CALDERWOOD & HARKNESS LLP CONFIDENTIAL / ATTORNEY WORK PRODUCT / PRIVILEGED
INTERNAL MEMORANDUM
TO: File — Matter No. 1003-00005 (HRW-SPIN-001)
FROM: Garrett Simmons, Tax Department
DATE: April 18, 2022
RE: Summary of Kick-off Call — Proposed Tax-Free Spin-Off of Precision Flow Solutions Division of Veldran Industries Holdings, Inc.
DISTRIBUTION (Internal): Leonard Cross (Responsible Partner, Tax Department); Sylvia Hartwell (Billing Partner, Tax Department); Leila Nazari (Working Associate, Tax Department)
This memorandum summarizes the substance of the kick-off call held on April 18, 2022 in connection with the proposed tax-free spin-off of the Precision Flow Solutions Division of Veldran Industries Holdings, Inc. into a newly formed publicly traded entity, Meridian Flow Technologies, Inc. The purpose of this memorandum is to document the key facts, issues, and action items discussed on the call, and to serve as the foundational record for the engagement going forward.
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I. Call Details
The kick-off call took place on April 18, 2022, from 2:00 p.m. to 3:45 p.m. (Eastern Daylight Time), and was conducted via video conference. The call was convened at the request of Harrowgate Capital Advisors LLC ("Harrowgate"), acting in its capacity as investment advisor to Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV"), the controlling shareholder of Veldran Industries Holdings, Inc. ("Veldran" or "Distributing").
The engagement is tracked under Calderwood & Harkness Engagement Number 1003-00005 and Matter Code HRW-SPIN-001. The firm's engagement letter was executed by Christine Yeung, General Counsel of Harrowgate Capital Advisors LLC, on April 12, 2022.
II. Attendees
The following individuals participated in the kick-off call:
A. Calderwood & Harkness LLP (Tax Counsel)
• Leonard Cross — Responsible Partner, Tax Department
• Sylvia Hartwell — Billing Partner, Tax Department
• Garrett Simmons — Lead Associate, Tax Department
• Leila Nazari — Working Associate, Tax Department
B. Harrowgate Capital Advisors LLC (Client / Investment Advisor to HPE Fund IV)
• Christine Yeung — General Counsel, Harrowgate Capital Advisors LLC
• Diana Fenn — Managing Partner & Chief Investment Officer, Harrowgate Capital Advisors LLC; Board Chair, Veldran Industries Holdings, Inc.
• Tobias Rourke — Partner, Head of Portfolio Operations, Harrowgate Capital Advisors LLC
C. Whitfield & Gage LLP (Corporate / M&A Counsel to Harrowgate)
• Priya Chandrasekar — Partner, Corporate / Capital Markets
• Ross Halverson — Counsel, Corporate
D. Not on Call but Referenced
The following individuals and entities were referenced during the call but were not participants:
• Philip Crundell — General Counsel, Veldran Industries Holdings, Inc. Thornapple McCord LLP serves as Veldran's separate corporate counsel; David Ochoa, Partner, leads that engagement out of Charlotte.
• Jonathan Caldecott — Chief Executive Officer, Veldran Industries Holdings, Inc.
• Rita Subramanian — Chief Financial Officer, Veldran Industries Holdings, Inc.
• Sandra Waverly — President, Precision Flow Solutions Division (planned CEO of the new publicly traded SpinCo entity, Meridian Flow Technologies, Inc.)
• Brackenridge & Co. (Samuel Ng, Managing Director, Industrials Group) — financial advisor engaged by Harrowgate and the Veldran Board to provide valuation and strategic advisory services in connection with the proposed spin-off.
• Pemberton Rathbone LLP (Lisa Engstrom, Partner, Audit & Assurance; Harold Weiss, Partner, Tax) — independent auditors and tax-return preparers for Veldran Industries Holdings, Inc.
III. Overview of Proposed Transaction
A. Transaction Structure
Diana Fenn opened the substantive portion of the call by describing the proposed transaction at a high level, with Christine Yeung and Priya Chandrasekar providing supplemental detail as needed throughout.
Distributing Corporation. Veldran Industries Holdings, Inc. ("Veldran" or "Distributing") is a Delaware corporation (EIN 86-1920347) headquartered at 2400 Commerce Park Drive, Suite 500, Charlotte, NC 28217. Veldran is a diversified industrial company operating through two principal business segments: Engineered Coatings and Precision Flow Solutions.
SpinCo. Under the proposed transaction, Veldran would separate its Precision Flow Solutions Division into a new, independent publicly traded entity to be named Meridian Flow Technologies, Inc. ("Meridian" or "SpinCo"). Meridian would be a newly formed Delaware corporation. As of the date of the call, Meridian has not yet been incorporated. The planned principal office for Meridian following the separation would be located at 7100 Northlake Parkway, Suite 300, Tucker, GA 30084, which is the current operational headquarters of the Precision Flow Solutions Division.
Two-Step Structure. The separation would be structured as a two-step transaction:
Step 1 — Contribution: Veldran would contribute all assets and liabilities of the Precision Flow Solutions Division to Meridian in exchange for (i) 100% of the common stock of Meridian and (ii) Meridian's assumption of certain allocated liabilities associated with the Precision Flow Solutions Division (the "Contribution"). The specific assets and liabilities to be transferred, and the mechanics of the allocation, will be set forth in the Separation Agreement to be drafted by Whitfield & Gage LLP.
Step 2 — Distribution: Immediately following the Contribution, Veldran would distribute 100% of the Meridian common stock pro rata to all holders of Veldran common stock of record as of the record date established by the Veldran Board of Directors (the "Distribution"). No consideration would be paid by Veldran shareholders in exchange for the Meridian shares; the distribution would be entirely pro rata.
Distribution Ratio and Share Counts. The contemplated distribution ratio is 1:1 — that is, one share of Meridian common stock would be distributed for each share of Veldran common stock outstanding on the record date. Veldran currently has 74,500,000 shares of common stock outstanding out of 100,000,000 shares authorized. Accordingly, and assuming no change in Veldran's outstanding share count prior to the record date, 74,500,000 shares of Meridian common stock would be distributed.
Post-Spin Ownership. Following the completion of the spin-off, each Veldran shareholder would hold one share of Veldran (representing the retained Engineered Coatings business) and one share of Meridian (representing the separated Precision Flow Solutions business). There would be complete parity of ownership between the two publicly traded entities at the moment of distribution.
B. Targeted Tax Treatment
Fenn and Yeung confirmed that the proposed transaction is intended to qualify as follows for U.S. federal income tax purposes:
(i) The Contribution would qualify as a tax-free reorganization under Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC").
(ii) The Distribution would qualify as a tax-free distribution under Section 355 of the Code.
Together, the Contribution and Distribution would be structured so that no gain or loss is recognized by Veldran at the corporate level on the transfer of the Precision Flow Solutions Division assets to Meridian or on the distribution of Meridian stock to Veldran shareholders, and no gain or income is recognized by Veldran shareholders upon receipt of Meridian stock in the Distribution.
Yeung confirmed that no private letter ruling will be sought from the Internal Revenue Service in connection with the proposed transaction. This is consistent with the general trend among taxpayers since the IRS curtailed the issuance of rulings on § 355 transactions. Accordingly, Calderwood & Harkness's tax opinion will serve as the sole source of tax assurance for the transaction. The parties and their respective boards of directors will rely on the opinion as the basis for concluding that the transaction qualifies for tax-free treatment.
The expected opinion level is "should" — the second-highest level of comfort in tax opinion practice, indicating that the opining counsel believes the position in question "should" be sustained if challenged. This is consistent with market practice for spin-off opinions when no IRS ruling is obtained.
C. Anticipated Timeline
Fenn stated that the target record date and distribution date for the spin-off is Q4 2022, with the record date and distribution date to fall on the same day or within one business day of each other (T+1). Fenn acknowledged that the timeline is aggressive and is dependent on the timely resolution of the tax and structural issues identified during the call and discussed further below. She noted that Harrowgate and the Veldran Board are committed to the Q4 2022 target but recognize that it may need to be adjusted if material issues arise during the tax and corporate work streams.
IV. Background on the Parties and Ownership
A. Harrowgate Private Equity Fund IV, L.P.
Christine Yeung provided background on the Harrowgate fund structure. Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV") is a Delaware limited partnership with a registered address at 1209 Orange Street, Wilmington, DE 19801, and a principal office at 600 Lexington Avenue, 38th Floor, New York, NY 10022. HPE Fund IV's EIN is 84-3291067.
HPE Fund IV is a 2018-vintage private equity fund with total committed capital of approximately $6.8 billion. The fund's general partner is Harrowgate Capital Partners IV GP LLC, a Delaware limited liability company (EIN 84-3291104). The investment advisor and manager to HPE Fund IV is Harrowgate Capital Advisors LLC, a Delaware limited liability company (EIN 83-2756891), which is the entity that has engaged Calderwood & Harkness for this matter.
The key principals of the Harrowgate platform are as follows:
• Marcus Adler — Founding Partner & Chairman
• Diana Fenn — Managing Partner & Chief Investment Officer
• Tobias Rourke — Partner, Head of Portfolio Operations
• Christine Yeung — General Counsel
B. HPE Fund IV's Acquisition of Veldran
Yeung provided background on HPE Fund IV's acquisition of its controlling stake in Veldran. On September 20, 2019, HPE Fund IV acquired approximately 62.4% of Veldran common stock, representing 46,488,000 shares, at a price of $40.00 per share, for an aggregate purchase price of $1,859,520,000.
The acquisition was structured as a negotiated tender offer followed by a merger squeeze-out of Veldran's prior controlling shareholder, Greystone Partners Fund III LP, a Delaware limited partnership (EIN 81-2683910). The tender offer and squeeze-out merger were conducted pursuant to a definitive agreement negotiated between HPE Fund IV and Greystone.
The acquisition was funded through a combination of HPE Fund IV equity capital (approximately $1.24 billion) and a co-investment from Prescott Capital Management LP (approximately $620 million for 15,500,000 shares at $40.00 per share). The co-investment by Prescott was made pursuant to a separate co-investment agreement with HPE Fund IV.
HPE Fund IV's stake in Veldran is held through a wholly owned subsidiary, Harrowgate Veldran Holdings LLC ("HVH"), a Delaware limited liability company (EIN 86-1483920). HVH is the record holder of the 46,488,000 shares of Veldran common stock attributable to HPE Fund IV.
C. Other Veldran Shareholders
In addition to HPE Fund IV's 62.4% controlling stake, the following shareholders and shareholder groups were identified during the call:
Prescott Capital Management LP. Prescott Capital Management LP is a New York limited partnership (EIN 13-4928371) with its principal office at 277 Park Avenue, 42nd Floor, New York, NY 10172. The Managing Partner of Prescott is Andrew Kessler. Prescott currently holds approximately 14.8% of Veldran common stock, representing 11,026,000 shares. Prescott originally acquired 15,500,000 shares at $40.00 per share as a co-investor alongside HPE Fund IV in the September 2019 acquisition, but subsequently sold 4,474,000 shares in a secondary offering. Yeung noted that Prescott has retained a separate tax advisor, Dunmore Havens & Associates LLC (discussed in Section VII.D below), and may independently seek comfort regarding the fund-level tax consequences of the spin-off to Prescott and its limited partners.
Veldran Management Stockholders. Veldran management and employees collectively hold approximately 5.3% of Veldran common stock, representing 3,948,500 shares, under Veldran's equity incentive plans. The specific plans and award types (e.g., restricted stock, stock options, restricted stock units) will need to be reviewed as part of the tax diligence process, as the treatment of equity awards in connection with the spin-off may raise additional tax issues.
Public / Institutional Float. The remaining approximately 17.5% of Veldran common stock, representing approximately 13,037,500 shares, is held by public and institutional shareholders and constitutes the public trading float.
D. Veldran Business Overview
Veldran Industries Holdings, Inc. is a diversified industrial products and engineered materials company. The company was incorporated in Delaware on March 14, 2019, in connection with the HPE Fund IV acquisition structure. Veldran employs approximately 8,200 people across its two business segments.
The current senior leadership of Veldran is as follows:
• Jonathan Caldecott — Chief Executive Officer
• Rita Subramanian — Chief Financial Officer
• Philip Crundell — General Counsel
• Diana Fenn — Board Chair (also Managing Partner & CIO, Harrowgate Capital Advisors LLC)
Veldran operates through two principal business segments:
Engineered Coatings Division (to remain with Veldran post-spin). This division manufactures and distributes industrial and specialty coatings for the aerospace, automotive, and infrastructure sectors. For fiscal year 2021, the Engineered Coatings Division generated revenue of approximately $1.52 billion and EBITDA of approximately $285 million, representing an EBITDA margin of approximately 18.75%. This division will constitute the core retained business of Veldran following the spin-off.
Precision Flow Solutions Division (to be spun off as Meridian). This division designs, manufactures, and sells precision fluid-control systems — including valves, pumps, regulators, and flow measurement instrumentation — serving industrial, petrochemical, and water-infrastructure end markets. For fiscal year 2021, the Precision Flow Solutions Division generated revenue of approximately $820 million and EBITDA of approximately $133 million, representing an EBITDA margin of approximately 16.22%. This division will be contributed to Meridian and separated from Veldran in the spin-off.
On a consolidated basis, Veldran reported aggregate fiscal year 2021 revenue of approximately $2.34 billion and aggregate EBITDA of approximately $418 million.
E. Meridian / SpinCo Leadership
Following the spin-off, Meridian Flow Technologies, Inc. is planned to be led by the following individuals:
• Sandra Waverly — Planned Chief Executive Officer. Ms. Waverly is currently serving as President of the Precision Flow Solutions Division of Veldran.
• Derek Okonkwo — Planned Chief Financial Officer. Mr. Okonkwo is currently serving as Vice President, Finance of the Precision Flow Solutions Division of Veldran.
Meridian's business will encompass the design, manufacture, and sale of precision fluid-control systems for industrial, petrochemical, and water-infrastructure end markets. The company is expected to be listed on the New York Stock Exchange or Nasdaq following the distribution.
F. Veldran Capital Structure
Chandrasekar and Yeung provided the following summary of Veldran's current capital structure:
Equity. Veldran's certificate of incorporation authorizes 100,000,000 shares of common stock, of which 74,500,000 shares are currently issued and outstanding. Veldran does not have any outstanding preferred stock.
Debt. Veldran's funded indebtedness consists of the following instruments:
(i) First Lien Term Loan B: $1.1 billion in aggregate principal amount, with a syndicate of lenders led by Ashfield National Bank, N.A. (100 Federal Street, Boston, MA 02110), which serves as administrative agent. The key contact at Ashfield is Margaret Tsao, Managing Director, Leveraged Finance.
(ii) 6.250% Senior Unsecured Notes due 2027: $450 million in aggregate principal amount, issued under an indenture with Colton Trust Company (10 South LaSalle Street, Chicago, IL 60603) as trustee.
The implications of the existing debt structure for the proposed spin-off are discussed further in Section VIII below.
V. Strategic Rationale for the Spin-Off
A. Presentation by Fenn and Yeung
Diana Fenn described two preliminary business purposes for the spin-off, which she characterized as the principal strategic rationale motivating the Board's consideration of the transaction:
1. Independent Capital-Allocation Strategies. Each business — Engineered Coatings and Precision Flow Solutions — would be able to pursue distinct investment, M&A, and capital-return strategies tailored to its respective end markets without competition for internal resources. Fenn noted that the two businesses serve fundamentally different customer bases and face different competitive dynamics, and that their capital needs and investment horizons are not naturally aligned. As separate, independent companies, each business would have greater flexibility to deploy capital in a manner optimized for its own growth trajectory, including the ability to issue equity, incur debt, and pursue acquisitions on terms specifically suited to its business profile and credit characteristics.
2. Management Focus and Operational Efficiency. The separation would allow each management team to focus exclusively on its respective business, improve strategic clarity for employees, customers, and investors, and enhance operational decision-making. Fenn observed that the Precision Flow Solutions Division has grown significantly since the Kestrel acquisition in 2019, and that the division's operational complexity and strategic ambitions warrant a dedicated, independent management structure and governance framework.
Fenn noted that Brackenridge & Co. (Samuel Ng, Managing Director, Industrials Group) has been engaged as financial advisor and is in the process of preparing preliminary valuation work and strategic analysis to support the Board's evaluation of the proposed spin-off. The Brackenridge engagement encompasses both the financial advisory mandate and the preparation of a fairness analysis for the Veldran Board.
B. Cross's Preliminary Observations on Business Purpose
Leonard Cross provided preliminary observations regarding the business purpose requirement under Section 355 of the Code, emphasizing the following points:
First, Cross flagged that the articulated business purposes will need to be robust and grounded in corporate-level (i.e., Veldran-level) rationale, not sponsor-level (HPE Fund IV-level) rationale. The requirement under Treasury Regulation § 1.355-2(b) is that the distribution be motivated, in whole or substantial part, by one or more corporate business purposes — that is, a real and substantial non-Federal-tax purpose germane to the business of the distributing corporation, the controlled corporation, or the affiliated group to which the distributing corporation belongs.
Second, Cross noted that business purposes driven primarily by a PE sponsor's objectives — such as returning capital to limited partners, facilitating monetization of an investment, creating exit optionality, or optimizing fund-level IRR — are vulnerable to IRS challenge under Treasury Regulation § 1.355-2(b). The IRS and the courts have historically scrutinized spin-offs in the PE context to determine whether the asserted business purpose is genuinely that of the distributing corporation or is merely a derivative of the sponsor's investment objectives. A business purpose that is essentially a shareholder-level purpose — particularly a purpose personal to a controlling shareholder — will generally not satisfy the corporate business purpose requirement.
Third, Cross recommended that Veldran management — specifically Jonathan Caldecott (CEO) and Sandra Waverly (President, Precision Flow Solutions Division) — be involved in developing and articulating the corporate-level justifications for the spin-off. The business purposes must be genuine corporate purposes of the Distributing corporation (Veldran), supported by contemporaneous evidence of the Board's deliberative process and the management team's strategic analysis. Cross indicated that he would want to have a separate call with Caldecott and Waverly to discuss the business rationale directly, and that any written materials prepared by Veldran management or Brackenridge & Co. documenting the strategic rationale for the spin-off would be important to the opinion process.
Cross stated that the business purpose analysis would be an area of significant focus during the engagement and that the strength of the business purpose articulation would be a key factor in determining whether Calderwood & Harkness is able to deliver its opinion at the "should" level. He noted that a weak or sponsor-centric business purpose articulation could, in a worst-case scenario, prevent the delivery of the opinion at the requested comfort level.
VI. Key Tax Issues Identified by Leonard Cross
Leonard Cross provided an overview of the principal federal income tax issues that Calderwood & Harkness has identified on a preliminary basis. Cross emphasized that this was an initial identification of issues based on the facts as presented on the call, and that the analysis would be refined as diligence materials are received and reviewed. The key issues are summarized below.
A. Section 355(b) Active Trade or Business — Kestrel Precision Controls Issue
Cross identified the active-trade-or-business ("ATB") requirement of Section 355(b) of the Code as a critical issue warranting detailed analysis.
General Requirement. For a distribution to qualify under Section 355, both the distributing corporation (Veldran) and the controlled corporation (Meridian) must be engaged, immediately after the distribution, in the active conduct of a trade or business that has been actively conducted throughout the five-year period ending on the date of the distribution (the "five-year active-trade-or-business test"). In addition, the trade or business must not have been acquired within such five-year period in a transaction in which gain or loss was recognized in whole or in part. See IRC § 355(b)(2)(B), (C), and (D).
Both the Engineered Coatings Division (which will remain with Veldran post-spin) and the Precision Flow Solutions Division (which will be contributed to Meridian) must independently satisfy the five-year ATB test. Cross noted that based on the facts presented on the call, the Engineered Coatings Division does not appear to present ATB issues and the primary ATB concern relates to the Precision Flow Solutions Division, specifically on account of the Kestrel Precision Controls acquisition.
The Kestrel Acquisition. Veldran acquired Kestrel Precision Controls, Inc. ("Kestrel"), a Georgia corporation (EIN 58-2847193), on June 7, 2019, from Rennick Industrial Partners Fund II LP, a Delaware limited partnership (EIN 82-3017564), for a purchase price of $295 million in an all-cash taxable stock acquisition. Following the acquisition, Kestrel was integrated into the Precision Flow Solutions Division. Kestrel accounts for approximately 35% of the Precision Flow Solutions Division's current revenue — approximately $287 million out of $820 million in total FY2021 revenue.
Five-Year Look-Back Analysis. The five-year look-back period, measured from an assumed Q4 2022 distribution date, reaches back to approximately Q4 2017. The Kestrel acquisition closed on June 7, 2019, which falls squarely within the five-year window. This triggers the prohibition under Section 355(b)(2)(C), which provides that a trade or business shall not be treated as meeting the five-year ATB requirement if the trade or business was acquired by the distributing or controlled corporation during the five-year period in a transaction in which gain or loss was recognized in whole or in part. Because the Kestrel acquisition was an all-cash taxable stock acquisition, it is a transaction in which gain or loss was recognized, and therefore the Kestrel trade or business, standing alone, would not satisfy Section 355(b)(2)(C).
Potential Relief Under Section 355(b)(2)(D). Cross identified potential relief under Section 355(b)(2)(D), which provides a safe harbor where the trade or business relied upon by the controlled corporation (or, in this case, constituting a portion of the Precision Flow Solutions Division) had been actively conducted by another corporation throughout the full five-year period, and was acquired by the distributing or controlled corporation in a transaction that did not result in the recognition of gain or loss to the acquired corporation (or, in the case of a stock acquisition, the trade or business had been conducted by the acquired corporation for the requisite period). Specifically, if Kestrel's precision flow controls business had been conducted by Kestrel continuously for the full five-year period ending on the date of the distribution, the safe harbor under Section 355(b)(2)(D) may apply regardless of the fact that Veldran acquired Kestrel in a taxable transaction.
Cross noted that, based on the facts provided on the call, Kestrel was founded on February 12, 2003 and has continuously operated its precision flow controls business since that date — a period of approximately nineteen years. This appears favorable for purposes of the Section 355(b)(2)(D) safe harbor. However, detailed diligence will be needed to confirm the following:
(i) The exact founding date and organizational documents of Kestrel;
(ii) Kestrel's complete operating history, including any periods of inactivity, changes in business lines, or significant acquisitions of its own during the five-year period;
(iii) The detailed structure of the June 7, 2019 acquisition — specifically, whether a Section 338 election (or Section 338(h)(10) election) was made in connection with the stock acquisition, which could have implications for the ATB analysis by potentially treating the acquisition as a deemed asset purchase for tax purposes; and
(iv) The basis computations and intercompany transactions affecting the Kestrel business and assets since the acquisition.
Cross emphasized that if a Section 338 election was made, the analysis would become more complex, as the deemed asset purchase resulting from a Section 338 election could affect the characterization of the acquisition for purposes of Section 355(b)(2)(C) and (D). This issue will need to be resolved at an early stage of the engagement.
B. Section 355(e) "Plan" Analysis — September 2019 Acquisition
Cross identified the anti-Morris Trust provision of Section 355(e) as the most significant risk area in the proposed transaction.
Overview of Section 355(e). Section 355(e) 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, stock representing a 50-percent-or-greater interest in the distributing corporation or the controlled corporation, then the distributing corporation must recognize gain on the distribution as if the distributed stock had been sold at fair market value. Importantly, Section 355(e) does not disqualify the distribution from Section 355 treatment at the shareholder level — shareholders continue to receive tax-free treatment — but it imposes a corporate-level gain recognition obligation on the distributing corporation.
Application to the Proposed Transaction. HPE Fund IV's acquisition of approximately 62.4% of Veldran common stock on September 20, 2019 unquestionably constituted a change of control — an acquisition of a 50-percent-or-greater interest in Veldran by a single acquirer (HPE Fund IV, acting through HVH). If the proposed spin-off distribution is determined to be part of a "plan (or series of related transactions)" that includes the September 2019 acquisition, Section 355(e) would require Veldran to recognize gain on the distribution of Meridian stock to its shareholders, with potentially very significant adverse tax consequences.
Temporal Gap. The temporal gap between the September 20, 2019 acquisition and the anticipated Q4 2022 distribution date is approximately three years. Cross noted that there is no statutory safe harbor at exactly three years. The regulations under Treasury Regulation § 1.355-7 employ a multi-factor framework, including certain presumptions based on temporal proximity:
• Acquisitions occurring within two years before or after the distribution are subject to a rebuttable presumption that the acquisition and the distribution are part of a plan.
• Acquisitions occurring more than two years before the distribution are not subject to this presumption, but the "plan" determination remains a facts-and-circumstances inquiry. There is no automatic safe harbor at any specific time interval beyond two years.
Because the September 2019 acquisition occurred approximately three years before the anticipated distribution, the two-year presumption does not apply, which is favorable. However, the absence of the presumption does not preclude a finding that a "plan" exists. The IRS could still argue that the spin-off was contemplated, discussed, or reasonably foreseeable at the time of the September 2019 acquisition, and that the acquisition and the distribution are part of a common plan or series of related transactions.
Factual Investigation Required. Cross noted that the Section 355(e) analysis will require detailed factual investigation, including the following:
(i) Whether there were any discussions, communications, or understandings — formal or informal — about a potential spin-off, separation, or other disposition of the Precision Flow Solutions Division at or before the time of the September 2019 acquisition, including during the due diligence, negotiation, and execution phases of the HPE Fund IV acquisition of Veldran;
(ii) The evolution of the spin-off concept post-acquisition — specifically, when the spin-off was first considered, who initiated the consideration, what analysis was undertaken, and when the Veldran Board or HPE Fund IV first discussed or authorized the exploration of a spin-off;
(iii) The business rationale for the spin-off independent of the September 2019 acquisition — i.e., whether the spin-off is driven by developments, changes in business conditions, or strategic considerations that arose after the acquisition and are independent of any pre-acquisition plan or intention; and
(iv) The representations that Veldran management and Harrowgate can make regarding the absence of a pre-existing plan or understanding.
Tax at Risk. Cross referenced the preliminary valuation work being conducted by Brackenridge & Co. and noted that the financial consequences of a Section 355(e) determination would be substantial. Sylvia Hartwell noted that, based on early estimates provided informally by Harrowgate, the estimated fair market value of Meridian/SpinCo is in the range of $1.4 billion to $1.7 billion, based on EV/EBITDA multiples of approximately 10.5× to 12.8× applied to $133 million of FY2021 EBITDA. Veldran's estimated adjusted tax basis in the Precision Flow Solutions Division assets is approximately $800 million. This would yield an estimated built-in gain of approximately $600 million to $900 million, and potential Section 355(e) tax exposure — at the current 21% corporate tax rate — of approximately $125 million to $189 million.
Cross emphasized the critical importance of strong representations from both Veldran management and Harrowgate regarding the absence of a "plan" connecting the September 2019 acquisition and the proposed spin-off. He stated that the sufficiency of the factual record on this issue would be a key determinant of whether the "should" opinion can be delivered, and that if the factual record is thin or equivocal, the opinion could be downgraded or withheld.
C. Section 355(d) Disqualified Distribution
Cross also briefly noted that Section 355(d) will need to be analyzed in connection with the proposed transaction. Section 355(d) provides that, in certain circumstances, a distribution that otherwise qualifies under Section 355 may be treated as a "disqualified distribution" resulting in corporate-level gain recognition.
Specifically, Section 355(d) applies where, immediately after the distribution, any person holds "disqualified stock" in either the distributing or controlled corporation that constitutes a 50-percent-or-greater interest. "Disqualified stock" generally includes stock acquired by "purchase" (as defined in Section 355(d)(5)) during the five-year period ending on the date of distribution.
HPE Fund IV's September 2019 stock purchase of approximately 62.4% of Veldran common stock is within the five-year period and constitutes a "purchase" for Section 355(d) purposes. Accordingly, the analysis would need to determine whether the spin-off would result in a "disqualified distribution" under Section 355(d), and whether any exceptions — including the exception for distributions to which Section 355(e) applies — are available.
Cross noted that this analysis would be conducted in tandem with the Section 355(e) analysis, as the two provisions address overlapping but distinct concerns regarding acquisitions in connection with spin-off distributions.
D. Device Test — Section 355(a)(1)(B)
Cross raised the "device" requirement under Section 355(a)(1)(B), which provides that Section 355 does not apply to a distribution that is used principally as a device for the distribution of the earnings and profits of the distributing corporation, the controlled corporation, or both.
Cross noted the following "device" factors present in the proposed transaction:
(i) Pro Rata Distribution. The proposed distribution is fully pro rata — all Veldran shareholders would receive Meridian stock in proportion to their existing holdings. A pro rata distribution is identified in Treasury Regulation § 1.355-2(d)(2)(ii) as a device factor, because it permits shareholders to accomplish a stock sale by selling shares in either the distributing or controlled corporation following the distribution, without surrendering any of their proportionate interest in the other entity.
(ii) PE Sponsor as Controlling Shareholder. The 62.4% controlling stake held by HPE Fund IV, a private equity sponsor, raises the concern that the spin-off could be characterized as a device to facilitate a subsequent sale or disposition of Meridian stock (or Veldran stock). Private equity investors are, by their nature, anticipated to seek an exit from their investments, and the existence of a PE controlling shareholder can heighten scrutiny under the device test.
Cross noted the following "non-device" factors that may mitigate these concerns:
(i) Absence of Any Planned Post-Spin Sale. To the extent that neither HPE Fund IV nor any other significant shareholder has any current plan, agreement, understanding, or arrangement to sell Meridian or Veldran stock following the distribution, this would constitute a strong non-device factor.
(ii) Presence of Legitimate Business Purposes. Strong, genuine corporate business purposes for the spin-off — as distinct from shareholder-level purposes — are identified in Treasury Regulation § 1.355-2(d)(3)(ii) as evidence that the distribution is not a device.
Cross indicated that the device test analysis is manageable but is dependent on (a) strong business purpose articulation, and (b) clear and unequivocal representations from Harrowgate, HPE Fund IV, Prescott Capital Management, and Veldran management that there is no agreement, understanding, arrangement, or substantial negotiations regarding a post-spin disposition of Meridian stock or Veldran stock.
E. Continuity of Interest / Section 368(a)(1)(D) Qualification
Cross confirmed that the Contribution step of the proposed transaction should satisfy the requirements of a divisive D reorganization under Section 368(a)(1)(D) of the Code. The key requirements include:
(i) Transfer of Substantially All Assets. Veldran would transfer all of the assets of the Precision Flow Solutions Division to Meridian. In the context of a divisive D reorganization, the "substantially all" requirement is measured by reference to the assets of the transferred business, and the transfer of all assets of a complete business segment should satisfy this requirement.
(ii) Control Requirement Under Section 368(c). Immediately after the Contribution and before the Distribution, Veldran will hold 100% of the stock of Meridian — both in terms of total combined voting power and total value — thereby satisfying the control requirement under Section 368(c).
(iii) Distribution Pursuant to the Plan of Reorganization. The Distribution of Meridian stock would occur immediately following the Contribution and pursuant to the overall plan of reorganization.
Cross also confirmed that continuity of interest is generally satisfied in a pro rata spin-off because the same shareholders hold stock in both the distributing and controlled corporations following the distribution. There is no break in the historic continuity of shareholder interest; rather, the interest is divided between two entities while remaining in the same hands.
F. Section 355(g) — Disqualified Investment Corporations
Cross flagged Section 355(g) as a minor issue that would need to be confirmed but is likely not applicable to the proposed transaction. Section 355(g) provides that Section 355 does not apply to a distribution if either the distributing corporation or the controlled corporation is a "disqualified investment corporation" immediately after the transaction. A "disqualified investment corporation" is a corporation whose investment assets constitute two-thirds or more of the fair market value of its total assets.
Given that both Veldran (Engineered Coatings Division) and Meridian (Precision Flow Solutions Division) are active operating businesses that are not primarily engaged in holding investment assets, Cross stated that he does not expect Section 355(g) to be a significant concern. Nonetheless, the issue would be confirmed as part of the overall analysis, particularly in light of any cash, marketable securities, or other investment-type assets that may be held by either entity.
VII. Scope of Calderwood & Harkness's Engagement and Work Allocation
A. Calderwood & Harkness's Deliverables
Based on the discussion during the kick-off call, Calderwood & Harkness's engagement will encompass the following deliverables:
1. Tax Opinion Letter. A "should" level tax opinion letter under IRC §§ 355 and 368(a)(1)(D), to be addressed to the Board of Directors of Veldran Industries Holdings, Inc. and to Harrowgate Private Equity Fund IV, L.P. The opinion will address the qualification of the Contribution as a tax-free reorganization under Section 368(a)(1)(D) and the qualification of the Distribution as a tax-free distribution under Section 355, and will set forth the material federal income tax consequences of the transaction to Veldran, Meridian, and the shareholders of Veldran.
2. Representation Letter. A Representation Letter to be prepared by Calderwood & Harkness for execution by officers of Veldran Industries Holdings, Inc. and Harrowgate Capital Advisors LLC (on behalf of HPE Fund IV). The Representation Letter will contain the factual representations on which the tax opinion will be based, including representations regarding business purpose, the absence of a Section 355(e) "plan," the device test, the active-trade-or-business history, and other material facts.
3. Internal Analysis Memoranda. Calderwood & Harkness will prepare internal analysis memoranda covering all key tax issues, including: Section 355(b) active trade or business (with a focus on the Kestrel acquisition); Section 355(e) plan analysis; business purpose; device test; Section 355(d); continuity of interest and Section 368(a)(1)(D) qualification; and state and local tax considerations.
4. Tax Matters Provisions. Calderwood & Harkness will draft the Tax Matters provisions for insertion into the Separation Agreement to be prepared by Whitfield & Gage LLP. These provisions will address, among other things, the allocation of tax liabilities, the treatment of pre-closing and post-closing tax periods, the handling of tax refunds, and the procedures for tax contests and audits.
5. Tax Sharing Agreement. Calderwood & Harkness will prepare a draft Tax Sharing Agreement (initially in outline form with key terms), which will govern the ongoing tax-related obligations and rights between Veldran and Meridian following the spin-off, including indemnification obligations, restrictions on certain post-spin transactions that could jeopardize the tax-free treatment of the spin-off, and information-sharing and cooperation obligations.
B. Whitfield & Gage's Role
Priya Chandrasekar confirmed that Whitfield & Gage LLP (51 West 52nd Street, New York, NY 10019) will serve as lead corporate and M&A counsel to Harrowgate in connection with the proposed spin-off. In that capacity, Whitfield & Gage will be responsible for drafting the Separation Agreement — the principal transaction document governing the separation of the Precision Flow Solutions Division from Veldran and its contribution to Meridian.
Calderwood & Harkness will prepare the Tax Matters provisions and the Tax Sharing Agreement, which Whitfield & Gage will integrate into the overall suite of transaction documents. The two firms will coordinate closely on the interplay between the tax-related provisions and the corporate and commercial terms of the Separation Agreement.
Chandrasekar noted that Ross Halverson (Counsel, Corporate) would serve as the day-to-day contact on the corporate side for coordination purposes. Halverson's contact information will be circulated to the Calderwood & Harkness team.
C. Thornapple McCord LLP — Separate Counsel to Veldran
Christine Yeung confirmed that Thornapple McCord LLP (227 West Trade Street, Suite 2000, Charlotte, NC 28202) serves as separate corporate counsel to Veldran Industries Holdings, Inc. in light of the controlled-company dynamic — that is, the fact that Harrowgate (through HPE Fund IV) holds a 62.4% controlling stake in Veldran and has appointed the Board Chair, Diana Fenn. The engagement of separate counsel for Veldran ensures that Veldran's interests, including those of its minority shareholders and its independent directors, are independently represented in the transaction.
The lead partner on the Thornapple McCord engagement is David Ochoa, Partner, Corporate/Securities, based in Charlotte. Thornapple McCord will review all transaction documents from Veldran's perspective, including the Representation Letter, the Separation Agreement, the Tax Sharing Agreement, and the Tax Matters provisions. Philip Crundell (Veldran's General Counsel) is the primary Veldran-side contact for purposes of coordinating with all outside counsel.
D. Coordination with Other Advisors
The engagement will require coordination with several additional advisors, as discussed on the call:
Pemberton Rathbone LLP (One PPG Place, Suite 1600, Pittsburgh, PA 15222). Pemberton Rathbone serves as Veldran's independent auditors and tax-return preparers. Calderwood & Harkness will need to coordinate with Harold Weiss (Partner, Tax) at Pemberton Rathbone to obtain historical federal and state income tax returns, schedules, elections, and other tax diligence materials for Veldran and its subsidiaries, including Kestrel Precision Controls, Inc. Lisa Engstrom (Partner, Audit & Assurance) leads the audit engagement and may be involved in the preparation of carve-out financial statements for the Precision Flow Solutions Division.
Brackenridge & Co. (383 Madison Avenue, New York, NY 10179). Brackenridge & Co. has been engaged as financial advisor by Harrowgate and the Veldran Board. Samuel Ng, Managing Director, Industrials Group, leads the Brackenridge engagement. Brackenridge is preparing preliminary valuation ranges for Meridian, which are expected to be available by mid-June 2022. Calderwood & Harkness will need the Brackenridge valuation data for purposes of the built-in gain analysis and the quantification of potential Section 355(e) tax exposure.
Dunmore Havens & Associates LLC (590 Madison Avenue, 20th Floor, New York, NY 10022). Dunmore Havens has been engaged as tax advisor to Prescott Capital Management LP. The principal contact at Dunmore Havens is Irene Salcedo, Principal. Yeung noted that Prescott may separately seek comfort regarding the fund-level tax consequences of the spin-off to Prescott and its limited partners. Calderwood & Harkness's opinion will not cover Prescott-specific issues, and Prescott will rely on its own advisors for any fund-level analysis. However, Calderwood & Harkness should be prepared to respond to inquiries from Dunmore Havens regarding the structure and tax treatment of the transaction, to the extent authorized by Harrowgate and Veldran.
VIII. Debt / Capital Structure Considerations
Priya Chandrasekar raised the issue of lender and bondholder consents in connection with the proposed spin-off, given Veldran's existing funded indebtedness.
First Lien Term Loan B. The $1.1 billion First Lien Term Loan B, for which Ashfield National Bank, N.A. serves as administrative agent, is expected to contain covenants that could be triggered by the spin-off, including restricted-payment covenants, asset-disposition covenants, and potentially a change-of-control provision. Chandrasekar noted that preliminary conversations with Margaret Tsao at Ashfield National Bank suggested that the lender group would require significant negotiation and would likely condition consent on a substantial reduction in the outstanding term loan balance, a refinancing, or both. The possibility of a full refinancing of the term loan in connection with the spin-off — potentially with new credit facilities at both Veldran and Meridian — is under consideration.
6.250% Senior Unsecured Notes due 2027. The $450 million in aggregate principal amount of 6.250% Senior Unsecured Notes due 2027, issued under an indenture with Colton Trust Company as trustee, may also be affected. The indenture may contain asset-sale or restricted-payment covenants that are implicated by the contribution of the Precision Flow Solutions Division to Meridian, as well as change-of-control put provisions that could be triggered by the spin-off depending on the specific terms of the indenture.
Tax Implications of Debt Actions. Leonard Cross noted that Calderwood & Harkness would review the credit agreement and indenture from a tax perspective. Specifically, Cross stated that if any refinancing, amendment, or exchange of the existing debt instruments is required in connection with the spin-off, Calderwood & Harkness would need to confirm that such refinancing or exchange would not constitute a taxable event for Veldran, Meridian, or the holders of the debt instruments, and would not otherwise adversely affect the Section 355 analysis. For example, a refinancing involving the issuance of new debt by Meridian in connection with the separation could raise issues regarding the receipt of "boot" (non-qualifying consideration) in the reorganization if structured as a distribution of cash or debt from Meridian to Veldran.
Allocation of Debt. Chandrasekar and Cross noted the potential need to allocate Veldran's existing debt between Veldran and Meridian as part of the separation. This allocation has both business implications (each entity's post-spin leverage, credit profile, and debt service capacity) and tax implications (including the potential treatment of any debt assumption or debt-for-debt exchange in the context of the Section 368(a)(1)(D) reorganization, and the allocation of interest deductions). The allocation of debt will be addressed in the Separation Agreement and will be the subject of further discussion among Whitfield & Gage, Calderwood & Harkness, and the Veldran and Harrowgate finance teams.
IX. Workplan and Timeline
A. Immediate Next Steps (April–May 2022)
The following immediate next steps were agreed upon during the call:
April 25, 2022 — Tax Diligence Information Request List. Calderwood & Harkness (Simmons and Nazari) will prepare and circulate an initial tax diligence information request list to Veldran management (Philip Crundell and Rita Subramanian) and to Whitfield & Gage (Priya Chandrasekar). The information request list will cover the following categories of materials, among others:
• Organizational documents (certificates of incorporation, bylaws, LLC agreements, partnership agreements) for Veldran, HVH, Kestrel, and related entities;
• Historical federal and state income tax returns (at least five years) for Veldran and all subsidiaries, including Kestrel;
• Tax elections (including any Section 338 election in connection with the Kestrel acquisition);
• Intercompany agreements between the Engineered Coatings Division and the Precision Flow Solutions Division;
• Detailed materials relating to the Kestrel acquisition (acquisition agreement, closing documents, basis computations, allocation schedules);
• Five-year trade-or-business history documentation for both the Engineered Coatings Division and the Precision Flow Solutions Division (including the Kestrel business);
• Capital structure documents (credit agreement, indenture, intercreditor agreements);
• Equity incentive plan documentation (plan documents, award agreements, outstanding award schedules);
• Shareholder records and capitalization tables;
• Board minutes and resolutions relating to the spin-off and any prior consideration of separation alternatives.