MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
TO: Harrison Wexford, Responsible Partner, Mergers & Acquisitions
FROM: Tiffany Rosenthal, Lead Associate, Mergers & Acquisitions Andrew Fitzpatrick, Working Associate, Mergers & Acquisitions
DATE: April 10, 2024
RE: Section 14(a) Compliance Review — Cloudium Technologies plc Definitive Proxy Statement (Special Meeting of Stockholders)
MATTER NO.: 1041-00003
CLIENT: Solara Digital Infrastructure LP
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I. Executive Summary and Purpose
The purpose of this memorandum is to set forth our analysis of the compliance of the Definitive Proxy Statement of Cloudium Technologies plc ("Cloudium" or the "Company") with Section 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-9 promulgated thereunder (the "Anti-Fraud Rule"), in connection with the special meeting of stockholders to be convened to approve the reverse triangular merger (the "Merger") pursuant to which Stratos Merger Sub Inc. ("Merger Sub"), a wholly owned subsidiary of Solara Digital Infrastructure Fund VI LP ("Fund VI"), will merge with and into Cloudium, with Cloudium surviving as a wholly owned subsidiary of Fund VI. The Merger is being consummated pursuant to the terms and conditions of the Agreement and Plan of Merger, dated as of January 22, 2024, by and among Cloudium, Merger Sub, and Fund VI (the "Merger Agreement").
Cloudium filed its preliminary proxy statement on Schedule 14A with the Securities and Exchange Commission (the "SEC") on or about March 14, 2024. Calderwood & Harkness LLP ("C&H" or "we") previously provided comments on the preliminary proxy statement on March 25, 2024, and those comments were transmitted to Ridgeway Phelps & Sato LLP ("RPS"), counsel to Cloudium, under cover of a letter from the undersigned to Catherine Answorth (New York) and Alistair Fenn (London) of RPS. No SEC staff comments requiring amendment were received on the preliminary filing. We have been advised that Cloudium intends to file the Definitive Proxy Statement (the "Proxy Statement") with the SEC on or about April 15, 2024, and to mail the Proxy Statement to stockholders of record promptly thereafter in advance of the special meeting of stockholders scheduled for May 20, 2024.
This review is based on the substantially final draft of the Proxy Statement provided by RPS to C&H on April 8, 2024 (the "Draft Proxy"). As of the date of this memorandum, the Definitive Proxy Statement has not yet been filed. Accordingly, our analysis is based on the Draft Proxy, together with our review of the execution version of the Merger Agreement and all ancillary transaction documents, including the rollover agreements, voting and support agreements, equity commitment letter, debt commitment letter, limited guarantee, escrow agreement, and the fairness opinion delivered by Veridian Partners LLC ("Veridian Partners") to the Cloudium board of directors.
The Merger involves an aggregate deal value of approximately $6,800,000,000, representing $36.92 per share in cash merger consideration payable to Cloudium stockholders (other than rollover shareholders). Cloudium is incorporated under the laws of England and Wales (Company No. 09734521) but is listed on the Nasdaq Global Select Market under the ticker symbol "CLDM." The stockholder vote on the Merger is governed by applicable provisions of the Delaware General Corporation Law (the "DGCL") as specified in the Merger Agreement and Cloudium's governing documents, as further discussed herein. Blackthorn Proxy Advisors LLC has been retained by Cloudium as proxy solicitor in connection with the special meeting.
Overall Conclusion. Based on our review, and subject to certain recommended revisions identified in Section XV of this memorandum, the Proxy Statement is substantially compliant with Section 14(a) of the Exchange Act and Rule 14a-9. We have not identified any material misstatement or omission that would, in our judgment, give rise to liability under the Anti-Fraud Rule. As noted above, no SEC staff comments requiring amendment were received on the preliminary filing. We nevertheless recommend certain targeted revisions to enhance clarity and compliance, as detailed below.
II. Legal Framework
A. Section 14(a) of the Exchange Act
Section 14(a) of the Exchange Act provides that it shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national securities exchange or otherwise, in contravention of such rules and regulations as the SEC may prescribe as necessary or appropriate in the public interest or for the protection of investors, to solicit or to permit the use of his or her name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange Act.
Section 14(a) is applicable to the Proxy Statement because Cloudium's common stock is registered under Section 12 of the Exchange Act and is listed on the Nasdaq Global Select Market. The solicitation of proxies by Cloudium in connection with the special meeting of stockholders to approve the Merger constitutes a "solicitation" subject to Regulation 14A promulgated under the Exchange Act (17 C.F.R. §§ 240.14a-1 through 240.14a-104). Accordingly, the Proxy Statement must comply with the substantive and procedural requirements set forth in Regulation 14A, including the disclosure requirements of Schedule 14A, the anti-fraud provisions of Rule 14a-9, and the procedural requirements of Rules 14a-3, 14a-4, 14a-5, and 14a-6.
The fundamental purpose of Section 14(a) is to ensure full and fair disclosure to stockholders who are being asked to vote on a proposed transaction, enabling them to exercise an informed and meaningful vote. As the Supreme Court has stated, the proxy rules were enacted to promote "the free exercise of the voting rights of stockholders by ensuring that proxies would be solicited with explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought." J.I. Case Co. v. Borak, 377 U.S. 426, 431 (1964). In reviewing the Proxy Statement, we are guided by this overarching purpose.
B. Schedule 14A Requirements
The Proxy Statement is subject to the disclosure requirements of Schedule 14A (17 C.F.R. § 240.14a-101), and in particular, Item 14 thereof, which governs proxy solicitations in connection with mergers, consolidations, acquisitions, and similar matters. Item 14 requires detailed disclosure of, among other things:
(a) the terms and conditions of the merger, including the form and amount of consideration;
(b) a summary of the merger agreement, including conditions to closing, termination provisions, and termination fees;
(c) the background of the merger, including the chronology of events and negotiations leading to execution of the merger agreement;
(d) the reasons for the merger and the board of directors' recommendation;
(e) a summary of any fairness opinion received by the board, including the financial analyses performed by the financial advisor;
(f) the interests of directors and officers in the merger, including any conflicts of interest;
(g) a description of appraisal rights available to stockholders;
(h) material federal income tax consequences of the merger; and
(i) such other information as is necessary to make the proxy solicitation not misleading.
Additionally, because the Merger constitutes a "going-private" transaction within the meaning of Rule 13e-3 under the Exchange Act — in that Fund VI is acquiring all outstanding shares of Cloudium common stock (other than rollover shares), resulting in Cloudium ceasing to be a publicly held company — the Proxy Statement is also required to incorporate the disclosures mandated by Schedule 13E-3 (17 C.F.R. § 240.13e-100). A comprehensive analysis of Schedule 13E-3 compliance is set forth in our separate memorandum dated March 20, 2024, which is incorporated herein by reference. As noted in that memorandum, the Draft Proxy incorporates the Schedule 13E-3 disclosures as an integrated part of the Proxy Statement, which is a permissible and customary approach.
C. Rule 14a-9 — Anti-Fraud Provisions
Rule 14a-9 under the Exchange Act (17 C.F.R. § 240.14a-9) provides as follows:
"No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading."
The materiality standard applicable to Rule 14a-9 was established by the Supreme Court in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), in which the Court held that a fact is "material" if there is a "substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." Id. at 449. The Court emphasized that the standard "does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote," but rather that the omitted fact "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Id. This standard was subsequently reaffirmed in Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1090 (1991), and in the securities fraud context in Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988).
Liability under Rule 14a-9 can attach to the issuer, its directors and officers, and potentially to the acquiror and its counsel to the extent of their participation in the preparation of the proxy materials. See, e.g., Adams v. Standard Knitting Mills, Inc., 623 F.2d 422 (6th Cir. 1980); Wilson v. Great Am. Indus., Inc., 855 F.2d 987 (2d Cir. 1988). The scope of potential liability underscores the importance of ensuring that the Proxy Statement is complete, accurate, and not materially misleading.
Our review of the Proxy Statement focuses on three principal areas: (i) accuracy of all material statements of fact; (ii) completeness of disclosure, including the absence of material omissions; and (iii) the absence of statements that are materially misleading, whether through context, emphasis, or the manner in which information is presented.
D. Rules 14a-3, 14a-4, 14a-5, and 14a-6 — Procedural Requirements
In addition to the substantive requirements described above, the Proxy Statement must comply with the procedural requirements of Regulation 14A, including the following:
Rule 14a-3 — requires that a proxy statement meeting the requirements of Schedule 14A be furnished to each person solicited concurrently with or prior to the solicitation, and sets forth the information required to be included therein.
Rule 14a-4 — prescribes the form of proxy, including requirements that the proxy clearly identify the matters to be acted upon and provide stockholders with the ability to specify their choices with respect to each matter.
Rule 14a-5 — establishes presentation requirements for proxy statements, including requirements regarding formatting, legibility, and the manner in which information is organized and presented.
Rule 14a-6 — sets forth filing requirements, including the requirement that a preliminary proxy statement be filed with the SEC at least ten calendar days prior to the date definitive copies of the proxy statement are first sent to stockholders, and that the definitive proxy statement be filed with the SEC no later than the date it is first sent or given to stockholders.
With respect to procedural compliance, we note the following: Cloudium filed its preliminary proxy statement with the SEC on or about March 14, 2024, in compliance with Rule 14a-6(a). No SEC staff comments were received during the ten-calendar-day review period, and accordingly, Cloudium is free to file the Definitive Proxy Statement and commence distribution to stockholders. The Definitive Proxy Statement is expected to be filed on April 15, 2024, and mailed to stockholders promptly thereafter. Based on our review of the Draft Proxy, the form of proxy appended thereto, and the notice of special meeting of stockholders, we believe the procedural requirements of Rules 14a-3, 14a-4, 14a-5, and 14a-6 have been or will be satisfied. We have not identified any procedural deficiencies.
III. Transaction Summary Disclosures — Compliance Review
A. Description of the Merger
We have reviewed the description of the Merger contained in the "Summary Term Sheet" and "The Merger" sections of the Draft Proxy to confirm that the Proxy Statement accurately and completely describes the structure and mechanics of the transaction.
The Merger is structured as a reverse triangular merger under the DGCL. Merger Sub, a Delaware corporation and wholly owned subsidiary of Fund VI, will merge with and into Cloudium, with Cloudium surviving as the surviving corporation and a wholly owned subsidiary of Fund VI. At the effective time of the Merger (the "Effective Time"), which will occur upon the filing of a Certificate of Merger with the Secretary of State of the State of Delaware, each outstanding share of Cloudium common stock (other than shares held by Fund VI, Merger Sub, or their affiliates, shares subject to rollover agreements, and shares held by stockholders who have properly exercised and perfected appraisal rights under DGCL § 262) will be converted into the right to receive $36.92 per share in cash, without interest and subject to applicable withholding taxes (the "Merger Consideration").
We confirm that the Draft Proxy accurately describes the following material terms:
(i) Merger Structure. The Draft Proxy correctly describes the transaction as a reverse triangular merger under the DGCL in which Merger Sub merges with and into Cloudium, with Cloudium as the surviving entity. The description is consistent with the terms of Section 2.1 of the Merger Agreement.
(ii) Merger Consideration. The Draft Proxy correctly states that each share of Cloudium common stock (subject to the exclusions noted above) will be converted into the right to receive $36.92 per share in cash, which is consistent with Section 3.1(a) of the Merger Agreement.
(iii) Shares Outstanding. The Draft Proxy correctly states that as of the signing date, there were approximately 184,200,000 shares of Cloudium common stock outstanding.
(iv) Aggregate Deal Value. The Draft Proxy correctly states that the aggregate deal value is approximately $6,800,000,000.
(v) Effective Time. The Draft Proxy correctly states that the Effective Time will occur upon the filing of a Certificate of Merger with the Delaware Secretary of State, consistent with Section 2.2 of the Merger Agreement.
(vi) Governing Law. The Draft Proxy correctly identifies Delaware law as the governing law of the Merger Agreement and the DGCL as the law governing the mechanics of the Merger.
Based on our review, the description of the Merger in the Draft Proxy is accurate and consistent with the terms of the Merger Agreement. We have not identified any material discrepancy between the description in the Draft Proxy and the execution version of the Merger Agreement.
B. Parties to the Merger
We have reviewed the descriptions of the parties to the Merger as set forth in the "Parties to the Merger" section of the Draft Proxy and confirm that the following information is accurately disclosed:
Cloudium Technologies plc. The Draft Proxy correctly identifies Cloudium as a public limited company incorporated under the laws of England and Wales, with Company No. 09734521, registered office at 45 Broadwick Street, London W1F 0DB, United Kingdom, and U.S. headquarters at 600 Townsend Street, Suite 800, San Francisco, California 94103. The Draft Proxy describes Cloudium as a provider of cloud-native enterprise resource planning ("ERP"), customer relationship management ("CRM"), and business-intelligence software-as-a-service ("SaaS") solutions serving mid-market and enterprise customers globally, with approximately 6,800 employees across the United States, United Kingdom, India, and Germany.
Stratos Merger Sub Inc. The Draft Proxy correctly identifies Merger Sub as a Delaware corporation formed on January 8, 2024, solely for the purpose of effecting the Merger. The registered office of Merger Sub is located at 1209 Orange Street, Wilmington, Delaware 19801. Merger Sub is a wholly owned subsidiary of Fund VI, has not conducted any business other than in connection with the Merger, and has no material assets or liabilities, other than those incident to its formation and incurred in connection with the transactions contemplated by the Merger Agreement. This description is accurate and appropriate.
Solara Digital Infrastructure Fund VI LP. The Draft Proxy correctly identifies Fund VI as a Delaware limited partnership, with Solara Fund VI GP LLC as its general partner. Fund VI is part of the Solara Digital Infrastructure LP platform, which has approximately $38 billion in assets under management. Fund VI is a 2022-vintage fund with approximately $12.4 billion in committed capital. The headquarters of Fund VI is located at 1200 Market Street, Suite 3400, Wilmington, Delaware 19801.
We further confirm that the Draft Proxy discloses the identities and titles of Solara's managing partners: Marcus Elliston, Founder and Managing Partner, and Priya Narasimhan, Co-Managing Partner and Chief Investment Officer. The Draft Proxy also accurately describes Solara's investment focus on enterprise software, cloud infrastructure, data analytics, and SaaS platforms. We have verified this description against publicly available information and the Merger Agreement recitals, and it is accurate.
C. Merger Consideration and Treatment of Equity
We have reviewed the disclosure of the Merger Consideration and the treatment of equity interests in the Draft Proxy, and we confirm the accuracy of the following:
Per-Share Consideration. Each share of Cloudium common stock (other than excluded shares) will be converted into the right to receive $36.92 per share in cash, without interest. This figure is consistent with Section 3.1(a) of the Merger Agreement.
Treatment of Rollover Shareholders. The Draft Proxy discloses that certain stockholders have entered into rollover agreements pursuant to which a portion of their shares will be exchanged for equity interests in the post-closing surviving entity rather than cash consideration:
(a) Jonathan Hargrove (CEO): Mr. Hargrove holds approximately 7,736,400 shares, representing approximately 4.2% of Cloudium's outstanding common stock. Pursuant to his rollover agreement, Mr. Hargrove will roll over approximately 50% of his shares (approximately 3,868,200 shares), representing approximately $142,814,544 in notional value based on the Merger Consideration of $36.92 per share. Mr. Hargrove will receive the $36.92 per share cash consideration for his remaining shares.
(b) Pinnacle Growth Ventures LLC: Pinnacle Growth Ventures LLC ("Pinnacle"), of which Evelyn Carmichael is the Managing Member, holds approximately 21,367,200 shares, representing approximately 11.6% of Cloudium's outstanding common stock. Pursuant to its rollover agreement, Pinnacle will roll over approximately 60% of its shares (approximately 12,820,320 shares), representing approximately $473,241,408 in notional value based on the Merger Consideration. Pinnacle will receive the $36.92 per share cash consideration for its remaining shares.
The total value of shares subject to rollover agreements is approximately $616,055,952. Accordingly, the total cash consideration payable to non-rolling stockholders is approximately $6,183,944,048. We have verified these figures and confirm they are arithmetically consistent with the aggregate deal value and per-share consideration.
Treatment of Stock Options, RSUs, and Other Equity Awards. The Draft Proxy includes a description of the treatment of outstanding equity awards at the Effective Time, consistent with Section 3.3 of the Merger Agreement. We have reviewed this disclosure and confirm it accurately describes the conversion of in-the-money stock options into the right to receive cash equal to the excess of the Merger Consideration over the exercise price, the conversion of RSUs into the right to receive cash equal to the Merger Consideration multiplied by the number of shares subject to the RSU award, and the treatment of any performance-based equity awards. The disclosure appears adequate and accurate.
Premium to Pre-Announcement Trading Price. The Draft Proxy discloses the premium represented by the $36.92 per share Merger Consideration relative to Cloudium's pre-announcement trading price. We have confirmed that the premium calculations reference appropriate benchmarks, including the closing price on January 19, 2024 (the last trading day prior to public announcement), and the volume-weighted average price over various periods (30-day, 60-day, and 90-day), and that the calculations are presented with appropriate context. We recommend that the Proxy Statement verify the accuracy of these trading prices against Westmark Services Inc. or Refinitiv data as of the filing date and include a note that actual premiums may vary based on the reference date used.
D. Valuation Metrics
We have reviewed the valuation metrics and financial data disclosed in the Draft Proxy, and we confirm the accuracy and consistency of the following data points:
We have verified the EV/EBITDA multiple calculation and confirm it is mathematically consistent with the disclosed deal value and LTM EBITDA figures. The Draft Proxy appropriately presents the valuation metrics in the context of the board's evaluation of the Merger Consideration and Veridian Partners' financial analyses. The business description — characterizing Cloudium as a provider of cloud-native ERP, CRM, and business-intelligence SaaS solutions serving mid-market and enterprise customers — is consistent with Cloudium's public filings and investor presentations.
IV. Background of the Merger — Compliance Review
A. Completeness of Timeline
Adequate disclosure of the background of the Merger is a critical component of the Proxy Statement's compliance with Section 14(a) and Rule 14a-9. Stockholders are entitled to a complete and accurate chronology of the events leading to the Merger, including the initiation of discussions, the conduct of due diligence, the negotiation of the transaction terms, and the board's deliberation and ultimate decision to approve the Merger Agreement. See, e.g., In re Pure Res., Inc. S'holders Litig., 808 A.2d 421, 448-49 (Del. Ch. 2002) (emphasizing the importance of background disclosure in evaluating the fairness of the board's process).
We have reviewed the "Background of the Merger" section of the Draft Proxy and confirm that it includes a comprehensive chronology of the material events leading to the signing of the Merger Agreement. Specifically, we confirm that the following key events are disclosed, consistent with the information provided to us by the deal team and reflected in the Merger Agreement and ancillary documents:
• September 5, 2023: Execution of a non-disclosure agreement ("NDA") between Cloudium and Solara.
• September 18, 2023: Cloudium granted Solara access to a virtual data room containing due diligence materials.
• October 2, 2023: Cloudium management, led by Mr. Hargrove (CEO) and Ms. Whitfield (CFO), delivered a management presentation to Solara.
• October 30, 2023: Solara submitted a preliminary indication of interest ("IOI") to the Cloudium board, indicating a proposed acquisition price in the range of $34.00 to $37.50 per share.
• November 6, 2023: The Cloudium board of directors, after deliberation, authorized management to enter into exclusive negotiations with Solara, based on the recommendation of Veridian Partners and Ridgeway Phelps & Sato LLP.
• November 15, 2023: Cloudium and Solara entered into an exclusivity agreement providing for a 45-day period of exclusive negotiations.
• December 1, 2023: Calderwood & Harkness LLP circulated an initial draft of the Merger Agreement to Ridgeway Phelps & Sato LLP on behalf of Solara.
• December 1, 2023 through January 15, 2024: Multiple rounds of negotiation of the Merger Agreement and ancillary transaction documents, conducted by counsel for both parties, with active involvement of the Cloudium board and its advisors. The final negotiation session took place in person at C&H's New York offices on January 14-15, 2024.
• January 22, 2024: Execution of the Merger Agreement by all parties. Simultaneous execution of the rollover agreements, voting and support agreements, equity commitment letter, debt commitment letter, limited guarantee, and other ancillary documents.
• January 23, 2024: Public announcement of the Merger via joint press release.
The Draft Proxy includes additional detail regarding the substance of the board discussions at each meeting, the key negotiation points, and the evolution of the transaction terms over the course of the process. We have reviewed this additional narrative and confirmed that it is consistent with the contemporaneous board minutes and meeting materials provided to us by RPS.
We further confirm that the Draft Proxy appropriately discloses the roles of the following advisors:
• Veridian Partners LLC (Monica Pressler, Managing Director): Financial advisor to Cloudium, engaged to provide advisory services in connection with the strategic review and the Merger, and to deliver a fairness opinion to the Cloudium board.
• Ridgeway Phelps & Sato LLP (Catherine Answorth, Partner, New York; Alistair Fenn, Partner, London): Legal counsel to Cloudium.
• Osprey Bancroft & Co. (Damien Harlow, Managing Director, Technology M&A): Financial advisor to Solara in connection with the Merger.
• Calderwood & Harkness LLP: Legal counsel to Solara.
The disclosure of the respective roles of the financial and legal advisors is important to provide stockholders with context regarding the process and the sources of advice upon which the board relied. We are satisfied that the Draft Proxy provides adequate disclosure in this regard.
B. Board Deliberation and Process
We have reviewed the Draft Proxy's disclosure of the Cloudium board's deliberative process and confirm that it includes the following material elements:
Role of Independent Board Chair. The Draft Proxy discloses that Douglas Pemberton served as the independent Chairman of the Cloudium board throughout the process, and that Mr. Pemberton presided over all board meetings at which the Merger was considered and directed the engagement of Veridian Partners and RPS to advise the board.
Consideration of Strategic Alternatives. The Draft Proxy discloses that, prior to entering into exclusive negotiations with Solara, the board considered various strategic alternatives, including continuing as an independent public company, pursuing organic growth, evaluating potential combinations with other strategic parties, and soliciting interest from other potential acquirors. The Draft Proxy describes the board's determination, based on the advice of Veridian Partners, that the Solara proposal represented the most attractive strategic alternative available to Cloudium at that time. This disclosure is important in establishing that the board fulfilled its fiduciary duties in evaluating the transaction and that the Proxy Statement provides stockholders with a meaningful understanding of the deliberative process.
Engagement of Veridian Partners. The Draft Proxy discloses that the board engaged Veridian Partners to serve as its financial advisor and to render a fairness opinion, and that the board considered Veridian Partners' qualifications and potential conflicts of interest in connection with the engagement. The fairness opinion is discussed in detail in Section V below.
Negotiations on Price. The Draft Proxy discloses the progression of the price negotiations from Solara's initial IOI of $34.00 to $37.50 per share to the final agreed-upon price of $36.92 per share. The Draft Proxy describes the key negotiation dynamics, including the board's view that the initial midpoint of the IOI range was below the board's expectations based on Veridian Partners' preliminary valuation analyses, and the subsequent discussions that led to the final price. We have confirmed that this narrative is consistent with the board minutes and the materials reviewed in our prior work on this engagement.
No-Shop Provision and Fiduciary Out. The Draft Proxy discloses the board's evaluation of the no-shop provision contained in the Merger Agreement and the negotiation of the fiduciary-out exception permitting the board to consider and respond to unsolicited superior proposals under specified circumstances. The Draft Proxy describes the board's consideration of the benefits and risks associated with the no-shop provision and its determination that the negotiated terms, including the fiduciary-out exception and the termination fee, appropriately balanced the interests of Cloudium's stockholders.
Termination Fees. The Draft Proxy discloses the board's evaluation of the termination fee of $221,000,000 (3.25% of the aggregate deal value of $6,800,000,000) payable by Cloudium in specified circumstances, and the reverse termination fee of $374,000,000 (5.5% of the aggregate deal value) payable by Solara (via a limited guarantee from Solara Fund VI GP LLC) in specified circumstances. The Draft Proxy describes the board's determination that the termination fee was within the range of termination fees customary in comparable transactions and would not unduly deter competing proposals.
C. Potential Conflicts of Interest
Adequate disclosure of potential conflicts of interest is a fundamental requirement under Section 14(a) and Rule 14a-9, and is particularly important in going-private transactions where insiders have interests that differ from, or are in addition to, those of unaffiliated stockholders. See, e.g., In re Emerging Commc'ns, Inc. S'holders Litig., No. Civ.A. 16415, 2004 WL 1305745, at *31 (Del. Ch. June 4, 2004).
We have reviewed the Draft Proxy's disclosure of potential conflicts of interest and confirm that the following material conflicts are adequately disclosed:
Jonathan Hargrove (CEO). The Draft Proxy discloses that Mr. Hargrove holds approximately 4.2% of Cloudium's outstanding common stock (approximately 7,736,400 shares) and has entered into a rollover agreement pursuant to which he will roll over approximately 50% of his shares into equity in the surviving entity. The Draft Proxy further discloses that Mr. Hargrove has entered into a non-competition and non-solicitation agreement with Fund VI in connection with the Merger and will continue in his role as Chief Executive Officer following the closing. These arrangements create interests that differ from, and are in addition to, those of unaffiliated stockholders, as Mr. Hargrove will participate in the post-closing equity upside of the surviving entity and will continue in a senior management role, rather than receiving the full cash Merger Consideration for all of his shares.
Sienna Whitfield (CFO). The Draft Proxy discloses that Ms. Whitfield has entered into a non-competition and non-solicitation agreement with Fund VI in connection with the Merger. While Ms. Whitfield does not hold a rollover equity interest, the existence of the non-competition and non-solicitation agreement, and any associated compensation or retention arrangements, creates a potential conflict of interest that is appropriate to disclose.
Pinnacle Growth Ventures LLC. The Draft Proxy discloses that Pinnacle holds approximately 11.6% of Cloudium's outstanding common stock (approximately 21,367,200 shares) and has entered into a rollover agreement pursuant to which it will roll over approximately 60% of its shares into equity in the surviving entity. The Draft Proxy further discloses that Evelyn Carmichael, the Managing Member of Pinnacle, is a member of the Cloudium board of directors, and that Pinnacle holds two board seats. The Draft Proxy also discloses that Pinnacle was an original Series B investor in Cloudium and has participated in subsequent financing rounds. These relationships and arrangements create significant conflicts of interest.
Board's Consideration of Conflicts. The Draft Proxy discloses that the Cloudium board was aware of and considered these conflicts of interest in its evaluation of the Merger and in reaching its determination to recommend the Merger to stockholders. The Draft Proxy notes that the board took the conflicts into account as part of its overall analysis of the transaction.
Nadia Chowdhury (General Counsel). The Draft Proxy discloses that Ms. Chowdhury, Cloudium's General Counsel, participated in the negotiations leading to the Merger Agreement and ancillary documents. While Ms. Chowdhury's involvement in negotiations is expected in her role as General Counsel, disclosure of her participation is appropriate in the interest of completeness.
Based on our review, we believe the Draft Proxy's disclosure of conflicts of interest is adequate and compliant with Section 14(a) and Rule 14a-9. We note one recommended revision in Section XV below to provide additional detail regarding Pinnacle's board representation and the measures, if any, that the board undertook to address potential conflicts arising from Pinnacle's dual role as a significant rollover participant and a board member with two designated seats.
V. Fairness Opinion Disclosure — Compliance Review
A. Veridian Partners LLC Fairness Opinion
The fairness opinion is a critical component of the Proxy Statement's disclosure regarding the board's process and its basis for recommending the Merger. Under Item 14 of Schedule 14A and Rule 14a-9, the Proxy Statement must adequately summarize the fairness opinion, the financial analyses performed by the financial advisor, and the material assumptions and qualifications underlying the opinion.
Veridian Partners delivered its fairness opinion to the Cloudium board of directors on January 21, 2024, one day prior to the execution of the Merger Agreement. We have reviewed the Draft Proxy's summary of the fairness opinion and confirm that it includes the following elements:
Financial Analyses Performed. The Draft Proxy summarizes the principal financial analyses performed by Veridian Partners in arriving at its fairness opinion, including:
(i) discounted Cash Flow ("DCF") Analysis: The Draft Proxy describes the DCF analysis, including the range of terminal values, discount rates, and projected free cash flows utilized by Veridian Partners. The discount rate range, terminal growth rate assumptions, and projected cash flow figures are disclosed with reasonable specificity.
(ii) Comparable Companies Analysis: The Draft Proxy identifies the comparable public companies selected by Veridian Partners and discloses the relevant multiples (including EV/Revenue, EV/EBITDA, and EV/ARR) applied to Cloudium's financial metrics.
(iii) Precedent Transactions Analysis: The Draft Proxy identifies the precedent transactions selected by Veridian Partners and discloses the relevant multiples applied in the analysis.
(iv) Premiums Paid Analysis: The Draft Proxy describes the premiums paid analysis, including the range of premiums observed in comparable going-private and take-private transactions.
Key Assumptions and Methodologies. The Draft Proxy describes the key assumptions underlying each financial analysis, including the use of Cloudium management's financial projections as a basis for the DCF analysis, the selection criteria for comparable companies and precedent transactions, and the sources of market data utilized. We have confirmed that these descriptions are consistent with the fairness opinion itself and the backup materials provided by Veridian Partners.
Conclusions. The Draft Proxy accurately states that, based on its analyses and subject to the assumptions, qualifications, and limitations set forth in the opinion, Veridian Partners concluded that the Merger Consideration of $36.92 per share to be received by holders of Cloudium common stock (other than rollover shareholders) pursuant to the Merger Agreement is fair, from a financial point of view, to such holders. This formulation is consistent with the language of the opinion itself.
Limitations and Qualifications. The Draft Proxy discloses the limitations and qualifications of the fairness opinion, including that the opinion addresses only the financial fairness of the Merger Consideration and does not constitute a recommendation as to how any stockholder should vote, that the opinion is based on financial, economic, and market conditions as they existed on the date of the opinion, and that Veridian Partners is not expressing any opinion as to the prices at which Cloudium common stock may trade at any time.
Fees and Relationships. The Draft Proxy discloses the compensation payable to Veridian Partners in connection with the engagement, including that a significant portion of Veridian Partners' fee is contingent upon the consummation of the Merger, and that Cloudium has agreed to reimburse Veridian Partners' expenses and to indemnify Veridian Partners and its affiliates against certain liabilities. The Draft Proxy also discloses any material prior relationships between Veridian Partners and Cloudium, Solara, or their respective affiliates during the two-year period preceding the engagement.
Full Text of Fairness Opinion. We confirm that the Draft Proxy indicates that the full text of the fairness opinion will be attached as Annex B to the Definitive Proxy Statement. Inclusion of the full text of the fairness opinion is required by Item 14(b)(6) of Schedule 14A and is essential for compliance. We recommend confirming that the final version of the fairness opinion is correctly attached to the filed Definitive Proxy Statement.
B. No Fairness Opinion from Buyer's Financial Advisor
Osprey Bancroft & Co. served as financial advisor to Solara in connection with the Merger. Osprey Bancroft was retained by Solara and owes its advisory duties to Solara, not to Cloudium or its stockholders. The Draft Proxy makes clear that Osprey Bancroft was Solara's financial advisor and did not deliver an opinion to the Cloudium board. We have reviewed the relevant disclosures and confirmed that the Draft Proxy does not create any confusion regarding the party to whom Osprey Bancroft owes its duties. No revision is recommended on this point.
VI. Merger Agreement Terms Disclosure — Compliance Review
A. Conditions to Closing
We have reviewed the Draft Proxy's summary of the conditions to the consummation of the Merger and confirm that the following material conditions are accurately disclosed:
Stockholder Approval. The Merger Agreement requires the affirmative vote of holders of a majority of the outstanding shares of Cloudium common stock entitled to vote at the special meeting. The Draft Proxy correctly describes this approval threshold and the mechanics of the stockholder vote.
HSR Act Clearance. The Draft Proxy discloses that filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), were made on February 9, 2024, and that the initial 30-day waiting period expired on March 11, 2024, without the issuance of a Second Request. The HSR condition to closing has been satisfied. This information should be confirmed as reflected in the Definitive Proxy Statement.
UK CMA Clearance. The Draft Proxy discloses that a Merger Notice was filed with the UK Competition and Markets Authority (the "CMA") on February 12, 2024, under Case No. ME/7184/24. We note that Phase 1 unconditional clearance was granted by the CMA on April 3, 2024. The Draft Proxy, which is based on a substantially final draft dated April 8, 2024, should reflect this clearance, and we recommend confirming that the Definitive Proxy Statement filed on April 15, 2024, accurately reflects the CMA's unconditional clearance. As of this memorandum, this appears to have been incorporated, but final confirmation is warranted.
No Legal Impediment. The Draft Proxy discloses the condition that no governmental authority shall have enacted, issued, promulgated, enforced, or entered any law, order, injunction, decree, or ruling that remains in effect and prohibits, enjoins, or makes illegal the consummation of the Merger.
Accuracy of Representations and Warranties. The Draft Proxy discloses the condition that the representations and warranties of each party shall be true and correct as of the closing date, subject to the materiality qualifiers and material adverse effect qualifiers specified in the Merger Agreement.
Compliance with Covenants. The Draft Proxy discloses the condition that each party shall have complied in all material respects with its covenants and agreements under the Merger Agreement.
Outside Date. The Draft Proxy discloses that the Merger Agreement provides for an outside date of June 30, 2024 (the "Outside Date"), after which either party may terminate the Merger Agreement if the Merger has not been consummated, subject to certain extension provisions. We recommend confirming that the extension provisions are described with sufficient specificity in the Proxy Statement to inform stockholders of the circumstances under which the Outside Date may be extended and the length of any such extension.
B. No-Shop Provision and Fiduciary Out
We have reviewed the Draft Proxy's description of the no-shop provision and the fiduciary-out exception, and we confirm the following:
The Merger Agreement contains a no-shop provision that became effective upon the execution of the Merger Agreement on January 22, 2024. Under the no-shop provision, Cloudium is prohibited from, among other things, soliciting, initiating, or knowingly facilitating or encouraging any inquiries, proposals, or offers that constitute or could reasonably be expected to lead to an alternative acquisition proposal. Cloudium is also required to cease and cause to be terminated any existing discussions or negotiations with any third parties that may be ongoing with respect to any alternative acquisition proposal.
The no-shop provision is subject to a fiduciary-out exception that permits the Cloudium board to consider and respond to bona fide, unsolicited acquisition proposals that the board determines in good faith, after consultation with its financial advisor and outside legal counsel, constitute or could reasonably be expected to lead to a "superior proposal" (as defined in the Merger Agreement). In such circumstances, the board may provide information to, and engage in discussions or negotiations with, the party making the superior proposal, subject to the execution of a confidentiality agreement and compliance with specified notice and matching-right provisions.
The Draft Proxy further discloses that if the board changes its recommendation in response to a superior proposal, or if the Merger Agreement is terminated in connection with a superior proposal, Cloudium will be required to pay the termination fee of $221,000,000, representing 3.25% of the aggregate deal value of $6,800,000,000. The Draft Proxy describes the matching-right provisions, which provide Solara with a specified period (typically three to five business days) to match or exceed a competing proposal before the board may change its recommendation.
We confirm that the Draft Proxy clearly explains the restrictions on Cloudium's ability to solicit or engage with competing proposals and the circumstances under which the board may change its recommendation. The disclosure is adequate and consistent with the terms of the Merger Agreement. We recommend one minor revision to further clarify the specific duration of Solara's matching-right period, as noted in Section XV below.
C. Termination Provisions
We have reviewed the Draft Proxy's disclosure of the termination provisions of the Merger Agreement and confirm that the following material terms are accurately described:
Termination Fee. The Draft Proxy discloses that Cloudium will be required to pay a termination fee of $221,000,000 (representing 3.25% of the aggregate deal value of $6,800,000,000) to Fund VI in the event that the Merger Agreement is terminated under specified circumstances, including (i) a termination by Cloudium to accept a superior proposal, (ii) a termination by Fund VI following a change in the board's recommendation, or (iii) a termination by either party following the failure to obtain stockholder approval, in each case subject to specified conditions.
Reverse Termination Fee. The Draft Proxy discloses that Fund VI will be required to pay a reverse termination fee of $374,000,000 (representing 5.5% of the aggregate deal value) to Cloudium in the event that the Merger Agreement is terminated under specified circumstances, including (i) a termination by Cloudium due to Fund VI's or Merger Sub's material breach of representations, warranties, or covenants, or (ii) a termination due to the failure to obtain required regulatory approvals. The reverse termination fee is payable pursuant to the terms of a limited guarantee provided by Solara Fund VI GP LLC.
Limited Guarantee. The Draft Proxy discloses that Solara Fund VI GP LLC has provided a limited guarantee in favor of Cloudium in the aggregate amount of $246,000,000, consisting of (i) the $221,000,000 termination fee (guaranteeing Fund VI's payment obligation in the event the termination fee is payable by Fund VI under the circumstances specified in the Merger Agreement) and (ii) up to $25,000,000 in enforcement costs. We note that the limited guarantee amount of $246,000,000 is distinct from the reverse termination fee of $374,000,000, and we recommend confirming that the Draft Proxy clearly delineates the circumstances under which each obligation arises and the respective amounts. See Section XV below for our specific recommendation.
Termination Triggers. The Draft Proxy includes a summary of the circumstances under which the Merger Agreement may be terminated, including by mutual consent, by either party upon the failure to consummate the Merger by the Outside Date, by either party upon the failure to obtain stockholder approval, and by either party upon the material breach by the other party of its representations, warranties, or covenants. We confirm that the disclosure of termination triggers is consistent with the Merger Agreement.
D. Material Adverse Effect Definition
We have reviewed the Draft Proxy's disclosure of the definition of "Material Adverse Effect" (as defined in the Merger Agreement) and confirm that the disclosure is consistent with Section 1.1 of the Merger Agreement. The definition includes customary carveouts for, among other things:
(i) changes in general economic, financial, or market conditions;
(ii) changes in the industries in which Cloudium operates;
(iii) changes in applicable law or accounting standards;
(iv) acts of war, armed hostilities, terrorism, or national emergency;
(v) pandemics or public health emergencies (including COVID-19 and any mutations or variants thereof);
(vi) changes resulting from the announcement or pendency of the Merger; and
(vii) the failure of Cloudium to meet any internal or public projections, forecasts, or estimates (provided that the underlying causes of such failure are not excluded from the definition of Material Adverse Effect).
The Draft Proxy describes the Material Adverse Effect definition in the "Summary of the Merger Agreement — Representations and Warranties" section. We have compared this summary to the execution version of the Merger Agreement and confirmed that it is materially consistent. No revision is recommended on this point, other than our general recommendation in Section XV below regarding consistent use of defined terms throughout the Proxy Statement.
E. Indemnification and Escrow
The indemnification and escrow provisions of the Merger Agreement have a direct bearing on the amounts that Cloudium stockholders may ultimately receive, and accordingly, adequate disclosure of these provisions is material under the TSC Industries standard. We have reviewed the Draft Proxy's disclosure and confirm the following:
We confirm that the Draft Proxy discloses each of these material terms. We note the following specific observations:
(i) The tipping basket structure means that once indemnifiable losses exceed the $51,000,000 basket threshold, Fund VI may recover indemnification from dollar one (i.e., losses are recoverable from the first dollar, not merely from the amount in excess of the basket). The Draft Proxy should clearly explain this "tipping" mechanic to avoid any potential confusion with a deductible-style basket.
(ii) The escrow release schedule provides that 50% of the escrow ($272,000,000) will be released at 12 months post-closing and the remainder at 18 months post-closing, in each case net of any amounts retained for pending claims. Stockholders should understand that their pro rata share of the escrow will not be distributed until the applicable release dates, and that amounts may be withheld in respect of pending claims.
(iii) The special indemnities for fraud, willful breach, tax indemnities, and certain specified litigation matters are uncapped and are not subject to the general indemnification cap or the basket. This means that stockholder exposure with respect to these categories of claims could exceed the escrow amount or the general indemnification cap.
(iv) Douglas Pemberton, the independent Board Chair, will serve as the Stockholder Representative, acting on behalf of the non-rolling stockholders in connection with indemnification claims and escrow matters. The Draft Proxy should disclose the terms of his engagement, including any compensation payable to Mr. Pemberton in his capacity as Stockholder Representative.
We recommend the specific revisions set forth in Section XV below to ensure that the escrow release mechanics are described with sufficient precision.
F. Interim Operating Covenants
We have reviewed the Draft Proxy's description of the interim operating covenants applicable to Cloudium between the signing of the Merger Agreement and the earlier of the Effective Time or the termination of the Merger Agreement. The Draft Proxy describes the obligation of Cloudium to conduct its business in the ordinary course of business consistent with past practice and to use commercially reasonable efforts to preserve its business organization, relationships with employees, customers, suppliers, and other third parties.
The Draft Proxy further describes the specific restrictions set forth in Section 6.1 of the Merger Agreement, which require Cloudium to obtain Fund VI's prior written consent before taking certain enumerated actions, including (among others) declaring or paying dividends, issuing securities, incurring indebtedness, making acquisitions, entering into or amending material contracts, settling litigation, and making capital expenditures in excess of specified thresholds.
We have confirmed that the Draft Proxy's summary of the interim operating covenants is consistent with Section 6.1 of the Merger Agreement. The disclosure is adequate for purposes of informing stockholders of the restrictions on Cloudium's operations during the interim period.
G. Financing
Adequate disclosure of the financing of the Merger is a material element of the Proxy Statement, as it bears directly on the certainty of closing and the ability of Fund VI and Merger Sub to consummate the transaction and pay the Merger Consideration. We have reviewed the Draft Proxy's disclosure and confirm the following:
Debt Commitment Letter. The Draft Proxy discloses that Fund VI has obtained a debt commitment letter from Meridian Atlantic Bank, N.A. and Ironclad Capital Markets LLC (together, the "Debt Financing Sources") providing for committed debt financing in the aggregate amount of $4,240,000,000, consisting of:
(i) a $3,740,000,000 Term Loan B facility; and
(ii) a $500,000,000 Revolving Credit Facility.
Equity Commitment Letter. The Draft Proxy discloses that Fund VI has delivered an equity commitment letter to Merger Sub pursuant to which Fund VI has committed to contribute equity in the amount of $2,832,888,096 to fund the Merger.
Rollover Agreements. The Draft Proxy discloses the rollover agreements with Mr. Hargrove and Pinnacle, as described in Section III.C above, which provide for the rollover of approximately $616,055,952 in aggregate value of equity.
Co-Investment. The Draft Proxy discloses that Solara Digital Co-Invest VI-A LP, a co-investment vehicle affiliated with Solara, has committed to contribute $425,000,000 in co-investment capital in connection with the Merger.
No Financing Condition. The Draft Proxy discloses that the Merger is not subject to a financing condition — that is, the obligation of Fund VI and Merger Sub to consummate the Merger is not conditioned on the receipt of debt or equity financing. However, the Draft Proxy notes that the debt commitment letter contains customary conditions to the obligation of the Debt Financing Sources to fund the debt financing, including accuracy of specified representations, absence of material adverse effect, execution and delivery of definitive credit documentation, and other conditions. We recommend that the Draft Proxy expand its description of the conditions in the debt commitment letter, as further discussed in Section XV below, to ensure that stockholders have a clear understanding of the risk that the debt financing may not be funded even though the Merger Agreement does not contain a financing condition.
Existing Cloudium Debt. The Draft Proxy discloses that Cloudium's existing indebtedness under the credit agreement dated March 15, 2021, with Atlas Commercial Lending Corp. (the "Existing Credit Agreement") — consisting of a $620,000,000 term loan and a $200,000,000 drawn revolving credit facility, for a total of $820,000,000 in outstanding indebtedness — will be repaid in full at the closing of the Merger. The Draft Proxy further discloses that the Existing Credit Agreement contains a change of control provision requiring mandatory prepayment upon a change of control of Cloudium, and that the consummation of the Merger will trigger this provision. We have confirmed that this disclosure is accurate and consistent with our review of the Existing Credit Agreement.
The sources and uses of funds for the Merger may be summarized as follows:
We recommend that the Proxy Statement include a summary sources and uses table, as this is customary practice and enhances the transparency of the financing disclosure.
VII. Voting and Support Agreements Disclosure
Voting and support agreements are material to the stockholder vote because they represent a committed block of votes, and their terms may bear on the likelihood that the Merger will receive the required stockholder approval. We have reviewed the Draft Proxy's disclosure of the voting and support agreements and confirm the following:
Parties. Voting and support agreements were executed on January 22, 2024 (concurrent with the signing of the Merger Agreement) by:
(i) Jonathan Hargrove, holding approximately 7,736,400 shares, representing approximately 4.2% of Cloudium's outstanding common stock; and
(ii) Pinnacle Growth Ventures LLC, holding approximately 21,367,200 shares, representing approximately 11.6% of Cloudium's outstanding common stock.
Combined Committed Votes. The combined committed votes under the voting and support agreements total approximately 29,103,600 shares, representing approximately 15.8% of Cloudium's outstanding common stock.
Terms. The Draft Proxy discloses that, pursuant to the voting and support agreements, each of Mr. Hargrove and Pinnacle has agreed to vote (or cause to be voted) all of his or its shares of Cloudium common stock (i) in favor of the adoption of the Merger Agreement, (ii) against any competing acquisition proposal, and (iii) against any action, proposal, or agreement that could reasonably be expected to impede, interfere with, delay, postpone, or adversely affect the Merger or any of the transactions contemplated by the Merger Agreement. The Draft Proxy further discloses the restrictions on transfer of shares subject to the voting and support agreements and the termination provisions of those agreements.
Relationship to Required Approval Threshold. The Draft Proxy discloses that the Merger requires the affirmative vote of holders of a majority of the outstanding shares of Cloudium common stock (i.e., more than 92,100,000 shares). The combined committed votes of approximately 15.8% represent a significant, but not determinative, portion of the total votes required. The Draft Proxy appropriately notes that the committed votes alone are not sufficient to ensure approval and that additional stockholder support is required for the Merger to be consummated.
We confirm that the Draft Proxy's disclosure of the voting and support agreements is adequate and accurate. No revision is recommended on this point.
VIII. Appraisal Rights Disclosure — Compliance Review
The availability of appraisal rights is a material consideration for stockholders deciding how to vote on the Merger and whether to seek judicial appraisal of the fair value of their shares. Under DGCL § 262, stockholders of a Delaware corporation who do not vote in favor of a merger and who comply with the statutory requirements may petition the Delaware Court of Chancery for a judicial determination of the fair value of their shares, and may receive the judicially determined fair value in lieu of the Merger Consideration.
We have reviewed the Draft Proxy's disclosure of appraisal rights and confirm that it includes the following elements:
(i) A description of the availability of appraisal rights under DGCL § 262 for holders of Cloudium common stock who do not vote in favor of the Merger.
(ii) A description of the procedures for perfecting appraisal rights, including the requirement that a stockholder deliver a written demand for appraisal to Cloudium before the vote on the Merger, that the stockholder not vote in favor of the Merger (or withdraw any previously submitted proxy voting in favor), and that the stockholder continuously hold the shares through the Effective Time.
(iii) A description of the withdrawal rights available to stockholders who have properly demanded appraisal, including the right to withdraw the demand and accept the Merger Consideration at any time within 60 days after the Effective Time, and thereafter with the written approval of the surviving corporation.