PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
FROM: Sandra Tung, Partner, and Ryan Kowalski, Associate Calderwood & Harkness LLP One Federal Street, 42nd Floor Boston, MA 02110
TO: File — Helix Bio Therapeutics Inc. De-SPAC Business Combination
DATE: March 15, 2023
RE: Deal Structuring and Federal Income Tax Analysis — Proposed De-SPAC Business Combination of Helix Bio Therapeutics Inc. and Pinnacle Venture Acquisition Corp.
CC: Oliver Mackenzie, Esq. (Billing Partner) Megan Chu, Esq. (Working Associate)
This memorandum is prepared by attorneys at Calderwood & Harkness LLP in connection with the legal representation of Helix Bio Therapeutics Inc. and is protected by the attorney-client privilege and the work-product doctrine. This memorandum is intended solely for use by Calderwood & Harkness LLP attorneys working on this matter and authorized representatives of the client. It should not be disclosed to any third party without the express written consent of Calderwood & Harkness LLP and Helix Bio Therapeutics Inc. This memorandum does not constitute a formal legal opinion or tax opinion and is subject to revision as additional facts and circumstances become known.
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I. EXECUTIVE SUMMARY
Calderwood & Harkness LLP represents Helix Bio Therapeutics Inc. ("HBT"), a Delaware corporation headquartered at 450 Kendall Street, Suite 800, Cambridge, MA 02142, in connection with a proposed de-SPAC business combination with Pinnacle Venture Acquisition Corp. ("PVAC"), a Cayman Islands exempted company listed on the Nasdaq Stock Market LLC ("Nasdaq") under the tickers PVAC.U (units), PVAC (Class A ordinary shares), and PVAC.W (warrants). This memorandum provides a comprehensive analysis of the proposed deal structure, the principal structural alternatives that were considered and rejected, the key commercial and legal elements of the transaction, and the federal income tax treatment of the business combination and its component parts.
The transaction is structured as a forward triangular merger in which Pinnacle Merger Sub Inc. ("Merger Sub"), a newly formed wholly owned Delaware subsidiary of PVAC that was incorporated on February 14, 2023, will merge with and into HBT pursuant to Section 251 of the Delaware General Corporation Law (the "DGCL"), with HBT surviving the merger as a wholly owned subsidiary of PVAC. Concurrently with or immediately prior to the closing of the merger, PVAC will re-domesticate from the Cayman Islands to the State of Delaware and will rename itself Helix Bio Therapeutics Holdings Inc., and its common stock will begin trading on Nasdaq under the new ticker symbol "HBIO."
The implied enterprise value of HBT in the transaction is $40,000,000. The merger consideration consists of 4,000,000 shares of PVAC Class A common stock at a deemed value of $10.00 per share, to be issued to the former equityholders of HBT at the closing. In addition to the upfront merger consideration, former HBT equityholders will be eligible to receive up to 500,000 additional earnout shares in two tranches, based on the achievement of post-closing stock price milestones during the 36 months following the closing. The earnout is structured to bridge the valuation gap between the parties and to provide additional upside participation to the HBT equityholders without increasing the fixed upfront dilution to PVAC public shareholders.
The transaction is accompanied by a concurrent private investment in public equity ("PIPE") financing of $20,000,000, consisting of commitments from Brindoval Capital Management, LP ($15,000,000 for 1,500,000 shares) and Lakepoint Health Opportunities Fund, LP ($5,000,000 for 500,000 shares), each at $10.00 per share. The PIPE proceeds, together with the trust account proceeds remaining after shareholder redemptions, will fund the combined company's operations, including the clinical development of HBT's gene-editing therapy pipeline.
The transaction is governed by Delaware law. The merger mechanics will be governed by the DGCL. The organizational documents of Pinnacle Venture Sponsor LLC, the sponsor entity of PVAC, are governed by the Delaware Limited Liability Company Act.
The purpose of this memorandum is to: (a) describe in detail the proposed deal structure and each of its component elements; (b) identify and analyze the structural alternatives that were considered and the reasons for their rejection; (c) address the key structuring elements of the transaction, including the merger consideration, earnout, Sponsor arrangements, PIPE financing, and post-closing governance; and (d) assess the federal income tax treatment of the transaction, including the potential qualification of the merger as a tax-free reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), and the alternative analysis under Section 351 of the Code.
Key Conclusion. Based on the analysis set forth below, the forward merger structure is recommended as optimal for both corporate law and tax purposes. The transaction should qualify as a tax-free reorganization under Section 368(a)(1)(A), by reason of Section 368(a)(2)(E), of the Code, subject to certain conditions and risks discussed herein. HBT equityholders should not recognize gain or loss upon the exchange of their HBT shares for shares of the combined company. Earnout shares, if and when issued, should also be received on a tax-free basis. The re-domestication of PVAC should separately qualify as a tax-free F reorganization under Section 368(a)(1)(F). While Section 351 provides an alternative framework for nonrecognition treatment, the analysis under that section is less certain, and we recommend reliance on Section 368(a) as the primary basis for tax-free treatment. We further recommend that formal tax opinions be obtained from Calderwood & Harkness LLP and Hargrove Slater & Dunn LLP in connection with the filing of the Form S-4 registration statement and proxy statement/prospectus with the U.S. Securities and Exchange Commission (the "SEC").
II. BACKGROUND
A. Description of Helix Bio Therapeutics Inc.
Helix Bio Therapeutics Inc. ("HBT") is a clinical-stage biotechnology company focused on the development of next-generation gene-editing therapies for rare monogenic diseases. HBT was incorporated in the State of Delaware on June 12, 2018, and its Employer Identification Number (EIN) is 83-2947156. HBT's registered agent in Delaware is CT Statutory Services, located at 1209 Orange Street, Wilmington, Delaware 19801. HBT's principal executive offices are located at 450 Kendall Street, Suite 800, Cambridge, Massachusetts 02142, in the heart of the Kendall Square life sciences hub.
HBT's lead product candidate is HBT-301, a gene-editing therapy designed to address Friedreich's ataxia, a debilitating rare neurodegenerative disease caused by mutations in the FXN gene. HBT-301 is currently in Phase 1b clinical trials, and the company has reported encouraging preliminary safety and efficacy data. HBT's second product candidate is HBT-502, a gene-editing approach targeting Wilson's disease, a rare genetic disorder involving copper metabolism. HBT-502 is in the preclinical stage of development, with an Investigational New Drug (IND) application anticipated to be filed with the U.S. Food and Drug Administration (the "FDA") in the second half of 2024.
HBT employs approximately 85 full-time employees, predominantly in research and development, clinical operations, and regulatory affairs. For the fiscal year ended December 31, 2022 ("FY2022"), HBT reported revenue of approximately $2.1 million, consisting entirely of collaboration and licensing revenue. HBT is a pre-commercial stage company and has not yet generated any product revenue. HBT reported a net loss of approximately ($18.4 million) for FY2022, reflecting the significant ongoing investment in its clinical and preclinical programs. As of December 31, 2022, HBT had approximately $9.7 million of cash and cash equivalents on hand, which, absent additional capital, would support the company's operations for approximately six to eight months at its current burn rate.
The capital structure and key pre-closing equity ownership of HBT is as follows:
HBT's Board of Directors consists of five members: Dr. Priya Nandakumar (Chairperson of the Board and Chief Executive Officer), Dr. James Whitfield (Chief Scientific Officer and Director), Catherine Alcott (designee of Ridgeline Ventures Fund III, LP), Marcus Leung (designee of Northbridge Life Sciences Partners, LP), and Dr. Elena Vasquez (Independent Director). The Board has been actively engaged in evaluating strategic alternatives for the company, including the proposed de-SPAC business combination, and has unanimously approved the company's entry into negotiations with PVAC.
B. Description of Pinnacle Venture Acquisition Corp.
Pinnacle Venture Acquisition Corp. ("PVAC") is a blank-check company, commonly referred to as a special purpose acquisition company or "SPAC," that was organized as a Cayman Islands exempted company on March 3, 2021, for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization, or similar business combination with one or more businesses. PVAC's Employer Identification Number (EIN) is 87-1630284, and its SEC Central Index Key (CIK) is 0001893742. PVAC's principal executive offices are located at 101 Park Avenue, 34th Floor, New York, New York 10178. Upon completion of its re-domestication to Delaware (discussed in Section III.B below), PVAC's registered agent in Delaware will be Cascade Systems, located at 160 Greentree Drive, Suite 101, Dover, Delaware 19904.
PVAC completed its initial public offering (the "IPO") on August 16, 2021, raising gross proceeds of $50,000,000 through the sale of 5,000,000 units at a price of $10.00 per unit. Each unit consisted of one Class A ordinary share and one-half of one redeemable warrant to purchase one Class A ordinary share at an exercise price of $11.50 per share. Accordingly, the IPO resulted in 5,000,000 Class A ordinary shares and 2,500,000 public warrants being outstanding and traded on Nasdaq under the tickers PVAC and PVAC.W, respectively.
The proceeds of the IPO, net of underwriting discounts and commissions and other offering expenses, were deposited into a trust account (the "Trust Account") held at Grandview Trust Company, N.A., located at 388 Greenwich Street, New York, New York 10013. As of the expected date of execution of the Business Combination Agreement (the "BCA"), the Trust Account balance is approximately $51,247,813.55, reflecting the IPO proceeds plus accrued interest earned on the trust investments (primarily U.S. Treasury securities and money market funds invested in U.S. government obligations).
In connection with the IPO, Pinnacle Venture Sponsor LLC (the "Sponsor"), a Delaware limited liability company whose Managing Members are Derek Holroyd and Samantha Briggs, acquired 1,250,000 Class B ordinary shares of PVAC (the "Founder Shares") at a nominal aggregate purchase price. The Founder Shares represent approximately 20% of the total outstanding shares of PVAC (on a post-IPO basis, prior to any redemptions), consistent with the customary SPAC sponsor economics. The Sponsor also purchased 375,000 private placement warrants at a price of $1.00 per warrant in a private placement that occurred simultaneously with the closing of the IPO. The Founder Shares and private placement warrants are subject to transfer restrictions and other limitations as set forth in the Sponsor's letter agreement entered into in connection with the IPO.
PVAC has 2,500,000 public warrants outstanding, each exercisable for one Class A ordinary share at an exercise price of $11.50 per share, subject to customary anti-dilution adjustments, beginning 30 days after the completion of the initial business combination and expiring five years after the completion of the initial business combination, or earlier upon redemption or liquidation.
PVAC's Board of Directors consists of four members: Derek Holroyd (Chief Executive Officer and Director), Samantha Briggs (Chief Financial Officer and Director), Robert Tannenbaum (Independent Director), and Julia Greenfield (Independent Director). PVAC is listed on the Nasdaq Capital Market.
C. Description of Merger Sub
Pinnacle Merger Sub Inc. ("Merger Sub") is a Delaware corporation that was incorporated on February 14, 2023, under the DGCL. Merger Sub's Employer Identification Number (EIN) is 92-1187453. Merger Sub is a wholly owned subsidiary of PVAC and was formed solely for the purpose of effecting the proposed merger with HBT. Merger Sub's address is c/o Pinnacle Venture Acquisition Corp., 101 Park Avenue, 34th Floor, New York, New York 10178. Since its formation, Merger Sub has not conducted any business activities and has no assets, liabilities, revenues, expenses, or operations other than those incident to its formation and the proposed merger. Merger Sub will cease to exist as a separate legal entity upon the effective time of the merger, at which point HBT will continue as the surviving corporation and a wholly owned subsidiary of the re-domesticated PVAC.
D. Advisors and Counsel
The following advisors and professional service providers are engaged in connection with the proposed transaction:
Counsel to HBT:
Calderwood & Harkness LLP One Federal Street, 42nd Floor Boston, MA 02110
Sandra Tung, Partner (Responsible Partner) Oliver Mackenzie, Partner (Billing Partner) Ryan Kowalski, Associate (Lead Associate) Megan Chu, Associate (Working Associate)
Counsel to PVAC and Sponsor:
Hargrove Slater & Dunn LLP 575 Lexington Avenue, 20th Floor New York, NY 10022
Nathan Dorsey, Partner (Lead Partner) Allison Park, Associate (Lead Associate)
Financial Advisor to PVAC / PIPE Placement Agent:
Birchwood Partners LLC 200 West 57th Street, Suite 1400 New York, NY 10019
Graham Hollis, Managing Director
Financial Advisor to HBT:
Calvert & Wren Advisory LLC 100 Summer Street, Suite 2200 Boston, MA 02110
Rachel Dominguez, Senior Managing Director
Auditor to HBT:
Whitmore & Gaines LLP Two Center Plaza, 14th Floor Boston, MA 02108
Leonard Brixton, Engagement Partner
Auditor to PVAC:
Prescott Townsend & Associates LLP 1345 Avenue of the Americas, 28th Floor New York, NY 10105
Deborah Kline, Engagement Partner
III. PROPOSED TRANSACTION STRUCTURE
A. Overview of the Forward Merger
The proposed transaction is structured as a forward triangular merger — also referred to in practice as a "forward subsidiary merger" — which is the predominant and most well-understood structure for de-SPAC business combinations. Under this structure, Merger Sub, a newly formed wholly owned Delaware subsidiary of PVAC, will merge with and into HBT pursuant to Section 251 of the DGCL. HBT will be the surviving corporation of the merger and will continue in existence as a wholly owned subsidiary of PVAC (as re-domesticated to Delaware and renamed Helix Bio Therapeutics Holdings Inc.). At the effective time of the merger, Merger Sub will cease to exist as a separate legal entity.
The merger will be effected by the filing of a certificate of merger with the Secretary of State of the State of Delaware in accordance with Section 251 of the DGCL. The certificate of merger will specify the effective time of the merger, which the parties intend to be simultaneously with or immediately following the satisfaction or waiver of all conditions to closing set forth in the BCA.
At the effective time of the merger, the following will occur by operation of law and without any further action on the part of PVAC, Merger Sub, HBT, or any of their respective shareholders or equityholders:
(a) Merger Sub will merge with and into HBT, and the separate existence of Merger Sub will thereupon cease;
(b) HBT will be the surviving corporation of the merger and will continue its corporate existence under the laws of the State of Delaware as a wholly owned subsidiary of PVAC (re-domesticated);
(c) The certificate of incorporation and bylaws of HBT, as in effect immediately prior to the effective time, will be the certificate of incorporation and bylaws of the surviving corporation (subject to any amendments agreed upon in the BCA);
(d) The directors and officers of HBT immediately prior to the effective time will be the directors and officers of the surviving corporation;
(e) All assets, rights, privileges, powers, immunities, and franchises of each of Merger Sub and HBT will vest in the surviving corporation, and all debts, liabilities, obligations, and duties of each of Merger Sub and HBT will become the debts, liabilities, obligations, and duties of the surviving corporation, in each case in accordance with Section 259 of the DGCL; and
(f) Each outstanding share of HBT common stock will be converted into the right to receive a portion of the merger consideration as described in Section III.C below.
This forward merger structure is significant for several reasons. It allows HBT to survive as the operating entity, preserving HBT's existing contracts, licenses, permits, regulatory filings, and other legal relationships without the need for entity-level assignments in most cases (subject to the change-of-control consent and notice requirements discussed in Section VII below). It establishes a clean two-tier parent-subsidiary structure that is standard for publicly traded holding companies. And it facilitates the continuation of PVAC's Nasdaq listing, as the publicly traded entity (PVAC, renamed) remains the same legal entity after the re-domestication.
B. Re-Domestication of PVAC
PVAC is currently organized as a Cayman Islands exempted company. As a prerequisite to the consummation of the merger, PVAC will re-domesticate from the Cayman Islands to the State of Delaware, thereby becoming a Delaware corporation. The re-domestication is planned to become effective on June 15, 2023, or such other date as may be determined by the parties, and in all events prior to the closing of the merger.
The re-domestication will be accomplished through a two-step process:
(i) De-registration in the Cayman Islands. PVAC will file the appropriate documents with the Cayman Islands Registrar of Companies to effect its de-registration as a Cayman Islands exempted company. This process is governed by the Companies Act (As Revised) of the Cayman Islands and requires, among other things, a special resolution of PVAC's shareholders approving the de-registration, as well as satisfaction of the notice and consent requirements applicable to creditors and other interested parties under Cayman Islands law.
(ii) Domestication to Delaware. Concurrently with or immediately following its de-registration from the Cayman Islands, PVAC will domesticate as a corporation organized under the laws of the State of Delaware pursuant to Section 388 of the DGCL. Section 388 permits a non-United States entity to become a Delaware corporation by filing a certificate of corporate domestication and a certificate of incorporation with the Secretary of State of the State of Delaware.
Upon the effectiveness of the domestication, PVAC will be deemed for all purposes to be a corporation organized and existing under the DGCL. PVAC will adopt an Amended and Restated Certificate of Incorporation reflecting, among other things, its new legal name — Helix Bio Therapeutics Holdings Inc. — and the corporate governance provisions appropriate for a Delaware corporation that is a publicly traded holding company.
By operation of law, the following conversions and continuities will occur upon the effectiveness of the re-domestication:
(a) The existing Class A ordinary shares of PVAC will convert into shares of Class A common stock, par value $0.0001 per share, of the re-domesticated Delaware corporation on a one-for-one basis;
(b) The existing Class B ordinary shares (Founder Shares) held by the Sponsor will similarly convert into shares of Class B common stock (or Class A common stock, as specified in the Amended and Restated Certificate of Incorporation) of the re-domesticated Delaware corporation on a one-for-one basis;
(c) All outstanding warrants of PVAC will continue to be exercisable on their existing terms for shares of the re-domesticated entity's Class A common stock; and
(d) All other rights, contracts, and obligations of PVAC, including the Trust Account and the investment management trust agreement with Grandview Trust Company, N.A., will continue in full force and effect as obligations of the re-domesticated Delaware corporation.
The tax implications of the re-domestication are addressed in detail in Section VI.F of this memorandum. In summary, the re-domestication should qualify as a tax-free reorganization under Section 368(a)(1)(F) of the Code as a "mere change in identity, form, or place of organization" of PVAC.
C. Merger Consideration
The total implied enterprise value of HBT in the proposed transaction is $40,000,000. This enterprise value was negotiated at arm's length between HBT and PVAC, with the assistance of their respective financial advisors, Calvert & Wren Advisory LLC and Birchwood Partners LLC, and reflects the parties' assessment of HBT's clinical-stage pipeline, intellectual property portfolio, team, and development milestones.
The enterprise value was set equal to the deal value by agreement of the parties. Specifically, the parties agreed that the closing net cash and closing net debt of HBT would be set to zero for purposes of the merger consideration calculation. To accomplish this, all of HBT's outstanding indebtedness will be repaid and all cash on HBT's balance sheet will be distributed to HBT's equityholders or otherwise swept prior to the closing, such that HBT is delivered to the combined company on a cash-free, debt-free basis. Customary closing adjustments for working capital, if any, will be addressed in the BCA.
The merger consideration payable to HBT equityholders consists entirely of shares of PVAC (post-re-domestication) Class A common stock at a deemed value of $10.00 per share. The total number of shares to be issued as merger consideration is calculated as follows:
$40,000,000 ÷ $10.00 per share = 4,000,000 shares
It is critically important for the tax analysis set forth in Section VI that the merger consideration consists entirely of stock and does not include any cash component. The all-stock nature of the consideration is the principal factor supporting qualification of the merger as a tax-free reorganization under Section 368(a) of the Code, and specifically the satisfaction of the "continuity of interest" requirement.
At the effective time of the merger, each outstanding share of HBT common stock will be converted into the right to receive a pro rata portion of the 4,000,000 merger consideration shares, based on each holder's pre-closing ownership percentage of HBT common stock. No fractional shares will be issued; instead, any fractional share amounts will be rounded down to the nearest whole share, and the holder will receive a de minimis cash payment in lieu of the fractional share.
The treatment of HBT stock options and restricted stock awards outstanding at the effective time of the merger remains subject to negotiation between the parties and will be set forth in the BCA. The principal alternatives under consideration are: (a) conversion of all outstanding HBT equity awards into equivalent awards in the combined company based on the exchange ratio applicable to the merger consideration, preserving the vesting schedules and other terms of the original awards to the extent practicable; or (b) acceleration of all outstanding HBT equity awards at the effective time, with the holders receiving merger consideration shares in respect of the net exercised or vested amount of such awards. The tax treatment of the equity award conversion or acceleration will be addressed in a separate analysis to be prepared by Calderwood & Harkness LLP in conjunction with the equity compensation provisions of the BCA.
D. Earnout Structure
In addition to the upfront merger consideration of 4,000,000 shares described above, the former equityholders of HBT will be eligible to receive up to an additional 500,000 shares of HBIO Class A common stock (the "Earnout Shares") in two tranches, contingent upon the achievement of specified post-closing stock price milestones. The earnout is structured to bridge the gap between the parties' respective views of HBT's value and to provide the HBT equityholders with additional upside participation tied to the post-closing performance of the combined company's stock, without increasing the fixed upfront dilution to PVAC's existing shareholders and the PIPE investors.
The two earnout tranches are structured as follows:
Tranche 1: 250,000 Earnout Shares will be issued to the former HBT equityholders if the volume-weighted average closing price ("VWAP") of HBIO Class A common stock on Nasdaq equals or exceeds $14.00 per share for any 20 trading days within any period of 30 consecutive trading days during the 36-month period following the closing of the merger (the "Earnout Period").
Tranche 2: An additional 250,000 Earnout Shares will be issued to the former HBT equityholders if the VWAP of HBIO Class A common stock on Nasdaq equals or exceeds $16.00 per share for any 20 trading days within any period of 30 consecutive trading days during the Earnout Period.
The Earnout Shares will be distributed to the former HBT equityholders on a pro rata basis in accordance with their respective pre-closing ownership percentages of HBT common stock, using the same allocation methodology as the upfront merger consideration. The inclusion of the 20-out-of-30 trading day measurement window is intended to prevent manipulation and to ensure that the stock price milestones reflect sustained market performance rather than a single day's trading activity.
Several additional structural elements of the earnout remain subject to negotiation between the parties and will be reflected in the definitive BCA:
(a) Issuance Mechanics. Whether the Earnout Shares will be held in escrow and released upon achievement of the applicable milestone, or whether the shares will be authorized but unissued and will be newly issued upon achievement of the milestone. The escrow approach provides greater certainty to HBT equityholders that the shares will be available, while the authorized-but-unissued approach avoids the need for an escrow agent and the associated costs and complications.
(b) Voting and Dividend Rights. If the Earnout Shares are held in escrow pending milestone achievement, the parties will need to determine whether the holders of the escrowed shares will have voting and dividend rights during the escrow period, or whether such rights will vest only upon release of the shares from escrow.
(c) Acceleration on Change of Control. In the event of a change of control of the combined company during the Earnout Period (whether by merger, tender offer, or otherwise), all unvested Earnout Shares will automatically vest and be issued to the former HBT equityholders. This acceleration provision is intended to protect the HBT equityholders from the loss of their earnout opportunity in the event of a post-closing acquisition of the combined company at a price below the earnout thresholds.
The federal income tax treatment of the earnout is addressed in Section VI.D of this memorandum. In summary, because the earnout consists entirely of additional HBIO common stock (with no cash component), the receipt of earnout shares should be treated as tax-free additional reorganization consideration under the applicable Treasury Regulations.
E. Sponsor Arrangements
1. Sponsor Forfeiture
Pinnacle Venture Sponsor LLC (the "Sponsor") has agreed, as part of the negotiated terms of the proposed transaction, to forfeit 375,000 of its 1,250,000 Founder Shares at the effective time of the merger. This forfeiture represents a 30% reduction of the Sponsor's equity position in PVAC. Following the forfeiture, the Sponsor will retain 875,000 shares of the combined company.
The Sponsor forfeiture was negotiated as a condition of HBT's agreement to proceed with the transaction and was a material factor in the arm's-length negotiations between the parties. The purpose of the forfeiture is to reduce the overall dilution to the former HBT equityholders and the PIPE investors, thereby improving the post-closing ownership percentage of those groups and aligning the economic interests of the Sponsor more closely with the success of the combined company. The forfeited shares will be cancelled at the effective time of the merger and will no longer be outstanding.
2. Sponsor Lock-Up
All 875,000 shares retained by the Sponsor following the forfeiture will be subject to a 12-month post-closing lock-up, during which period the Sponsor will be prohibited from transferring, selling, pledging, or otherwise disposing of any of its retained shares. The lock-up is subject to an early release provision: the lock-up will terminate early if the closing price of HBIO Class A common stock equals or exceeds $12.00 per share for any 20 trading days within any period of 30 consecutive trading days after 150 days following the closing of the merger.
The lock-up provisions will be set forth in a Sponsor Support Agreement, which will be executed by the Sponsor concurrently with the execution of the BCA. The Sponsor Support Agreement will also contain customary representations and warranties by the Sponsor regarding its ownership of the Founder Shares and its authority to enter into the agreement.
3. Sponsor Voting and Waiver
Pursuant to the Sponsor Support Agreement, the Sponsor will agree to the following:
(a) Voting Commitment. The Sponsor will vote all of its Class B ordinary shares (and any other shares of PVAC over which it has voting control) in favor of the approval and adoption of the BCA and the transactions contemplated thereby, including the merger and the re-domestication, at any meeting of PVAC shareholders called for such purpose.
(b) Waiver of Anti-Dilution Protections. The Sponsor will waive any anti-dilution protections or adjustments that might otherwise apply to the Founder Shares under PVAC's Memorandum and Articles of Association or any other governing documents.
(c) Waiver of Redemption Rights. The Sponsor will waive any right to redeem its Founder Shares in connection with the shareholder vote on the business combination. This waiver ensures that the trust account proceeds remain available for the combined company and is consistent with the customary terms applicable to SPAC sponsor founder shares.
F. PIPE Financing
Concurrently with the closing of the merger, two institutional investors have committed to purchase shares of PVAC (post-re-domestication) Class A common stock through a private placement, commonly referred to in the de-SPAC context as a "PIPE" (private investment in public equity). The PIPE commitments are as follows:
Brindoval Capital Management, LP, a healthcare-focused investment fund based in San Francisco, California (contact: Thomas Yeung, Managing Partner), has committed to invest $15,000,000 in exchange for 1,500,000 shares of Class A common stock at a purchase price of $10.00 per share.
Lakepoint Health Opportunities Fund, LP, based in New York, New York (contact: Diana Strickland, Principal), has committed to invest $5,000,000 in exchange for 500,000 shares of Class A common stock at a purchase price of $10.00 per share.
The total PIPE commitment is $20,000,000 for an aggregate of 2,000,000 shares. The PIPE proceeds will be funded into escrow or directly to the combined company concurrently with the closing of the merger. The funding of the PIPE is conditioned upon the consummation of the business combination, such that if the merger does not close for any reason, the PIPE investors will not be obligated to fund their commitments and no shares will be issued.
Birchwood Partners LLC, PVAC's financial advisor, served as the exclusive placement agent for the PIPE. The PIPE subscription agreements will be executed on or about the date of execution of the BCA and will contain customary representations, warranties, and covenants by the PIPE investors, including representations regarding accredited investor or qualified institutional buyer status under the Securities Act of 1933, as amended (the "Securities Act").
The PIPE investors will receive customary registration rights, including piggyback registration rights and demand registration rights, pursuant to a registration rights agreement to be entered into at the closing. These registration rights will allow the PIPE investors to include their shares in any registration statement filed by the combined company and to demand the filing of a registration statement for the resale of their shares, subject to customary holdback, cutback, and other limitations.
The PIPE financing is a critical component of the overall transaction structure. Because PVAC public shareholders have the right to redeem their shares for a pro rata portion of the trust account in connection with the shareholder vote on the business combination, the actual amount of cash available to the combined company from the trust account is uncertain and depends on the level of shareholder redemptions. The PIPE commitment of $20,000,000 provides a significant floor of available cash that is not subject to the uncertainty of public shareholder redemptions. As discussed in Section IV.F below, the PIPE is essential to ensuring satisfaction of the minimum cash condition set forth in the BCA.
The federal income tax treatment of the PIPE investment is addressed in Section VI.E of this memorandum.
G. Post-Closing Structure
Following the consummation of the re-domestication and the merger, the post-closing corporate structure will be as follows:
• Public Parent Company: Helix Bio Therapeutics Holdings Inc. (f/k/a Pinnacle Venture Acquisition Corp.), a Delaware corporation, listed on Nasdaq under the ticker symbol "HBIO." This entity will be the publicly traded holding company and the registrant for SEC reporting purposes.
• Operating Subsidiary: Helix Bio Therapeutics Inc. (the surviving corporation of the merger), a Delaware corporation and wholly owned subsidiary of Helix Bio Therapeutics Holdings Inc. This entity will conduct all of the combined company's operating activities, including the development of the HBT-301 and HBT-502 programs.
The principal executive offices of the combined company will be located at 450 Kendall Street, Suite 800, Cambridge, Massachusetts 02142, the current headquarters of HBT. The first anticipated trading day of HBIO on Nasdaq is June 21, 2023. The Nasdaq listing application for the combined company has been assigned listing application number HBIO-2023-0615. The transfer agent for the combined company's common stock will be Adriatic Health IT of Delaware, Inc., located at 1 Ashbury Asset Advisors, 30th Floor, New York, New York 10004.
The post-closing board of directors and management of the combined company are subject to negotiation between the parties and will be specified in the BCA and the Amended and Restated Certificate of Incorporation. It is anticipated that Dr. Priya Nandakumar will serve as Chief Executive Officer of the combined company and that the board will include representatives of HBT, PVAC/Sponsor, and independent directors satisfying Nasdaq listing requirements.
IV. FINANCIAL STRUCTURE AND SOURCES & USES
A. Sources of Funds
The combined company's available cash at closing will be derived from two principal sources:
The Trust Account balance of $51,247,813.55 reflects the gross proceeds of the IPO ($50,000,000) plus accrued interest earned on the trust investments since the IPO closing date of August 16, 2021. The trust investments consist primarily of U.S. Treasury securities and money market funds invested in U.S. government obligations, as required by the investment management trust agreement between PVAC and Grandview Trust Company, N.A.
B. Shareholder Redemptions
PVAC public shareholders have the right, in connection with the shareholder vote on the proposed business combination, to redeem their Class A ordinary shares for a pro rata portion of the funds held in the Trust Account. This redemption right is a fundamental feature of the SPAC structure and is set forth in PVAC's Memorandum and Articles of Association. The redemption price per share is calculated by dividing the aggregate amount on deposit in the Trust Account (including accrued interest, net of taxes payable on such interest) by the number of then-outstanding Class A ordinary shares.
Based on current market conditions and recent de-SPAC transaction experience, we project the following redemption scenario:
• Assumed redemption: 2,814,390 shares out of 5,000,000 Class A ordinary shares, representing a 56.3% redemption rate
• Redemption price per share: approximately $10.25 (calculated as $51,247,813.55 ÷ 5,000,000 ≈ $10.2496, rounded to $10.25)
• Total cash used for redemptions: 2,814,390 shares × $10.25 per share = $28,847,497.50
• Trust Account proceeds available after redemptions: $51,247,813.55 − $28,847,497.50 = $22,400,316.05
The 56.3% redemption rate assumption is based on a review of comparable de-SPAC transactions completed in 2022 and early 2023, which have experienced elevated redemption rates due to rising interest rates and broader market conditions. As discussed in Section VIII.A below, the sensitivity analysis indicates that the minimum cash condition can withstand redemptions of up to approximately 73.3% before becoming at risk.
C. Total Cash Available to Combined Company
The total cash available to the combined company before the payment of transaction expenses is the sum of the Trust Account proceeds remaining after redemptions and the PIPE proceeds:
D. Transaction Expenses
The estimated aggregate transaction expenses to be incurred in connection with the business combination are summarized as follows:
The deferred underwriting commission of $1,750,000 was deferred at the time of the IPO and is payable to Birchwood Partners LLC only upon the consummation of the initial business combination. The legal fee estimates are based on current time and expense projections and are subject to adjustment as the transaction progresses. The D&O tail policy from Ridgepoint Specialty Insurance Company provides six years of coverage for the pre-closing directors and officers of HBT against claims arising from pre-closing acts or omissions.
E. Net Cash to Combined Company
After deducting the estimated transaction expenses from the total cash available, the net cash to the combined company at closing is estimated as follows:
$42,400,316.05 − $6,000,000.00 = $36,400,316.05
This amount represents the combined company's estimated cash position at closing, before giving effect to any cash on HBT's balance sheet at closing (which, as noted above, the parties have agreed will be swept to zero) and before any post-closing operational expenditures.
F. Minimum Cash Condition
Section 7.03(c) of the BCA (as currently drafted) provides that, as a condition to HBT's obligation to consummate the merger, the available cash at closing — defined as the Trust Account proceeds net of shareholder redemptions, plus the PIPE proceeds, minus aggregate transaction expenses — must be no less than $30,000,000 (the "Minimum Cash Condition"). This condition is for the benefit of HBT and may not be waived by PVAC without HBT's consent.
Based on the projected financial scenario set forth above:
Net cash to combined company: $36,400,316.05
Minimum Cash Condition: $30,000,000.00
Surplus above Minimum Cash Condition: $6,400,316.05
The Minimum Cash Condition is expected to be satisfied with a comfortable margin. The rationale for the Minimum Cash Condition reflects HBT's status as a pre-commercial, cash-burning clinical-stage biotechnology company. With a FY2022 net loss of ($18.4 million), HBT requires a minimum level of cash at closing to fund the continued clinical development of HBT-301 (Phase 1b clinical trials for Friedreich's ataxia) and HBT-502 (preclinical development for Wilson's disease) and to support the combined company's general corporate operations for a period sufficient to achieve meaningful clinical milestones and/or raise additional capital.
Sensitivity Analysis. We have analyzed the sensitivity of the Minimum Cash Condition to variations in the redemption rate. The Minimum Cash Condition would be at risk if redemptions exceeded approximately 3,667,000 shares out of 5,000,000 Class A shares (approximately 73.3%). At that level of redemptions, the Trust Account proceeds after redemptions would be approximately $13,641,392.50, which, when combined with the $20,000,000 PIPE proceeds and reduced by $6,000,000 in transaction expenses, would yield net cash of approximately $27,641,392.50 — below the $30,000,000 threshold. The current projected redemption level of 2,814,390 shares (56.3%) provides a margin of safety of approximately 852,610 additional shares (approximately 17 percentage points of additional redemption capacity).
G. Post-Closing Capitalization
The following table sets forth the projected post-closing capitalization of the combined company on an undiluted basis (excluding the earnout shares and warrants):
On a fully diluted basis, the following additional share equivalents would be outstanding:
• Earnout Shares (assuming both Tranche 1 and Tranche 2 milestones are achieved): 500,000 shares
• Public Warrants (2,500,000 warrants at a strike price of $11.50 per share): 2,500,000 shares
The fully diluted total share count, assuming achievement of all earnout milestones and exercise of all public warrants, would be 12,060,610 shares.
The post-closing ownership of the former HBT equityholders is significant for multiple purposes. From a governance perspective, the former HBT equityholders will hold a plurality of the undiluted post-closing shares at 44.1%, making them the single largest shareholder group. From a tax perspective, the 44.1% ownership stake of the former HBT equityholders is relevant to the "continuity of interest" test under the tax-free reorganization analysis set forth in Section VI.B.2 below.
V. ALTERNATIVE STRUCTURES CONSIDERED
In the course of negotiations and deal structuring, we evaluated several alternative transaction structures before recommending the forward triangular merger. Each alternative was assessed on the basis of its tax treatment, corporate law implications, effect on the Nasdaq listing, consent and assignment requirements, and overall transactional complexity. Set forth below is a summary of each alternative considered and the reasons for its rejection.
A. Reverse Triangular Merger
Under a reverse triangular merger, Merger Sub would merge with and into HBT, with HBT as the surviving corporation. However, unlike the proposed forward merger, in a reverse triangular merger the equityholders of PVAC and the PIPE investors would receive equity in HBT (or a newly formed holding company parent of HBT), rather than the HBT equityholders receiving shares of PVAC.
This structure was rejected for several reasons. First, it creates significant complexity around PVAC's existing Nasdaq listing and public float. PVAC is the entity listed on Nasdaq, and the de-SPAC transaction is intended to result in the continued listing of PVAC (renamed) as the publicly traded parent company. A reverse structure in which the listed entity changes would require a new Nasdaq listing application and could disrupt the continuity of the public float. Second, the reverse structure does not achieve the desired two-tier public-company parent / operating subsidiary structure as cleanly as the forward merger. Third, there is no incremental tax benefit of the reverse triangular merger over the forward merger in the context of this transaction, as both structures can qualify for tax-free reorganization treatment under Section 368(a) of the Code.
It is worth noting that the proposed forward merger already results in HBT surviving as the operating subsidiary, which preserves HBT's material contracts, licenses, and regulatory approvals — including the Exclusive License Agreement with the Regents of Graystone University (License No. GU-2019-0914-HBT) and the Collaboration and Option Agreement with Meridian Pharmaceuticals Inc. (Ref. MPI-COA-2021-0308) — without the need for entity-level assignment in most cases.
B. Stock-for-Stock Exchange (No Merger)
Under this alternative, HBT shareholders would exchange their shares of HBT common stock directly for shares of PVAC (re-domesticated) Class A common stock in a share exchange, without the use of a statutory merger. This approach could potentially qualify as a reorganization under Section 368(a)(1)(B) of the Code (a "B reorganization").
This structure was rejected because it requires the affirmative consent of each individual HBT shareholder to effectuate the exchange. Unlike a statutory merger, which operates by operation of law upon approval by the requisite vote of shareholders (typically a majority), a stock-for-stock exchange has no statutory squeeze-out mechanism and would leave dissenting HBT shareholders as minority shareholders of a private company. This is particularly problematic given HBT's fragmented shareholder base, which includes two institutional venture capital investors, two founders, and a group of employees and early-stage angel investors. Obtaining 100% shareholder participation would be administratively burdensome and uncertain.
Additionally, this structure does not cleanly extinguish HBT as a standalone entity and could result in a minority shareholder overhang that complicates the post-closing corporate governance. Finally, while a B reorganization can provide tax-free treatment, it is subject to stricter requirements than an A reorganization (specifically, the "solely for voting stock" requirement), which provides less flexibility in structuring the transaction.
C. Direct Merger (PVAC Merges with HBT, No Merger Sub)
Under this alternative, PVAC would merge directly with HBT, without the use of a subsidiary merger vehicle. In such a structure, one of the two entities would survive and the other would cease to exist.
This structure was rejected primarily because it complicates the continuation of the Nasdaq listing. If HBT were the surviving entity, the Nasdaq-listed entity (PVAC) would cease to exist, and HBT would need to apply for a new Nasdaq listing — a more complex and time-consuming process than the re-listing of PVAC (renamed) under the proposed forward merger structure. If PVAC were the surviving entity, HBT would cease to exist as a legal entity, which would require the assignment or novation of all of HBT's material contracts, licenses, leases, and regulatory filings from HBT to PVAC — precisely the kind of administrative burden that the forward triangular merger structure is designed to avoid.
Moreover, a direct merger structure does not achieve the clean two-tier parent/subsidiary structure that is desirable for a publicly traded holding company with an operating subsidiary. Finally, if the direct merger were to occur before the re-domestication of PVAC from the Cayman Islands to Delaware, there would be potential complications arising from the cross-jurisdictional nature of the merger (Cayman Islands entity merging with a Delaware corporation) and from PVAC's existing Cayman Islands organizational documents, which may not contemplate or permit such a transaction without significant amendment.
D. Asset Acquisition
Under this alternative, PVAC (or a subsidiary of PVAC) would acquire all or substantially all of the assets of HBT in a taxable asset purchase.
This structure was rejected for several compelling reasons. First, HBT's key assets include licensed intellectual property (principally the Exclusive License Agreement with the Regents of Graystone University), clinical-stage programs (HBT-301 and HBT-502), and a broad array of contracts, permits, and regulatory filings. An asset acquisition would require the individual assignment or transfer of every material contract, lease (including the lease with Kendall Square Properties Trust, Lease No. KSP-2020-0800), permit, and regulatory filing held by HBT, which would be significantly more complex, time-consuming, and risky than a merger in which HBT continues as the surviving entity. Second, the transfer of FDA regulatory filings and designations in an asset acquisition could result in delays or complications in HBT's clinical development timeline. Third, an asset acquisition would be a taxable transaction to the HBT equityholders, who would recognize gain or loss on the deemed sale of HBT's assets — a result that is materially inferior to the tax-free treatment available under the proposed forward merger structure. Fourth, an asset acquisition would require HBT to subsequently wind down and dissolve its corporate entity, adding further complexity and cost.
E. Rationale for Selected Structure
For the foregoing reasons, the forward triangular merger is the recommended transaction structure. It is the most common and well-understood structure for de-SPAC business combinations, providing market participants and regulators with a high degree of familiarity and predictability. The key advantages of the forward triangular merger are as follows:
(a) Entity Preservation. HBT survives as a legal entity, minimizing change-of-control issues and preserving HBT's contracts, licenses, permits, and regulatory filings. While certain material contracts do contain change-of-control provisions requiring consent or notice (as discussed in Section VII), the forward merger significantly reduces the scope of required assignments relative to an asset acquisition.
(b) Public-Company Structure. The forward merger achieves the desired two-tier structure with a Nasdaq-listed public holding company (Helix Bio Therapeutics Holdings Inc.) and a wholly owned operating subsidiary (HBT), consistent with standard practice for publicly traded biotechnology companies.
(c) Tax-Free Treatment. The forward merger supports qualification as a tax-free reorganization under Section 368(a)(1)(A) by reason of Section 368(a)(2)(E) of the Code, and potentially also under Section 351, as discussed in detail in Section VI below. The all-stock consideration structure maximizes the probability of tax-free treatment for HBT equityholders.
(d) Nasdaq Listing Continuity. PVAC continues as the listed entity (renamed), facilitating the continuation of the Nasdaq listing and avoiding the need for a de novo listing application.
(e) Market Precedent. The forward triangular merger is consistent with the structure used in the vast majority of de-SPAC transactions, providing market participants, the SEC, the IRS, and Nasdaq with a well-established framework for analysis and review.
VI. FEDERAL INCOME TAX ANALYSIS
A. Overview and Importance
A principal objective of the deal structuring process has been to ensure that the transaction is structured so that the exchange by HBT equityholders of their shares of HBT common stock for shares of the combined company (HBIO) is tax-free (or, more precisely, tax-deferred) to the greatest extent possible under the Internal Revenue Code. This objective is important not only to the HBT equityholders themselves (who, in a taxable transaction, would be required to recognize gain on their exchange of HBT shares for HBIO shares), but also to the commercial viability of the transaction as a whole, as tax-free treatment is frequently a condition to closing in de-SPAC transactions involving private company targets with venture-backed shareholder bases.
This Section VI sets forth our analysis of the federal income tax treatment of the proposed transaction under two primary frameworks:
(i) Tax-free reorganization under Section 368 of the Code. This is the primary basis for nonrecognition treatment and is the framework upon which we recommend the parties rely.
(ii) Section 351 exchange. This provides an alternative (though less certain) basis for nonrecognition treatment, particularly in the de-SPAC context where the PIPE and other elements of the transaction may be integrated into the analysis.
Important Disclaimer. This analysis is preliminary and is prepared for internal planning purposes in connection with the structuring of the proposed transaction. It does not constitute a formal tax opinion and should not be relied upon as such by any party. The analysis is based on the facts and assumptions set forth in this memorandum, current provisions of the Code, Treasury Regulations promulgated thereunder, judicial decisions, and IRS administrative guidance as of the date hereof, all of which are subject to change, possibly with retroactive effect. Formal tax opinions will be required in connection with the filing of the Form S-4 registration statement (SEC File No. 333-271498) and the proxy statement/prospectus to be distributed to PVAC shareholders, and such opinions will be delivered by Calderwood & Harkness LLP (for HBT equityholders) and Hargrove Slater & Dunn LLP (for PVAC shareholders).
B. Tax-Free Reorganization Under Section 368(a)
1. Applicable Reorganization Types
The proposed merger of Merger Sub with and into HBT, with HBT surviving, is analyzed under two interrelated provisions of Section 368(a) of the Code.
Section 368(a)(1)(A) — Statutory Merger. Section 368(a)(1)(A) defines a "reorganization" to include "a statutory merger or consolidation." A statutory merger is a merger effected pursuant to a state or federal merger statute. Here, the merger of Merger Sub with and into HBT will be effected pursuant to Section 251 of the DGCL, which is the general Delaware merger statute. Accordingly, the merger satisfies the threshold requirement of being a statutory merger under Section 368(a)(1)(A).
Section 368(a)(2)(E) — Forward Triangular Merger. Because the merger is accomplished through a subsidiary (Merger Sub) of the acquiring corporation (PVAC), rather than through a direct merger of PVAC itself with and into HBT, the transaction must also satisfy the requirements of Section 368(a)(2)(E) of the Code. Section 368(a)(2)(E) provides that a transaction otherwise qualifying as a reorganization under Section 368(a)(1)(A) will not be disqualified by reason of the fact that the merger is with a subsidiary of the acquiring corporation, provided that the following requirements are met:
(a) Statutory Merger Requirement. The transaction must otherwise qualify as a reorganization under Section 368(a)(1)(A) — that is, it must be a statutory merger. As discussed above, the merger will be effected under DGCL Section 251, satisfying this requirement.
(b) No Stock of Acquiring Subsidiary Used. No stock of the acquiring subsidiary (Merger Sub) may be used as consideration in the merger. In the proposed transaction, HBT equityholders will receive only shares of PVAC (the parent of Merger Sub) Class A common stock as merger consideration. No stock of Merger Sub is used as consideration. This requirement is satisfied.
(c) "Substantially All" Properties Requirement. The surviving corporation (HBT) must acquire "substantially all" of the properties of the merged entity (Merger Sub). Merger Sub is a newly formed shell corporation with no material assets or operations other than those incident to the merger. At the effective time of the merger, HBT (as the surviving corporation) will acquire all of Merger Sub's properties, which consist solely of its corporate charter and any nominal assets contributed by PVAC in connection with its formation. This requirement is unquestionably satisfied.
(d) Hypothetical Direct Merger Test. The transaction must be one that would have qualified under Section 368(a)(1)(A) if the merged corporation (Merger Sub) had merged directly into the acquiring corporation (PVAC). Because a direct merger of Merger Sub into PVAC would be a statutory merger under the applicable state law (whether DGCL or Cayman Islands law, depending on timing), and because all other reorganization requirements (discussed below) would be satisfied in such a hypothetical direct merger, this requirement is met.
Based on the foregoing, the merger should qualify as a reorganization under Section 368(a)(1)(A) by reason of Section 368(a)(2)(E) of the Code, subject to satisfaction of the judicial doctrines discussed below.