Contract analysis

I. Executive Summary The purpose of this memorandum is to analyze whether the proposed contribution by Veldran Industries Holdings, Inc. ("Veldran" or "Distributing") of all assets and liabilities associated with its Precision Flow Solutions Division to Meridian Flow Technologies, Inc. ("Meridian," "Controlled," or "SpinCo") — in exchange for one hundred percent (100%) of the outstanding common stock of Meridian and

II. Background and Transaction Overview A. The Parties

1. Veldran Industries Holdings, Inc. (Distributing) Veldran Industries Holdings, Inc. ("Veldran") is a corporation organized under the laws of the State of Delaware, having been incorporated on March 14, 2019 (Employer Identification Number 86-1920347). Veldran maintains its principal executive office at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217, and its registered agent and registered addr

2. Meridian Flow Technologies, Inc. (Controlled / SpinCo) Meridian Flow Technologies, Inc. ("Meridian") is a planned Delaware corporation that has not yet been incorporated as of the date of this memorandum. Upon incorporation, Meridian's registered agent and registered address will be located at 1209 Orange Street, Wilmington, Delaware 19801, and its principal executive office will be located at 7100 Northlake Parkw

3. Harrowgate Private Equity Fund IV, L.P. (Controlling Shareholder) Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV") is a limited partnership organized under the laws of the State of Delaware (Employer Identification Number 84-3291067). HPE Fund IV is a private equity fund with a fund size of approximately $6.8 billion (vintage 2018). The general partner of HPE Fund IV is Harrowgate Capital Partners IV GP LLC

4. Other Significant Shareholders In addition to HPE Fund IV, the following significant shareholders of Veldran have been identified: (a) Prescott Capital Management LP (EIN 13-4928371) holds approximately 14.8% of the outstanding common stock of Veldran, representing 11,026,000 shares. Prescott Capital Management LP is an institutional investment manager with its principal office at 277 Park Avenue, 42nd Floor, New

III. Statutory Framework — § 368(a)(1)(D) Reorganization A. Text of § 368(a)(1)(D)

Section 368(a)(1)(D) of the Code defines as a "reorganization" the following transaction: A transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are tra

Section 368(a)(1)(D) encompasses two fundamentally different types of reorganizations, commonly referred to as "acquisitive" D reorganizations and "divisive" D reorganizations. The distinction between the two is critical to the proper analytical framework. In an acquisitive D reorganization, the transferor corporation transfers substantially all of its assets to another corporation controlled by the transferor or its

Section 368(a)(1)(D) requires that, "immediately after the transfer," the transferor or its shareholders (or any combination thereof) be "in control" of the transferee corporation. The term "control" is defined by cross-reference to IRC § 368(c), which provides: The term "control" means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote an

IV. Application of § 368(a)(1)(D) to the Proposed Transaction A. The Contribution Satisfies the Transfer Requirement The first requirement of § 368(a)(1)(D) is that there be "a transfer by a corporation of all or a part of its assets to another corporation." The statute is satisfied by the transfer of "all" or "a part" of the transferor's assets — there is no minimum threshold, although in the divisive context the tr

1. Testing Immediately After the Contribution The control requirement of § 368(a)(1)(D) is satisfied if, "immediately after the transfer," the transferor (Veldran) or one or more of its shareholders (or any combination thereof) is "in control" of the transferee (Meridian), where "control" is defined by § 368(c) as ownership of stock possessing at least 80% of the total combined voting power of all classes of stock en

2. Effect of the Distribution on the Control Analysis After the Distribution, Veldran will own zero shares of Meridian stock, having distributed all 74,500,000 shares to its shareholders on a pro rata basis. This raises the question of whether the control requirement should be tested before or after the Distribution. In the context of a divisive D reorganization effected through a § 355 distribution, the well-establi

3. Conclusion on Control The control requirement of § 368(a)(1)(D), as defined by § 368(c), is satisfied because Veldran will own 100% of the outstanding common stock of Meridian immediately after the Contribution and before the Distribution. C. The Distribution Requirement Is Satisfied (Subject to § 355 Qualification) The second prong of § 368(a)(1)(D) requires that, in pursuance of the plan of reorganization, stock

V. Continuity of Interest Analysis A. The COI Requirement in General The continuity of interest ("COI") doctrine is a judicially developed requirement for tax-free reorganization treatment that has been codified in the Treasury Regulations. The COI doctrine provides that a transaction will not qualify as a reorganization unless the historic shareholders of the target (or, in a divisive reorganization, the transferor

1. General Rule — § 357(a) In the Contribution, Meridian will assume certain liabilities of the Precision Flow Solutions Division (the "Assumed Liabilities"). Under IRC § 357(a), the assumption of liabilities by the transferee corporation in a reorganization is generally not treated as "money" or "other property" received by the transferor — that is, the assumption of liabilities is not treated as boot. Accordingly,

2. Exception — § 357(c) Excess Liabilities

Section 357(c) provides an important exception to the general rule. Under § 357(c)(1), if the total amount of the liabilities assumed by the transferee exceeds the total adjusted basis of the properties transferred by the transferor, the excess is treated as gain from the sale or exchange of a capital asset (or, if the transferred property is not a capital asset, as ordinary income). This gain is recognized by the tr

3. Tax-Avoidance Purpose — § 357(b)

Section 357(b) provides another exception to the general rule of § 357(a). Under § 357(b), if the principal purpose of the assumption of liabilities is the avoidance of Federal income tax, or if there is not a bona fide business purpose for the assumption, the entire amount of the assumed liabilities is treated as boot received by the transferor. Section 357(b) shifts the burden of proof to the transferor (Veldran) t

4. Cross-Reference to Related Analyses The credit agreement governing the First Lien Term Loan B and the indenture governing the 6.250% Senior Unsecured Notes due 2027 contain restrictive covenants that may bear on the permissibility and mechanics of the debt allocation. Separate analyses of the credit agreement and indenture covenant implications are being prepared by the corporate finance team. We recommend coordin

VI. Interplay Between § 368(a)(1)(D) and § 355 A. Integrated Analysis Required A divisive D reorganization and a § 355 distribution are inextricably linked, forming a single integrated transaction structure that must satisfy the requirements of both provisions simultaneously. The qualification under one provision is contingent upon the qualification under the other: (i) The Distribution must qualify under § 355 for t

1. To Veldran (Distributing) (a) No gain or loss on the Contribution. Under § 361(a), Veldran will recognize no gain or loss on the transfer of the Contributed Business assets to Meridian in exchange for Meridian common stock. (b) No gain or loss on the Distribution. Under § 361(c), Veldran will recognize no gain or loss on the distribution of Meridian common stock to its shareholders. The Meridian common stock const

2. To Meridian (Controlled / SpinCo) (a) Carryover basis. Under § 362(b), Meridian will take a carryover basis in the Contributed Business assets equal to Veldran's adjusted basis in those assets, increased by any gain recognized by Veldran on the transfer. If Veldran recognizes no gain on the Contribution (as expected), Meridian's basis in the Contributed Business assets will equal Veldran's adjusted basis of approx

3. To Veldran Shareholders (a) No gain or loss on receipt of Meridian stock. Under § 355(a)(1), Veldran shareholders will recognize no gain or loss on the receipt of Meridian common stock in the Distribution, provided all § 355 requirements are satisfied. (b) Basis allocation. Under § 358, each shareholder's aggregate adjusted basis in its pre-spin Veldran common stock will be allocated between the Veldran common sto

1. Shareholder-Level Consequences The Distribution would be treated as a taxable distribution under IRC § 301. The distribution of Meridian stock to Veldran shareholders would be treated as a dividend to the extent of Veldran's current and accumulated earnings and profits, as a tax-free return of capital to the extent of each shareholder's adjusted basis in its Veldran stock, and as capital gain to the extent in exce

2. Corporate-Level Consequences If the Contribution does not qualify as a D reorganization, Veldran would be required to recognize gain on the transfer of the Precision Flow Solutions Division assets to Meridian to the extent the fair market value of the Meridian stock received exceeds Veldran's adjusted basis in the Contributed Business assets. Based on the estimated built-in gain of $596.5 million to $902.4 million

3. Aggregate Tax Exposure The combination of corporate-level gain recognition and shareholder-level dividend or capital gains treatment would result in a substantial aggregate tax liability. Furthermore, Meridian would take a fair-market-value basis (rather than a carryover basis) in the Contributed Business assets, which, while providing a "step-up" benefit for future depreciation and amortization, would not offset

VII. Potential Issues and Open Items A. Qualification of the Distribution Under § 355 As discussed throughout this memorandum, the § 368(a)(1)(D) reorganization analysis is contingent on the Distribution qualifying under IRC § 355. As of the date of this memorandum, the following significant § 355 issues remain open and are being analyzed in separate memoranda. Each of these issues has the potential to affect the via

1. Business Purpose The business purpose requirement — a judicially developed and administratively enforced prerequisite to § 355 qualification — requires that the Distribution be motivated by one or more substantial, real, and non-tax corporate business purposes. The articulated business purposes for the proposed spin-off include (i) independent capital-allocation strategies (enabling Meridian to invest in its growt

Section 355(b) requires that both Distributing (Veldran) and Controlled (Meridian) be engaged, immediately after the Distribution, in the active conduct of a trade or business that has been actively conducted throughout the five-year period ending on the date of the Distribution. Section 355(b)(2)(D) further provides that a trade or business is not treated as meeting the five-year active-conduct requirement if contro