Contract analysis

I. Executive Summary Calderwood & Harkness LLP has been engaged by Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV"), a Delaware limited partnership managed by Harrowgate Capital Advisors LLC, to render a "should" level tax opinion in connection with the proposed separation of Veldran Industries Holdings, Inc. ("Veldran" or "Distributing"), a Delaware corporation (EIN 86-1920347), into two independent publicly

II. Factual Background A. The Parties

1. Harrowgate Private Equity Fund IV, L.P. (Client / Controlling Shareholder). Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV") is a Delaware limited partnership with its registered address at 1209 Orange Street, Wilmington, Delaware 19801, and its principal office at 600 Lexington Avenue, 38th Floor, New York, New York 10022. HPE Fund IV's Employer Identification Number is 84-3291067. HPE Fund IV is a private

2. Veldran Industries Holdings, Inc. (Distributing Corporation). Veldran Industries Holdings, Inc. ("Veldran" or "Distributing") is a Delaware corporation incorporated on March 14, 2019, with its registered address at 1209 Orange Street, Wilmington, Delaware 19801, and its principal office at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217. Veldran's Employer Identification Number is 86-1920347.

3. Meridian Flow Technologies, Inc. (Controlled Corporation / SpinCo). Meridian Flow Technologies, Inc. ("Meridian" or "SpinCo" or "Controlled") is a Delaware corporation that has not yet been incorporated as of the date of this memorandum. Meridian will be formed prior to the Contribution as a wholly owned subsidiary of Veldran for the purpose of receiving the assets and liabilities of the Precision Flow Solutions D

4. Other Veldran Shareholders. In addition to HPE Fund IV (through HVH), the following shareholders hold significant positions in Veldran common stock: Prescott Capital Management LP. Prescott Capital Management LP ("Prescott Capital") is a New York-based institutional investor with its principal office at 277 Park Avenue, 42nd Floor, New York, New York 10172. Its managing partner is Andrew Kessler. Prescott Capital'

III. Applicable Legal Framework A. Overview of IRC § 355 and § 368(a)(1)(D) The federal income tax treatment of the proposed Spin-Off is governed principally by two Code provisions: Section 355, which governs the tax treatment of distributions of controlled corporation stock by a distributing corporation to its shareholders, and Section 368(a)(1)(D), which governs the reorganization treatment of the preceding asset t

1. Control immediately before the distribution — § 368(c). Distributing must "control" Controlled immediately before the Distribution, where "control" means ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock.

2. Active trade or business — § 355(b). Both Distributing and Controlled must 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. The five-year active-trade-or-business requirement is subject to important limitations under § 355(b)(2)(C) (prohibiting reliance on businesses

3. Not a device for distribution of earnings and profits — § 355(a)(1)(B). The Distribution must not be used principally as a "device" for the distribution of the earnings and profits of Distributing, Controlled, or both. The device test is analyzed under a facts-and-circumstances framework set forth in Treasury Regulation § 1.355-2(d).

4. Distribution of all stock or securities in Controlled, or distribution of "control" with establishment of non-tax-avoidance purpose for retention — § 355(a)(1)(D). Distributing must distribute all of its stock and securities in Controlled, or, alternatively, must distribute an amount of stock constituting "control" (within the meaning of § 368(c)) and establish to the satisfaction of the Secretary that the retenti

5. Business purpose — judicial/regulatory requirement (Treas. Reg. § 1.355-2(b)). The Distribution must be motivated, in whole or substantial part, by one or more real and substantial non-federal-tax corporate business purposes. This is a judicially developed requirement incorporated into the Treasury Regulations.

6. Continuity of interest — Treas. Reg. § 1.355-2(c). One or more persons who, directly or indirectly, were owners of the enterprise prior to the Distribution must maintain a continuing interest in the modified corporate form(s) after the Distribution.

7. Not a disqualified distribution — § 355(d). The Distribution must not be a "disqualified distribution" within the meaning of § 355(d), which applies where, immediately after the distribution, any person holds "disqualified stock" (generally, stock acquired by purchase within the five-year period) constituting a 50-percent-or-greater interest in Distributing or Controlled.

8. Not part of a plan involving a 50% change of control — § 355(e). The Distribution must not be part of a "plan (or series of related transactions)" pursuant to which one or more persons acquire directly or indirectly a 50-percent-or-greater interest in Distributing or Controlled (the "Anti-Morris Trust" rule).

9. Not a distribution of stock of a disqualified investment corporation — § 355(g). Section 355 does not apply if either Distributing or Controlled is a "disqualified investment corporation" — generally, a corporation whose investment assets constitute two-thirds or more of the fair market value of all of its assets — immediately after the Distribution. In addition, the Contribution must independently satisfy the req

IV. Analysis of Statutory and Judicial Requirements A. Control Immediately Before the Distribution — IRC § 368(c)

1. Legal Standard. Section 368(c) defines "control" as ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. This definition of control is referenced by § 355(a)(1)(A), which requires that Distributing "control" (within the meaning of § 368(c)) Controlled im

2. Application to the Proposed Spin-Off. Immediately prior to the Distribution (and immediately after the Contribution), Veldran will own 100% of the outstanding common stock of Meridian. Meridian will have only one class of stock outstanding — common stock — all of which will be held by Veldran. This constitutes ownership of 100% of the total combined voting power of all classes of stock entitled to vote and 100% of

1. Legal Standard. The active-trade-or-business ("ATB") requirement is one of the most significant substantive requirements for tax-free treatment under § 355. It serves the policy objective of ensuring that § 355 is used to divide genuine operating businesses, rather than to distribute investment assets or recently acquired businesses in a disguised sale.

Section 355(b)(1) provides that § 355 applies to a distribution only if both Distributing and Controlled are "engaged immediately after the distribution in the active conduct of a trade or business." This requirement is applied at the entity level — both the distributing corporation (Veldran, post-spin) and the controlled corporation (Meridian, post-spin) must independently satisfy it.

Section 355(b)(2) elaborates on the meaning of "active conduct of a trade or business." A corporation is treated as engaged in the active conduct of a trade or business if and only if: (A) it is engaged in the active conduct of a trade or business; (B) such trade or business has been "actively conducted" throughout the five-year period ending on the date of distribution; (C) such trade or business was not acquired wi

2. Analysis — Engineered Coatings Division (Remaining with Veldran). Post-spin, Veldran will retain the Engineered Coatings Division as its sole operating business. The Engineered Coatings Division is a substantial, operating industrial business with FY2021 revenue of approximately $1.52 billion and EBITDA of approximately $285 million, employing thousands of workers across multiple manufacturing facilities. The Engi

3. Analysis — Precision Flow Solutions Division (To Be Contributed to Meridian). Post-spin, Meridian (Controlled) will operate the Precision Flow Solutions Division as its sole business. The ATB analysis for Meridian is more complex than for Veldran because the Precision Flow Solutions Division includes both (a) organically developed precision flow operations that have been part of Veldran (and its predecessors) for

1. Legal Standard. Section 355(a)(1)(B) provides that § 355 applies to a distribution only if "the transaction was not used principally as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation or both." This requirement, commonly referred to as the "device test," is designed to prevent taxpayers from using § 355 as a mechanism to convert what would oth

2. Application. ##### a. Device Factors Pro rata distribution. The proposed Distribution is fully pro rata — each Veldran shareholder will receive one share of Meridian common stock for each share of Veldran common stock held on the record date, resulting in identical ownership percentages in both Veldran and Meridian post-spin. This is a device factor under Treas. Reg. § 1.355-2(d)(2)(ii). However, many successful §