1003-00005 · Veldran Industries Holdings · Correspondence

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CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT PRIVILEGE

INTERNAL MEMORANDUM — CONFERENCE CALL SUMMARY

CALDERWOOD & HARKNESS LLP 1301 Avenue of the Americas, 40th Floor New York, New York 10019

1. Call Details

The conference call that is the subject of this memorandum took place on August 15, 2022, beginning at 3:00 p.m. (Eastern) and concluding at approximately 4:25 p.m. (Eastern). The call was conducted via videoconference and was convened at the request of Christine Yeung, General Counsel of Harrowgate Capital Advisors LLC ("Harrowgate Advisors"), in its capacity as investment manager and general partner affiliate of Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV"). No written agenda was circulated in advance of the call.

2. Attendees

The following individuals participated in the call:

Calderwood & Harkness LLP

• Leonard Cross — Responsible Partner, Tax Department

• Sylvia Hartwell — Billing Partner, Tax Department

• Garrett Simmons — Lead Associate, Tax Department

Harrowgate Capital Advisors LLC (on behalf of Harrowgate Private Equity Fund IV, L.P.)

• Marcus Adler — Founding Partner & Chairman

• Diana Fenn — Managing Partner & Chief Investment Officer; Board Chair of Veldran Industries Holdings, Inc.

• Tobias Rourke — Partner, Head of Portfolio Operations

• Christine Yeung — General Counsel

Veldran Industries Holdings, Inc.

• Jonathan Caldecott — Chief Executive Officer

• Philip Crundell — General Counsel

Whitfield & Gage LLP (Corporate / M&A Counsel to Harrowgate)

• Priya Chandrasekar — Partner, Corporate / Capital Markets

No other individuals joined or monitored the call. Sandra Waverly, President of the Precision Flow Solutions Division and planned CEO of Meridian Flow Technologies, Inc. ("Meridian" or "SpinCo"), was not present. David Ochoa, lead partner at Thornapple McCord LLP (corporate counsel to Veldran), was likewise not present but was referenced during the discussion as described below. Samuel Ng, Managing Director of the Industrials Group at Brackenridge & Co. (financial advisor), was not present but his views were relayed by Mr. Adler.

3. Purpose of Call

The call was convened at Harrowgate's request to discuss two interrelated issues that had arisen since the circulation of Calderwood & Harkness's first draft tax opinion letter on August 5, 2022:

(i) the sufficiency of the articulated business purposes for the proposed pro rata spin-off of one hundred percent (100%) of the common stock of Meridian Flow Technologies, Inc. ("Meridian" or "SpinCo") to the shareholders of Veldran Industries Holdings, Inc. ("Veldran" or "Distributing"), which transaction is intended to qualify as a tax-free reorganization under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"); and

(ii) whether current equity market conditions, including macroeconomic headwinds affecting industrial-sector valuations, warranted a reconsideration of the previously targeted Q4 2022 distribution timeline.

As background, Mr. Cross had previously raised concerns regarding the business purpose articulation in two separate communications: (a) his July 22, 2022 email to Ms. Yeung (copying Ms. Hartwell), which identified specific deficiencies in the factual predicate supporting the two preliminary business purposes set forth in Calderwood & Harkness's July 18, 2022 business purpose memorandum; and (b) his cover email transmitting the first draft tax opinion on August 5, 2022, which reiterated those concerns and noted that the draft opinion reflected a number of bracketed open issues and qualifications tied directly to the business purpose analysis. The August 5 draft opinion was expressly marked as a preliminary draft not for reliance and was circulated solely for the purpose of eliciting comments and additional factual information from the client teams.

4. Summary of Discussion

4.1 Market Conditions and Timing Concerns

Marcus Adler opened the substantive portion of the call by directing the group's attention to recent developments in the industrial-sector equity markets. Mr. Adler noted that industrial-sector equity valuations had deteriorated materially during mid-2022, driven by macroeconomic headwinds that included, among other factors, persistent inflationary pressures, the Federal Reserve's aggressive interest rate increases during the second and third quarters of 2022, elevated energy costs, and growing recessionary fears across the broader economy. Mr. Adler stated that these conditions had resulted in meaningful compression in public-company trading multiples across the industrial sector, particularly among mid-market diversified industrials and flow-control technology businesses.

Mr. Adler reported that Brackenridge & Co. (Harrowgate's financial advisor for the transaction), through Samuel Ng, Managing Director in the Industrials Group, had indicated in recent conversations with Harrowgate that the preliminary valuation range for Meridian of $1.4 billion to $1.7 billion — which was based on a 10.5× to 12.8× EV/EBITDA multiple applied to the Precision Flow Solutions Division's fiscal year 2021 EBITDA of $133 million, as set forth in Brackenridge's June 10, 2022 preliminary analysis — may no longer be achievable in the current market environment. Mr. Adler noted that Mr. Ng had observed significant compression in comparable industrial trading multiples during June, July, and August of 2022 and had expressed the view that a public-market debut for Meridian under current conditions would likely result in a valuation at or below the low end of the preliminary range.

Mr. Adler expressed concern that proceeding with the spin-off distribution in Q4 2022 under these depressed market conditions would result in a suboptimal initial valuation for Meridian as a standalone publicly traded company. He further noted that a depressed valuation at the time of the distribution would undermine any potential post-spin monetization strategy or secondary public offering by HPE Fund IV, which holds approximately 62.4% of Veldran's outstanding common stock through Harrowgate Veldran Holdings LLC, the intermediate holding vehicle. Mr. Adler observed that Harrowgate's limited partners in HPE Fund IV — a $6.8 billion vintage 2018 fund — had certain return expectations that would be difficult to satisfy if Meridian were launched into a hostile valuation environment.

Diana Fenn supplemented Mr. Adler's comments by noting that the Harrowgate investment committee had discussed the market timing issue at its most recent meeting. Ms. Fenn stated that there was internal sentiment among the members of the investment committee in favor of deferring the spin-off distribution to a more favorable market window, though she emphasized that no formal decision had been reached and that the investment committee had not voted on any specific recommendation. Ms. Fenn acknowledged that the market timing question was inextricably linked to the tax and legal issues that Mr. Cross had raised and that Harrowgate wanted to understand the full scope of open issues before making a determination.

Tobias Rourke, Head of Portfolio Operations at Harrowgate, added that from a portfolio operations standpoint, the Precision Flow Solutions Division was performing in line with management's expectations and budget for fiscal year 2022. Mr. Rourke noted that the Division had delivered fiscal year 2021 revenue of approximately $820 million and EBITDA of approximately $133 million, and that first-half 2022 operating results were tracking near plan. Mr. Rourke observed that there was no operational urgency — such as a deteriorating business trend, an imminent competitive threat, or a capital-intensive investment opportunity requiring immediate separation — that would compel an accelerated timeline for the spin-off. He characterized the current pace of the transaction as driven primarily by Harrowgate's investment realization timeline rather than by business exigency at the operating company level.

4.2 Business Purpose Articulation — Tax Opinion Impediment

Leonard Cross then provided the group with a detailed update on the status of the tax opinion and the specific impediment arising from the business purpose analysis.

Mr. Cross began by referencing the first draft opinion letter circulated on August 5, 2022, and his July 22, 2022 email to Ms. Yeung and Ms. Hartwell, both of which had flagged substantive concerns regarding the articulation of the business purposes underlying the proposed spin-off. Mr. Cross noted that these concerns had not been addressed in the intervening period and that the purpose of this portion of the call was to discuss the issue in greater detail and to solicit additional factual input from the Veldran management team and Harrowgate.

Mr. Cross reiterated that the business purpose requirement is a well-established judicial and regulatory prerequisite to tax-free treatment under Section 355 of the Code, as set forth in Treasury Regulation § 1.355-2(b). He stated that, under the applicable legal standard, a distribution must be carried out for one or more real and substantial non-federal-tax business purposes that are germane to the business of the distributing corporation (Veldran), the controlled corporation (Meridian), or the affiliated group of which those corporations are members. Mr. Cross emphasized that the business purpose must be a "corporate" business purpose as distinct from a "shareholder" purpose. A purpose that primarily serves the interests of one or more shareholders — such as the PE sponsor's desire to return capital to its limited partners, facilitate a secondary offering, or otherwise monetize its investment in one of the separated businesses — does not constitute a valid corporate business purpose for purposes of the regulation, even if it is incidentally beneficial to the corporation.

Mr. Cross stated that the two preliminary business purposes articulated to date — as set forth in Calderwood & Harkness's July 18, 2022 business purpose memorandum — remained insufficiently developed for purposes of supporting the "should" level tax opinion that is the deliverable under the engagement letter. Those two purposes were:

(i) Independent Capital Allocation: Enabling each of Veldran's two principal operating divisions (the Engineered Coatings Division and the Precision Flow Solutions Division) to pursue independent capital-allocation strategies, including the ability to access the public equity and debt capital markets on a standalone basis, without the constraints and cross-subsidization dynamics inherent in the current integrated corporate structure; and

(ii) Management Focus and Operational Efficiency: Enhancing management focus and operational efficiency by creating two separate publicly traded companies, each with a dedicated management team, board of directors, and strategic plan tailored to its specific end markets and competitive dynamics.

With respect to the first articulated purpose — independent capital allocation — Mr. Cross explained that, as set forth in his July 22, 2022 email and the July 18, 2022 business purpose memorandum, this purpose was susceptible to characterization as a function of HPE Fund IV's fund-level portfolio management strategy rather than a genuine Veldran corporate-level objective. Mr. Cross observed that HPE Fund IV, a $6.8 billion vintage 2018 fund, holds 62.4% of Veldran's outstanding equity through Harrowgate Veldran Holdings LLC and exercises effective control over Veldran's board of directors, with Diana Fenn serving as Board Chair and Harrowgate-designated directors constituting a majority of the board. In this context, a separation that would enable HPE Fund IV to pursue different monetization timelines and capital markets strategies for each separated business could readily be viewed by the Internal Revenue Service as serving the sponsor's investment management objectives rather than the operating company's corporate business needs. Mr. Cross noted that the independent capital allocation purpose would be significantly strengthened if the client teams could identify specific capital needs of either division that could not be met within the current integrated structure — for example, a transformative acquisition opportunity for the Precision Flow Solutions Division that Veldran's existing leverage profile would not accommodate, or a need for equity-linked compensation arrangements to attract or retain key division-level talent.

With respect to the second articulated purpose — management focus and operational efficiency — Mr. Cross stated that the factual predicate remained largely undeveloped. To date, no specific operational inefficiencies, lost business opportunities, or management bandwidth constraints attributable to the integrated corporate structure had been identified or documented. Mr. Cross noted that for this purpose to carry weight in the context of a tax opinion, Calderwood & Harkness would need to see concrete, contemporaneous evidence — such as management presentations, board minutes, strategic planning documents, consultant reports, or affidavits from senior operating executives — demonstrating that the integrated structure had actually impaired one or both divisions' operational performance or strategic flexibility. Absent such evidence, the management focus purpose would read as boilerplate and would carry little persuasive weight in an IRS examination.

Mr. Cross emphasized that without at least one robust, well-documented corporate-level business purpose, Calderwood & Harkness would be unable to deliver the tax opinion at the "should" level of confidence — which is the second-highest level of tax opinion comfort, indicating a probability of greater than approximately 70% that the transaction would be treated as described in the opinion. Mr. Cross reminded the attendees that the "should" level was the opinion standard agreed upon in the April 11, 2022 engagement letter between Calderwood & Harkness and Harrowgate Advisors. A downgrade to a "more likely than not" opinion — which indicates a probability of greater than 50% — would be technically supportable under a broader range of circumstances but would represent a materially less favorable level of assurance and could affect the willingness of transaction parties and their respective boards to rely on the opinion in approving the distribution.

4.3 Veldran Management's Response on Business Purpose

Jonathan Caldecott, CEO of Veldran, responded to Mr. Cross's presentation and acknowledged the difficulty in articulating business purposes for the spin-off that were genuinely independent of HPE Fund IV's strategic objectives.

Mr. Caldecott stated candidly that the primary impetus for the separation of the Precision Flow Solutions Division from Veldran had originated from Harrowgate's investment thesis for Veldran at the time of the September 20, 2019 leveraged acquisition. That acquisition was effected through the purchase of 46,488,000 shares of Veldran common stock at a price of $40.00 per share, representing a total acquisition price of approximately $1,859,520,000. Mr. Caldecott observed that the Harrowgate deal team's original underwriting had contemplated a separation of Veldran's two principal operating divisions as a means of unlocking a "sum-of-the-parts" valuation premium and facilitating differential exit timelines for each business. He acknowledged that the operational arguments in favor of the separation, while plausible in the abstract, had not been the principal motivation driving the transaction.

Mr. Caldecott provided additional context regarding the two divisions. The Engineered Coatings Division, which constitutes the larger of Veldran's two operating segments, generated fiscal year 2021 revenue of approximately $1.52 billion and EBITDA of approximately $285 million, reflecting an EBITDA margin of approximately 18.75%. The Precision Flow Solutions Division generated fiscal year 2021 revenue of approximately $820 million and EBITDA of approximately $133 million, reflecting an EBITDA margin of approximately 16.22%. Mr. Caldecott noted that the two divisions do operate in somewhat different end markets — the Engineered Coatings Division serves industrial and aerospace customers requiring high-performance protective coatings, while the Precision Flow Solutions Division manufactures precision fluid-control systems for petrochemical refining, chemical processing, and water-infrastructure applications. However, Mr. Caldecott observed that Veldran's current integrated corporate structure provides shared-service efficiencies across a number of functions — including procurement, IT infrastructure, human resources, and certain back-office finance and accounting operations — that would be lost upon separation. These shared-service cost savings had been estimated internally at approximately $25 million to $35 million annually, though no formal dissynergy analysis had yet been prepared by Brackenridge & Co. or any other advisor.

Mr. Caldecott noted that Sandra Waverly, President of the Precision Flow Solutions Division and the planned CEO of Meridian, was not on the call. He suggested that Ms. Waverly might be able to provide additional operational justifications from the perspective of the division's day-to-day management — including, potentially, examples of capital expenditure requests that had been deferred or deprioritized within the integrated budget process, or competitive dynamics in the precision flow-control market that might be better addressed by a standalone, publicly traded entity. Mr. Caldecott recommended that a follow-up conversation be arranged to include Ms. Waverly so that these operational perspectives could be explored and, if substantive, documented in support of the business purpose analysis.

Philip Crundell, General Counsel of Veldran, added that Thornapple McCord LLP — Veldran's outside corporate counsel, with David Ochoa as lead partner on the engagement — had also expressed concern about the business purpose articulation in its separate capacity as corporate counsel to Veldran. Mr. Crundell stated that Mr. Ochoa had raised the issue informally during a call with Mr. Crundell on or about August 8, 2022, and that Thornapple McCord's concerns appeared to be substantially aligned with those expressed by Mr. Cross. Mr. Crundell noted that Thornapple McCord would need to be comfortable with the business purpose record for purposes of its own corporate-law analysis and any board-level resolutions authorizing the distribution.

4.4 Cross's Advisory on the Interplay Between Business Purpose and § 355(e) Risk

Mr. Cross then briefly addressed the relationship between the business purpose issue and the Section 355(e) "plan" analysis, which had been the subject of a separate Calderwood & Harkness memorandum dated June 28, 2022.

Mr. Cross reminded the attendees that Section 355(e) of the Code provides that if a distribution otherwise qualifying under Section 355 is part of a "plan (or series of related transactions)" pursuant to which one or more persons acquire, directly or indirectly, a fifty percent (50%) or greater interest (by vote or value) in the distributing corporation or the controlled corporation, then the distributing corporation recognizes gain on the distribution as if it had sold the controlled corporation stock at fair market value. This provision — commonly referred to as the "anti-Morris Trust" rule — was specifically designed to prevent the use of tax-free spin-offs as a precursor to prearranged acquisitions or other changes of control.

Mr. Cross noted that the September 20, 2019 acquisition of Veldran by HPE Fund IV constituted a change of control of Veldran (with HPE Fund IV acquiring 62.4% of Veldran's equity), and that the approximately three-year gap between that acquisition and the anticipated Q4 2022 distribution date fell within the broader "plan" analysis framework set forth in Treasury Regulation § 1.355-7. Mr. Cross observed that while the regulatory safe harbors generally provide comfort for distributions that occur more than two years after a related acquisition, the "plan" analysis is a facts-and-circumstances inquiry that can look beyond the two-year window in cases where the acquisition and the distribution were part of an integrated plan from the outset.

Mr. Cross stated that, as detailed in Calderwood & Harkness's June 28, 2022 memorandum analyzing the Section 355(e) "plan" question, the preliminary conclusion was favorable — specifically, that the September 2019 acquisition and the proposed spin-off distribution should not be treated as part of a single plan or series of related transactions, principally because (a) the acquisition predated the distribution by more than two years, (b) there was no binding commitment or firm intention to effect the spin-off at the time of the acquisition, and (c) intervening events (including the COVID-19 pandemic and related operational disruptions) had introduced significant business uncertainty between the acquisition and the initiation of the spin-off planning process. However, Mr. Cross cautioned that the factual record supporting this conclusion remained thin and that additional documentation — including board minutes, investment committee memoranda, and contemporaneous correspondence — would need to be assembled and reviewed to buttress the analysis.

Mr. Cross stated that the estimated tax at risk if Section 355(e) were determined to apply ranged from approximately $125 million to $190 million. This estimate was derived by applying the 21% federal corporate income tax rate to an estimated built-in gain of $600 million to $900 million on the Meridian stock. The built-in gain range was calculated based on the estimated fair market value of Meridian of $1.4 billion to $1.7 billion (per Brackenridge's June 10, 2022 preliminary analysis) less Veldran's approximately $800 million adjusted tax basis in the assets of the Precision Flow Solutions Division. Mr. Cross noted that these were preliminary estimates subject to refinement as the valuation analysis was updated and as the asset-level basis computations were finalized.

Mr. Cross then drew the group's attention to the practical interrelationship between the business purpose deficiency and the Section 355(e) risk. He observed that, although the business purpose requirement under Treasury Regulation § 1.355-2(b) and the "plan" analysis under Section 355(e) are analytically distinct doctrines, they are practically interrelated in the context of an IRS examination. Specifically, a weak or poorly documented business purpose could, in an audit, feed an IRS argument that the spin-off was motivated primarily by the PE sponsor's plan to monetize its investment — and that same evidence of sponsor-driven motivation could, in turn, support a Section 355(e) "plan" argument linking the spin-off distribution to the September 2019 acquisition. In other words, if the business purpose record suggested that the spin-off was conceived as part of Harrowgate's exit strategy at or near the time of the acquisition, the IRS could use that evidence to argue that the distribution was part of the same "plan" as the acquisition, thereby triggering gain recognition under Section 355(e). Mr. Cross emphasized that this was a factual vulnerability rather than a legal inevitability, but that it underscored the importance of developing a well-documented, genuinely corporate-level business purpose record before proceeding with the distribution.

4.5 Lender Consent Uncertainty

Philip Crundell raised an additional issue that he characterized as significant to the overall transaction timeline: the status of lender consents under Veldran's existing credit facilities.

Mr. Crundell reported that Ashfield National Bank, N.A., in its capacity as administrative agent under Veldran's $1.1 billion First Lien Term Loan B (the "Credit Facility"), had indicated through Margaret Tsao, Managing Director in Ashfield's Leveraged Finance group, that consents under the credit agreement for the proposed spin-off would require significant negotiation and could potentially necessitate a partial or full refinancing of the term loan. Mr. Crundell stated that Ms. Tsao had communicated this view informally during a call on or about August 10, 2022, and that no formal waiver or consent request had yet been submitted to the lender group.

Mr. Crundell noted that Calderwood & Harkness's memorandum on credit agreement spin-off covenant analysis, dated August 2, 2022, had identified several restrictive covenants that would be implicated by the proposed spin-off. In particular, the memorandum concluded that the distribution of one hundred percent of the Meridian common stock to Veldran shareholders would likely constitute both a "Disposition" (as defined in Section 1.01 of the credit agreement) and an "Investment" (as defined in Section 1.01 of the credit agreement) under the operative definitions, and that neither the general disposition basket nor the investment basket would be sufficient to accommodate a transaction of this magnitude without affirmative lender consent. Mr. Crundell stated that the credit agreement also contained a "no material adverse effect" representation and a financial maintenance covenant (a first lien net leverage ratio) that could be affected by the removal of the Precision Flow Solutions Division's EBITDA from Veldran's consolidated financial statements.

Priya Chandrasekar of Whitfield & Gage LLP confirmed that the lender consent process was at an early stage and that Ashfield National Bank's specific requirements — including whether it would insist on an amendment to the credit agreement, a full refinancing, or some other structural accommodation — remained undefined. Ms. Chandrasekar noted that Whitfield & Gage was prepared to lead the lender negotiation process on Harrowgate's behalf once a decision was made to proceed, but that no meaningful engagement with the lender group could take place until the fundamental question of whether and when to pursue the spin-off was resolved.

Mr. Crundell also raised a secondary debt-related issue involving the indenture governing Veldran's 6.250% Senior Unsecured Notes due 2027, issued in an aggregate principal amount of $450 million, with Colton Trust Company serving as trustee. Mr. Crundell noted that the proposed spin-off could potentially trigger the asset-sale covenant contained in the indenture, which generally restricts dispositions of assets exceeding a specified threshold unless certain reinvestment or offer-to-purchase conditions are satisfied. However, Mr. Crundell stated that this issue was considered more manageable than the term loan consent issue, based on Calderwood & Harkness's indenture analysis memorandum dated August 3, 2022, which had identified potential avenues for structuring the spin-off to fall within the indenture's permitted exceptions or, alternatively, for obtaining a supplemental indenture or waiver from the trustee.

4.6 Marcus Adler's Suggestion to Pause the Transaction

Following Mr. Cross's summary of the tax-opinion impediments, Mr. Caldecott's and Mr. Crundell's discussion of the operational and debt-related concerns, and the foregoing exchange among the participants, Marcus Adler addressed the group with what he characterized as a preliminary but considered view on the appropriate path forward.

Mr. Adler stated that, taking into account the totality of the open issues discussed on the call — including the tax-opinion impediment arising from the inadequacy of the business purpose record, the Section 355(e) factual vulnerabilities, the unresolved lender consent process, and the unfavorable equity market conditions — it might be advisable to "pause" the spin-off transaction. Mr. Adler stated that a pause would allow Harrowgate and Veldran management to accomplish several objectives:

(a) reassess prevailing equity market conditions and develop a view on whether industrial-sector valuations were likely to recover during 2023 or beyond;

(b) develop a stronger, more well-documented business purpose narrative, including by engaging Sandra Waverly and other members of the division-level management team to identify and memorialize specific operational justifications for the separation;

(c) bolster the factual record supporting the Section 355(e) "plan" analysis, including by assembling and organizing contemporaneous documents from the period surrounding the September 2019 acquisition to demonstrate the absence of a pre-existing plan to effect the spin-off; and

(d) resolve the lender consent issues under the Credit Facility and, to the extent necessary, under the Senior Notes indenture, in a manner that would not impede or delay the distribution once a decision to proceed was made.

Mr. Adler stated clearly that Harrowgate was not abandoning the spin-off concept. He characterized the separation of the Precision Flow Solutions Division as a core element of Harrowgate's value-creation thesis for Veldran and stated that he continued to believe the transaction would ultimately be executed. However, Mr. Adler stated that pursuing the spin-off on the current timeline — targeting a distribution date in Q4 2022 — did not appear prudent given the confluence of unresolved tax, legal, financial, and market issues. He observed that it would be preferable to take additional time to resolve these issues and to pursue the transaction from a position of strength rather than to rush forward and risk either an adverse tax outcome or a suboptimal market reception.

Diana Fenn agreed with Mr. Adler's assessment. She noted that the Harrowgate investment committee would need to formally consider the question at its next meeting and render a decision regarding whether to authorize a pause. Ms. Fenn stated that she and Ms. Yeung would confer internally with the investment committee members in the coming days and that Harrowgate would communicate its determination to Calderwood & Harkness and the other advisors promptly.

5. Open Items and Next Steps

No decision was reached on the call. The participants agreed that the questions raised during the discussion required further internal deliberation within Harrowgate before a determination could be made regarding the path forward.

Christine Yeung stated that she would confer with Marcus Adler and Diana Fenn internally and would revert to Calderwood & Harkness with Harrowgate's determination regarding the spin-off timeline — specifically, whether to proceed with the Q4 2022 distribution target, to defer the distribution to a later date, or to formally place the engagement on hold pending further developments. Ms. Yeung indicated that she expected to be able to communicate Harrowgate's decision within the coming days.

Mr. Cross noted that, in the event the matter were paused or placed on hold, Calderwood & Harkness would preserve all work product generated to date in connection with the engagement. The principal work product items generated through the date of this memorandum include the following:

• Draft Tax Opinion Letter (first draft circulated August 5, 2022) — marked as draft, not for reliance;

• Comprehensive Section 355 Analysis Memorandum (dated May 20, 2022);

• Section 355(b) Active Trade or Business Analysis regarding the June 7, 2019 acquisition of Kestrel Precision Controls, Inc. ($295 million purchase price, acquired from Rennick Industrial Partners Fund II LP) (dated June 1, 2022);

• Section 355(e) Plan Analysis Memorandum (dated June 28, 2022);

• Business Purpose Memorandum (dated July 18, 2022);

• Device Test Analysis Memorandum (dated July 25, 2022);

• Credit Agreement Spin-Off Covenant Analysis Memorandum (dated August 2, 2022);

• Senior Notes Indenture Analysis Memorandum (dated August 3, 2022); and

• All supporting diligence materials, including organizational charts, financial data, transaction documents, and correspondence.

Mr. Cross further reminded the attendees that the second draft of the Representation Letter, which had been circulated on July 11, 2022, remained unexecuted by Veldran and Harrowgate. The execution of the Representation Letter is a condition precedent to the delivery of the final tax opinion, and the draft tax opinion circulated on August 5, 2022, was expressly marked as a preliminary draft not for reliance and not to be treated as a final opinion of Calderwood & Harkness on any matter discussed therein. Mr. Cross stated that no party should place reliance on the draft opinion in its current form, and that Calderwood & Harkness reserved the right to revise, supplement, or withdraw its analysis as additional facts were developed and as the transaction structure was refined.

Mr. Simmons noted that total work in process (WIP) on the engagement through August 15, 2022 was approaching approximately $480,000. Two interim invoices had been rendered to date:

Mr. Simmons stated that, in the event the matter were placed on hold, Calderwood & Harkness would prepare and provide a final WIP summary reflecting all unbilled time and costs through the date of the hold, and would render a final interim invoice for the outstanding balance. All billing would remain subject to the terms and conditions of the April 11, 2022 engagement letter.

Ms. Yeung thanked the teams for their participation in the call and for the thoroughness of the discussion. She reiterated that she would communicate Harrowgate's decision regarding the path forward in the coming days and that she expected to be in a position to provide direction no later than the end of the week of August 22, 2022.

The call concluded at approximately 4:25 p.m. (Eastern).

This memorandum was prepared by Garrett Simmons and has been reviewed by Leonard Cross.

6. Privilege and Confidentiality Notice

This memorandum constitutes privileged and confidential attorney work product prepared by Calderwood & Harkness LLP in connection with the rendering of legal advice to Harrowgate Private Equity Fund IV, L.P., Harrowgate Capital Advisors LLC, and Veldran Industries Holdings, Inc. This memorandum is protected by the attorney-client privilege, the work product doctrine, and all other applicable privileges and protections under federal and state law. The information contained herein is strictly confidential and is intended solely for the use of the engagement team at Calderwood & Harkness LLP and authorized in-house counsel at Harrowgate Capital Advisors LLC and Veldran Industries Holdings, Inc.

This memorandum shall not be disclosed, distributed, or made available to any third party without the prior written consent of Calderwood & Harkness LLP. Any inadvertent disclosure of this memorandum or its contents does not constitute a waiver of any applicable privilege or protection. If you have received this memorandum in error, please notify the sender immediately and destroy all copies.

Distribution of this memorandum is limited to the following:

• Leonard Cross, Partner, Calderwood & Harkness LLP

• Sylvia Hartwell, Partner, Calderwood & Harkness LLP

• Garrett Simmons, Associate, Calderwood & Harkness LLP

• Christine Yeung, General Counsel, Harrowgate Capital Advisors LLC

• Philip Crundell, General Counsel, Veldran Industries Holdings, Inc.

No additional distribution is authorized without prior written approval.

CALDERWOOD & HARKNESS LLP 1301 Avenue of the Americas, 40th Floor New York, New York 10019

Engagement Number:	1003-00005
Matter Code:	HRW-SPIN-001
Prepared By:	Garrett Simmons, Lead Associate, Tax Department
Reviewed By:	Leonard Cross, Responsible Partner, Tax Department
Date of Memorandum:	August 15, 2022
Re:	Summary of Conference Call — Proposed Tax-Free Spin-Off of Meridian Flow Technologies, Inc. from Veldran Industries Holdings, Inc. — Business Purpose and Market Timing Discussion
Invoice Number	Date	Amount
22-7831-001	June 15, 2022	$165,000.00
22-7831-002	August 1, 2022	$145,000.00
Total Billed to Date	$310,000.00

CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT PRIVILEGE
INTERNAL MEMORANDUM — CONFERENCE CALL SUMMARY
CALDERWOOD & HARKNESS LLP 1301 Avenue of the Americas, 40th Floor New York, New York 10019
1. Call Details
The conference call that is the subject of this memorandum took place on August 15, 2022, beginning at 3:00 p.m. (Eastern) and concluding at approximately 4:25 p.m. (Eastern). The call was conducted via videoconference and was convened at the request of Christine Yeung, General Counsel of Harrowgate Capital Advisors LLC ("Harrowgate Advisors"), in its capacity as investment manager and general partner affiliate of Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV"). No written agenda was circulated in advance of the call.
2. Attendees
The following individuals participated in the call:
Calderwood & Harkness LLP
• Leonard Cross — Responsible Partner, Tax Department
• Sylvia Hartwell — Billing Partner, Tax Department
• Garrett Simmons — Lead Associate, Tax Department
Harrowgate Capital Advisors LLC (on behalf of Harrowgate Private Equity Fund IV, L.P.)
• Marcus Adler — Founding Partner & Chairman
• Diana Fenn — Managing Partner & Chief Investment Officer; Board Chair of Veldran Industries Holdings, Inc.
• Tobias Rourke — Partner, Head of Portfolio Operations
• Christine Yeung — General Counsel
Veldran Industries Holdings, Inc.
• Jonathan Caldecott — Chief Executive Officer
• Philip Crundell — General Counsel
Whitfield & Gage LLP (Corporate / M&A Counsel to Harrowgate)
• Priya Chandrasekar — Partner, Corporate / Capital Markets
No other individuals joined or monitored the call. Sandra Waverly, President of the Precision Flow Solutions Division and planned CEO of Meridian Flow Technologies, Inc. ("Meridian" or "SpinCo"), was not present. David Ochoa, lead partner at Thornapple McCord LLP (corporate counsel to Veldran), was likewise not present but was referenced during the discussion as described below. Samuel Ng, Managing Director of the Industrials Group at Brackenridge & Co. (financial advisor), was not present but his views were relayed by Mr. Adler.
3. Purpose of Call
The call was convened at Harrowgate's request to discuss two interrelated issues that had arisen since the circulation of Calderwood & Harkness's first draft tax opinion letter on August 5, 2022:
(i) the sufficiency of the articulated business purposes for the proposed pro rata spin-off of one hundred percent (100%) of the common stock of Meridian Flow Technologies, Inc. ("Meridian" or "SpinCo") to the shareholders of Veldran Industries Holdings, Inc. ("Veldran" or "Distributing"), which transaction is intended to qualify as a tax-free reorganization under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"); and
(ii) whether current equity market conditions, including macroeconomic headwinds affecting industrial-sector valuations, warranted a reconsideration of the previously targeted Q4 2022 distribution timeline.
As background, Mr. Cross had previously raised concerns regarding the business purpose articulation in two separate communications: (a) his July 22, 2022 email to Ms. Yeung (copying Ms. Hartwell), which identified specific deficiencies in the factual predicate supporting the two preliminary business purposes set forth in Calderwood & Harkness's July 18, 2022 business purpose memorandum; and (b) his cover email transmitting the first draft tax opinion on August 5, 2022, which reiterated those concerns and noted that the draft opinion reflected a number of bracketed open issues and qualifications tied directly to the business purpose analysis. The August 5 draft opinion was expressly marked as a preliminary draft not for reliance and was circulated solely for the purpose of eliciting comments and additional factual information from the client teams.
4. Summary of Discussion
4.1 Market Conditions and Timing Concerns
Marcus Adler opened the substantive portion of the call by directing the group's attention to recent developments in the industrial-sector equity markets. Mr. Adler noted that industrial-sector equity valuations had deteriorated materially during mid-2022, driven by macroeconomic headwinds that included, among other factors, persistent inflationary pressures, the Federal Reserve's aggressive interest rate increases during the second and third quarters of 2022, elevated energy costs, and growing recessionary fears across the broader economy. Mr. Adler stated that these conditions had resulted in meaningful compression in public-company trading multiples across the industrial sector, particularly among mid-market diversified industrials and flow-control technology businesses.
Mr. Adler reported that Brackenridge & Co. (Harrowgate's financial advisor for the transaction), through Samuel Ng, Managing Director in the Industrials Group, had indicated in recent conversations with Harrowgate that the preliminary valuation range for Meridian of $1.4 billion to $1.7 billion — which was based on a 10.5× to 12.8× EV/EBITDA multiple applied to the Precision Flow Solutions Division's fiscal year 2021 EBITDA of $133 million, as set forth in Brackenridge's June 10, 2022 preliminary analysis — may no longer be achievable in the current market environment. Mr. Adler noted that Mr. Ng had observed significant compression in comparable industrial trading multiples during June, July, and August of 2022 and had expressed the view that a public-market debut for Meridian under current conditions would likely result in a valuation at or below the low end of the preliminary range.
Mr. Adler expressed concern that proceeding with the spin-off distribution in Q4 2022 under these depressed market conditions would result in a suboptimal initial valuation for Meridian as a standalone publicly traded company. He further noted that a depressed valuation at the time of the distribution would undermine any potential post-spin monetization strategy or secondary public offering by HPE Fund IV, which holds approximately 62.4% of Veldran's outstanding common stock through Harrowgate Veldran Holdings LLC, the intermediate holding vehicle. Mr. Adler observed that Harrowgate's limited partners in HPE Fund IV — a $6.8 billion vintage 2018 fund — had certain return expectations that would be difficult to satisfy if Meridian were launched into a hostile valuation environment.
Diana Fenn supplemented Mr. Adler's comments by noting that the Harrowgate investment committee had discussed the market timing issue at its most recent meeting. Ms. Fenn stated that there was internal sentiment among the members of the investment committee in favor of deferring the spin-off distribution to a more favorable market window, though she emphasized that no formal decision had been reached and that the investment committee had not voted on any specific recommendation. Ms. Fenn acknowledged that the market timing question was inextricably linked to the tax and legal issues that Mr. Cross had raised and that Harrowgate wanted to understand the full scope of open issues before making a determination.
Tobias Rourke, Head of Portfolio Operations at Harrowgate, added that from a portfolio operations standpoint, the Precision Flow Solutions Division was performing in line with management's expectations and budget for fiscal year 2022. Mr. Rourke noted that the Division had delivered fiscal year 2021 revenue of approximately $820 million and EBITDA of approximately $133 million, and that first-half 2022 operating results were tracking near plan. Mr. Rourke observed that there was no operational urgency — such as a deteriorating business trend, an imminent competitive threat, or a capital-intensive investment opportunity requiring immediate separation — that would compel an accelerated timeline for the spin-off. He characterized the current pace of the transaction as driven primarily by Harrowgate's investment realization timeline rather than by business exigency at the operating company level.
4.2 Business Purpose Articulation — Tax Opinion Impediment
Leonard Cross then provided the group with a detailed update on the status of the tax opinion and the specific impediment arising from the business purpose analysis.
Mr. Cross began by referencing the first draft opinion letter circulated on August 5, 2022, and his July 22, 2022 email to Ms. Yeung and Ms. Hartwell, both of which had flagged substantive concerns regarding the articulation of the business purposes underlying the proposed spin-off. Mr. Cross noted that these concerns had not been addressed in the intervening period and that the purpose of this portion of the call was to discuss the issue in greater detail and to solicit additional factual input from the Veldran management team and Harrowgate.
Mr. Cross reiterated that the business purpose requirement is a well-established judicial and regulatory prerequisite to tax-free treatment under Section 355 of the Code, as set forth in Treasury Regulation § 1.355-2(b). He stated that, under the applicable legal standard, a distribution must be carried out for one or more real and substantial non-federal-tax business purposes that are germane to the business of the distributing corporation (Veldran), the controlled corporation (Meridian), or the affiliated group of which those corporations are members. Mr. Cross emphasized that the business purpose must be a "corporate" business purpose as distinct from a "shareholder" purpose. A purpose that primarily serves the interests of one or more shareholders — such as the PE sponsor's desire to return capital to its limited partners, facilitate a secondary offering, or otherwise monetize its investment in one of the separated businesses — does not constitute a valid corporate business purpose for purposes of the regulation, even if it is incidentally beneficial to the corporation.
Mr. Cross stated that the two preliminary business purposes articulated to date — as set forth in Calderwood & Harkness's July 18, 2022 business purpose memorandum — remained insufficiently developed for purposes of supporting the "should" level tax opinion that is the deliverable under the engagement letter. Those two purposes were:
(i) Independent Capital Allocation: Enabling each of Veldran's two principal operating divisions (the Engineered Coatings Division and the Precision Flow Solutions Division) to pursue independent capital-allocation strategies, including the ability to access the public equity and debt capital markets on a standalone basis, without the constraints and cross-subsidization dynamics inherent in the current integrated corporate structure; and
(ii) Management Focus and Operational Efficiency: Enhancing management focus and operational efficiency by creating two separate publicly traded companies, each with a dedicated management team, board of directors, and strategic plan tailored to its specific end markets and competitive dynamics.
With respect to the first articulated purpose — independent capital allocation — Mr. Cross explained that, as set forth in his July 22, 2022 email and the July 18, 2022 business purpose memorandum, this purpose was susceptible to characterization as a function of HPE Fund IV's fund-level portfolio management strategy rather than a genuine Veldran corporate-level objective. Mr. Cross observed that HPE Fund IV, a $6.8 billion vintage 2018 fund, holds 62.4% of Veldran's outstanding equity through Harrowgate Veldran Holdings LLC and exercises effective control over Veldran's board of directors, with Diana Fenn serving as Board Chair and Harrowgate-designated directors constituting a majority of the board. In this context, a separation that would enable HPE Fund IV to pursue different monetization timelines and capital markets strategies for each separated business could readily be viewed by the Internal Revenue Service as serving the sponsor's investment management objectives rather than the operating company's corporate business needs. Mr. Cross noted that the independent capital allocation purpose would be significantly strengthened if the client teams could identify specific capital needs of either division that could not be met within the current integrated structure — for example, a transformative acquisition opportunity for the Precision Flow Solutions Division that Veldran's existing leverage profile would not accommodate, or a need for equity-linked compensation arrangements to attract or retain key division-level talent.
With respect to the second articulated purpose — management focus and operational efficiency — Mr. Cross stated that the factual predicate remained largely undeveloped. To date, no specific operational inefficiencies, lost business opportunities, or management bandwidth constraints attributable to the integrated corporate structure had been identified or documented. Mr. Cross noted that for this purpose to carry weight in the context of a tax opinion, Calderwood & Harkness would need to see concrete, contemporaneous evidence — such as management presentations, board minutes, strategic planning documents, consultant reports, or affidavits from senior operating executives — demonstrating that the integrated structure had actually impaired one or both divisions' operational performance or strategic flexibility. Absent such evidence, the management focus purpose would read as boilerplate and would carry little persuasive weight in an IRS examination.
Mr. Cross emphasized that without at least one robust, well-documented corporate-level business purpose, Calderwood & Harkness would be unable to deliver the tax opinion at the "should" level of confidence — which is the second-highest level of tax opinion comfort, indicating a probability of greater than approximately 70% that the transaction would be treated as described in the opinion. Mr. Cross reminded the attendees that the "should" level was the opinion standard agreed upon in the April 11, 2022 engagement letter between Calderwood & Harkness and Harrowgate Advisors. A downgrade to a "more likely than not" opinion — which indicates a probability of greater than 50% — would be technically supportable under a broader range of circumstances but would represent a materially less favorable level of assurance and could affect the willingness of transaction parties and their respective boards to rely on the opinion in approving the distribution.
4.3 Veldran Management's Response on Business Purpose
Jonathan Caldecott, CEO of Veldran, responded to Mr. Cross's presentation and acknowledged the difficulty in articulating business purposes for the spin-off that were genuinely independent of HPE Fund IV's strategic objectives.
Mr. Caldecott stated candidly that the primary impetus for the separation of the Precision Flow Solutions Division from Veldran had originated from Harrowgate's investment thesis for Veldran at the time of the September 20, 2019 leveraged acquisition. That acquisition was effected through the purchase of 46,488,000 shares of Veldran common stock at a price of $40.00 per share, representing a total acquisition price of approximately $1,859,520,000. Mr. Caldecott observed that the Harrowgate deal team's original underwriting had contemplated a separation of Veldran's two principal operating divisions as a means of unlocking a "sum-of-the-parts" valuation premium and facilitating differential exit timelines for each business. He acknowledged that the operational arguments in favor of the separation, while plausible in the abstract, had not been the principal motivation driving the transaction.
Mr. Caldecott provided additional context regarding the two divisions. The Engineered Coatings Division, which constitutes the larger of Veldran's two operating segments, generated fiscal year 2021 revenue of approximately $1.52 billion and EBITDA of approximately $285 million, reflecting an EBITDA margin of approximately 18.75%. The Precision Flow Solutions Division generated fiscal year 2021 revenue of approximately $820 million and EBITDA of approximately $133 million, reflecting an EBITDA margin of approximately 16.22%. Mr. Caldecott noted that the two divisions do operate in somewhat different end markets — the Engineered Coatings Division serves industrial and aerospace customers requiring high-performance protective coatings, while the Precision Flow Solutions Division manufactures precision fluid-control systems for petrochemical refining, chemical processing, and water-infrastructure applications. However, Mr. Caldecott observed that Veldran's current integrated corporate structure provides shared-service efficiencies across a number of functions — including procurement, IT infrastructure, human resources, and certain back-office finance and accounting operations — that would be lost upon separation. These shared-service cost savings had been estimated internally at approximately $25 million to $35 million annually, though no formal dissynergy analysis had yet been prepared by Brackenridge & Co. or any other advisor.
Mr. Caldecott noted that Sandra Waverly, President of the Precision Flow Solutions Division and the planned CEO of Meridian, was not on the call. He suggested that Ms. Waverly might be able to provide additional operational justifications from the perspective of the division's day-to-day management — including, potentially, examples of capital expenditure requests that had been deferred or deprioritized within the integrated budget process, or competitive dynamics in the precision flow-control market that might be better addressed by a standalone, publicly traded entity. Mr. Caldecott recommended that a follow-up conversation be arranged to include Ms. Waverly so that these operational perspectives could be explored and, if substantive, documented in support of the business purpose analysis.
Philip Crundell, General Counsel of Veldran, added that Thornapple McCord LLP — Veldran's outside corporate counsel, with David Ochoa as lead partner on the engagement — had also expressed concern about the business purpose articulation in its separate capacity as corporate counsel to Veldran. Mr. Crundell stated that Mr. Ochoa had raised the issue informally during a call with Mr. Crundell on or about August 8, 2022, and that Thornapple McCord's concerns appeared to be substantially aligned with those expressed by Mr. Cross. Mr. Crundell noted that Thornapple McCord would need to be comfortable with the business purpose record for purposes of its own corporate-law analysis and any board-level resolutions authorizing the distribution.
4.4 Cross's Advisory on the Interplay Between Business Purpose and § 355(e) Risk
Mr. Cross then briefly addressed the relationship between the business purpose issue and the Section 355(e) "plan" analysis, which had been the subject of a separate Calderwood & Harkness memorandum dated June 28, 2022.
Mr. Cross reminded the attendees that Section 355(e) of the Code provides that if a distribution otherwise qualifying under Section 355 is part of a "plan (or series of related transactions)" pursuant to which one or more persons acquire, directly or indirectly, a fifty percent (50%) or greater interest (by vote or value) in the distributing corporation or the controlled corporation, then the distributing corporation recognizes gain on the distribution as if it had sold the controlled corporation stock at fair market value. This provision — commonly referred to as the "anti-Morris Trust" rule — was specifically designed to prevent the use of tax-free spin-offs as a precursor to prearranged acquisitions or other changes of control.
Mr. Cross noted that the September 20, 2019 acquisition of Veldran by HPE Fund IV constituted a change of control of Veldran (with HPE Fund IV acquiring 62.4% of Veldran's equity), and that the approximately three-year gap between that acquisition and the anticipated Q4 2022 distribution date fell within the broader "plan" analysis framework set forth in Treasury Regulation § 1.355-7. Mr. Cross observed that while the regulatory safe harbors generally provide comfort for distributions that occur more than two years after a related acquisition, the "plan" analysis is a facts-and-circumstances inquiry that can look beyond the two-year window in cases where the acquisition and the distribution were part of an integrated plan from the outset.
Mr. Cross stated that, as detailed in Calderwood & Harkness's June 28, 2022 memorandum analyzing the Section 355(e) "plan" question, the preliminary conclusion was favorable — specifically, that the September 2019 acquisition and the proposed spin-off distribution should not be treated as part of a single plan or series of related transactions, principally because (a) the acquisition predated the distribution by more than two years, (b) there was no binding commitment or firm intention to effect the spin-off at the time of the acquisition, and (c) intervening events (including the COVID-19 pandemic and related operational disruptions) had introduced significant business uncertainty between the acquisition and the initiation of the spin-off planning process. However, Mr. Cross cautioned that the factual record supporting this conclusion remained thin and that additional documentation — including board minutes, investment committee memoranda, and contemporaneous correspondence — would need to be assembled and reviewed to buttress the analysis.
Mr. Cross stated that the estimated tax at risk if Section 355(e) were determined to apply ranged from approximately $125 million to $190 million. This estimate was derived by applying the 21% federal corporate income tax rate to an estimated built-in gain of $600 million to $900 million on the Meridian stock. The built-in gain range was calculated based on the estimated fair market value of Meridian of $1.4 billion to $1.7 billion (per Brackenridge's June 10, 2022 preliminary analysis) less Veldran's approximately $800 million adjusted tax basis in the assets of the Precision Flow Solutions Division. Mr. Cross noted that these were preliminary estimates subject to refinement as the valuation analysis was updated and as the asset-level basis computations were finalized.
Mr. Cross then drew the group's attention to the practical interrelationship between the business purpose deficiency and the Section 355(e) risk. He observed that, although the business purpose requirement under Treasury Regulation § 1.355-2(b) and the "plan" analysis under Section 355(e) are analytically distinct doctrines, they are practically interrelated in the context of an IRS examination. Specifically, a weak or poorly documented business purpose could, in an audit, feed an IRS argument that the spin-off was motivated primarily by the PE sponsor's plan to monetize its investment — and that same evidence of sponsor-driven motivation could, in turn, support a Section 355(e) "plan" argument linking the spin-off distribution to the September 2019 acquisition. In other words, if the business purpose record suggested that the spin-off was conceived as part of Harrowgate's exit strategy at or near the time of the acquisition, the IRS could use that evidence to argue that the distribution was part of the same "plan" as the acquisition, thereby triggering gain recognition under Section 355(e). Mr. Cross emphasized that this was a factual vulnerability rather than a legal inevitability, but that it underscored the importance of developing a well-documented, genuinely corporate-level business purpose record before proceeding with the distribution.
4.5 Lender Consent Uncertainty
Philip Crundell raised an additional issue that he characterized as significant to the overall transaction timeline: the status of lender consents under Veldran's existing credit facilities.
Mr. Crundell reported that Ashfield National Bank, N.A., in its capacity as administrative agent under Veldran's $1.1 billion First Lien Term Loan B (the "Credit Facility"), had indicated through Margaret Tsao, Managing Director in Ashfield's Leveraged Finance group, that consents under the credit agreement for the proposed spin-off would require significant negotiation and could potentially necessitate a partial or full refinancing of the term loan. Mr. Crundell stated that Ms. Tsao had communicated this view informally during a call on or about August 10, 2022, and that no formal waiver or consent request had yet been submitted to the lender group.
Mr. Crundell noted that Calderwood & Harkness's memorandum on credit agreement spin-off covenant analysis, dated August 2, 2022, had identified several restrictive covenants that would be implicated by the proposed spin-off. In particular, the memorandum concluded that the distribution of one hundred percent of the Meridian common stock to Veldran shareholders would likely constitute both a "Disposition" (as defined in Section 1.01 of the credit agreement) and an "Investment" (as defined in Section 1.01 of the credit agreement) under the operative definitions, and that neither the general disposition basket nor the investment basket would be sufficient to accommodate a transaction of this magnitude without affirmative lender consent. Mr. Crundell stated that the credit agreement also contained a "no material adverse effect" representation and a financial maintenance covenant (a first lien net leverage ratio) that could be affected by the removal of the Precision Flow Solutions Division's EBITDA from Veldran's consolidated financial statements.
Priya Chandrasekar of Whitfield & Gage LLP confirmed that the lender consent process was at an early stage and that Ashfield National Bank's specific requirements — including whether it would insist on an amendment to the credit agreement, a full refinancing, or some other structural accommodation — remained undefined. Ms. Chandrasekar noted that Whitfield & Gage was prepared to lead the lender negotiation process on Harrowgate's behalf once a decision was made to proceed, but that no meaningful engagement with the lender group could take place until the fundamental question of whether and when to pursue the spin-off was resolved.
Mr. Crundell also raised a secondary debt-related issue involving the indenture governing Veldran's 6.250% Senior Unsecured Notes due 2027, issued in an aggregate principal amount of $450 million, with Colton Trust Company serving as trustee. Mr. Crundell noted that the proposed spin-off could potentially trigger the asset-sale covenant contained in the indenture, which generally restricts dispositions of assets exceeding a specified threshold unless certain reinvestment or offer-to-purchase conditions are satisfied. However, Mr. Crundell stated that this issue was considered more manageable than the term loan consent issue, based on Calderwood & Harkness's indenture analysis memorandum dated August 3, 2022, which had identified potential avenues for structuring the spin-off to fall within the indenture's permitted exceptions or, alternatively, for obtaining a supplemental indenture or waiver from the trustee.
4.6 Marcus Adler's Suggestion to Pause the Transaction
Following Mr. Cross's summary of the tax-opinion impediments, Mr. Caldecott's and Mr. Crundell's discussion of the operational and debt-related concerns, and the foregoing exchange among the participants, Marcus Adler addressed the group with what he characterized as a preliminary but considered view on the appropriate path forward.
Mr. Adler stated that, taking into account the totality of the open issues discussed on the call — including the tax-opinion impediment arising from the inadequacy of the business purpose record, the Section 355(e) factual vulnerabilities, the unresolved lender consent process, and the unfavorable equity market conditions — it might be advisable to "pause" the spin-off transaction. Mr. Adler stated that a pause would allow Harrowgate and Veldran management to accomplish several objectives:
(a) reassess prevailing equity market conditions and develop a view on whether industrial-sector valuations were likely to recover during 2023 or beyond;
(b) develop a stronger, more well-documented business purpose narrative, including by engaging Sandra Waverly and other members of the division-level management team to identify and memorialize specific operational justifications for the separation;
(c) bolster the factual record supporting the Section 355(e) "plan" analysis, including by assembling and organizing contemporaneous documents from the period surrounding the September 2019 acquisition to demonstrate the absence of a pre-existing plan to effect the spin-off; and
(d) resolve the lender consent issues under the Credit Facility and, to the extent necessary, under the Senior Notes indenture, in a manner that would not impede or delay the distribution once a decision to proceed was made.
Mr. Adler stated clearly that Harrowgate was not abandoning the spin-off concept. He characterized the separation of the Precision Flow Solutions Division as a core element of Harrowgate's value-creation thesis for Veldran and stated that he continued to believe the transaction would ultimately be executed. However, Mr. Adler stated that pursuing the spin-off on the current timeline — targeting a distribution date in Q4 2022 — did not appear prudent given the confluence of unresolved tax, legal, financial, and market issues. He observed that it would be preferable to take additional time to resolve these issues and to pursue the transaction from a position of strength rather than to rush forward and risk either an adverse tax outcome or a suboptimal market reception.
Diana Fenn agreed with Mr. Adler's assessment. She noted that the Harrowgate investment committee would need to formally consider the question at its next meeting and render a decision regarding whether to authorize a pause. Ms. Fenn stated that she and Ms. Yeung would confer internally with the investment committee members in the coming days and that Harrowgate would communicate its determination to Calderwood & Harkness and the other advisors promptly.
5. Open Items and Next Steps
No decision was reached on the call. The participants agreed that the questions raised during the discussion required further internal deliberation within Harrowgate before a determination could be made regarding the path forward.
Christine Yeung stated that she would confer with Marcus Adler and Diana Fenn internally and would revert to Calderwood & Harkness with Harrowgate's determination regarding the spin-off timeline — specifically, whether to proceed with the Q4 2022 distribution target, to defer the distribution to a later date, or to formally place the engagement on hold pending further developments. Ms. Yeung indicated that she expected to be able to communicate Harrowgate's decision within the coming days.
Mr. Cross noted that, in the event the matter were paused or placed on hold, Calderwood & Harkness would preserve all work product generated to date in connection with the engagement. The principal work product items generated through the date of this memorandum include the following:
• Draft Tax Opinion Letter (first draft circulated August 5, 2022) — marked as draft, not for reliance;
• Comprehensive Section 355 Analysis Memorandum (dated May 20, 2022);
• Section 355(b) Active Trade or Business Analysis regarding the June 7, 2019 acquisition of Kestrel Precision Controls, Inc. ($295 million purchase price, acquired from Rennick Industrial Partners Fund II LP) (dated June 1, 2022);
• Section 355(e) Plan Analysis Memorandum (dated June 28, 2022);
• Business Purpose Memorandum (dated July 18, 2022);
• Device Test Analysis Memorandum (dated July 25, 2022);
• Credit Agreement Spin-Off Covenant Analysis Memorandum (dated August 2, 2022);
• Senior Notes Indenture Analysis Memorandum (dated August 3, 2022); and
• All supporting diligence materials, including organizational charts, financial data, transaction documents, and correspondence.
Mr. Cross further reminded the attendees that the second draft of the Representation Letter, which had been circulated on July 11, 2022, remained unexecuted by Veldran and Harrowgate. The execution of the Representation Letter is a condition precedent to the delivery of the final tax opinion, and the draft tax opinion circulated on August 5, 2022, was expressly marked as a preliminary draft not for reliance and not to be treated as a final opinion of Calderwood & Harkness on any matter discussed therein. Mr. Cross stated that no party should place reliance on the draft opinion in its current form, and that Calderwood & Harkness reserved the right to revise, supplement, or withdraw its analysis as additional facts were developed and as the transaction structure was refined.
Mr. Simmons noted that total work in process (WIP) on the engagement through August 15, 2022 was approaching approximately $480,000. Two interim invoices had been rendered to date:
Mr. Simmons stated that, in the event the matter were placed on hold, Calderwood & Harkness would prepare and provide a final WIP summary reflecting all unbilled time and costs through the date of the hold, and would render a final interim invoice for the outstanding balance. All billing would remain subject to the terms and conditions of the April 11, 2022 engagement letter.
Ms. Yeung thanked the teams for their participation in the call and for the thoroughness of the discussion. She reiterated that she would communicate Harrowgate's decision regarding the path forward in the coming days and that she expected to be in a position to provide direction no later than the end of the week of August 22, 2022.
The call concluded at approximately 4:25 p.m. (Eastern).
This memorandum was prepared by Garrett Simmons and has been reviewed by Leonard Cross.
6. Privilege and Confidentiality Notice
This memorandum constitutes privileged and confidential attorney work product prepared by Calderwood & Harkness LLP in connection with the rendering of legal advice to Harrowgate Private Equity Fund IV, L.P., Harrowgate Capital Advisors LLC, and Veldran Industries Holdings, Inc. This memorandum is protected by the attorney-client privilege, the work product doctrine, and all other applicable privileges and protections under federal and state law. The information contained herein is strictly confidential and is intended solely for the use of the engagement team at Calderwood & Harkness LLP and authorized in-house counsel at Harrowgate Capital Advisors LLC and Veldran Industries Holdings, Inc.
This memorandum shall not be disclosed, distributed, or made available to any third party without the prior written consent of Calderwood & Harkness LLP. Any inadvertent disclosure of this memorandum or its contents does not constitute a waiver of any applicable privilege or protection. If you have received this memorandum in error, please notify the sender immediately and destroy all copies.
Distribution of this memorandum is limited to the following:
• Leonard Cross, Partner, Calderwood & Harkness LLP
• Sylvia Hartwell, Partner, Calderwood & Harkness LLP
• Garrett Simmons, Associate, Calderwood & Harkness LLP
• Christine Yeung, General Counsel, Harrowgate Capital Advisors LLC
• Philip Crundell, General Counsel, Veldran Industries Holdings, Inc.
No additional distribution is authorized without prior written approval.
CALDERWOOD & HARKNESS LLP 1301 Avenue of the Americas, 40th Floor New York, New York 10019
Engagement Number: | 1003-00005
Matter Code: | HRW-SPIN-001
Prepared By: | Garrett Simmons, Lead Associate, Tax Department
Reviewed By: | Leonard Cross, Responsible Partner, Tax Department
Date of Memorandum: | August 15, 2022
Re: | Summary of Conference Call — Proposed Tax-Free Spin-Off of Meridian Flow Technologies, Inc. from Veldran Industries Holdings, Inc. — Business Purpose and Market Timing Discussion
Invoice Number | Date | Amount
22-7831-001 | June 15, 2022 | $165,000.00
22-7831-002 | August 1, 2022 | $145,000.00
Total Billed to Date | $310,000.00

CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT PRIVILEGE

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