1041-00003 · Solara Digital Infrastructure LP · Tax

tax-memo-uk-implications.docx DOCUMENT M&A / Corporate

124 / 155 ← → ✕

MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

To: Harrison Wexford, Responsible Partner, Mergers & Acquisitions Tiffany Rosenthal, Lead Associate, Mergers & Acquisitions

From: Leonard Cross, Specialist Partner, Tax, Calderwood & Harkness LLP

Date: December 12, 2023

Re: UK Tax Implications of the Acquisition of Cloudium Technologies plc (Matter No. 1041-00003)

Client: Solara Digital Infrastructure LP

Prepared in coordination with: Glenmore Thornton LLP (Richard Okamura, Lead Partner, Transaction Tax; London office: 1 More London Place, London SE1 2AF)

Right-click to update Table of Contents

I. Executive Summary

The purpose of this memorandum is to analyze the principal United Kingdom tax consequences arising from the proposed acquisition of Cloudium Technologies plc ("Cloudium" or the "Target") by Solara Digital Infrastructure Fund VI LP ("Fund VI") through a reverse triangular merger under the General Corporation Law of the State of Delaware (the "DGCL"). In the proposed transaction, Stratos Merger Sub Inc. ("Merger Sub"), a newly formed Delaware corporation and wholly owned subsidiary of Fund VI, will merge with and into Cloudium, with Cloudium surviving the merger as a wholly owned subsidiary of Fund VI (the "Merger" or the "Transaction"). This memorandum has been prepared in coordination with Glenmore Thornton LLP's London office, and the analysis reflects our joint views on the matters discussed herein.

The aggregate transaction value is approximately $6,800,000,000 (approximately £5,440,000,000 at an assumed exchange rate of $1.25 per £1.00 Sterling). The per-share cash consideration payable in the Merger is approximately $36.92 per share of Cloudium common stock, based on approximately 184,200,000 shares of common stock outstanding (inclusive of shares subject to rollover agreements, as discussed below). The transaction consideration consists entirely of cash, except for shares subject to certain rollover equity arrangements described in Section II below.

Cloudium is a public limited company incorporated under the laws of England and Wales, with Company No. 09734521, and a registered office at 45 Broadwick Street, London W1F 0DB. Notwithstanding its UK incorporation, Cloudium's shares of common stock are listed on the Nasdaq Global Select Market under the ticker symbol "CLDM." Cloudium is not currently listed on any UK securities exchange.

The Cloudium group includes the following material subsidiaries relevant to this analysis:

• Cloudium Technologies UK Ltd. — a private limited company incorporated in England and Wales, Company No. 11287456, registered at 45 Broadwick Street, London W1F 0DB. Cloudium Technologies UK Ltd. ("Cloudium UK") is a wholly owned subsidiary of Cloudium plc and operates the group's principal UK business, employing approximately 1,200 individuals across offices in London and Manchester. For the fiscal year ended September 30, 2023, Cloudium UK reported revenue of approximately £312,000,000 (approximately $390,000,000 at the assumed exchange rate).

• Cloudium Technologies India Pvt. Ltd. — a private limited company incorporated in India and based in Bangalore, employing approximately 2,400 individuals. This entity principally provides research and development and technical support services to other group entities.

• Cloudium Solutions GmbH — a Gesellschaft mit beschränkter Haftung incorporated in Germany and based in Berlin, employing approximately 400 individuals. This entity principally serves the DACH (Germany, Austria, and Switzerland) region for sales and customer success functions.

This memorandum identifies and analyzes the following key UK tax issues arising from the Transaction:

(a) stamp duty and stamp duty reserve tax ("SDRT") on the cancellation or transfer of Cloudium shares in the Merger;

(b) UK capital gains tax ("CGT") and corporation tax on chargeable gains for UK-resident shareholders of Cloudium receiving the cash Merger consideration;

(c) transfer pricing implications for intercompany arrangements within the Cloudium group both prior to and following the closing of the Transaction (the "Closing");

(d) UK tax residence considerations for Cloudium plc following the Closing, including the risk of a shift in central management and control and potential exit charges;

(e) withholding tax on payments within the reconstituted group, including dividends, interest, and royalties;

(f) the substantial shareholding exemption ("SSE") and its potential application to UK corporate shareholders disposing of Cloudium shares;

(g) the UK corporate interest restriction ("CIR") rules and their application to any acquisition debt pushed down to Cloudium UK or to intercompany financing arrangements established after the Closing; and

(h) the application of UK anti-avoidance provisions, including the general anti-abuse rule ("GAAR"), the transactions in securities provisions, and targeted anti-avoidance rules.

This memorandum does not address the Indian or German tax implications of the Transaction, which are to be covered in separate memoranda. This memorandum has been prepared in coordination with Glenmore Thornton LLP's London office, and we have consulted with Richard Okamura on matters of UK tax law and HMRC practice throughout.

II. Transaction Structure Summary

A. Reverse Triangular Merger Mechanics

The Transaction is structured as a reverse triangular merger under Section 251 of the DGCL. The key structural elements are as follows:

Fund VI has caused the incorporation of Stratos Merger Sub Inc. ("Merger Sub"), a Delaware corporation (Delaware File No. 7923841), which was incorporated on January 8, 2024, solely for the purpose of effecting the Merger. Fund VI is the sole stockholder of Merger Sub. At the effective time of the Merger (the "Effective Time"), Merger Sub will merge with and into Cloudium pursuant to the Agreement and Plan of Merger (the "Merger Agreement"). Cloudium will be the surviving corporation in the Merger, and as a result of the Merger, Cloudium will become a wholly owned subsidiary of Fund VI.

At the Effective Time, each outstanding share of Cloudium common stock (other than shares held by Cloudium as treasury stock, shares held by Fund VI or Merger Sub, and shares subject to rollover agreements) will be cancelled and converted into the right to receive cash consideration of approximately $36.92 per share (the "Per Share Merger Consideration"), without interest. Based on approximately 184,200,000 shares of Cloudium common stock outstanding, the aggregate Merger consideration (assuming no rollover) would be approximately $6,800,000,000. Dissenting shares, if any, will be treated in accordance with the appraisal provisions of the DGCL, to the extent applicable.

Certain shareholders of Cloudium have entered into rollover agreements with Fund VI, pursuant to which a portion of their Cloudium shares will be exchanged for equity interests in the surviving entity (or a parent entity thereof) rather than cash consideration. The rollover participants and their respective equity positions are as follows:

• Jonathan Hargrove (Chief Executive Officer of Cloudium): holds approximately 7,736,400 shares, representing approximately 4.2% of outstanding Cloudium common stock. Mr. Hargrove will roll over 50% of his shares (approximately 3,868,200 shares), with the remaining 50% cashed out. The cash consideration for the cashed-out portion is approximately $142,814,544 (3,868,200 shares × $36.92). The rolled-over shares will be exchanged for equity interests in a holding entity within the Fund VI structure.

• Pinnacle Growth Ventures LLC: holds approximately 21,367,200 shares, representing approximately 11.6% of outstanding Cloudium common stock. Pinnacle Growth Ventures LLC will roll over 60% of its shares (approximately 12,820,320 shares), with the remaining 40% cashed out. The cash consideration for the cashed-out portion is approximately $315,494,272 (8,546,880 shares × $36.92). The rolled-over shares will be exchanged for equity interests in a holding entity within the Fund VI structure.

The aggregate rollover equity value is approximately $615,820,000 (comprising approximately $142,814,544 for Mr. Hargrove's rolled-over portion and approximately $473,241,408 for Pinnacle Growth Ventures LLC's rolled-over portion, in each case calculated by reference to the Per Share Merger Consideration).

B. UK Structural Considerations

Several structural features of the Transaction are relevant to the UK tax analysis:

First, Cloudium plc is incorporated in England and Wales, which has direct implications for stamp duty and SDRT, as discussed in Section III below. The fact that Cloudium's shares are listed on Nasdaq (a US securities exchange) rather than on a UK exchange (such as the London Stock Exchange) is relevant in certain respects but does not remove Cloudium's shares from the scope of the UK stamp duty regime, which applies to shares of companies incorporated in the United Kingdom regardless of where those shares are listed or traded.

Second, Cloudium Technologies UK Ltd. is a wholly owned subsidiary of Cloudium plc, and its shares are not directly transferred or affected by the Merger. The change of control occurs at the parent level — that is, Cloudium plc's shares are cancelled and Fund VI becomes the sole indirect shareholder of Cloudium UK by virtue of its ownership of the surviving entity, Cloudium plc. This indirect change of control does not involve a conveyance or transfer of Cloudium UK shares.

Third, following the Closing, Cloudium plc will be a wholly owned subsidiary of Fund VI, a Delaware limited partnership. This change in the ultimate parent entity has implications for UK tax residence, group relief, transfer pricing reporting, and the corporate interest restriction, each of which is discussed in detail below.

C. Existing Indebtedness

Cloudium's existing credit facility, entered into with Atlas Commercial Lending Corp. pursuant to a Credit Agreement dated March 15, 2021 (the "Existing Credit Agreement"), provides for a $620,000,000 term loan facility and a $200,000,000 revolving credit facility (of which the full $200,000,000 is currently drawn), resulting in total outstanding indebtedness of approximately $820,000,000 under the Existing Credit Agreement. The Existing Credit Agreement contains change-of-control provisions that will be triggered by the Merger, requiring mandatory prepayment of all amounts outstanding thereunder at or prior to the Closing.

The Transaction will be financed in part through new debt facilities, consisting of a $3,740,000,000 Term Loan B facility and a $500,000,000 revolving credit facility (the "New Credit Facilities"), to be provided by Meridian Atlantic Bank, N.A. and Ironclad Capital Markets LLC as lead arrangers. A portion of the proceeds of the Term Loan B facility will be used to fund the repayment of the Existing Credit Agreement at the Closing, with the balance applied to fund the cash Merger consideration and transaction expenses. The resulting leverage profile will be discussed in the context of the corporate interest restriction analysis in Section VII below.

III. Stamp Duty and Stamp Duty Reserve Tax (SDRT)

A. Overview of UK Stamp Duty Framework

UK stamp duty is an ad valorem tax imposed on "instruments" (i.e., written documents) that effect or evidence the transfer of "stock or marketable securities" (which includes shares in UK-incorporated companies). The standard rate of stamp duty is 0.5% of the consideration for the transfer, rounded up to the nearest £5. Stamp duty is technically payable by the purchaser and is due within 30 days of execution of the instrument of transfer. An unstamped or insufficiently stamped instrument is generally inadmissible in evidence in civil proceedings in England and Wales.

Stamp duty reserve tax ("SDRT") is a separate tax that arises on "agreements to transfer" chargeable securities for consideration in money or money's worth. SDRT is charged at a rate of 0.5% of the consideration and arises on the date the agreement becomes unconditional (or, if later, the date the consideration is ascertained). SDRT was introduced to capture paperless transactions — that is, transfers effected through electronic settlement systems (principally CREST in the UK) where no physical instrument of transfer is executed. Where a transfer is effected by an instrument that is duly stamped, any SDRT liability on the same transaction is cancelled or, if already paid, refunded.

A higher rate of 1.5% stamp duty or SDRT applies to transfers of chargeable securities to, or to a person acting as nominee or agent for, a clearance service or depositary receipt issuer (the "1.5% Charge"). This higher rate was introduced to collect stamp duty at the point of entry into a clearance or depositary system, effectively prepaying the stamp duty that would otherwise arise on subsequent transfers within the system.

For purposes of both stamp duty and SDRT, "chargeable securities" include shares in a company incorporated in the United Kingdom, regardless of the place of listing, the currency of denomination, or the location of the share register. This is a critical point for the analysis of Cloudium, as discussed below.

B. Application to the Merger

Cloudium plc is incorporated in England and Wales. Accordingly, Cloudium's shares of common stock are "chargeable securities" for purposes of both stamp duty and SDRT, notwithstanding that they are listed solely on Nasdaq and are held principally through the facilities of the Depository Trust Company ("DTC") in the United States. This means that any "transfer on sale" of Cloudium shares would, in principle, attract stamp duty at 0.5%, and any "agreement to transfer" Cloudium shares for consideration would, in principle, attract SDRT at 0.5%.

The central question for stamp duty and SDRT purposes is whether the Merger — a reverse triangular merger effected under the DGCL — involves a "transfer" of Cloudium shares or merely a statutory cancellation of those shares by operation of law.

Stamp Duty Analysis. Stamp duty is charged on "instruments" of "conveyance or transfer on sale." In the Merger, Cloudium shareholders do not execute stock transfer forms or any analogous instrument of transfer. Rather, at the Effective Time, by operation of Section 259 of the DGCL, the shares of Cloudium common stock are cancelled and converted into the right to receive the Per Share Merger Consideration. No instrument is executed that conveys title to the Cloudium shares from the existing shareholders to Fund VI or Merger Sub. Cloudium, as the surviving corporation, simply continues in existence as a wholly owned subsidiary of Fund VI, with its original shares having been extinguished.

Under UK stamp duty law, the charge arises only on an "instrument" that effects or evidences a "conveyance or transfer on sale." The leading authorities establish that stamp duty is a tax on instruments, not on transactions. Where no stampable instrument exists — as is the case in a merger by operation of law — stamp duty should not arise. This principle has been recognized in the context of transfers by operation of law, including transfers effected by court orders and statutory vesting declarations, which are generally not chargeable to stamp duty absent a specific charging provision.

HMRC has historically accepted that the cancellation of shares by operation of law in a foreign merger (such as a merger under the DGCL) does not constitute a "conveyance or transfer on sale" for stamp duty purposes. HMRC's Stamp Taxes on Shares Manual (STSM) at paragraph STSM021060 provides guidance on transfers by operation of law, noting that certain transactions effected by statute or court order may fall outside the scope of stamp duty. While HMRC's published guidance does not specifically address DGCL reverse triangular mergers in comprehensive terms, the general principle that stamp duty requires a stampable instrument is well established.

SDRT Analysis. SDRT arises on an "agreement to transfer" chargeable securities for consideration. The SDRT charge is triggered by the formation of the agreement (or when the agreement becomes unconditional), and does not depend on the existence of a physical instrument. The question is therefore whether the Merger constitutes or involves an "agreement to transfer" Cloudium shares.

In a reverse triangular merger under the DGCL, the cancellation of the target's shares occurs by operation of law at the Effective Time. The Merger Agreement itself provides for the merger of Merger Sub with and into Cloudium, and as a consequence of the merger, the shares of Cloudium common stock are cancelled and converted into the right to receive cash consideration. However, there is a strong argument that this statutory cancellation does not constitute an "agreement to transfer" the shares for SDRT purposes. The shareholders of Cloudium are not agreeing to transfer their shares to any person; rather, their shares are being extinguished by operation of the DGCL, and they receive cash consideration as a consequence of that statutory extinguishment.

HMRC's position on this point has been generally consistent with the stamp duty analysis: where shares are cancelled by operation of law in a foreign merger, HMRC has accepted that SDRT should not arise because there is no "agreement to transfer" but rather a statutory cancellation. This position is supported by the fundamental distinction between a "transfer" (which involves a change of ownership of existing shares from one person to another) and a "cancellation" (which involves the extinguishment of the shares themselves).

Conclusion. Based on the foregoing analysis, and consistent with the position of Glenmore Thornton LLP, we conclude that there are strong arguments that neither stamp duty nor SDRT is chargeable on the cancellation of Cloudium shares in the reverse triangular merger. The shares are cancelled by operation of the DGCL rather than transferred pursuant to any instrument or agreement, and accordingly, the fundamental conditions for the imposition of either stamp duty or SDRT are not satisfied.

We note, however, that HMRC has not published a definitive ruling or formal guidance specifically addressing the stamp duty and SDRT treatment of shares in UK-incorporated companies cancelled in DGCL reverse triangular mergers. While HMRC's general approach has been consistent with the analysis above, there is a residual risk that HMRC could seek to challenge this position, particularly given the increasing number of UK-incorporated companies listed on US exchanges and the potential revenue implications. In our experience, such a challenge is unlikely in the absence of a change in HMRC's published approach or new legislation, but the risk should be acknowledged and managed through the recommendations set out in Section III.F below.

C. Clearance Service / Depositary Receipt Considerations

Cloudium's shares are currently held through the facilities of the Depository Trust Company ("DTC") in the United States, which serves as the central securities depository and clearance system for Nasdaq-listed securities. DTC is a "relevant system" for these purposes, and the question arises whether the 1.5% stamp duty or SDRT charge on transfers into a clearance service or depositary receipt system applies to any aspect of the Transaction.

The 1.5% Charge is imposed under Section 96 of the Finance Act 1986 (SDRT) and Section 70 of the Finance Act 1986 (stamp duty) on the transfer of chargeable securities to, or to a nominee or agent for, a person whose business is or includes the provision of clearance services or the issue of depositary receipts. The charge is intended to capture the initial deposit of shares into a clearance or depositary system, at a rate of 1.5% of the consideration for the transfer (or, in the case of a transfer for no consideration, 1.5% of the value of the securities).

In the Transaction, Cloudium shares are being cancelled in the Merger, not transferred to a new clearance service or depositary receipt issuer. At the Effective Time, the shares held through DTC will simply cease to exist, and the former holders will be entitled to receive cash consideration in lieu of their cancelled shares. There is no transfer of Cloudium shares into a clearance service in connection with the Transaction, and accordingly, the 1.5% Charge should not apply.

We note that, prior to Brexit, the 1.5% Charge on transfers into EU clearance services was held to be inconsistent with EU free movement of capital provisions by the Court of Justice of the European Union in Harborline Savings Bank Holdings plc v. HMRC (Case C-569/07). Following the United Kingdom's withdrawal from the European Union on January 31, 2020, the retained EU law implications of this line of case law are uncertain. However, the CJEU jurisprudence is relevant here only to the extent that it may affect the scope of the 1.5% Charge in general; in the context of the Transaction, the 1.5% Charge is inapplicable on the separate and independent ground that no transfer into a clearance service occurs.

D. Stamp Duty on Rollover Shares

Certain Cloudium shareholders (Mr. Hargrove and Pinnacle Growth Ventures LLC) will participate in rollover equity arrangements pursuant to which a portion of their Cloudium shares will be exchanged for equity interests in a holding entity within the Fund VI structure. As described in Section II.A above, Mr. Hargrove will roll over approximately 3,868,200 shares and Pinnacle Growth Ventures LLC will roll over approximately 12,820,320 shares.

The rollover participants will not receive shares in a UK-incorporated company in exchange for their Cloudium shares. Rather, they will receive equity interests (likely limited partnership interests or interests in a Delaware limited liability company) in a non-UK entity within the Fund VI structure. Since the equity interests received by the rollover participants are not shares in a UK-incorporated company, they are not "chargeable securities" for stamp duty or SDRT purposes, and no UK stamp duty or SDRT should arise on the issuance of such non-UK equity interests.

Moreover, the Cloudium shares held by the rollover participants are, like all other Cloudium shares, cancelled by operation of the DGCL at the Effective Time. As discussed in Section III.B above, this cancellation should not give rise to stamp duty or SDRT. The fact that the rollover participants receive equity interests (rather than cash) as consideration for their cancelled shares does not alter this analysis, because the shares are still cancelled by operation of law rather than transferred pursuant to an instrument or agreement.

E. Stamp Duty on Subsidiary Shares (Cloudium UK Ltd.)

The shares of Cloudium Technologies UK Ltd. are not directly transferred in the Merger. Cloudium UK is, and will remain, a wholly owned subsidiary of Cloudium plc. The change of control occurs at the Cloudium plc level — that is, Fund VI replaces the public shareholders as the ultimate beneficial owner of Cloudium plc, and Cloudium UK remains within the Cloudium plc corporate group. Accordingly, no stamp duty or SDRT should arise on the shares of Cloudium UK in connection with the Transaction.

We note, however, that if any post-Closing intra-group restructuring involves the transfer of Cloudium UK shares (for example, a transfer of Cloudium UK shares from Cloudium plc to another group entity), stamp duty at 0.5% of the consideration (or market value, if higher, in the case of connected party transactions) would apply to any instrument effecting such transfer. In such circumstances, intra-group relief under Section 42 of the Finance Act 1930 (as supplemented by Section 27 of the Finance Act 1967 and Schedule 15 of the Finance Act 1999) may be available, provided that the transferor and transferee are members of the same "group" for stamp duty purposes (broadly, 75% subsidiary relationship) and the relevant conditions are satisfied. Intra-group relief can be clawed back if the transferee ceases to be a member of the same group within a prescribed period (generally three years, though the conditions and periods have been subject to amendment) as a result of a transaction that is not itself an intra-group transaction. This should be factored into any post-Closing restructuring planning.

F. Recommendations. In light of the analysis set out above, we recommend the following steps:

1. HMRC Clearance or Confirmation. We recommend that the parties consider seeking informal confirmation from HMRC that the cancellation of Cloudium shares in the reverse triangular merger does not give rise to stamp duty or SDRT. While we do not believe a formal statutory clearance is available under the stamp duty or SDRT legislation for this purpose, an informal approach to HMRC's Stamp Taxes team (either by telephone or by correspondence) may provide additional comfort. Alternatively, if the parties prefer not to approach HMRC directly (given the timing and confidentiality constraints of the Transaction), we recommend that the closing opinion from Glenmore Thornton LLP expressly address the stamp duty and SDRT position.

2. Documentation. It is essential that the Merger Agreement, the certificate of merger, and all other Transaction documentation clearly reflect that the Cloudium shares are cancelled by operation of the DGCL at the Effective Time, and are not transferred to Fund VI, Merger Sub, or any other person. The documentation should avoid language that could be construed as describing a "transfer" or "conveyance" of shares. We recommend that the drafting team review the current Merger Agreement (and any ancillary documentation) with this point in mind.

3. Coordination with Target's Counsel. We recommend coordination with Ridgeway Phelps & Sato LLP (Alistair Fenn, London office, 1 Angel Court, London EC2R 7HJ), which serves as counsel to Cloudium, on the mechanics of the share cancellation and the confirmation of the stamp duty/SDRT position. As target's counsel, Ridgeway Phelps & Sato LLP will have primary responsibility for ensuring that the Merger mechanics are properly implemented under both Delaware and English law, and their input on the English law aspects of the share cancellation will be relevant to the stamp duty analysis.

IV. UK Capital Gains Tax Implications for Shareholders

A. UK-Resident Individual Shareholders

For a UK-resident individual shareholder of Cloudium, the cancellation of Cloudium shares in the Merger in exchange for cash consideration constitutes a "disposal" for UK capital gains tax purposes. Specifically, the cancellation of shares in exchange for a capital sum (the Per Share Merger Consideration) is treated as a disposal under Section 22 of the Taxation of Chargeable Gains Act 1992 ("TCGA 1992"), which provides that a capital sum received by way of compensation for the loss, destruction, or extinction of an asset is treated as a disposal of the asset.

The chargeable gain (or allowable loss) arising on such disposal is calculated as follows:

• Proceeds of disposal: the Per Share Merger Consideration of approximately $36.92 per share, converted into Sterling at the prevailing exchange rate on the date of disposal (i.e., the date of the Effective Time). We note that the date of disposal for CGT purposes may be the date of the Merger Agreement (if unconditional) or the Effective Time, depending on the circumstances; this should be confirmed based on the specific terms of the Merger Agreement.

• Less: allowable expenditure, comprising (i) the original cost of acquisition of the Cloudium shares (including incidental costs of acquisition, such as brokerage commissions); and (ii) any enhancement expenditure (which is unlikely to be relevant in the case of publicly traded shares).

• Equals: chargeable gain (or allowable loss).

The applicable rates of UK capital gains tax for individual shareholders for the 2023/24 tax year are:

• 10% for gains falling within the basic rate band (to the extent that the individual's taxable income and gains, when aggregated, do not exceed the basic rate limit of £37,700 for 2023/24); and

• 20% for gains falling within the higher rate or additional rate bands.

Individual shareholders are entitled to an annual exempt amount (the "AEA") of £6,000 for the 2023/24 tax year (reduced from £12,300 in 2022/23). Gains up to the AEA are not subject to CGT.

It is important to note that no UK tax deferral or rollover relief is available for UK-resident individual shareholders who receive cash consideration in the Merger. Unlike a UK scheme of arrangement involving a share-for-share exchange (which may qualify for share exchange relief under Sections 135 or 136 of TCGA 1992, as discussed further below), a cash acquisition does not permit the holder to defer the gain until a subsequent disposal of replacement shares. The full chargeable gain crystallizes at the time of the disposal in the Merger, and CGT is payable in respect of the disposal in the normal way.

B. UK-Resident Corporate Shareholders

For a UK-resident corporate shareholder of Cloudium, the disposal proceeds received in the Merger are subject to UK corporation tax on chargeable gains. The chargeable gain is calculated in a manner similar to that described above for individual shareholders, except that:

(i) the indexation allowance (which adjusts the base cost of assets for inflation) is available for assets held on or before December 31, 2017, but was frozen as of that date by Section 31 of the Finance Act 2018. Accordingly, any indexation allowance is computed only by reference to the increase in the retail prices index from the date of acquisition to December 2017 (or the date of disposal, if earlier). For shares acquired after December 31, 2017, no indexation allowance is available;

(ii) the gain is subject to corporation tax at the prevailing main rate, which is 25% for the financial year beginning April 1, 2023 (applicable to companies with profits exceeding £250,000); and

(iii) the substantial shareholding exemption ("SSE") may be available to exempt the entire gain from corporation tax, as discussed below.

Substantial Shareholding Exemption. The SSE, introduced by Schedule 7AC to TCGA 1992, exempts from corporation tax the gain arising on the disposal of shares in a trading company (or holding company of a trading group) where the disposing company has held a "substantial shareholding" (i.e., at least 10% of the ordinary share capital of the company being disposed of) for a continuous period of at least 12 months within the two years preceding the disposal.

For the SSE to apply, the following principal conditions must be satisfied:

(a) The disposing company must be a "trading company" or a member of a "trading group," or, following amendments introduced by Finance (No. 2) Act 2017 for disposals on or after April 1, 2017, the condition relating to the investing company is relaxed where the company invested in is a "qualifying institutional investor" (broadly, a company owned by pension funds, sovereign wealth funds, or similar qualifying entities — this exception is unlikely to be relevant for most Cloudium corporate shareholders);

(b) The company whose shares are being disposed of (Cloudium) must be a "trading company" or the holding company of a "trading group" immediately after the disposal, or must have ceased to satisfy that condition within the 12 months preceding the disposal as a result of the disposal itself;

(c) The disposing company must have held at least 10% of the ordinary share capital of Cloudium for a continuous period of at least 12 months within the two years preceding the disposal.

With respect to Cloudium's status as a "trading company," we note that Cloudium operates a cloud-native enterprise software-as-a-service ("SaaS") business. Its activities consist principally of developing, licensing, and providing support for its software products and related services. These activities should constitute "trading" activities for the purposes of the SSE, and Cloudium should qualify as a "trading company" (or, as a holding company of a "trading group," since it holds subsidiaries through which the group's trade is conducted). We are not aware of any non-trading activities (such as investment activities or the holding of non-trading assets) that would cause Cloudium to fail the "trading company" test, though this should be confirmed as part of the ongoing due diligence process.

The SSE is a potentially valuable exemption for any UK corporate shareholder of Cloudium that satisfies the qualifying conditions, as it would exempt the entire chargeable gain from corporation tax. UK corporate shareholders should be advised to review their own positions to determine whether they satisfy the 10% holding and 12-month continuous holding requirements.

C. Non-UK-Resident Shareholders

Non-UK-resident shareholders of Cloudium are generally not subject to UK capital gains tax on the disposal of their Cloudium shares, unless the shares derive their value (directly or indirectly) to the extent of more than 75% from UK land (broadly, interests in UK real property).

Since April 6, 2019, the UK has imposed CGT on non-residents in respect of disposals of interests in "UK property rich" entities — that is, entities that derive 75% or more of their gross asset value from UK land. However, Cloudium is a SaaS technology company, and its assets consist principally of intellectual property, software, customer contracts, cash, receivables, and goodwill. Cloudium does not hold significant UK land or property interests, and it is not a "UK property rich" company for these purposes. We do not expect Cloudium's gross asset value to derive more than 75% (or anywhere close to 75%) from UK land.

Accordingly, non-UK-resident shareholders of Cloudium should not be subject to UK CGT on the disposal of their Cloudium shares in the Merger. This includes non-UK-resident institutional investors, US-based retail shareholders, and other non-resident holders.

We also note that the annual tax on enveloped dwellings ("ATED")-related CGT provisions are not applicable to the Transaction, as those provisions apply only to disposals of interests in UK residential property held by companies within the ATED regime.

D. Rollover Equity Participants

Two categories of rollover equity participants require specific consideration:

Jonathan Hargrove (CEO). Mr. Hargrove holds approximately 7,736,400 shares of Cloudium common stock and will roll over 50% of those shares (approximately 3,868,200 shares) into equity interests in a holding entity within the Fund VI structure. If Mr. Hargrove is a UK tax resident (which we understand to be the case based on preliminary due diligence), the UK CGT treatment of the rolled-over portion requires careful analysis.

In a UK domestic context, share exchange or reconstruction relief under Sections 135 and 136 of TCGA 1992 may apply where:

• A company issues shares to the shareholders of another company in exchange for their shares in that company, as a result of a general offer made to the shareholders (Section 135); or

• There is a "scheme of reconstruction" involving the issue of shares in one company in exchange for or in respect of shares in another company (Section 136).

Where either relief applies, the exchange is treated as not involving a disposal of the original shares, and the new shares are treated as having been acquired at the same time and for the same cost as the original shares. In effect, the gain is "rolled over" into the new shares and is only realized upon a subsequent disposal of the replacement shares.

The critical question is whether the reverse triangular merger under the DGCL qualifies as a transaction to which Section 135 or Section 136 of TCGA 1992 applies. There are significant challenges in this regard:

(i) Section 135 applies where a company "acquires" shares pursuant to a "general offer" and issues its own shares as consideration. In the Merger, Cloudium shares are cancelled by operation of law rather than "acquired" by Fund VI or any other company. Moreover, Fund VI is a limited partnership, not a company, and the equity interests received by the rollover participants are likely limited partnership interests or LLC membership interests, not "shares" in a "company" within the meaning of Section 135.

(ii) Section 136 applies to a "scheme of reconstruction" involving the allotment of shares in a company. Again, the equity interests issued in the Fund VI structure may not constitute "shares" in a "company" for these purposes, and the Merger may not constitute a "scheme of reconstruction" within the meaning of the TCGA 1992, which has been interpreted narrowly by the UK courts.

If UK reconstruction relief under Sections 135 or 136 of TCGA 1992 does not apply (which we consider to be the likely outcome, given that the Merger involves a cancellation under foreign law and the issuance of non-UK equity interests that may not constitute "shares" for UK tax purposes), Mr. Hargrove would face a deemed disposal of all of his Cloudium shares (including both the cashed-out and rolled-over portions) at their market value at the time of the Merger. This would result in an immediate CGT charge on the full gain attributable to all 7,736,400 shares, with no deferral available for the rolled-over portion. Mr. Hargrove would acquire a new base cost in his replacement equity interests equal to their market value at the date of acquisition.

This is a potentially significant adverse consequence for Mr. Hargrove, and we recommend that the Transaction team explore whether the rollover structure can be modified to mitigate this outcome — for example, by structuring the rollover through a UK holding company that issues shares in exchange for Cloudium shares prior to the Merger, potentially enabling Section 135 or Section 136 relief to apply to the initial share exchange. We recommend further analysis of this point in coordination with Mr. Hargrove's personal tax advisors.

Pinnacle Growth Ventures LLC. Pinnacle Growth Ventures LLC is a Delaware limited liability company and is not UK tax resident. Accordingly, as discussed in Section IV.C above, UK CGT should not apply to Pinnacle Growth Ventures LLC's disposal of Cloudium shares in the Merger, absent any connection to UK land (which, as noted, is not expected). The rollover treatment applicable to Pinnacle Growth Ventures LLC is therefore a US tax matter and is not addressed in this memorandum.

E. Withholding on Merger Consideration

The United Kingdom does not impose withholding tax on payments of merger consideration or purchase price for shares. There is no UK obligation on Solara, Fund VI, Merger Sub, or any other person to withhold UK tax from the Per Share Merger Consideration payable to Cloudium shareholders in the Merger, regardless of the tax residence of the recipient shareholder.

UK-resident shareholders who realize a chargeable gain on the disposal of their Cloudium shares will be required to self-assess and pay any CGT or corporation tax on chargeable gains in the ordinary course, but this is a matter for each shareholder and does not create a withholding obligation for the buyer.

V. UK Corporation Tax — Cloudium Group Considerations

A. Tax Residence of Cloudium plc Post-Closing

Cloudium plc is incorporated in England and Wales. Under Section 14 of the Corporation Tax Act 2009 ("CTA 2009"), a company incorporated in the United Kingdom is UK tax resident, unless it is treated as resident in another jurisdiction under the provisions of a double tax treaty (the "treaty tiebreaker").

Following the Closing, Cloudium plc will become a wholly owned subsidiary of Fund VI, a Delaware limited partnership managed by Solara Digital Infrastructure LP. There is a risk that the central management and control of Cloudium plc may shift to the United States if key strategic decisions are made by Solara personnel, if board meetings are regularly held in the United States, or if the practical decision-making authority in respect of Cloudium plc's affairs is exercised from the United States. In such circumstances, Cloudium plc could become dual-resident — that is, UK tax resident by virtue of incorporation, and US tax resident by virtue of central management and control being exercised in the United States (although the US "place of incorporation" test would also apply separately under US domestic law).

Under the UK-US Double Taxation Convention (2001, as amended by the 2002 Protocol) (the "UK-US Treaty"), the tiebreaker provision for dual-resident companies is set out in Article 4(3). Unlike many modern tax treaties, which resolve dual residence by reference to the "place of effective management," the UK-US Treaty provides that dual residence is to be resolved by "mutual agreement" of the competent authorities of the two Contracting States. This mutual agreement procedure is inherently uncertain and may result in significant delays, during which Cloudium plc's treaty residence remains unresolved.

The implications of a loss of UK tax residence (or the commencement of dual residence) for Cloudium plc are potentially significant:

(a) Exit charges under TCGA 1992 Section 185. If Cloudium plc ceases to be UK tax resident (or, in certain circumstances, if it becomes treaty-resident in another jurisdiction), it is treated as having disposed of all of its assets at their market value immediately before ceasing to be UK resident. This deemed disposal would give rise to chargeable gains on Cloudium plc's worldwide assets, including (critically) the shares of Cloudium Technologies UK Ltd., any intellectual property held directly by Cloudium plc, and any other capital assets. The resulting tax liability could be very substantial, given the value of the Cloudium group.

(b) Loss of UK group relief positions. A change in the tax residence of Cloudium plc could affect its eligibility to claim or surrender group relief (current-period trading losses and other amounts) with Cloudium UK, if the change in residence disrupts the UK group relief relationship.

(c) Impact on withholding tax positions. If Cloudium plc ceases to be UK tax resident, its ability to rely on UK domestic withholding tax exemptions (e.g., the exemption from withholding tax on UK-source dividends) and the UK-US Treaty for withholding tax reduction on payments received from other group entities could be affected.

Recommendation. We strongly recommend that post-Closing governance protocols be established to ensure that Cloudium plc's board of directors continues to meet and exercise central management and control from the United Kingdom. Specifically:

• A majority of the board of directors of Cloudium plc should be UK-resident individuals.

• Board meetings should be held regularly in the United Kingdom, with all material strategic decisions taken at or ratified at UK board meetings.

• Board minutes should clearly document that the directors have exercised independent judgment in the United Kingdom, and that key decisions have been taken in the United Kingdom.

• Day-to-day management of Cloudium plc should continue to be conducted from the UK.

These protocols should be incorporated into the post-Closing integration plan and revisited periodically to ensure ongoing compliance.

B. Degrouping Charges

Under Section 179 of TCGA 1992, where a company ("Company A") has acquired an asset from another company ("Company B") on a no-gain/no-loss intra-group basis under Section 171 of TCGA 1992, and Company A subsequently leaves the group of which Company B is a member within six years of the intra-group transfer, a "degrouping charge" arises. The degrouping charge is calculated by reference to the gain (or loss) that would have arisen on the intra-group transfer if it had been made at market value at the time of the transfer, and is treated as arising immediately before Company A leaves the group.

In the context of the Transaction, the reverse triangular merger does not directly cause any company to "leave" the Cloudium group. Cloudium plc survives the Merger and remains the direct parent of Cloudium UK. Cloudium UK does not leave the group; it remains a wholly owned subsidiary of Cloudium plc. Accordingly, the Merger itself should not trigger any degrouping charge under Section 179.

However, there is a potential risk of degrouping charges in connection with any post-Closing restructuring. If, following the Closing, Cloudium Technologies UK Ltd. is transferred to a different group entity (for example, as part of a reorganization of the Cloudium group's corporate structure), and Cloudium UK has received assets from Cloudium plc (or from another Cloudium group company) on a no-gain/no-loss basis within the preceding six years, the transfer of Cloudium UK out of the Cloudium plc group could trigger a degrouping charge. The degrouping charge would be attributed to Cloudium UK and would increase its corporation tax liability for the period in which the degrouping occurs.

Recommendation. As part of the ongoing tax due diligence, we recommend obtaining comprehensive details of any intra-group asset transfers within the Cloudium UK group (including transfers between Cloudium plc and Cloudium UK, and between Cloudium UK and any other group entities) that have occurred within the past six years. This information should be cross-referenced with the preliminary due diligence request list dated September 10, 2023, which included a request for details of intra-group transfers. The results of this review should inform any post-Closing restructuring planning to ensure that degrouping charges are identified and, where possible, mitigated.

C. Loss of UK Group Relief

Cloudium plc and Cloudium Technologies UK Ltd. currently form a UK group for the purposes of Part 5 of the Corporation Tax Act 2010 ("CTA 2010"), which governs group relief. The 75% ownership test is satisfied, as Cloudium plc holds 100% of the ordinary share capital of Cloudium UK, and Cloudium plc is entitled to 100% of the profits available for distribution and 100% of the assets available on a winding up.

Following the Closing, this group relief relationship should continue, as Cloudium plc will remain the direct parent of Cloudium UK. The fact that Cloudium plc itself becomes a subsidiary of Fund VI does not, by itself, disrupt the group relief relationship between Cloudium plc and Cloudium UK, provided that Cloudium plc continues to hold (directly or indirectly) at least 75% of the ordinary share capital of Cloudium UK and the other group relief conditions remain satisfied.

However, if subsequent post-Closing restructuring breaks the 75% group relationship (for example, by interposing a non-UK entity between Cloudium plc and Cloudium UK, or by transferring Cloudium UK shares to a different entity that is not within the same 75% group), group relief for current-period trading losses and other eligible amounts could be affected. In addition, any consortium relief arrangements currently in place within the Cloudium group should be reviewed to determine whether they are affected by the change of control.

D. Loan Relationships and Derivative Contracts

The repayment of the existing $820,000,000 indebtedness to Atlas Commercial Lending Corp. at or prior to the Closing will require a review of any UK loan relationship tax consequences. In particular:

(i) To the extent that any portion of the existing indebtedness is denominated in a currency other than the functional currency of the relevant UK borrower (which, for Cloudium UK, is likely Sterling), foreign exchange gains or losses may arise on the repayment of the debt. Under Part 5 of the Corporation Tax Act 2009, loan relationship debits and credits (including foreign exchange gains and losses) are brought into account for corporation tax purposes on an amortized cost or fair value basis, depending on the accounting treatment adopted by the company.

(ii) If Cloudium UK has entered into derivative contracts (such as interest rate swaps or cross-currency swaps) in connection with the existing credit facility, the early termination of those contracts in connection with the refinancing at Closing could give rise to taxable gains or allowable losses under Part 7 of the Corporation Tax Act 2009.

With respect to the new financing, if any portion of the $3,740,000,000 Term Loan B is on-lent to Cloudium UK (whether directly or through an intercompany loan), the UK thin capitalization rules and the corporate interest restriction rules will apply to determine the extent to which the interest expense is deductible for UK corporation tax purposes. The corporate interest restriction is discussed in detail in Section VII below.

VI. Transfer Pricing

A. Current Intercompany Arrangements

The Cloudium group has significant intercompany flows among its various subsidiaries. Based on our preliminary understanding of the group's operational structure:

• Cloudium Technologies India Pvt. Ltd. (Bangalore, approximately 2,400 employees) provides research and development services and technical support services to other group entities. It is likely remunerated on a cost-plus basis under intercompany service agreements, although the precise terms of these agreements have not yet been reviewed as part of the tax due diligence.

• Cloudium Solutions GmbH (Berlin, approximately 400 employees) provides sales and customer success services to the DACH region. It is likely characterized as either a limited-risk distributor or a commissionnaire, remunerated on a transactional net margin basis, although again the precise arrangements remain to be confirmed.

• Cloudium Technologies UK Ltd. (London and Manchester, approximately 1,200 employees, revenue of £312,000,000 for FYE September 30, 2023) is a substantial operating entity within the group. It likely has intercompany arrangements relating to service agreements, licensing of intellectual property, cost-sharing or cost-contribution arrangements, and intercompany management and administrative services.

UK transfer pricing rules, set out in Part 4 of the Taxation (International and Other Provisions) Act 2010 ("TIOPA 2010"), require that transactions between "connected persons" (including members of the same group of companies) be priced at arm's length — that is, at the price that would have been agreed between independent parties in comparable circumstances. Where a transaction is not at arm's length, HMRC may adjust the taxable profits of the UK entity to reflect arm's-length pricing.

The existing intercompany arrangements within the Cloudium group should be reviewed comprehensively as part of the tax due diligence to identify any transfer pricing risks or exposures. We understand that Richard Okamura of Glenmore Thornton LLP is coordinating the transfer pricing review as part of the overall transaction tax due diligence.

B. Post-Acquisition Transfer Pricing Risks

Following the Closing, there are several categories of transfer pricing risk that should be identified and managed:

IP Migration. If any post-Closing restructuring involves the migration of intellectual property from Cloudium UK (or to Cloudium UK from another jurisdiction), the transfer must be effected at arm's length. HMRC has been increasingly active in scrutinizing IP migration transactions in the technology sector, particularly in the context of private equity acquisitions where the acquirer may seek to restructure the target group's IP ownership arrangements for tax efficiency purposes. Any transfer of IP from Cloudium UK to a non-UK entity would give rise to a disposal for UK corporation tax purposes, and the proceeds of disposal would need to reflect arm's-length pricing. Failure to obtain arm's-length consideration would expose the group to a transfer pricing adjustment by HMRC, and could also give rise to a Diverted Profits Tax charge (as discussed below).

Recharacterization Risk. If post-Closing restructuring alters Cloudium UK's functional profile — for example, by converting it from an "entrepreneur" entity (bearing significant risks and owning significant intangible assets) to a "limited-risk distributor" or "contract service provider" (bearing limited risks and performing limited functions) — HMRC may seek to recharacterize the arrangement and adjust Cloudium UK's taxable profits accordingly. Under the OECD Transfer Pricing Guidelines (which are relevant to the interpretation of Part 4 of TIOPA 2010), the actual conduct of the parties may override the contractual terms if the contractual allocation of risks is inconsistent with the economic substance of the arrangement.

Diverted Profits Tax. The Diverted Profits Tax ("DPT"), introduced by the Finance Act 2015, is charged at a rate of 25% (higher than the main corporation tax rate) on profits that HMRC considers to have been "diverted" from the United Kingdom through arrangements involving entities with "insufficient economic substance" or arrangements designed to exploit the "mismatch condition" between UK and foreign tax rules. In the context of the Cloudium acquisition, DPT could apply if post-Closing arrangements are structured in a way that reduces Cloudium UK's taxable profits through transactions with low-substance entities in other jurisdictions, or through arrangements that take advantage of mismatches between UK and non-UK tax rules.

Management Fees. Post-Closing, management or advisory fees may be charged to Cloudium UK by Solara, Fund VI, or their affiliated management entities. Any such fees must be at arm's length, and Cloudium UK must receive genuine services commensurate with the fees charged. HMRC has historically scrutinized management fee arrangements in the private equity context, and the group should be prepared to demonstrate the arm's-length nature of any such charges.

C. Documentation Requirements

Under UK law, there is no mandatory requirement to prepare and maintain contemporaneous transfer pricing documentation in a prescribed form. However, it is well-established best practice — and, for practical purposes, a near-requirement for large companies — to maintain transfer pricing documentation sufficient to demonstrate that intercompany transactions have been priced at arm's length. HMRC expects large companies to be able to provide transfer pricing documentation promptly upon request, and the absence of such documentation may lead HMRC to draw adverse inferences.

Cloudium UK, with revenue of £312,000,000 for FYE September 30, 2023, comfortably exceeds the thresholds for classification as a "large" company under HMRC's guidelines and the Companies Act 2006 criteria. Accordingly, Cloudium UK should be maintaining transfer pricing documentation in accordance with HMRC's expectations and the OECD Transfer Pricing Documentation standards (Master File, Local File, and Country-by-Country Report).

With respect to Country-by-Country Reporting ("CbCR") obligations under OECD BEPS Action 13 (implemented in the UK by the Taxes (Base Erosion and Profit Shifting) (Country-by-Country Reporting) Regulations 2016), the Cloudium group is likely already required to file a CbCR, given the group's consolidated revenue exceeds the €750,000,000 threshold. Following the Closing, the ultimate parent entity ("UPE") of the Cloudium group will change from Cloudium plc to Fund VI (or its general partner or management company, depending on the group structure). This change in UPE may affect the CbCR filing obligations, including the identity of the reporting entity, the filing jurisdiction, and the surrogate filing arrangements. The group should ensure that CbCR filing obligations are properly transitioned following the Closing.

D. Recommendations.

1. Conduct a comprehensive review of existing intercompany agreements within the Cloudium group as part of the ongoing tax due diligence, with particular focus on the characterization and pricing of intercompany service agreements, IP licensing arrangements, and cost-sharing or cost-contribution arrangements involving Cloudium UK.

2. Prepare arm's-length benchmarking studies for any post-Closing restructuring of intercompany arrangements, including any IP migration, changes in Cloudium UK's functional profile, or introduction of management fee arrangements.

3. A detailed analysis of post-Closing integration transfer pricing matters will be provided in a separate memorandum (Tax Memorandum — Post-Closing Integration Tax Considerations) to be prepared following the Closing.

4. Coordinate with Glenmore Thornton LLP (Vanessa Liu, Financial Due Diligence lead; Richard Okamura, Transaction Tax lead) to ensure that transfer pricing matters are fully addressed in the due diligence process and in the integration planning.

VII. Corporate Interest Restriction (CIR)

A. Overview. The UK Corporate Interest Restriction ("CIR") rules, enacted by Part 10 of TIOPA 2010 (as inserted by the Finance (No. 2) Act 2017) and effective for periods of account beginning on or after April 1, 2017, limit the amount of net interest expense that a UK group may deduct for corporation tax purposes. The CIR rules implement the interest limitation recommendation of the OECD's Base Erosion and Profit Shifting ("BEPS") Action 4 report.

Under the CIR rules, a UK group's tax-deductible net interest expense is limited to the higher of:

(a) the de minimis amount of £2,000,000 (i.e., if the UK group's aggregate net tax-interest expense does not exceed £2,000,000, no restriction applies); or

(b) the fixed ratio of 30% of the UK group's aggregate "tax-EBITDA" (broadly, taxable income before interest, tax, depreciation, and amortization, calculated on a tax basis).

In addition, a UK group may elect to apply the group ratio rule, which allows deduction of net interest expense up to the worldwide group's ratio of net interest expense to group-EBITDA (calculated on a consolidated accounting basis). The group ratio rule is designed to accommodate groups that are more highly leveraged at the worldwide level, allowing them to deduct a proportionately higher amount of UK interest expense.

Given the significant leverage involved in the Transaction — the $3,740,000,000 Term Loan B, together with the $500,000,000 revolving facility and residual equity contributions, implies closing-date leverage of approximately 9.24x total debt-to-LTM EBITDA (approximately 8.79x on a net debt basis, assuming cash balances at closing) — the CIR rules will be a critical consideration if any portion of the acquisition debt is pushed down to Cloudium UK or if intercompany loans are established between US group entities and Cloudium UK.

B. Application to Cloudium UK

To illustrate the potential impact of the CIR rules on Cloudium UK, we set out the following indicative analysis based on available financial data:

Estimated UK Tax-EBITDA. Cloudium UK reported revenue of approximately £312,000,000 for FYE September 30, 2023. Applying the Cloudium group's consolidated EBITDA margin of approximately 25% (based on group LTM consolidated EBITDA of approximately $405,000,000 on group revenue of approximately $1,620,000,000) as a proxy for Cloudium UK's standalone EBITDA margin, we estimate Cloudium UK's standalone EBITDA at approximately £78,000,000. This is a preliminary estimate and should be refined based on the actual management accounts and tax computations of Cloudium UK, which we expect to receive through the due diligence process.

Fixed Ratio Rule. Under the fixed ratio rule, the maximum deductible net tax-interest expense for Cloudium UK would be 30% of its tax-EBITDA, or approximately £23,400,000 per annum. Any net interest expense in excess of this amount would be disallowed (subject to carry-forward as "disallowed amo

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
To: Harrison Wexford, Responsible Partner, Mergers & Acquisitions Tiffany Rosenthal, Lead Associate, Mergers & Acquisitions
From: Leonard Cross, Specialist Partner, Tax, Calderwood & Harkness LLP
Date: December 12, 2023
Re: UK Tax Implications of the Acquisition of Cloudium Technologies plc (Matter No. 1041-00003)
Client: Solara Digital Infrastructure LP
Prepared in coordination with: Glenmore Thornton LLP (Richard Okamura, Lead Partner, Transaction Tax; London office: 1 More London Place, London SE1 2AF)
Right-click to update Table of Contents
I. Executive Summary
The purpose of this memorandum is to analyze the principal United Kingdom tax consequences arising from the proposed acquisition of Cloudium Technologies plc ("Cloudium" or the "Target") by Solara Digital Infrastructure Fund VI LP ("Fund VI") through a reverse triangular merger under the General Corporation Law of the State of Delaware (the "DGCL"). In the proposed transaction, Stratos Merger Sub Inc. ("Merger Sub"), a newly formed Delaware corporation and wholly owned subsidiary of Fund VI, will merge with and into Cloudium, with Cloudium surviving the merger as a wholly owned subsidiary of Fund VI (the "Merger" or the "Transaction"). This memorandum has been prepared in coordination with Glenmore Thornton LLP's London office, and the analysis reflects our joint views on the matters discussed herein.
The aggregate transaction value is approximately $6,800,000,000 (approximately £5,440,000,000 at an assumed exchange rate of $1.25 per £1.00 Sterling). The per-share cash consideration payable in the Merger is approximately $36.92 per share of Cloudium common stock, based on approximately 184,200,000 shares of common stock outstanding (inclusive of shares subject to rollover agreements, as discussed below). The transaction consideration consists entirely of cash, except for shares subject to certain rollover equity arrangements described in Section II below.
Cloudium is a public limited company incorporated under the laws of England and Wales, with Company No. 09734521, and a registered office at 45 Broadwick Street, London W1F 0DB. Notwithstanding its UK incorporation, Cloudium's shares of common stock are listed on the Nasdaq Global Select Market under the ticker symbol "CLDM." Cloudium is not currently listed on any UK securities exchange.
The Cloudium group includes the following material subsidiaries relevant to this analysis:
•  Cloudium Technologies UK Ltd. — a private limited company incorporated in England and Wales, Company No. 11287456, registered at 45 Broadwick Street, London W1F 0DB. Cloudium Technologies UK Ltd. ("Cloudium UK") is a wholly owned subsidiary of Cloudium plc and operates the group's principal UK business, employing approximately 1,200 individuals across offices in London and Manchester. For the fiscal year ended September 30, 2023, Cloudium UK reported revenue of approximately £312,000,000 (approximately $390,000,000 at the assumed exchange rate).
•  Cloudium Technologies India Pvt. Ltd. — a private limited company incorporated in India and based in Bangalore, employing approximately 2,400 individuals. This entity principally provides research and development and technical support services to other group entities.
•  Cloudium Solutions GmbH — a Gesellschaft mit beschränkter Haftung incorporated in Germany and based in Berlin, employing approximately 400 individuals. This entity principally serves the DACH (Germany, Austria, and Switzerland) region for sales and customer success functions.
This memorandum identifies and analyzes the following key UK tax issues arising from the Transaction:
(a) stamp duty and stamp duty reserve tax ("SDRT") on the cancellation or transfer of Cloudium shares in the Merger;
(b) UK capital gains tax ("CGT") and corporation tax on chargeable gains for UK-resident shareholders of Cloudium receiving the cash Merger consideration;
(c) transfer pricing implications for intercompany arrangements within the Cloudium group both prior to and following the closing of the Transaction (the "Closing");
(d) UK tax residence considerations for Cloudium plc following the Closing, including the risk of a shift in central management and control and potential exit charges;
(e) withholding tax on payments within the reconstituted group, including dividends, interest, and royalties;
(f) the substantial shareholding exemption ("SSE") and its potential application to UK corporate shareholders disposing of Cloudium shares;
(g) the UK corporate interest restriction ("CIR") rules and their application to any acquisition debt pushed down to Cloudium UK or to intercompany financing arrangements established after the Closing; and
(h) the application of UK anti-avoidance provisions, including the general anti-abuse rule ("GAAR"), the transactions in securities provisions, and targeted anti-avoidance rules.
This memorandum does not address the Indian or German tax implications of the Transaction, which are to be covered in separate memoranda. This memorandum has been prepared in coordination with Glenmore Thornton LLP's London office, and we have consulted with Richard Okamura on matters of UK tax law and HMRC practice throughout.
II. Transaction Structure Summary
A. Reverse Triangular Merger Mechanics
The Transaction is structured as a reverse triangular merger under Section 251 of the DGCL. The key structural elements are as follows:
Fund VI has caused the incorporation of Stratos Merger Sub Inc. ("Merger Sub"), a Delaware corporation (Delaware File No. 7923841), which was incorporated on January 8, 2024, solely for the purpose of effecting the Merger. Fund VI is the sole stockholder of Merger Sub. At the effective time of the Merger (the "Effective Time"), Merger Sub will merge with and into Cloudium pursuant to the Agreement and Plan of Merger (the "Merger Agreement"). Cloudium will be the surviving corporation in the Merger, and as a result of the Merger, Cloudium will become a wholly owned subsidiary of Fund VI.
At the Effective Time, each outstanding share of Cloudium common stock (other than shares held by Cloudium as treasury stock, shares held by Fund VI or Merger Sub, and shares subject to rollover agreements) will be cancelled and converted into the right to receive cash consideration of approximately $36.92 per share (the "Per Share Merger Consideration"), without interest. Based on approximately 184,200,000 shares of Cloudium common stock outstanding, the aggregate Merger consideration (assuming no rollover) would be approximately $6,800,000,000. Dissenting shares, if any, will be treated in accordance with the appraisal provisions of the DGCL, to the extent applicable.
Certain shareholders of Cloudium have entered into rollover agreements with Fund VI, pursuant to which a portion of their Cloudium shares will be exchanged for equity interests in the surviving entity (or a parent entity thereof) rather than cash consideration. The rollover participants and their respective equity positions are as follows:
•  Jonathan Hargrove (Chief Executive Officer of Cloudium): holds approximately 7,736,400 shares, representing approximately 4.2% of outstanding Cloudium common stock. Mr. Hargrove will roll over 50% of his shares (approximately 3,868,200 shares), with the remaining 50% cashed out. The cash consideration for the cashed-out portion is approximately $142,814,544 (3,868,200 shares × $36.92). The rolled-over shares will be exchanged for equity interests in a holding entity within the Fund VI structure.
•  Pinnacle Growth Ventures LLC: holds approximately 21,367,200 shares, representing approximately 11.6% of outstanding Cloudium common stock. Pinnacle Growth Ventures LLC will roll over 60% of its shares (approximately 12,820,320 shares), with the remaining 40% cashed out. The cash consideration for the cashed-out portion is approximately $315,494,272 (8,546,880 shares × $36.92). The rolled-over shares will be exchanged for equity interests in a holding entity within the Fund VI structure.
The aggregate rollover equity value is approximately $615,820,000 (comprising approximately $142,814,544 for Mr. Hargrove's rolled-over portion and approximately $473,241,408 for Pinnacle Growth Ventures LLC's rolled-over portion, in each case calculated by reference to the Per Share Merger Consideration).
B. UK Structural Considerations
Several structural features of the Transaction are relevant to the UK tax analysis:
First, Cloudium plc is incorporated in England and Wales, which has direct implications for stamp duty and SDRT, as discussed in Section III below. The fact that Cloudium's shares are listed on Nasdaq (a US securities exchange) rather than on a UK exchange (such as the London Stock Exchange) is relevant in certain respects but does not remove Cloudium's shares from the scope of the UK stamp duty regime, which applies to shares of companies incorporated in the United Kingdom regardless of where those shares are listed or traded.
Second, Cloudium Technologies UK Ltd. is a wholly owned subsidiary of Cloudium plc, and its shares are not directly transferred or affected by the Merger. The change of control occurs at the parent level — that is, Cloudium plc's shares are cancelled and Fund VI becomes the sole indirect shareholder of Cloudium UK by virtue of its ownership of the surviving entity, Cloudium plc. This indirect change of control does not involve a conveyance or transfer of Cloudium UK shares.
Third, following the Closing, Cloudium plc will be a wholly owned subsidiary of Fund VI, a Delaware limited partnership. This change in the ultimate parent entity has implications for UK tax residence, group relief, transfer pricing reporting, and the corporate interest restriction, each of which is discussed in detail below.
C. Existing Indebtedness
Cloudium's existing credit facility, entered into with Atlas Commercial Lending Corp. pursuant to a Credit Agreement dated March 15, 2021 (the "Existing Credit Agreement"), provides for a $620,000,000 term loan facility and a $200,000,000 revolving credit facility (of which the full $200,000,000 is currently drawn), resulting in total outstanding indebtedness of approximately $820,000,000 under the Existing Credit Agreement. The Existing Credit Agreement contains change-of-control provisions that will be triggered by the Merger, requiring mandatory prepayment of all amounts outstanding thereunder at or prior to the Closing.
The Transaction will be financed in part through new debt facilities, consisting of a $3,740,000,000 Term Loan B facility and a $500,000,000 revolving credit facility (the "New Credit Facilities"), to be provided by Meridian Atlantic Bank, N.A. and Ironclad Capital Markets LLC as lead arrangers. A portion of the proceeds of the Term Loan B facility will be used to fund the repayment of the Existing Credit Agreement at the Closing, with the balance applied to fund the cash Merger consideration and transaction expenses. The resulting leverage profile will be discussed in the context of the corporate interest restriction analysis in Section VII below.
III. Stamp Duty and Stamp Duty Reserve Tax (SDRT)
A. Overview of UK Stamp Duty Framework
UK stamp duty is an ad valorem tax imposed on "instruments" (i.e., written documents) that effect or evidence the transfer of "stock or marketable securities" (which includes shares in UK-incorporated companies). The standard rate of stamp duty is 0.5% of the consideration for the transfer, rounded up to the nearest £5. Stamp duty is technically payable by the purchaser and is due within 30 days of execution of the instrument of transfer. An unstamped or insufficiently stamped instrument is generally inadmissible in evidence in civil proceedings in England and Wales.
Stamp duty reserve tax ("SDRT") is a separate tax that arises on "agreements to transfer" chargeable securities for consideration in money or money's worth. SDRT is charged at a rate of 0.5% of the consideration and arises on the date the agreement becomes unconditional (or, if later, the date the consideration is ascertained). SDRT was introduced to capture paperless transactions — that is, transfers effected through electronic settlement systems (principally CREST in the UK) where no physical instrument of transfer is executed. Where a transfer is effected by an instrument that is duly stamped, any SDRT liability on the same transaction is cancelled or, if already paid, refunded.
A higher rate of 1.5% stamp duty or SDRT applies to transfers of chargeable securities to, or to a person acting as nominee or agent for, a clearance service or depositary receipt issuer (the "1.5% Charge"). This higher rate was introduced to collect stamp duty at the point of entry into a clearance or depositary system, effectively prepaying the stamp duty that would otherwise arise on subsequent transfers within the system.
For purposes of both stamp duty and SDRT, "chargeable securities" include shares in a company incorporated in the United Kingdom, regardless of the place of listing, the currency of denomination, or the location of the share register. This is a critical point for the analysis of Cloudium, as discussed below.
B. Application to the Merger
Cloudium plc is incorporated in England and Wales. Accordingly, Cloudium's shares of common stock are "chargeable securities" for purposes of both stamp duty and SDRT, notwithstanding that they are listed solely on Nasdaq and are held principally through the facilities of the Depository Trust Company ("DTC") in the United States. This means that any "transfer on sale" of Cloudium shares would, in principle, attract stamp duty at 0.5%, and any "agreement to transfer" Cloudium shares for consideration would, in principle, attract SDRT at 0.5%.
The central question for stamp duty and SDRT purposes is whether the Merger — a reverse triangular merger effected under the DGCL — involves a "transfer" of Cloudium shares or merely a statutory cancellation of those shares by operation of law.
Stamp Duty Analysis. Stamp duty is charged on "instruments" of "conveyance or transfer on sale." In the Merger, Cloudium shareholders do not execute stock transfer forms or any analogous instrument of transfer. Rather, at the Effective Time, by operation of Section 259 of the DGCL, the shares of Cloudium common stock are cancelled and converted into the right to receive the Per Share Merger Consideration. No instrument is executed that conveys title to the Cloudium shares from the existing shareholders to Fund VI or Merger Sub. Cloudium, as the surviving corporation, simply continues in existence as a wholly owned subsidiary of Fund VI, with its original shares having been extinguished.
Under UK stamp duty law, the charge arises only on an "instrument" that effects or evidences a "conveyance or transfer on sale." The leading authorities establish that stamp duty is a tax on instruments, not on transactions. Where no stampable instrument exists — as is the case in a merger by operation of law — stamp duty should not arise. This principle has been recognized in the context of transfers by operation of law, including transfers effected by court orders and statutory vesting declarations, which are generally not chargeable to stamp duty absent a specific charging provision.
HMRC has historically accepted that the cancellation of shares by operation of law in a foreign merger (such as a merger under the DGCL) does not constitute a "conveyance or transfer on sale" for stamp duty purposes. HMRC's Stamp Taxes on Shares Manual (STSM) at paragraph STSM021060 provides guidance on transfers by operation of law, noting that certain transactions effected by statute or court order may fall outside the scope of stamp duty. While HMRC's published guidance does not specifically address DGCL reverse triangular mergers in comprehensive terms, the general principle that stamp duty requires a stampable instrument is well established.
SDRT Analysis. SDRT arises on an "agreement to transfer" chargeable securities for consideration. The SDRT charge is triggered by the formation of the agreement (or when the agreement becomes unconditional), and does not depend on the existence of a physical instrument. The question is therefore whether the Merger constitutes or involves an "agreement to transfer" Cloudium shares.
In a reverse triangular merger under the DGCL, the cancellation of the target's shares occurs by operation of law at the Effective Time. The Merger Agreement itself provides for the merger of Merger Sub with and into Cloudium, and as a consequence of the merger, the shares of Cloudium common stock are cancelled and converted into the right to receive cash consideration. However, there is a strong argument that this statutory cancellation does not constitute an "agreement to transfer" the shares for SDRT purposes. The shareholders of Cloudium are not agreeing to transfer their shares to any person; rather, their shares are being extinguished by operation of the DGCL, and they receive cash consideration as a consequence of that statutory extinguishment.
HMRC's position on this point has been generally consistent with the stamp duty analysis: where shares are cancelled by operation of law in a foreign merger, HMRC has accepted that SDRT should not arise because there is no "agreement to transfer" but rather a statutory cancellation. This position is supported by the fundamental distinction between a "transfer" (which involves a change of ownership of existing shares from one person to another) and a "cancellation" (which involves the extinguishment of the shares themselves).
Conclusion. Based on the foregoing analysis, and consistent with the position of Glenmore Thornton LLP, we conclude that there are strong arguments that neither stamp duty nor SDRT is chargeable on the cancellation of Cloudium shares in the reverse triangular merger. The shares are cancelled by operation of the DGCL rather than transferred pursuant to any instrument or agreement, and accordingly, the fundamental conditions for the imposition of either stamp duty or SDRT are not satisfied.
We note, however, that HMRC has not published a definitive ruling or formal guidance specifically addressing the stamp duty and SDRT treatment of shares in UK-incorporated companies cancelled in DGCL reverse triangular mergers. While HMRC's general approach has been consistent with the analysis above, there is a residual risk that HMRC could seek to challenge this position, particularly given the increasing number of UK-incorporated companies listed on US exchanges and the potential revenue implications. In our experience, such a challenge is unlikely in the absence of a change in HMRC's published approach or new legislation, but the risk should be acknowledged and managed through the recommendations set out in Section III.F below.
C. Clearance Service / Depositary Receipt Considerations
Cloudium's shares are currently held through the facilities of the Depository Trust Company ("DTC") in the United States, which serves as the central securities depository and clearance system for Nasdaq-listed securities. DTC is a "relevant system" for these purposes, and the question arises whether the 1.5% stamp duty or SDRT charge on transfers into a clearance service or depositary receipt system applies to any aspect of the Transaction.
The 1.5% Charge is imposed under Section 96 of the Finance Act 1986 (SDRT) and Section 70 of the Finance Act 1986 (stamp duty) on the transfer of chargeable securities to, or to a nominee or agent for, a person whose business is or includes the provision of clearance services or the issue of depositary receipts. The charge is intended to capture the initial deposit of shares into a clearance or depositary system, at a rate of 1.5% of the consideration for the transfer (or, in the case of a transfer for no consideration, 1.5% of the value of the securities).
In the Transaction, Cloudium shares are being cancelled in the Merger, not transferred to a new clearance service or depositary receipt issuer. At the Effective Time, the shares held through DTC will simply cease to exist, and the former holders will be entitled to receive cash consideration in lieu of their cancelled shares. There is no transfer of Cloudium shares into a clearance service in connection with the Transaction, and accordingly, the 1.5% Charge should not apply.
We note that, prior to Brexit, the 1.5% Charge on transfers into EU clearance services was held to be inconsistent with EU free movement of capital provisions by the Court of Justice of the European Union in Harborline Savings Bank Holdings plc v. HMRC (Case C-569/07). Following the United Kingdom's withdrawal from the European Union on January 31, 2020, the retained EU law implications of this line of case law are uncertain. However, the CJEU jurisprudence is relevant here only to the extent that it may affect the scope of the 1.5% Charge in general; in the context of the Transaction, the 1.5% Charge is inapplicable on the separate and independent ground that no transfer into a clearance service occurs.
D. Stamp Duty on Rollover Shares
Certain Cloudium shareholders (Mr. Hargrove and Pinnacle Growth Ventures LLC) will participate in rollover equity arrangements pursuant to which a portion of their Cloudium shares will be exchanged for equity interests in a holding entity within the Fund VI structure. As described in Section II.A above, Mr. Hargrove will roll over approximately 3,868,200 shares and Pinnacle Growth Ventures LLC will roll over approximately 12,820,320 shares.
The rollover participants will not receive shares in a UK-incorporated company in exchange for their Cloudium shares. Rather, they will receive equity interests (likely limited partnership interests or interests in a Delaware limited liability company) in a non-UK entity within the Fund VI structure. Since the equity interests received by the rollover participants are not shares in a UK-incorporated company, they are not "chargeable securities" for stamp duty or SDRT purposes, and no UK stamp duty or SDRT should arise on the issuance of such non-UK equity interests.
Moreover, the Cloudium shares held by the rollover participants are, like all other Cloudium shares, cancelled by operation of the DGCL at the Effective Time. As discussed in Section III.B above, this cancellation should not give rise to stamp duty or SDRT. The fact that the rollover participants receive equity interests (rather than cash) as consideration for their cancelled shares does not alter this analysis, because the shares are still cancelled by operation of law rather than transferred pursuant to an instrument or agreement.
E. Stamp Duty on Subsidiary Shares (Cloudium UK Ltd.)
The shares of Cloudium Technologies UK Ltd. are not directly transferred in the Merger. Cloudium UK is, and will remain, a wholly owned subsidiary of Cloudium plc. The change of control occurs at the Cloudium plc level — that is, Fund VI replaces the public shareholders as the ultimate beneficial owner of Cloudium plc, and Cloudium UK remains within the Cloudium plc corporate group. Accordingly, no stamp duty or SDRT should arise on the shares of Cloudium UK in connection with the Transaction.
We note, however, that if any post-Closing intra-group restructuring involves the transfer of Cloudium UK shares (for example, a transfer of Cloudium UK shares from Cloudium plc to another group entity), stamp duty at 0.5% of the consideration (or market value, if higher, in the case of connected party transactions) would apply to any instrument effecting such transfer. In such circumstances, intra-group relief under Section 42 of the Finance Act 1930 (as supplemented by Section 27 of the Finance Act 1967 and Schedule 15 of the Finance Act 1999) may be available, provided that the transferor and transferee are members of the same "group" for stamp duty purposes (broadly, 75% subsidiary relationship) and the relevant conditions are satisfied. Intra-group relief can be clawed back if the transferee ceases to be a member of the same group within a prescribed period (generally three years, though the conditions and periods have been subject to amendment) as a result of a transaction that is not itself an intra-group transaction. This should be factored into any post-Closing restructuring planning.
F. Recommendations.  In light of the analysis set out above, we recommend the following steps:
1.  HMRC Clearance or Confirmation. We recommend that the parties consider seeking informal confirmation from HMRC that the cancellation of Cloudium shares in the reverse triangular merger does not give rise to stamp duty or SDRT. While we do not believe a formal statutory clearance is available under the stamp duty or SDRT legislation for this purpose, an informal approach to HMRC's Stamp Taxes team (either by telephone or by correspondence) may provide additional comfort. Alternatively, if the parties prefer not to approach HMRC directly (given the timing and confidentiality constraints of the Transaction), we recommend that the closing opinion from Glenmore Thornton LLP expressly address the stamp duty and SDRT position.
2.  Documentation. It is essential that the Merger Agreement, the certificate of merger, and all other Transaction documentation clearly reflect that the Cloudium shares are cancelled by operation of the DGCL at the Effective Time, and are not transferred to Fund VI, Merger Sub, or any other person. The documentation should avoid language that could be construed as describing a "transfer" or "conveyance" of shares. We recommend that the drafting team review the current Merger Agreement (and any ancillary documentation) with this point in mind.
3.  Coordination with Target's Counsel. We recommend coordination with Ridgeway Phelps & Sato LLP (Alistair Fenn, London office, 1 Angel Court, London EC2R 7HJ), which serves as counsel to Cloudium, on the mechanics of the share cancellation and the confirmation of the stamp duty/SDRT position. As target's counsel, Ridgeway Phelps & Sato LLP will have primary responsibility for ensuring that the Merger mechanics are properly implemented under both Delaware and English law, and their input on the English law aspects of the share cancellation will be relevant to the stamp duty analysis.
IV. UK Capital Gains Tax Implications for Shareholders
A. UK-Resident Individual Shareholders
For a UK-resident individual shareholder of Cloudium, the cancellation of Cloudium shares in the Merger in exchange for cash consideration constitutes a "disposal" for UK capital gains tax purposes. Specifically, the cancellation of shares in exchange for a capital sum (the Per Share Merger Consideration) is treated as a disposal under Section 22 of the Taxation of Chargeable Gains Act 1992 ("TCGA 1992"), which provides that a capital sum received by way of compensation for the loss, destruction, or extinction of an asset is treated as a disposal of the asset.
The chargeable gain (or allowable loss) arising on such disposal is calculated as follows:
•  Proceeds of disposal: the Per Share Merger Consideration of approximately $36.92 per share, converted into Sterling at the prevailing exchange rate on the date of disposal (i.e., the date of the Effective Time). We note that the date of disposal for CGT purposes may be the date of the Merger Agreement (if unconditional) or the Effective Time, depending on the circumstances; this should be confirmed based on the specific terms of the Merger Agreement.
•  Less: allowable expenditure, comprising (i) the original cost of acquisition of the Cloudium shares (including incidental costs of acquisition, such as brokerage commissions); and (ii) any enhancement expenditure (which is unlikely to be relevant in the case of publicly traded shares).
•  Equals: chargeable gain (or allowable loss).
The applicable rates of UK capital gains tax for individual shareholders for the 2023/24 tax year are:
•  10% for gains falling within the basic rate band (to the extent that the individual's taxable income and gains, when aggregated, do not exceed the basic rate limit of £37,700 for 2023/24); and
•  20% for gains falling within the higher rate or additional rate bands.
Individual shareholders are entitled to an annual exempt amount (the "AEA") of £6,000 for the 2023/24 tax year (reduced from £12,300 in 2022/23). Gains up to the AEA are not subject to CGT.
It is important to note that no UK tax deferral or rollover relief is available for UK-resident individual shareholders who receive cash consideration in the Merger. Unlike a UK scheme of arrangement involving a share-for-share exchange (which may qualify for share exchange relief under Sections 135 or 136 of TCGA 1992, as discussed further below), a cash acquisition does not permit the holder to defer the gain until a subsequent disposal of replacement shares. The full chargeable gain crystallizes at the time of the disposal in the Merger, and CGT is payable in respect of the disposal in the normal way.
B. UK-Resident Corporate Shareholders
For a UK-resident corporate shareholder of Cloudium, the disposal proceeds received in the Merger are subject to UK corporation tax on chargeable gains. The chargeable gain is calculated in a manner similar to that described above for individual shareholders, except that:
(i) the indexation allowance (which adjusts the base cost of assets for inflation) is available for assets held on or before December 31, 2017, but was frozen as of that date by Section 31 of the Finance Act 2018. Accordingly, any indexation allowance is computed only by reference to the increase in the retail prices index from the date of acquisition to December 2017 (or the date of disposal, if earlier). For shares acquired after December 31, 2017, no indexation allowance is available;
(ii) the gain is subject to corporation tax at the prevailing main rate, which is 25% for the financial year beginning April 1, 2023 (applicable to companies with profits exceeding £250,000); and
(iii) the substantial shareholding exemption ("SSE") may be available to exempt the entire gain from corporation tax, as discussed below.
Substantial Shareholding Exemption. The SSE, introduced by Schedule 7AC to TCGA 1992, exempts from corporation tax the gain arising on the disposal of shares in a trading company (or holding company of a trading group) where the disposing company has held a "substantial shareholding" (i.e., at least 10% of the ordinary share capital of the company being disposed of) for a continuous period of at least 12 months within the two years preceding the disposal.
For the SSE to apply, the following principal conditions must be satisfied:
(a) The disposing company must be a "trading company" or a member of a "trading group," or, following amendments introduced by Finance (No. 2) Act 2017 for disposals on or after April 1, 2017, the condition relating to the investing company is relaxed where the company invested in is a "qualifying institutional investor" (broadly, a company owned by pension funds, sovereign wealth funds, or similar qualifying entities — this exception is unlikely to be relevant for most Cloudium corporate shareholders);
(b) The company whose shares are being disposed of (Cloudium) must be a "trading company" or the holding company of a "trading group" immediately after the disposal, or must have ceased to satisfy that condition within the 12 months preceding the disposal as a result of the disposal itself;
(c) The disposing company must have held at least 10% of the ordinary share capital of Cloudium for a continuous period of at least 12 months within the two years preceding the disposal.
With respect to Cloudium's status as a "trading company," we note that Cloudium operates a cloud-native enterprise software-as-a-service ("SaaS") business. Its activities consist principally of developing, licensing, and providing support for its software products and related services. These activities should constitute "trading" activities for the purposes of the SSE, and Cloudium should qualify as a "trading company" (or, as a holding company of a "trading group," since it holds subsidiaries through which the group's trade is conducted). We are not aware of any non-trading activities (such as investment activities or the holding of non-trading assets) that would cause Cloudium to fail the "trading company" test, though this should be confirmed as part of the ongoing due diligence process.
The SSE is a potentially valuable exemption for any UK corporate shareholder of Cloudium that satisfies the qualifying conditions, as it would exempt the entire chargeable gain from corporation tax. UK corporate shareholders should be advised to review their own positions to determine whether they satisfy the 10% holding and 12-month continuous holding requirements.
C. Non-UK-Resident Shareholders
Non-UK-resident shareholders of Cloudium are generally not subject to UK capital gains tax on the disposal of their Cloudium shares, unless the shares derive their value (directly or indirectly) to the extent of more than 75% from UK land (broadly, interests in UK real property).
Since April 6, 2019, the UK has imposed CGT on non-residents in respect of disposals of interests in "UK property rich" entities — that is, entities that derive 75% or more of their gross asset value from UK land. However, Cloudium is a SaaS technology company, and its assets consist principally of intellectual property, software, customer contracts, cash, receivables, and goodwill. Cloudium does not hold significant UK land or property interests, and it is not a "UK property rich" company for these purposes. We do not expect Cloudium's gross asset value to derive more than 75% (or anywhere close to 75%) from UK land.
Accordingly, non-UK-resident shareholders of Cloudium should not be subject to UK CGT on the disposal of their Cloudium shares in the Merger. This includes non-UK-resident institutional investors, US-based retail shareholders, and other non-resident holders.
We also note that the annual tax on enveloped dwellings ("ATED")-related CGT provisions are not applicable to the Transaction, as those provisions apply only to disposals of interests in UK residential property held by companies within the ATED regime.
D. Rollover Equity Participants
Two categories of rollover equity participants require specific consideration:
Jonathan Hargrove (CEO). Mr. Hargrove holds approximately 7,736,400 shares of Cloudium common stock and will roll over 50% of those shares (approximately 3,868,200 shares) into equity interests in a holding entity within the Fund VI structure. If Mr. Hargrove is a UK tax resident (which we understand to be the case based on preliminary due diligence), the UK CGT treatment of the rolled-over portion requires careful analysis.
In a UK domestic context, share exchange or reconstruction relief under Sections 135 and 136 of TCGA 1992 may apply where:
•  A company issues shares to the shareholders of another company in exchange for their shares in that company, as a result of a general offer made to the shareholders (Section 135); or
•  There is a "scheme of reconstruction" involving the issue of shares in one company in exchange for or in respect of shares in another company (Section 136).
Where either relief applies, the exchange is treated as not involving a disposal of the original shares, and the new shares are treated as having been acquired at the same time and for the same cost as the original shares. In effect, the gain is "rolled over" into the new shares and is only realized upon a subsequent disposal of the replacement shares.
The critical question is whether the reverse triangular merger under the DGCL qualifies as a transaction to which Section 135 or Section 136 of TCGA 1992 applies. There are significant challenges in this regard:
(i) Section 135 applies where a company "acquires" shares pursuant to a "general offer" and issues its own shares as consideration. In the Merger, Cloudium shares are cancelled by operation of law rather than "acquired" by Fund VI or any other company. Moreover, Fund VI is a limited partnership, not a company, and the equity interests received by the rollover participants are likely limited partnership interests or LLC membership interests, not "shares" in a "company" within the meaning of Section 135.
(ii) Section 136 applies to a "scheme of reconstruction" involving the allotment of shares in a company. Again, the equity interests issued in the Fund VI structure may not constitute "shares" in a "company" for these purposes, and the Merger may not constitute a "scheme of reconstruction" within the meaning of the TCGA 1992, which has been interpreted narrowly by the UK courts.
If UK reconstruction relief under Sections 135 or 136 of TCGA 1992 does not apply (which we consider to be the likely outcome, given that the Merger involves a cancellation under foreign law and the issuance of non-UK equity interests that may not constitute "shares" for UK tax purposes), Mr. Hargrove would face a deemed disposal of all of his Cloudium shares (including both the cashed-out and rolled-over portions) at their market value at the time of the Merger. This would result in an immediate CGT charge on the full gain attributable to all 7,736,400 shares, with no deferral available for the rolled-over portion. Mr. Hargrove would acquire a new base cost in his replacement equity interests equal to their market value at the date of acquisition.
This is a potentially significant adverse consequence for Mr. Hargrove, and we recommend that the Transaction team explore whether the rollover structure can be modified to mitigate this outcome — for example, by structuring the rollover through a UK holding company that issues shares in exchange for Cloudium shares prior to the Merger, potentially enabling Section 135 or Section 136 relief to apply to the initial share exchange. We recommend further analysis of this point in coordination with Mr. Hargrove's personal tax advisors.
Pinnacle Growth Ventures LLC. Pinnacle Growth Ventures LLC is a Delaware limited liability company and is not UK tax resident. Accordingly, as discussed in Section IV.C above, UK CGT should not apply to Pinnacle Growth Ventures LLC's disposal of Cloudium shares in the Merger, absent any connection to UK land (which, as noted, is not expected). The rollover treatment applicable to Pinnacle Growth Ventures LLC is therefore a US tax matter and is not addressed in this memorandum.
E. Withholding on Merger Consideration
The United Kingdom does not impose withholding tax on payments of merger consideration or purchase price for shares. There is no UK obligation on Solara, Fund VI, Merger Sub, or any other person to withhold UK tax from the Per Share Merger Consideration payable to Cloudium shareholders in the Merger, regardless of the tax residence of the recipient shareholder.
UK-resident shareholders who realize a chargeable gain on the disposal of their Cloudium shares will be required to self-assess and pay any CGT or corporation tax on chargeable gains in the ordinary course, but this is a matter for each shareholder and does not create a withholding obligation for the buyer.
V. UK Corporation Tax — Cloudium Group Considerations
A. Tax Residence of Cloudium plc Post-Closing
Cloudium plc is incorporated in England and Wales. Under Section 14 of the Corporation Tax Act 2009 ("CTA 2009"), a company incorporated in the United Kingdom is UK tax resident, unless it is treated as resident in another jurisdiction under the provisions of a double tax treaty (the "treaty tiebreaker").
Following the Closing, Cloudium plc will become a wholly owned subsidiary of Fund VI, a Delaware limited partnership managed by Solara Digital Infrastructure LP. There is a risk that the central management and control of Cloudium plc may shift to the United States if key strategic decisions are made by Solara personnel, if board meetings are regularly held in the United States, or if the practical decision-making authority in respect of Cloudium plc's affairs is exercised from the United States. In such circumstances, Cloudium plc could become dual-resident — that is, UK tax resident by virtue of incorporation, and US tax resident by virtue of central management and control being exercised in the United States (although the US "place of incorporation" test would also apply separately under US domestic law).
Under the UK-US Double Taxation Convention (2001, as amended by the 2002 Protocol) (the "UK-US Treaty"), the tiebreaker provision for dual-resident companies is set out in Article 4(3). Unlike many modern tax treaties, which resolve dual residence by reference to the "place of effective management," the UK-US Treaty provides that dual residence is to be resolved by "mutual agreement" of the competent authorities of the two Contracting States. This mutual agreement procedure is inherently uncertain and may result in significant delays, during which Cloudium plc's treaty residence remains unresolved.
The implications of a loss of UK tax residence (or the commencement of dual residence) for Cloudium plc are potentially significant:
(a) Exit charges under TCGA 1992 Section 185. If Cloudium plc ceases to be UK tax resident (or, in certain circumstances, if it becomes treaty-resident in another jurisdiction), it is treated as having disposed of all of its assets at their market value immediately before ceasing to be UK resident. This deemed disposal would give rise to chargeable gains on Cloudium plc's worldwide assets, including (critically) the shares of Cloudium Technologies UK Ltd., any intellectual property held directly by Cloudium plc, and any other capital assets. The resulting tax liability could be very substantial, given the value of the Cloudium group.
(b) Loss of UK group relief positions. A change in the tax residence of Cloudium plc could affect its eligibility to claim or surrender group relief (current-period trading losses and other amounts) with Cloudium UK, if the change in residence disrupts the UK group relief relationship.
(c) Impact on withholding tax positions. If Cloudium plc ceases to be UK tax resident, its ability to rely on UK domestic withholding tax exemptions (e.g., the exemption from withholding tax on UK-source dividends) and the UK-US Treaty for withholding tax reduction on payments received from other group entities could be affected.
Recommendation. We strongly recommend that post-Closing governance protocols be established to ensure that Cloudium plc's board of directors continues to meet and exercise central management and control from the United Kingdom. Specifically:
•  A majority of the board of directors of Cloudium plc should be UK-resident individuals.
•  Board meetings should be held regularly in the United Kingdom, with all material strategic decisions taken at or ratified at UK board meetings.
•  Board minutes should clearly document that the directors have exercised independent judgment in the United Kingdom, and that key decisions have been taken in the United Kingdom.
•  Day-to-day management of Cloudium plc should continue to be conducted from the UK.
These protocols should be incorporated into the post-Closing integration plan and revisited periodically to ensure ongoing compliance.
B. Degrouping Charges
Under Section 179 of TCGA 1992, where a company ("Company A") has acquired an asset from another company ("Company B") on a no-gain/no-loss intra-group basis under Section 171 of TCGA 1992, and Company A subsequently leaves the group of which Company B is a member within six years of the intra-group transfer, a "degrouping charge" arises. The degrouping charge is calculated by reference to the gain (or loss) that would have arisen on the intra-group transfer if it had been made at market value at the time of the transfer, and is treated as arising immediately before Company A leaves the group.
In the context of the Transaction, the reverse triangular merger does not directly cause any company to "leave" the Cloudium group. Cloudium plc survives the Merger and remains the direct parent of Cloudium UK. Cloudium UK does not leave the group; it remains a wholly owned subsidiary of Cloudium plc. Accordingly, the Merger itself should not trigger any degrouping charge under Section 179.
However, there is a potential risk of degrouping charges in connection with any post-Closing restructuring. If, following the Closing, Cloudium Technologies UK Ltd. is transferred to a different group entity (for example, as part of a reorganization of the Cloudium group's corporate structure), and Cloudium UK has received assets from Cloudium plc (or from another Cloudium group company) on a no-gain/no-loss basis within the preceding six years, the transfer of Cloudium UK out of the Cloudium plc group could trigger a degrouping charge. The degrouping charge would be attributed to Cloudium UK and would increase its corporation tax liability for the period in which the degrouping occurs.
Recommendation. As part of the ongoing tax due diligence, we recommend obtaining comprehensive details of any intra-group asset transfers within the Cloudium UK group (including transfers between Cloudium plc and Cloudium UK, and between Cloudium UK and any other group entities) that have occurred within the past six years. This information should be cross-referenced with the preliminary due diligence request list dated September 10, 2023, which included a request for details of intra-group transfers. The results of this review should inform any post-Closing restructuring planning to ensure that degrouping charges are identified and, where possible, mitigated.
C. Loss of UK Group Relief
Cloudium plc and Cloudium Technologies UK Ltd. currently form a UK group for the purposes of Part 5 of the Corporation Tax Act 2010 ("CTA 2010"), which governs group relief. The 75% ownership test is satisfied, as Cloudium plc holds 100% of the ordinary share capital of Cloudium UK, and Cloudium plc is entitled to 100% of the profits available for distribution and 100% of the assets available on a winding up.
Following the Closing, this group relief relationship should continue, as Cloudium plc will remain the direct parent of Cloudium UK. The fact that Cloudium plc itself becomes a subsidiary of Fund VI does not, by itself, disrupt the group relief relationship between Cloudium plc and Cloudium UK, provided that Cloudium plc continues to hold (directly or indirectly) at least 75% of the ordinary share capital of Cloudium UK and the other group relief conditions remain satisfied.
However, if subsequent post-Closing restructuring breaks the 75% group relationship (for example, by interposing a non-UK entity between Cloudium plc and Cloudium UK, or by transferring Cloudium UK shares to a different entity that is not within the same 75% group), group relief for current-period trading losses and other eligible amounts could be affected. In addition, any consortium relief arrangements currently in place within the Cloudium group should be reviewed to determine whether they are affected by the change of control.
D. Loan Relationships and Derivative Contracts
The repayment of the existing $820,000,000 indebtedness to Atlas Commercial Lending Corp. at or prior to the Closing will require a review of any UK loan relationship tax consequences. In particular:
(i) To the extent that any portion of the existing indebtedness is denominated in a currency other than the functional currency of the relevant UK borrower (which, for Cloudium UK, is likely Sterling), foreign exchange gains or losses may arise on the repayment of the debt. Under Part 5 of the Corporation Tax Act 2009, loan relationship debits and credits (including foreign exchange gains and losses) are brought into account for corporation tax purposes on an amortized cost or fair value basis, depending on the accounting treatment adopted by the company.
(ii) If Cloudium UK has entered into derivative contracts (such as interest rate swaps or cross-currency swaps) in connection with the existing credit facility, the early termination of those contracts in connection with the refinancing at Closing could give rise to taxable gains or allowable losses under Part 7 of the Corporation Tax Act 2009.
With respect to the new financing, if any portion of the $3,740,000,000 Term Loan B is on-lent to Cloudium UK (whether directly or through an intercompany loan), the UK thin capitalization rules and the corporate interest restriction rules will apply to determine the extent to which the interest expense is deductible for UK corporation tax purposes. The corporate interest restriction is discussed in detail in Section VII below.
VI. Transfer Pricing
A. Current Intercompany Arrangements
The Cloudium group has significant intercompany flows among its various subsidiaries. Based on our preliminary understanding of the group's operational structure:
•  Cloudium Technologies India Pvt. Ltd. (Bangalore, approximately 2,400 employees) provides research and development services and technical support services to other group entities. It is likely remunerated on a cost-plus basis under intercompany service agreements, although the precise terms of these agreements have not yet been reviewed as part of the tax due diligence.
•  Cloudium Solutions GmbH (Berlin, approximately 400 employees) provides sales and customer success services to the DACH region. It is likely characterized as either a limited-risk distributor or a commissionnaire, remunerated on a transactional net margin basis, although again the precise arrangements remain to be confirmed.
•  Cloudium Technologies UK Ltd. (London and Manchester, approximately 1,200 employees, revenue of £312,000,000 for FYE September 30, 2023) is a substantial operating entity within the group. It likely has intercompany arrangements relating to service agreements, licensing of intellectual property, cost-sharing or cost-contribution arrangements, and intercompany management and administrative services.
UK transfer pricing rules, set out in Part 4 of the Taxation (International and Other Provisions) Act 2010 ("TIOPA 2010"), require that transactions between "connected persons" (including members of the same group of companies) be priced at arm's length — that is, at the price that would have been agreed between independent parties in comparable circumstances. Where a transaction is not at arm's length, HMRC may adjust the taxable profits of the UK entity to reflect arm's-length pricing.
The existing intercompany arrangements within the Cloudium group should be reviewed comprehensively as part of the tax due diligence to identify any transfer pricing risks or exposures. We understand that Richard Okamura of Glenmore Thornton LLP is coordinating the transfer pricing review as part of the overall transaction tax due diligence.
B. Post-Acquisition Transfer Pricing Risks
Following the Closing, there are several categories of transfer pricing risk that should be identified and managed:
IP Migration. If any post-Closing restructuring involves the migration of intellectual property from Cloudium UK (or to Cloudium UK from another jurisdiction), the transfer must be effected at arm's length. HMRC has been increasingly active in scrutinizing IP migration transactions in the technology sector, particularly in the context of private equity acquisitions where the acquirer may seek to restructure the target group's IP ownership arrangements for tax efficiency purposes. Any transfer of IP from Cloudium UK to a non-UK entity would give rise to a disposal for UK corporation tax purposes, and the proceeds of disposal would need to reflect arm's-length pricing. Failure to obtain arm's-length consideration would expose the group to a transfer pricing adjustment by HMRC, and could also give rise to a Diverted Profits Tax charge (as discussed below).
Recharacterization Risk. If post-Closing restructuring alters Cloudium UK's functional profile — for example, by converting it from an "entrepreneur" entity (bearing significant risks and owning significant intangible assets) to a "limited-risk distributor" or "contract service provider" (bearing limited risks and performing limited functions) — HMRC may seek to recharacterize the arrangement and adjust Cloudium UK's taxable profits accordingly. Under the OECD Transfer Pricing Guidelines (which are relevant to the interpretation of Part 4 of TIOPA 2010), the actual conduct of the parties may override the contractual terms if the contractual allocation of risks is inconsistent with the economic substance of the arrangement.
Diverted Profits Tax. The Diverted Profits Tax ("DPT"), introduced by the Finance Act 2015, is charged at a rate of 25% (higher than the main corporation tax rate) on profits that HMRC considers to have been "diverted" from the United Kingdom through arrangements involving entities with "insufficient economic substance" or arrangements designed to exploit the "mismatch condition" between UK and foreign tax rules. In the context of the Cloudium acquisition, DPT could apply if post-Closing arrangements are structured in a way that reduces Cloudium UK's taxable profits through transactions with low-substance entities in other jurisdictions, or through arrangements that take advantage of mismatches between UK and non-UK tax rules.
Management Fees. Post-Closing, management or advisory fees may be charged to Cloudium UK by Solara, Fund VI, or their affiliated management entities. Any such fees must be at arm's length, and Cloudium UK must receive genuine services commensurate with the fees charged. HMRC has historically scrutinized management fee arrangements in the private equity context, and the group should be prepared to demonstrate the arm's-length nature of any such charges.
C. Documentation Requirements
Under UK law, there is no mandatory requirement to prepare and maintain contemporaneous transfer pricing documentation in a prescribed form. However, it is well-established best practice — and, for practical purposes, a near-requirement for large companies — to maintain transfer pricing documentation sufficient to demonstrate that intercompany transactions have been priced at arm's length. HMRC expects large companies to be able to provide transfer pricing documentation promptly upon request, and the absence of such documentation may lead HMRC to draw adverse inferences.
Cloudium UK, with revenue of £312,000,000 for FYE September 30, 2023, comfortably exceeds the thresholds for classification as a "large" company under HMRC's guidelines and the Companies Act 2006 criteria. Accordingly, Cloudium UK should be maintaining transfer pricing documentation in accordance with HMRC's expectations and the OECD Transfer Pricing Documentation standards (Master File, Local File, and Country-by-Country Report).
With respect to Country-by-Country Reporting ("CbCR") obligations under OECD BEPS Action 13 (implemented in the UK by the Taxes (Base Erosion and Profit Shifting) (Country-by-Country Reporting) Regulations 2016), the Cloudium group is likely already required to file a CbCR, given the group's consolidated revenue exceeds the €750,000,000 threshold. Following the Closing, the ultimate parent entity ("UPE") of the Cloudium group will change from Cloudium plc to Fund VI (or its general partner or management company, depending on the group structure). This change in UPE may affect the CbCR filing obligations, including the identity of the reporting entity, the filing jurisdiction, and the surrogate filing arrangements. The group should ensure that CbCR filing obligations are properly transitioned following the Closing.
D. Recommendations.  
1.  Conduct a comprehensive review of existing intercompany agreements within the Cloudium group as part of the ongoing tax due diligence, with particular focus on the characterization and pricing of intercompany service agreements, IP licensing arrangements, and cost-sharing or cost-contribution arrangements involving Cloudium UK.
2.  Prepare arm's-length benchmarking studies for any post-Closing restructuring of intercompany arrangements, including any IP migration, changes in Cloudium UK's functional profile, or introduction of management fee arrangements.
3.  A detailed analysis of post-Closing integration transfer pricing matters will be provided in a separate memorandum (Tax Memorandum — Post-Closing Integration Tax Considerations) to be prepared following the Closing.
4.  Coordinate with Glenmore Thornton LLP (Vanessa Liu, Financial Due Diligence lead; Richard Okamura, Transaction Tax lead) to ensure that transfer pricing matters are fully addressed in the due diligence process and in the integration planning.
VII. Corporate Interest Restriction (CIR)
A. Overview.  The UK Corporate Interest Restriction ("CIR") rules, enacted by Part 10 of TIOPA 2010 (as inserted by the Finance (No. 2) Act 2017) and effective for periods of account beginning on or after April 1, 2017, limit the amount of net interest expense that a UK group may deduct for corporation tax purposes. The CIR rules implement the interest limitation recommendation of the OECD's Base Erosion and Profit Shifting ("BEPS") Action 4 report.
Under the CIR rules, a UK group's tax-deductible net interest expense is limited to the higher of:
(a) the de minimis amount of £2,000,000 (i.e., if the UK group's aggregate net tax-interest expense does not exceed £2,000,000, no restriction applies); or
(b) the fixed ratio of 30% of the UK group's aggregate "tax-EBITDA" (broadly, taxable income before interest, tax, depreciation, and amortization, calculated on a tax basis).
In addition, a UK group may elect to apply the group ratio rule, which allows deduction of net interest expense up to the worldwide group's ratio of net interest expense to group-EBITDA (calculated on a consolidated accounting basis). The group ratio rule is designed to accommodate groups that are more highly leveraged at the worldwide level, allowing them to deduct a proportionately higher amount of UK interest expense.
Given the significant leverage involved in the Transaction — the $3,740,000,000 Term Loan B, together with the $500,000,000 revolving facility and residual equity contributions, implies closing-date leverage of approximately 9.24x total debt-to-LTM EBITDA (approximately 8.79x on a net debt basis, assuming cash balances at closing) — the CIR rules will be a critical consideration if any portion of the acquisition debt is pushed down to Cloudium UK or if intercompany loans are established between US group entities and Cloudium UK.
B. Application to Cloudium UK
To illustrate the potential impact of the CIR rules on Cloudium UK, we set out the following indicative analysis based on available financial data:
Estimated UK Tax-EBITDA. Cloudium UK reported revenue of approximately £312,000,000 for FYE September 30, 2023. Applying the Cloudium group's consolidated EBITDA margin of approximately 25% (based on group LTM consolidated EBITDA of approximately $405,000,000 on group revenue of approximately $1,620,000,000) as a proxy for Cloudium UK's standalone EBITDA margin, we estimate Cloudium UK's standalone EBITDA at approximately £78,000,000. This is a preliminary estimate and should be refined based on the actual management accounts and tax computations of Cloudium UK, which we expect to receive through the due diligence process.
Fixed Ratio Rule. Under the fixed ratio rule, the maximum deductible net tax-interest expense for Cloudium UK would be 30% of its tax-EBITDA, or approximately £23,400,000 per annum. Any net interest expense in excess of this amount would be disallowed (subject to carry-forward as "disallowed amo

MEMORANDUM

Record

Parties

Dates

Amounts