annotated-redline-mae-definition.docx

1041-00003 · Solara Digital Infrastructure LP · Transaction Documents/Merger Agreement

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Drummond & Fenwick LLP 125 Broad Street New York, New York 10004

INTERNAL MEMORANDUM

December 22, 2023

FROM: Tiffany Rosenthal, Associate, Mergers & Acquisitions

TO: Harrison Wexford, Responsible Partner, Mergers & Acquisitions Beatrice Holloway, Billing Partner, Mergers & Acquisitions

CC: Andrew Fitzpatrick, Associate, Mergers & Acquisitions

RE: Annotated Analysis of "Material Adverse Effect" Definition and Carveouts — Agreement and Plan of Merger among Cloudium Technologies plc, Stratos Merger Sub Inc., and Solara Digital Infrastructure Fund VI LP

MATTER NO.: 1041-00003

CLIENT: Solara Digital Infrastructure LP

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I. Executive Summary and Purpose

This memorandum provides an internal analysis of the "Material Adverse Effect" definition (the "MAE Definition") as drafted in Section 1.1 of the initial draft Agreement and Plan of Merger (the "Merger Agreement") circulated to Ridgeway Phelps & Sato LLP, counsel to Cloudium Technologies plc ("Cloudium" or the "Company"), on December 1, 2023. The purpose of this memorandum is to equip the deal team with a comprehensive understanding of the MAE Definition's construction, its alignment with current market precedent, and its interactions with other critical provisions of the Merger Agreement, in advance of anticipated markup by target counsel.

Transaction Overview. The proposed transaction is a $6,800,000,000 reverse triangular merger in which Stratos Merger Sub Inc. ("Merger Sub"), a newly formed Delaware corporation and wholly owned subsidiary of Solara Digital Infrastructure Fund VI LP ("Solara" or the "Buyer"), will merge with and into Cloudium Technologies plc (Nasdaq: CLDM), with Cloudium surviving as a wholly owned subsidiary of Solara. Each share of Cloudium common stock (approximately 184,200,000 shares outstanding) will be converted into the right to receive per-share cash consideration of approximately $36.92. The transaction implies an enterprise value-to-EBITDA multiple of approximately 16.8x based on Cloudium's last-twelve-months ("LTM") EBITDA of approximately $405,000,000.

Significance of the MAE Definition. The MAE Definition is among the most consequential provisions of the Merger Agreement because it serves as a central risk-allocation mechanism across multiple operative provisions:

(a) Representation and Warranty Qualification. The MAE Definition qualifies key seller representations and warranties set forth in Article IV of the Merger Agreement, including representations concerning the absence of certain changes since September 30, 2023 (the date of Cloudium's most recent audited interim financial statements), the accuracy of financial statements, the absence of undisclosed liabilities, and the condition of material contracts. The scope of the MAE Definition directly determines the threshold at which adverse events give rise to representation breaches.

(b) Closing Condition. Section 7.2(a) of the Merger Agreement conditions Solara's and Merger Sub's obligation to consummate the merger on the absence of a "Material Adverse Effect" having occurred between the date of the Merger Agreement and the closing date. Given the anticipated interim period of several months (with an outside date of June 30, 2024), this closing condition represents a critical protection for Solara against significant deterioration in Cloudium's business during the pre-closing period.

(c) Indemnification and R&W Insurance. The MAE Definition interacts with the indemnification regime set forth in Article IX, which provides for post-closing recourse for breaches of representations and warranties subject to a general cap of 15% of deal value ($1,020,000,000), an escrow of 8% of deal value ($544,000,000), and an 18-month survival period. Additionally, the buyer-side representations and warranties insurance policy to be issued by Northfield Assurance Ltd. (Policy No. NFA-TRI-2024-00487, $680,000,000 limit) will key off the MAE Definition for purposes of evaluating covered losses. The breadth of the carveouts in the MAE Definition directly affects the recoverability of post-closing claims under both the contractual indemnification provisions and the R&W insurance policy.

Scope of Analysis. This memorandum (i) sets forth the full text of the proposed MAE Definition with clause-by-clause annotations, (ii) compares the proposed definition against current market precedent in large-cap software and technology acquisitions (12 comparable transactions with enterprise values exceeding $3 billion, signed in 2022–2023), (iii) analyzes the interaction of the MAE Definition with the closing conditions, indemnification provisions, and R&W insurance policy, (iv) identifies anticipated negotiation positions from Ridgeway Phelps & Sato LLP (Catherine Answorth, lead M&A partner) and recommends responsive positions for Solara, and (v) discusses relevant Delaware law considerations.

Jurisdictional Note. Cloudium is incorporated under the laws of England and Wales but is listed on the Nasdaq Global Select Market and reports under IFRS with US GAAP reconciliation. The Merger Agreement is governed by the laws of the State of Delaware. This dual-jurisdiction profile informs certain aspects of the MAE Definition, including the carveout for changes in accounting standards (which must address both IFRS and GAAP), the carveout for changes in law (which must encompass UK, US, Indian, and German regulatory regimes), and the disproportionate-impact comparator group (which must reflect the geographies in which Cloudium operates). English court precedent on material adverse change clauses is not directly applicable to interpretation of the MAE Definition under Delaware law, but may be relevant to the interpretation of analogous provisions in Cloudium's existing commercial agreements, some of which are governed by English law.

II. Text of the Proposed "Material Adverse Effect" Definition

Set forth below is the complete text of the MAE Definition as drafted in Section 1.1 of the December 1, 2023 draft of the Merger Agreement, together with clause-by-clause annotations. Annotations appear in italicized text following the relevant clause and are identified by the prefix "[Annotation]." A clean copy of the full definition with margin annotations is attached as Appendix A.

A. Base Definition

The proposed base definition reads as follows:

"Material Adverse Effect" means any event, change, effect, development, condition, circumstance, or occurrence (each, an "MAE Event") that, individually or in the aggregate with all other MAE Events, has had or would reasonably be expected to have a material adverse effect on:

(i) the business, assets, liabilities, results of operations, or financial condition of the Company and its Subsidiaries (including Cloudium Technologies UK Ltd., Cloudium Technologies India Pvt. Ltd., and Cloudium Solutions GmbH), taken as a whole; or

(ii) the ability of the Company to consummate the Transactions contemplated by this Agreement;

provided, however, that, solely for purposes of clause (i) of this definition, none of the following, and no event, change, effect, development, condition, circumstance, or occurrence arising out of or resulting from any of the following, shall be taken into account in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur:

[Annotation — Base Definition, Generally.] The opening language employs the comprehensive catalogue of covered events ("event, change, effect, development, condition, circumstance, or occurrence") that is standard across virtually all large-cap M&A transactions. The phrase "individually or in the aggregate" ensures that multiple individually non-material events may be considered collectively. The temporal standard — "has had or would reasonably be expected to have" — covers both events that have already manifested and those with a forward-looking reasonable likelihood of materializing. This dual temporal reach is standard and appropriate.

[Annotation — "Taken as a Whole" Qualifier.] The "taken as a whole" modifier in clause (i) is standard and essential. It ensures that the MAE analysis focuses on the consolidated enterprise rather than any individual subsidiary, product line, geography, or business segment. Given Cloudium's scale — LTM Revenue of approximately $1,620,000,000, annual recurring revenue ("ARR") of approximately $1,740,000,000 as of December 31, 2023 (estimated), and approximately 6,800 employees operating across the United States, United Kingdom, India, and Germany — an event affecting a single subsidiary or product line (for example, a decline in Cloudium Technologies India Pvt. Ltd.'s operations) would need to be evaluated in the context of the overall consolidated business. This qualification benefits the seller, as adverse developments in one segment may be offset by stable or positive performance elsewhere. We believe this qualifier is appropriate and market-standard and do not recommend seeking its removal.

[Annotation — Prong (ii): Ability to Close.] Clause (ii) is the "ability to close" prong, which addresses the Company's capacity to consummate the transactions contemplated by the Merger Agreement. This prong is conceptually distinct from clause (i) and is narrower in scope. It is directed primarily at legal impediments, regulatory blocks, or corporate-authority failures — for example, a scenario in which a governmental authority enjoins the Company from consummating the merger, or the Company's board of directors lacks the requisite authority to approve the transaction. This prong is not subject to the enumerated carveouts, which apply only "for purposes of clause (i)." This asymmetry is deliberate and buyer-favorable: even if a change in law would ordinarily be carved out under clause (i), if that change in law renders the Company legally unable to consummate the merger, it may still constitute a Material Adverse Effect under clause (ii). We recommend retaining prong (ii) and anticipate that target counsel may seek its removal or narrowing.

B. Enumerated Carveouts (Exceptions to MAE)

The MAE Definition contains nine enumerated carveouts, each of which excludes certain categories of events from the MAE analysis under clause (i). Each carveout is set forth below with annotations.

Carveout (a): General Economic and Market Conditions

(a) changes in general economic, financial, credit, or securities market conditions (including changes in interest rates, exchange rates, credit spreads, or commodity prices);

[Annotation.] This carveout is standard and appears in virtually all large-cap M&A transactions. Its purpose is to exclude from the MAE analysis deterioration in the general macroeconomic environment — for example, a recession, a rise in interest rates, a widening of credit spreads, or a decline in equity markets — that affects market participants broadly rather than the Company specifically. The parenthetical reference to exchange rates is particularly relevant here given Cloudium's significant UK operations (Cloudium Technologies UK Ltd. generated approximately £312,000,000, or approximately $390,000,000 at $1.25/£, in revenue during the LTM period), as well as its India and Germany operations, which expose the Company to INR/USD and EUR/USD exchange-rate risk. The parenthetical reference to commodity prices is less directly relevant to Cloudium's software business but is standard boilerplate and does no harm. This carveout is subject to the disproportionate-impact bring-back discussed in Section II.C below, which preserves Solara's protection if macroeconomic conditions affect Cloudium disproportionately relative to its industry peers.

Carveout (b): Industry Conditions

(b) changes or conditions generally affecting the industries in which the Company and its Subsidiaries operate (including the cloud enterprise resource planning, customer relationship management, business intelligence, and software-as-a-service industries);

[Annotation.] This carveout is standard and excludes industry-wide headwinds — for example, a sector-wide decline in enterprise IT spending, increased price competition among SaaS vendors, or a general slowdown in cloud-migration activity — from the MAE analysis. The parenthetical identifies the specific industry segments in which Cloudium operates (cloud ERP, CRM, business intelligence, and SaaS). We should resist any target-counsel attempt to expand this parenthetical to include additional industry segments or, conversely, to narrow it to exclude specific sub-segments. The current formulation is appropriately calibrated. As with carveout (a), this carveout is subject to the disproportionate-impact bring-back, ensuring that Solara retains protection if Cloudium is hit harder than its industry peers by a general industry downturn.

Carveout (c): Pandemics

(c) any pandemic, epidemic, or disease outbreak (including COVID-19, SARS-CoV-2, and any mutation, variation, or evolution thereof), or any governmental or regulatory response thereto, including any quarantine, "shelter in place," "stay at home," workforce reduction, social distancing, shut-down, closure, sequester, safety, or similar law, directive, guidelines, order, restriction, or recommendation by any Governmental Authority;

[Annotation.] This carveout is now standard in virtually all large-cap M&A transactions following the COVID-19 pandemic. The C&H draft includes broad language that encompasses not only the disease event itself but also the full range of governmental and regulatory responses, which is appropriate and consistent with market practice. The specific reference to "COVID-19, SARS-CoV-2, and any mutation, variation, or evolution thereof" is included for the avoidance of doubt, though some recent 2023 transactions have begun moving toward generic "pandemic/epidemic" language without specific COVID-19 references. We note that 3 of the 12 comparable precedent transactions reviewed still include specific COVID-19 references, while the remaining 9 use generic language only. Our formulation — which includes both generic and specific language — is the most comprehensive approach and we recommend retaining it. This carveout is subject to the disproportionate-impact bring-back.

Carveout (d): War, Terrorism, and Hostilities

(d) any act of war (whether or not declared), armed hostilities, sabotage, terrorism, cyberattack, or military action, or any escalation or worsening of the foregoing, or any governmental or regulatory response thereto;

[Annotation — General.] This carveout is standard and excludes from the MAE analysis the effects of armed conflict, terrorism, and similar geopolitical events. The inclusion of "any escalation or worsening of the foregoing" is important because it captures not only the initial occurrence of such events but also their intensification over the interim period.

[Annotation — Cyberattack.] The inclusion of "cyberattack" within this carveout is a significant negotiation point. While the inclusion of cyberattack in the war/terrorism carveout has become increasingly common — appearing in 9 of the 12 comparable precedent transactions we reviewed — it raises a meaningful concern for Solara given Cloudium's business profile. Cloudium is a cloud-native SaaS provider whose business fundamentally depends on the integrity, availability, and security of its technology systems and the enterprise data hosted on its platform. A targeted cyberattack on Cloudium specifically (as distinguished from a widespread cyber event affecting multiple entities) could have devastating consequences for the Company's business, customer relationships, and reputation. If such a targeted attack were excluded from the MAE analysis by virtue of carveout (d), Solara would have no recourse under the MAE closing condition or the MAE-qualified representations and warranties.

We note that 2 recent 2023 comparable transactions included a qualifier to the cyberattack carveout: "other than a cyberattack targeted specifically at the Company or its systems." This formulation preserves the carveout for widespread or indiscriminate cyber events (e.g., a state-sponsored attack affecting a broad range of enterprises) while ensuring that a targeted, Company-specific attack falls back into the MAE definition. We recommend that Solara affirmatively push for this targeted-cyberattack exclusion from the carveout. This is the single most important buyer-favorable negotiation point on the MAE Definition given Cloudium's technology profile. This carveout is subject to the disproportionate-impact bring-back.

Carveout (e): Changes in Law or Regulation

(e) any adoption, implementation, promulgation, repeal, modification, amendment, reinterpretation, or change in interpretation of, or any proposal to adopt, implement, promulgate, repeal, modify, amend, reinterpret, or change the interpretation of, any Law (including any applicable Tax law) or any rule, regulation, order, directive, or guidance of any Governmental Authority (including changes in applicable accounting standards under GAAP, IFRS, or other applicable accounting principles);

[Annotation — General.] This carveout excludes from the MAE analysis changes in the legal and regulatory environment. It is standard and appears in all 12 comparable precedent transactions reviewed. The carveout encompasses the full life cycle of a legal change — adoption, implementation, promulgation, repeal, modification, amendment, and reinterpretation — and is appropriately broad.

[Annotation — "Proposals."] The carveout extends to "proposals" to adopt, modify, or repeal law. This is a seller-favorable feature because it excludes from the MAE analysis a mere legislative or regulatory proposal that has not yet been enacted or adopted. A proposed change in law could cause significant market uncertainty or disrupt the Company's business even before it takes effect. Eleven of the 12 comparable precedent transactions include "proposals" in the changes-in-law carveout, and only 3 limit coverage to "enacted" or "adopted" changes. Accordingly, the inclusion of "proposals" is consistent with the market majority. We recommend retaining this language as drafted. However, if target counsel seeks to broaden this carveout further (for example, by adding "contemplated" or "discussed" changes), we should resist.

[Annotation — Accounting Standards.] The parenthetical reference to "changes in applicable accounting standards under GAAP, IFRS, or other applicable accounting principles" is important given Cloudium's dual reporting framework. As an English company listed on Nasdaq, Cloudium prepares its primary financial statements under IFRS and provides reconciliation to US GAAP for SEC reporting purposes. Changes in either IFRS or GAAP standards could affect the Company's reported financial metrics. The inclusion of both accounting frameworks is appropriate and necessary.

[Annotation — Tax Law.] The parenthetical reference to "any applicable Tax law" is critical given the cross-border structure of the transaction and Cloudium's operations in the United States, United Kingdom, India, and Germany. Changes in tax law in any of these jurisdictions could materially affect the Company's effective tax rate, cash flows, and post-tax earnings. We recommend that Leonard Cross (Tax) review this carveout and its interaction with the tax indemnity provisions in Article IX to ensure consistency and to identify any tax-specific issues that may warrant separate treatment. This carveout is subject to the disproportionate-impact bring-back.

Carveout (f): Changes in Company Stock Price or Trading Volume

(f) any change in the market price or trading volume of the shares of Company Common Stock on the Nasdaq Global Select Market; provided that the underlying cause or causes of such change shall not, by operation of this clause (f), be excluded from the determination of whether a Material Adverse Effect has occurred;

[Annotation.] This is a standard "stock price" carveout with the equally standard "symptom versus cause" proviso. The carveout recognizes that a decline in stock price is a market reaction — a symptom — rather than an underlying business event. Excluding stock-price declines per se from the MAE analysis is appropriate because stock prices are influenced by a wide range of factors, many of which are unrelated to the Company's fundamental business performance. However, the proviso ensures that the root cause of a stock-price decline (for example, the loss of a major customer, a cybersecurity breach, or a material decline in recurring revenue) may still be considered in determining whether a Material Adverse Effect has occurred. This formulation is market-standard and appears in all 12 comparable precedent transactions reviewed. No changes are recommended.

Carveout (g): Failure to Meet Projections or Estimates

(g) any failure by the Company or any of its Subsidiaries to meet any internal or published industry analyst projections, budgets, plans, forecasts, or estimates of revenue, earnings, cash flow, or other financial or operating metrics for any period (including any failure to meet any projections, budgets, plans, forecasts, or estimates set forth in the Confidential Information Memorandum dated August 15, 2023, or the Company Management Presentation dated September 22, 2023); provided that the underlying cause or causes of such failure shall not, by operation of this clause (g), be excluded from the determination of whether a Material Adverse Effect has occurred;

[Annotation.] This carveout, like carveout (f), addresses symptoms rather than causes. A failure to meet projections, budgets, or forecasts is an outcome rather than an event and is excluded from the MAE analysis per se. The proviso preserves the ability to look to the underlying causes of the miss. The specific references to the Confidential Information Memorandum dated August 15, 2023, and the Company Management Presentation dated September 22, 2023, are included to clarify that failures to meet the projections set forth in the deal-process marketing materials are also subject to the symptom-versus-cause framework. This is appropriate. We should ensure that Osprey Bancroft & Co. (Damien Harlow, lead financial advisor) and Glenmore Thornton LLP (Vanessa Liu, financial due diligence lead) are aware that this carveout does not insulate the underlying business deterioration that causes a projection miss; it merely prevents the miss itself from being the basis for an MAE claim. No changes are recommended.

Carveout (h): Announcement or Pendency of the Transaction

(h) any effect arising from or relating to the announcement, pendency, or anticipated consummation of the Transactions contemplated by this Agreement or the identity of Buyer, Merger Sub, or any of their respective Affiliates, including (A) any loss of, or adverse change in, the relationship of the Company or any of its Subsidiaries with any of their respective customers, suppliers, distributors, vendors, licensors, licensees, partners, employees, independent contractors, or other business relations, and (B) any actions taken by any Governmental Authority in connection with, or arising out of, the Transactions contemplated by this Agreement;

[Annotation — General.] This is a critical carveout that protects against signing-to-closing attrition — that is, adverse effects on the Company's business relationships that arise specifically because the transaction has been announced and is pending. It is standard and appropriate. Without this carveout, the buyer could potentially invoke the MAE closing condition based on customer departures, employee resignations, or supplier renegotiations triggered by the transaction announcement itself — an outcome that would effectively give the buyer an option to walk away based on transaction-specific effects that the buyer's own acquisition caused.

[Annotation — Specific Contract Risks.] This carveout is particularly relevant given certain change-of-control provisions in Cloudium's material contracts. Specifically, the Aegis Federal Solutions Inc. Master SaaS Agreement (representing approximately $84,000,000 in ARR) contains a change-of-control consent requirement that could be triggered by the merger, and the Helix Data Systems GmbH Technology License Agreement contains a termination-for-change-of-control clause. If Aegis Federal Solutions declines to consent or Helix Data Systems exercises its termination right, the resulting loss of revenue would be excluded from the MAE analysis by virtue of this carveout. This is the correct result from a risk-allocation perspective: Solara was aware of these change-of-control provisions during due diligence and priced the transaction accordingly.

[Annotation — Scope Limitation.] Note that this carveout does not apply to representations and warranties that specifically address the consequences of the transaction — for example, the "required consents" representation in Section 4.5 (which addresses consents necessary to consummate the merger without violating existing contractual obligations). This is a standard and important limitation. The carveout also does not apply to representations and warranties expressly qualified by reference to the effects of the announcement or pendency of the transaction (if any). No changes are recommended.

Carveout (i): Actions Taken at Buyer's Request or with Buyer's Consent

(i) any action taken or omitted to be taken by the Company or any of its Subsidiaries (A) at the express written request of, or with the prior written consent of, Buyer or Merger Sub, or (B) expressly required to be taken or omitted to be taken by the Company or any of its Subsidiaries pursuant to this Agreement.

[Annotation.] This carveout is standard and necessary to prevent moral hazard. If Solara requests or consents to an action by the Company that subsequently causes adverse consequences — for example, Solara directs the Company to terminate a particular contract or to refrain from pursuing a business opportunity — it would be inequitable for Solara to then invoke those consequences as a Material Adverse Effect. Similarly, actions that the Merger Agreement itself expressly requires the Company to take (or refrain from taking) — for example, compliance with operating covenants in Article V that restrict the Company's pre-closing conduct — should not give rise to an MAE claim. No changes are recommended.

C. Disproportionate-Impact Exception (Bring-Back)

The MAE Definition includes a "disproportionate impact" qualifier (commonly referred to as a "bring-back") that limits the scope of carveouts (a) through (e). The relevant provision reads as follows:

provided, further, that with respect to clauses (a) through (e) above, such events, changes, effects, developments, conditions, circumstances, or occurrences shall be taken into account in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur to the extent that such events, changes, effects, developments, conditions, circumstances, or occurrences have had, or would reasonably be expected to have, a disproportionate adverse effect on the Company and its Subsidiaries, taken as a whole, as compared to other participants in the industries and geographies in which the Company and its Subsidiaries operate.

[Annotation — Purpose and Significance.] The disproportionate-impact bring-back is a standard and essential buyer protection. It operates as a partial reversal of the carveouts: even though general economic conditions, industry conditions, pandemics, war/terrorism events, and changes in law are ordinarily excluded from the MAE analysis, the differential impact of those events on the Company relative to its peers can still be considered. For example, if a global recession causes a 20% decline in revenue across the cloud ERP industry but Cloudium experiences a 50% decline, the 30-percentage-point differential impact would be "brought back" into the MAE analysis. This ensures that Solara is protected against scenarios in which the Company's idiosyncratic vulnerabilities cause it to suffer disproportionately from otherwise excluded events.

[Annotation — Comparator Group.] The comparator group is defined as "other participants in the industries and geographies in which the Company and its Subsidiaries operate." The reference to "industries" (plural) is appropriate given Cloudium's multi-product business spanning cloud ERP, CRM, business intelligence, and SaaS. The reference to "geographies" is a buyer-favorable feature that appears in only 2 of the 12 comparable precedent transactions reviewed (the remaining 10 reference "industries" only). This geographic component is important given Cloudium's operations in the United States, United Kingdom, India, and Germany. It ensures that a jurisdiction-specific event — for example, a UK regulatory change that disproportionately affects Cloudium relative to other UK-based cloud-software companies, or an Indian tax-law change that disproportionately affects Cloudium Technologies India Pvt. Ltd. relative to other Indian technology companies — is not carved out. We recommend retaining the "and geographies" language and resisting any target-counsel attempt to remove it.

[Annotation — Scope of Application.] The bring-back applies to carveouts (a) through (e) — that is, general economic conditions, industry conditions, pandemics, war/terrorism, and changes in law. It does not apply to carveouts (f) through (i) — stock price, projections, transaction effects, and buyer-directed actions. This asymmetry is standard: the bring-back is conceptually appropriate for systemic or exogenous events (where it makes sense to compare the Company's experience to that of its peers) but not for Company-specific symptoms (stock price, projection misses) or transaction-related effects (which are inherently Company-specific).

[Annotation — Negotiation Risk.] We anticipate that Ridgeway Phelps & Sato LLP will seek to narrow the bring-back, potentially by (i) limiting the comparator group to "direct competitors" rather than "participants in the industries and geographies," (ii) removing the "geographies" reference, or (iii) seeking to eliminate the bring-back entirely for one or more carveouts (most likely the pandemic carveout). We recommend resisting all such attempts. The bring-back as currently drafted reflects the appropriate risk allocation and is consistent with the market majority. See Section VI below for detailed negotiation recommendations.

III. Market Precedent Comparison

A. Methodology

To benchmark the proposed MAE Definition against current market practice, we reviewed the MAE definitions in twelve (12) signed merger agreements from 2022–2023 involving large-cap enterprise software and SaaS acquisitions with enterprise values exceeding $3 billion. All agreements are publicly filed on SEC EDGAR. Supplemental data was drawn from proprietary deal databases and the Greaves & Castellan LLP internal precedent library.

The twelve precedent transactions were selected based on the following criteria:

(i) the target company operated in the cloud computing, enterprise software, or SaaS industry;

(ii) the buyer was either a private equity sponsor or a strategic acquiror;

(iii) the transaction was structured as a Delaware-law reverse triangular merger or a two-step tender offer followed by a back-end merger; and

(iv) the enterprise value of the transaction exceeded $3 billion.

The twelve precedent transactions span a range of deal sizes (from approximately $3.2 billion to approximately $18.7 billion), buyer types (7 private equity sponsors, 5 strategic acquirors), and closing timelines (from approximately 3 months to approximately 9 months). The selected transactions represent a reasonable cross-section of current market practice for large-cap software M&A transactions.

B. Summary of Precedent Analysis

The following table summarizes the key features of the MAE definitions in each of the twelve precedent transactions. Transactions are identified by deal number to preserve confidentiality where appropriate.

Key Findings:

1. Universal carveouts. All 12 precedent transactions include carveouts for pandemics, war/terrorism, changes in law, stock-price changes, projection misses, transaction effects, and buyer-directed actions. The C&H draft is consistent with market on all of these dimensions.

2. Cyberattack placement. Nine of 12 precedent transactions include cyberattack within the war/terrorism carveout (as does the C&H draft); the remaining 3 have a standalone cyberattack carveout. Two of the 9 transactions that include cyberattack within the war/terrorism carveout added a qualifier excluding targeted cyberattacks on the company specifically — a more buyer-favorable formulation that we recommend Solara pursue.

3. "Proposals" in changes-in-law carveout. Eleven of 12 precedent transactions include "proposals" to change law within the changes-in-law carveout (as does the C&H draft). Only 2 transactions limit coverage to enacted or adopted changes. The C&H draft is consistent with the market majority.

4. Disproportionate-impact bring-back. All 12 precedent transactions include a disproportionate-impact bring-back for the general economic, industry, pandemic, war/terrorism, and changes-in-law carveouts. The C&H draft is consistent. However, only 2 of 12 include the "and geographies" language in the comparator group. The C&H draft's inclusion of "and geographies" is a buyer-favorable feature.

5. Missing carveouts. Two of 12 precedent transactions include a separate natural disaster / force majeure carveout, which the C&H draft does not include. Four of 12 include a separate sanctions / trade restrictions carveout. We recommend proactively adding both (subject to the disproportionate-impact bring-back) to demonstrate reasonableness and preempt target-counsel requests. Three of 12 include a separate credit-rating changes carveout. None of the 12 include a seasonal fluctuations carveout.

6. Ability-to-close prong. Eleven of 12 precedent transactions include an ability-to-close prong (clause (ii) of the base definition). The C&H draft is consistent with the market majority.

7. Quantitative threshold. None of the 12 precedent transactions uses a quantitative threshold (e.g., a specified percentage decline in revenue or EBITDA) for the MAE definition itself. The standard remains qualitative throughout.

C. Specific Precedent Points

Pandemic Carveout. The market standard for the pandemic carveout is broad language encompassing both the disease event and all governmental responses thereto. Three of the 12 precedent transactions still include specific references to "COVID-19" or "SARS-CoV-2" alongside generic "pandemic/epidemic" language; the remaining 9 have moved to purely generic formulations. The C&H draft includes both specific COVID-19 references and generic pandemic/epidemic language, which is the most comprehensive approach and ensures coverage regardless of the specific pathogen involved. There is no market basis for narrowing this carveout, and we do not expect meaningful pushback from target counsel.

War and Cyberattack

The trend in recent transactions has been toward including cyberattack within the war/terrorism carveout, reflecting the growing recognition that state-sponsored and quasi-military cyber operations share characteristics with traditional armed conflict. However, as noted above, 2 recent 2023 precedent transactions have added a qualifier to the cyberattack carveout: "other than a cyberattack targeted specifically at the Company or its systems." This qualifier creates a meaningful distinction between (a) widespread or indiscriminate cyberattacks (e.g., a state-sponsored attack affecting cloud infrastructure providers generally, or a ransomware campaign affecting hundreds of enterprises across multiple industries) and (b) a targeted attack specifically directed at Cloudium's systems, data, or operations.

Given that Cloudium is a cloud-native SaaS provider whose business fundamentally depends on the integrity and availability of its technology platform, a targeted cyberattack could have severe consequences: loss of customer data, regulatory enforcement actions (including under GDPR and the UK Data Protection Act 2018), reputational harm, customer churn, and business interruption. If such a targeted attack were excluded from the MAE analysis, Solara would bear the full risk of a potentially catastrophic event without recourse under either the closing condition or the post-closing indemnification regime.

Recommendation. Solara should affirmatively propose the targeted-cyberattack exclusion from the carveout. We recommend the following formulation:

"provided that this clause (d) shall not apply to any cyberattack, cybersecurity incident, or similar event specifically targeted at the Company or any of its Subsidiaries or their respective information technology systems, networks, or data;"

This is the single most important buyer-favorable negotiation point on the MAE Definition given Cloudium's technology profile. We anticipate resistance from Ridgeway Phelps & Sato LLP on this point, as target counsel will argue that the disproportionate-impact bring-back already provides adequate protection. However, the bring-back requires Solara to demonstrate that the targeted attack had a disproportionate impact relative to industry peers — a comparison that may be difficult or meaningless in the context of a uniquely targeted event. The targeted-cyberattack exclusion provides a cleaner and more direct protection.

Changes in Law — "Proposals"

The inclusion of "proposals" to adopt, modify, or repeal law is a seller-favorable feature that extends the carveout beyond enacted or adopted changes to cover mere legislative or regulatory proposals. While 11 of 12 precedent transactions include this language, 3 of the 12 limit coverage to "enacted" or "adopted" changes only. The seller-favorable rationale for including "proposals" is that the mere prospect of a legal change — for example, a congressional bill to impose new data-privacy regulations on cloud-computing providers — can create market uncertainty and affect the Company's business environment, even before (and regardless of whether) the proposal is ultimately enacted.

From Solara's perspective, the "proposals" language is acceptable as drafted. It reflects the market-majority position and does not significantly undermine Solara's protections given the availability of the disproportionate-impact bring-back. However, if target counsel seeks to broaden this carveout to include "contemplated," "discussed," or "informally proposed" changes — language that would capture even informal policy discussions by government officials — we should resist such expansion.

Disproportionate-Impact Comparator Group

As noted above, 10 of 12 precedent transactions use a comparator group defined as "other participants in the industries in which the Company operates" (or substantially similar language). Only 2 of 12 add the "and geographies" qualifier that appears in the C&H draft. The "and geographies" language is a slightly more buyer-favorable formulation because it narrows the comparator group by requiring a jurisdiction-specific comparison. For example, if a change in UK tax law disproportionately affects Cloudium relative to other UK cloud-software companies, the "and geographies" language ensures that the comparison is made against UK-based peers rather than a global peer set.

Recommendation. The "and geographies" language should be retained. We anticipate that target counsel will seek its removal on the ground that it is outside the market mainstream. However, its inclusion is justified by Cloudium's multi-jurisdictional operational footprint and the associated risk of jurisdiction-specific adverse events. We should be prepared to defend this language with reference to Cloudium's significant UK operations (approximately $390 million in revenue) and the particular regulatory environments in which it operates.

Quantitative vs. Qualitative Standard

None of the 12 precedent transactions employs a quantitative threshold or bright-line test for the MAE definition. The standard remains qualitative throughout the market. This is consistent with Delaware Court of Chancery jurisprudence, which evaluates MAE claims based on the totality of circumstances rather than any single financial metric. The absence of a quantitative threshold preserves maximum flexibility for the buyer in asserting an MAE claim and avoids the risk that a bright-line test could be manipulated by the seller (for example, through aggressive accounting treatment or one-time charges designed to remain just above the threshold).

Recommendation. If target counsel proposes the addition of a quantitative floor — for example, a requirement that a Material Adverse Effect involve a decline of at least 20% in revenue or EBITDA — we should firmly resist. Such a threshold would fundamentally alter the risk allocation and could preclude Solara from asserting an MAE claim even in circumstances involving severe and durable business deterioration that falls marginally short of the specified percentage. The qualitative standard is the market standard and the appropriate standard for this transaction.

IV. Interaction with Closing Condition

A. Closing Condition — No MAE

Section 7.2(a) of the draft Merger Agreement conditions the obligations of Solara and Merger Sub to consummate the merger on the satisfaction (or waiver by Solara) of the following condition, among others:

"Since the date of this Agreement, no Material Adverse Effect shall have occurred and be continuing as of the Closing Date."

This is a standard formulation. The phrase "occurred and be continuing" requires that the Material Adverse Effect not only have occurred but also remain extant as of the closing date. This temporal requirement means that a transient adverse event that has been fully remediated before closing would not satisfy the condition, while a durable adverse event that persists through closing would.

Interim Period Risk. The interim period between signing and closing is expected to be substantial. Assuming signing on or about January 22, 2024, the principal regulatory milestones and events during the interim period include:

• HSR Filing: Expected February 9, 2024 (30-day initial waiting period, subject to potential second request)

• CMA Filing (UK Competition and Markets Authority): Expected February 12, 2024

• Cloudium Stockholder Approval: Required under Section 7.1(a); stockholder meeting expected in Q2 2024

• Outside Date: June 30, 2024 (subject to extension provisions in Section 8.1(b))

• Anticipated Closing: Approximately 5–6 months post-signing (actual closing occurred on July 9, 2024, approximately 5.5 months after signing)

During this extended interim period, Cloudium's business will be subject to a wide range of risks — macroeconomic conditions, competitive dynamics, customer churn, employee retention, product-development setbacks, cybersecurity threats, and regulatory changes, among others. The MAE closing condition, read in conjunction with the MAE Definition and its carveouts, determines the scope of Solara's protection against these risks. An overly broad set of carveouts could effectively eliminate Solara's ability to decline to close based on adverse developments, even in scenarios involving significant business deterioration.

B. Bring-Down of Representations

Section 7.2(b) of the draft Merger Agreement conditions closing on the accuracy of Cloudium's representations and warranties at signing and at closing (the "bring-down" condition). Many of Cloudium's representations and warranties in Article IV are qualified by the phrase "except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect." The interaction between the MAE qualifier in the representations and the bring-down standard creates a potential "double materiality" issue.

Double Materiality Explained. If a representation is already qualified by the MAE standard (i.e., the representation is true "except as would not reasonably be expected to have a Material Adverse Effect"), and the bring-down condition requires such representation to be true "in all material respects," the combined effect could be that a breach must be both "material" (under the bring-down standard) and constitute a "Material Adverse Effect" (under the representation qualifier) before the closing condition is failed. This double-materiality threshold could render the MAE qualifier effectively meaningless, because the "in all material respects" bring-down standard would already screen out immaterial inaccuracies.

Recommendation. To avoid the double-materiality problem, we recommend the following approach in the bring-down condition:

• For representations that are not qualified by MAE: the bring-down standard should be "true and correct in all material respects" as of the closing date.

• For representations that are qualified by MAE: the bring-down standard should be "true and correct in all respects" as of the closing date (with the MAE qualifier within the representation itself serving as the sole materiality filter).

This approach ensures that the MAE qualifier retains independent significance and that the closing condition provides meaningful protection for Solara. We note that this is the more buyer-favorable formulation and may face pushback from target counsel, but it is increasingly common in large-cap transactions and is supportable as a matter of drafting logic.

V. Interaction with Indemnification and R&W Insurance

A. Indemnification

Article IX of the Merger Agreement provides for post-closing indemnification in favor of Solara and its affiliates (including the surviving company) for, among other things, breaches of Cloudium's representations and warranties in Article IV. The key indemnification parameters are as follows:

Impact of MAE Carveouts on Indemnification. The breadth of the MAE carveouts directly affects the scope of indemnifiable breaches. Because many of Cloudium's representations and warranties in Article IV are qualified by the MAE standard, events that fall within one of the enumerated carveouts are excluded from the MAE analysis and therefore cannot give rise to a breach of an MAE-qualified representation. This means that a broader carveout regime narrows the universe of post-closing indemnification claims available to Solara.

Consider, for example, Cloudium's representation in Section 4.8 that, since September 30, 2023, no event has occurred that has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. If a pandemic occurs during the interim period and severely impacts Cloudium's business, carveout (c) would exclude the pandemic's effects from the MAE analysis (subject to the disproportionate-impact bring-back). As a result, Solara could not assert a breach of Section 4.8 based on the pandemic's effects, and no indemnification claim would be available for losses attributable to the pandemic's impact on the business.

Recommendation. The MAE Definition must strike the right balance. On one hand, the carveouts serve legitimate risk-allocation purposes by protecting the seller against events beyond its control. On the other hand, overly broad carveouts can undermine the buyer's post-closing indemnification protection and effectively transfer all business risk to the buyer once the transaction closes. We believe the current draft strikes an appropriate balance, with the disproportionate-impact bring-back providing a meaningful safety valve. However, as discussed in Section VI below, we recommend that Solara push for the targeted-cyberattack exclusion and resist any target-counsel attempt to further broaden the carveouts or narrow the bring-back.

B. R&W Insurance

Solara has procured a buyer-side representations and warranties insurance policy from Northfield Assurance Ltd. The key policy parameters are as follows:

R&W Insurance Underwriting Considerations. The Northfield Assurance underwriting team will scrutinize the MAE Definition during the underwriting process, which was initiated on January 10, 2024. R&W insurers typically evaluate the MAE Definition from two perspectives:

(i) Breadth of Coverage. Insurers generally prefer a well-drafted MAE definition with standard carveouts and a disproportionate-impact bring-back, because such a definition provides certainty and predictability regarding the scope of covered representations and warranties. An MAE definition with unusual or excessively broad carveouts may result in the insurer imposing policy exclusions or increasing the retention to account for the broader risk transfer away from the seller.

(ii) Claims Exposure. Insurers assess the likelihood and potential magnitude of claims arising from MAE-qualified representations. If the carveouts are so broad that virtually no event could constitute a Material Adverse Effect, the insurer may conclude that the MAE-qualified representations provide limited coverage and may price the policy accordingly or impose coverage restrictions.

Recommendation. We recommend coordinating closely with Peregrine Advisory Group LLC (Timothy Gallagher, broker) and Northfield Assurance Ltd. (Patrick Graves, lead underwriter) during the R&W underwriting process to confirm that the MAE Definition as drafted — and as ultimately negotiated with target counsel — is acceptable from an insurance-coverage perspective. Specifically, we should:

(a) share the final negotiated MAE Definition with the Northfield underwriting team promptly following execution of the Merger Agreement;

(b) confirm that the carveout regime does not trigger any policy exclusions or additional retention requirements;

(c) discuss with the underwriting team the targeted-cyberattack exclusion that Solara intends to negotiate, as this exclusion may be viewed favorably by the insurer (because it narrows the carveouts and thereby broadens the scope of covered claims); and

(d) ensure that the R&W policy definitions of "Loss" and "Breach" are consistent with the Merger Agreement's MAE Definition and indemnification provisions.

VI. Anticipated Target-Counsel Positions and Negotiation Strategy

A. Expected Pushback from Ridgeway Phelps & Sato LLP

Based on prior dealings with Catherine Answorth (lead M&A partner at Ridgeway Phelps & Sato LLP) and observed market trends, we anticipate the following requests in Ridgeway Phelps's markup of the MAE Definition:

1. Additional Carveouts

Target counsel is likely to request the addition of carveouts for the following categories:

(a) Natural Disasters / Force Majeure. Events such as earthquakes, hurricanes, floods, fires, tsunamis, volcanic eruptions, and other natural disasters or acts of God. Two of the 12 precedent transactions include such a carveout. This request has a reasonable market basis.

(b) Sanctions / Trade Restrictions. Changes in economic sanctions, export controls, trade embargoes, or similar restrictions imposed by any governmental authority. Four of the 12 precedent transactions include such a carveout. This request has a reasonable market basis, particularly given Cloudium's international operations.

(c) Changes in Credit Ratings. Any change in the credit rating of the Company or any of its Subsidiaries (or any downgrade in the credit rating of the Company's or any Subsidiary's indebtedness). Three of the 12 precedent transactions include such a carveout. This request has some market basis but is less common.

(d) Seasonal Fluctuations. Fluctuations in revenue, earnings, or other financial metrics attributable to seasonal patterns in the Company's business. None of the 12 precedent transactions include such a carveout. This request has no market basis.

2. Broadening of Existing Carveouts

Target counsel may seek to broaden existing carveouts in the following ways:

(a) Expanding the pandemic carveout to include all public-health measures and responses by any governmental authority, regardless of whether the disproportionate-impact bring-back applies. This would effectively eliminate the bring-back for the pandemic carveout.

(b) Expanding the changes-in-law carveout to include "contemplated" or "informally proposed" changes in law, in addition to the "proposals" already covered.

(c) Broadening the transaction-effects carveout to include effects arising from any financing obtained or sought in connection with the transaction (relevant if Solara's financing arrangements create market disruption or supplier concern).

3. Narrowing the Disproportionate-Impact Bring-Back

This is the most strategically significant area of anticipated pushback. Target counsel may seek to:

(a) Narrow the comparator group from "other participants in the industries and geographies in which the Company and its Subsidiaries operate" to "direct competitors of the Company" or "companies of similar size and scope operating in the same industry." This would make the disproportionate-impact showing more difficult for Solara by limiting the peer set to a smaller group of closely comparable companies.

(b) Remove the "and geographies" language from the comparator group, reverting to the more common formulation that references industries only.

(c) Eliminate the bring-back for one or more carveouts, most likely the pandemic carveout (on the ground that pandemic effects are inherently unpredictable and should be fully allocated to the buyer).

4. Eliminating or Narrowing the Ability-to-Close Prong

Target counsel may argue that clause (ii) of the base definition — the "ability to close" prong — is duplicative of the closing conditions set forth in Article VII and should be removed. The argument would be that regulatory blocks and legal impediments are already addressed through the specific closing conditions relating to governmental approvals (Section 7.1(b)) and absence of injunctions (Section 7.1(c)), rendering clause (ii) unnecessary.

B. Recommended Positions for Solara

Based on the foregoing analysis, we recommend the following negotiation positions:

1. Natural Disaster / Force Majeure Carveout

Position: Acceptable, subject to the disproportionate-impact bring-back.

We recommend proactively including a natural disaster / force majeure carveout in the next iteration of the draft, subject to the disproportionate-impact bring-back. This demonstrates reasonableness and preempts a predictable target-counsel request, which may generate goodwill that can be deployed on more significant negotiation points (particularly the targeted-cyberattack exclusion). The proposed carveout language is as follows:

"(j) any hurricane, tornado, earthquake, flood, tsunami, wildfire, or other natural disaster, weather condition, or act of God;"

This carveout should be added to the list of carveouts subject to the disproportionate-impact bring-back (i.e., carveouts (a) through (e), which would become (a) through (f) with the addition of this new carveout).

2. Sanctions / Trade Restrictions Carveout

Position: Acceptable, subject to the disproportionate-impact bring-back.

Given Cloudium's international operations in the United States, United Kingdom, India, and Germany, a carveout for changes in sanctions and trade restrictions is reasonable. Cloudium's operations in these jurisdictions expose the Company to the sanctions regimes of multiple governmental authorities (including OFAC, HMT, and the EU). A change in sanctions that broadly affects technology companies doing business internationally should not, standing alone, constitute a Material Adverse Effect. However, if such a change disproportionately affects Cloudium relative to its peers, the bring-back should apply. We recommend the following formulation:

"(k) any adoption, implementation, or modification of, or any change in, any economic sanction, export control, trade embargo, or similar restriction imposed by any Governmental Authority;"

3. Credit-Rating Changes Carveout

Position: Acceptable, with "symptom versus cause" proviso.

Consistent with the stock-price carveout (clause (f)) and the projections carveout (clause (g)), a carveout for changes in credit ratings is acceptable provided it includes the standard proviso that the underlying cause of the rating change is not excluded. The proposed language is:

"(l) any change in, or withdrawal of, any credit rating or financial strength rating of the Company or any of its Subsidiaries or any of their respective Indebtedness; provided that the underlying cause or causes of such change or withdrawal shall not, by operation of this clause (l), be excluded from the determination of whether a Material Adverse Effect has occurred;"

4. Seasonal Fluctuations

Position: Resist.

Cloudium is a SaaS business with a predominantly recurring revenue model. Annual recurring revenue was approximately $1,740,000,000 as of December 31, 2023 (estimated), representing approximately 107% of LTM revenue — reflecting the growing ARR base. SaaS subscription revenue is recognized ratably over the contract term and is not subject to significant seasonal variation. While Cloudium may experience some quarterly fluctuation in new bookings or professional services revenue, these fluctuations are modest and well within normal operating patterns. A seasonal-fluctuations carveout is unnecessary for a business with Cloudium's revenue profile and could be abused by the seller to shield genuine business deterioration as purportedly "seasonal" effects. We should firmly resist any request for this carveout.

5. Narrowing the Disproportionate-Impact Comparator Group

Position: Resist firmly.

The comparator group — "other participants in the industries and geographies in which the Company and its Subsidiaries operate" — is the correct standard and must be retained. The reference to "industries" (plural) reflects Cloudium's multi-product business across cloud ERP, CRM, business intelligence, and SaaS, and ensures that the comparator group is broad enough to encompass the Company's competitive landscape. The reference to "geographies" ensures that jurisdiction-specific adverse events are evaluated against a geographically relevant peer set.

We anticipate that target counsel will propose narrowing the comparator group to "direct competitors" or similar language. This would be problematic for several reasons:

(a) Cloudium operates across multiple product categories and market segments, making it difficult to identify a definitive set of "direct competitors."

(b) A narrow comparator group could be manipulated by the seller post-signing (e.g., by arguing that a particular peer is or is not a "direct competitor" depending on the circumstances).

(c) A narrow comparator group may not include a sufficient number of companies to provide a statistically meaningful comparison, particularly in niche market segments.

(d) The "industries and geographies" formulation is the standard used in 2 of 12 precedent transactions and is consistent with market practice, albeit at the buyer-favorable end of the spectrum.

If target counsel insists on narrowing the comparator group, we could offer as a fallback the addition of clarifying language such as "including companies of comparable size, scope, and geographic footprint," but we should not concede the removal of either "industries" or "geographies."

6. Eliminating the Ability-to-Close Prong

Position: Resist.

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT THIS MEMORANDUM IS PROTECTED BY THE ATTORNEY-CLIENT PRIVILEGE AND THE WORK PRODUCT DOCTRINE. IT IS INTENDED SOLELY FOR THE USE OF THE ADDRESSEES AND SHOULD NOT BE DISCLOSED TO ANY THIRD PARTY WITHOUT THE PRIOR WRITTEN CONSENT OF Drummond & Fenwick LLP.
Drummond & Fenwick LLP 125 Broad Street New York, New York 10004
INTERNAL MEMORANDUM
December 22, 2023
FROM: Tiffany Rosenthal, Associate, Mergers & Acquisitions
TO: Harrison Wexford, Responsible Partner, Mergers & Acquisitions Beatrice Holloway, Billing Partner, Mergers & Acquisitions
CC: Andrew Fitzpatrick, Associate, Mergers & Acquisitions
RE: Annotated Analysis of "Material Adverse Effect" Definition and Carveouts — Agreement and Plan of Merger among Cloudium Technologies plc, Stratos Merger Sub Inc., and Solara Digital Infrastructure Fund VI LP
MATTER NO.: 1041-00003
CLIENT: Solara Digital Infrastructure LP
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I. Executive Summary and Purpose
This memorandum provides an internal analysis of the "Material Adverse Effect" definition (the "MAE Definition") as drafted in Section 1.1 of the initial draft Agreement and Plan of Merger (the "Merger Agreement") circulated to Ridgeway Phelps & Sato LLP, counsel to Cloudium Technologies plc ("Cloudium" or the "Company"), on December 1, 2023. The purpose of this memorandum is to equip the deal team with a comprehensive understanding of the MAE Definition's construction, its alignment with current market precedent, and its interactions with other critical provisions of the Merger Agreement, in advance of anticipated markup by target counsel.
Transaction Overview. The proposed transaction is a $6,800,000,000 reverse triangular merger in which Stratos Merger Sub Inc. ("Merger Sub"), a newly formed Delaware corporation and wholly owned subsidiary of Solara Digital Infrastructure Fund VI LP ("Solara" or the "Buyer"), will merge with and into Cloudium Technologies plc (Nasdaq: CLDM), with Cloudium surviving as a wholly owned subsidiary of Solara. Each share of Cloudium common stock (approximately 184,200,000 shares outstanding) will be converted into the right to receive per-share cash consideration of approximately $36.92. The transaction implies an enterprise value-to-EBITDA multiple of approximately 16.8x based on Cloudium's last-twelve-months ("LTM") EBITDA of approximately $405,000,000.
Significance of the MAE Definition. The MAE Definition is among the most consequential provisions of the Merger Agreement because it serves as a central risk-allocation mechanism across multiple operative provisions:
(a) Representation and Warranty Qualification. The MAE Definition qualifies key seller representations and warranties set forth in Article IV of the Merger Agreement, including representations concerning the absence of certain changes since September 30, 2023 (the date of Cloudium's most recent audited interim financial statements), the accuracy of financial statements, the absence of undisclosed liabilities, and the condition of material contracts. The scope of the MAE Definition directly determines the threshold at which adverse events give rise to representation breaches.
(b) Closing Condition. Section 7.2(a) of the Merger Agreement conditions Solara's and Merger Sub's obligation to consummate the merger on the absence of a "Material Adverse Effect" having occurred between the date of the Merger Agreement and the closing date. Given the anticipated interim period of several months (with an outside date of June 30, 2024), this closing condition represents a critical protection for Solara against significant deterioration in Cloudium's business during the pre-closing period.
(c) Indemnification and R&W Insurance. The MAE Definition interacts with the indemnification regime set forth in Article IX, which provides for post-closing recourse for breaches of representations and warranties subject to a general cap of 15% of deal value ($1,020,000,000), an escrow of 8% of deal value ($544,000,000), and an 18-month survival period. Additionally, the buyer-side representations and warranties insurance policy to be issued by Northfield Assurance Ltd. (Policy No. NFA-TRI-2024-00487, $680,000,000 limit) will key off the MAE Definition for purposes of evaluating covered losses. The breadth of the carveouts in the MAE Definition directly affects the recoverability of post-closing claims under both the contractual indemnification provisions and the R&W insurance policy.
Scope of Analysis. This memorandum (i) sets forth the full text of the proposed MAE Definition with clause-by-clause annotations, (ii) compares the proposed definition against current market precedent in large-cap software and technology acquisitions (12 comparable transactions with enterprise values exceeding $3 billion, signed in 2022–2023), (iii) analyzes the interaction of the MAE Definition with the closing conditions, indemnification provisions, and R&W insurance policy, (iv) identifies anticipated negotiation positions from Ridgeway Phelps & Sato LLP (Catherine Answorth, lead M&A partner) and recommends responsive positions for Solara, and (v) discusses relevant Delaware law considerations.
Jurisdictional Note. Cloudium is incorporated under the laws of England and Wales but is listed on the Nasdaq Global Select Market and reports under IFRS with US GAAP reconciliation. The Merger Agreement is governed by the laws of the State of Delaware. This dual-jurisdiction profile informs certain aspects of the MAE Definition, including the carveout for changes in accounting standards (which must address both IFRS and GAAP), the carveout for changes in law (which must encompass UK, US, Indian, and German regulatory regimes), and the disproportionate-impact comparator group (which must reflect the geographies in which Cloudium operates). English court precedent on material adverse change clauses is not directly applicable to interpretation of the MAE Definition under Delaware law, but may be relevant to the interpretation of analogous provisions in Cloudium's existing commercial agreements, some of which are governed by English law.
II. Text of the Proposed "Material Adverse Effect" Definition
Set forth below is the complete text of the MAE Definition as drafted in Section 1.1 of the December 1, 2023 draft of the Merger Agreement, together with clause-by-clause annotations. Annotations appear in italicized text following the relevant clause and are identified by the prefix "[Annotation]." A clean copy of the full definition with margin annotations is attached as Appendix A.
A. Base Definition
The proposed base definition reads as follows:
"Material Adverse Effect" means any event, change, effect, development, condition, circumstance, or occurrence (each, an "MAE Event") that, individually or in the aggregate with all other MAE Events, has had or would reasonably be expected to have a material adverse effect on:
(i) the business, assets, liabilities, results of operations, or financial condition of the Company and its Subsidiaries (including Cloudium Technologies UK Ltd., Cloudium Technologies India Pvt. Ltd., and Cloudium Solutions GmbH), taken as a whole; or
(ii) the ability of the Company to consummate the Transactions contemplated by this Agreement;
provided, however, that, solely for purposes of clause (i) of this definition, none of the following, and no event, change, effect, development, condition, circumstance, or occurrence arising out of or resulting from any of the following, shall be taken into account in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur:
[Annotation — Base Definition, Generally.] The opening language employs the comprehensive catalogue of covered events ("event, change, effect, development, condition, circumstance, or occurrence") that is standard across virtually all large-cap M&A transactions. The phrase "individually or in the aggregate" ensures that multiple individually non-material events may be considered collectively. The temporal standard — "has had or would reasonably be expected to have" — covers both events that have already manifested and those with a forward-looking reasonable likelihood of materializing. This dual temporal reach is standard and appropriate.
[Annotation — "Taken as a Whole" Qualifier.] The "taken as a whole" modifier in clause (i) is standard and essential. It ensures that the MAE analysis focuses on the consolidated enterprise rather than any individual subsidiary, product line, geography, or business segment. Given Cloudium's scale — LTM Revenue of approximately $1,620,000,000, annual recurring revenue ("ARR") of approximately $1,740,000,000 as of December 31, 2023 (estimated), and approximately 6,800 employees operating across the United States, United Kingdom, India, and Germany — an event affecting a single subsidiary or product line (for example, a decline in Cloudium Technologies India Pvt. Ltd.'s operations) would need to be evaluated in the context of the overall consolidated business. This qualification benefits the seller, as adverse developments in one segment may be offset by stable or positive performance elsewhere. We believe this qualifier is appropriate and market-standard and do not recommend seeking its removal.
[Annotation — Prong (ii): Ability to Close.] Clause (ii) is the "ability to close" prong, which addresses the Company's capacity to consummate the transactions contemplated by the Merger Agreement. This prong is conceptually distinct from clause (i) and is narrower in scope. It is directed primarily at legal impediments, regulatory blocks, or corporate-authority failures — for example, a scenario in which a governmental authority enjoins the Company from consummating the merger, or the Company's board of directors lacks the requisite authority to approve the transaction. This prong is not subject to the enumerated carveouts, which apply only "for purposes of clause (i)." This asymmetry is deliberate and buyer-favorable: even if a change in law would ordinarily be carved out under clause (i), if that change in law renders the Company legally unable to consummate the merger, it may still constitute a Material Adverse Effect under clause (ii). We recommend retaining prong (ii) and anticipate that target counsel may seek its removal or narrowing.
B. Enumerated Carveouts (Exceptions to MAE)
The MAE Definition contains nine enumerated carveouts, each of which excludes certain categories of events from the MAE analysis under clause (i). Each carveout is set forth below with annotations.
Carveout (a): General Economic and Market Conditions
(a) changes in general economic, financial, credit, or securities market conditions (including changes in interest rates, exchange rates, credit spreads, or commodity prices);
[Annotation.] This carveout is standard and appears in virtually all large-cap M&A transactions. Its purpose is to exclude from the MAE analysis deterioration in the general macroeconomic environment — for example, a recession, a rise in interest rates, a widening of credit spreads, or a decline in equity markets — that affects market participants broadly rather than the Company specifically. The parenthetical reference to exchange rates is particularly relevant here given Cloudium's significant UK operations (Cloudium Technologies UK Ltd. generated approximately £312,000,000, or approximately $390,000,000 at $1.25/£, in revenue during the LTM period), as well as its India and Germany operations, which expose the Company to INR/USD and EUR/USD exchange-rate risk. The parenthetical reference to commodity prices is less directly relevant to Cloudium's software business but is standard boilerplate and does no harm. This carveout is subject to the disproportionate-impact bring-back discussed in Section II.C below, which preserves Solara's protection if macroeconomic conditions affect Cloudium disproportionately relative to its industry peers.
Carveout (b): Industry Conditions
(b) changes or conditions generally affecting the industries in which the Company and its Subsidiaries operate (including the cloud enterprise resource planning, customer relationship management, business intelligence, and software-as-a-service industries);
[Annotation.] This carveout is standard and excludes industry-wide headwinds — for example, a sector-wide decline in enterprise IT spending, increased price competition among SaaS vendors, or a general slowdown in cloud-migration activity — from the MAE analysis. The parenthetical identifies the specific industry segments in which Cloudium operates (cloud ERP, CRM, business intelligence, and SaaS). We should resist any target-counsel attempt to expand this parenthetical to include additional industry segments or, conversely, to narrow it to exclude specific sub-segments. The current formulation is appropriately calibrated. As with carveout (a), this carveout is subject to the disproportionate-impact bring-back, ensuring that Solara retains protection if Cloudium is hit harder than its industry peers by a general industry downturn.
Carveout (c): Pandemics
(c) any pandemic, epidemic, or disease outbreak (including COVID-19, SARS-CoV-2, and any mutation, variation, or evolution thereof), or any governmental or regulatory response thereto, including any quarantine, "shelter in place," "stay at home," workforce reduction, social distancing, shut-down, closure, sequester, safety, or similar law, directive, guidelines, order, restriction, or recommendation by any Governmental Authority;
[Annotation.] This carveout is now standard in virtually all large-cap M&A transactions following the COVID-19 pandemic. The C&H draft includes broad language that encompasses not only the disease event itself but also the full range of governmental and regulatory responses, which is appropriate and consistent with market practice. The specific reference to "COVID-19, SARS-CoV-2, and any mutation, variation, or evolution thereof" is included for the avoidance of doubt, though some recent 2023 transactions have begun moving toward generic "pandemic/epidemic" language without specific COVID-19 references. We note that 3 of the 12 comparable precedent transactions reviewed still include specific COVID-19 references, while the remaining 9 use generic language only. Our formulation — which includes both generic and specific language — is the most comprehensive approach and we recommend retaining it. This carveout is subject to the disproportionate-impact bring-back.
Carveout (d): War, Terrorism, and Hostilities
(d) any act of war (whether or not declared), armed hostilities, sabotage, terrorism, cyberattack, or military action, or any escalation or worsening of the foregoing, or any governmental or regulatory response thereto;
[Annotation — General.] This carveout is standard and excludes from the MAE analysis the effects of armed conflict, terrorism, and similar geopolitical events. The inclusion of "any escalation or worsening of the foregoing" is important because it captures not only the initial occurrence of such events but also their intensification over the interim period.
[Annotation — Cyberattack.] The inclusion of "cyberattack" within this carveout is a significant negotiation point. While the inclusion of cyberattack in the war/terrorism carveout has become increasingly common — appearing in 9 of the 12 comparable precedent transactions we reviewed — it raises a meaningful concern for Solara given Cloudium's business profile. Cloudium is a cloud-native SaaS provider whose business fundamentally depends on the integrity, availability, and security of its technology systems and the enterprise data hosted on its platform. A targeted cyberattack on Cloudium specifically (as distinguished from a widespread cyber event affecting multiple entities) could have devastating consequences for the Company's business, customer relationships, and reputation. If such a targeted attack were excluded from the MAE analysis by virtue of carveout (d), Solara would have no recourse under the MAE closing condition or the MAE-qualified representations and warranties.
We note that 2 recent 2023 comparable transactions included a qualifier to the cyberattack carveout: "other than a cyberattack targeted specifically at the Company or its systems." This formulation preserves the carveout for widespread or indiscriminate cyber events (e.g., a state-sponsored attack affecting a broad range of enterprises) while ensuring that a targeted, Company-specific attack falls back into the MAE definition. We recommend that Solara affirmatively push for this targeted-cyberattack exclusion from the carveout. This is the single most important buyer-favorable negotiation point on the MAE Definition given Cloudium's technology profile. This carveout is subject to the disproportionate-impact bring-back.
Carveout (e): Changes in Law or Regulation
(e) any adoption, implementation, promulgation, repeal, modification, amendment, reinterpretation, or change in interpretation of, or any proposal to adopt, implement, promulgate, repeal, modify, amend, reinterpret, or change the interpretation of, any Law (including any applicable Tax law) or any rule, regulation, order, directive, or guidance of any Governmental Authority (including changes in applicable accounting standards under GAAP, IFRS, or other applicable accounting principles);
[Annotation — General.] This carveout excludes from the MAE analysis changes in the legal and regulatory environment. It is standard and appears in all 12 comparable precedent transactions reviewed. The carveout encompasses the full life cycle of a legal change — adoption, implementation, promulgation, repeal, modification, amendment, and reinterpretation — and is appropriately broad.
[Annotation — "Proposals."] The carveout extends to "proposals" to adopt, modify, or repeal law. This is a seller-favorable feature because it excludes from the MAE analysis a mere legislative or regulatory proposal that has not yet been enacted or adopted. A proposed change in law could cause significant market uncertainty or disrupt the Company's business even before it takes effect. Eleven of the 12 comparable precedent transactions include "proposals" in the changes-in-law carveout, and only 3 limit coverage to "enacted" or "adopted" changes. Accordingly, the inclusion of "proposals" is consistent with the market majority. We recommend retaining this language as drafted. However, if target counsel seeks to broaden this carveout further (for example, by adding "contemplated" or "discussed" changes), we should resist.
[Annotation — Accounting Standards.] The parenthetical reference to "changes in applicable accounting standards under GAAP, IFRS, or other applicable accounting principles" is important given Cloudium's dual reporting framework. As an English company listed on Nasdaq, Cloudium prepares its primary financial statements under IFRS and provides reconciliation to US GAAP for SEC reporting purposes. Changes in either IFRS or GAAP standards could affect the Company's reported financial metrics. The inclusion of both accounting frameworks is appropriate and necessary.
[Annotation — Tax Law.] The parenthetical reference to "any applicable Tax law" is critical given the cross-border structure of the transaction and Cloudium's operations in the United States, United Kingdom, India, and Germany. Changes in tax law in any of these jurisdictions could materially affect the Company's effective tax rate, cash flows, and post-tax earnings. We recommend that Leonard Cross (Tax) review this carveout and its interaction with the tax indemnity provisions in Article IX to ensure consistency and to identify any tax-specific issues that may warrant separate treatment. This carveout is subject to the disproportionate-impact bring-back.
Carveout (f): Changes in Company Stock Price or Trading Volume
(f) any change in the market price or trading volume of the shares of Company Common Stock on the Nasdaq Global Select Market; provided that the underlying cause or causes of such change shall not, by operation of this clause (f), be excluded from the determination of whether a Material Adverse Effect has occurred;
[Annotation.] This is a standard "stock price" carveout with the equally standard "symptom versus cause" proviso. The carveout recognizes that a decline in stock price is a market reaction — a symptom — rather than an underlying business event. Excluding stock-price declines per se from the MAE analysis is appropriate because stock prices are influenced by a wide range of factors, many of which are unrelated to the Company's fundamental business performance. However, the proviso ensures that the root cause of a stock-price decline (for example, the loss of a major customer, a cybersecurity breach, or a material decline in recurring revenue) may still be considered in determining whether a Material Adverse Effect has occurred. This formulation is market-standard and appears in all 12 comparable precedent transactions reviewed. No changes are recommended.
Carveout (g): Failure to Meet Projections or Estimates
(g) any failure by the Company or any of its Subsidiaries to meet any internal or published industry analyst projections, budgets, plans, forecasts, or estimates of revenue, earnings, cash flow, or other financial or operating metrics for any period (including any failure to meet any projections, budgets, plans, forecasts, or estimates set forth in the Confidential Information Memorandum dated August 15, 2023, or the Company Management Presentation dated September 22, 2023); provided that the underlying cause or causes of such failure shall not, by operation of this clause (g), be excluded from the determination of whether a Material Adverse Effect has occurred;
[Annotation.] This carveout, like carveout (f), addresses symptoms rather than causes. A failure to meet projections, budgets, or forecasts is an outcome rather than an event and is excluded from the MAE analysis per se. The proviso preserves the ability to look to the underlying causes of the miss. The specific references to the Confidential Information Memorandum dated August 15, 2023, and the Company Management Presentation dated September 22, 2023, are included to clarify that failures to meet the projections set forth in the deal-process marketing materials are also subject to the symptom-versus-cause framework. This is appropriate. We should ensure that Osprey Bancroft & Co. (Damien Harlow, lead financial advisor) and Glenmore Thornton LLP (Vanessa Liu, financial due diligence lead) are aware that this carveout does not insulate the underlying business deterioration that causes a projection miss; it merely prevents the miss itself from being the basis for an MAE claim. No changes are recommended.
Carveout (h): Announcement or Pendency of the Transaction
(h) any effect arising from or relating to the announcement, pendency, or anticipated consummation of the Transactions contemplated by this Agreement or the identity of Buyer, Merger Sub, or any of their respective Affiliates, including (A) any loss of, or adverse change in, the relationship of the Company or any of its Subsidiaries with any of their respective customers, suppliers, distributors, vendors, licensors, licensees, partners, employees, independent contractors, or other business relations, and (B) any actions taken by any Governmental Authority in connection with, or arising out of, the Transactions contemplated by this Agreement;
[Annotation — General.] This is a critical carveout that protects against signing-to-closing attrition — that is, adverse effects on the Company's business relationships that arise specifically because the transaction has been announced and is pending. It is standard and appropriate. Without this carveout, the buyer could potentially invoke the MAE closing condition based on customer departures, employee resignations, or supplier renegotiations triggered by the transaction announcement itself — an outcome that would effectively give the buyer an option to walk away based on transaction-specific effects that the buyer's own acquisition caused.
[Annotation — Specific Contract Risks.] This carveout is particularly relevant given certain change-of-control provisions in Cloudium's material contracts. Specifically, the Aegis Federal Solutions Inc. Master SaaS Agreement (representing approximately $84,000,000 in ARR) contains a change-of-control consent requirement that could be triggered by the merger, and the Helix Data Systems GmbH Technology License Agreement contains a termination-for-change-of-control clause. If Aegis Federal Solutions declines to consent or Helix Data Systems exercises its termination right, the resulting loss of revenue would be excluded from the MAE analysis by virtue of this carveout. This is the correct result from a risk-allocation perspective: Solara was aware of these change-of-control provisions during due diligence and priced the transaction accordingly.
[Annotation — Scope Limitation.] Note that this carveout does not apply to representations and warranties that specifically address the consequences of the transaction — for example, the "required consents" representation in Section 4.5 (which addresses consents necessary to consummate the merger without violating existing contractual obligations). This is a standard and important limitation. The carveout also does not apply to representations and warranties expressly qualified by reference to the effects of the announcement or pendency of the transaction (if any). No changes are recommended.
Carveout (i): Actions Taken at Buyer's Request or with Buyer's Consent
(i) any action taken or omitted to be taken by the Company or any of its Subsidiaries (A) at the express written request of, or with the prior written consent of, Buyer or Merger Sub, or (B) expressly required to be taken or omitted to be taken by the Company or any of its Subsidiaries pursuant to this Agreement.
[Annotation.] This carveout is standard and necessary to prevent moral hazard. If Solara requests or consents to an action by the Company that subsequently causes adverse consequences — for example, Solara directs the Company to terminate a particular contract or to refrain from pursuing a business opportunity — it would be inequitable for Solara to then invoke those consequences as a Material Adverse Effect. Similarly, actions that the Merger Agreement itself expressly requires the Company to take (or refrain from taking) — for example, compliance with operating covenants in Article V that restrict the Company's pre-closing conduct — should not give rise to an MAE claim. No changes are recommended.
C. Disproportionate-Impact Exception (Bring-Back)
The MAE Definition includes a "disproportionate impact" qualifier (commonly referred to as a "bring-back") that limits the scope of carveouts (a) through (e). The relevant provision reads as follows:
provided, further, that with respect to clauses (a) through (e) above, such events, changes, effects, developments, conditions, circumstances, or occurrences shall be taken into account in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur to the extent that such events, changes, effects, developments, conditions, circumstances, or occurrences have had, or would reasonably be expected to have, a disproportionate adverse effect on the Company and its Subsidiaries, taken as a whole, as compared to other participants in the industries and geographies in which the Company and its Subsidiaries operate.
[Annotation — Purpose and Significance.] The disproportionate-impact bring-back is a standard and essential buyer protection. It operates as a partial reversal of the carveouts: even though general economic conditions, industry conditions, pandemics, war/terrorism events, and changes in law are ordinarily excluded from the MAE analysis, the differential impact of those events on the Company relative to its peers can still be considered. For example, if a global recession causes a 20% decline in revenue across the cloud ERP industry but Cloudium experiences a 50% decline, the 30-percentage-point differential impact would be "brought back" into the MAE analysis. This ensures that Solara is protected against scenarios in which the Company's idiosyncratic vulnerabilities cause it to suffer disproportionately from otherwise excluded events.
[Annotation — Comparator Group.] The comparator group is defined as "other participants in the industries and geographies in which the Company and its Subsidiaries operate." The reference to "industries" (plural) is appropriate given Cloudium's multi-product business spanning cloud ERP, CRM, business intelligence, and SaaS. The reference to "geographies" is a buyer-favorable feature that appears in only 2 of the 12 comparable precedent transactions reviewed (the remaining 10 reference "industries" only). This geographic component is important given Cloudium's operations in the United States, United Kingdom, India, and Germany. It ensures that a jurisdiction-specific event — for example, a UK regulatory change that disproportionately affects Cloudium relative to other UK-based cloud-software companies, or an Indian tax-law change that disproportionately affects Cloudium Technologies India Pvt. Ltd. relative to other Indian technology companies — is not carved out. We recommend retaining the "and geographies" language and resisting any target-counsel attempt to remove it.
[Annotation — Scope of Application.] The bring-back applies to carveouts (a) through (e) — that is, general economic conditions, industry conditions, pandemics, war/terrorism, and changes in law. It does not apply to carveouts (f) through (i) — stock price, projections, transaction effects, and buyer-directed actions. This asymmetry is standard: the bring-back is conceptually appropriate for systemic or exogenous events (where it makes sense to compare the Company's experience to that of its peers) but not for Company-specific symptoms (stock price, projection misses) or transaction-related effects (which are inherently Company-specific).
[Annotation — Negotiation Risk.] We anticipate that Ridgeway Phelps & Sato LLP will seek to narrow the bring-back, potentially by (i) limiting the comparator group to "direct competitors" rather than "participants in the industries and geographies," (ii) removing the "geographies" reference, or (iii) seeking to eliminate the bring-back entirely for one or more carveouts (most likely the pandemic carveout). We recommend resisting all such attempts. The bring-back as currently drafted reflects the appropriate risk allocation and is consistent with the market majority. See Section VI below for detailed negotiation recommendations.
III. Market Precedent Comparison
A. Methodology
To benchmark the proposed MAE Definition against current market practice, we reviewed the MAE definitions in twelve (12) signed merger agreements from 2022–2023 involving large-cap enterprise software and SaaS acquisitions with enterprise values exceeding $3 billion. All agreements are publicly filed on SEC EDGAR. Supplemental data was drawn from proprietary deal databases and the Greaves & Castellan LLP internal precedent library.
The twelve precedent transactions were selected based on the following criteria:
(i) the target company operated in the cloud computing, enterprise software, or SaaS industry;
(ii) the buyer was either a private equity sponsor or a strategic acquiror;
(iii) the transaction was structured as a Delaware-law reverse triangular merger or a two-step tender offer followed by a back-end merger; and
(iv) the enterprise value of the transaction exceeded $3 billion.
The twelve precedent transactions span a range of deal sizes (from approximately $3.2 billion to approximately $18.7 billion), buyer types (7 private equity sponsors, 5 strategic acquirors), and closing timelines (from approximately 3 months to approximately 9 months). The selected transactions represent a reasonable cross-section of current market practice for large-cap software M&A transactions.
B. Summary of Precedent Analysis
The following table summarizes the key features of the MAE definitions in each of the twelve precedent transactions. Transactions are identified by deal number to preserve confidentiality where appropriate.
Key Findings:
1. Universal carveouts. All 12 precedent transactions include carveouts for pandemics, war/terrorism, changes in law, stock-price changes, projection misses, transaction effects, and buyer-directed actions. The C&H draft is consistent with market on all of these dimensions.
2. Cyberattack placement. Nine of 12 precedent transactions include cyberattack within the war/terrorism carveout (as does the C&H draft); the remaining 3 have a standalone cyberattack carveout. Two of the 9 transactions that include cyberattack within the war/terrorism carveout added a qualifier excluding targeted cyberattacks on the company specifically — a more buyer-favorable formulation that we recommend Solara pursue.
3. "Proposals" in changes-in-law carveout. Eleven of 12 precedent transactions include "proposals" to change law within the changes-in-law carveout (as does the C&H draft). Only 2 transactions limit coverage to enacted or adopted changes. The C&H draft is consistent with the market majority.
4. Disproportionate-impact bring-back. All 12 precedent transactions include a disproportionate-impact bring-back for the general economic, industry, pandemic, war/terrorism, and changes-in-law carveouts. The C&H draft is consistent. However, only 2 of 12 include the "and geographies" language in the comparator group. The C&H draft's inclusion of "and geographies" is a buyer-favorable feature.
5. Missing carveouts. Two of 12 precedent transactions include a separate natural disaster / force majeure carveout, which the C&H draft does not include. Four of 12 include a separate sanctions / trade restrictions carveout. We recommend proactively adding both (subject to the disproportionate-impact bring-back) to demonstrate reasonableness and preempt target-counsel requests. Three of 12 include a separate credit-rating changes carveout. None of the 12 include a seasonal fluctuations carveout.
6. Ability-to-close prong. Eleven of 12 precedent transactions include an ability-to-close prong (clause (ii) of the base definition). The C&H draft is consistent with the market majority.
7. Quantitative threshold. None of the 12 precedent transactions uses a quantitative threshold (e.g., a specified percentage decline in revenue or EBITDA) for the MAE definition itself. The standard remains qualitative throughout.
C. Specific Precedent Points
Pandemic Carveout. The market standard for the pandemic carveout is broad language encompassing both the disease event and all governmental responses thereto. Three of the 12 precedent transactions still include specific references to "COVID-19" or "SARS-CoV-2" alongside generic "pandemic/epidemic" language; the remaining 9 have moved to purely generic formulations. The C&H draft includes both specific COVID-19 references and generic pandemic/epidemic language, which is the most comprehensive approach and ensures coverage regardless of the specific pathogen involved. There is no market basis for narrowing this carveout, and we do not expect meaningful pushback from target counsel.
War and Cyberattack
The trend in recent transactions has been toward including cyberattack within the war/terrorism carveout, reflecting the growing recognition that state-sponsored and quasi-military cyber operations share characteristics with traditional armed conflict. However, as noted above, 2 recent 2023 precedent transactions have added a qualifier to the cyberattack carveout: "other than a cyberattack targeted specifically at the Company or its systems." This qualifier creates a meaningful distinction between (a) widespread or indiscriminate cyberattacks (e.g., a state-sponsored attack affecting cloud infrastructure providers generally, or a ransomware campaign affecting hundreds of enterprises across multiple industries) and (b) a targeted attack specifically directed at Cloudium's systems, data, or operations.
Given that Cloudium is a cloud-native SaaS provider whose business fundamentally depends on the integrity and availability of its technology platform, a targeted cyberattack could have severe consequences: loss of customer data, regulatory enforcement actions (including under GDPR and the UK Data Protection Act 2018), reputational harm, customer churn, and business interruption. If such a targeted attack were excluded from the MAE analysis, Solara would bear the full risk of a potentially catastrophic event without recourse under either the closing condition or the post-closing indemnification regime.
Recommendation. Solara should affirmatively propose the targeted-cyberattack exclusion from the carveout. We recommend the following formulation:
"provided that this clause (d) shall not apply to any cyberattack, cybersecurity incident, or similar event specifically targeted at the Company or any of its Subsidiaries or their respective information technology systems, networks, or data;"
This is the single most important buyer-favorable negotiation point on the MAE Definition given Cloudium's technology profile. We anticipate resistance from Ridgeway Phelps & Sato LLP on this point, as target counsel will argue that the disproportionate-impact bring-back already provides adequate protection. However, the bring-back requires Solara to demonstrate that the targeted attack had a disproportionate impact relative to industry peers — a comparison that may be difficult or meaningless in the context of a uniquely targeted event. The targeted-cyberattack exclusion provides a cleaner and more direct protection.
Changes in Law — "Proposals"
The inclusion of "proposals" to adopt, modify, or repeal law is a seller-favorable feature that extends the carveout beyond enacted or adopted changes to cover mere legislative or regulatory proposals. While 11 of 12 precedent transactions include this language, 3 of the 12 limit coverage to "enacted" or "adopted" changes only. The seller-favorable rationale for including "proposals" is that the mere prospect of a legal change — for example, a congressional bill to impose new data-privacy regulations on cloud-computing providers — can create market uncertainty and affect the Company's business environment, even before (and regardless of whether) the proposal is ultimately enacted.
From Solara's perspective, the "proposals" language is acceptable as drafted. It reflects the market-majority position and does not significantly undermine Solara's protections given the availability of the disproportionate-impact bring-back. However, if target counsel seeks to broaden this carveout to include "contemplated," "discussed," or "informally proposed" changes — language that would capture even informal policy discussions by government officials — we should resist such expansion.
Disproportionate-Impact Comparator Group
As noted above, 10 of 12 precedent transactions use a comparator group defined as "other participants in the industries in which the Company operates" (or substantially similar language). Only 2 of 12 add the "and geographies" qualifier that appears in the C&H draft. The "and geographies" language is a slightly more buyer-favorable formulation because it narrows the comparator group by requiring a jurisdiction-specific comparison. For example, if a change in UK tax law disproportionately affects Cloudium relative to other UK cloud-software companies, the "and geographies" language ensures that the comparison is made against UK-based peers rather than a global peer set.
Recommendation. The "and geographies" language should be retained. We anticipate that target counsel will seek its removal on the ground that it is outside the market mainstream. However, its inclusion is justified by Cloudium's multi-jurisdictional operational footprint and the associated risk of jurisdiction-specific adverse events. We should be prepared to defend this language with reference to Cloudium's significant UK operations (approximately $390 million in revenue) and the particular regulatory environments in which it operates.
Quantitative vs. Qualitative Standard
None of the 12 precedent transactions employs a quantitative threshold or bright-line test for the MAE definition. The standard remains qualitative throughout the market. This is consistent with Delaware Court of Chancery jurisprudence, which evaluates MAE claims based on the totality of circumstances rather than any single financial metric. The absence of a quantitative threshold preserves maximum flexibility for the buyer in asserting an MAE claim and avoids the risk that a bright-line test could be manipulated by the seller (for example, through aggressive accounting treatment or one-time charges designed to remain just above the threshold).
Recommendation. If target counsel proposes the addition of a quantitative floor — for example, a requirement that a Material Adverse Effect involve a decline of at least 20% in revenue or EBITDA — we should firmly resist. Such a threshold would fundamentally alter the risk allocation and could preclude Solara from asserting an MAE claim even in circumstances involving severe and durable business deterioration that falls marginally short of the specified percentage. The qualitative standard is the market standard and the appropriate standard for this transaction.
IV. Interaction with Closing Condition
A. Closing Condition — No MAE
Section 7.2(a) of the draft Merger Agreement conditions the obligations of Solara and Merger Sub to consummate the merger on the satisfaction (or waiver by Solara) of the following condition, among others:
"Since the date of this Agreement, no Material Adverse Effect shall have occurred and be continuing as of the Closing Date."
This is a standard formulation. The phrase "occurred and be continuing" requires that the Material Adverse Effect not only have occurred but also remain extant as of the closing date. This temporal requirement means that a transient adverse event that has been fully remediated before closing would not satisfy the condition, while a durable adverse event that persists through closing would.
Interim Period Risk. The interim period between signing and closing is expected to be substantial. Assuming signing on or about January 22, 2024, the principal regulatory milestones and events during the interim period include:
• HSR Filing: Expected February 9, 2024 (30-day initial waiting period, subject to potential second request)
• CMA Filing (UK Competition and Markets Authority): Expected February 12, 2024
• Cloudium Stockholder Approval: Required under Section 7.1(a); stockholder meeting expected in Q2 2024
• Outside Date: June 30, 2024 (subject to extension provisions in Section 8.1(b))
• Anticipated Closing: Approximately 5–6 months post-signing (actual closing occurred on July 9, 2024, approximately 5.5 months after signing)
During this extended interim period, Cloudium's business will be subject to a wide range of risks — macroeconomic conditions, competitive dynamics, customer churn, employee retention, product-development setbacks, cybersecurity threats, and regulatory changes, among others. The MAE closing condition, read in conjunction with the MAE Definition and its carveouts, determines the scope of Solara's protection against these risks. An overly broad set of carveouts could effectively eliminate Solara's ability to decline to close based on adverse developments, even in scenarios involving significant business deterioration.
B. Bring-Down of Representations
Section 7.2(b) of the draft Merger Agreement conditions closing on the accuracy of Cloudium's representations and warranties at signing and at closing (the "bring-down" condition). Many of Cloudium's representations and warranties in Article IV are qualified by the phrase "except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect." The interaction between the MAE qualifier in the representations and the bring-down standard creates a potential "double materiality" issue.
Double Materiality Explained. If a representation is already qualified by the MAE standard (i.e., the representation is true "except as would not reasonably be expected to have a Material Adverse Effect"), and the bring-down condition requires such representation to be true "in all material respects," the combined effect could be that a breach must be both "material" (under the bring-down standard) and constitute a "Material Adverse Effect" (under the representation qualifier) before the closing condition is failed. This double-materiality threshold could render the MAE qualifier effectively meaningless, because the "in all material respects" bring-down standard would already screen out immaterial inaccuracies.
Recommendation. To avoid the double-materiality problem, we recommend the following approach in the bring-down condition:
• For representations that are not qualified by MAE: the bring-down standard should be "true and correct in all material respects" as of the closing date.
• For representations that are qualified by MAE: the bring-down standard should be "true and correct in all respects" as of the closing date (with the MAE qualifier within the representation itself serving as the sole materiality filter).
This approach ensures that the MAE qualifier retains independent significance and that the closing condition provides meaningful protection for Solara. We note that this is the more buyer-favorable formulation and may face pushback from target counsel, but it is increasingly common in large-cap transactions and is supportable as a matter of drafting logic.
V. Interaction with Indemnification and R&W Insurance
A. Indemnification
Article IX of the Merger Agreement provides for post-closing indemnification in favor of Solara and its affiliates (including the surviving company) for, among other things, breaches of Cloudium's representations and warranties in Article IV. The key indemnification parameters are as follows:
Impact of MAE Carveouts on Indemnification. The breadth of the MAE carveouts directly affects the scope of indemnifiable breaches. Because many of Cloudium's representations and warranties in Article IV are qualified by the MAE standard, events that fall within one of the enumerated carveouts are excluded from the MAE analysis and therefore cannot give rise to a breach of an MAE-qualified representation. This means that a broader carveout regime narrows the universe of post-closing indemnification claims available to Solara.
Consider, for example, Cloudium's representation in Section 4.8 that, since September 30, 2023, no event has occurred that has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. If a pandemic occurs during the interim period and severely impacts Cloudium's business, carveout (c) would exclude the pandemic's effects from the MAE analysis (subject to the disproportionate-impact bring-back). As a result, Solara could not assert a breach of Section 4.8 based on the pandemic's effects, and no indemnification claim would be available for losses attributable to the pandemic's impact on the business.
Recommendation. The MAE Definition must strike the right balance. On one hand, the carveouts serve legitimate risk-allocation purposes by protecting the seller against events beyond its control. On the other hand, overly broad carveouts can undermine the buyer's post-closing indemnification protection and effectively transfer all business risk to the buyer once the transaction closes. We believe the current draft strikes an appropriate balance, with the disproportionate-impact bring-back providing a meaningful safety valve. However, as discussed in Section VI below, we recommend that Solara push for the targeted-cyberattack exclusion and resist any target-counsel attempt to further broaden the carveouts or narrow the bring-back.
B. R&W Insurance
Solara has procured a buyer-side representations and warranties insurance policy from Northfield Assurance Ltd. The key policy parameters are as follows:
R&W Insurance Underwriting Considerations. The Northfield Assurance underwriting team will scrutinize the MAE Definition during the underwriting process, which was initiated on January 10, 2024. R&W insurers typically evaluate the MAE Definition from two perspectives:
(i) Breadth of Coverage. Insurers generally prefer a well-drafted MAE definition with standard carveouts and a disproportionate-impact bring-back, because such a definition provides certainty and predictability regarding the scope of covered representations and warranties. An MAE definition with unusual or excessively broad carveouts may result in the insurer imposing policy exclusions or increasing the retention to account for the broader risk transfer away from the seller.
(ii) Claims Exposure. Insurers assess the likelihood and potential magnitude of claims arising from MAE-qualified representations. If the carveouts are so broad that virtually no event could constitute a Material Adverse Effect, the insurer may conclude that the MAE-qualified representations provide limited coverage and may price the policy accordingly or impose coverage restrictions.
Recommendation. We recommend coordinating closely with Peregrine Advisory Group LLC (Timothy Gallagher, broker) and Northfield Assurance Ltd. (Patrick Graves, lead underwriter) during the R&W underwriting process to confirm that the MAE Definition as drafted — and as ultimately negotiated with target counsel — is acceptable from an insurance-coverage perspective. Specifically, we should:
(a) share the final negotiated MAE Definition with the Northfield underwriting team promptly following execution of the Merger Agreement;
(b) confirm that the carveout regime does not trigger any policy exclusions or additional retention requirements;
(c) discuss with the underwriting team the targeted-cyberattack exclusion that Solara intends to negotiate, as this exclusion may be viewed favorably by the insurer (because it narrows the carveouts and thereby broadens the scope of covered claims); and
(d) ensure that the R&W policy definitions of "Loss" and "Breach" are consistent with the Merger Agreement's MAE Definition and indemnification provisions.
VI. Anticipated Target-Counsel Positions and Negotiation Strategy
A. Expected Pushback from Ridgeway Phelps & Sato LLP
Based on prior dealings with Catherine Answorth (lead M&A partner at Ridgeway Phelps & Sato LLP) and observed market trends, we anticipate the following requests in Ridgeway Phelps's markup of the MAE Definition:
1. Additional Carveouts
Target counsel is likely to request the addition of carveouts for the following categories:
(a) Natural Disasters / Force Majeure. Events such as earthquakes, hurricanes, floods, fires, tsunamis, volcanic eruptions, and other natural disasters or acts of God. Two of the 12 precedent transactions include such a carveout. This request has a reasonable market basis.
(b) Sanctions / Trade Restrictions. Changes in economic sanctions, export controls, trade embargoes, or similar restrictions imposed by any governmental authority. Four of the 12 precedent transactions include such a carveout. This request has a reasonable market basis, particularly given Cloudium's international operations.
(c) Changes in Credit Ratings. Any change in the credit rating of the Company or any of its Subsidiaries (or any downgrade in the credit rating of the Company's or any Subsidiary's indebtedness). Three of the 12 precedent transactions include such a carveout. This request has some market basis but is less common.
(d) Seasonal Fluctuations. Fluctuations in revenue, earnings, or other financial metrics attributable to seasonal patterns in the Company's business. None of the 12 precedent transactions include such a carveout. This request has no market basis.
2. Broadening of Existing Carveouts
Target counsel may seek to broaden existing carveouts in the following ways:
(a) Expanding the pandemic carveout to include all public-health measures and responses by any governmental authority, regardless of whether the disproportionate-impact bring-back applies. This would effectively eliminate the bring-back for the pandemic carveout.
(b) Expanding the changes-in-law carveout to include "contemplated" or "informally proposed" changes in law, in addition to the "proposals" already covered.
(c) Broadening the transaction-effects carveout to include effects arising from any financing obtained or sought in connection with the transaction (relevant if Solara's financing arrangements create market disruption or supplier concern).
3. Narrowing the Disproportionate-Impact Bring-Back
This is the most strategically significant area of anticipated pushback. Target counsel may seek to:
(a) Narrow the comparator group from "other participants in the industries and geographies in which the Company and its Subsidiaries operate" to "direct competitors of the Company" or "companies of similar size and scope operating in the same industry." This would make the disproportionate-impact showing more difficult for Solara by limiting the peer set to a smaller group of closely comparable companies.
(b) Remove the "and geographies" language from the comparator group, reverting to the more common formulation that references industries only.
(c) Eliminate the bring-back for one or more carveouts, most likely the pandemic carveout (on the ground that pandemic effects are inherently unpredictable and should be fully allocated to the buyer).
4. Eliminating or Narrowing the Ability-to-Close Prong
Target counsel may argue that clause (ii) of the base definition — the "ability to close" prong — is duplicative of the closing conditions set forth in Article VII and should be removed. The argument would be that regulatory blocks and legal impediments are already addressed through the specific closing conditions relating to governmental approvals (Section 7.1(b)) and absence of injunctions (Section 7.1(c)), rendering clause (ii) unnecessary.
B. Recommended Positions for Solara
Based on the foregoing analysis, we recommend the following negotiation positions:
1. Natural Disaster / Force Majeure Carveout
Position: Acceptable, subject to the disproportionate-impact bring-back.
We recommend proactively including a natural disaster / force majeure carveout in the next iteration of the draft, subject to the disproportionate-impact bring-back. This demonstrates reasonableness and preempts a predictable target-counsel request, which may generate goodwill that can be deployed on more significant negotiation points (particularly the targeted-cyberattack exclusion). The proposed carveout language is as follows:
"(j) any hurricane, tornado, earthquake, flood, tsunami, wildfire, or other natural disaster, weather condition, or act of God;"
This carveout should be added to the list of carveouts subject to the disproportionate-impact bring-back (i.e., carveouts (a) through (e), which would become (a) through (f) with the addition of this new carveout).
2. Sanctions / Trade Restrictions Carveout
Position: Acceptable, subject to the disproportionate-impact bring-back.
Given Cloudium's international operations in the United States, United Kingdom, India, and Germany, a carveout for changes in sanctions and trade restrictions is reasonable. Cloudium's operations in these jurisdictions expose the Company to the sanctions regimes of multiple governmental authorities (including OFAC, HMT, and the EU). A change in sanctions that broadly affects technology companies doing business internationally should not, standing alone, constitute a Material Adverse Effect. However, if such a change disproportionately affects Cloudium relative to its peers, the bring-back should apply. We recommend the following formulation:
"(k) any adoption, implementation, or modification of, or any change in, any economic sanction, export control, trade embargo, or similar restriction imposed by any Governmental Authority;"
3. Credit-Rating Changes Carveout
Position: Acceptable, with "symptom versus cause" proviso.
Consistent with the stock-price carveout (clause (f)) and the projections carveout (clause (g)), a carveout for changes in credit ratings is acceptable provided it includes the standard proviso that the underlying cause of the rating change is not excluded. The proposed language is:
"(l) any change in, or withdrawal of, any credit rating or financial strength rating of the Company or any of its Subsidiaries or any of their respective Indebtedness; provided that the underlying cause or causes of such change or withdrawal shall not, by operation of this clause (l), be excluded from the determination of whether a Material Adverse Effect has occurred;"
4. Seasonal Fluctuations
Position: Resist.
Cloudium is a SaaS business with a predominantly recurring revenue model. Annual recurring revenue was approximately $1,740,000,000 as of December 31, 2023 (estimated), representing approximately 107% of LTM revenue — reflecting the growing ARR base. SaaS subscription revenue is recognized ratably over the contract term and is not subject to significant seasonal variation. While Cloudium may experience some quarterly fluctuation in new bookings or professional services revenue, these fluctuations are modest and well within normal operating patterns. A seasonal-fluctuations carveout is unnecessary for a business with Cloudium's revenue profile and could be abused by the seller to shield genuine business deterioration as purportedly "seasonal" effects. We should firmly resist any request for this carveout.
5. Narrowing the Disproportionate-Impact Comparator Group
Position: Resist firmly.
The comparator group — "other participants in the industries and geographies in which the Company and its Subsidiaries operate" — is the correct standard and must be retained. The reference to "industries" (plural) reflects Cloudium's multi-product business across cloud ERP, CRM, business intelligence, and SaaS, and ensures that the comparator group is broad enough to encompass the Company's competitive landscape. The reference to "geographies" ensures that jurisdiction-specific adverse events are evaluated against a geographically relevant peer set.
We anticipate that target counsel will propose narrowing the comparator group to "direct competitors" or similar language. This would be problematic for several reasons:
(a) Cloudium operates across multiple product categories and market segments, making it difficult to identify a definitive set of "direct competitors."
(b) A narrow comparator group could be manipulated by the seller post-signing (e.g., by arguing that a particular peer is or is not a "direct competitor" depending on the circumstances).
(c) A narrow comparator group may not include a sufficient number of companies to provide a statistically meaningful comparison, particularly in niche market segments.
(d) The "industries and geographies" formulation is the standard used in 2 of 12 precedent transactions and is consistent with market practice, albeit at the buyer-favorable end of the spectrum.
If target counsel insists on narrowing the comparator group, we could offer as a fallback the addition of clarifying language such as "including companies of comparable size, scope, and geographic footprint," but we should not concede the removal of either "industries" or "geographies."
6. Eliminating the Ability-to-Close Prong
Position: Resist.

INTERNAL MEMORANDUM

MATTER NO.: 1041-00003

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