Contract analysis

I. Executive Summary The purpose of this memorandum is to analyze whether the proposed pro rata distribution by Veldran Industries Holdings, Inc. ("Distributing" or "Veldran") of 100% of the outstanding common stock of Meridian Flow Technologies, Inc. ("Controlled," "SpinCo," or "Meridian") to Veldran's shareholders is part of a "plan (or series of related transactions)" within the meaning of Section 355(e) of the In

II. Factual Background The following facts are based on information obtained from the client, from Harrowgate's legal counsel (Whitfield & Gage LLP), from Veldran's corporate counsel (Thornapple McCord LLP), and from publicly available sources. Where indicated, certain facts remain subject to confirmation through documentary evidence or formal representations. All facts set forth below are stated as of the date of th

1. Engineered Coatings Division. This segment manufactures and distributes high-performance industrial coatings, protective surface treatments, and specialty chemical formulations for applications in aerospace, defense, oil and gas, and general industrial markets. For the fiscal year ended December 31, 2021 ("FY2021"), the Engineered Coatings Division reported revenue of approximately $1.52 billion and EBITDA of appr

2. Precision Flow Solutions Division. This segment designs, manufactures, and distributes precision fluid-handling equipment, flow-control instrumentation, and related components for applications in pharmaceutical manufacturing, semiconductor fabrication, water treatment, and specialty chemical processing. For FY2021, the Precision Flow Solutions Division reported revenue of approximately $820 million and EBITDA of a

III. Statement of the Legal Issue IRC § 355(e)(1) provides that if a distribution to which § 355(a) applies is part of a "plan (or series of related transactions)" pursuant to which one or more persons acquire directly or indirectly stock representing a 50-percent or greater interest (within the meaning of IRC § 355(d)(4)) in the distributing corporation or any controlled corporation, then the distributing corporatio

IV. Statutory and Regulatory Framework A. IRC § 355(e) — Overview IRC § 355(e) was enacted in 1997 as Section 1012 of the Taxpayer Relief Act of 1997, Public Law 105-34, 111 Stat. 788 (August 5, 1997). The provision was a direct legislative response to the Tax Court's decision in Commissioner v. Morris Trust, 367 F.2d 794 (4th Cir. 1966), which had held that a spin-off followed by an acquisition of the distributing c

1. General Rule — Treas. Reg. § 1.355-7(b) Treasury Regulation § 1.355-7(b)(1) provides the overarching principle: a distribution and an acquisition are part of a plan if the distribution was made "in connection with" or "in furtherance of" the acquisition, or vice versa. More specifically, a distribution and an acquisition will be treated as part of a plan if, at some point during the two-year period ending on the d

2. Safe Harbors — Treas. Reg. § 1.355-7(d) Treasury Regulation § 1.355-7(d) provides several safe harbors under which a distribution and an acquisition will not be treated as part of a plan. Two of these safe harbors are particularly relevant to the present analysis: Safe Harbor I — Treas. Reg. § 1.355-7(d)(1) (Post-Distribution Acquisition). An acquisition occurring after a distribution will not be treated as part o

3. The Two-Year Presumption As noted above, Treasury Regulation § 1.355-7(b)(2) provides that if an acquisition occurs within the two-year period preceding or following a distribution, there is a rebuttable presumption that the distribution and the acquisition are part of a plan. The converse is also significant: if the acquisition falls outside the two-year window, the rebuttable presumption does not apply, and ther

V. Application to the Proposed Spin-Off This section applies the statutory and regulatory framework described in Section IV to the facts of the proposed spin-off transaction, as set forth in Section II. We analyze the temporal relationship between the acquisition and the distribution, the applicability of Safe Harbor II, the non-exclusive factors under the facts-and-circumstances test, the significance of intervening

1. Factors Tending to Show the Existence of a Plan Factor (i): Distribution motivated by business purpose to facilitate the acquisition. There is no evidence — and no logical basis — for concluding that the proposed spin-off was designed to "facilitate" the September 2019 acquisition. The acquisition was a complete buyout of the prior controlling shareholder (Greystone Partners Fund III LP) through a negotiated tende

2. Factors Tending to Show the Absence of a Plan Factor (i): Distribution motivated by corporate business purpose other than to facilitate the acquisition. Two preliminary business purposes for the proposed spin-off have been identified: (a) enabling independent capital-allocation strategies for the two businesses, each of which has different capital needs, growth profiles, and risk characteristics; and (b) enhancing