Contract analysis

I. OVERVIEW AND GENERAL OBSERVATIONS A. Cross — General Comments on Draft Structure and Confidence Level Cross has reviewed the first draft of the Tax Opinion Letter in its entirety and provides the following general observations regarding the structure, confidence level, and overall framing of the opinion.

1. Current Opinion Level. The draft opinion currently opines that the proposed pro rata distribution by Veldran Industries Holdings, Inc. ("Distributing" or "Veldran") of 100% of the common stock of Meridian Flow Technologies, Inc. ("Controlled," "SpinCo," or "Meridian") to Veldran shareholders "should" qualify as a tax-free distribution under Section 355(a) of the Internal Revenue Code of 1986, as amended (the "Code

2. Appropriateness of "Should" Level. Cross notes that the "should" level of comfort — the second-highest level in our firm's customary hierarchy, below "will" and above "more likely than not" — is appropriate given the open factual and legal issues identified throughout this compilation. However, Cross has a significant concern regarding how the draft deploys the "should" qualifier: the current draft applies "should

3. Recommended Restructuring. Cross recommends that the opinion be restructured to provide a "will" level conclusion on certain discrete, mechanical requirements of Sections 355 and 368(a)(1)(D) where the facts are clear and there is no meaningful uncertainty. Specifically, a "will" level conclusion is supportable for the following elements: (a) The "control" requirement under Section 368(c) of the Code — Veldran wil

4. Representation Letter Caveat. Cross further flags that the draft must include a more prominent caveat regarding the Representation Letter. The current draft references the Representation Letter in a general "assumptions and qualifications" section near the end of the opinion, but does not make sufficiently clear on the face of the opinion that (a) the Representation Letter has not been finalized — the second draft

1. Opinion Addressees. The draft opinion is currently addressed to the Board of Directors of Veldran Industries Holdings, Inc. and Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV"). Hartwell notes that HPE Fund IV is a Delaware limited partnership, not a corporation, and the opinion should clarify whether any of its conclusions extend to the partners of HPE Fund IV — in particular, the limited partners who will

2. Federal-Only Scope. Hartwell recommends adding a paragraph in the "Limitations" section of the opinion clarifying that the opinion addresses only the federal income tax consequences of the proposed spin-off and distribution. The opinion should expressly state that it does not address any state, local, or foreign tax consequences arising from the transaction, including but not limited to state income taxes, franchi

3. Third-Party Reliance Disclaimer. Hartwell observes that the draft opinion does not address the tax consequences to any Veldran shareholder other than the named addressees — in particular, the opinion is silent regarding Prescott Capital Management LP, which holds approximately 14.8% of Veldran's outstanding common stock (11,026,000 shares) and is a significant co-investor alongside HPE Fund IV. Prescott's tax advi

II. COMMENTS ON § 355(e) "PLAN" ANALYSIS — STRENGTHENING THE "SHOULD" OPINION LANGUAGE A. Cross — Comment on Section IV.B of Draft (§ 355(e) Anti-Morris Trust Analysis) Cross has reviewed Section IV.B of the draft opinion, which addresses the application of Section 355(e) of the Code (the so-called "Anti-Morris Trust" provision) to the proposed spin-off in light of HPE Fund IV's prior acquisition of a controlling int

1. Current Draft Treatment. The draft's treatment of Section 355(e) currently occupies approximately three pages of the opinion letter and concludes that the proposed distribution of Meridian stock by Veldran to its shareholders "should not" be treated as part of a plan or series of related transactions that includes the September 20, 2019 acquisition by HPE Fund IV of approximately 62.4% of Veldran's outstanding com

2. Temporal Gap Analysis. Cross acknowledges that the draft correctly identifies the approximately three-year temporal gap between the September 20, 2019 acquisition and the anticipated Q4 2022 distribution date, and that this temporal gap is favorable for the client's position. However, Cross notes that the draft fails to engage with the specific safe harbors and presumptions set forth in the Treasury Regulations un

3. Specific Requested Revisions. Cross requests the following specific revisions to the § 355(e) discussion in the draft opinion: (a) Treasury Regulations Section 1.355-7(b)(2) Safe Harbor. The revised draft must include an explicit discussion of the safe harbor provided under Treasury Regulations Section 1.355-7(b)(2), which provides that a distribution and an acquisition are not part of a "plan" if the distribution

III. COMMENTS ON § 355(d) DISQUALIFIED DISTRIBUTION — ADDING A SEPARATE DISCLAIMER PARAGRAPH A. Cross — Comment on Current § 355(d) Treatment in Draft Cross has reviewed the draft's treatment of Section 355(d) of the Code — the "disqualified distribution" provision — and finds it materially deficient in its current form. The draft currently limits its discussion of Section 355(d) to two paragraphs in Section IV.C of

1. Separate Treatment Required. Cross notes that Section 355(d) is technically a separate provision from Section 355(e), with distinct requirements, different triggering events, and independent consequences. Section 355(d) applies where stock of the distributing or controlled corporation was "purchased" (within the meaning of Section 355(d)(5)) within the five-year period ending on the date of the distribution, and t

2. Key Facts. The key facts for the Section 355(d) analysis are as follows: (a) HPE Fund IV acquired its 62.4% stake in Veldran (46,488,000 shares) on September 20, 2019, for cash consideration of $1,859,520,000. This acquisition is within the five-year period preceding the anticipated Q4 2022 distribution date. (b) The acquisition by HPE Fund IV constitutes a "purchase" within the meaning of Section 355(d)(5) of the

3. Internal Memorandum. The Section 355(d) analysis memorandum, prepared by Nazari, reviewed by Simmons, and dated July 8, 2022, concluded that Section 355(d) is implicated on these facts and that gain would be recognized by Veldran at the corporate level unless an exception applies. Cross notes that the draft opinion does not adequately reflect this conclusion. The opinion should not ignore or minimize the Section 3

1. Prescott Capital Management LP. Hartwell notes that the Section 355(d) disclaimer should also reference the fact that Prescott Capital Management LP (approximately 14.8% of Veldran's outstanding common stock, 11,026,000 shares, Managing Partner: Andrew Kessler) co-invested alongside HPE Fund IV in the September 2019 acquisition, acquiring Veldran shares at $40.00 per share. Prescott's shares may also have been acq

2. Prescott Secondary Offering. However, Hartwell notes a complicating factor: Prescott later sold 4,474,000 shares of Veldran common stock in a secondary offering, reducing its stake from approximately 15,500,000 shares to 11,026,000 shares. The Section 355(d) analysis should consider whether the shares sold by Prescott in the secondary offering are still counted for purposes of Section 355(d) vis-à-vis the current

IV. COMMENTS ON BUSINESS PURPOSE DISCUSSION — RECASTING TO AVOID PE SPONSOR MONETIZATION RATIONALE A. Cross — Comment on Section III.A of Draft (Business Purpose) Cross identifies the business purpose discussion in Section III.A of the draft opinion as the most significant substantive concern with the current draft. The business purpose requirement under Section 355(a) of the Code and Treasury Regulations Section 1.3

1. Current Articulation. The draft currently identifies two business purposes for the proposed spin-off: (i) Enabling each business — the Engineered Coatings Division (to be retained by Veldran) and the Precision Flow Solutions Division (to be transferred to Meridian) — to pursue independent capital-allocation strategies; and (ii) Enhancing management focus and operational efficiency by allowing each division to oper

2. Concern Regarding Purpose (i): PE Sponsor Monetization Rationale. Cross has a serious concern with the first articulated business purpose. As currently drafted, the statement that the spin-off will enable each business to "pursue independent capital-allocation strategies" reads as a thinly veiled restatement of HPE Fund IV's fund-level objectives. In the context of this transaction — where HPE Fund IV is a 2018 vi

3. Requested Revisions. Cross requests the following specific revisions to the business purpose discussion in the draft opinion: (a) Remove or Substantially Rewrite Purpose (i). The "independent capital-allocation strategies" purpose must be removed or substantially rewritten to eliminate any reference to or implication of PE sponsor monetization. The current draft's supporting paragraph for this purpose references "

V. COMMENTS ON KESTREL § 355(b)(2)(C)/(D) ANALYSIS — REVISING TREATMENT A. Cross — Comment on Section III.C of Draft (Active Trade or Business) Cross has reviewed the draft's treatment of the Section 355(b) active trade or business ("ATB") requirement and finds it generally sound, with one significant exception: the handling of the Kestrel Precision Controls acquisition requires substantial revision. The ATB requirem

1. Background Facts. The following background facts should be more precisely stated in the opinion's factual summary and in the ATB analysis section: (a) Kestrel Precision Controls, Inc. is a Georgia corporation (EIN: 58-2847193) that was acquired by Veldran on June 7, 2019 from Rennick Industrial Partners Fund II LP (EIN: 82-3017564) for aggregate consideration of $295 million in an all-cash taxable stock acquisitio

2. Section 355(b)(2)(C) Issue. Section 355(b)(2)(C) of the Code provides that a trade or business shall not be treated as meeting the ATB requirement if it was acquired by the distributing or controlled corporation in a transaction in which gain or loss was recognized in whole or in part within the five-year period ending on the date of the distribution. Because Kestrel was acquired by Veldran for cash in a fully tax

3. Section 355(b)(2)(D) Safe Harbor. However, Section 355(b)(2)(D) provides a safe harbor. Under this provision, a trade or business acquired in a taxable transaction within the five-year period is nevertheless treated as meeting the ATB requirement if the trade or business was actively conducted throughout the five-year period ending on the date of the distribution by the entity from which it was acquired (i.e., Kes

1. Standalone Subsection. The draft currently conflates the Section 355(b)(2)(C)/(D) issue with the broader ATB analysis, mentioning the Kestrel acquisition in passing within a general discussion of the Precision Flow Solutions Division's business history. Cross recommends creating a standalone subsection within the ATB discussion dedicated specifically to the Kestrel issue. This subsection should set forth the relev

2. Distinguishing Kestrel from Non-Kestrel Business. The draft does not adequately distinguish between the Kestrel business and the non-Kestrel portion of the Precision Flow Solutions Division. This distinction is analytically important. The opinion should make clear that: (a) The ATB analysis applies to the Precision Flow Solutions Division as a whole — i.e., as the trade or business to be conducted by Meridian foll

3. Predecessor Entity History. With respect to the non-Kestrel portion of the division, Cross notes that the draft should clarify the predecessor-entity history. Veldran Industries Holdings, Inc. was incorporated on March 14, 2019 — within the five-year look-back period — in connection with the leveraged buyout by HPE Fund IV. However, the Precision Flow Solutions business operations trace to predecessor entities tha

4. Section 338 Election. Cross also notes that the draft should address whether a Section 338 election was made in connection with the Kestrel acquisition. A Section 338 election would have treated the Kestrel stock acquisition as an asset acquisition for federal income tax purposes, which could affect Kestrel's tax basis in its assets and could potentially implicate different aspects of the Section 355(b)(2)(C)/(D)

VI. HARTWELL'S COMMENTS ON PARTNERSHIP-LEVEL TAX CONSEQUENCES FOR HPE FUND IV LIMITED PARTNERS A. Hartwell — Comment on Scope of Opinion Hartwell provides the following detailed comments regarding the scope of the opinion as it relates to partnership-level tax consequences for HPE Fund IV and its limited partners.

1. Current Opinion Scope. The draft opinion currently addresses the tax consequences of the proposed spin-off at two levels: (i) the corporate level — specifically, whether Veldran will recognize gain or loss on the distribution of Meridian stock to its shareholders — and (ii) the shareholder level — specifically, whether Veldran shareholders will recognize gain or loss on their receipt of Meridian stock in the distr

2. Omission of Partnership-Level Analysis. Hartwell notes that the opinion is entirely silent on the pass-through consequences to HPE Fund IV's limited partners. This is a significant omission that should be addressed — not by adding a full partnership-level opinion (which is beyond the scope of the engagement and raises additional complexity), but by adding appropriate disclaimers and scope limitations.

3. Fund Structure. The relevant fund structure is as follows: (a) HPE Fund IV — Harrowgate Private Equity Fund IV, L.P. (EIN: 84-3291067) — is a Delaware limited partnership formed under the Delaware Revised Uniform Limited Partnership Act. HPE Fund IV is the entity that holds the 62.4% stake in Veldran (through the disregarded entity described below). (b) HPE Fund IV is managed by Harrowgate Capital Advisors LLC (EI

4. Tax Consequences to Partners. Upon receipt of Meridian stock in the distribution, HPE Fund IV would hold the Meridian stock as a partnership asset. The tax consequences of the distribution to HPE Fund IV's limited partners would depend on several factors, including: (a) Whether the Section 355(a) non-recognition treatment at the shareholder level "flows through" to the partners of HPE Fund IV — i.e., whether the p

5. Recommended Disclaimers. Hartwell recommends adding a paragraph in the op