1041-00003 · Solara Digital Infrastructure LP · Tax

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CALDERWOOD & HARKNESS LLP

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

This memorandum is a privileged and confidential attorney-client communication and work product of Calderwood & Harkness LLP prepared in connection with the representation of Solara Digital Infrastructure Fund VI LP. This memorandum is not intended as tax advice to any party other than the addressees and is not for distribution outside the deal team without the prior written approval of the responsible partner. No person other than the addressees may rely on the analysis or conclusions set forth herein.

December 5, 2023

INTERNAL TAX MEMORANDUM

Matter Number: 1041-00003

To: Harrison Wexford, Responsible Partner, M&A Tiffany Rosenthal, Lead Associate, M&A

From: Leonard Cross, Specialist Partner, Tax

Re: Withholding Obligations on Merger Consideration — Acquisition of Cloudium Technologies plc (Nasdaq: CLDM) by Solara Digital Infrastructure Fund VI LP

I. EXECUTIVE SUMMARY

This memorandum analyzes the federal income tax withholding obligations arising in connection with the payment of the $36.92 per share cash merger consideration to stockholders of Cloudium Technologies plc ("Cloudium" or the "Target") in the proposed reverse triangular merger (the "Merger") in which Stratos Merger Sub Inc. ("Merger Sub"), a wholly owned subsidiary of Solara Digital Infrastructure Fund VI LP ("Fund VI" or the "Buyer"), will merge with and into Cloudium, with Cloudium surviving as a wholly owned subsidiary of Fund VI. The aggregate equity value of the transaction is approximately $6,800,000,000 (the "Deal"), based on 184,200,000 shares of common stock outstanding at a per-share price of $36.92. This memorandum is intended to provide the M&A deal team with a comprehensive roadmap for analyzing and implementing the applicable withholding obligations across all relevant federal income tax regimes, and to identify the specific provisions that should be included in the transaction documents to address those obligations.

The memorandum analyzes three principal withholding regimes under the Internal Revenue Code of 1986, as amended (the "Code"): (1) withholding under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), codified at Sections 1445 and 897 of the Code; (2) backup withholding under Section 3406 of the Code; and (3) nonresident alien ("NRA") and foreign corporation withholding under Sections 1441 through 1442 of the Code. In addition, the memorandum addresses certain related considerations under Section 1446 of the Code (withholding on effectively connected income allocable to foreign partners of partnerships), state and local withholding obligations, escrow-related withholding issues, and information reporting requirements.

Our principal conclusions are as follows:

(a) FIRPTA Withholding (Sections 1445/897). FIRPTA withholding can be eliminated in its entirety by the delivery at closing of a valid FIRPTA certificate under Section 1445(b)(3) of the Code by Cloudium, confirming that Cloudium is not a "United States real property holding corporation" ("USRPHC") within the meaning of Section 897(c)(2) of the Code. Based on our preliminary review of Cloudium's asset composition—which consists principally of intellectual property, software, customer contracts, goodwill, and working capital, with no significant US real property holdings—we conclude that Cloudium is not a USRPHC. As an additional protective measure, to the extent Cloudium is treated as a domestic corporation for US federal income tax purposes (a classification question that remains under review, as discussed in Part III below), the publicly traded exception under Section 1445(b)(5) of the Code provides an independent basis for exemption from FIRPTA withholding given Cloudium's listing on the Nasdaq Global Select Market.

(b) Backup Withholding (Section 3406). Backup withholding at the current rate of 24% will apply to any stockholder who fails to furnish a valid taxpayer identification number ("TIN") on IRS Form W-9 (for US persons) or who is otherwise subject to backup withholding pursuant to an IRS notice. Backup withholding is not an additional tax; it is fully creditable against the stockholder's federal income tax liability and refundable to the extent it exceeds such liability. The Letter of Transmittal must incorporate a substitute Form W-9 or require submission of a separate Form W-9, and the paying agent, Cascade Corporate Services Inc. ("Cascade"), must be instructed to apply backup withholding to any stockholder who does not furnish the required certification.

(c) NRA / Foreign Corporation Withholding (Sections 1441–1442). NRA withholding under Sections 1441 and 1442 of the Code generally does not apply to the merger consideration because such consideration is properly characterized as proceeds from a sale or exchange of stock under Section 302 of the Code, rather than as "fixed or determinable annual or periodical" ("FDAP") income. Accordingly, provided the merger consideration is correctly treated as sale or exchange proceeds, no NRA withholding should be required. However, if any portion of the consideration were to be recharacterized as a dividend (for example, under Section 302(d) or Section 356(a)(2) of the Code), NRA withholding at 30% (or a reduced rate under an applicable income tax treaty) would apply to such portion. Coordination with Cascade (as paying agent) and Cobalt Trust Company (as escrow agent) is essential to ensure that proper withholding procedures are in place in the event of any such recharacterization.

This memorandum also addresses the withholding implications for the two rollover equity participants in the transaction: Jonathan Hargrove, Chief Executive Officer of Cloudium, who holds 7,736,400 shares (approximately 4.2% of shares outstanding) and will roll over 50% of his equity position (approximately 3,868,200 shares with a rollover value of approximately $142,814,544); and Pinnacle Growth Ventures LLC ("Pinnacle"), which holds 21,367,200 shares (approximately 11.6% of shares outstanding) and will roll over 60% of its equity position (approximately 12,820,320 shares with a rollover value of approximately $473,241,408). With respect to these rollover participants, withholding applies only to the cash-out portion of their consideration; the rollover portion, which involves the exchange of Cloudium shares for equity interests in the surviving entity (or a parent thereof), is not subject to withholding because no cash is received on the rollover.

We recommend that the withholding framework outlined in this memorandum be implemented through specific provisions in the Merger Agreement (Article II — Payment Procedures), the Letter of Transmittal (Exhibit D to the Merger Agreement), the Escrow Agreement, and the Rollover Agreements (Exhibits F and G). We further recommend that the deal team coordinate Form W-9 and Form W-8BEN-E collection with Cascade in its capacity as transfer agent and exchange agent, and that an IRS Form W-9 / W-8BEN-E Collection Tracker be established and maintained by the deal team with a target completion date of July 5, 2024, consistent with the anticipated closing timeline.

This memorandum should be read in conjunction with (i) the separate tax memorandum dated November 1, 2023 (prepared by the undersigned) analyzing the qualification of the rollover component of the transaction as a tax-free reorganization under Section 368(a)(2)(E) of the Code, and (ii) the financial due diligence being conducted by Glenmore Thornton LLP (Richard Okamura, partner), which includes a separate analysis of Cloudium's US tax classification and asset composition relevant to the USRPHC determination. A separate memorandum addressing UK tax implications (including UK withholding tax and Stamp Duty Reserve Tax considerations) is anticipated on or about December 12, 2023.

II. BACKGROUND

A. Transaction Overview

Buyer. The acquiring entity is Solara Digital Infrastructure Fund VI LP ("Fund VI"), a Delaware limited partnership with a 2022 vintage year and approximately $12.4 billion of committed capital from institutional limited partners. The general partner of Fund VI is Solara Fund VI GP LLC, a Delaware limited liability company. Fund VI is a private equity fund focused on digital infrastructure, enterprise software, and data services investments across North America and Western Europe.

Target. The target is Cloudium Technologies plc ("Cloudium"), a public limited company incorporated under the laws of England and Wales (Company Number 09734521). Cloudium's shares of common stock are listed on the Nasdaq Global Select Market under the ticker symbol "CLDM." Cloudium maintains its US headquarters at 600 Townsend Street, Suite 800, San Francisco, California 94103, and its registered office at 45 Broadwick Street, London W1F 0DB, United Kingdom. Cloudium's US taxpayer employer identification number ("EIN") is 83-2196754. Cloudium is a provider of enterprise cloud-based software-as-a-service ("SaaS") solutions and reported last-twelve-months revenue of approximately $1,620,000,000 for its fiscal year ended September 30, 2023.

Deal Structure. The transaction is structured as a reverse triangular merger under the Delaware General Corporation Law (the "DGCL"). In this structure, Stratos Merger Sub Inc. ("Merger Sub"), a newly formed Delaware corporation (Delaware File Number 7923841, incorporated on January 8, 2024) and a 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. At the effective time of the Merger (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 elections) will be converted into the right to receive $36.92 per share in cash, without interest (the "Merger Consideration").

Total Outstanding Shares. As of the date of this memorandum, Cloudium has 184,200,000 shares of common stock outstanding.

Aggregate Equity Value. The aggregate equity value of the transaction is approximately $6,800,000,000, calculated as 184,200,000 shares multiplied by $36.92 per share (before giving effect to the rollover elections, which reduce the aggregate cash consideration payable at closing).

Anticipated Signing Date. The Merger Agreement is expected to be executed on or about January 22, 2024.

Anticipated Closing Date. Subject to satisfaction of customary closing conditions, including receipt of antitrust clearances and the approval of Cloudium's stockholders at a special meeting, the closing of the Merger is expected to occur in early July 2024 (anticipated closing date of July 9, 2024).

Paying Agent / Exchange Agent. Cascade Corporate Services Inc. ("Cascade"), located at 6201 15th Avenue, Brooklyn, New York 11219, will serve as the paying agent and exchange agent under the Merger Agreement. In this capacity, Cascade will be responsible for processing Letters of Transmittal, making cash payments of the Merger Consideration to stockholders who properly tender their shares, collecting IRS Forms W-9 and W-8 from stockholders, and implementing withholding as required by applicable law. Cascade also serves as Cloudium's transfer agent and will continue in that capacity through the closing of the Merger.

Escrow Agent. Cobalt Trust Company ("Cobalt"), located at 100 Wall Street, New York, New York 10005, will serve as escrow agent under a separate Escrow Agreement to be entered into at closing. The primary contact at Cobalt is Laura Ng, Vice President, Escrow Services. The escrow amount is $544,000,000, representing approximately 8% of the aggregate deal value, and will be deposited with Cobalt at closing to secure the indemnification obligations of the selling stockholders under the Merger Agreement. The escrow is structured as a two-tranche release: 50% ($272,000,000) to be released 12 months after closing (approximately July 9, 2025), and the remaining 50% to be released at 18 months after closing (approximately January 9, 2026), in each case less amounts retained for pending or unresolved indemnification claims.

B. Stockholder Base Composition

Cloudium is a publicly traded company on the Nasdaq Global Select Market with a broad, global stockholder base. The stockholder population includes US persons (including individuals, corporations, partnerships, limited liability companies, and tax-exempt entities such as qualified pension plans, endowments, and individual retirement accounts), nonresident alien individuals ("NRAs"), foreign corporations, and the two rollover equity participants described below. Cloudium has approximately 6,800 employees globally across its principal office locations in the United States, the United Kingdom, India, and Germany.

Rollover Equity Participants. Two stockholders have elected to roll over a portion of their equity in Cloudium into the post-closing capital structure:

(i) Jonathan Hargrove (CEO). Mr. Hargrove is a US person and currently serves as the Chief Executive Officer of Cloudium. He holds 7,736,400 shares of Cloudium common stock, representing approximately 4.2% of total shares outstanding. Pursuant to the Rollover Agreement (anticipated to be Exhibit F to the Merger Agreement), Mr. Hargrove will roll over approximately 50% of his equity position (approximately 3,868,200 shares, with a rollover value of approximately $142,814,544 based on the per-share Merger Consideration of $36.92) into equity interests in the surviving entity or a parent holding company. The remaining approximately 50% of his shares (approximately 3,868,200 shares) will be cashed out at the per-share Merger Consideration, yielding approximately $142,814,544 in cash, subject to the escrow holdback.

(ii) Pinnacle Growth Ventures LLC. Pinnacle Growth Ventures LLC ("Pinnacle") is a Delaware limited liability company. Its Managing Member is Evelyn Carmichael. Pinnacle holds 21,367,200 shares of Cloudium common stock, representing approximately 11.6% of total shares outstanding. Pursuant to the Rollover Agreement (anticipated to be Exhibit G to the Merger Agreement), Pinnacle will roll over approximately 60% of its equity position (approximately 12,820,320 shares, with a rollover value of approximately $473,241,408) into equity interests in the surviving entity or a parent holding company. The remaining approximately 40% of its shares (approximately 8,546,880 shares) will be cashed out at the per-share Merger Consideration, yielding approximately $315,550,810 in cash, subject to the escrow holdback.

With respect to Pinnacle, its withholding classification depends on its entity status for federal income tax purposes. As a Delaware limited liability company, Pinnacle may be classified as a partnership or as a corporation for US federal income tax purposes, depending on whether it has made an election on IRS Form 8832 (Entity Classification Election) or is otherwise classified under the default rules of Treasury Regulation § 301.7701-3. Pinnacle should be requested to furnish a completed IRS Form W-9 certifying its TIN, entity classification, and backup withholding status. We expect that Pinnacle is classified as a domestic partnership for US federal income tax purposes but should confirm this through the diligence process.

All remaining publicly held shares of Cloudium common stock (i.e., shares not subject to rollover elections, not held as treasury stock, and not held by Fund VI or Merger Sub) will be cashed out at the per-share Merger Consideration of $36.92 at the Effective Time.

C. Withholding Regimes Overview

The payment of the Merger Consideration to Cloudium's stockholders implicates three principal federal income tax withholding regimes, each of which is analyzed in detail in Parts III through V of this memorandum:

(1) FIRPTA Withholding (Sections 1445 and 897). Section 1445(a) of the Code generally requires the transferee of a "United States real property interest" ("USRPI") to withhold 15% of the amount realized. A USRPI includes stock in a USRPHC. This regime is relevant to the extent foreign stockholders (NRAs and foreign corporations) receive Merger Consideration in exchange for Cloudium shares, if Cloudium is (or has been) a USRPHC.

(2) Backup Withholding (Section 3406). Section 3406 of the Code requires payors of "reportable payments" to withhold at a rate of 24% if the payee fails to furnish a correct TIN (or if the IRS has issued a backup withholding notice). The Merger Consideration constitutes reportable gross proceeds under the information reporting rules, and backup withholding is therefore a practical concern for all stockholders who fail to provide proper tax certifications.

(3) NRA / Foreign Corporation Withholding (Sections 1441–1442). Sections 1441 and 1442 of the Code require withholding agents to withhold 30% (or a reduced treaty rate) on FDAP income paid to NRAs and foreign corporations. This regime is relevant to the extent any portion of the Merger Consideration is characterized as FDAP income (principally, a dividend) rather than as proceeds from a sale or exchange.

In addition, this memorandum briefly addresses Section 1446 of the Code, which imposes withholding obligations on effectively connected income allocable to foreign partners of a partnership. Section 1446 is not directly at issue with respect to the payment of the Merger Consideration itself, but it could become relevant to the extent that the surviving entity or Fund VI makes distributions of effectively connected income to any foreign partners in the post-closing period. This issue is flagged for post-closing analysis by the tax team but is not analyzed in detail here.

For completeness, this memorandum also references the separate tax memorandum dated November 1, 2023, prepared by the undersigned, which addresses the Section 368(a)(2)(E) reorganization analysis for the rollover component of the transaction. A separate memorandum addressing UK tax implications (including potential UK withholding tax and Stamp Duty Reserve Tax ("SDRT") considerations arising from the cancellation of Cloudium shares held in the CREST settlement system) is anticipated on or about December 12, 2023.

III. FIRPTA WITHHOLDING ANALYSIS (SECTIONS 1445 AND 897)

A. Statutory Framework

Section 1445(a) of the Code provides that a transferee of a USRPI must deduct and withhold a tax equal to 15% of the "amount realized" on the disposition. The term "amount realized" is defined by reference to Section 1001 of the Code and generally means the sum of money and the fair market value of any other property received in exchange for the USRPI. In the context of this Merger, the "amount realized" by each Cloudium stockholder is the per-share Merger Consideration of $36.92, multiplied by the number of shares exchanged for cash.

Section 897 of the Code provides the substantive rule underlying FIRPTA. Under Section 897(a), gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a USRPI is treated as if the taxpayer were engaged in a trade or business within the United States during the taxable year, and as if such gain or loss were effectively connected with such trade or business ("ECI"). This constructive ECI treatment ensures that the gain is subject to US federal income tax in the hands of the foreign person, and the withholding obligation under Section 1445 serves as a mechanism for collecting such tax at source.

The term "United States real property interest" is defined in Section 897(c)(1) of the Code to include (A) an interest in real property located in the United States or the US Virgin Islands, and (B) any interest (other than an interest solely as a creditor) in a domestic corporation that constitutes a USRPHC. A domestic corporation is a USRPHC if the fair market value of its USRPIs equals or exceeds 50% of the sum of (i) the fair market value of its USRPIs, (ii) the fair market value of its interests in real property located outside the United States, and (iii) the fair market value of any other of its assets which are used or held for use in a trade or business (the "50% Test"). See Section 897(c)(2) of the Code; Treasury Regulation § 1.897-2(b).

In the context of a reverse triangular merger, the exchange of target shares for cash consideration constitutes a "disposition" of the target's stock. If the target is a USRPHC, the target's stock constitutes a USRPI, and the transferee (here, the paying agent acting on behalf of Fund VI) is required to withhold 15% of the amount realized from payments to foreign stockholders under Section 1445(a). Conversely, if the target is not a USRPHC, the target's stock does not constitute a USRPI, and FIRPTA withholding does not apply.

B. Cloudium's Status — USRPHC Analysis

The threshold question for the FIRPTA withholding analysis is whether Cloudium is, or has been during the applicable testing period, a USRPHC within the meaning of Section 897(c)(2) of the Code.

Entity Classification. As a preliminary matter, we note that Cloudium Technologies plc is a public limited company organized under the laws of England and Wales. Under the entity classification rules of Treasury Regulation § 301.7701-2(b)(8)(i), a UK public limited company is a "per se" entity that is automatically classified as a corporation for US federal income tax purposes. The question is whether Cloudium is treated as a domestic corporation or a foreign corporation. As a default matter, an entity organized under the laws of a foreign jurisdiction is classified as a foreign corporation. See Section 7701(a)(4)–(5) of the Code. However, a foreign eligible entity may elect to be treated as a domestic corporation by filing IRS Form 8832 (Entity Classification Election) under Treasury Regulation § 301.7701-3. As of the date of this memorandum, we have not yet confirmed whether Cloudium has made such an election, and we have included this as an open diligence item (see Part XI below). This classification question affects which FIRPTA exception applies, as discussed in Part III.D below, but does not ultimately change our bottom-line conclusion.

Asset Composition. Cloudium is a cloud-based enterprise SaaS company. Based on our preliminary review of the due diligence materials made available to date, Cloudium's principal assets consist of:

• Proprietary intellectual property and software (comprising the core of Cloudium's enterprise value);

• Customer contracts and related intangibles (including contractual relationships with over 4,500 enterprise customers);

• Goodwill and going-concern value;

• Cash and cash equivalents (approximately $412 million as of September 30, 2023);

• Accounts receivable and other working capital assets; and

• Tangible personal property (computer equipment, servers, office furnishings, and similar items).

With respect to US real property, Cloudium's US headquarters at 600 Townsend Street, Suite 800, San Francisco, California, is leased, not owned. Cloudium does not appear to own any significant US real property interests, either directly or through subsidiaries. Its remaining office locations (in London, Bangalore, and Berlin) are likewise leased. The due diligence review has not identified any real estate holdings, mineral interests, timber interests, or other USRPIs held by Cloudium or its subsidiaries.

50% Test. Given the foregoing asset composition, the fair market value of Cloudium's USRPIs (to the extent any exist) is negligible in relation to the sum of its USRPIs, its foreign real property interests, and its other trade or business assets. The fair market value of Cloudium's intellectual property, software, customer contracts, and goodwill alone significantly exceeds the total enterprise value attributed to any conceivable US real property interests. Accordingly, the 50% Test set forth in Section 897(c)(2) is not met, and Cloudium does not constitute a USRPHC.

Testing Period. Under Section 897(c)(1)(A)(ii), stock of a corporation that was a USRPHC at any time during the shorter of (i) the five-year period ending on the date of the disposition, or (ii) the period of time during which the holder held the stock, is treated as a USRPI. Based on our understanding of Cloudium's business and asset composition over the relevant five-year look-back period, Cloudium has not at any time been a USRPHC. We will confirm this conclusion through the diligence process.

Preliminary Conclusion. Based on the foregoing analysis, we conclude on a preliminary basis that Cloudium is not, and has not been during the applicable testing period, a USRPHC within the meaning of Section 897(c)(2) of the Code. Accordingly, shares of Cloudium common stock do not constitute USRPIs, and the disposition of such shares in the Merger should not trigger FIRPTA withholding under Section 1445(a).

C. FIRPTA Certificate — Section 1445(b)(3) Exception

Even though we believe that Cloudium is not a USRPHC and that FIRPTA withholding should not apply as a substantive matter, the most reliable and customary method for ensuring that no withholding is required at closing is for Cloudium to deliver a FIRPTA certificate to Fund VI and the paying agent at or prior to the Effective Time.

Section 1445(b)(3) of the Code provides that no withholding is required under Section 1445(a) if the transferor furnishes to the transferee an affidavit, signed under penalty of perjury, stating (i) the transferor's US taxpayer identification number, and (ii) that the transferor is not a foreign person. In the context of a merger, this exception is implemented through a certification from the target (here, Cloudium) confirming that the target is not a foreign person and/or that its stock is not a USRPI because the target is not (and has not been during the testing period) a USRPHC.

Alternatively, under Treasury Regulation § 1.1445-2(c)(3), where the transferor is a corporation, the transferor may provide a certification stating that the transferor is not a foreign corporation, together with the transferor's US taxpayer identification number (in Cloudium's case, EIN 83-2196754). This form of certification is sometimes referred to as a "non-foreign affidavit" or "FIRPTA affidavit."

In the particular circumstances of this transaction, where Cloudium is a UK public limited company, there is an additional nuance: if Cloudium is treated as a foreign corporation for US federal income tax purposes (i.e., if it has not made a check-the-box election to be treated as a domestic corporation), Cloudium would not be able to certify that it is "not a foreign person." In that case, the appropriate certification would focus on the non-USRPHC status of the corporation—i.e., a certification that shares of Cloudium common stock are not USRPIs because Cloudium is not and has not been a USRPHC. Such a certification, together with the non-USRPHC determination described in Part III.B above, would relieve the transferee of the obligation to withhold under Section 1445.

Recommendation. We recommend that the Merger Agreement include a covenant requiring Cloudium to prepare and deliver at closing a FIRPTA certificate in a form reasonably satisfactory to counsel for Fund VI. The certificate should include:

(a) Cloudium's legal name, address, and US taxpayer identification number (EIN 83-2196754);

(b) A representation, made under penalty of perjury, that Cloudium is not a USRPHC within the meaning of Section 897(c)(2) of the Code and has not been a USRPHC at any time during the applicable five-year testing period;

(c) A representation that shares of Cloudium common stock are therefore not USRPIs within the meaning of Section 897(c)(1) of the Code; and

(d) An acknowledgment that the certificate is being provided to Fund VI and the paying agent in reliance on Section 1445(b)(3) of the Code and the regulations thereunder, and that Fund VI and the paying agent are entitled to rely on the certificate for purposes of their withholding obligations.

The delivery of this certificate should be listed as a closing deliverable in the Master Closing Checklist maintained by the deal team. We will prepare a draft form of the FIRPTA certificate for review by the M&A team and for coordination with Cloudium's General Counsel, Nadia Chowdhury, and target's outside counsel, Ridgeway Phelps & Sato LLP (Catherine Answorth, partner).

Failure to Deliver Certificate. If Cloudium fails or refuses to deliver a valid FIRPTA certificate at closing—an outcome we do not anticipate, but one that should be addressed as a contingency—the paying agent would be required to withhold 15% of the amount realized from payments of Merger Consideration to foreign stockholders (NRAs and foreign corporations) under Section 1445(a) of the Code. This would not affect US person stockholders, who are not subject to FIRPTA withholding in any event. To manage this risk, the Merger Agreement should include the delivery of the FIRPTA certificate as a condition to closing (or, at a minimum, as a closing covenant with a right to deduct and withhold if the certificate is not delivered).

D. FIRPTA — Publicly Traded Exception (Section 1445(b)(5))

As an alternative and additional basis for exemption from FIRPTA withholding, Section 1445(b)(5) of the Code and Treasury Regulation § 1.1445-2(d)(1) provide that no withholding is required under Section 1445(a) with respect to the disposition of an interest in a domestic corporation if that corporation's stock is "regularly traded on an established securities market" as defined in Treasury Regulation § 1.1445-2(d)(2). Cloudium's common stock is listed on the Nasdaq Global Select Market under the ticker symbol "CLDM," which is an established securities market within the meaning of the regulation.

However, the publicly traded exception under Section 1445(b)(5) applies by its terms only to interests in domestic corporations. If Cloudium is treated as a foreign corporation for US federal income tax purposes—as would be the case if Cloudium, as a UK public limited company, has not made a check-the-box election under Treasury Regulation § 301.7701-3 to be treated as a domestic corporation—this exception would not be available. A UK public limited company is listed as a "per se" corporation under Treasury Regulation § 301.7701-2(b)(8)(i), and absent an affirmative election, it is classified as a foreign corporation.

We have included confirmation of Cloudium's check-the-box election status as an open diligence item (see Part XI below). If Cloudium has made a Form 8832 election to be treated as a domestic corporation, the publicly traded exception under Section 1445(b)(5) would provide an independent and self-executing basis for exemption from FIRPTA withholding—one that does not require the delivery of any certificate. If Cloudium has not made such an election and is treated as a foreign corporation, this exception is unavailable, but FIRPTA withholding would nevertheless not apply because, as discussed in Part III.B above, Cloudium is not a USRPHC and its stock is therefore not a USRPI regardless of the corporation's domestic or foreign classification.

Conclusion. Whether Cloudium is treated as a domestic corporation or a foreign corporation for US federal income tax purposes, FIRPTA withholding under Section 1445 should not apply to the Merger Consideration, provided:

(a) If Cloudium is treated as a domestic corporation: the publicly traded exception under Section 1445(b)(5) applies because Cloudium's stock is regularly traded on Nasdaq; and/or a FIRPTA certificate is delivered confirming non-USRPHC status; or

(b) If Cloudium is treated as a foreign corporation: Cloudium's stock is not a USRPI because Cloudium is not (and has not been) a USRPHC, and therefore Section 897 does not apply to the disposition of such stock.

In either case, the delivery of a FIRPTA certificate is the safest "belt-and-suspenders" approach and is our primary recommendation for ensuring that the paying agent and Fund VI are fully protected from withholding liability.

E. Recommendations — FIRPTA

Based on the foregoing analysis, we make the following recommendations with respect to FIRPTA withholding:

1. FIRPTA Certificate Covenant. Include a covenant in the Merger Agreement requiring Cloudium to deliver, at or prior to the Effective Time, a FIRPTA certificate under Section 1445(b)(3) of the Code (and the Treasury Regulations thereunder) certifying that Cloudium is not a USRPHC and that its stock is not a USRPI. The form of the certificate should be negotiated and agreed upon in advance of signing.

2. Coordination with Target's Counsel. Coordinate with Cloudium's General Counsel (Nadia Chowdhury) and target's outside counsel (Ridgeway Phelps & Sato LLP, Catherine Answorth) to prepare and finalize the FIRPTA certificate. Confirm that Cloudium's officers are willing to sign the certificate under penalty of perjury.

3. Master Closing Checklist. Include the FIRPTA certificate as a line item on the Master Closing Checklist to ensure timely preparation and delivery.

4. No FIRPTA Withholding on Merger Consideration. No FIRPTA withholding should be required on any portion of the Merger Consideration (whether paid to US persons, NRAs, or foreign corporations; and whether representing cash-out consideration or rollover equity), provided the FIRPTA certificate is delivered at closing.

IV. BACKUP WITHHOLDING ANALYSIS (SECTION 3406)

A. Statutory Framework

Section 3406 of the Code requires that "payors" of "reportable payments" deduct and withhold income tax at a rate of 24% (the current statutory rate, as adjusted by the Tax Cuts and Jobs Act of 2017) from such payments if any of the following conditions is met:

(a) The payee fails to furnish a correct taxpayer identification number ("TIN") to the payor;

(b) The IRS notifies the payor that the TIN furnished by the payee is incorrect (a so-called "B-notice");

(c) The IRS notifies the payor that the payee is subject to backup withholding due to underreported interest or dividends (a "C-notice"); or

(d) The payee fails to certify, under penalty of perjury, that the payee is not subject to backup withholding due to a prior notification from the IRS.

The term "reportable payment" includes, among other things, "gross proceeds" from the sale or exchange of property, as reported on IRS Form 1099-B under Treasury Regulation § 1.6045-1. In the context of this Merger, the payment of the per-share Merger Consideration of $36.92 to each stockholder who properly tenders shares through the Letter of Transmittal constitutes "gross proceeds" from the exchange of Cloudium stock, and is therefore a reportable payment subject to backup withholding under Section 3406 if the payee conditions described above are present.

The mechanism for certifying a correct TIN and exemption from backup withholding is IRS Form W-9 (Request for Taxpayer Identification Number and Certification), which must be furnished by each US person payee to the payor. For purposes of the Merger, the paying agent—Cascade Corporate Services Inc.—is the "payor" responsible for collecting Forms W-9 and implementing backup withholding.

B. Application to the Merger

In the context of the Merger, each stockholder who tenders shares of Cloudium common stock through the Letter of Transmittal (Exhibit D to the Merger Agreement) in exchange for the per-share Merger Consideration must furnish a completed, signed IRS Form W-9 to Cascade in order to avoid backup withholding. The Form W-9 will certify the stockholder's name, address, TIN (which, for an individual, is typically the Social Security number, and for an entity, is the EIN), and that the stockholder is not subject to backup withholding.

Stockholders who fail to provide a valid Form W-9, or who are subject to an existing IRS backup withholding notice (B-notice or C-notice), will be subject to backup withholding at the rate of 24% on the gross Merger Consideration payable to them. Cascade, as paying agent, will be responsible for deducting and withholding such amounts and remitting them to the IRS on behalf of the stockholder.

It is important to note that backup withholding is not an additional tax. Rather, it is a credit against the stockholder's federal income tax liability for the taxable year in which the withholding occurs. To the extent that the amount of backup withholding exceeds the stockholder's federal income tax liability, the excess is refundable upon the filing of the stockholder's federal income tax return (IRS Form 1040 for individuals, Form 1120 for corporations, or the applicable entity return).

C. Exemptions

Certain categories of payees are exempt from backup withholding under Section 3406 and the Treasury Regulations thereunder. These exempt recipients include:

• Corporations (including S corporations for this purpose), as identified by an exempt payee code on Form W-9;

• Tax-exempt organizations described in Section 501(a) of the Code;

• Individual retirement accounts (IRAs) described in Section 408(a) of the Code;

• The United States and any of its agencies or instrumentalities;

• States, the District of Columbia, and their political subdivisions;

• International organizations described in Section 7701(a)(18) of the Code; and

• Certain other exempt recipients identified in the instructions to IRS Form W-9.

These exempt payees must still furnish a Form W-9 to claim their exemption, but they are not subject to backup withholding even if they fail to certify under penalty of perjury that they are not subject to backup withholding notices.

In addition, foreign persons who furnish a valid IRS Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting — Individuals), Form W-8BEN-E (for entities), or other applicable W-8 form (such as Form W-8IMY for intermediaries) are exempt from backup withholding. Foreign persons are instead potentially subject to NRA withholding under Sections 1441 and 1442, as discussed in Part V below. It is critical that the Letter of Transmittal clearly direct foreign stockholders to furnish the applicable W-8 form rather than a Form W-9.

D. Coordination with Rollover Participants

The backup withholding analysis has specific implications for the two rollover equity participants:

Jonathan Hargrove (CEO). Mr. Hargrove is a US person and must provide a completed and signed IRS Form W-9 in connection with the cash-out portion of his Merger Consideration (approximately $142,814,544). Provided Mr. Hargrove furnishes a valid Form W-9 with a correct TIN and is not subject to any IRS backup withholding notice, no backup withholding will apply. The rollover portion of Mr. Hargrove's consideration (approximately 3,868,200 shares exchanged for equity interests in the surviving entity) is not a cash payment and is therefore not subject to backup withholding (or any other withholding), because no cash is "paid" to Mr. Hargrove with respect to the rollover shares.

Pinnacle Growth Ventures LLC. Pinnacle is a Delaware limited liability company and must provide a completed and signed IRS Form W-9 certifying its TIN and backup withholding status in connection with the cash-out portion of its Merger Consideration (approximately $315,550,810, based on approximately 8,546,880 shares cashed out at $36.92 per share). As a domestic entity, Pinnacle is not exempt from information reporting on Form 1099-B (unless it is classified as a corporation for US federal income tax purposes, in which case it may claim an exempt payee code on its Form W-9). Backup withholding applies only if Pinnacle fails to furnish a valid Form W-9. As with Mr. Hargrove, the rollover portion of Pinnacle's consideration is not subject to backup withholding.

We note that the deal team is establishing an IRS Form W-9 / W-8BEN-E Collection Tracker to monitor the receipt of withholding certifications from all stockholders, with a target completion date of July 5, 2024, in advance of the anticipated closing. We recommend that the rollover participants be among the first stockholders from whom Forms W-9 are collected, given their significant individual consideration amounts.

E. Recommendations — Backup Withholding

Based on the foregoing analysis, we make the following recommendations with respect to backup withholding:

1. Letter of Transmittal. The Letter of Transmittal (Exhibit D to the Merger Agreement) must include either a substitute Form W-9 section (incorporated directly into the Letter of Transmittal, as is customary in public company mergers) or a requirement that stockholders submit a separate IRS Form W-9 together with the Letter of Transmittal. The substitute Form W-9 should include all certifications required by the IRS instructions, including the TIN certification and the backup withholding certification.

2. Paying Agent Instructions. Cascade Corporate Services Inc. should be instructed, pursuant to the Paying Agent Agreement (or the applicable provisions of the Merger Agreement), to deduct and withhold 24% of the Merger Consideration from any stockholder who does not furnish a valid Form W-9 (or applicable Form W-8) and to remit such withheld amounts to the IRS in accordance with applicable law.

3. Disclosure of Consequences. The Letter of Transmittal should include clear and conspicuous disclosure of the consequences of failing to provide a valid Form W-9, including the application of 24% backup withholding, and should inform stockholders of their right to claim a credit or refund of any excess withholding on their federal income tax return.

4. Merger Agreement Withholding Provision. The Merger Agreement (Article II — Payment Procedures) should include a provision expressly authorizing the surviving corporation, Fund VI, the paying agent, and the escrow agent to deduct and withhold from the Merger Consideration any amounts required to be deducted and withheld under the Code or any applicable provision of state, local, or foreign tax law, with amounts so withheld and timely remitted to the applicable taxing authority being treated as having been paid to the stockholder for all purposes of the Merger Agreement.

5. Foreign Stockholder Forms. The Letter of Transmittal should clearly instruct foreign stockholders to furnish the applicable IRS Form W-8 (W-8BEN for individuals, W-8BEN-E for entities, W-8ECI for effectively connected income, W-8EXP for certain foreign governments and international organizations, or W-8IMY for intermediaries) rather than a Form W-9. Foreign persons providing valid W-8 forms are exempt from backup withholding, though they may be subject to NRA withholding as discussed in Part V.

V. NRA / FOREIGN CORPORATION WITHHOLDING ANALYSIS (SECTIONS 1441–1442)

A. Statutory Framework

Sections 1441 and 1442 of the Code impose a withholding obligation on "withholding agents" who make payments of certain categories of US-source income to NRAs (Section 1441) and foreign corporations (Section 1442). The statutory withholding rate is 30% of the gross amount of the payment, subject to reduction under an applicable income tax treaty.

The categories of income subject to NRA withholding are "fixed or determinable annual or periodical" income—commonly referred to as "FDAP income." FDAP income includes, without limitation, interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income. See Section 1441(a); Treasury Regulation § 1.1441-2(b)(1).

Critically, FDAP income does not generally include gains from the sale or exchange of property. See Treasury Regulation § 1.1441-2(b)(2)(i). Gross proceeds from the sale or exchange of stock are not subject to NRA withholding under Sections 1441 and 1442, because such proceeds are not FDAP income. This distinction is central to the analysis of the Merger Consideration, as discussed below.

B. Characterization of Merger Consideration

The characterization of the Merger Consideration for purposes of the NRA withholding analysis depends on the federal income tax treatment of the exchange of Cloudium shares for the per-share cash consideration.

Non-Rollover Stockholders (Cash-Out Only). For stockholders who receive only cash in exchange for their Cloudium shares (i.e., all stockholders other than the two rollover participants), the exchange constitutes a fully taxable disposition of stock. Under Section 302(a) of the Code, a distribution in complete redemption of all of a stockholder's shares is treated as a distribution in part or full payment in exchange for the stock, rather than as a distribution under Section 301 (which could result in dividend treatment). In the Merger, each non-rollover stockholder's shares are cancelled and converted into the right to receive cash. This is properly treated as an exchange under Section 302(a), and the Merger Consideration constitutes the stockholder's "amount realized" in a sale or exchange of stock.

Because the Merger Consideration paid to non-rollover stockholders is characterized as proceeds from a sale or exchange—and not as FDAP income—NRA withholding under Sections 1441 and 1442 does not apply to such payments. This conclusion holds regardless of whether the stockholder is a US person, an NRA, or a foreign corporation.

Rollover Stockholders (Cash and Equity). For the rollover stockholders (Mr. Hargrove and Pinnacle), the tax treatment is more complex. To the extent the transaction qualifies as a reorganization under Section 368(a)(2)(E) of the Code—an analysis that is being conducted separately in the November 1, 2023 memorandum—the rollover stockholders may be treated as exchanging their Cloudium shares for a combination of qualifying consideration (the rollover equity, received tax-free under Section 354) and nonqualifying consideration or "boot" (the cash portion, potentially taxable under Section 356).

Under Section 356(a)(2) of the Code, if the receipt of boot in a reorganization has the "effect of the distribution of a dividend" (determined by reference to the principles of Section 302, as applied under Commissioner v. Clark, 489 U.S. 726 (1989)), the gain recognized by the rollover stockholder is treated as a dividend to the extent of the stockholder's ratable share of accumulated earnings and profits ("E&P") of the target, and as gain from the exchange of property to the extent of any excess. If any portion of the boot received by a foreign rollover stockholder (if any) were treated as a dividend under Section 356(a)(2), such dividend would be FDAP income subject to NRA withholding at 30% (or the applicable treaty rate).

However, in the present transaction, neither Mr. Hargrove nor Pinnacle is a foreign person. Mr. Hargrove is a US person (as CEO of Cloudium, he is a US citizen or resident alien), and Pinnacle is a Delaware LLC (a domestic entity). Accordingly, the NRA withholding analysis under Sections 1441 and 1442 is not directly relevant to the rollover participants. The Section 356(a)(2) dividend characterization analysis is relevant primarily for determining the income tax treatment of the boot received by the rollover participants—not for purposes of NRA withholding.

The Section 356(a)(2) analysis could, however, become relevant if any foreign stockholder in the public float were in a position where the merger consideration it receives is treated as boot in a reorganization (as opposed to sale proceeds). In practice, for a widely held public company like Cloudium, the non-rollover stockholders receiving only cash will be treated as engaging in a fully taxable exchange under Section 302, and the dividend recharacterization risk under Section 356(a)(2) is limited to the rollover participants (who, as noted, are domestic persons).

C. Practical Considerations for Foreign Stockholders

Notwithstanding the foregoing analysis, prudent practice requires that the paying agent be prepared to address NRA withholding in the event that the characterization of the Merger Consideration is challenged or that any portion of the consideration is recharacterized as a dividend. The following practical considerations apply:

W-8 Form Collection. Foreign stockholders receiving Merger Consideration should provide the applicable IRS Form W-8 to Cascade. Specifically:

• NRA individuals should provide IRS Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting — Individuals);

• Foreign corporations should provide IRS Form W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting — Entities);

• Foreign partnerships, trusts, and intermediaries should provide the applicable Form W-8 (W-8IMY for intermediaries, W-8ECI for income effectively connected with a US trade or business, or W-8EXP for foreign governments and international organizations).

The receipt of a valid W-8 form establishes the stockholder's foreign status and, if applicable, entitlement to a reduced treaty rate of withholding on FDAP income. Even if NRA withholding is ultimately not required (because the Merger Consideration is sale/exchange proceeds), the W-8 form serves the important secondary function of exempting the stockholder from backup withholding under Section 3406 and supporting the paying agent's information reporting obligations on Form 1042-S.

Recharacterization Risk. If, for any reason, the IRS were to recharacterize any portion of the Merger Consideration as a dividend (for example, under Section 302(d) treating the redemption as a Section 301 distribution), NRA withholding at 30% (or the applicable treaty rate) would apply to the dividend portion of the payment. While we do not anticipate this outcome for the non-rollover stockholders in this transaction—given that the Merger results in a complete termination of each stockholder's interest in Cloudium—the paying agent should be advised of this contingency and should have procedures in place to apply withholding if instructed to do so.

Stockholder Base Geography. Cloudium's stockholder base includes holders in multiple foreign jurisdictions, including the United Kingdom, India, Germany, and other countries. To the extent NRA withholding were to apply to any portion of the Merger Consideration, the applicable treaty rate (rather than the statutory 30% rate) may be available to stockholders who are residents of treaty countries and who furnish valid Forms W-8BEN or W-8BEN-E with a proper treaty claim. The relevant treaty provisions are discussed in Part V.D below.

D. Treaty Considerations

To the extent any portion of the Merger Consideration paid to a foreign stockholder is recharacterized as a dividend for NRA withholding purposes, the following bilateral income tax treaty provisions may reduce the applicable withholding rate below the statutory 30%:

United States–United Kingdom Income Tax Treaty (2001, as amended by protocol). Article 10 of the US-UK Treaty provides for reduced withholding rates on dividends. For "portfolio" holders (i.e., holders of less than 10% of the voting stock of the paying corporation), the treaty rate is 15%. For "direct investment" holders (i.e., companies that own 10% or more of the voting stock), the treaty rate is reduced to 5%. To claim the reduced treaty rate, the UK-resident stockholder must furnish a valid IRS Form W-8BEN or W-8BEN-E that includes the applicable treaty claim, the stockholder's foreign tax identification number, and a certification that the stockholder satisfies the limitation on benefits ("LOB") provisions of the treaty.

United States–India Income Tax Treaty. Article 12 of the US-India Treaty provides for reduced withholding rates on dividends, generally consistent with the rates applicable under the US-UK Treaty (15% for portfolio holders, with lower rates available under certain circumstances for qualifying companies).

United States–Germany Income Tax Treaty. Article 10 of the US-Germany Treaty similarly provides for reduced withholding rates on dividends (15% for portfolio holders, 5% for direct investors meeting the applicable ownership threshold).

In each case, the reduced treaty rate is available only if the stockholder furnishes a valid Form W-8BEN or W-8BEN-E with a completed treaty claim section and meets the applicable LOB requirements. The paying agent should not apply a reduced rate absent receipt of a properly completed W-8 form.

E. Section 305(c) — Deemed Distributions

We note briefly that in a transaction involving both cash-out and rollover stockholders, Section 305(c) of the Code and the regulations thereunder (Treasury Regulation § 1.305-7) could potentially treat the transaction as resulting in a deemed distribution with respect to certain stockholders. Specifically, where some stockholders receive cash and others receive (or increase their relative interest in) equity, Section 305(b)(2) and (c) may treat the transaction as a disproportionate distribution—one that results in an increase in the proportionate interest of some stockholders in the earnings and profits or assets of the corporation, while other stockholders receive property.

The potential application of Section 305(c) to this Merger, and its implications for the characterization of the Merger Consideration as sale proceeds versus dividend income, is addressed in greater detail in the separate Section 368 memorandum dated November 1, 2023. We flag this issue here for completeness and note that, to the extent any recharacterization under Section 305(c) results in dividend treatment for foreign stockholders, NRA withholding at 30% (or the applicable treaty rate) would apply to such deemed distribution.

F. Recommendations — NRA Withholding

Based on the foregoing analysis, we make the following recommendations with respect to NRA withholding:

1. Sale/Exchange Treatment. The Merger Consideration paid to stockholders in exchange for their Cloudium shares should be treated as proceeds from a sale or exchange under Section 302 of the Code (for non-rollover stockholders) or under Sections 354/356 (for rollover stockholders). As sale or exchange proceeds, the Merger Consideration is not FDAP income and is not subject to NRA withholding under Sections 1441 and 1442.

2. W-8 Form Collection. Cascade Corporate Services Inc. should collect IRS Forms W-8BEN (for NRA individuals) and W-8BEN-E (for foreign entities) from all foreign stockholders, whether or not NRA withholding is expected to apply. These forms are necessary for information reporting purposes, for claiming exemption from backup withholding, and as a precaution in the event of any dividend recharacterization.

3. Merger Agreement and Letter of Transmittal Provisions. The Merger Agreement (Article II) and the Letter of Transmittal should include provisions expressly permitting the paying agent to deduct and withhold any amounts required to be withheld under the Code, including under Sections 1441 and 1442, if applicable. This protective language ensures that the paying agent has contractual authority to withhold in the event of a recharacterization.

4. Recharacterization Contingency. To the extent any portion of the Merger Consideration is recharacterized as a dividend (whether under Section 302(d), Section 356(a)(2), Section 305(c), or otherwise), the paying agent should be prepared to withhold at 30% (or the applicable treaty rate, if a valid W-8 form with a treaty claim has been provided) on such recharacterized amount and to remit the withheld amounts to the IRS.

5. Proxy Statement Disclosure. Coordinate with Ridgeway Phelps & Sato LLP (Catherine Answorth) to include appropriate disclosure in the definitive proxy statement regarding the potential application of NRA withholding to foreign stockholders, the requirement to furnish applicable W-8 forms, and the availability of reduced treaty rates.

VI. ESCROW WITHHOLDING CONSIDERATIONS

A. Escrow Mechanics

As described in Part II.A above, at the closing of the Merger, an amount equal to $544,000,000—representing approximately 8% of the aggregate deal value—will be deposited with Cobalt Trust Company ("Cobalt"), as escrow agent, pursuant to the terms of a separate Escrow Agreement. The escrow fund is intended to secure the indemnification obligations of the selling stockholders (represented by a stockholder representative to be designated in the Merger Agreement) for breaches of representations, warranties, and covenants in the Merger Agreement, as well as certain specified indemnification matters.

The escrow is structured as a two-tranche release mechanism:

• First Release (12 Months Post-Closing). Fifty percent (50%) of the initial escrow amount—$272,000,000—will be released to the selling stockholders (through the paying agent) on the date that is 12 months after the closing date (anticipated to be approximately July 9, 2025), less amounts retained on account of pending or unresolved indemnification claims as of such date.

• Second Release (18 Months Post-Closing). The remaining fifty percent (50%) of the initial escrow amount—$272,000,000—will be released to the selling stockholders on the date that is 18 months after the closing date (anticipated to be approximately January 9, 2026), less amounts retained on account of pending or unresolved indemnification claims as of such date and less any amounts previously paid from the escrow fund in satisfaction of indemnification claims.

During the escrow period, the escrowed funds will be invested by Cobalt in accordance with the investment provisions of the Escrow Agreement (typically in short-term, investment-grade instruments such as money market funds, US Treasury bills, or similar low-risk investments). Interest and other investment income earned on the escrow fund will accrue for the benefit of the selling stockholders (or may be treated as earned by the stockholder representative as agent, depending on the specific terms of the Escrow Agreement).

B. Withholding on Escrowed Amounts

The escrow holdback raises several withholding questions that must be addressed in the transaction documents.

Treatment of Escrow as Part of Merger Consideration. Under general federal income tax principles, the full per-share Merger Consideration of $36.92 is treated as the "amount realized" by each stockholder at the Effective Time, regardless of the fact that a portion of such consideration (the escrow holdback) is not immediately paid to the stockholder but is instead deposited with the escrow agent. The escrow amount is treated as received by the stockholders at closing (or, more precisely, as held by the escrow agent on behalf of the stockholders as a form of deferred payment or security arrangement), with the stockholder representative acting as agent for the selling stockholders with respect to the escrowed funds.

This treatment is consistent with the approach taken under Revenue Procedure 84-42, 1984-1 C.B. 521, and the general principles applicable to escrow arrangements in the merger context. The IRS has generally taken the position that where merger consideration is deposited in escrow to secure indemnification obligations, the escrowed amount is includible in the selling stockholders' amount realized in the year of closing, subject to potential adjustments if amounts are later forfeited from the escrow. The installment sale rules of Section 453 of the Code are generally not applicable to publicly traded stock (which is "marketable security" excluded from installment sale treatment under Section 453(k)).

Withholding Computation. Backup withholding and any applicable FIRPTA or NRA withholding should be computed based on the full per-share Merger Consideration of $36.92 at closing—not net of the escrow holdback. This means that the paying agent should withhold (if applicable) based o

CALDERWOOD & HARKNESS LLP
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
This memorandum is a privileged and confidential attorney-client communication and work product of Calderwood & Harkness LLP prepared in connection with the representation of Solara Digital Infrastructure Fund VI LP. This memorandum is not intended as tax advice to any party other than the addressees and is not for distribution outside the deal team without the prior written approval of the responsible partner. No person other than the addressees may rely on the analysis or conclusions set forth herein.
December 5, 2023
INTERNAL TAX MEMORANDUM
Matter Number: 1041-00003
To: Harrison Wexford, Responsible Partner, M&A Tiffany Rosenthal, Lead Associate, M&A
From: Leonard Cross, Specialist Partner, Tax
Re: Withholding Obligations on Merger Consideration — Acquisition of Cloudium Technologies plc (Nasdaq: CLDM) by Solara Digital Infrastructure Fund VI LP
I. EXECUTIVE SUMMARY
This memorandum analyzes the federal income tax withholding obligations arising in connection with the payment of the $36.92 per share cash merger consideration to stockholders of Cloudium Technologies plc ("Cloudium" or the "Target") in the proposed reverse triangular merger (the "Merger") in which Stratos Merger Sub Inc. ("Merger Sub"), a wholly owned subsidiary of Solara Digital Infrastructure Fund VI LP ("Fund VI" or the "Buyer"), will merge with and into Cloudium, with Cloudium surviving as a wholly owned subsidiary of Fund VI. The aggregate equity value of the transaction is approximately $6,800,000,000 (the "Deal"), based on 184,200,000 shares of common stock outstanding at a per-share price of $36.92. This memorandum is intended to provide the M&A deal team with a comprehensive roadmap for analyzing and implementing the applicable withholding obligations across all relevant federal income tax regimes, and to identify the specific provisions that should be included in the transaction documents to address those obligations.
The memorandum analyzes three principal withholding regimes under the Internal Revenue Code of 1986, as amended (the "Code"): (1) withholding under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), codified at Sections 1445 and 897 of the Code; (2) backup withholding under Section 3406 of the Code; and (3) nonresident alien ("NRA") and foreign corporation withholding under Sections 1441 through 1442 of the Code. In addition, the memorandum addresses certain related considerations under Section 1446 of the Code (withholding on effectively connected income allocable to foreign partners of partnerships), state and local withholding obligations, escrow-related withholding issues, and information reporting requirements.
Our principal conclusions are as follows:
(a) FIRPTA Withholding (Sections 1445/897). FIRPTA withholding can be eliminated in its entirety by the delivery at closing of a valid FIRPTA certificate under Section 1445(b)(3) of the Code by Cloudium, confirming that Cloudium is not a "United States real property holding corporation" ("USRPHC") within the meaning of Section 897(c)(2) of the Code. Based on our preliminary review of Cloudium's asset composition—which consists principally of intellectual property, software, customer contracts, goodwill, and working capital, with no significant US real property holdings—we conclude that Cloudium is not a USRPHC. As an additional protective measure, to the extent Cloudium is treated as a domestic corporation for US federal income tax purposes (a classification question that remains under review, as discussed in Part III below), the publicly traded exception under Section 1445(b)(5) of the Code provides an independent basis for exemption from FIRPTA withholding given Cloudium's listing on the Nasdaq Global Select Market.
(b) Backup Withholding (Section 3406). Backup withholding at the current rate of 24% will apply to any stockholder who fails to furnish a valid taxpayer identification number ("TIN") on IRS Form W-9 (for US persons) or who is otherwise subject to backup withholding pursuant to an IRS notice. Backup withholding is not an additional tax; it is fully creditable against the stockholder's federal income tax liability and refundable to the extent it exceeds such liability. The Letter of Transmittal must incorporate a substitute Form W-9 or require submission of a separate Form W-9, and the paying agent, Cascade Corporate Services Inc. ("Cascade"), must be instructed to apply backup withholding to any stockholder who does not furnish the required certification.
(c) NRA / Foreign Corporation Withholding (Sections 1441–1442). NRA withholding under Sections 1441 and 1442 of the Code generally does not apply to the merger consideration because such consideration is properly characterized as proceeds from a sale or exchange of stock under Section 302 of the Code, rather than as "fixed or determinable annual or periodical" ("FDAP") income. Accordingly, provided the merger consideration is correctly treated as sale or exchange proceeds, no NRA withholding should be required. However, if any portion of the consideration were to be recharacterized as a dividend (for example, under Section 302(d) or Section 356(a)(2) of the Code), NRA withholding at 30% (or a reduced rate under an applicable income tax treaty) would apply to such portion. Coordination with Cascade (as paying agent) and Cobalt Trust Company (as escrow agent) is essential to ensure that proper withholding procedures are in place in the event of any such recharacterization.
This memorandum also addresses the withholding implications for the two rollover equity participants in the transaction: Jonathan Hargrove, Chief Executive Officer of Cloudium, who holds 7,736,400 shares (approximately 4.2% of shares outstanding) and will roll over 50% of his equity position (approximately 3,868,200 shares with a rollover value of approximately $142,814,544); and Pinnacle Growth Ventures LLC ("Pinnacle"), which holds 21,367,200 shares (approximately 11.6% of shares outstanding) and will roll over 60% of its equity position (approximately 12,820,320 shares with a rollover value of approximately $473,241,408). With respect to these rollover participants, withholding applies only to the cash-out portion of their consideration; the rollover portion, which involves the exchange of Cloudium shares for equity interests in the surviving entity (or a parent thereof), is not subject to withholding because no cash is received on the rollover.
We recommend that the withholding framework outlined in this memorandum be implemented through specific provisions in the Merger Agreement (Article II — Payment Procedures), the Letter of Transmittal (Exhibit D to the Merger Agreement), the Escrow Agreement, and the Rollover Agreements (Exhibits F and G). We further recommend that the deal team coordinate Form W-9 and Form W-8BEN-E collection with Cascade in its capacity as transfer agent and exchange agent, and that an IRS Form W-9 / W-8BEN-E Collection Tracker be established and maintained by the deal team with a target completion date of July 5, 2024, consistent with the anticipated closing timeline.
This memorandum should be read in conjunction with (i) the separate tax memorandum dated November 1, 2023 (prepared by the undersigned) analyzing the qualification of the rollover component of the transaction as a tax-free reorganization under Section 368(a)(2)(E) of the Code, and (ii) the financial due diligence being conducted by Glenmore Thornton LLP (Richard Okamura, partner), which includes a separate analysis of Cloudium's US tax classification and asset composition relevant to the USRPHC determination. A separate memorandum addressing UK tax implications (including UK withholding tax and Stamp Duty Reserve Tax considerations) is anticipated on or about December 12, 2023.
II. BACKGROUND
A. Transaction Overview
Buyer. The acquiring entity is Solara Digital Infrastructure Fund VI LP ("Fund VI"), a Delaware limited partnership with a 2022 vintage year and approximately $12.4 billion of committed capital from institutional limited partners. The general partner of Fund VI is Solara Fund VI GP LLC, a Delaware limited liability company. Fund VI is a private equity fund focused on digital infrastructure, enterprise software, and data services investments across North America and Western Europe.
Target. The target is Cloudium Technologies plc ("Cloudium"), a public limited company incorporated under the laws of England and Wales (Company Number 09734521). Cloudium's shares of common stock are listed on the Nasdaq Global Select Market under the ticker symbol "CLDM." Cloudium maintains its US headquarters at 600 Townsend Street, Suite 800, San Francisco, California 94103, and its registered office at 45 Broadwick Street, London W1F 0DB, United Kingdom. Cloudium's US taxpayer employer identification number ("EIN") is 83-2196754. Cloudium is a provider of enterprise cloud-based software-as-a-service ("SaaS") solutions and reported last-twelve-months revenue of approximately $1,620,000,000 for its fiscal year ended September 30, 2023.
Deal Structure. The transaction is structured as a reverse triangular merger under the Delaware General Corporation Law (the "DGCL"). In this structure, Stratos Merger Sub Inc. ("Merger Sub"), a newly formed Delaware corporation (Delaware File Number 7923841, incorporated on January 8, 2024) and a 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. At the effective time of the Merger (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 elections) will be converted into the right to receive $36.92 per share in cash, without interest (the "Merger Consideration").
Total Outstanding Shares. As of the date of this memorandum, Cloudium has 184,200,000 shares of common stock outstanding.
Aggregate Equity Value. The aggregate equity value of the transaction is approximately $6,800,000,000, calculated as 184,200,000 shares multiplied by $36.92 per share (before giving effect to the rollover elections, which reduce the aggregate cash consideration payable at closing).
Anticipated Signing Date. The Merger Agreement is expected to be executed on or about January 22, 2024.
Anticipated Closing Date. Subject to satisfaction of customary closing conditions, including receipt of antitrust clearances and the approval of Cloudium's stockholders at a special meeting, the closing of the Merger is expected to occur in early July 2024 (anticipated closing date of July 9, 2024).
Paying Agent / Exchange Agent. Cascade Corporate Services Inc. ("Cascade"), located at 6201 15th Avenue, Brooklyn, New York 11219, will serve as the paying agent and exchange agent under the Merger Agreement. In this capacity, Cascade will be responsible for processing Letters of Transmittal, making cash payments of the Merger Consideration to stockholders who properly tender their shares, collecting IRS Forms W-9 and W-8 from stockholders, and implementing withholding as required by applicable law. Cascade also serves as Cloudium's transfer agent and will continue in that capacity through the closing of the Merger.
Escrow Agent. Cobalt Trust Company ("Cobalt"), located at 100 Wall Street, New York, New York 10005, will serve as escrow agent under a separate Escrow Agreement to be entered into at closing. The primary contact at Cobalt is Laura Ng, Vice President, Escrow Services. The escrow amount is $544,000,000, representing approximately 8% of the aggregate deal value, and will be deposited with Cobalt at closing to secure the indemnification obligations of the selling stockholders under the Merger Agreement. The escrow is structured as a two-tranche release: 50% ($272,000,000) to be released 12 months after closing (approximately July 9, 2025), and the remaining 50% to be released at 18 months after closing (approximately January 9, 2026), in each case less amounts retained for pending or unresolved indemnification claims.
B. Stockholder Base Composition
Cloudium is a publicly traded company on the Nasdaq Global Select Market with a broad, global stockholder base. The stockholder population includes US persons (including individuals, corporations, partnerships, limited liability companies, and tax-exempt entities such as qualified pension plans, endowments, and individual retirement accounts), nonresident alien individuals ("NRAs"), foreign corporations, and the two rollover equity participants described below. Cloudium has approximately 6,800 employees globally across its principal office locations in the United States, the United Kingdom, India, and Germany.
Rollover Equity Participants. Two stockholders have elected to roll over a portion of their equity in Cloudium into the post-closing capital structure:
(i) Jonathan Hargrove (CEO). Mr. Hargrove is a US person and currently serves as the Chief Executive Officer of Cloudium. He holds 7,736,400 shares of Cloudium common stock, representing approximately 4.2% of total shares outstanding. Pursuant to the Rollover Agreement (anticipated to be Exhibit F to the Merger Agreement), Mr. Hargrove will roll over approximately 50% of his equity position (approximately 3,868,200 shares, with a rollover value of approximately $142,814,544 based on the per-share Merger Consideration of $36.92) into equity interests in the surviving entity or a parent holding company. The remaining approximately 50% of his shares (approximately 3,868,200 shares) will be cashed out at the per-share Merger Consideration, yielding approximately $142,814,544 in cash, subject to the escrow holdback.
(ii) Pinnacle Growth Ventures LLC. Pinnacle Growth Ventures LLC ("Pinnacle") is a Delaware limited liability company. Its Managing Member is Evelyn Carmichael. Pinnacle holds 21,367,200 shares of Cloudium common stock, representing approximately 11.6% of total shares outstanding. Pursuant to the Rollover Agreement (anticipated to be Exhibit G to the Merger Agreement), Pinnacle will roll over approximately 60% of its equity position (approximately 12,820,320 shares, with a rollover value of approximately $473,241,408) into equity interests in the surviving entity or a parent holding company. The remaining approximately 40% of its shares (approximately 8,546,880 shares) will be cashed out at the per-share Merger Consideration, yielding approximately $315,550,810 in cash, subject to the escrow holdback.
With respect to Pinnacle, its withholding classification depends on its entity status for federal income tax purposes. As a Delaware limited liability company, Pinnacle may be classified as a partnership or as a corporation for US federal income tax purposes, depending on whether it has made an election on IRS Form 8832 (Entity Classification Election) or is otherwise classified under the default rules of Treasury Regulation § 301.7701-3. Pinnacle should be requested to furnish a completed IRS Form W-9 certifying its TIN, entity classification, and backup withholding status. We expect that Pinnacle is classified as a domestic partnership for US federal income tax purposes but should confirm this through the diligence process.
All remaining publicly held shares of Cloudium common stock (i.e., shares not subject to rollover elections, not held as treasury stock, and not held by Fund VI or Merger Sub) will be cashed out at the per-share Merger Consideration of $36.92 at the Effective Time.
C. Withholding Regimes Overview
The payment of the Merger Consideration to Cloudium's stockholders implicates three principal federal income tax withholding regimes, each of which is analyzed in detail in Parts III through V of this memorandum:
(1) FIRPTA Withholding (Sections 1445 and 897). Section 1445(a) of the Code generally requires the transferee of a "United States real property interest" ("USRPI") to withhold 15% of the amount realized. A USRPI includes stock in a USRPHC. This regime is relevant to the extent foreign stockholders (NRAs and foreign corporations) receive Merger Consideration in exchange for Cloudium shares, if Cloudium is (or has been) a USRPHC.
(2) Backup Withholding (Section 3406). Section 3406 of the Code requires payors of "reportable payments" to withhold at a rate of 24% if the payee fails to furnish a correct TIN (or if the IRS has issued a backup withholding notice). The Merger Consideration constitutes reportable gross proceeds under the information reporting rules, and backup withholding is therefore a practical concern for all stockholders who fail to provide proper tax certifications.
(3) NRA / Foreign Corporation Withholding (Sections 1441–1442). Sections 1441 and 1442 of the Code require withholding agents to withhold 30% (or a reduced treaty rate) on FDAP income paid to NRAs and foreign corporations. This regime is relevant to the extent any portion of the Merger Consideration is characterized as FDAP income (principally, a dividend) rather than as proceeds from a sale or exchange.
In addition, this memorandum briefly addresses Section 1446 of the Code, which imposes withholding obligations on effectively connected income allocable to foreign partners of a partnership. Section 1446 is not directly at issue with respect to the payment of the Merger Consideration itself, but it could become relevant to the extent that the surviving entity or Fund VI makes distributions of effectively connected income to any foreign partners in the post-closing period. This issue is flagged for post-closing analysis by the tax team but is not analyzed in detail here.
For completeness, this memorandum also references the separate tax memorandum dated November 1, 2023, prepared by the undersigned, which addresses the Section 368(a)(2)(E) reorganization analysis for the rollover component of the transaction. A separate memorandum addressing UK tax implications (including potential UK withholding tax and Stamp Duty Reserve Tax ("SDRT") considerations arising from the cancellation of Cloudium shares held in the CREST settlement system) is anticipated on or about December 12, 2023.
III. FIRPTA WITHHOLDING ANALYSIS (SECTIONS 1445 AND 897)
A. Statutory Framework
Section 1445(a) of the Code provides that a transferee of a USRPI must deduct and withhold a tax equal to 15% of the "amount realized" on the disposition. The term "amount realized" is defined by reference to Section 1001 of the Code and generally means the sum of money and the fair market value of any other property received in exchange for the USRPI. In the context of this Merger, the "amount realized" by each Cloudium stockholder is the per-share Merger Consideration of $36.92, multiplied by the number of shares exchanged for cash.
Section 897 of the Code provides the substantive rule underlying FIRPTA. Under Section 897(a), gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a USRPI is treated as if the taxpayer were engaged in a trade or business within the United States during the taxable year, and as if such gain or loss were effectively connected with such trade or business ("ECI"). This constructive ECI treatment ensures that the gain is subject to US federal income tax in the hands of the foreign person, and the withholding obligation under Section 1445 serves as a mechanism for collecting such tax at source.
The term "United States real property interest" is defined in Section 897(c)(1) of the Code to include (A) an interest in real property located in the United States or the US Virgin Islands, and (B) any interest (other than an interest solely as a creditor) in a domestic corporation that constitutes a USRPHC. A domestic corporation is a USRPHC if the fair market value of its USRPIs equals or exceeds 50% of the sum of (i) the fair market value of its USRPIs, (ii) the fair market value of its interests in real property located outside the United States, and (iii) the fair market value of any other of its assets which are used or held for use in a trade or business (the "50% Test"). See Section 897(c)(2) of the Code; Treasury Regulation § 1.897-2(b).
In the context of a reverse triangular merger, the exchange of target shares for cash consideration constitutes a "disposition" of the target's stock. If the target is a USRPHC, the target's stock constitutes a USRPI, and the transferee (here, the paying agent acting on behalf of Fund VI) is required to withhold 15% of the amount realized from payments to foreign stockholders under Section 1445(a). Conversely, if the target is not a USRPHC, the target's stock does not constitute a USRPI, and FIRPTA withholding does not apply.
B. Cloudium's Status — USRPHC Analysis
The threshold question for the FIRPTA withholding analysis is whether Cloudium is, or has been during the applicable testing period, a USRPHC within the meaning of Section 897(c)(2) of the Code.
Entity Classification. As a preliminary matter, we note that Cloudium Technologies plc is a public limited company organized under the laws of England and Wales. Under the entity classification rules of Treasury Regulation § 301.7701-2(b)(8)(i), a UK public limited company is a "per se" entity that is automatically classified as a corporation for US federal income tax purposes. The question is whether Cloudium is treated as a domestic corporation or a foreign corporation. As a default matter, an entity organized under the laws of a foreign jurisdiction is classified as a foreign corporation. See Section 7701(a)(4)–(5) of the Code. However, a foreign eligible entity may elect to be treated as a domestic corporation by filing IRS Form 8832 (Entity Classification Election) under Treasury Regulation § 301.7701-3. As of the date of this memorandum, we have not yet confirmed whether Cloudium has made such an election, and we have included this as an open diligence item (see Part XI below). This classification question affects which FIRPTA exception applies, as discussed in Part III.D below, but does not ultimately change our bottom-line conclusion.
Asset Composition. Cloudium is a cloud-based enterprise SaaS company. Based on our preliminary review of the due diligence materials made available to date, Cloudium's principal assets consist of:
•  Proprietary intellectual property and software (comprising the core of Cloudium's enterprise value);
•  Customer contracts and related intangibles (including contractual relationships with over 4,500 enterprise customers);
•  Goodwill and going-concern value;
•  Cash and cash equivalents (approximately $412 million as of September 30, 2023);
•  Accounts receivable and other working capital assets; and
•  Tangible personal property (computer equipment, servers, office furnishings, and similar items).
With respect to US real property, Cloudium's US headquarters at 600 Townsend Street, Suite 800, San Francisco, California, is leased, not owned. Cloudium does not appear to own any significant US real property interests, either directly or through subsidiaries. Its remaining office locations (in London, Bangalore, and Berlin) are likewise leased. The due diligence review has not identified any real estate holdings, mineral interests, timber interests, or other USRPIs held by Cloudium or its subsidiaries.
50% Test. Given the foregoing asset composition, the fair market value of Cloudium's USRPIs (to the extent any exist) is negligible in relation to the sum of its USRPIs, its foreign real property interests, and its other trade or business assets. The fair market value of Cloudium's intellectual property, software, customer contracts, and goodwill alone significantly exceeds the total enterprise value attributed to any conceivable US real property interests. Accordingly, the 50% Test set forth in Section 897(c)(2) is not met, and Cloudium does not constitute a USRPHC.
Testing Period. Under Section 897(c)(1)(A)(ii), stock of a corporation that was a USRPHC at any time during the shorter of (i) the five-year period ending on the date of the disposition, or (ii) the period of time during which the holder held the stock, is treated as a USRPI. Based on our understanding of Cloudium's business and asset composition over the relevant five-year look-back period, Cloudium has not at any time been a USRPHC. We will confirm this conclusion through the diligence process.
Preliminary Conclusion. Based on the foregoing analysis, we conclude on a preliminary basis that Cloudium is not, and has not been during the applicable testing period, a USRPHC within the meaning of Section 897(c)(2) of the Code. Accordingly, shares of Cloudium common stock do not constitute USRPIs, and the disposition of such shares in the Merger should not trigger FIRPTA withholding under Section 1445(a).
C. FIRPTA Certificate — Section 1445(b)(3) Exception
Even though we believe that Cloudium is not a USRPHC and that FIRPTA withholding should not apply as a substantive matter, the most reliable and customary method for ensuring that no withholding is required at closing is for Cloudium to deliver a FIRPTA certificate to Fund VI and the paying agent at or prior to the Effective Time.
Section 1445(b)(3) of the Code provides that no withholding is required under Section 1445(a) if the transferor furnishes to the transferee an affidavit, signed under penalty of perjury, stating (i) the transferor's US taxpayer identification number, and (ii) that the transferor is not a foreign person. In the context of a merger, this exception is implemented through a certification from the target (here, Cloudium) confirming that the target is not a foreign person and/or that its stock is not a USRPI because the target is not (and has not been during the testing period) a USRPHC.
Alternatively, under Treasury Regulation § 1.1445-2(c)(3), where the transferor is a corporation, the transferor may provide a certification stating that the transferor is not a foreign corporation, together with the transferor's US taxpayer identification number (in Cloudium's case, EIN 83-2196754). This form of certification is sometimes referred to as a "non-foreign affidavit" or "FIRPTA affidavit."
In the particular circumstances of this transaction, where Cloudium is a UK public limited company, there is an additional nuance: if Cloudium is treated as a foreign corporation for US federal income tax purposes (i.e., if it has not made a check-the-box election to be treated as a domestic corporation), Cloudium would not be able to certify that it is "not a foreign person." In that case, the appropriate certification would focus on the non-USRPHC status of the corporation—i.e., a certification that shares of Cloudium common stock are not USRPIs because Cloudium is not and has not been a USRPHC. Such a certification, together with the non-USRPHC determination described in Part III.B above, would relieve the transferee of the obligation to withhold under Section 1445.
Recommendation. We recommend that the Merger Agreement include a covenant requiring Cloudium to prepare and deliver at closing a FIRPTA certificate in a form reasonably satisfactory to counsel for Fund VI. The certificate should include:
(a) Cloudium's legal name, address, and US taxpayer identification number (EIN 83-2196754);
(b) A representation, made under penalty of perjury, that Cloudium is not a USRPHC within the meaning of Section 897(c)(2) of the Code and has not been a USRPHC at any time during the applicable five-year testing period;
(c) A representation that shares of Cloudium common stock are therefore not USRPIs within the meaning of Section 897(c)(1) of the Code; and
(d) An acknowledgment that the certificate is being provided to Fund VI and the paying agent in reliance on Section 1445(b)(3) of the Code and the regulations thereunder, and that Fund VI and the paying agent are entitled to rely on the certificate for purposes of their withholding obligations.
The delivery of this certificate should be listed as a closing deliverable in the Master Closing Checklist maintained by the deal team. We will prepare a draft form of the FIRPTA certificate for review by the M&A team and for coordination with Cloudium's General Counsel, Nadia Chowdhury, and target's outside counsel, Ridgeway Phelps & Sato LLP (Catherine Answorth, partner).
Failure to Deliver Certificate. If Cloudium fails or refuses to deliver a valid FIRPTA certificate at closing—an outcome we do not anticipate, but one that should be addressed as a contingency—the paying agent would be required to withhold 15% of the amount realized from payments of Merger Consideration to foreign stockholders (NRAs and foreign corporations) under Section 1445(a) of the Code. This would not affect US person stockholders, who are not subject to FIRPTA withholding in any event. To manage this risk, the Merger Agreement should include the delivery of the FIRPTA certificate as a condition to closing (or, at a minimum, as a closing covenant with a right to deduct and withhold if the certificate is not delivered).
D. FIRPTA — Publicly Traded Exception (Section 1445(b)(5))
As an alternative and additional basis for exemption from FIRPTA withholding, Section 1445(b)(5) of the Code and Treasury Regulation § 1.1445-2(d)(1) provide that no withholding is required under Section 1445(a) with respect to the disposition of an interest in a domestic corporation if that corporation's stock is "regularly traded on an established securities market" as defined in Treasury Regulation § 1.1445-2(d)(2). Cloudium's common stock is listed on the Nasdaq Global Select Market under the ticker symbol "CLDM," which is an established securities market within the meaning of the regulation.
However, the publicly traded exception under Section 1445(b)(5) applies by its terms only to interests in domestic corporations. If Cloudium is treated as a foreign corporation for US federal income tax purposes—as would be the case if Cloudium, as a UK public limited company, has not made a check-the-box election under Treasury Regulation § 301.7701-3 to be treated as a domestic corporation—this exception would not be available. A UK public limited company is listed as a "per se" corporation under Treasury Regulation § 301.7701-2(b)(8)(i), and absent an affirmative election, it is classified as a foreign corporation.
We have included confirmation of Cloudium's check-the-box election status as an open diligence item (see Part XI below). If Cloudium has made a Form 8832 election to be treated as a domestic corporation, the publicly traded exception under Section 1445(b)(5) would provide an independent and self-executing basis for exemption from FIRPTA withholding—one that does not require the delivery of any certificate. If Cloudium has not made such an election and is treated as a foreign corporation, this exception is unavailable, but FIRPTA withholding would nevertheless not apply because, as discussed in Part III.B above, Cloudium is not a USRPHC and its stock is therefore not a USRPI regardless of the corporation's domestic or foreign classification.
Conclusion. Whether Cloudium is treated as a domestic corporation or a foreign corporation for US federal income tax purposes, FIRPTA withholding under Section 1445 should not apply to the Merger Consideration, provided:
(a) If Cloudium is treated as a domestic corporation: the publicly traded exception under Section 1445(b)(5) applies because Cloudium's stock is regularly traded on Nasdaq; and/or a FIRPTA certificate is delivered confirming non-USRPHC status; or
(b) If Cloudium is treated as a foreign corporation: Cloudium's stock is not a USRPI because Cloudium is not (and has not been) a USRPHC, and therefore Section 897 does not apply to the disposition of such stock.
In either case, the delivery of a FIRPTA certificate is the safest "belt-and-suspenders" approach and is our primary recommendation for ensuring that the paying agent and Fund VI are fully protected from withholding liability.
E. Recommendations — FIRPTA
Based on the foregoing analysis, we make the following recommendations with respect to FIRPTA withholding:
1.  FIRPTA Certificate Covenant. Include a covenant in the Merger Agreement requiring Cloudium to deliver, at or prior to the Effective Time, a FIRPTA certificate under Section 1445(b)(3) of the Code (and the Treasury Regulations thereunder) certifying that Cloudium is not a USRPHC and that its stock is not a USRPI. The form of the certificate should be negotiated and agreed upon in advance of signing.
2.  Coordination with Target's Counsel. Coordinate with Cloudium's General Counsel (Nadia Chowdhury) and target's outside counsel (Ridgeway Phelps & Sato LLP, Catherine Answorth) to prepare and finalize the FIRPTA certificate. Confirm that Cloudium's officers are willing to sign the certificate under penalty of perjury.
3.  Master Closing Checklist. Include the FIRPTA certificate as a line item on the Master Closing Checklist to ensure timely preparation and delivery.
4.  No FIRPTA Withholding on Merger Consideration. No FIRPTA withholding should be required on any portion of the Merger Consideration (whether paid to US persons, NRAs, or foreign corporations; and whether representing cash-out consideration or rollover equity), provided the FIRPTA certificate is delivered at closing.
IV. BACKUP WITHHOLDING ANALYSIS (SECTION 3406)
A. Statutory Framework
Section 3406 of the Code requires that "payors" of "reportable payments" deduct and withhold income tax at a rate of 24% (the current statutory rate, as adjusted by the Tax Cuts and Jobs Act of 2017) from such payments if any of the following conditions is met:
(a) The payee fails to furnish a correct taxpayer identification number ("TIN") to the payor;
(b) The IRS notifies the payor that the TIN furnished by the payee is incorrect (a so-called "B-notice");
(c) The IRS notifies the payor that the payee is subject to backup withholding due to underreported interest or dividends (a "C-notice"); or
(d) The payee fails to certify, under penalty of perjury, that the payee is not subject to backup withholding due to a prior notification from the IRS.
The term "reportable payment" includes, among other things, "gross proceeds" from the sale or exchange of property, as reported on IRS Form 1099-B under Treasury Regulation § 1.6045-1. In the context of this Merger, the payment of the per-share Merger Consideration of $36.92 to each stockholder who properly tenders shares through the Letter of Transmittal constitutes "gross proceeds" from the exchange of Cloudium stock, and is therefore a reportable payment subject to backup withholding under Section 3406 if the payee conditions described above are present.
The mechanism for certifying a correct TIN and exemption from backup withholding is IRS Form W-9 (Request for Taxpayer Identification Number and Certification), which must be furnished by each US person payee to the payor. For purposes of the Merger, the paying agent—Cascade Corporate Services Inc.—is the "payor" responsible for collecting Forms W-9 and implementing backup withholding.
B. Application to the Merger
In the context of the Merger, each stockholder who tenders shares of Cloudium common stock through the Letter of Transmittal (Exhibit D to the Merger Agreement) in exchange for the per-share Merger Consideration must furnish a completed, signed IRS Form W-9 to Cascade in order to avoid backup withholding. The Form W-9 will certify the stockholder's name, address, TIN (which, for an individual, is typically the Social Security number, and for an entity, is the EIN), and that the stockholder is not subject to backup withholding.
Stockholders who fail to provide a valid Form W-9, or who are subject to an existing IRS backup withholding notice (B-notice or C-notice), will be subject to backup withholding at the rate of 24% on the gross Merger Consideration payable to them. Cascade, as paying agent, will be responsible for deducting and withholding such amounts and remitting them to the IRS on behalf of the stockholder.
It is important to note that backup withholding is not an additional tax. Rather, it is a credit against the stockholder's federal income tax liability for the taxable year in which the withholding occurs. To the extent that the amount of backup withholding exceeds the stockholder's federal income tax liability, the excess is refundable upon the filing of the stockholder's federal income tax return (IRS Form 1040 for individuals, Form 1120 for corporations, or the applicable entity return).
C. Exemptions
Certain categories of payees are exempt from backup withholding under Section 3406 and the Treasury Regulations thereunder. These exempt recipients include:
•  Corporations (including S corporations for this purpose), as identified by an exempt payee code on Form W-9;
•  Tax-exempt organizations described in Section 501(a) of the Code;
•  Individual retirement accounts (IRAs) described in Section 408(a) of the Code;
•  The United States and any of its agencies or instrumentalities;
•  States, the District of Columbia, and their political subdivisions;
•  International organizations described in Section 7701(a)(18) of the Code; and
•  Certain other exempt recipients identified in the instructions to IRS Form W-9.
These exempt payees must still furnish a Form W-9 to claim their exemption, but they are not subject to backup withholding even if they fail to certify under penalty of perjury that they are not subject to backup withholding notices.
In addition, foreign persons who furnish a valid IRS Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting — Individuals), Form W-8BEN-E (for entities), or other applicable W-8 form (such as Form W-8IMY for intermediaries) are exempt from backup withholding. Foreign persons are instead potentially subject to NRA withholding under Sections 1441 and 1442, as discussed in Part V below. It is critical that the Letter of Transmittal clearly direct foreign stockholders to furnish the applicable W-8 form rather than a Form W-9.
D. Coordination with Rollover Participants
The backup withholding analysis has specific implications for the two rollover equity participants:
Jonathan Hargrove (CEO). Mr. Hargrove is a US person and must provide a completed and signed IRS Form W-9 in connection with the cash-out portion of his Merger Consideration (approximately $142,814,544). Provided Mr. Hargrove furnishes a valid Form W-9 with a correct TIN and is not subject to any IRS backup withholding notice, no backup withholding will apply. The rollover portion of Mr. Hargrove's consideration (approximately 3,868,200 shares exchanged for equity interests in the surviving entity) is not a cash payment and is therefore not subject to backup withholding (or any other withholding), because no cash is "paid" to Mr. Hargrove with respect to the rollover shares.
Pinnacle Growth Ventures LLC. Pinnacle is a Delaware limited liability company and must provide a completed and signed IRS Form W-9 certifying its TIN and backup withholding status in connection with the cash-out portion of its Merger Consideration (approximately $315,550,810, based on approximately 8,546,880 shares cashed out at $36.92 per share). As a domestic entity, Pinnacle is not exempt from information reporting on Form 1099-B (unless it is classified as a corporation for US federal income tax purposes, in which case it may claim an exempt payee code on its Form W-9). Backup withholding applies only if Pinnacle fails to furnish a valid Form W-9. As with Mr. Hargrove, the rollover portion of Pinnacle's consideration is not subject to backup withholding.
We note that the deal team is establishing an IRS Form W-9 / W-8BEN-E Collection Tracker to monitor the receipt of withholding certifications from all stockholders, with a target completion date of July 5, 2024, in advance of the anticipated closing. We recommend that the rollover participants be among the first stockholders from whom Forms W-9 are collected, given their significant individual consideration amounts.
E. Recommendations — Backup Withholding
Based on the foregoing analysis, we make the following recommendations with respect to backup withholding:
1.  Letter of Transmittal. The Letter of Transmittal (Exhibit D to the Merger Agreement) must include either a substitute Form W-9 section (incorporated directly into the Letter of Transmittal, as is customary in public company mergers) or a requirement that stockholders submit a separate IRS Form W-9 together with the Letter of Transmittal. The substitute Form W-9 should include all certifications required by the IRS instructions, including the TIN certification and the backup withholding certification.
2.  Paying Agent Instructions. Cascade Corporate Services Inc. should be instructed, pursuant to the Paying Agent Agreement (or the applicable provisions of the Merger Agreement), to deduct and withhold 24% of the Merger Consideration from any stockholder who does not furnish a valid Form W-9 (or applicable Form W-8) and to remit such withheld amounts to the IRS in accordance with applicable law.
3.  Disclosure of Consequences. The Letter of Transmittal should include clear and conspicuous disclosure of the consequences of failing to provide a valid Form W-9, including the application of 24% backup withholding, and should inform stockholders of their right to claim a credit or refund of any excess withholding on their federal income tax return.
4.  Merger Agreement Withholding Provision. The Merger Agreement (Article II — Payment Procedures) should include a provision expressly authorizing the surviving corporation, Fund VI, the paying agent, and the escrow agent to deduct and withhold from the Merger Consideration any amounts required to be deducted and withheld under the Code or any applicable provision of state, local, or foreign tax law, with amounts so withheld and timely remitted to the applicable taxing authority being treated as having been paid to the stockholder for all purposes of the Merger Agreement.
5.  Foreign Stockholder Forms. The Letter of Transmittal should clearly instruct foreign stockholders to furnish the applicable IRS Form W-8 (W-8BEN for individuals, W-8BEN-E for entities, W-8ECI for effectively connected income, W-8EXP for certain foreign governments and international organizations, or W-8IMY for intermediaries) rather than a Form W-9. Foreign persons providing valid W-8 forms are exempt from backup withholding, though they may be subject to NRA withholding as discussed in Part V.
V. NRA / FOREIGN CORPORATION WITHHOLDING ANALYSIS (SECTIONS 1441–1442)
A. Statutory Framework
Sections 1441 and 1442 of the Code impose a withholding obligation on "withholding agents" who make payments of certain categories of US-source income to NRAs (Section 1441) and foreign corporations (Section 1442). The statutory withholding rate is 30% of the gross amount of the payment, subject to reduction under an applicable income tax treaty.
The categories of income subject to NRA withholding are "fixed or determinable annual or periodical" income—commonly referred to as "FDAP income." FDAP income includes, without limitation, interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income. See Section 1441(a); Treasury Regulation § 1.1441-2(b)(1).
Critically, FDAP income does not generally include gains from the sale or exchange of property. See Treasury Regulation § 1.1441-2(b)(2)(i). Gross proceeds from the sale or exchange of stock are not subject to NRA withholding under Sections 1441 and 1442, because such proceeds are not FDAP income. This distinction is central to the analysis of the Merger Consideration, as discussed below.
B. Characterization of Merger Consideration
The characterization of the Merger Consideration for purposes of the NRA withholding analysis depends on the federal income tax treatment of the exchange of Cloudium shares for the per-share cash consideration.
Non-Rollover Stockholders (Cash-Out Only). For stockholders who receive only cash in exchange for their Cloudium shares (i.e., all stockholders other than the two rollover participants), the exchange constitutes a fully taxable disposition of stock. Under Section 302(a) of the Code, a distribution in complete redemption of all of a stockholder's shares is treated as a distribution in part or full payment in exchange for the stock, rather than as a distribution under Section 301 (which could result in dividend treatment). In the Merger, each non-rollover stockholder's shares are cancelled and converted into the right to receive cash. This is properly treated as an exchange under Section 302(a), and the Merger Consideration constitutes the stockholder's "amount realized" in a sale or exchange of stock.
Because the Merger Consideration paid to non-rollover stockholders is characterized as proceeds from a sale or exchange—and not as FDAP income—NRA withholding under Sections 1441 and 1442 does not apply to such payments. This conclusion holds regardless of whether the stockholder is a US person, an NRA, or a foreign corporation.
Rollover Stockholders (Cash and Equity). For the rollover stockholders (Mr. Hargrove and Pinnacle), the tax treatment is more complex. To the extent the transaction qualifies as a reorganization under Section 368(a)(2)(E) of the Code—an analysis that is being conducted separately in the November 1, 2023 memorandum—the rollover stockholders may be treated as exchanging their Cloudium shares for a combination of qualifying consideration (the rollover equity, received tax-free under Section 354) and nonqualifying consideration or "boot" (the cash portion, potentially taxable under Section 356).
Under Section 356(a)(2) of the Code, if the receipt of boot in a reorganization has the "effect of the distribution of a dividend" (determined by reference to the principles of Section 302, as applied under Commissioner v. Clark, 489 U.S. 726 (1989)), the gain recognized by the rollover stockholder is treated as a dividend to the extent of the stockholder's ratable share of accumulated earnings and profits ("E&P") of the target, and as gain from the exchange of property to the extent of any excess. If any portion of the boot received by a foreign rollover stockholder (if any) were treated as a dividend under Section 356(a)(2), such dividend would be FDAP income subject to NRA withholding at 30% (or the applicable treaty rate).
However, in the present transaction, neither Mr. Hargrove nor Pinnacle is a foreign person. Mr. Hargrove is a US person (as CEO of Cloudium, he is a US citizen or resident alien), and Pinnacle is a Delaware LLC (a domestic entity). Accordingly, the NRA withholding analysis under Sections 1441 and 1442 is not directly relevant to the rollover participants. The Section 356(a)(2) dividend characterization analysis is relevant primarily for determining the income tax treatment of the boot received by the rollover participants—not for purposes of NRA withholding.
The Section 356(a)(2) analysis could, however, become relevant if any foreign stockholder in the public float were in a position where the merger consideration it receives is treated as boot in a reorganization (as opposed to sale proceeds). In practice, for a widely held public company like Cloudium, the non-rollover stockholders receiving only cash will be treated as engaging in a fully taxable exchange under Section 302, and the dividend recharacterization risk under Section 356(a)(2) is limited to the rollover participants (who, as noted, are domestic persons).
C. Practical Considerations for Foreign Stockholders
Notwithstanding the foregoing analysis, prudent practice requires that the paying agent be prepared to address NRA withholding in the event that the characterization of the Merger Consideration is challenged or that any portion of the consideration is recharacterized as a dividend. The following practical considerations apply:
W-8 Form Collection. Foreign stockholders receiving Merger Consideration should provide the applicable IRS Form W-8 to Cascade. Specifically:
•  NRA individuals should provide IRS Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting — Individuals);
•  Foreign corporations should provide IRS Form W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting — Entities);
•  Foreign partnerships, trusts, and intermediaries should provide the applicable Form W-8 (W-8IMY for intermediaries, W-8ECI for income effectively connected with a US trade or business, or W-8EXP for foreign governments and international organizations).
The receipt of a valid W-8 form establishes the stockholder's foreign status and, if applicable, entitlement to a reduced treaty rate of withholding on FDAP income. Even if NRA withholding is ultimately not required (because the Merger Consideration is sale/exchange proceeds), the W-8 form serves the important secondary function of exempting the stockholder from backup withholding under Section 3406 and supporting the paying agent's information reporting obligations on Form 1042-S.
Recharacterization Risk. If, for any reason, the IRS were to recharacterize any portion of the Merger Consideration as a dividend (for example, under Section 302(d) treating the redemption as a Section 301 distribution), NRA withholding at 30% (or the applicable treaty rate) would apply to the dividend portion of the payment. While we do not anticipate this outcome for the non-rollover stockholders in this transaction—given that the Merger results in a complete termination of each stockholder's interest in Cloudium—the paying agent should be advised of this contingency and should have procedures in place to apply withholding if instructed to do so.
Stockholder Base Geography. Cloudium's stockholder base includes holders in multiple foreign jurisdictions, including the United Kingdom, India, Germany, and other countries. To the extent NRA withholding were to apply to any portion of the Merger Consideration, the applicable treaty rate (rather than the statutory 30% rate) may be available to stockholders who are residents of treaty countries and who furnish valid Forms W-8BEN or W-8BEN-E with a proper treaty claim. The relevant treaty provisions are discussed in Part V.D below.
D. Treaty Considerations
To the extent any portion of the Merger Consideration paid to a foreign stockholder is recharacterized as a dividend for NRA withholding purposes, the following bilateral income tax treaty provisions may reduce the applicable withholding rate below the statutory 30%:
United States–United Kingdom Income Tax Treaty (2001, as amended by protocol). Article 10 of the US-UK Treaty provides for reduced withholding rates on dividends. For "portfolio" holders (i.e., holders of less than 10% of the voting stock of the paying corporation), the treaty rate is 15%. For "direct investment" holders (i.e., companies that own 10% or more of the voting stock), the treaty rate is reduced to 5%. To claim the reduced treaty rate, the UK-resident stockholder must furnish a valid IRS Form W-8BEN or W-8BEN-E that includes the applicable treaty claim, the stockholder's foreign tax identification number, and a certification that the stockholder satisfies the limitation on benefits ("LOB") provisions of the treaty.
United States–India Income Tax Treaty. Article 12 of the US-India Treaty provides for reduced withholding rates on dividends, generally consistent with the rates applicable under the US-UK Treaty (15% for portfolio holders, with lower rates available under certain circumstances for qualifying companies).
United States–Germany Income Tax Treaty. Article 10 of the US-Germany Treaty similarly provides for reduced withholding rates on dividends (15% for portfolio holders, 5% for direct investors meeting the applicable ownership threshold).
In each case, the reduced treaty rate is available only if the stockholder furnishes a valid Form W-8BEN or W-8BEN-E with a completed treaty claim section and meets the applicable LOB requirements. The paying agent should not apply a reduced rate absent receipt of a properly completed W-8 form.
E. Section 305(c) — Deemed Distributions
We note briefly that in a transaction involving both cash-out and rollover stockholders, Section 305(c) of the Code and the regulations thereunder (Treasury Regulation § 1.305-7) could potentially treat the transaction as resulting in a deemed distribution with respect to certain stockholders. Specifically, where some stockholders receive cash and others receive (or increase their relative interest in) equity, Section 305(b)(2) and (c) may treat the transaction as a disproportionate distribution—one that results in an increase in the proportionate interest of some stockholders in the earnings and profits or assets of the corporation, while other stockholders receive property.
The potential application of Section 305(c) to this Merger, and its implications for the characterization of the Merger Consideration as sale proceeds versus dividend income, is addressed in greater detail in the separate Section 368 memorandum dated November 1, 2023. We flag this issue here for completeness and note that, to the extent any recharacterization under Section 305(c) results in dividend treatment for foreign stockholders, NRA withholding at 30% (or the applicable treaty rate) would apply to such deemed distribution.
F. Recommendations — NRA Withholding
Based on the foregoing analysis, we make the following recommendations with respect to NRA withholding:
1.  Sale/Exchange Treatment. The Merger Consideration paid to stockholders in exchange for their Cloudium shares should be treated as proceeds from a sale or exchange under Section 302 of the Code (for non-rollover stockholders) or under Sections 354/356 (for rollover stockholders). As sale or exchange proceeds, the Merger Consideration is not FDAP income and is not subject to NRA withholding under Sections 1441 and 1442.
2.  W-8 Form Collection. Cascade Corporate Services Inc. should collect IRS Forms W-8BEN (for NRA individuals) and W-8BEN-E (for foreign entities) from all foreign stockholders, whether or not NRA withholding is expected to apply. These forms are necessary for information reporting purposes, for claiming exemption from backup withholding, and as a precaution in the event of any dividend recharacterization.
3.  Merger Agreement and Letter of Transmittal Provisions. The Merger Agreement (Article II) and the Letter of Transmittal should include provisions expressly permitting the paying agent to deduct and withhold any amounts required to be withheld under the Code, including under Sections 1441 and 1442, if applicable. This protective language ensures that the paying agent has contractual authority to withhold in the event of a recharacterization.
4.  Recharacterization Contingency. To the extent any portion of the Merger Consideration is recharacterized as a dividend (whether under Section 302(d), Section 356(a)(2), Section 305(c), or otherwise), the paying agent should be prepared to withhold at 30% (or the applicable treaty rate, if a valid W-8 form with a treaty claim has been provided) on such recharacterized amount and to remit the withheld amounts to the IRS.
5.  Proxy Statement Disclosure. Coordinate with Ridgeway Phelps & Sato LLP (Catherine Answorth) to include appropriate disclosure in the definitive proxy statement regarding the potential application of NRA withholding to foreign stockholders, the requirement to furnish applicable W-8 forms, and the availability of reduced treaty rates.
VI. ESCROW WITHHOLDING CONSIDERATIONS
A. Escrow Mechanics
As described in Part II.A above, at the closing of the Merger, an amount equal to $544,000,000—representing approximately 8% of the aggregate deal value—will be deposited with Cobalt Trust Company ("Cobalt"), as escrow agent, pursuant to the terms of a separate Escrow Agreement. The escrow fund is intended to secure the indemnification obligations of the selling stockholders (represented by a stockholder representative to be designated in the Merger Agreement) for breaches of representations, warranties, and covenants in the Merger Agreement, as well as certain specified indemnification matters.
The escrow is structured as a two-tranche release mechanism:
•  First Release (12 Months Post-Closing). Fifty percent (50%) of the initial escrow amount—$272,000,000—will be released to the selling stockholders (through the paying agent) on the date that is 12 months after the closing date (anticipated to be approximately July 9, 2025), less amounts retained on account of pending or unresolved indemnification claims as of such date.
•  Second Release (18 Months Post-Closing). The remaining fifty percent (50%) of the initial escrow amount—$272,000,000—will be released to the selling stockholders on the date that is 18 months after the closing date (anticipated to be approximately January 9, 2026), less amounts retained on account of pending or unresolved indemnification claims as of such date and less any amounts previously paid from the escrow fund in satisfaction of indemnification claims.
During the escrow period, the escrowed funds will be invested by Cobalt in accordance with the investment provisions of the Escrow Agreement (typically in short-term, investment-grade instruments such as money market funds, US Treasury bills, or similar low-risk investments). Interest and other investment income earned on the escrow fund will accrue for the benefit of the selling stockholders (or may be treated as earned by the stockholder representative as agent, depending on the specific terms of the Escrow Agreement).
B. Withholding on Escrowed Amounts
The escrow holdback raises several withholding questions that must be addressed in the transaction documents.
Treatment of Escrow as Part of Merger Consideration. Under general federal income tax principles, the full per-share Merger Consideration of $36.92 is treated as the "amount realized" by each stockholder at the Effective Time, regardless of the fact that a portion of such consideration (the escrow holdback) is not immediately paid to the stockholder but is instead deposited with the escrow agent. The escrow amount is treated as received by the stockholders at closing (or, more precisely, as held by the escrow agent on behalf of the stockholders as a form of deferred payment or security arrangement), with the stockholder representative acting as agent for the selling stockholders with respect to the escrowed funds.
This treatment is consistent with the approach taken under Revenue Procedure 84-42, 1984-1 C.B. 521, and the general principles applicable to escrow arrangements in the merger context. The IRS has generally taken the position that where merger consideration is deposited in escrow to secure indemnification obligations, the escrowed amount is includible in the selling stockholders' amount realized in the year of closing, subject to potential adjustments if amounts are later forfeited from the escrow. The installment sale rules of Section 453 of the Code are generally not applicable to publicly traded stock (which is "marketable security" excluded from installment sale treatment under Section 453(k)).
Withholding Computation. Backup withholding and any applicable FIRPTA or NRA withholding should be computed based on the full per-share Merger Consideration of $36.92 at closing—not net of the escrow holdback. This means that the paying agent should withhold (if applicable) based o

CALDERWOOD & HARKNESS LLP

INTERNAL TAX MEMORANDUM

I. EXECUTIVE SUMMARY

II. BACKGROUND

III. FIRPTA WITHHOLDING ANALYSIS (SECTIONS 1445 AND 897)

IV. BACKUP WITHHOLDING ANALYSIS (SECTION 3406)

VI. ESCROW WITHHOLDING CONSIDERATIONS

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