1041-00003 · Solara Digital Infrastructure LP · Tax

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

MEMORANDUM

November 1, 2023

FROM: Leonard Cross, Specialist Partner, Tax — Calderwood & Harkness LLP

TO: Harrison Wexford, Responsible Partner, M&A — Calderwood & Harkness LLP Beatrice Holloway, Billing Partner, M&A — Calderwood & Harkness LLP Tiffany Rosenthal, Lead Associate, M&A — Calderwood & Harkness LLP

CC: Andrew Fitzpatrick, Working Associate, M&A — Calderwood & Harkness LLP

RE: Tax-Free Reorganization Analysis — Reverse Triangular Merger of Stratos Merger Sub Inc. with and into Cloudium Technologies plc Under Section 368(a)(2)(E) of the Internal Revenue Code — Implications for Rollover Equity Participants

MATTER NO.: 1041-00003

CLIENT: Solara Digital Infrastructure LP

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I. Executive Summary

The purpose of this memorandum is to analyze whether the proposed reverse triangular merger structure by which Solara Digital Infrastructure Fund VI LP ("Fund VI") proposes to acquire Cloudium Technologies plc ("Cloudium" or the "Target") qualifies as a tax-free reorganization under Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"), and, in particular, to address the United States federal income tax implications for the two rollover equity participants in the proposed transaction. This memorandum further evaluates alternative non-recognition provisions that may be utilized to achieve tax-deferred treatment for the rollover equity participants in the event — as we conclude — that reorganization treatment is unavailable.

Transaction Overview. Fund VI, a Delaware limited partnership (EIN 87-4523190), proposes to acquire all of the issued and outstanding shares of common stock of Cloudium, a public limited company incorporated under the laws of England and Wales (Companies House No. 09734521; Nasdaq Global Select Market ticker: CLDM; US EIN 83-2196754), for an aggregate enterprise value of approximately $6,800,000,000 (the "Transaction"). The acquisition will be effectuated by means of a reverse triangular merger in which Stratos Merger Sub Inc. ("Merger Sub"), a Delaware corporation (Delaware File No. 7923841) to be incorporated on or about January 8, 2024, formed solely to effectuate the merger and wholly owned by Fund VI, will merge with and into Cloudium, with Cloudium surviving as a wholly owned subsidiary of Fund VI (the "Merger").

Consideration. The form of merger consideration is predominantly cash, at approximately $36.92 per share, except with respect to shares subject to rollover agreements with two key participants, as described below. All public stockholders of Cloudium other than the rollover participants will receive exclusively cash in the Merger.

Rollover Equity Participants. Two participants have entered into, or are expected to enter into, rollover agreements in connection with the Transaction:

(a) Jonathan Hargrove, Chief Executive Officer of Cloudium, who holds 7,736,400 shares of Cloudium common stock (representing approximately 4.2% of the 184,200,000 shares of common stock currently outstanding), will roll over 50% of his equity position (approximately $142,814,544 in value) into equity interests in the surviving entity or a parent thereof, with the remaining 50% cashed out at $36.92 per share; and

(b) Pinnacle Growth Ventures LLC ("Pinnacle"), a Delaware limited liability company whose Managing Member is Evelyn Carmichael, which holds 21,367,200 shares of Cloudium common stock (representing approximately 11.6% of outstanding shares), will roll over 60% of its equity position (approximately $473,241,408 in value) into equity interests in the surviving entity or a parent thereof, with the remaining 40% cashed out at $36.92 per share.

The total value of rollover equity in the Transaction is approximately $616,055,952.

Overall Conclusion. As set forth in detail below, the proposed Transaction, as currently structured, is unlikely to qualify as a tax-free reorganization under Section 368(a)(2)(E) of the Code. The continuity of interest ("COI") requirement — a judicial and regulatory doctrine that requires a substantial portion of the aggregate merger consideration to consist of stock of the acquiring corporation or its parent — will not be satisfied because stock consideration constitutes only approximately 9.06% of the total merger consideration, a figure far below any accepted threshold. Accordingly, the Transaction will be treated as a fully taxable acquisition for U.S. federal income tax purposes.

However, even though reorganization treatment is not available at the transaction level, the rollover participants' exchange of Cloudium shares for equity in the surviving entity or a parent entity may be structured to achieve tax-deferred treatment under alternative provisions of the Code — specifically, Section 351 (if the parent entity is a corporation) or Section 721 (if the parent entity is a partnership or limited liability company classified as a partnership for U.S. federal income tax purposes). Specific recommendations regarding the optimal structuring approach are set forth in Section IX of this memorandum.

Coordination Note. This memorandum has been prepared in consultation with Glenmore Thornton LLP, specifically Richard Okamura, Lead Partner, Transaction Tax, and Vanessa Liu, Financial Due Diligence, who are advising Solara Digital Infrastructure LP on financial due diligence, purchase price allocation, and related tax advisory matters in connection with the Transaction.

II. Factual Background and Transaction Structure

A. Parties. Solara Digital Infrastructure LP. The sponsor of the proposed Transaction is Solara Digital Infrastructure LP, a Delaware limited partnership with its principal offices at 1200 Market Street, Suite 3400, Wilmington, Delaware 19801. The general partner of Solara Digital Infrastructure LP is Solara Digital GP LLC, a Delaware limited liability company. Solara Digital Infrastructure LP is managed by Marcus Elliston, Founder and Managing Partner, and Priya Narasimhan, Co-Managing Partner and Chief Investment Officer. Solara Digital Infrastructure LP and its affiliated entities manage approximately $38 billion in assets under management across six flagship infrastructure-focused private equity funds.

Fund VI (Investing Entity). The direct acquiring entity for purposes of this Transaction is Solara Digital Infrastructure Fund VI LP ("Fund VI"), a Delaware limited partnership, vintage year 2022, with approximately $12.4 billion in committed capital from institutional limited partners. The general partner of Fund VI is Solara Fund VI GP LLC, a Delaware limited liability company. Fund VI's EIN is 87-4523190. Fund VI will serve as the direct or indirect parent of Merger Sub and, following the closing, the surviving entity.

Co-Investment Vehicle. In addition to Fund VI, Solara Digital Co-Invest VI-A LP, a Delaware limited partnership, has been formed to source approximately $425,000,000 in co-investment capital from a subset of Fund VI's limited partners who have elected to exercise their co-investment rights under the Fund VI limited partnership agreement. The co-investment vehicle's capital contribution is included within the total equity contribution described in Section II.C below.

Cloudium Technologies plc (Target). Cloudium Technologies plc is a public limited company incorporated under the laws of England and Wales (Companies House No. 09734521), with its registered office at 45 Broadwick Street, London W1F 0DB, United Kingdom. Cloudium's U.S. headquarters are located at 600 Townsend Street, Suite 800, San Francisco, California 94103. Cloudium's shares of common stock are listed on the Nasdaq Global Select Market under the ticker symbol "CLDM." As of the date of this memorandum, there are 184,200,000 shares of Cloudium common stock issued and outstanding.

Cloudium's senior management and board include the following key individuals:

• Jonathan Hargrove, Chief Executive Officer

• Sienna Whitfield, Chief Financial Officer

• Nadia Chowdhury, General Counsel

• Douglas Pemberton, Independent Board Chair

Cloudium is a provider of cloud-native enterprise resource planning ("ERP"), customer relationship management ("CRM"), and business-intelligence software-as-a-service ("SaaS") solutions to enterprise customers globally. The company employs approximately 6,800 individuals across the United States, the United Kingdom, India, and Germany.

Key financial metrics for Cloudium, as derived from publicly available filings and preliminary financial due diligence materials provided by Glenmore Thornton LLP, include the following:

Cloudium operates through three principal foreign subsidiaries, each of which will remain in place following the closing of the Merger:

(i) Cloudium Technologies UK Ltd., a private limited company organized under the laws of England and Wales (Companies House No. 11287456), employing approximately 1,200 individuals and generating revenue of approximately £312,000,000 (approximately $390,000,000 at a rate of $1.25/£) for the most recent fiscal year;

(ii) Cloudium Technologies India Pvt. Ltd., a private limited company organized under the laws of India with its registered office in Bangalore, Karnataka, employing approximately 2,400 individuals; and

(iii) Cloudium Solutions GmbH, a Gesellschaft mit beschränkter Haftung organized under the laws of Germany with its registered office in Berlin, employing approximately 400 individuals.

Stratos Merger Sub Inc. Stratos Merger Sub Inc. is a Delaware corporation that is planned to be incorporated solely for the purpose of effectuating the reverse triangular merger. Merger Sub's Delaware File Number is expected to be 7923841, and its registered agent will be located at 1209 Orange Street, Wilmington, Delaware 19801 (Cobalt Ridge Technologies). Merger Sub's sole stockholder will be Fund VI. Merger Sub will have only nominal capitalization at the time of the Merger and will have conducted no business operations prior to the Merger.

B. Deal Economics and Consideration

The aggregate deal value for the Transaction is $6,800,000,000. With 184,200,000 shares of Cloudium common stock outstanding, the per-share merger consideration is approximately $36.92 (calculated as $6,800,000,000 ÷ 184,200,000 shares).

The composition of the merger consideration is as follows:

The remaining shares held by Jonathan Hargrove (50% of his position, or approximately 3,868,200 shares) and Pinnacle Growth Ventures LLC (40% of its position, or approximately 8,546,880 shares) will be cashed out at $36.92 per share, consistent with the treatment of all other public stockholders of Cloudium. All public stockholders other than Hargrove and Pinnacle (with respect to their rolled-over shares) will receive exclusively cash in the Merger.

C. Sources of Funds

The Transaction will be financed from the following sources:

Total uses of funds include (i) the aggregate cash merger consideration of $6,183,944,048, (ii) the rollover equity of $616,055,952, (iii) estimated transaction expenses of approximately $185,000,000 (including advisory fees, legal fees, financing fees, and regulatory filing fees), and (iv) the repayment of approximately $820,000,000 in existing Cloudium indebtedness owed to Atlas Commercial Lending Corp. The total uses of $7,188,944,048 (including the value of the rollover equity, which is a non-cash use) match the total sources.

D. Merger Mechanics

The Transaction is structured as a reverse triangular merger under the Delaware General Corporation Law (the "DGCL"), specifically Title 8, Chapter 1, Subchapter IX thereof.

The merger mechanics are as follows:

(1) Stratos Merger Sub Inc. will merge with and into Cloudium Technologies plc, with Cloudium surviving the Merger as a wholly owned subsidiary of Fund VI (or such other direct parent entity as may be designated in the final holding structure).

(2) At the effective time of the Merger (anticipated to be 11:59 PM Eastern Time on the closing date), each issued and outstanding share of Cloudium common stock (other than (x) rollover shares as defined in the applicable Rollover Agreements, (y) shares held by stockholders who have properly exercised and perfected their appraisal rights under applicable law ("Dissenting Shares"), and (z) shares held in treasury by Cloudium) will be automatically converted into the right to receive $36.92 in cash, without interest.

(3) Rollover shares held by Jonathan Hargrove and Pinnacle Growth Ventures LLC will be cancelled and exchanged for equity interests in the surviving entity or a parent thereof, pursuant to and in accordance with the separate Rollover Agreements to be executed by each rollover participant.

(4) Each share of Merger Sub common stock outstanding immediately prior to the effective time of the Merger will be converted into one share of common stock of the surviving entity.

The governing law for the Merger Agreement and the merger mechanics is the law of the State of Delaware. Cloudium's status as a public limited company incorporated in England and Wales raises additional regulatory and corporate-law considerations that are being addressed by Albright & Kerr LLP (Fiona McAllister, partner) but are outside the scope of this tax memorandum.

III. Legal Framework — Section 368(a)(2)(E) Reverse Triangular Merger

A. Statutory Requirements

Section 368(a)(2)(E) of the Code provides a specific form of tax-free reorganization applicable to reverse triangular mergers. Under this provision, a transaction qualifies as a reorganization if the following conditions are satisfied:

(i) A subsidiary corporation (the "Merger Sub") merges into the target (here, Cloudium), with the target surviving the merger;

(ii) After the merger, the surviving corporation (Cloudium) holds "substantially all" of its own properties and of the properties of the merged subsidiary (Merger Sub);

(iii) In the merger, the former shareholders of the target exchange their stock solely for voting stock of the controlling corporation (here, Fund VI or its corporate designee); and

(iv) The transaction satisfies the judicial and regulatory requirements applicable to reorganizations generally, including the continuity of interest doctrine and the continuity of business enterprise doctrine.

The statute itself requires that, in the exchange, the former shareholders of the target receive "solely" voting stock of the controlling corporation in exchange for "control" of the surviving corporation. However, this requirement is relaxed by the so-called "boot relaxation" rule: Section 368(a)(2)(E)(ii) provides that the target shareholders need not receive solely stock, so long as the former shareholders exchange, in the aggregate, a sufficient amount of their target stock for stock of the parent to satisfy the controlling corporation's obtaining "control" of the target within the meaning of Section 368(c) (i.e., 80% of total combined voting power and 80% of each class of nonvoting stock). In practical terms, this means that some cash ("boot") may be paid in a reverse triangular merger without disqualifying the transaction as a reorganization — but only if the stock component is sufficient to satisfy both the statutory requirements and the continuity of interest doctrine.

It is essential to distinguish between the statutory "solely for voting stock" requirement (as modified by the boot relaxation provision) and the separate judicial and regulatory requirement of continuity of interest, which imposes an independent quantitative floor on the proportion of stock consideration, as discussed in greater detail below.

B. Continuity of Interest ("COI") Requirement

The continuity of interest requirement is a longstanding judicial and regulatory doctrine that requires that "a substantial part of the value of the proprietary interests in the target" be preserved through the receipt of equity interests in the acquiring corporation or its parent. This requirement is codified in Treasury Regulation § 1.368-1(e).

The COI requirement serves the policy objective of distinguishing reorganizations — in which the target's shareholders continue as equity participants in the combined enterprise, merely in modified form — from outright sales, in which the target's shareholders cash out their investment entirely.

Quantitative Threshold. The Internal Revenue Service has historically applied the following guidelines in evaluating whether the COI requirement is satisfied:

• In Revenue Procedure 77-37, 1977-1 C.B. 568, the IRS indicated that it would issue favorable advance rulings on reorganization transactions where at least 50% of the total consideration consisted of stock of the acquiring corporation. This 50% threshold is often cited as the "safe harbor" for obtaining a private letter ruling.

• In practice, however, courts and the IRS have sustained reorganization treatment in transactions where stock consideration constituted as little as approximately 40% of the total consideration. See, e.g., John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935); Kass v. Commissioner, 60 T.C. 218 (1973), aff'd, 491 F.2d 749 (3d Cir. 1974). The 40% floor is generally regarded as the practical minimum for continuity of interest, though the IRS's ruling position (as reflected in its no-rule policy) suggests some residual uncertainty in the 40%–50% range.

• Certain practitioners have suggested that transactions with stock consideration as low as 25% to 30% of total consideration might satisfy the COI requirement under the most liberal reading of the case law, but this position is considered aggressive and would not be supportable under the weight of existing authority.

Measurement Principles. Treasury Regulation § 1.368-1(e)(1)(i) provides that the COI requirement is measured by reference to the value of the proprietary interests received by the target shareholders in the aggregate relative to the total consideration. Critically, the COI requirement is measured on a transaction-wide basis — that is, the relevant inquiry is what percentage of the total merger consideration consists of stock, not whether any individual shareholder received stock. Thus, in a transaction in which most shareholders receive cash and only a small number roll their equity into the combined entity, the stock component of the consideration is measured against the entire deal value, not against the rollover participants' consideration alone.

Treasury Regulation § 1.368-1(e)(2) further provides that the proprietary interest must be a "meaningful" interest in the resulting enterprise and must represent a "substantial part" of the total consideration, reinforcing the requirement that stock consideration be a significant component of the overall deal economics.

The "over the top" structure — a cash-heavy merger with select equity rollover by management or financial sponsors — is a well-recognized transaction format in the leveraged buyout context. In such transactions, the COI analysis necessarily focuses on the aggregate ratio of stock to total consideration across all target shareholders. Because leveraged buyouts are, by their nature, predominantly cash-financed (with debt providing a substantial portion of the acquisition price), these transactions rarely satisfy the COI requirement.

C. Substantially All Properties Test

Section 368(a)(2)(E) requires that, after the merger, the surviving corporation hold "substantially all" of its own properties and the properties of the merged subsidiary. The IRS has provided guidance on the "substantially all" standard in Revenue Ruling 77-37, 1977-1 C.B. 568, which provides that a corporation will be deemed to hold "substantially all" of a transferor's properties if it holds:

(a) At least 90% of the fair market value of the net assets of the transferor; and

(b) At least 70% of the fair market value of the gross assets of the transferor.

In the context of a reverse triangular merger under Section 368(a)(2)(E), this test is typically straightforward to satisfy. The target (here, Cloudium) survives the merger with all of its own assets and properties intact. Merger Sub, having been formed solely for the purpose of effectuating the merger and having only nominal capitalization, contributes de minimis properties to the surviving entity. Accordingly, the surviving entity will hold substantially all of the properties of both itself and the merged subsidiary.

The "substantially all" test can become more complicated if, in connection with or as a precondition to the merger, the target disposes of a significant portion of its assets (e.g., through spin-offs, asset sales, or distributions to shareholders). In the present Transaction, no such dispositions are contemplated, and the test is expected to be satisfied without difficulty.

D. Step-Transaction Doctrine Considerations

The step-transaction doctrine is a judicial doctrine under which a court or the IRS may disregard the formal structure of a series of ostensibly separate transactions and instead treat them as a single integrated transaction for tax purposes, if the individual steps are so interdependent or prearranged that they have no independent economic significance apart from their relationship to the overall plan.

The step-transaction doctrine is relevant to the present Transaction in at least one important respect. If the rollover equity contributions by Hargrove and Pinnacle are treated as a separate transaction from the cash-out merger — either because the rollover is consummated at a different time, is documented as a standalone investment rather than as part of the merger consideration, or is otherwise distinguishable from the merger — a court or the IRS could conclude that the merger itself is entirely a cash acquisition (with no stock component), and that the rollover constitutes a distinct investment by Hargrove and Pinnacle in the post-closing entity.

Under such an analysis, the merger would be taxable in its entirety, and the rollover would be evaluated independently under Section 351 (if the rollover is effected as a contribution to a corporation) or Section 721 (if the rollover is effected as a contribution to a partnership). In many respects, this recharacterization may be favorable to the rollover participants, as it could support tax-deferred treatment for the rollover under one of these alternative provisions — even though the overall merger does not qualify as a reorganization.

Conversely, if the step-transaction doctrine is applied to integrate the rollover with the merger, and the overall transaction is treated as a single reorganization, the failure of the COI requirement would cause the entire transaction — including the rollover component — to be taxable. Under this scenario, rollover participants would recognize gain on the exchange of their Cloudium shares for equity interests in the post-closing entity.

As discussed in Section V below, we believe the preferred approach is to structure the rollover contributions in a manner that permits them to qualify for tax-deferred treatment under Section 351 or Section 721, independent of whether the overall merger qualifies as a reorganization. Careful drafting of the Rollover Agreements, combined with appropriate integration of the rollover with the closing mechanics, is essential to achieving this result.

IV. Application to the Proposed Transaction

A. Continuity of Interest Analysis

Applying the COI framework set forth in Section III.B above to the proposed Transaction, the relevant figures are as follows:

The calculation is straightforward: $616,055,952 ÷ $6,800,000,000 = approximately 9.06%.

This percentage is far below the 40% minimum threshold that has been generally accepted as the floor for continuity of interest in the case law and IRS guidance. Indeed, even under the most aggressive interpretation of the COI doctrine — under which certain commentators have argued that stock consideration as low as 25% to 30% of total consideration might suffice — the 9.06% stock component in this Transaction would be plainly insufficient.

To illustrate the magnitude of the shortfall: if the parties wished to achieve the 40% COI threshold, the stock component of the merger consideration would need to be at least $2,720,000,000 (i.e., 40% × $6,800,000,000). The actual stock component of $616,055,952 is approximately $2.1 billion below this level — a gap that cannot be closed through any reasonable restructuring of the rollover equity without fundamentally altering the economics of the Transaction.

Moreover, even if the parties were prepared to adopt the more conservative 50% safe harbor position articulated in Revenue Procedure 77-37, the stock component would need to be at least $3,400,000,000 — more than five times the amount of rollover equity currently contemplated.

There is no credible basis on which to argue that the COI requirement is satisfied in the present Transaction.

Conclusion: The continuity of interest requirement of Section 368(a)(2)(E) is not satisfied. The proposed Transaction, taken as a whole, does not qualify as a tax-free reorganization under Section 368(a)(2)(E) of the Code.

B. Substantially All Properties Test

Although the failure of the COI test is dispositive — and the Transaction cannot qualify as a reorganization regardless of whether any other statutory or judicial requirement is met — we address the "substantially all" properties test for the sake of completeness.

As discussed in Section III.C, the "substantially all" test requires that the surviving entity hold at least 90% of the fair market value of the net assets and at least 70% of the fair market value of the gross assets of both the target and the merged subsidiary following the merger.

In the present Transaction, Cloudium will survive the Merger with all of its assets intact. No pre-closing asset dispositions, spin-offs, or distributions are contemplated that would reduce Cloudium's asset base. Stratos Merger Sub Inc. was formed solely for the purpose of effectuating the Merger and will have only nominal capitalization (expected to be no more than $1,000) at the time of the Merger. Accordingly, the surviving entity will hold substantially all of the properties of both Cloudium and Merger Sub.

Conclusion: The "substantially all" properties test is satisfied. However, because the COI requirement is not met, this conclusion does not alter the overall analysis.

C. Consequences of Failing to Qualify Under Section 368(a)(2)(E)

Because the Transaction does not qualify as a tax-free reorganization under Section 368(a)(2)(E), it will be treated as a fully taxable acquisition for U.S. federal income tax purposes. The consequences of this characterization differ depending on the category of stockholder.

Non-Rolling Shareholders. For the non-rolling shareholders — i.e., all Cloudium stockholders other than Hargrove and Pinnacle (with respect to their rolled-over shares) — the tax treatment is identical regardless of whether the Transaction qualifies as a reorganization. These shareholders receive exclusively cash consideration of $36.92 per share. Each such shareholder will recognize capital gain or loss equal to the difference between $36.92 and the shareholder's adjusted tax basis in the exchanged shares. Whether the Transaction is taxable or tax-free at the reorganization level is irrelevant to these shareholders, since boot received in a reorganization would in any event be taxable under Section 356.

Rollover Shareholders (Hargrove and Pinnacle). For the rollover participants, the failure of the Transaction to qualify as a reorganization has more significant consequences. Absent an alternative tax-deferred structure, the exchange by Hargrove and Pinnacle of their Cloudium shares for equity interests in the surviving entity or a parent thereof would be treated as a taxable exchange under Section 1001 of the Code. Each rollover participant would recognize gain equal to the excess of the fair market value of the equity interests received over the participant's adjusted tax basis in the surrendered Cloudium shares. Given that both Hargrove and Pinnacle hold shares with a cost basis that is likely well below the current per-share value of $36.92 (Hargrove, as a founder-era executive, likely has a basis significantly below the current market price, and Pinnacle, as an early-stage investor, similarly may have a low basis), the tax cost of a fully taxable rollover could be substantial.

It is therefore essential to consider alternative non-recognition provisions that may be utilized to achieve tax deferral for the rollover participants, as discussed in Section V below.

V. Alternative Tax-Deferred Structures for Rollover Equity

Because the Transaction does not qualify as a tax-free reorganization under Section 368(a)(2)(E), we must look to alternative provisions of the Code that may provide non-recognition treatment for the rollover equity contributions by Jonathan Hargrove and Pinnacle Growth Ventures LLC. Two primary alternatives are available, depending on the entity classification of the post-closing parent entity: (1) Section 351 of the Code (applicable to contributions to a controlled corporation) and (2) Section 721 of the Code (applicable to contributions to a partnership). We analyze each in turn.

A. Section 351 — Transfer to Controlled Corporation

Statutory Framework. Section 351(a) of the Code provides that no gain or loss shall be recognized if one or more persons transfer property to a corporation solely in exchange for stock of such corporation, and immediately after the exchange, the transferor or transferors are in "control" (as defined in Section 368(c)) of the corporation.

Section 368(c) defines "control" as the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote, and at least 80% of the total number of shares of all other classes of stock of the corporation.

The term "property" for purposes of Section 351 includes shares of stock in another corporation (such as Cloudium shares). Services do not constitute "property" for Section 351 purposes, but this limitation is not relevant here, as both Hargrove and Pinnacle will be contributing stock, not services, in exchange for equity interests in the post-closing entity.

Application to the Transaction. If the post-closing structure utilizes a corporate entity (either the surviving Cloudium entity itself or a newly formed corporate parent) as the vehicle through which the rollover is effectuated, Section 351 treatment may be available, provided the control requirement is satisfied. The analysis is as follows:

(i) Transferors and Transfers. At the closing of the Merger, Fund VI will contribute approximately $2,832,888,096 in cash equity to the corporate parent entity (or the surviving entity, as applicable). Simultaneously, Hargrove will contribute Cloudium shares valued at approximately $142,814,544, and Pinnacle will contribute Cloudium shares valued at approximately $473,241,408. Each transferor will receive stock of the corporate parent entity in exchange for its respective contribution.

(ii) Control Test. Immediately after the exchange, the total equity capitalization of the post-closing entity will be at least $3,448,944,048 (consisting of Fund VI's $2,832,888,096 equity contribution plus the $616,055,952 aggregate rollover equity). Fund VI alone will hold approximately 82.1% of the equity in the post-closing entity ($2,832,888,096 ÷ $3,448,944,048). The rollover participants together will hold approximately 17.9%. All transferors in the aggregate — Fund VI, Hargrove, and Pinnacle — will hold 100% of the equity in the post-closing entity immediately after the exchange. Accordingly, the Section 368(c) control requirement (80% of total combined voting power and 80% of each class of nonvoting stock) is satisfied with a substantial margin, whether measured by reference to all transferors collectively (100%) or to Fund VI alone (approximately 82.1%).

(iii) Solely Stock Requirement. Section 351(a) requires that the transferors receive "solely" stock in exchange for their property contributions. To the extent any rollover participant receives cash, notes, preferred returns with fixed or guaranteed distributions, or other non-stock consideration at the time of the rollover exchange, such consideration would constitute "boot" under Section 351(b), and gain would be recognized by the recipient to the extent of the fair market value of the boot received. To preserve full tax deferral for the rollover participants, the Rollover Agreements should provide that the rollover participants receive solely common stock (or, if preferred stock is issued, solely stock that satisfies the requirements of Section 351) and no other consideration.

(iv) Timing and Integration. The rollover contribution should be structured to occur simultaneously with, or as an integrated part of, the closing of the Merger. Specifically, the contribution of cash equity by Fund VI and the contribution of Cloudium shares by Hargrove and Pinnacle should be structured as a single, simultaneous exchange occurring at the effective time of the Merger (anticipated to be 11:59 PM Eastern Time on the closing date). This simultaneous closing is important for two reasons: (a) it ensures that the transferors are "in control" of the corporation "immediately after the exchange," as required by Section 351(a); and (b) it mitigates the risk that the IRS might treat the rollover contribution as a separate, non-integrated transaction that does not qualify for Section 351 treatment.

Conclusion. Section 351 is a viable path to achieve tax deferral for the rollover participants, provided that (a) the parent entity is classified as a corporation for U.S. federal income tax purposes, (b) the rollover participants receive solely stock (and no boot) in the exchange, and (c) the exchange is structured as a simultaneous, integrated closing.

B. Section 721 — Contribution to Partnership

Statutory Framework. Section 721(a) of the Code provides that no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership. This provision applies broadly to any contribution of property — including shares of stock in a corporation — to an entity classified as a partnership for U.S. federal income tax purposes.

Application to the Transaction. Fund VI is itself a Delaware limited partnership. In many private equity-sponsored buyouts, the post-closing holding structure utilizes a partnership or limited liability company classified as a partnership as the direct or indirect parent of the target. If the post-closing holding entity for the surviving Cloudium corporation is a partnership or LLC taxed as a partnership, then the rollover contributions by Hargrove and Pinnacle may be structured as contributions of Cloudium shares (or equity in the surviving entity) to the partnership in exchange for partnership or membership interests, qualifying for non-recognition treatment under Section 721.

The Section 721 analysis is generally more straightforward than the Section 351 analysis because Section 721 does not impose an "80% control" requirement. Any contribution of property to a partnership in exchange for a partnership interest is generally tax-free, regardless of the percentage of partnership interests received by the contributing partner.

However, the Section 721 framework is subject to several important anti-abuse and allocation rules that must be carefully managed:

(i) Disguised Sale Rules — Section 707(a)(2)(B). Treasury Regulation § 1.707-3 provides a presumption that a contribution of property to a partnership followed by a distribution of money or other property to the contributing partner within a two-year period constitutes a "disguised sale" of the property. If the rollover participants contribute Cloudium shares to the partnership and receive any distributions of cash or other property within two years of the contribution, the IRS may recharacterize the contribution and distribution as a taxable sale. To mitigate this risk, the partnership agreement should provide that no distributions are made to the rollover participants within two years of the closing, or, if distributions are necessary, that they qualify for one of the exceptions set forth in Treasury Regulation § 1.707-4 (e.g., guaranteed payments for services, preferred returns, or operating cash flow distributions made to all partners on a pro rata basis).

(ii) Section 704(c) Allocations. Section 704(c)(1)(A) of the Code provides that income, gain, loss, and deduction with respect to contributed property must be allocated among the partners so as to take into account any variation between the adjusted tax basis of the property and its fair market value at the time of the contribution. In the present case, the Cloudium shares contributed by Hargrove and Pinnacle will likely have built-in gain (i.e., fair market value in excess of adjusted tax basis). The partnership agreement must include appropriate Section 704(c) allocation provisions — using one of the three methods specified in the Treasury Regulations (traditional method, traditional method with curative allocations, or remedial allocation method) — to ensure that the built-in gain is allocated to the contributing partner and is not shifted to other partners. This creates "book-tax" differences that will follow the rollover participants throughout the life of their partnership investment.

(iii) Mixing Bowl Transaction Rules — Sections 704(c)(1)(B) and 737. Section 704(c)(1)(B) provides that if contributed property is distributed to a partner other than the contributing partner within seven years of the contribution, the contributing partner must recognize the gain or loss that would have been allocated to it under Section 704(c)(1)(A) had the property been sold at its fair market value at the time of the distribution. Section 737 provides a complementary rule: if a partner who has contributed property with built-in gain receives a distribution of other property from the partnership within seven years of the contribution, the contributing partner must recognize gain in an amount equal to the lesser of (x) the excess of the distribution over the partner's adjusted basis in the partnership interest, and (y) the net pre-contribution gain. These rules are designed to prevent the use of a partnership as a vehicle for tax-free exchanges of appreciated property. The parties should be counseled regarding these rules and the seven-year holding period that applies.

Conclusion. Section 721 is a viable path to achieve tax deferral for the rollover participants if the post-closing holding entity is classified as a partnership or LLC for U.S. federal income tax purposes. The Section 721 framework is generally more flexible than Section 351 for private equity-sponsored transactions, particularly because it does not impose a control requirement. However, ongoing compliance with the disguised sale rules, Section 704(c) allocation requirements, and mixing bowl transaction rules must be carefully managed throughout the life of the investment.

C. Comparison and Recommendation

The choice between Section 351 and Section 721 depends on the entity classification of the immediate parent of the surviving corporation in the post-closing holding structure.

• If the immediate parent of the surviving corporation is a corporate entity (i.e., a C corporation or an entity that has elected to be treated as a corporation for U.S. federal income tax purposes), then the rollover contributions should be structured as a Section 351 exchange.

• If the immediate parent is a partnership or limited liability company classified as a partnership for U.S. federal income tax purposes (as is typical for private equity-sponsored buyouts where Fund VI, a limited partnership, directly or through a blocker corporation holds the equity in the portfolio company), then the rollover contributions should be structured as Section 721 contributions.

In either case, the following principles apply:

(a) The rollover participants (Hargrove and Pinnacle) should not receive any cash, notes, preferred returns, or other non-equity consideration at the time of the rollover contribution, in order to preserve full tax deferral. Any boot received would trigger gain recognition under Section 351(b) (for corporate entities) or could give rise to a disguised sale under Section 707 (for partnerships).

(b) The Rollover Agreements should be carefully drafted to effectuate the contribution or exchange at the effective time of the Merger — i.e., as a simultaneous, integrated step with the closing of the Merger. The rollover should not be contingent on, or separated in time from, the closing. Temporal separation would increase the risk that the IRS applies the step-transaction doctrine to recharacterize the rollover as a separate transaction that does not qualify for non-recognition treatment, or conversely, to integrate it with the merger in a manner that undermines the desired tax treatment.

(c) If the partnership structure is utilized, the partnership agreement must include appropriate Section 704(c) allocation provisions, and the parties should be advised regarding the disguised sale rules and the mixing bowl transaction rules.

Coordination with Glenmore Thornton LLP. We note that the final determination of the post-closing holding structure — including the question of whether the direct parent of the surviving corporation will be a corporation, a partnership, or an LLC — is dependent on a number of factors that extend beyond the scope of this memorandum, including fund structuring considerations, blocker corporation mechanics for tax-exempt and non-U.S. limited partners of Fund VI, and the optimal structure for future exit transactions. We understand that Glenmore Thornton LLP (Richard Okamura) is advising Solara on these structuring questions, and that the holding structure is expected to be finalized in consultation with the Solara fund structuring team. The selection between Section 351 and Section 721 rollover structuring will need to be confirmed once the holding structure is finalized.

Additionally, Glenmore Thornton LLP is advising on the purchase price allocation under the Section 1060 framework and on the related financial due diligence (Vanessa Liu). The holding structure for the surviving entity and the rollover equity will directly affect the Section 338 election analysis and purchase price allocation methodology, as discussed further in Section VIII below.

VI. Tax Treatment of Non-Rolling Shareholders

The non-rolling shareholders of Cloudium — constituting the vast majority of Cloudium's stockholder base — will receive $36.92 per share in cash in the Merger. The U.S. federal income tax treatment of these shareholders is straightforward.

Gain or Loss Recognition. Each non-rolling shareholder will recognize capital gain or loss on the exchange of Cloudium shares for cash, equal to the difference between the amount of cash received ($36.92 per share) and the shareholder's adjusted tax basis in the surrendered shares. Shareholders who acquired their shares at different times and at different prices will compute gain or loss separately with respect to each lot of shares.

Character of Gain or Loss. The gain or loss recognized by each shareholder will generally be characterized as follows:

• Long-term capital gain or loss if the shareholder held the surrendered shares for more than one year as of the date of the Merger. Long-term capital gains of individual taxpayers are generally taxable at preferential rates (currently 0%, 15%, or 20%, depending on the taxpayer's income level, plus the 3.8% net investment income tax under Section 1411 for certain high-income individuals).

• Short-term capital gain or loss if the shareholder held the surrendered shares for one year or less as of the date of the Merger. Short-term capital gains are taxable at ordinary income rates.

• For corporate shareholders, the distinction between long-term and short-term capital gains is less significant, as capital gains of corporations are generally taxable at the regular corporate tax rate (currently 21% under Section 11(b)).

Withholding Considerations. The withholding obligations applicable to the merger consideration are complex and will be addressed in a separate memorandum expected to be distributed by December 5, 2023. For purposes of this summary, we note the following preliminary considerations:

(i) FIRPTA (Section 897). Cloudium Technologies plc is incorporated in England and Wales. Under Section 897 of the Code, gain or loss of a non-U.S. person from the disposition of a "United States real property interest" ("USRPI") is treated as effectively connected income subject to U.S. tax. A USRPI includes stock in a "United States real property holding corporation" ("USRPHC"), which is any corporation in which the fair market value of U.S. real property interests equals or exceeds 50% of the aggregate fair market value of the corporation's worldwide real property interests plus any other assets used or held for use in a trade or business. We must confirm whether Cloudium qualifies as a USRPHC. If Cloudium is not a USRPHC (which appears likely given that Cloudium's business is principally a SaaS software business with limited real estate holdings), no FIRPTA withholding under Section 1445 will be required on cash consideration paid to non-U.S. persons. This determination is pending further analysis of Cloudium's balance sheet and asset composition.

(ii) Backup Withholding (Section 3406). Under Section 3406, backup withholding at a rate of 24% applies to certain reportable payments — including merger consideration — paid to U.S. persons who fail to provide a valid taxpayer identification number on IRS Form W-9 or who are otherwise subject to backup withholding. The paying agent (anticipated to be the exchange agent designated in the Merger Agreement) will be responsible for collecting Forms W-9 from U.S. shareholders and applying backup withholding as required.

(iii) NRA Withholding (Sections 1441/1442). Under Sections 1441 and 1442 of the Code, withholding at a rate of 30% (or such lower rate as may be provided under an applicable income tax treaty) applies to certain "fixed or determinable annual or periodical" ("FDAP") income paid to non-U.S. persons, including dividends. In a standard cash-out merger, the cash consideration paid to shareholders in exchange for their stock is generally treated as exchange consideration (giving rise to capital gain or loss) rather than as a dividend, and accordingly, Sections 1441/1442 withholding should not apply. However, if any payments are recharacterized as dividends — for example, under a Section 302(b) analysis in unusual circumstances — withholding could be required. We do not anticipate this issue arising in the present Transaction, but it will be addressed in the separate withholding memorandum.

VII. Cross-Border Considerations (Summary)

The Transaction involves a target company incorporated in England and Wales with substantial operations in the United Kingdom, India, and Germany. A comprehensive analysis of the cross-border tax implications is beyond the scope of this memorandum, and a separate memorandum addressing the UK tax implications of the Transaction is expected to be distributed by December 12, 2023, in coordination with Albright & Kerr LLP (Fiona McAllister). We provide the following summary of key cross-border considerations for the deal team's reference.

United Kingdom. The principal UK tax considerations include the following:

(i) Stamp Duty / Stamp Duty Reserve Tax ("SDRT"). UK stamp duty is generally chargeable at 0.5% on instruments effecting the transfer of UK shares or marketable securities. SDRT, also at 0.5%, is chargeable on agreements to transfer chargeable securities. In a reverse triangular merger structure, where the Cloudium shares held by public stockholders are cancelled and converted into the right to receive cash (rather than being transferred to a third party), it is possible that UK stamp duty and SDRT may not be chargeable, on the basis that there is no "transfer" of shares within the meaning of the Stamp Act 1891 or Finance Act 1986. However, this analysis depends on the precise merger mechanics as applied under English corporate law, and will be confirmed in the separate UK tax memorandum.

(ii) UK Capital Gains Tax. UK-resident shareholders of Cloudium who dispose of their shares in the Merger will generally be subject to UK capital gains tax on any gain arising on the disposal. For individual UK-resident shareholders, the applicable capital gains tax rate is 10% (basic rate taxpayers) or 20% (higher or additional rate taxpayers). For corporate UK-resident shareholders, gains are generally included in the corporation's chargeable gains and taxed at the prevailing corporation tax rate (25% for accounting periods beginning on or after April 1, 2023). Certain UK exemptions and reliefs (including the Substantial Shareholding Exemption for corporate shareholders) may apply and will be analyzed in the separate memorandum.

(iii) Transfer Pricing. Cloudium Technologies UK Ltd. generates revenue of approximately £312,000,000 (approximately $390,000,000 at a rate of $1.25/£). Following the change of control, any intercompany restructuring involving Cloudium UK Ltd. — including changes to intercompany agreements, cost-sharing arrangements, or intellectual property licensing — will be subject to UK transfer pricing rules and must be documented in compliance with the OECD Transfer Pricing Guidelines and UK domestic law. This is primarily a post-closing integration issue and will be addressed in the integration tax memorandum.

India and Germany. The change of control at the Cloudium parent level — from public shareholders to Fund VI — does not, in itself, trigger an immediate tax liability at the level of Cloudium Technologies India Pvt. Ltd. or Cloudium Solutions GmbH, provided there are no direct transfers of assets at the subsidiary level and no transactions that give rise to deemed dispositions under applicable local law. However, India imposes a "minimum alternate tax" and has rules regarding indirect transfers of Indian assets that must be evaluated. In Germany, the change of ownership may affect the utilization of any existing tax loss carryforwards under the German Corporate Income Tax Act (Körperschaftsteuergesetz). These matters will be confirmed in the integration tax memorandum being prepared in coordination with local counsel.

Coordination. The cross-border tax analysis is being coordinated with Albright & Kerr LLP (Fiona McAllister, partner) regarding UK regulatory and tax matters, and with local counsel in India and Germany as appropriate. We will circulate updated guidance to the deal team as the cross-border analysis is completed.

VIII. Impact on Purchase Price Allocation and Section 338 Elections

The characterization of the Transaction as a taxable acquisition (rather than a tax-free reorganization) raises the question of whether the buyer should consider making a Section 338 election to achieve a stepped-up tax basis in the Target's underlying assets.

Section 338(h)(10) Election. A Section 338(h)(10) election may be made jointly by the buyer and the seller of a target that is either (a) a member of a selling consolidated group filing a consolidated federal income tax return or (b) an S corporation. In the present Transaction, Cloudium Technologies plc is not a member of any U.S. consolidated group (it is an English public limited company), and it is not an S corporation. Accordingly, a Section 338(h)(10) election is not available.

Section 338(g) Election. A Section 338(g) election may be made unilaterally by the purchasing corporation with respect to any "qualified stock purchase" — i.e., an acquisition of at least 80% of the total combined voting power and 80% of the total value of the stock of a target within a 12-month period. If the Merger is consummated as described, Fund VI (or the entity treated as the purchaser for U.S. federal income tax purposes) will acquire 100% of the Cloudium stock, and the Transaction will constitute a qualified stock purchase.

Cloudium Technologies plc is an English company that is treated as a corporation for U.S. federal income tax purposes (US EIN 83-2196754). A Section 338(g) election is therefore available with respect to the stock acquisition.

Effect of a Section 338(g) Election. A Section 338(g) election would result in a deemed sale of all of Cloudium's assets at the close of the "acquisition date" (the closing date of the Merger) at fair market value, followed by a deemed repurchase of those assets at an "aggregate deemed sale price" determined under Treasury Regulation § 1.338-4. This deemed asset sale would generate corporate-level tax on any gain recognized by "old" Cloudium — i.e., the Cloudium entity as it existed prior to the deemed sale. At the same time, the actual shareholders of Cloudium would recognize gain or loss on the receipt of cash merger consideration, resulting in a second layer of tax at the shareholder level.

This "double tax" consequence is the principal drawback of a Section 338(g) election. The election would be beneficial to the buyer only if the stepped-up basis in Cloudium's assets — and the resulting increase in future depreciation and amortization deductions — is sufficient to offset, on a net present value basis, the additional corporate-level tax liability arising from the deemed asset sale. Given the magnitude of the Transaction ($6.8 billion enterprise value) and the nature of Cloudium's assets (primarily intangible assets, including software, customer relationships, and goodwill, which are amortizable over a 15-year useful life under Section 197), the present value of incremental amortization deductions may not be sufficient to justify the immediate corporate-level tax cost.

Preliminary View. Based on our preliminary assessment, a Section 338(g) election is unlikely to be beneficial in this Transaction given the double-tax cost. Absent a Section 338(g) election, the acquisition will be treated as a standard stock acquisition for U.S. federal income tax purposes, and the purchase price will not receive a stepped-up basis in Cloudium's underlying assets at the U.S. federal level. Cloudium's existing tax basis in its assets will carry over.

Purchase Price Allocation Under Section 1060. If a Section 338(g) election were made (or if the Transaction were treated as an actual or deemed asset acquisition under any other theory), the purchase price would be allocated among Cloudium's assets in accordance with the residual method prescribed by Section 1060 of the Code. This allocation would have significant implications for the buyer's future depreciation and amortization deductions, as well as for the characterization of the acquired assets for purposes of Section 197 (intangible assets), Section 167 (tangible personal property), and Section 168 (MACRS depreciation).

The purchase price allocation analysis will be the subject of a separate memorandum (expected June 2024) prepared once Glenmore Thornton LLP (Vanessa Liu) completes the financial due diligence workstream. Glenmore Thornton (Richard Okamura) is also advising on the Section 338 election analysis and will provide a formal recommendation following completion of the asset valuation.

IX. Structuring Recommendations

Based on the analysis set forth in this memorandum, we recommend the following structuring steps:

1. Do not rely on Section 368(a)(2)(E) reorganization treatment. The stock consideration in the proposed Transaction constitutes only approximately 9.06% of the total merger consideration, which is far below the minimum 40% continuity of interest threshold required for a transaction to qualify as a tax-free reorganization under Section 368(a)(2)(E). There is no reasonable basis on which to take the position that the Transaction qualifies as a reorganization. The Transaction will be, and should be treated as, a fully taxable acquisition.

2. Structure the rollover equity contribution as a Section 351 exchange (if the post-closing parent entity is a corporation) or a Section 721 contribution (if the post-closing parent entity is a partnership or LLC taxed as a partnership). Either provision can provide tax-deferred treatment for the rollover equity participants — Jonathan Hargrove and Pinnacle Growth Ventures LLC — on their exchange of Cloudium shares for equity interests in the post-closing entity. The selection between Section 351 and Section 721 depends on the entity classification of the holding entity, which is expected to be finalized by the Solara fund structuring team in coordination with Glenmore Thornton LLP.

3. Ensure the Rollover Agreements provide for simultaneous closing. The rollover contribution must occur at the effective time of the Merger (currently planned for 11:59 PM Eastern Time on the closing date) as a single integrated step with the closing of the Merger. Temporal separation between the closing of the Merger and the consummation of the rollover contribution would increase the risk that the IRS or a court could apply the step-transaction doctrine to recharacterize the rollover as a separate transaction, potentially undermining the intended tax treatment. The Rollover Agreements should expressly provide that the rollover is consummated simultaneously with, and conditioned upon, the effective time of the Merger.

4. Avoid boot in the rollover. The rollover participants should receive solely equity interests — common stock of the corporate parent (in a Section 351 structure) or partnership or membership interests in the partnership or LLC parent (in a Section 721 structure) — and should not receive any cash, promissory notes, preferred returns with guaranteed distribution features, or other non-equity property at the time of the rollover exchange. Any boot received by a rollover participant would trigger gain recognition under Section 351(b) (in a corporate structure) or could give rise to a disguised sale under Section 707(a)(2)(B) (in a partnership structure), thereby defeating the purpose of the tax-deferred rollover.

5. Section 704(c) / Section 704(b) allocations (if partnership structure). If the post-closing holding entity is a partnership or LLC classified as a partnership, the partnership or operating agreement must include appropriate Section 704(c) allocation provisions to ensure that the built-in gain attributable to the contributed Cloudium equity is allocated to the respective contributing partners (Hargrove and Pinnacle) and is not shifted to Fund VI or other non-contributing partners. The partnership agreement should specify the method of Section 704(c) allocation to be used (traditional method, traditional method with curative allocations, or remedial allocation method) and should include appropriate Section 704(b) "substantial economic effect" provisions to ensure that all allocations are respected under the Treasury Regulations.

6. IRS Form W-9 / W-8BEN-E collection. We recommend that the deal team initiate the collection of IRS Forms W-9 (for U.S. persons) and W-8BEN-E (for non-U.S. entities) from the rollover participants and key stockholders well in advance of the closing date, in order to ensure compliance with applicable withholding and information-reporting obligations. We recommend that the deal team establish and maintain a tracker of received forms, including notation of any deficiencies, and circulate updated status reports to the tax team on a bi-weekly basis during the pre-

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
MEMORANDUM
November 1, 2023
FROM: Leonard Cross, Specialist Partner, Tax — Calderwood & Harkness LLP
TO: Harrison Wexford, Responsible Partner, M&A — Calderwood & Harkness LLP Beatrice Holloway, Billing Partner, M&A — Calderwood & Harkness LLP Tiffany Rosenthal, Lead Associate, M&A — Calderwood & Harkness LLP
CC: Andrew Fitzpatrick, Working Associate, M&A — Calderwood & Harkness LLP
RE: Tax-Free Reorganization Analysis — Reverse Triangular Merger of Stratos Merger Sub Inc. with and into Cloudium Technologies plc Under Section 368(a)(2)(E) of the Internal Revenue Code — Implications for Rollover Equity Participants
MATTER NO.: 1041-00003
CLIENT: Solara Digital Infrastructure LP
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I. Executive Summary
The purpose of this memorandum is to analyze whether the proposed reverse triangular merger structure by which Solara Digital Infrastructure Fund VI LP ("Fund VI") proposes to acquire Cloudium Technologies plc ("Cloudium" or the "Target") qualifies as a tax-free reorganization under Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"), and, in particular, to address the United States federal income tax implications for the two rollover equity participants in the proposed transaction. This memorandum further evaluates alternative non-recognition provisions that may be utilized to achieve tax-deferred treatment for the rollover equity participants in the event — as we conclude — that reorganization treatment is unavailable.
Transaction Overview. Fund VI, a Delaware limited partnership (EIN 87-4523190), proposes to acquire all of the issued and outstanding shares of common stock of Cloudium, a public limited company incorporated under the laws of England and Wales (Companies House No. 09734521; Nasdaq Global Select Market ticker: CLDM; US EIN 83-2196754), for an aggregate enterprise value of approximately $6,800,000,000 (the "Transaction"). The acquisition will be effectuated by means of a reverse triangular merger in which Stratos Merger Sub Inc. ("Merger Sub"), a Delaware corporation (Delaware File No. 7923841) to be incorporated on or about January 8, 2024, formed solely to effectuate the merger and wholly owned by Fund VI, will merge with and into Cloudium, with Cloudium surviving as a wholly owned subsidiary of Fund VI (the "Merger").
Consideration. The form of merger consideration is predominantly cash, at approximately $36.92 per share, except with respect to shares subject to rollover agreements with two key participants, as described below. All public stockholders of Cloudium other than the rollover participants will receive exclusively cash in the Merger.
Rollover Equity Participants. Two participants have entered into, or are expected to enter into, rollover agreements in connection with the Transaction:
(a) Jonathan Hargrove, Chief Executive Officer of Cloudium, who holds 7,736,400 shares of Cloudium common stock (representing approximately 4.2% of the 184,200,000 shares of common stock currently outstanding), will roll over 50% of his equity position (approximately $142,814,544 in value) into equity interests in the surviving entity or a parent thereof, with the remaining 50% cashed out at $36.92 per share; and
(b) Pinnacle Growth Ventures LLC ("Pinnacle"), a Delaware limited liability company whose Managing Member is Evelyn Carmichael, which holds 21,367,200 shares of Cloudium common stock (representing approximately 11.6% of outstanding shares), will roll over 60% of its equity position (approximately $473,241,408 in value) into equity interests in the surviving entity or a parent thereof, with the remaining 40% cashed out at $36.92 per share.
The total value of rollover equity in the Transaction is approximately $616,055,952.
Overall Conclusion. As set forth in detail below, the proposed Transaction, as currently structured, is unlikely to qualify as a tax-free reorganization under Section 368(a)(2)(E) of the Code. The continuity of interest ("COI") requirement — a judicial and regulatory doctrine that requires a substantial portion of the aggregate merger consideration to consist of stock of the acquiring corporation or its parent — will not be satisfied because stock consideration constitutes only approximately 9.06% of the total merger consideration, a figure far below any accepted threshold. Accordingly, the Transaction will be treated as a fully taxable acquisition for U.S. federal income tax purposes.
However, even though reorganization treatment is not available at the transaction level, the rollover participants' exchange of Cloudium shares for equity in the surviving entity or a parent entity may be structured to achieve tax-deferred treatment under alternative provisions of the Code — specifically, Section 351 (if the parent entity is a corporation) or Section 721 (if the parent entity is a partnership or limited liability company classified as a partnership for U.S. federal income tax purposes). Specific recommendations regarding the optimal structuring approach are set forth in Section IX of this memorandum.
Coordination Note. This memorandum has been prepared in consultation with Glenmore Thornton LLP, specifically Richard Okamura, Lead Partner, Transaction Tax, and Vanessa Liu, Financial Due Diligence, who are advising Solara Digital Infrastructure LP on financial due diligence, purchase price allocation, and related tax advisory matters in connection with the Transaction.
II. Factual Background and Transaction Structure
A. Parties. Solara Digital Infrastructure LP. The sponsor of the proposed Transaction is Solara Digital Infrastructure LP, a Delaware limited partnership with its principal offices at 1200 Market Street, Suite 3400, Wilmington, Delaware 19801. The general partner of Solara Digital Infrastructure LP is Solara Digital GP LLC, a Delaware limited liability company. Solara Digital Infrastructure LP is managed by Marcus Elliston, Founder and Managing Partner, and Priya Narasimhan, Co-Managing Partner and Chief Investment Officer. Solara Digital Infrastructure LP and its affiliated entities manage approximately $38 billion in assets under management across six flagship infrastructure-focused private equity funds.
Fund VI (Investing Entity). The direct acquiring entity for purposes of this Transaction is Solara Digital Infrastructure Fund VI LP ("Fund VI"), a Delaware limited partnership, vintage year 2022, with approximately $12.4 billion in committed capital from institutional limited partners. The general partner of Fund VI is Solara Fund VI GP LLC, a Delaware limited liability company. Fund VI's EIN is 87-4523190. Fund VI will serve as the direct or indirect parent of Merger Sub and, following the closing, the surviving entity.
Co-Investment Vehicle. In addition to Fund VI, Solara Digital Co-Invest VI-A LP, a Delaware limited partnership, has been formed to source approximately $425,000,000 in co-investment capital from a subset of Fund VI's limited partners who have elected to exercise their co-investment rights under the Fund VI limited partnership agreement. The co-investment vehicle's capital contribution is included within the total equity contribution described in Section II.C below.
Cloudium Technologies plc (Target). Cloudium Technologies plc is a public limited company incorporated under the laws of England and Wales (Companies House No. 09734521), with its registered office at 45 Broadwick Street, London W1F 0DB, United Kingdom. Cloudium's U.S. headquarters are located at 600 Townsend Street, Suite 800, San Francisco, California 94103. Cloudium's shares of common stock are listed on the Nasdaq Global Select Market under the ticker symbol "CLDM." As of the date of this memorandum, there are 184,200,000 shares of Cloudium common stock issued and outstanding.
Cloudium's senior management and board include the following key individuals:
• Jonathan Hargrove, Chief Executive Officer
• Sienna Whitfield, Chief Financial Officer
• Nadia Chowdhury, General Counsel
• Douglas Pemberton, Independent Board Chair
Cloudium is a provider of cloud-native enterprise resource planning ("ERP"), customer relationship management ("CRM"), and business-intelligence software-as-a-service ("SaaS") solutions to enterprise customers globally. The company employs approximately 6,800 individuals across the United States, the United Kingdom, India, and Germany.
Key financial metrics for Cloudium, as derived from publicly available filings and preliminary financial due diligence materials provided by Glenmore Thornton LLP, include the following:
Cloudium operates through three principal foreign subsidiaries, each of which will remain in place following the closing of the Merger:
(i) Cloudium Technologies UK Ltd., a private limited company organized under the laws of England and Wales (Companies House No. 11287456), employing approximately 1,200 individuals and generating revenue of approximately £312,000,000 (approximately $390,000,000 at a rate of $1.25/£) for the most recent fiscal year;
(ii) Cloudium Technologies India Pvt. Ltd., a private limited company organized under the laws of India with its registered office in Bangalore, Karnataka, employing approximately 2,400 individuals; and
(iii) Cloudium Solutions GmbH, a Gesellschaft mit beschränkter Haftung organized under the laws of Germany with its registered office in Berlin, employing approximately 400 individuals.
Stratos Merger Sub Inc. Stratos Merger Sub Inc. is a Delaware corporation that is planned to be incorporated solely for the purpose of effectuating the reverse triangular merger. Merger Sub's Delaware File Number is expected to be 7923841, and its registered agent will be located at 1209 Orange Street, Wilmington, Delaware 19801 (Cobalt Ridge Technologies). Merger Sub's sole stockholder will be Fund VI. Merger Sub will have only nominal capitalization at the time of the Merger and will have conducted no business operations prior to the Merger.
B. Deal Economics and Consideration
The aggregate deal value for the Transaction is $6,800,000,000. With 184,200,000 shares of Cloudium common stock outstanding, the per-share merger consideration is approximately $36.92 (calculated as $6,800,000,000 ÷ 184,200,000 shares).
The composition of the merger consideration is as follows:
The remaining shares held by Jonathan Hargrove (50% of his position, or approximately 3,868,200 shares) and Pinnacle Growth Ventures LLC (40% of its position, or approximately 8,546,880 shares) will be cashed out at $36.92 per share, consistent with the treatment of all other public stockholders of Cloudium. All public stockholders other than Hargrove and Pinnacle (with respect to their rolled-over shares) will receive exclusively cash in the Merger.
C. Sources of Funds
The Transaction will be financed from the following sources:
Total uses of funds include (i) the aggregate cash merger consideration of $6,183,944,048, (ii) the rollover equity of $616,055,952, (iii) estimated transaction expenses of approximately $185,000,000 (including advisory fees, legal fees, financing fees, and regulatory filing fees), and (iv) the repayment of approximately $820,000,000 in existing Cloudium indebtedness owed to Atlas Commercial Lending Corp. The total uses of $7,188,944,048 (including the value of the rollover equity, which is a non-cash use) match the total sources.
D. Merger Mechanics
The Transaction is structured as a reverse triangular merger under the Delaware General Corporation Law (the "DGCL"), specifically Title 8, Chapter 1, Subchapter IX thereof.
The merger mechanics are as follows:
(1) Stratos Merger Sub Inc. will merge with and into Cloudium Technologies plc, with Cloudium surviving the Merger as a wholly owned subsidiary of Fund VI (or such other direct parent entity as may be designated in the final holding structure).
(2) At the effective time of the Merger (anticipated to be 11:59 PM Eastern Time on the closing date), each issued and outstanding share of Cloudium common stock (other than (x) rollover shares as defined in the applicable Rollover Agreements, (y) shares held by stockholders who have properly exercised and perfected their appraisal rights under applicable law ("Dissenting Shares"), and (z) shares held in treasury by Cloudium) will be automatically converted into the right to receive $36.92 in cash, without interest.
(3) Rollover shares held by Jonathan Hargrove and Pinnacle Growth Ventures LLC will be cancelled and exchanged for equity interests in the surviving entity or a parent thereof, pursuant to and in accordance with the separate Rollover Agreements to be executed by each rollover participant.
(4) Each share of Merger Sub common stock outstanding immediately prior to the effective time of the Merger will be converted into one share of common stock of the surviving entity.
The governing law for the Merger Agreement and the merger mechanics is the law of the State of Delaware. Cloudium's status as a public limited company incorporated in England and Wales raises additional regulatory and corporate-law considerations that are being addressed by Albright & Kerr LLP (Fiona McAllister, partner) but are outside the scope of this tax memorandum.
III. Legal Framework — Section 368(a)(2)(E) Reverse Triangular Merger
A. Statutory Requirements
Section 368(a)(2)(E) of the Code provides a specific form of tax-free reorganization applicable to reverse triangular mergers. Under this provision, a transaction qualifies as a reorganization if the following conditions are satisfied:
(i) A subsidiary corporation (the "Merger Sub") merges into the target (here, Cloudium), with the target surviving the merger;
(ii) After the merger, the surviving corporation (Cloudium) holds "substantially all" of its own properties and of the properties of the merged subsidiary (Merger Sub);
(iii) In the merger, the former shareholders of the target exchange their stock solely for voting stock of the controlling corporation (here, Fund VI or its corporate designee); and
(iv) The transaction satisfies the judicial and regulatory requirements applicable to reorganizations generally, including the continuity of interest doctrine and the continuity of business enterprise doctrine.
The statute itself requires that, in the exchange, the former shareholders of the target receive "solely" voting stock of the controlling corporation in exchange for "control" of the surviving corporation. However, this requirement is relaxed by the so-called "boot relaxation" rule: Section 368(a)(2)(E)(ii) provides that the target shareholders need not receive solely stock, so long as the former shareholders exchange, in the aggregate, a sufficient amount of their target stock for stock of the parent to satisfy the controlling corporation's obtaining "control" of the target within the meaning of Section 368(c) (i.e., 80% of total combined voting power and 80% of each class of nonvoting stock). In practical terms, this means that some cash ("boot") may be paid in a reverse triangular merger without disqualifying the transaction as a reorganization — but only if the stock component is sufficient to satisfy both the statutory requirements and the continuity of interest doctrine.
It is essential to distinguish between the statutory "solely for voting stock" requirement (as modified by the boot relaxation provision) and the separate judicial and regulatory requirement of continuity of interest, which imposes an independent quantitative floor on the proportion of stock consideration, as discussed in greater detail below.
B. Continuity of Interest ("COI") Requirement
The continuity of interest requirement is a longstanding judicial and regulatory doctrine that requires that "a substantial part of the value of the proprietary interests in the target" be preserved through the receipt of equity interests in the acquiring corporation or its parent. This requirement is codified in Treasury Regulation § 1.368-1(e).
The COI requirement serves the policy objective of distinguishing reorganizations — in which the target's shareholders continue as equity participants in the combined enterprise, merely in modified form — from outright sales, in which the target's shareholders cash out their investment entirely.
Quantitative Threshold. The Internal Revenue Service has historically applied the following guidelines in evaluating whether the COI requirement is satisfied:
• In Revenue Procedure 77-37, 1977-1 C.B. 568, the IRS indicated that it would issue favorable advance rulings on reorganization transactions where at least 50% of the total consideration consisted of stock of the acquiring corporation. This 50% threshold is often cited as the "safe harbor" for obtaining a private letter ruling.
• In practice, however, courts and the IRS have sustained reorganization treatment in transactions where stock consideration constituted as little as approximately 40% of the total consideration. See, e.g., John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935); Kass v. Commissioner, 60 T.C. 218 (1973), aff'd, 491 F.2d 749 (3d Cir. 1974). The 40% floor is generally regarded as the practical minimum for continuity of interest, though the IRS's ruling position (as reflected in its no-rule policy) suggests some residual uncertainty in the 40%–50% range.
• Certain practitioners have suggested that transactions with stock consideration as low as 25% to 30% of total consideration might satisfy the COI requirement under the most liberal reading of the case law, but this position is considered aggressive and would not be supportable under the weight of existing authority.
Measurement Principles. Treasury Regulation § 1.368-1(e)(1)(i) provides that the COI requirement is measured by reference to the value of the proprietary interests received by the target shareholders in the aggregate relative to the total consideration. Critically, the COI requirement is measured on a transaction-wide basis — that is, the relevant inquiry is what percentage of the total merger consideration consists of stock, not whether any individual shareholder received stock. Thus, in a transaction in which most shareholders receive cash and only a small number roll their equity into the combined entity, the stock component of the consideration is measured against the entire deal value, not against the rollover participants' consideration alone.
Treasury Regulation § 1.368-1(e)(2) further provides that the proprietary interest must be a "meaningful" interest in the resulting enterprise and must represent a "substantial part" of the total consideration, reinforcing the requirement that stock consideration be a significant component of the overall deal economics.
The "over the top" structure — a cash-heavy merger with select equity rollover by management or financial sponsors — is a well-recognized transaction format in the leveraged buyout context. In such transactions, the COI analysis necessarily focuses on the aggregate ratio of stock to total consideration across all target shareholders. Because leveraged buyouts are, by their nature, predominantly cash-financed (with debt providing a substantial portion of the acquisition price), these transactions rarely satisfy the COI requirement.
C. Substantially All Properties Test
Section 368(a)(2)(E) requires that, after the merger, the surviving corporation hold "substantially all" of its own properties and the properties of the merged subsidiary. The IRS has provided guidance on the "substantially all" standard in Revenue Ruling 77-37, 1977-1 C.B. 568, which provides that a corporation will be deemed to hold "substantially all" of a transferor's properties if it holds:
(a) At least 90% of the fair market value of the net assets of the transferor; and
(b) At least 70% of the fair market value of the gross assets of the transferor.
In the context of a reverse triangular merger under Section 368(a)(2)(E), this test is typically straightforward to satisfy. The target (here, Cloudium) survives the merger with all of its own assets and properties intact. Merger Sub, having been formed solely for the purpose of effectuating the merger and having only nominal capitalization, contributes de minimis properties to the surviving entity. Accordingly, the surviving entity will hold substantially all of the properties of both itself and the merged subsidiary.
The "substantially all" test can become more complicated if, in connection with or as a precondition to the merger, the target disposes of a significant portion of its assets (e.g., through spin-offs, asset sales, or distributions to shareholders). In the present Transaction, no such dispositions are contemplated, and the test is expected to be satisfied without difficulty.
D. Step-Transaction Doctrine Considerations
The step-transaction doctrine is a judicial doctrine under which a court or the IRS may disregard the formal structure of a series of ostensibly separate transactions and instead treat them as a single integrated transaction for tax purposes, if the individual steps are so interdependent or prearranged that they have no independent economic significance apart from their relationship to the overall plan.
The step-transaction doctrine is relevant to the present Transaction in at least one important respect. If the rollover equity contributions by Hargrove and Pinnacle are treated as a separate transaction from the cash-out merger — either because the rollover is consummated at a different time, is documented as a standalone investment rather than as part of the merger consideration, or is otherwise distinguishable from the merger — a court or the IRS could conclude that the merger itself is entirely a cash acquisition (with no stock component), and that the rollover constitutes a distinct investment by Hargrove and Pinnacle in the post-closing entity.
Under such an analysis, the merger would be taxable in its entirety, and the rollover would be evaluated independently under Section 351 (if the rollover is effected as a contribution to a corporation) or Section 721 (if the rollover is effected as a contribution to a partnership). In many respects, this recharacterization may be favorable to the rollover participants, as it could support tax-deferred treatment for the rollover under one of these alternative provisions — even though the overall merger does not qualify as a reorganization.
Conversely, if the step-transaction doctrine is applied to integrate the rollover with the merger, and the overall transaction is treated as a single reorganization, the failure of the COI requirement would cause the entire transaction — including the rollover component — to be taxable. Under this scenario, rollover participants would recognize gain on the exchange of their Cloudium shares for equity interests in the post-closing entity.
As discussed in Section V below, we believe the preferred approach is to structure the rollover contributions in a manner that permits them to qualify for tax-deferred treatment under Section 351 or Section 721, independent of whether the overall merger qualifies as a reorganization. Careful drafting of the Rollover Agreements, combined with appropriate integration of the rollover with the closing mechanics, is essential to achieving this result.
IV. Application to the Proposed Transaction
A. Continuity of Interest Analysis
Applying the COI framework set forth in Section III.B above to the proposed Transaction, the relevant figures are as follows:
The calculation is straightforward: $616,055,952 ÷ $6,800,000,000 = approximately 9.06%.
This percentage is far below the 40% minimum threshold that has been generally accepted as the floor for continuity of interest in the case law and IRS guidance. Indeed, even under the most aggressive interpretation of the COI doctrine — under which certain commentators have argued that stock consideration as low as 25% to 30% of total consideration might suffice — the 9.06% stock component in this Transaction would be plainly insufficient.
To illustrate the magnitude of the shortfall: if the parties wished to achieve the 40% COI threshold, the stock component of the merger consideration would need to be at least $2,720,000,000 (i.e., 40% × $6,800,000,000). The actual stock component of $616,055,952 is approximately $2.1 billion below this level — a gap that cannot be closed through any reasonable restructuring of the rollover equity without fundamentally altering the economics of the Transaction.
Moreover, even if the parties were prepared to adopt the more conservative 50% safe harbor position articulated in Revenue Procedure 77-37, the stock component would need to be at least $3,400,000,000 — more than five times the amount of rollover equity currently contemplated.
There is no credible basis on which to argue that the COI requirement is satisfied in the present Transaction.
Conclusion: The continuity of interest requirement of Section 368(a)(2)(E) is not satisfied. The proposed Transaction, taken as a whole, does not qualify as a tax-free reorganization under Section 368(a)(2)(E) of the Code.
B. Substantially All Properties Test
Although the failure of the COI test is dispositive — and the Transaction cannot qualify as a reorganization regardless of whether any other statutory or judicial requirement is met — we address the "substantially all" properties test for the sake of completeness.
As discussed in Section III.C, the "substantially all" test requires that the surviving entity hold at least 90% of the fair market value of the net assets and at least 70% of the fair market value of the gross assets of both the target and the merged subsidiary following the merger.
In the present Transaction, Cloudium will survive the Merger with all of its assets intact. No pre-closing asset dispositions, spin-offs, or distributions are contemplated that would reduce Cloudium's asset base. Stratos Merger Sub Inc. was formed solely for the purpose of effectuating the Merger and will have only nominal capitalization (expected to be no more than $1,000) at the time of the Merger. Accordingly, the surviving entity will hold substantially all of the properties of both Cloudium and Merger Sub.
Conclusion: The "substantially all" properties test is satisfied. However, because the COI requirement is not met, this conclusion does not alter the overall analysis.
C. Consequences of Failing to Qualify Under Section 368(a)(2)(E)
Because the Transaction does not qualify as a tax-free reorganization under Section 368(a)(2)(E), it will be treated as a fully taxable acquisition for U.S. federal income tax purposes. The consequences of this characterization differ depending on the category of stockholder.
Non-Rolling Shareholders. For the non-rolling shareholders — i.e., all Cloudium stockholders other than Hargrove and Pinnacle (with respect to their rolled-over shares) — the tax treatment is identical regardless of whether the Transaction qualifies as a reorganization. These shareholders receive exclusively cash consideration of $36.92 per share. Each such shareholder will recognize capital gain or loss equal to the difference between $36.92 and the shareholder's adjusted tax basis in the exchanged shares. Whether the Transaction is taxable or tax-free at the reorganization level is irrelevant to these shareholders, since boot received in a reorganization would in any event be taxable under Section 356.
Rollover Shareholders (Hargrove and Pinnacle). For the rollover participants, the failure of the Transaction to qualify as a reorganization has more significant consequences. Absent an alternative tax-deferred structure, the exchange by Hargrove and Pinnacle of their Cloudium shares for equity interests in the surviving entity or a parent thereof would be treated as a taxable exchange under Section 1001 of the Code. Each rollover participant would recognize gain equal to the excess of the fair market value of the equity interests received over the participant's adjusted tax basis in the surrendered Cloudium shares. Given that both Hargrove and Pinnacle hold shares with a cost basis that is likely well below the current per-share value of $36.92 (Hargrove, as a founder-era executive, likely has a basis significantly below the current market price, and Pinnacle, as an early-stage investor, similarly may have a low basis), the tax cost of a fully taxable rollover could be substantial.
It is therefore essential to consider alternative non-recognition provisions that may be utilized to achieve tax deferral for the rollover participants, as discussed in Section V below.
V. Alternative Tax-Deferred Structures for Rollover Equity
Because the Transaction does not qualify as a tax-free reorganization under Section 368(a)(2)(E), we must look to alternative provisions of the Code that may provide non-recognition treatment for the rollover equity contributions by Jonathan Hargrove and Pinnacle Growth Ventures LLC. Two primary alternatives are available, depending on the entity classification of the post-closing parent entity: (1) Section 351 of the Code (applicable to contributions to a controlled corporation) and (2) Section 721 of the Code (applicable to contributions to a partnership). We analyze each in turn.
A. Section 351 — Transfer to Controlled Corporation
Statutory Framework. Section 351(a) of the Code provides that no gain or loss shall be recognized if one or more persons transfer property to a corporation solely in exchange for stock of such corporation, and immediately after the exchange, the transferor or transferors are in "control" (as defined in Section 368(c)) of the corporation.
Section 368(c) defines "control" as the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote, and at least 80% of the total number of shares of all other classes of stock of the corporation.
The term "property" for purposes of Section 351 includes shares of stock in another corporation (such as Cloudium shares). Services do not constitute "property" for Section 351 purposes, but this limitation is not relevant here, as both Hargrove and Pinnacle will be contributing stock, not services, in exchange for equity interests in the post-closing entity.
Application to the Transaction. If the post-closing structure utilizes a corporate entity (either the surviving Cloudium entity itself or a newly formed corporate parent) as the vehicle through which the rollover is effectuated, Section 351 treatment may be available, provided the control requirement is satisfied. The analysis is as follows:
(i) Transferors and Transfers. At the closing of the Merger, Fund VI will contribute approximately $2,832,888,096 in cash equity to the corporate parent entity (or the surviving entity, as applicable). Simultaneously, Hargrove will contribute Cloudium shares valued at approximately $142,814,544, and Pinnacle will contribute Cloudium shares valued at approximately $473,241,408. Each transferor will receive stock of the corporate parent entity in exchange for its respective contribution.
(ii) Control Test. Immediately after the exchange, the total equity capitalization of the post-closing entity will be at least $3,448,944,048 (consisting of Fund VI's $2,832,888,096 equity contribution plus the $616,055,952 aggregate rollover equity). Fund VI alone will hold approximately 82.1% of the equity in the post-closing entity ($2,832,888,096 ÷ $3,448,944,048). The rollover participants together will hold approximately 17.9%. All transferors in the aggregate — Fund VI, Hargrove, and Pinnacle — will hold 100% of the equity in the post-closing entity immediately after the exchange. Accordingly, the Section 368(c) control requirement (80% of total combined voting power and 80% of each class of nonvoting stock) is satisfied with a substantial margin, whether measured by reference to all transferors collectively (100%) or to Fund VI alone (approximately 82.1%).
(iii) Solely Stock Requirement. Section 351(a) requires that the transferors receive "solely" stock in exchange for their property contributions. To the extent any rollover participant receives cash, notes, preferred returns with fixed or guaranteed distributions, or other non-stock consideration at the time of the rollover exchange, such consideration would constitute "boot" under Section 351(b), and gain would be recognized by the recipient to the extent of the fair market value of the boot received. To preserve full tax deferral for the rollover participants, the Rollover Agreements should provide that the rollover participants receive solely common stock (or, if preferred stock is issued, solely stock that satisfies the requirements of Section 351) and no other consideration.
(iv) Timing and Integration. The rollover contribution should be structured to occur simultaneously with, or as an integrated part of, the closing of the Merger. Specifically, the contribution of cash equity by Fund VI and the contribution of Cloudium shares by Hargrove and Pinnacle should be structured as a single, simultaneous exchange occurring at the effective time of the Merger (anticipated to be 11:59 PM Eastern Time on the closing date). This simultaneous closing is important for two reasons: (a) it ensures that the transferors are "in control" of the corporation "immediately after the exchange," as required by Section 351(a); and (b) it mitigates the risk that the IRS might treat the rollover contribution as a separate, non-integrated transaction that does not qualify for Section 351 treatment.
Conclusion. Section 351 is a viable path to achieve tax deferral for the rollover participants, provided that (a) the parent entity is classified as a corporation for U.S. federal income tax purposes, (b) the rollover participants receive solely stock (and no boot) in the exchange, and (c) the exchange is structured as a simultaneous, integrated closing.
B. Section 721 — Contribution to Partnership
Statutory Framework. Section 721(a) of the Code provides that no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership. This provision applies broadly to any contribution of property — including shares of stock in a corporation — to an entity classified as a partnership for U.S. federal income tax purposes.
Application to the Transaction. Fund VI is itself a Delaware limited partnership. In many private equity-sponsored buyouts, the post-closing holding structure utilizes a partnership or limited liability company classified as a partnership as the direct or indirect parent of the target. If the post-closing holding entity for the surviving Cloudium corporation is a partnership or LLC taxed as a partnership, then the rollover contributions by Hargrove and Pinnacle may be structured as contributions of Cloudium shares (or equity in the surviving entity) to the partnership in exchange for partnership or membership interests, qualifying for non-recognition treatment under Section 721.
The Section 721 analysis is generally more straightforward than the Section 351 analysis because Section 721 does not impose an "80% control" requirement. Any contribution of property to a partnership in exchange for a partnership interest is generally tax-free, regardless of the percentage of partnership interests received by the contributing partner.
However, the Section 721 framework is subject to several important anti-abuse and allocation rules that must be carefully managed:
(i) Disguised Sale Rules — Section 707(a)(2)(B). Treasury Regulation § 1.707-3 provides a presumption that a contribution of property to a partnership followed by a distribution of money or other property to the contributing partner within a two-year period constitutes a "disguised sale" of the property. If the rollover participants contribute Cloudium shares to the partnership and receive any distributions of cash or other property within two years of the contribution, the IRS may recharacterize the contribution and distribution as a taxable sale. To mitigate this risk, the partnership agreement should provide that no distributions are made to the rollover participants within two years of the closing, or, if distributions are necessary, that they qualify for one of the exceptions set forth in Treasury Regulation § 1.707-4 (e.g., guaranteed payments for services, preferred returns, or operating cash flow distributions made to all partners on a pro rata basis).
(ii) Section 704(c) Allocations. Section 704(c)(1)(A) of the Code provides that income, gain, loss, and deduction with respect to contributed property must be allocated among the partners so as to take into account any variation between the adjusted tax basis of the property and its fair market value at the time of the contribution. In the present case, the Cloudium shares contributed by Hargrove and Pinnacle will likely have built-in gain (i.e., fair market value in excess of adjusted tax basis). The partnership agreement must include appropriate Section 704(c) allocation provisions — using one of the three methods specified in the Treasury Regulations (traditional method, traditional method with curative allocations, or remedial allocation method) — to ensure that the built-in gain is allocated to the contributing partner and is not shifted to other partners. This creates "book-tax" differences that will follow the rollover participants throughout the life of their partnership investment.
(iii) Mixing Bowl Transaction Rules — Sections 704(c)(1)(B) and 737. Section 704(c)(1)(B) provides that if contributed property is distributed to a partner other than the contributing partner within seven years of the contribution, the contributing partner must recognize the gain or loss that would have been allocated to it under Section 704(c)(1)(A) had the property been sold at its fair market value at the time of the distribution. Section 737 provides a complementary rule: if a partner who has contributed property with built-in gain receives a distribution of other property from the partnership within seven years of the contribution, the contributing partner must recognize gain in an amount equal to the lesser of (x) the excess of the distribution over the partner's adjusted basis in the partnership interest, and (y) the net pre-contribution gain. These rules are designed to prevent the use of a partnership as a vehicle for tax-free exchanges of appreciated property. The parties should be counseled regarding these rules and the seven-year holding period that applies.
Conclusion. Section 721 is a viable path to achieve tax deferral for the rollover participants if the post-closing holding entity is classified as a partnership or LLC for U.S. federal income tax purposes. The Section 721 framework is generally more flexible than Section 351 for private equity-sponsored transactions, particularly because it does not impose a control requirement. However, ongoing compliance with the disguised sale rules, Section 704(c) allocation requirements, and mixing bowl transaction rules must be carefully managed throughout the life of the investment.
C. Comparison and Recommendation
The choice between Section 351 and Section 721 depends on the entity classification of the immediate parent of the surviving corporation in the post-closing holding structure.
• If the immediate parent of the surviving corporation is a corporate entity (i.e., a C corporation or an entity that has elected to be treated as a corporation for U.S. federal income tax purposes), then the rollover contributions should be structured as a Section 351 exchange.
• If the immediate parent is a partnership or limited liability company classified as a partnership for U.S. federal income tax purposes (as is typical for private equity-sponsored buyouts where Fund VI, a limited partnership, directly or through a blocker corporation holds the equity in the portfolio company), then the rollover contributions should be structured as Section 721 contributions.
In either case, the following principles apply:
(a) The rollover participants (Hargrove and Pinnacle) should not receive any cash, notes, preferred returns, or other non-equity consideration at the time of the rollover contribution, in order to preserve full tax deferral. Any boot received would trigger gain recognition under Section 351(b) (for corporate entities) or could give rise to a disguised sale under Section 707 (for partnerships).
(b) The Rollover Agreements should be carefully drafted to effectuate the contribution or exchange at the effective time of the Merger — i.e., as a simultaneous, integrated step with the closing of the Merger. The rollover should not be contingent on, or separated in time from, the closing. Temporal separation would increase the risk that the IRS applies the step-transaction doctrine to recharacterize the rollover as a separate transaction that does not qualify for non-recognition treatment, or conversely, to integrate it with the merger in a manner that undermines the desired tax treatment.
(c) If the partnership structure is utilized, the partnership agreement must include appropriate Section 704(c) allocation provisions, and the parties should be advised regarding the disguised sale rules and the mixing bowl transaction rules.
Coordination with Glenmore Thornton LLP. We note that the final determination of the post-closing holding structure — including the question of whether the direct parent of the surviving corporation will be a corporation, a partnership, or an LLC — is dependent on a number of factors that extend beyond the scope of this memorandum, including fund structuring considerations, blocker corporation mechanics for tax-exempt and non-U.S. limited partners of Fund VI, and the optimal structure for future exit transactions. We understand that Glenmore Thornton LLP (Richard Okamura) is advising Solara on these structuring questions, and that the holding structure is expected to be finalized in consultation with the Solara fund structuring team. The selection between Section 351 and Section 721 rollover structuring will need to be confirmed once the holding structure is finalized.
Additionally, Glenmore Thornton LLP is advising on the purchase price allocation under the Section 1060 framework and on the related financial due diligence (Vanessa Liu). The holding structure for the surviving entity and the rollover equity will directly affect the Section 338 election analysis and purchase price allocation methodology, as discussed further in Section VIII below.
VI. Tax Treatment of Non-Rolling Shareholders
The non-rolling shareholders of Cloudium — constituting the vast majority of Cloudium's stockholder base — will receive $36.92 per share in cash in the Merger. The U.S. federal income tax treatment of these shareholders is straightforward.
Gain or Loss Recognition. Each non-rolling shareholder will recognize capital gain or loss on the exchange of Cloudium shares for cash, equal to the difference between the amount of cash received ($36.92 per share) and the shareholder's adjusted tax basis in the surrendered shares. Shareholders who acquired their shares at different times and at different prices will compute gain or loss separately with respect to each lot of shares.
Character of Gain or Loss. The gain or loss recognized by each shareholder will generally be characterized as follows:
• Long-term capital gain or loss if the shareholder held the surrendered shares for more than one year as of the date of the Merger. Long-term capital gains of individual taxpayers are generally taxable at preferential rates (currently 0%, 15%, or 20%, depending on the taxpayer's income level, plus the 3.8% net investment income tax under Section 1411 for certain high-income individuals).
• Short-term capital gain or loss if the shareholder held the surrendered shares for one year or less as of the date of the Merger. Short-term capital gains are taxable at ordinary income rates.
• For corporate shareholders, the distinction between long-term and short-term capital gains is less significant, as capital gains of corporations are generally taxable at the regular corporate tax rate (currently 21% under Section 11(b)).
Withholding Considerations. The withholding obligations applicable to the merger consideration are complex and will be addressed in a separate memorandum expected to be distributed by December 5, 2023. For purposes of this summary, we note the following preliminary considerations:
(i) FIRPTA (Section 897). Cloudium Technologies plc is incorporated in England and Wales. Under Section 897 of the Code, gain or loss of a non-U.S. person from the disposition of a "United States real property interest" ("USRPI") is treated as effectively connected income subject to U.S. tax. A USRPI includes stock in a "United States real property holding corporation" ("USRPHC"), which is any corporation in which the fair market value of U.S. real property interests equals or exceeds 50% of the aggregate fair market value of the corporation's worldwide real property interests plus any other assets used or held for use in a trade or business. We must confirm whether Cloudium qualifies as a USRPHC. If Cloudium is not a USRPHC (which appears likely given that Cloudium's business is principally a SaaS software business with limited real estate holdings), no FIRPTA withholding under Section 1445 will be required on cash consideration paid to non-U.S. persons. This determination is pending further analysis of Cloudium's balance sheet and asset composition.
(ii) Backup Withholding (Section 3406). Under Section 3406, backup withholding at a rate of 24% applies to certain reportable payments — including merger consideration — paid to U.S. persons who fail to provide a valid taxpayer identification number on IRS Form W-9 or who are otherwise subject to backup withholding. The paying agent (anticipated to be the exchange agent designated in the Merger Agreement) will be responsible for collecting Forms W-9 from U.S. shareholders and applying backup withholding as required.
(iii) NRA Withholding (Sections 1441/1442). Under Sections 1441 and 1442 of the Code, withholding at a rate of 30% (or such lower rate as may be provided under an applicable income tax treaty) applies to certain "fixed or determinable annual or periodical" ("FDAP") income paid to non-U.S. persons, including dividends. In a standard cash-out merger, the cash consideration paid to shareholders in exchange for their stock is generally treated as exchange consideration (giving rise to capital gain or loss) rather than as a dividend, and accordingly, Sections 1441/1442 withholding should not apply. However, if any payments are recharacterized as dividends — for example, under a Section 302(b) analysis in unusual circumstances — withholding could be required. We do not anticipate this issue arising in the present Transaction, but it will be addressed in the separate withholding memorandum.
VII. Cross-Border Considerations (Summary)
The Transaction involves a target company incorporated in England and Wales with substantial operations in the United Kingdom, India, and Germany. A comprehensive analysis of the cross-border tax implications is beyond the scope of this memorandum, and a separate memorandum addressing the UK tax implications of the Transaction is expected to be distributed by December 12, 2023, in coordination with Albright & Kerr LLP (Fiona McAllister). We provide the following summary of key cross-border considerations for the deal team's reference.
United Kingdom. The principal UK tax considerations include the following:
(i) Stamp Duty / Stamp Duty Reserve Tax ("SDRT"). UK stamp duty is generally chargeable at 0.5% on instruments effecting the transfer of UK shares or marketable securities. SDRT, also at 0.5%, is chargeable on agreements to transfer chargeable securities. In a reverse triangular merger structure, where the Cloudium shares held by public stockholders are cancelled and converted into the right to receive cash (rather than being transferred to a third party), it is possible that UK stamp duty and SDRT may not be chargeable, on the basis that there is no "transfer" of shares within the meaning of the Stamp Act 1891 or Finance Act 1986. However, this analysis depends on the precise merger mechanics as applied under English corporate law, and will be confirmed in the separate UK tax memorandum.
(ii) UK Capital Gains Tax. UK-resident shareholders of Cloudium who dispose of their shares in the Merger will generally be subject to UK capital gains tax on any gain arising on the disposal. For individual UK-resident shareholders, the applicable capital gains tax rate is 10% (basic rate taxpayers) or 20% (higher or additional rate taxpayers). For corporate UK-resident shareholders, gains are generally included in the corporation's chargeable gains and taxed at the prevailing corporation tax rate (25% for accounting periods beginning on or after April 1, 2023). Certain UK exemptions and reliefs (including the Substantial Shareholding Exemption for corporate shareholders) may apply and will be analyzed in the separate memorandum.
(iii) Transfer Pricing. Cloudium Technologies UK Ltd. generates revenue of approximately £312,000,000 (approximately $390,000,000 at a rate of $1.25/£). Following the change of control, any intercompany restructuring involving Cloudium UK Ltd. — including changes to intercompany agreements, cost-sharing arrangements, or intellectual property licensing — will be subject to UK transfer pricing rules and must be documented in compliance with the OECD Transfer Pricing Guidelines and UK domestic law. This is primarily a post-closing integration issue and will be addressed in the integration tax memorandum.
India and Germany. The change of control at the Cloudium parent level — from public shareholders to Fund VI — does not, in itself, trigger an immediate tax liability at the level of Cloudium Technologies India Pvt. Ltd. or Cloudium Solutions GmbH, provided there are no direct transfers of assets at the subsidiary level and no transactions that give rise to deemed dispositions under applicable local law. However, India imposes a "minimum alternate tax" and has rules regarding indirect transfers of Indian assets that must be evaluated. In Germany, the change of ownership may affect the utilization of any existing tax loss carryforwards under the German Corporate Income Tax Act (Körperschaftsteuergesetz). These matters will be confirmed in the integration tax memorandum being prepared in coordination with local counsel.
Coordination. The cross-border tax analysis is being coordinated with Albright & Kerr LLP (Fiona McAllister, partner) regarding UK regulatory and tax matters, and with local counsel in India and Germany as appropriate. We will circulate updated guidance to the deal team as the cross-border analysis is completed.
VIII. Impact on Purchase Price Allocation and Section 338 Elections
The characterization of the Transaction as a taxable acquisition (rather than a tax-free reorganization) raises the question of whether the buyer should consider making a Section 338 election to achieve a stepped-up tax basis in the Target's underlying assets.
Section 338(h)(10) Election. A Section 338(h)(10) election may be made jointly by the buyer and the seller of a target that is either (a) a member of a selling consolidated group filing a consolidated federal income tax return or (b) an S corporation. In the present Transaction, Cloudium Technologies plc is not a member of any U.S. consolidated group (it is an English public limited company), and it is not an S corporation. Accordingly, a Section 338(h)(10) election is not available.
Section 338(g) Election. A Section 338(g) election may be made unilaterally by the purchasing corporation with respect to any "qualified stock purchase" — i.e., an acquisition of at least 80% of the total combined voting power and 80% of the total value of the stock of a target within a 12-month period. If the Merger is consummated as described, Fund VI (or the entity treated as the purchaser for U.S. federal income tax purposes) will acquire 100% of the Cloudium stock, and the Transaction will constitute a qualified stock purchase.
Cloudium Technologies plc is an English company that is treated as a corporation for U.S. federal income tax purposes (US EIN 83-2196754). A Section 338(g) election is therefore available with respect to the stock acquisition.
Effect of a Section 338(g) Election. A Section 338(g) election would result in a deemed sale of all of Cloudium's assets at the close of the "acquisition date" (the closing date of the Merger) at fair market value, followed by a deemed repurchase of those assets at an "aggregate deemed sale price" determined under Treasury Regulation § 1.338-4. This deemed asset sale would generate corporate-level tax on any gain recognized by "old" Cloudium — i.e., the Cloudium entity as it existed prior to the deemed sale. At the same time, the actual shareholders of Cloudium would recognize gain or loss on the receipt of cash merger consideration, resulting in a second layer of tax at the shareholder level.
This "double tax" consequence is the principal drawback of a Section 338(g) election. The election would be beneficial to the buyer only if the stepped-up basis in Cloudium's assets — and the resulting increase in future depreciation and amortization deductions — is sufficient to offset, on a net present value basis, the additional corporate-level tax liability arising from the deemed asset sale. Given the magnitude of the Transaction ($6.8 billion enterprise value) and the nature of Cloudium's assets (primarily intangible assets, including software, customer relationships, and goodwill, which are amortizable over a 15-year useful life under Section 197), the present value of incremental amortization deductions may not be sufficient to justify the immediate corporate-level tax cost.
Preliminary View. Based on our preliminary assessment, a Section 338(g) election is unlikely to be beneficial in this Transaction given the double-tax cost. Absent a Section 338(g) election, the acquisition will be treated as a standard stock acquisition for U.S. federal income tax purposes, and the purchase price will not receive a stepped-up basis in Cloudium's underlying assets at the U.S. federal level. Cloudium's existing tax basis in its assets will carry over.
Purchase Price Allocation Under Section 1060. If a Section 338(g) election were made (or if the Transaction were treated as an actual or deemed asset acquisition under any other theory), the purchase price would be allocated among Cloudium's assets in accordance with the residual method prescribed by Section 1060 of the Code. This allocation would have significant implications for the buyer's future depreciation and amortization deductions, as well as for the characterization of the acquired assets for purposes of Section 197 (intangible assets), Section 167 (tangible personal property), and Section 168 (MACRS depreciation).
The purchase price allocation analysis will be the subject of a separate memorandum (expected June 2024) prepared once Glenmore Thornton LLP (Vanessa Liu) completes the financial due diligence workstream. Glenmore Thornton (Richard Okamura) is also advising on the Section 338 election analysis and will provide a formal recommendation following completion of the asset valuation.
IX. Structuring Recommendations
Based on the analysis set forth in this memorandum, we recommend the following structuring steps:
1. Do not rely on Section 368(a)(2)(E) reorganization treatment. The stock consideration in the proposed Transaction constitutes only approximately 9.06% of the total merger consideration, which is far below the minimum 40% continuity of interest threshold required for a transaction to qualify as a tax-free reorganization under Section 368(a)(2)(E). There is no reasonable basis on which to take the position that the Transaction qualifies as a reorganization. The Transaction will be, and should be treated as, a fully taxable acquisition.
2. Structure the rollover equity contribution as a Section 351 exchange (if the post-closing parent entity is a corporation) or a Section 721 contribution (if the post-closing parent entity is a partnership or LLC taxed as a partnership). Either provision can provide tax-deferred treatment for the rollover equity participants — Jonathan Hargrove and Pinnacle Growth Ventures LLC — on their exchange of Cloudium shares for equity interests in the post-closing entity. The selection between Section 351 and Section 721 depends on the entity classification of the holding entity, which is expected to be finalized by the Solara fund structuring team in coordination with Glenmore Thornton LLP.
3. Ensure the Rollover Agreements provide for simultaneous closing. The rollover contribution must occur at the effective time of the Merger (currently planned for 11:59 PM Eastern Time on the closing date) as a single integrated step with the closing of the Merger. Temporal separation between the closing of the Merger and the consummation of the rollover contribution would increase the risk that the IRS or a court could apply the step-transaction doctrine to recharacterize the rollover as a separate transaction, potentially undermining the intended tax treatment. The Rollover Agreements should expressly provide that the rollover is consummated simultaneously with, and conditioned upon, the effective time of the Merger.
4. Avoid boot in the rollover. The rollover participants should receive solely equity interests — common stock of the corporate parent (in a Section 351 structure) or partnership or membership interests in the partnership or LLC parent (in a Section 721 structure) — and should not receive any cash, promissory notes, preferred returns with guaranteed distribution features, or other non-equity property at the time of the rollover exchange. Any boot received by a rollover participant would trigger gain recognition under Section 351(b) (in a corporate structure) or could give rise to a disguised sale under Section 707(a)(2)(B) (in a partnership structure), thereby defeating the purpose of the tax-deferred rollover.
5. Section 704(c) / Section 704(b) allocations (if partnership structure). If the post-closing holding entity is a partnership or LLC classified as a partnership, the partnership or operating agreement must include appropriate Section 704(c) allocation provisions to ensure that the built-in gain attributable to the contributed Cloudium equity is allocated to the respective contributing partners (Hargrove and Pinnacle) and is not shifted to Fund VI or other non-contributing partners. The partnership agreement should specify the method of Section 704(c) allocation to be used (traditional method, traditional method with curative allocations, or remedial allocation method) and should include appropriate Section 704(b) "substantial economic effect" provisions to ensure that all allocations are respected under the Treasury Regulations.
6. IRS Form W-9 / W-8BEN-E collection. We recommend that the deal team initiate the collection of IRS Forms W-9 (for U.S. persons) and W-8BEN-E (for non-U.S. entities) from the rollover participants and key stockholders well in advance of the closing date, in order to ensure compliance with applicable withholding and information-reporting obligations. We recommend that the deal team establish and maintain a tracker of received forms, including notation of any deficiencies, and circulate updated status reports to the tax team on a bi-weekly basis during the pre-

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

MEMORANDUM

MATTER NO.: 1041-00003

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