure in the context of going-private transactions. We request that Ridgeway Phelps verify that the narrative chronology presented in the Proxy Statement is accurate, complete, and consistent with the confirmed timeline of events. Specifically, we request confirmation that the following key milestones are accurately described:
(a) September 5, 2023: Cloudium Technologies plc and Solara Digital Infrastructure LP executed a mutual non-disclosure agreement (the "NDA"), permitting the exchange of confidential information in connection with Solara's evaluation of a potential strategic transaction involving Cloudium.
(b) September 18, 2023: Cloudium granted Solara and its advisors access to a virtual data room maintained by Crestline Solutions, containing non-public financial, operational, legal, and commercial information regarding Cloudium and its subsidiaries.
(c) October 2, 2023: Cloudium's senior management, including Jonathan Hargrove (CEO) and Sienna Whitfield (CFO), delivered a management presentation to representatives of Solara and its advisors, Osprey Bancroft & Co. In attendance from the Solara team were representatives of Fund VI's investment committee and deal team, along with Damien Harlow, Managing Director of Osprey Bancroft's Technology M&A practice.
(d) October 30, 2023: Solara submitted a preliminary, non-binding indication of interest (the "IOI") to acquire 100% of the outstanding equity of Cloudium at a per-share price in the range of $34.00 to $37.50 per share in cash, subject to confirmatory due diligence and negotiation of definitive transaction documentation.
(e) November 6, 2023: The Cloudium board of directors held a meeting at which the board reviewed and discussed the IOI, the strategic alternatives available to the Company (including continuing to operate as a standalone public company, pursuing an alternative strategic transaction, or exploring a sale to a financial sponsor), and the recommendation of Veridian Partners LLC, the Company's financial advisor, regarding the merits of engaging in further discussions with Solara. After deliberation, the board authorized management and its advisors to negotiate exclusively with Solara, subject to the execution of a mutually acceptable exclusivity agreement.
(f) November 15, 2023: Cloudium and Solara executed an Exclusivity Agreement pursuant to which Cloudium agreed to negotiate exclusively with Solara for a period of 45 days (through December 30, 2023) with respect to a potential acquisition transaction. The Exclusivity Agreement contained customary standstill and confidentiality provisions.
(g) December 1, 2023: Calderwood & Harkness LLP, on behalf of Solara and Fund VI, circulated an initial draft of the Merger Agreement to Ridgeway Phelps & Sato LLP, counsel to Cloudium.
(h) December 15, 2023: Meridian Atlantic Bank, N.A. and Ironclad Capital Markets LLC executed an initial commitment letter providing for the debt financing contemplated by the transaction, subject to customary conditions and subsequent revisions.
(i) December 2023 through January 2024: Multiple rounds of negotiation on the Merger Agreement and ancillary documentation took place between the parties and their respective counsel. Key negotiation points included the level of the termination and reverse termination fees, the scope of the indemnification provisions (including the cap, basket, and escrow structure), the breadth of the MAE definition and carveouts, the terms of the no-shop provision and fiduciary-out exception, the rollover arrangements with Jonathan Hargrove and Pinnacle Growth Ventures LLC, and the terms of the debt financing.
(j) January 15, 2024: A final negotiation session was held in person in New York at the offices of Calderwood & Harkness LLP, attended by representatives of Cloudium, Solara, Veridian Partners, Osprey Bancroft, Calderwood & Harkness, and Ridgeway Phelps & Sato. The parties reached agreement on remaining open points, including the final per-share price of $36.92, the reverse termination fee at 5.5% of deal value, and the escrow release schedule.
(k) January 19, 2024: The buyer-side representations and warranty insurance policy was bound by Northfield Assurance Ltd. (Policy No. NFA-TRI-2024-00487).
(l) January 21, 2024: Veridian Partners LLC delivered its written fairness opinion to the Cloudium board of directors, opining that the per-share merger consideration of approximately $36.92 in cash was fair, from a financial point of view, to the holders of Cloudium common stock (other than Solara, Merger Sub, and their affiliates, and rollover stockholders). The board convened a special meeting at which it received the fairness opinion, deliberated regarding the proposed transaction, and unanimously approved the Merger Agreement and the transactions contemplated thereby, and resolved to recommend that stockholders vote to adopt the Merger Agreement.
(m) January 22, 2024: The Merger Agreement, together with the Rollover Agreements, the Equity Commitment Letter, the Debt Commitment Letter, the Limited Guarantee, the Voting/Support Agreements, and other ancillary documents, were executed and delivered by the parties.
(n) January 23, 2024: The parties issued a joint press release announcing the execution of the Merger Agreement and the proposed merger. Cloudium filed a Current Report on Form 8-K with the SEC disclosing the transaction.
We request that Ridgeway Phelps review the April 9 Draft against this timeline and correct any inconsistencies or omissions. In particular, we note that the April 9 Draft does not currently reference the initial Debt Commitment Letter signed on December 15, 2023, and we believe this event should be included in the chronology because it represents a material step in the development of the financing structure for the transaction.
4.2 Role of Financial Advisors
The Proxy Statement should accurately describe the roles of the financial advisors engaged by the parties:
(a) Cloudium's Financial Advisor: Veridian Partners LLC. The Proxy Statement should describe the scope of Veridian's engagement, including its role in advising the Cloudium board on the financial terms of the transaction, evaluating the IOI, participating in negotiations, and delivering the fairness opinion. The engagement partner is Monica Pressler, Managing Director. The Proxy Statement should disclose the fees payable to Veridian, including any portion of the fees that is contingent on the closing of the merger, as required by Item 1015 of Regulation M-A and Item 14(b) of Schedule 14A.
(b) Solara's Financial Advisor: Osprey Bancroft & Co. The Proxy Statement should identify Osprey Bancroft as the financial advisor to Solara, with Damien Harlow, Managing Director of the Technology M&A practice, serving as the lead advisor. While the Proxy Statement is not required to disclose the fees payable by Solara to Osprey Bancroft, the description should be sufficient for stockholders to understand the advisory structure of the transaction.
(c) Proxy Solicitor: Blackthorn Proxy Advisors LLC. The fees and role of Blackthorn Proxy Advisors LLC as the proxy solicitor engaged by Cloudium should be disclosed in the appropriate section of the Proxy Statement. See Section XI.2 below.
We further request that Ridgeway Phelps verify that the description of the fairness opinion includes a discussion of the valuation methodologies employed by Veridian Partners, including the discounted cash flow analysis, selected comparable companies analysis, selected comparable transactions analysis, and premiums paid analysis. The basis for each methodology and the key assumptions and inputs should be described in sufficient detail for stockholders to evaluate the opinion. See Section VI below for more detailed comments on the fairness opinion section.
4.3 Role of Cloudium Board and Special Committee (if any)
We request that Ridgeway Phelps confirm that the Proxy Statement includes a description of the Cloudium board's deliberation process, including the following elements:
(a) The role of Douglas Pemberton as Independent Board Chair in overseeing the process and the board's engagement with Solara.
(b) The board's reasons for approving the merger, which should be articulated in a manner consistent with the requirements of Item 1014 of Regulation M-A and should include, at a minimum, a discussion of the premium to market price, the certainty of value offered by an all-cash transaction, the strategic alternatives considered by the board (including the option of remaining a standalone public company), the terms of the Merger Agreement (including the protections afforded by the reverse termination fee and the fiduciary-out provision), and the fairness opinion of Veridian Partners.
(c) A description of the interests of Cloudium's directors and executive officers in the merger that may differ from those of stockholders generally. This is required by Item 14(b) of Schedule 14A and is an area of heightened anti-fraud scrutiny under Rule 14a-9. See Section VII below for detailed comments. We note that our separate Rule 14a-9 Compliance Memorandum dated April 10, 2024 addresses these disclosures in greater detail.
We note that the April 9 Draft does not indicate that the board formed a special committee of independent directors to negotiate the transaction. If no special committee was formed, the Proxy Statement should explain the board's rationale for proceeding without one, including the fact that the board determined in its judgment that the full board, with the leadership of the Independent Board Chair, was the appropriate body to evaluate and negotiate the proposed transaction. If a special committee was in fact formed and this is not reflected in the April 9 Draft, the Proxy Statement should be corrected to include a description of the committee's composition, mandate, and deliberations.
4.4 Key Negotiations
We request that Ridgeway Phelps verify that the description of the negotiation process accurately reflects the progression of the economic and legal terms of the transaction, including:
(a) Price Negotiations. The Proxy Statement should describe the evolution of the per-share price from the preliminary IOI range of $34.00 to $37.50 per share to the final per-share merger consideration of approximately $36.92. The description should include any interim proposals, counterproposals, or indicative valuations exchanged between the parties during the negotiation period. Stockholders are entitled to understand how the final price was arrived at and whether the board and its advisors were successful in negotiating a price at or near the top of the initial range.
(b) Key Legal Terms. The Proxy Statement should describe the negotiation of the following key legal terms:
• Termination fee levels (including the progression from initial proposals by each side to the final agreed amounts of $221,000,000 and $374,000,000);
• Indemnification cap and basket (the progression to the final 15% cap and 0.75% tipping basket);
• Escrow amount and release schedule;
• MAE definition and carveouts;
• No-shop and fiduciary-out provisions (including any back-and-forth regarding the scope of the fiduciary-out exception and the length and structure of the matching-rights period); and
• The rollover arrangements with Jonathan Hargrove and Pinnacle Growth Ventures LLC, including the negotiation of the rollover percentages and the terms on which the rolling stockholders will participate in the post-closing equity structure.
The Background of the Merger section should present a candid and complete account of the negotiation process. Omissions or selective presentations of the negotiation history are a frequent basis for stockholder challenges under Rule 14a-9 and may be scrutinized by the Delaware courts in the context of any appraisal proceeding or fiduciary duty claim.
V. The Merger Agreement
5.1 Description of the Merger
The Proxy Statement should include an accurate description of the mechanics of the reverse triangular merger. Specifically:
(a) Merger Mechanics. Stratos Merger Sub Inc. will merge with and into Cloudium Technologies plc, with Cloudium surviving as a wholly owned subsidiary of Solara Digital Infrastructure Fund VI LP. At the effective time of the merger, each issued and outstanding share of common stock of Merger Sub will be converted into one share of common stock of the surviving corporation, and each issued and outstanding share of common stock of Cloudium (other than (i) shares owned by Solara, Merger Sub, or their respective affiliates, which will be canceled without consideration, (ii) shares subject to the Rollover Agreements, which will be treated in accordance with the terms of those agreements, and (iii) shares held by stockholders who have validly perfected appraisal rights under DGCL § 262) will be converted into the right to receive the per-share merger consideration of approximately $36.92 in cash.
(b) Effective Time. The merger will become effective upon the filing of the Certificate of Merger with the Secretary of State of the State of Delaware (or at such later date and time as may be agreed by the parties and specified in the Certificate of Merger). The scheduled outside date for consummation of the merger under the Merger Agreement is June 30, 2024.
(c) Anticipated Closing Timeline. The Proxy Statement should note the anticipated closing timeline, taking into account the status of the remaining conditions to closing. As discussed in Section III.4 above, both the HSR Act clearance and the CMA clearance have been obtained. The principal remaining conditions are (i) stockholder approval, expected to be sought at the Special Meeting on May 20, 2024, and (ii) the satisfaction of the bring-down conditions relating to the accuracy of representations and warranties and compliance with covenants. Assuming stockholder approval is obtained and the remaining conditions are satisfied, the parties currently anticipate closing the transaction promptly following the Special Meeting, subject to the completion of the debt financing syndication and other customary closing mechanics.
5.2 Merger Consideration and Payment Mechanics
The Proxy Statement should describe the merger consideration and the mechanics by which stockholders will receive payment:
(a) Cash Consideration. Each holder of Cloudium common stock (other than excluded shares and rollover shares) will receive approximately $36.92 per share in cash, without interest and subject to applicable withholding taxes.
(b) Treatment of Stock Options. The Proxy Statement should describe the treatment of outstanding stock options (both vested and unvested) at the effective time of the merger, as provided in the Merger Agreement. Generally, each outstanding option to purchase shares of Cloudium common stock will be canceled and converted into the right to receive a cash payment equal to the product of (x) the number of shares subject to the option and (y) the excess, if any, of $36.92 over the per-share exercise price of the option, less applicable withholding taxes. Unvested options will vest on an accelerated basis immediately prior to the effective time. Options with an exercise price equal to or greater than $36.92 will be canceled without consideration.
(c) Treatment of RSUs. Each outstanding restricted stock unit will be canceled and converted into the right to receive a cash payment equal to the product of (x) the number of shares underlying the RSU and (y) $36.92, less applicable withholding taxes. Unvested RSUs will vest on an accelerated basis immediately prior to the effective time.
(d) Treatment of Other Equity Awards. If there are any other equity-based awards outstanding (e.g., performance stock units, stock appreciation rights, or deferred stock awards), their treatment should be described consistent with the Merger Agreement.
(e) Letter of Transmittal. Promptly following the effective time of the merger, the surviving corporation (or its designee) will mail to each former stockholder of record a letter of transmittal and instructions for surrendering certificates (or book-entry shares) evidencing shares of Cloudium common stock in exchange for the per-share merger consideration. The transfer agent and paying agent for the merger is Cascade Corporate Services Inc. The Proxy Statement should describe the procedures for surrendering shares and receiving payment, including any applicable deadlines and requirements.
(f) Rollover Mechanics. The Proxy Statement should describe the mechanics by which the shares held by Jonathan Hargrove and Pinnacle Growth Ventures LLC that are subject to the Rollover Agreements will be treated at the effective time, including the conversion of those shares into equity interests in the surviving corporation or its parent entity. We request that Ridgeway Phelps verify that this description is consistent with the terms of the Rollover Agreements.
5.3 Representations and Warranties
The Proxy Statement includes a summary of the representations and warranties of the parties contained in the Merger Agreement. We request that Ridgeway Phelps confirm the following:
(a) The summary of Article III (representations and warranties of Fund VI and Merger Sub) and Article IV (representations and warranties of Cloudium) is accurate and not misleading. The summary need not reproduce the representations verbatim but should convey the general nature and scope of the representations made by each party.
(b) The description of the "Material Adverse Effect" definition is accurate and includes a reference to the specific carveouts discussed in Section I.3(a) above (pandemics, war, and changes in law, among others).
(c) The Proxy Statement does not selectively summarize certain representations while omitting others in a manner that could create a misleading impression of the risk allocation between the parties. Under Rule 14a-9, a selective or incomplete summary of the representations and warranties could be challenged as materially misleading if it gives stockholders an inaccurate picture of the transaction's terms.
We note that the April 9 Draft includes the standard disclaimer that the representations and warranties were made for purposes of allocating risk between the parties and should not be relied upon by stockholders as statements of fact. We recommend retaining this disclaimer, which is consistent with market practice.
5.4 Covenants
The Proxy Statement should accurately summarize the principal covenants of the parties under the Merger Agreement:
(a) Interim Operating Covenants (Section 6.1). From the date of the Merger Agreement through the earlier of the effective time or the termination of the Merger Agreement, Cloudium is required to conduct its business in the ordinary course of business consistent with past practice. The Merger Agreement imposes specific restrictions on Cloudium's ability to, among other things, (i) incur capital expenditures above specified thresholds, (ii) hire or terminate employees above specified levels, (iii) enter into, amend, or terminate material contracts, (iv) make acquisitions or divestitures, (v) declare or pay dividends, (vi) incur indebtedness, (vii) issue equity securities, or (viii) change accounting policies. Each of these restrictions is subject to specified exceptions and to the ability of Cloudium to obtain the prior written consent of Fund VI (not to be unreasonably withheld, conditioned, or delayed). The Proxy Statement should accurately summarize these restrictions.
(b) No-Shop Covenant. As described in Section III.6 above, the no-shop covenant became effective on January 22, 2024, and restricts Cloudium's ability to solicit, initiate, or encourage competing acquisition proposals, subject to the fiduciary-out exception. See Section III.6 for our detailed comments.
(c) Financing Cooperation Covenant (Section 6.14). Cloudium is required to use its reasonable best efforts to cooperate with Fund VI and Merger Sub in connection with their efforts to arrange and obtain the debt financing contemplated by the Debt Commitment Letter. This includes providing financial information, making management available for lender presentations and due diligence sessions, and taking such other actions as may be reasonably requested by Fund VI to facilitate the financing. The Proxy Statement should summarize this covenant, as it represents a material obligation of the Company during the pre-closing period.
(d) Regulatory Efforts. Each party is required to use its reasonable best efforts to obtain all regulatory approvals necessary to consummate the merger, including making all required filings under the HSR Act and with the CMA. The Proxy Statement should note the status of these efforts (see Section VIII below).
5.5 Conditions to Closing
The Proxy Statement should describe the conditions precedent to the obligations of each party to consummate the merger. These conditions are set forth in Article VII of the Merger Agreement and include:
(a) Mutual Conditions (Section 7.1):
• Stockholder approval (adoption of the Merger Agreement by the affirmative vote of a majority of the outstanding shares entitled to vote);
• No injunction, order, or law prohibiting the consummation of the merger;
• HSR Act clearance (waiting period expired or terminated); and
• CMA clearance (unconditional Phase 1 or Phase 2 clearance).
(b) Conditions to Fund VI's and Merger Sub's Obligations (Section 7.2):
• Accuracy of Cloudium's representations and warranties at closing (subject to the MAE bring-down standard, except for fundamental representations which are subject to a more stringent "in all respects" standard);
• Cloudium's compliance with its covenants under the Merger Agreement in all material respects;
• Receipt by Fund VI of an officer's certificate from Cloudium certifying the satisfaction of the foregoing conditions; and
• No Material Adverse Effect having occurred since the date of the Merger Agreement.
(c) Conditions to Cloudium's Obligations (Section 7.3):
• Accuracy of Fund VI's and Merger Sub's representations and warranties at closing;
• Fund VI's and Merger Sub's compliance with their covenants under the Merger Agreement in all material respects; and
• Receipt by Cloudium of an officer's certificate from Fund VI certifying the satisfaction of the foregoing conditions.
As noted above, the HSR Act clearance was obtained on March 11, 2024, and the CMA clearance was obtained on April 3, 2024. Because the definitive Proxy Statement will be filed after these dates, the Proxy Statement should disclose that these regulatory conditions have been satisfied. This information is material to stockholders' evaluation of the likelihood and timing of closing. We request that Ridgeway Phelps ensure that the conditions to closing section, as well as the Summary Term Sheet and the regulatory approvals section, are updated to reflect the current status.
5.6 Termination Provisions
The Proxy Statement should describe the circumstances under which the Merger Agreement may be terminated:
(a) Mutual Termination. The Merger Agreement may be terminated by mutual written consent of Cloudium and Fund VI at any time prior to the effective time.
(b) Termination by Either Party:
• If the merger has not been consummated by the outside date of June 30, 2024 (the "Outside Date"), provided that the right to terminate is not available to a party whose failure to fulfill its obligations has been the cause of the failure to close by the Outside Date;
• If any governmental authority has issued a final, non-appealable order permanently enjoining or prohibiting the merger; or
• If the stockholders fail to adopt the Merger Agreement at the Special Meeting (or any adjournment thereof).