Contract analysis

I. Executive Summary The purpose of this memorandum is to analyze whether both the Engineered Coatings Division (which will remain with Veldran Industries Holdings, Inc. ("Veldran" or "Distributing")) and the Precision Flow Solutions Division (which will be contributed to Meridian Flow Technologies, Inc. ("Meridian," "MFT," "Controlled," or "SpinCo")) independently satisfy the five-year active trade or business ("ATB

II. Scope and Limitations This memorandum addresses solely the Section 355(b) ATB requirement as it applies to the proposed pro rata distribution by Veldran of 100% of the Meridian common stock. We do not address in this memorandum any other requirements for qualification under Section 355, including without limitation: (a) the device test under Section 355(a)(1)(B) (addressed in a separate memorandum prepared by Gar

III. Factual Background A. Overview of the Proposed Transaction Veldran Industries Holdings, Inc. ("Veldran" or "VIH") is a Delaware corporation (EIN 86-1920347) incorporated on March 14, 2019. Veldran's principal office is located at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217. Veldran is a diversified industrial company operating through two principal business segments: the Engineered Coati

Section 338 Election. Based on information received to date, it does not appear that Veldran made an election under Section 338(g) or Section 338(h)(10) of the Code with respect to the Kestrel stock acquisition. We have requested confirmation of this fact through the supplemental diligence request sent to Philip Crundell on May 16, 2022. The absence of a Section 338 election is a critical factual assumption for purpo

IV. Applicable Legal Framework A. Section 355(b)(1) — General Requirement

Section 355(a) of the Code provides that, under certain conditions, a distribution by a corporation to its shareholders of stock or securities of a corporation it controls immediately before the distribution is not treated as a distribution of property to which Section 301 applies. Among the several requirements that must be satisfied for a distribution to qualify under Section 355(a) is the active trade or business

Section 355(b)(1) sets forth the general ATB requirement in two alternative formulations. Under Section 355(b)(1)(A), the requirement is satisfied if "the distributing corporation, and the controlled corporation (or, if stock of more than 1 controlled corporation is distributed, each of such corporations), is engaged immediately after the distribution in the active conduct of a trade or business." This is the operati

Section 355(b)(1)(B) provides an alternative formulation applicable where, immediately before the distribution, the distributing corporation had no assets other than stock or securities in the controlled corporations and each of the controlled corporations is engaged immediately after the distribution in the active conduct of a trade or business. This alternative is not applicable to the proposed Distribution because

Section 355(b)(2) defines the term "active conduct of a trade or business" for purposes of Section 355(b)(1). The provision imposes four separate requirements, each of which must be independently satisfied.

Section 355(b)(2)(A) — Direct Active Conduct. A corporation is treated as engaged in the active conduct of a trade or business only if (i) it is "directly engaged in the active conduct of a trade or business," or (ii) "substantially all of the assets of such corporation consist of stock and securities of a corporation controlled by it (immediately after the distribution) which is so engaged." This requirement ensures

Section 355(b)(2)(B) — Five-Year Active Conduct Requirement. The trade or business must have been "actively conducted throughout the 5-year period ending on the date of the distribution." This is the temporal component of the ATB requirement. It is not sufficient that the corporation be engaged in an active trade or business at the time of the distribution; the trade or business must have been actively conducted for

Section 355(b)(2)(C) — Prohibition on Acquisitions in Taxable Transactions. The trade or business must not have been "acquired within the period described in subparagraph (B) in a transaction in which gain or loss was recognized in whole or in part." This provision is the primary source of concern in the present analysis. It is designed to prevent a corporation from satisfying the five-year ATB requirement by purchas

Section 355(b)(2)(D) — Safe Harbor for Acquisitions of Corporations Conducting the Business Throughout the Five-Year Period. Section 355(b)(2)(D) provides a critically important safe harbor that moderates the potentially broad reach of Section 355(b)(2)(C). Under this provision, the prohibition in Section 355(b)(2)(C) does not apply if "control of a corporation which (at the time of acquisition of control) was conduc

V. Analysis A. Engineered Coatings Division (Distributing — Veldran) The Engineered Coatings Division will remain with Veldran following the Distribution. For Veldran to satisfy the ATB requirement of Section 355(b)(1)(A), the Engineered Coatings Division must constitute an active trade or business that has been actively conducted throughout the five-year period ending on the Distribution date, and the trade or busin

1. Legacy Precision Flow Operations (Excluding Kestrel). Veldran has operated the Legacy Precision Flow Operations — comprising the non-Kestrel portion of the Precision Flow Solutions Division — generating approximately $533 million of the division's FY2021 revenue (approximately 65% of the total $820 million). These operations involve the design, manufacture, and sale of precision fluid-control systems, valves, and

2. Kestrel Precision Controls — Section 355(b)(2)(C) Analysis. The Issue. Kestrel Precision Controls, Inc. was acquired by Veldran on June 7, 2019, in a fully taxable stock acquisition for $295,000,000 in cash from Rennick Industrial Partners Fund II LP. The anticipated Q4 2022 Distribution date means the five-year look-back period under Section 355(b)(2)(B) extends to approximately Q4 2017. The June 7, 2019 Kestrel

3. Kestrel Precision Controls — Section 355(b)(2)(D) Safe Harbor Analysis. Statutory Framework. Section 355(b)(2)(D) provides that the prohibition in Section 355(b)(2)(C) does not apply if control of the corporation which, at the time of the acquisition of control, was conducting such trade or business: (i) was not acquired directly (or through one or more corporations) by another corporation within the five-year per

4. Integration Considerations — Combined Division Analysis. Following the June 7, 2019 acquisition, the Kestrel Operations were integrated into the Precision Flow Solutions Division. The Kestrel product lines were incorporated into the division's unified product portfolio, and Kestrel's manufacturing and engineering functions were brought under the division's management structure. The question arises whether, for pur

5. SAG Rules — Section 355(b)(3). Section 355(b)(3) provides that, for purposes of determining whether a corporation is engaged in the active conduct of a trade or business under Section 355(b), all members of the corporation's "separate affiliated group" ("SAG") are treated as a single corporation. The SAG of a corporation consists of the corporation itself and all corporations that are members of an affiliated grou

VI. Open Items and Additional Diligence Required The analysis set forth in this memorandum is subject to the completion of