Contract analysis

I. Executive Summary The purpose of this memorandum is to analyze whether the proposed pro rata distribution by Veldran Industries Holdings, Inc. ("Veldran," "Distributing," or the "Company," EIN 86-1920347), a Delaware corporation, of 100% of the common stock of Meridian Flow Technologies, Inc. ("Meridian," "Controlled," or "SpinCo"), a planned Delaware corporation, to Veldran shareholders would constitute a "disqua

II. Scope and Limitations This memorandum is an internal work-product analysis prepared for the Calderwood & Harkness LLP engagement team in connection with the proposed Spin-Off of the Precision Flow Solutions Division of Veldran Industries Holdings, Inc. This memorandum is not intended for delivery to the client, the Company, HPE Fund IV, Harrowgate Capital Advisors LLC, or any third party. It is protected by the a

III. Factual Background A. Parties and Ownership Structure Veldran Industries Holdings, Inc. Veldran is a Delaware corporation incorporated on March 14, 2019, with its principal executive office located at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217. Veldran is a diversified industrial products and engineered materials company with operations spanning precision flow solutions, advanced polyme

IV. Statutory Framework: IRC § 355(d) A. Overview of § 355(d)

Section 355(d) was enacted as part of the Revenue Reconciliation Act of 1990 (Pub. L. No. 101-508, § 11321, 104 Stat. 1388 (1990)) and has been in effect for distributions occurring after October 9, 1990 (with certain transition rules for binding contracts in effect on that date). The provision was designed to prevent the use of Section 355 distributions to extract corporate-level gain recognition in the context of a

Section 355(d)(2) provides that a distribution is a "disqualified distribution" if, immediately after the distribution, any person holds "disqualified stock" in either the distributing corporation or any distributed controlled corporation that constitutes a "50-percent or greater interest" in such corporation. The term "disqualified stock" is defined in Section 355(d)(3), and the term "50-percent or greater interest"

Section 355(d)(3) defines "disqualified stock" as any stock in the distributing corporation or the controlled corporation that was "acquired by purchase" (as defined in Section 355(d)(5)) during the five-year period ending on the date of the distribution. The concept of "disqualified stock" is the linchpin of the Section 355(d) analysis: it identifies the stock whose recent acquisition triggers the disqualified distr

Section 355(d)(5)(A) defines "purchase" for purposes of Section 355(d) by cross-reference to the definition in Section 338(h)(3), with certain modifications. Under Section 338(h)(3), the term "purchase" means any acquisition of stock, but only if the basis of the stock in the hands of the purchasing corporation is not determined in whole or in part by reference to the adjusted basis of such stock in the hands of the

Section 355(d)(4) defines a "50-percent or greater interest" as stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote, or at least 50% of the total value of shares of all classes of stock. HPE Fund IV (through HVH) holds 46,488,000 of the 74,500,000 outstanding shares of Veldran common stock, representing 62.4% of the outstanding shares. Because Veldran has only one

Section 355(d)(3)(B) specifies that the relevant look-back period is the "5-year period ending on the date of the distribution." The starting point of the five-year period is determined by counting backwards five years from the actual distribution date. Assuming an anticipated Q4 2022 distribution date (e.g., October 31, 2022), the five-year look-back period would extend from approximately October 31, 2017 through Oc

V. Application to the Proposed Spin-Off A. HPE Fund IV's 62.4% Stake — Primary Analysis The primary Section 355(d) analysis is straightforward on the facts presented. HPE Fund IV acquired 46,488,000 shares of Veldran common stock, representing approximately 62.4% of the outstanding shares, on September 20, 2019, for aggregate cash consideration of $1,859,520,000 in a fully taxable tender offer and merger squeeze-out.

Section 355(d)(7) and (8) incorporate and modify the constructive ownership rules of Section 318(a) for purposes of the Section 355(d) analysis. Under these rules, stock owned by a partnership is treated as owned proportionately by its partners (Section 318(a)(2)(A)), and stock owned by a corporation, estate, or trust may be attributed to its shareholders, beneficiaries, or other owners under the applicable rules of

Section 355(d) applies at the corporate level. The gain recognized by Veldran would be computed as the excess of the aggregate fair market value of the Meridian stock distributed over Veldran's adjusted tax basis in the Meridian stock (which, in a Contribution qualifying under Section 351 or Section 368(a)(1)(D), would generally equal Veldran's basis in the contributed assets, subject to adjustments for assumed liabi

VI. Potential Exceptions and Defenses A. § 355(d)(5)(B) — Coordination with § 355(e)

Section 355(d)(5)(B) provides a coordination rule designed to prevent the double counting of gain under both Section 355(d) and Section 355(e) with respect to the same stock. Specifically, Section 355(d)(5)(B) provides that if stock of a distributing corporation is acquired by a "purchase" within the meaning of Section 355(d)(5)(A), and the same acquisition is also treated as part of a "plan" (or series of related tr

Section 355(d)(5)(A) provides that acquisitions in transactions described in Section 351, Section 354, Section 355, or Section 356 — that is, nonrecognition transactions in which the acquiror's basis is determined by reference to the transferor's basis — are excluded from the definition of "purchase." If HPE Fund IV's acquisition of the Veldran stock had been effected in one of these nonrecognition transactions (for

Section 355(d)(3) focuses on stock that was "acquired by purchase" and is held by the purchaser at the time of the distribution. If HPE Fund IV had disposed of a portion of its Veldran shares between the September 2019 acquisition and the distribution date, the "disqualified stock" calculation would be based on the shares actually held at the time of the distribution, not the shares originally purchased. A sufficient

VII. Interplay with § 355(e) Analysis As discussed in Section VI.A above, the coordination rule in Section 355(d)(5)(B) creates a direct interdependence between the Section 355(d) and Section 355(e) analyses. The practical effect of this coordination rule, applied to the facts of the proposed Spin-Off, is as follows: Scenario 1: Section 355(e) "plan" analysis concludes that the September 2019 acquisition and the Q4 2