DEFA14A: Clearwater Analytics Seeks Shareholder Approval to Terminate Tax Receivable Agreement for $72.5 Million

Clearwater Analytics is asking unaffiliated stockholders to vote on a proposal to terminate the Tax Receivable Agreement (TRA) by paying an aggregate of $72.5 million to TRA counterparties and certain pre-IPO members of management.

Summary

• Clearwater Analytics is seeking shareholder approval to terminate its Tax Receivable Agreement (TRA).
• The company proposes to pay $72.5 million to TRA counterparties and certain pre-IPO members of management to terminate the agreement.
• This termination requires approval from a majority of unaffiliated stockholders, excluding parties to the TRA, TRA bonus holders, named executive officers, and affiliated directors.
• The TRA relates to payments by the company to TRA participants of 85% of the amount of any tax benefits that the company realizes as a result of certain tax attributes.
• These attributes include any increase in the tax basis of the net assets of CWAN Holdings resulting from exchanges of CWAN Holdings units for shares of Class A common stock.
• The company recorded TRA expenses of $11.6 million in 2022, $14.4 million in 2023, and expects approximately $17 million for the full year 2024.
• As of September 30, 2024, the company has $28.8 million in unpaid TRA liabilities recorded on its balance sheet.
• The estimated potential sum of future TRA liability from past and hypothetical future exchanges as of September 30, 2024, is $614 million, with $417 million related to historical exchanges and $197 million related to future exchanges.
• Terminating the TRA is expected to generate significant savings compared to cumulative expenses over the TRA's life.
• Termination will eliminate the need to use cash for ongoing TRA obligations, positively impacting future operating cash flow and potentially the company's valuation.
• The company believes terminating the TRA will eliminate the need to record a large liability when releasing the valuation allowance on deferred tax asset balances, enhancing the ability to complete strategic transactions.
• As of the beginning of 2023, there were over 177 million Class C and Class D shares outstanding, which were held exclusively by TRA participants; this number has decreased to less than 75 million shares outstanding today.
• The Board special committee did extraordinary work in bringing the TRA termination proposal to our shareholders for ratification on a vote.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive. While there is a cost associated with terminating the TRA, the company frames it as a strategic move that will ultimately benefit shareholders by reducing future liabilities and improving cash flow. The management's comments are also optimistic.

Positives

• Terminating the TRA is expected to result in significant savings compared to the cumulative expenses over the life of the agreement.
• The company will no longer need to use cash to fund ongoing TRA obligations, improving future operating cash flow.
• The termination will eliminate the need to record a large liability when releasing the valuation allowance on deferred tax asset balances.
• The company believes it will have greater ability to complete strategic transactions.
• The decision to terminate the TRA is being put to a vote of unaffiliated shareholders.

Negatives

• The company will need to spend $72.5 million to terminate the TRA.
• The company has already accrued $28.8 million in unpaid TRA liabilities.
• The company expects full year TRA expense to be approximately $17 million absent any settlement.

Risks

• The company may not obtain the required shareholder approval to terminate the TRA.
• The company may not be able to satisfy the conditions to the effectiveness of the Amendment, including the requirement to obtain the approval of the Company's Unaffiliated Stockholders.
• There are risks related to the disruption of management's attention from the Company's ongoing business operations due to the TRA Buyout.
• There are risks related to the significant transaction costs to be paid in connection with the TRA Buyout and their impact on the Company's financial condition.
• There are risks of legal proceedings that may arise as a result of the TRA Buyout.
• Changes in applicable laws or fluctuations in the Company's taxable income could impact the Company's ability to realize the anticipated benefits from the TRA Buyout.

Future Outlook

The company expects the full year TRA expense to be approximately $17 million absent any settlement. The company anticipates significant savings and improved cash flow if the TRA termination is approved.

Management Comments

• Jim Cox: 'We are asking our unaffiliated stockholders to vote on a proposal to terminate the Tax Receivable Agreement by paying an aggregate of $72.5 million to the TRA counterparties and certain pre-IPO members of management.'
• Jim Cox: 'We believe the termination of the TRA is in the best interest of all shareholders.'
• Jim Cox: 'We believe it is a good and shareholder-friendly use of resources to execute this TRA termination at this time.'
• Sandeep Sahai: 'These results were extraordinary, but they are not generated by Jim or myself or just Subi. It is the team which does that.'
• Sandeep Sahai: 'I also want to take a moment to thank the Board special committee, which did extraordinary work in bringing the TRA termination proposal to our shareholders for ratification on a vote.'

Industry Context

Many companies with pre-IPO tax receivable agreements have faced similar decisions regarding whether to terminate these agreements. The decision often hinges on balancing the immediate cash outlay against the potential for future liabilities and the impact on shareholder value.

Comparison to Industry Standards

• Other companies with TRAs, such as those in the technology and healthcare sectors, have also considered or executed TRA terminations.
• The valuation of TRA liabilities and the terms of termination can vary significantly based on factors such as the company's tax position, share price, and the terms of the original agreement.
• The $72.5 million termination payment represents a fraction of the estimated $614 million in potential future TRA liabilities, which could be seen as a favorable outcome compared to some industry benchmarks.

Stakeholder Impact

• Shareholders: The termination of the TRA is expected to benefit shareholders by reducing future liabilities and improving cash flow.
• TRA Participants: The TRA participants will receive a payment of $72.5 million in exchange for terminating the agreement.
• Employees: The termination of the TRA is not expected to have a direct impact on employees.

Next Steps

• The company will hold a special meeting of stockholders to vote on the TRA termination proposal.
• The company will continue to engage with shareholders to explain the benefits of the proposed termination.

Key Dates

Keywords

Tax Receivable Agreement, TRA, Shareholder Vote, Termination, Clearwater Analytics, CWAN, Liabilities, Tax Benefits, Proxy Statement