Contract analysis

I. Executive Summary This memorandum analyzes whether the proposed pro rata distribution by Veldran Industries Holdings, Inc. ("Veldran" or "Distributing"), a Delaware corporation (EIN 86-1920347), of 100% of the outstanding common stock of Meridian Flow Technologies, Inc. ("Meridian," "Controlled," or "SpinCo"), a Delaware corporation to be formed, to Veldran's shareholders on a one-for-one basis (one share of Merid

II. Background and Transaction Summary A. Parties and Ownership Structure Veldran Industries Holdings, Inc. Veldran is a Delaware corporation incorporated on March 14, 2019. Its principal office is located at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217. Veldran is a diversified industrial products and engineered materials company operating across two principal business segments: the Engineere

III. Applicable Legal Framework A. Statutory Provision — IRC § 355(a)(1)(B)

Section 355(a) of the Code provides that, under certain circumstances, no gain or loss shall be recognized to a shareholder upon the receipt of stock of a controlled corporation that is distributed by a distributing corporation. To qualify for this tax-free treatment, however, the transaction must satisfy several requirements, including the requirement set forth in Section 355(a)(1)(B). That provision states, in rele

1. Device factors (Treas. Reg. § 1.355-2(d)(2)): factors that tend to establish the existence of a device — i.e., factors that suggest the transaction was used principally as a mechanism for distributing earnings and profits at favorable rates.

2. Non-device factors (Treas. Reg. § 1.355-2(d)(3)): factors that tend to establish the absence of a device — i.e., factors that suggest the transaction was undertaken for legitimate non-tax purposes and was not principally a mechanism for distributing earnings and profits. 3. "Ordinarily not a device" safe harbor (Treas. Reg. § 1.355-2(d)(5)): certain distributions that, by reason of their characteristics, will ordi

1. Pro Rata Distribution (Treas. Reg. § 1.355-2(d)(2)(ii)). A pro rata (or substantially pro rata) distribution is more likely to be a device than a non-pro rata distribution. The regulation explains that a pro rata distribution "presents the greatest opportunity for the distribution of earnings and profits in the guise of a tax-free reorganization" because all shareholders receive stock of the controlled corporation

2. Subsequent Sale or Exchange (Treas. Reg. § 1.355-2(d)(2)(iii)). A sale or exchange of stock of either the distributing corporation or the controlled corporation after the distribution is evidence that the transaction was used as a device. The strength of this evidence depends on several factors, including whether the sale was negotiated or agreed upon before the distribution. The regulations draw a critical distin

3. Nature and Use of Assets (Treas. Reg. § 1.355-2(d)(2)(iv)). If either the distributing corporation or the controlled corporation, immediately after the distribution, holds a disproportionate amount of non-operating assets, assets not required in the conduct of an active trade or business, or investment-type assets (such as cash, securities, or real estate held for investment), this factor tends to establish a devi

1. Corporate Business Purpose (Treas. Reg. § 1.355-2(d)(3)(ii)). The existence of a corporate business purpose for the distribution is evidence that the transaction is not a device. The regulations specify that the stronger the evidence of a corporate business purpose, the stronger the evidence that the distribution is not a device. The business purpose must be a "real and substantial non Federal tax purpose germane

2. Public Trading (Treas. Reg. § 1.355-2(d)(3)(iii)). The fact that the stock of either the distributing corporation or the controlled corporation is publicly traded, or that either corporation is widely held, is evidence that the distribution is not a device. The rationale is that shareholders of a publicly traded company can sell their stock on the open market and realize capital gains without the need for a spin-o

3. Absence of Earnings and Profits / Dividend History. While not expressly enumerated as a separate non-device factor in the regulations, the absence of a history of dividend payments by the distributing corporation is a relevant consideration in the overall facts-and-circumstances analysis. Where the distributing corporation has historically retained its earnings rather than distributing them as dividends, the spin-

IV. Application of Device Factors to the Proposed Spin-Off A. Pro Rata Distribution (Device Factor) The proposed Distribution of Meridian stock to Veldran shareholders is pro rata. Each holder of Veldran common stock will receive one share of Meridian common stock for each share of Veldran common stock held on the record date, resulting in a 1:1 distribution ratio. Following the Distribution, each Veldran shareholder

V. Application of Non-Device Factors to the Proposed Spin-Off A. Corporate Business Purpose (Non-Device Factor) The corporate business purpose is widely recognized as the single most important non-device factor in the § 355 device analysis. A strong corporate business purpose provides powerful evidence that the distribution is not a device for the distribution of earnings and profits, because it establishes that the

VI. Interaction of Device Factors and Non-Device Factors — Weighing Analysis A. Balancing Framework The device test requires a holistic weighing of all relevant device factors against all relevant non-device factors, in light of the totality of the facts and circumstances. The following summary reflects our assessment of the weight of each factor in the context of the proposed Spin-Off. Summary of Device Factors: (i)

VII. Impact of the Kestrel Acquisition on Device Analysis The Precision Flow Solutions Division includes the Kestrel Precision Controls business ("Kestrel"), which was acquired by Veldran on June 7, 2019, from Rennick Industrial Partners Fund II LP for $295 million in a taxable stock acqui