Christine,
I am writing to follow up on the Business Purpose Memorandum that we circulated on July 18. After further reflection and internal discussion with Sylvia and Garrett, I want to flag an important concern regarding the sufficiency of the business purposes currently articulated for the proposed spin-off of Meridian Flow Technologies, Inc. from Veldran Industries Holdings, Inc. I think this warrants your prompt attention.
**The Two Currently Proposed Business Purposes**
As set forth in the July 18 memorandum, the two business purposes identified to date are: (i) enabling each business — the Engineered Coatings Division (remaining with Veldran) and the Precision Flow Solutions Division (to become Meridian) — to pursue independent capital-allocation strategies tailored to their distinct end markets and growth profiles; and (ii) enhancing management focus and operational efficiency by eliminating the complexity of operating two distinct industrial platforms under a single corporate umbrella.
**The Core Concern — Sponsor-Level vs. Corporate-Level Purpose**
Under Treas. Reg. § 1.355-2(b), the business purpose requirement demands a real and substantial non-Federal-tax business purpose that is germane to the *distributing corporation's* business — that is, Veldran's business — not merely a purpose that serves the interests of its shareholders. The IRS and the courts have consistently distinguished between corporate-level purposes (which satisfy the requirement) and shareholder-level purposes (which generally do not).
My concern is that both proposed purposes, as currently formulated, could be characterized by the IRS as primarily serving HPE Fund IV's fund-level objectives rather than Veldran's corporate-level interests.
The "independent capital-allocation strategies" rationale, while facially a corporate purpose, risks being recast as a mechanism to facilitate HPE Fund IV's monetization of the Precision Flow investment or to enable the fund to return capital to its limited partners — classic shareholder/sponsor-level objectives. The "management focus / operational efficiency" rationale is a recognized corporate-level purpose in principle, but the current articulation lacks the specificity and concrete supporting facts that would make it credible under IRS scrutiny. Generic assertions of "management focus" have received skeptical treatment in cases where the distributing corporation's actual operations do not demonstrate meaningful inefficiencies or conflicts.
I want to be candid about why this matters here. A business purpose driven primarily by a PE sponsor's liquidity needs or portfolio management strategy is particularly vulnerable to IRS challenge. That vulnerability is heightened in a situation where the controlling shareholder is a private equity fund — HPE Fund IV holding 62.4% through Harrowgate Veldran Holdings LLC — that acquired its stake relatively recently, in September 2019, approximately three years before the anticipated distribution date.
**Impact on the Tax Opinion**
As you know, our engagement is to deliver a "should" level tax opinion — the second-highest level of comfort — that the spin-off qualifies under IRC §§ 355 and 368(a)(1)(D). In the current state of the business purpose articulation, I do not believe we can reach a "should" conclusion on the business purpose requirement. This is the primary impediment to finalizing the opinion.
We are preparing the first draft of the tax opinion letter for circulation in early August. Unless the business purpose articulation is strengthened, the opinion will need to contain a significant qualification or caveat on this point, which I do not think serves anyone's interests.
**Recommendations and Next Steps**
I recommend that we schedule a working session or call with Veldran management — specifically Jonathan Caldecott and Sandra Waverly — to develop additional corporate-level justifications that are anchored in the operational realities of both divisions. Areas I would want to explore include:
- Whether there are specific capital expenditure programs, R&D initiatives, or acquisition strategies for the Precision Flow business that are being constrained or deprioritized under the current combined structure.
- Whether there are customer or supplier relationship dynamics, regulatory considerations, or competitive positioning issues that would benefit from separation.
- Whether Veldran's current capital structure — including the $1.1 billion First Lien Term Loan B and the $450 million 6.250% Senior Unsecured Notes due 2027 — creates constraints on one division that the other division does not share, and whether separation would meaningfully improve the Precision Flow business's access to capital on a standalone basis.
- Whether there are concrete management distraction or resource-allocation conflicts that can be documented with specificity.
Critically, these justifications need to be supported by contemporaneous evidence — board minutes, strategic planning documents, management presentations, and the like — not just representations in the Representation Letter.
I would ask that you coordinate with Philip Crundell at Veldran and Priya Chandrasekar at Whitfield & Gage to arrange this call. Given our target timeline for circulating the draft opinion, I would like to have this discussion within the next week to ten days.
Christine, I want to underscore that this is a critical issue. The strength of the business purpose articulation will directly affect our ability to deliver the opinion at the "should" level. I am happy to discuss any of this by phone at your convenience.
Best regards,
Leonard Cross Partner Calderwood & Harkness LLP 1301 Avenue of the Americas, 40th Floor New York, NY 10019 T: (212) 558-3714 E: lcross@calderwoodharkness.com
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