1003-00005 · Veldran Industries Holdings · Debt/Capital Structure

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MEMORANDUM

PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT

To: Leonard Cross, Partner, Tax Department

From: Garrett Simmons, Senior Associate, Tax Department

Date: August 2, 2022

Re: Veldran Industries Holdings, Inc. — Analysis of First Lien Credit Agreement Provisions Implicated by Proposed Spin-Off of Meridian Flow Technologies, Inc.

Matter: HRW-SPIN-001 / Engagement No. 1003-00005

Client: Harrowgate Private Equity Fund IV, L.P.

I. Purpose and Scope of Memorandum

This memorandum is prepared by Calderwood & Harkness LLP (1301 Avenue of the Americas, 40th Floor, New York, NY 10019) in connection with the firm's engagement to render a "should" level tax opinion under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), regarding the proposed pro rata distribution by Veldran Industries Holdings, Inc. ("Veldran," the "Borrower," or "Distributing") of one hundred percent (100%) of the common stock of Meridian Flow Technologies, Inc. ("Meridian," "SpinCo," or "Controlled") to all holders of Veldran common stock. References herein to "sections" or "§" are references to sections of the Code, and references to "Treasury Regulations" or "Treas. Reg." are references to the Treasury Regulations promulgated thereunder, unless otherwise indicated.

The purpose of this memorandum is to analyze the provisions of Veldran's First Lien Term Loan B Credit Agreement, dated as of September 20, 2019, by and among Veldran Industries Holdings, Inc., as Borrower, the subsidiary guarantors party thereto, Ashfield National Bank, N.A., as Administrative Agent and Collateral Agent, and the lenders from time to time party thereto (as amended, restated, supplemented, or otherwise modified from time to time, the "Credit Agreement"), that are implicated by the proposed spin-off transaction (the "Spin-Off"). This analysis focuses in particular on whether:

(a) the Spin-Off triggers consent or waiver requirements under the Credit Agreement;

(b) any required refinancing, amendment, or repayment of the Credit Agreement in connection with the Spin-Off would constitute a taxable event for purposes of the "should" level tax opinion; and

(c) the debt-related mechanics of the Spin-Off could adversely affect the qualification of the transaction as a tax-free distribution under § 355, including but not limited to implications under § 355(a)(3)(B) (boot), § 357 (assumption of liabilities), § 355(d) (disqualified distributions), and § 355(e) (recognition of gain on certain distributions).

This analysis is limited to tax-opinion-related purposes. The analysis is not intended to serve as, and should not be relied upon as, a comprehensive covenant compliance analysis for corporate or commercial lending purposes. A separate, comprehensive covenant compliance analysis for corporate and lending purposes is being conducted by Whitfield & Gage LLP (corporate and M&A counsel to Harrowgate Private Equity Fund IV, L.P.) and Thornapple McCord LLP (corporate counsel to Veldran). Calderwood & Harkness expresses no opinion on matters of compliance or non-compliance under the Credit Agreement from a commercial law perspective, and nothing in this memorandum should be construed as providing such an opinion.

This memorandum has been reviewed by Leonard Cross, Responsible Partner, Tax Department, Calderwood & Harkness LLP.

II. Background — Transaction Overview

A. The Proposed Transaction

The proposed transaction consists of a pro rata distribution by Veldran of one hundred percent (100%) of the common stock of Meridian to all holders of Veldran common stock, on a one-for-one basis — that is, one (1) share of Meridian common stock for each share of Veldran common stock outstanding as of the record date for the distribution. As of the date of this memorandum, there are 74,500,000 shares of Veldran common stock issued and outstanding. Accordingly, 74,500,000 shares of Meridian common stock would be distributed in connection with the Spin-Off.

B. Pre-Spin Internal Restructuring

Immediately prior to the distribution, Veldran will contribute all assets and liabilities of its Precision Flow Solutions Division (the "Contributed Business") to Meridian in exchange for all outstanding shares of Meridian common stock and Meridian's assumption of certain allocated liabilities associated with the Contributed Business (the "Contribution"). Immediately following the Contribution, Veldran will effect the pro rata distribution of all Meridian common stock to the Veldran shareholders (the "Distribution"). The Contribution and the Distribution are collectively referred to herein as the "Spin-Off."

The Spin-Off is intended to qualify as a reorganization under § 368(a)(1)(D) and as a tax-free distribution under § 355. Calderwood & Harkness has been engaged to deliver a "should" level tax opinion that the Spin-Off will so qualify, subject to customary assumptions, qualifications, and representations.

C. Targeted Timeline

The originally targeted timeline for the Spin-Off contemplated both the record date and the distribution date occurring during the fourth quarter of 2022 (Q4 2022). As discussed in Section V below, certain factors — including the lender consent requirements analyzed herein — have introduced uncertainty regarding the feasibility of this timeline.

D. Distributing Corporation — Veldran Industries Holdings, Inc.

Veldran Industries Holdings, Inc. is a corporation organized under the laws of the State of Delaware, with its Employer Identification Number (EIN) 86-1920347. Veldran's principal executive offices are located at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217. The principal officers of Veldran relevant to this engagement are:

• Chief Executive Officer: Jonathan Caldecott

• Chief Financial Officer: Rita Subramanian

• General Counsel: Philip Crundell

Veldran operates through two principal business divisions: (i) the Engineered Coatings Division, which will be retained by Veldran following the Spin-Off, and (ii) the Precision Flow Solutions Division, which will be contributed to Meridian in connection with the Spin-Off. Each division constitutes an active trade or business for purposes of § 355(b), as analyzed in the Active Trade or Business Memorandum dated May 15, 2022.

E. Controlled Corporation — Meridian Flow Technologies, Inc.

Meridian Flow Technologies, Inc. is a planned Delaware corporation that will be formed prior to the Contribution for the purpose of receiving the Precision Flow Solutions Division assets and liabilities. Meridian is expected to be headquartered at 7100 Northlake Parkway, Suite 300, Tucker, Georgia 30084. The planned principal officers of Meridian are:

• Planned Chief Executive Officer: Sandra Waverly

• Planned Chief Financial Officer: Derek Okonkwo

As of the date of this memorandum, Meridian has not yet been incorporated. Calderwood & Harkness understands that incorporation will occur at a date to be determined in coordination with the overall Spin-Off timeline, following resolution of the open items identified herein and in related workstreams.

F. Controlling Shareholder — Harrowgate Private Equity Fund IV, L.P.

Harrowgate Private Equity Fund IV, L.P. (EIN: 84-3291067), a Delaware limited partnership ("HPE Fund IV" or "Harrowgate"), is the controlling shareholder of Veldran. HPE Fund IV holds approximately 62.4% of the outstanding Veldran common stock, representing 46,488,000 shares, through its wholly owned subsidiary Harrowgate Veldran Holdings LLC (EIN: 86-1483920), a Delaware limited liability company. HPE Fund IV acquired this controlling stake on September 20, 2019, through a negotiated tender offer followed by a squeeze-out merger, displacing the prior controlling shareholder, Greystone Partners Fund III LP. The acquisition price was $40.00 per share, representing aggregate consideration of approximately $1,859,520,000.

The timing of HPE Fund IV's acquisition of its controlling interest in Veldran — specifically, that such acquisition occurred approximately three years prior to the anticipated Q4 2022 distribution date — is the subject of a separate § 355(e) plan analysis, cross-referenced in Section VI.C below.

G. Other Significant Shareholders

In addition to HPE Fund IV, the following shareholders hold significant positions in Veldran common stock:

III. Overview of Veldran's Debt Capital Structure

An understanding of Veldran's debt capital structure is essential to the analysis of the Credit Agreement provisions implicated by the Spin-Off and the tax implications thereof. Set forth below is a summary of Veldran's outstanding indebtedness as of the date of this memorandum.

A. First Lien Term Loan B Credit Agreement

The Credit Agreement, which is the primary subject of this memorandum, provides for a first lien term loan B facility in an aggregate principal amount of $1,100,000,000 ($1.1 billion). The material terms of the Credit Agreement are summarized as follows:

Facility: First Lien Term Loan B

Aggregate Principal Amount: $1,100,000,000 ($1.1 billion)

Administrative Agent and Collateral Agent: Ashfield National Bank, N.A. (100 Federal Street, Boston, Massachusetts 02110)

Key Contact at Administrative Agent: Margaret Tsao, Managing Director, Leveraged Finance

Borrower: Veldran Industries Holdings, Inc.

Lender Syndicate: A syndicate of institutional lenders, led by Ashfield National Bank, N.A., as lead arranger and bookrunner. The syndicate includes approximately forty-seven (47) institutional lenders holding various participation interests in the facility.

Collateral: First-priority lien on substantially all assets of Veldran and its domestic subsidiaries, including, without limitation, the assets of the Precision Flow Solutions Division and the assets of Kestrel Precision Controls, Inc.

Guarantors: All domestic subsidiaries of Veldran, including, as applicable, Kestrel Precision Controls, Inc. (EIN: 58-2847193), a Georgia corporation that Veldran acquired on June 7, 2019, from Rennick Industrial Partners Fund II LP, for aggregate consideration of approximately $295,000,000.

The Credit Agreement was entered into on September 20, 2019, in connection with HPE Fund IV's acquisition of its controlling stake in Veldran. The proceeds of the Term Loan B were used, in part, to finance the acquisition and to refinance Veldran's then-existing credit facilities.

B. 6.250% Senior Unsecured Notes due 2027

For completeness, Veldran also has outstanding $450,000,000 in aggregate principal amount of 6.250% Senior Unsecured Notes due 2027 (the "Senior Notes"), issued pursuant to an indenture (the "Indenture") between Veldran and Colton Trust Company (10 South LaSalle Street, Chicago, Illinois 60603), as trustee. The Senior Notes bear interest at a fixed rate of 6.250% per annum, payable semi-annually, and mature in 2027.

A separate analysis of the provisions of the Indenture implicated by the Spin-Off has been prepared by Leila Nazari, Associate, Tax Department, Calderwood & Harkness LLP, in a companion memorandum entitled "Indenture Spin-Off Covenant Analysis," dated August 3, 2022. The Senior Notes and the Indenture are not further addressed in this memorandum except to the extent relevant to the aggregate debt and leverage analysis set forth below.

C. Aggregate Debt Summary and Pro Forma Leverage Analysis

Veldran's total funded indebtedness, as of the date of this memorandum, is approximately $1,550,000,000, consisting of:

For purposes of the analysis herein, the following financial data is derived from Veldran's audited consolidated financial statements for the fiscal year ended December 31, 2021 ("FY2021"):

• Veldran Consolidated FY2021 EBITDA: $418,000,000

• Net Debt / EBITDA (Consolidated): Approximately 3.7× ($1,550M / $418M)

On a divisional basis, the financial characteristics of the two divisions are as follows:

Following the Spin-Off, if Veldran were to retain the entirety of the existing $1,550,000,000 in funded debt, the pro forma leverage profile would be as follows: based on the remaining Engineered Coatings Division EBITDA of $285,000,000, pro forma total Net Debt / EBITDA would increase to approximately 5.4× ($1,550M / $285M). This significant increase in leverage is a material factor in the lender consent and potential refinancing analysis discussed in Section V below, and informs the economic dynamics of the negotiations with Ashfield National Bank and the lender syndicate.

IV. Credit Agreement Provisions Implicated by the Spin-Off

This Section IV identifies and analyzes the specific provisions of the Credit Agreement that are implicated by the proposed Spin-Off. For each provision, we summarize the relevant covenant language, apply it to the facts of the Spin-Off, and state our conclusion as to whether the Spin-Off would trigger or violate the provision. This analysis is conducted for purposes of identifying potential tax-opinion-related issues; the definitive covenant compliance analysis is being conducted separately by Whitfield & Gage LLP and Thornapple McCord LLP.

A. Definition of "Disposition" / "Asset Sale"

Covenant Summary. The Credit Agreement defines "Disposition" (in certain provisions alternatively referred to as an "Asset Sale") broadly to include any sale, transfer, conveyance, assignment, or other disposition of any property or assets by the Borrower or any Restricted Subsidiary, whether consummated in a single transaction or in a series of related transactions. The definition is drafted expansively, consistent with customary leveraged finance documentation, and contains only limited carve-outs (e.g., dispositions of obsolete equipment in the ordinary course, certain permitted intercompany transfers among Restricted Subsidiaries, and dispositions below a de minimis dollar threshold).

Application to the Spin-Off. The Spin-Off would involve two dispositions within the meaning of this definition. First, the Contribution — in which Veldran transfers the assets and liabilities of the Precision Flow Solutions Division to Meridian — would constitute a transfer and conveyance of a substantial portion of Veldran's assets. Based on FY2021 figures, the Precision Flow Solutions Division represents approximately 35% of Veldran's consolidated revenue ($820M of $2,340M) and approximately 32% of consolidated EBITDA ($133M of $418M). Second, the Distribution — in which Veldran distributes 100% of the Meridian common stock to Veldran shareholders on a pro rata basis — would constitute a disposition of the equity interests in Meridian. Because the Contribution and the Distribution are steps in a single integrated transaction, they would be treated as a series of related transactions for purposes of this definition.

The Contribution and Distribution, taken together, do not fall within any of the enumerated exceptions to the Disposition definition. The Spin-Off is not a disposition in the ordinary course of business; it is not an intercompany transfer among Restricted Subsidiaries that preserves the guarantor and collateral structure; and the value of the assets involved far exceeds any de minimis carve-out.

Conclusion. The Spin-Off would constitute a "Disposition" under the Credit Agreement definition. The Contribution step represents a transfer of assets constituting approximately one-third of the Borrower's consolidated business, and the Distribution step represents a disposition of all Meridian equity interests. This characterization triggers the applicable asset-sale and disposition covenant restrictions discussed in Section IV.D below.

B. Definition of "Investment"

Covenant Summary. The Credit Agreement defines "Investment" to include any direct or indirect advance, loan, or other extension of credit to, or capital contribution to, or purchase or other acquisition of equity interests, debt securities, or other securities of, any Person. The definition is designed to capture the deployment of Borrower or Restricted Subsidiary value into non-guarantor or non-Restricted-Subsidiary entities, and is customary in leveraged credit agreements.

Application to the Spin-Off. The Contribution step of the Spin-Off — in which Veldran transfers the assets and liabilities of the Precision Flow Solutions Division to Meridian in exchange for all outstanding Meridian common stock — could be characterized as a "capital contribution to" Meridian or as a "purchase of equity interests in" Meridian. In either characterization, Veldran would be deploying a substantial portion of its assets (the Precision Flow Division) into a newly formed entity (Meridian) that is not currently a Restricted Subsidiary under the Credit Agreement and that will, following the Distribution, no longer be a subsidiary of Veldran at all.

Although the Contribution is structured as an exchange (assets for stock), the substance of the transaction is that Veldran is capitalizing Meridian with divisional assets. This falls squarely within the "capital contribution" prong of the Investment definition, as Meridian will receive property from Veldran without any cash or other consideration flowing back to Veldran from Meridian (other than the Meridian stock itself, which is immediately distributed to shareholders).

Conclusion. The Contribution step of the Spin-Off would constitute an "Investment" under the Credit Agreement definition. This characterization implicates the Investment covenant restrictions, which generally limit the aggregate amount and types of Investments that the Borrower and Restricted Subsidiaries may make.

C. Restricted Payment Covenant

Covenant Summary. The Credit Agreement contains a negative covenant restricting the ability of the Borrower and its Restricted Subsidiaries to make "Restricted Payments." As defined in the Credit Agreement, "Restricted Payments" include, among other things, dividends and distributions on, or redemptions or repurchases of, equity interests of the Borrower. The Restricted Payment covenant generally prohibits the Borrower from declaring or paying any Restricted Payment, except to the extent permitted by one or more enumerated baskets. These baskets typically include:

(i) a "builder basket" based on a percentage of retained Excess Cash Flow (as defined) accumulated since the closing date;

(ii) a "general basket" permitting Restricted Payments up to a specified dollar amount (typically in the range of $25,000,000 to $75,000,000 for a facility of this size);

(iii) a basket for dividends and distributions customarily paid on preferred stock;

(iv) a basket for repurchases of equity interests held by officers, directors, and employees, subject to an annual cap; and

(v) in some cases, a basket permitting Restricted Payments so long as a specified pro forma leverage ratio is satisfied.

Application to the Spin-Off. The pro rata distribution of Meridian common stock to Veldran shareholders constitutes a dividend in kind — that is, a distribution on Veldran common stock. Even though the Distribution is a non-cash transaction (stock, rather than cash, is distributed), the distribution of property on account of equity interests falls within the definition of a "Restricted Payment" under the Credit Agreement.

The fair market value of the Meridian common stock to be distributed has been estimated by Brackenridge & Co. (383 Madison Avenue, New York, New York 10179; contact: Samuel Ng, Managing Director, Industrials Group), Veldran's financial advisor, at between $1,396,500,000 and $1,702,400,000. This valuation range is based on a range of enterprise value-to-EBITDA multiples of 10.5× to 12.8× applied to the Precision Flow Solutions Division's FY2021 EBITDA of $133,000,000, adjusted for allocated net debt and other customary adjustments.

The distribution value within this range would substantially exceed the aggregate capacity of any available Restricted Payment basket under the Credit Agreement. By way of illustration, even if the builder basket and general basket were fully available (which would depend on cumulative Excess Cash Flow calculations and other conditions), the combined available capacity would be unlikely to exceed $200,000,000 to $300,000,000 — an amount that represents, at most, approximately 15% to 22% of the low end of the estimated Meridian fair market value. Accordingly, the Distribution cannot be effected within the existing Restricted Payment baskets.

Conclusion. The Distribution would constitute a "Restricted Payment" under the Credit Agreement that exceeds any available basket capacity by a very wide margin. Consequently, the Distribution would require either (a) utilization of Restricted Payment basket capacity, which is almost certainly insufficient given the magnitude of the distribution, or (b) an amendment to the Credit Agreement permitting the Distribution or a waiver from the requisite lenders of the Restricted Payment covenant as applied to the Distribution.

D. Asset Disposition / Asset Sale Covenant

Covenant Summary. Separate and apart from the Restricted Payment covenant, the Credit Agreement contains an Asset Sale covenant that restricts dispositions of assets by the Borrower and its Restricted Subsidiaries outside the ordinary course of business. The Asset Sale covenant is designed to ensure that the proceeds of any asset disposition are applied to reduce outstanding indebtedness or are reinvested in productive assets of the business. The Asset Sale covenant typically requires:

(i) that the disposition be made for fair market value consideration (as determined in good faith by the Board of Directors or an authorized officer of the Borrower);

(ii) that a minimum percentage (commonly 75%) of the aggregate consideration received consist of cash or Cash Equivalents (as defined); and

(iii) that the net cash proceeds of any such disposition be applied, within a specified reinvestment period (commonly 365 to 450 days), to either (x) prepayment of term loans under the Credit Agreement (typically through mandatory prepayment mechanics) or (y) reinvestment in assets useful in the Borrower's business.

Application to the Spin-Off. The Spin-Off, as currently structured, involves a pro rata distribution of Meridian common stock to Veldran shareholders for no cash consideration flowing back to Veldran. This structure is fundamentally incompatible with the requirements of the Asset Sale covenant:

Fair Market Value Consideration. The Distribution does not involve the receipt by Veldran of any consideration from any person. The Meridian stock is distributed to Veldran shareholders; Veldran receives nothing in return.

Cash Consideration Requirement. No cash or Cash Equivalents are received by Veldran in connection with the Distribution. The 75% (or other specified percentage) cash consideration requirement cannot be satisfied.

Mandatory Prepayment / Reinvestment. Because Veldran receives no net cash proceeds from the Distribution, there are no proceeds available to apply to prepayment of the Term Loan B or to reinvest in the business. The mandatory prepayment and reinvestment mechanics are inapplicable by their terms.

In addition to the Distribution step, the Contribution step — which involves the transfer of the Precision Flow Division assets to Meridian — may also constitute a separate Asset Sale. Although Veldran receives Meridian common stock in exchange for the Contributed Business, that stock is immediately distributed to shareholders rather than retained as an asset of the Borrower. Accordingly, the receipt of Meridian stock in the Contribution step would not satisfy the cash consideration requirement.

Conclusion. The Spin-Off would trigger the Asset Sale covenant, and Veldran could not comply with the typical mandatory prepayment, reinvestment, and cash consideration mechanics that the covenant prescribes. A waiver or amendment of the Asset Sale covenant, as applied to the Spin-Off, will be required.

E. Change of Control Provision

Covenant Summary. The Credit Agreement contains a Change of Control provision that constitutes an event of default upon the occurrence of certain specified triggering events. Change of Control provisions in leveraged credit agreements typically include multiple prongs, the most common of which are:

(i) a change in the identity or ownership percentage of the controlling shareholder or group (e.g., any person or group acquiring more than a specified percentage of voting stock);

(ii) the existing controlling shareholder ceasing to own a specified minimum percentage of voting stock;

(iii) a change in the composition of the Board of Directors such that a majority of the board does not consist of "continuing directors"; and

(iv) the sale, transfer, or other disposition of all or substantially all of the assets of the Borrower and its subsidiaries, taken as a whole.

Application to the Spin-Off. Two prongs of the Change of Control provision warrant analysis in the context of the Spin-Off.

Equity Control Prong. HPE Fund IV, through Harrowgate Veldran Holdings LLC, currently holds approximately 62.4% of the outstanding Veldran common stock. In a pro rata distribution, each Veldran shareholder (including Harrowgate Veldran Holdings LLC) receives a proportionate distribution of Meridian stock. Accordingly, Harrowgate Veldran Holdings LLC would continue to hold exactly the same percentage of Veldran common stock (62.4%) following the Spin-Off. No change in equity control of Veldran would occur, and the equity control prong of the Change of Control provision would not be triggered.

"Substantially All Assets" Prong. The contribution and distribution of the Precision Flow Solutions Division raises a more nuanced question under the "substantially all assets" prong. The Precision Flow Division represents approximately 35% of Veldran's consolidated revenue and approximately 32% of consolidated EBITDA. Whether the disposition of assets of this magnitude constitutes a transfer of "all or substantially all" of the Borrower's assets depends on the specific defined terms and thresholds in the Credit Agreement, as well as applicable case law and interpretive guidance. As a general matter, courts and practitioners have typically construed "substantially all" to require a disposition of assets representing 50% or more (and in some cases, as much as 70% to 80%) of consolidated asset value, revenue, or earnings. The 32% to 35% metrics here are likely below the threshold required to trigger this prong, but the analysis is inherently fact-specific and depends on the specific language of the Credit Agreement.

Conclusion. The Change of Control provision is unlikely to be triggered by the Spin-Off itself. HPE Fund IV's controlling ownership of Veldran common stock would not change, and the Precision Flow Division assets, while substantial, likely fall below the threshold for "all or substantially all" of Veldran's assets. However, the analysis depends on the specific defined terms and thresholds in the Credit Agreement, and further review of the precise language is warranted in coordination with Whitfield & Gage LLP and Thornapple McCord LLP.

F. Covenant Regarding Subsidiaries / Restricted Subsidiaries

Covenant Summary. The Credit Agreement distinguishes between "Restricted Subsidiaries," which are subject to the affirmative and negative covenants of the Credit Agreement and are required to provide guarantees and grant collateral liens, and "Unrestricted Subsidiaries," which are excluded from the covenant framework and are not required to guarantee the obligations or pledge assets. The designation of a subsidiary as an Unrestricted Subsidiary is typically subject to specific conditions and limitations (e.g., the designation of an Unrestricted Subsidiary may be treated as an Investment or Restricted Payment in an amount equal to the fair market value of the subsidiary's assets).

Veldran's domestic subsidiaries are currently designated as Restricted Subsidiaries and serve as guarantors under the Credit Agreement. These entities have also granted first-priority liens on substantially all of their assets as collateral for the Term Loan B.

Application to the Spin-Off. Among the Restricted Subsidiaries and guarantors under the Credit Agreement are the entities that comprise the Precision Flow Solutions Division, including, most notably, Kestrel Precision Controls, Inc. (EIN: 58-2847193), a Georgia corporation that Veldran acquired on June 7, 2019, from Rennick Industrial Partners Fund II LP for approximately $295,000,000. Kestrel Precision Controls is a material operating subsidiary within the Precision Flow Division and represents a significant component of the collateral and guarantor package.

The Contribution would result in the Precision Flow Division entities — including Kestrel Precision Controls and the other operating subsidiaries of the Precision Flow Division — becoming subsidiaries of Meridian, rather than direct or indirect subsidiaries of Veldran. The subsequent Distribution would result in Meridian (and, through it, the Precision Flow Division entities) ceasing to be subsidiaries of Veldran entirely. As a consequence, these entities would no longer be eligible to serve as Restricted Subsidiaries, guarantors, or collateral grantors under the Credit Agreement.

The release of Restricted Subsidiaries from the guarantor and collateral package — particularly guarantor entities that contribute materially to the credit support for the facility — is not a matter that can be effected unilaterally by the Borrower. Leveraged credit agreements uniformly require affirmative lender consent for the release of guarantors and the release of collateral liens, and certain releases (particularly those involving release of all or substantially all of the collateral) may require unanimous or super-majority lender consent rather than mere majority lender approval.

Conclusion. The Spin-Off would require the release of Precision Flow Division entities, including Kestrel Precision Controls, Inc., from their obligations as guarantors under the Credit Agreement and the release of first-priority liens on their respective assets. This release constitutes a material diminution of the credit support and collateral package available to the lender syndicate, and would require affirmative lender consent under the Credit Agreement. The applicable consent threshold — whether majority lenders, super-majority lenders, or all lenders — should be confirmed through review by Whitfield & Gage LLP and Thornapple McCord LLP.

V. Lender Consent Requirements and Ashfield National Bank Position

A. Summary of Required Consents

Based on the analysis set forth in Section IV above, the Spin-Off would require, at a minimum, the following consents, waivers, or amendments under the Credit Agreement:

(a) A waiver of the Restricted Payment covenant to permit the Distribution of Meridian common stock to Veldran shareholders, the fair market value of which ($1,396,500,000 to $1,702,400,000) far exceeds any available basket capacity;

(b) A waiver of the Asset Sale covenant, which the Spin-Off would trigger and with which Veldran could not comply due to the absence of cash consideration and the inapplicability of the mandatory prepayment and reinvestment mechanics;

(c) Consent to the release of the Precision Flow Division entities (including Kestrel Precision Controls, Inc.) from their guarantor obligations under the Credit Agreement;

(d) Consent to the release of first-priority liens on the assets of the Precision Flow Division entities; and

(e) Potentially, an amendment to the definition of "Restricted Subsidiaries" to remove the Precision Flow Division entities and to reflect the post-spin organizational structure of Veldran and its remaining subsidiaries.

B. Ashfield National Bank Position

Calderwood & Harkness understands from communications relayed by Philip Crundell (Veldran General Counsel) and Priya Chandrasekar (Whitfield & Gage LLP, 51 West 52nd Street, New York, New York 10019) that preliminary discussions have been held with Margaret Tsao, Managing Director, Leveraged Finance, at Ashfield National Bank, N.A., regarding the Spin-Off and the associated Credit Agreement implications. Ms. Tsao has indicated, in substance, that the lender group would require significant negotiation and potentially a full refinancing of the Term Loan B in connection with any spin-off transaction.

This position is not unexpected. From the lenders' perspective, the Spin-Off would result in the removal of approximately one-third of the consolidated revenue and EBITDA from the credit support available to the facility, the release of guarantors and collateral representing a material portion of the collateral package, and a significant increase in pro forma leverage (from approximately 3.7× to approximately 5.4×, assuming Veldran retains all existing debt). The lender group's concerns are economically rational and consistent with customary lender positions in comparable spin-off situations.

C. Potential Refinancing Scenarios

Three principal scenarios for resolving the Credit Agreement constraints have been identified by the working group:

Scenario 1 — Amendment and Waiver. Under this scenario, Veldran would seek to obtain requisite lender consent — typically a majority of lenders by outstanding principal amount, but release of collateral and guarantors may require unanimous consent or super-majority consent depending on the specific provisions of the Credit Agreement — to permit the Spin-Off while leaving the existing $1.1 billion Term Loan B in place at Veldran post-spin. The lenders would waive the Restricted Payment covenant and the Asset Sale covenant as applied to the Spin-Off, and would consent to the release of the Precision Flow Division guarantors and collateral. Under this scenario, the full $1.1 billion of debt would remain at Veldran, supported solely by the Engineered Coatings Division (with pro forma EBITDA of approximately $285,000,000 and pro forma leverage of approximately 3.9× on the $1.1 billion Term Loan B alone, or approximately 5.4× on total funded debt of $1.55 billion). The lenders would likely require amendments to the financial covenants (if any) and potentially a repricing of the facility to reflect the increased credit risk.

Scenario 2 — Full Refinancing. Under this scenario, Veldran would refinance the $1.1 billion Term Loan B with a new credit facility sized to the post-spin Veldran (Engineered Coatings Division) credit profile. The new facility would be smaller in aggregate principal amount, reflecting the reduced asset base and earnings of the post-spin Veldran. Concurrently, Meridian might obtain its own separate credit facility to fund a portion of the refinancing (i.e., Meridian would borrow and remit a portion of the proceeds to Veldran, which Veldran would apply to repay a corresponding portion of the existing Term Loan B). The net effect would be a split of the existing debt between the two post-spin entities, with each entity bearing a level of debt appropriate to its standalone credit profile.

Scenario 3 — Partial Repayment and Amendment. Under this scenario, a partial paydown of the Term Loan B would be effected — either from Veldran's available cash, from proceeds of new Meridian-level financing, or from a combination thereof — with the remaining balance being amended to reflect the post-spin capital structure. This hybrid approach might be necessary if the lender group is unwilling to maintain the full $1.1 billion of debt exposure to the post-spin Veldran but is also unwilling to agree to a complete refinancing.

D. Harrowgate Position on Spin-Off Timing

The uncertainty regarding lender consent was identified by Harrowgate as one of four principal factors contributing to its evaluation of the timing and feasibility of the Spin-Off. This was communicated by Christine Yeung (Senior Vice President, Harrowgate) in correspondence dated August 22, 2022, to the transaction working group. The other three factors identified by Ms. Yeung are addressed in separate workstream memoranda and are not further discussed herein.

VI. Tax Implications of Credit Agreement Mechanics

This Section VI analyzes the tax implications of the Credit Agreement mechanics described above, with particular focus on the impact, if any, on the qualification of the Spin-Off under § 355 and the potential for taxable events arising from any required refinancing.

A. Impact of Potential Refinancing on § 355 Qualification

General Rule. A refinancing of existing debt in connection with a spin-off does not, by itself, disqualify the transaction under § 355 or otherwise impair the tax-free treatment of the distribution. The § 355 qualification analysis focuses on the requirements specified in the statute and the associated Treasury Regulations, including the distribution of Controlled stock, the active-trade-or-business requirement of § 355(b), the business purpose requirement, the device test, the continuity-of-interest and continuity-of-business-enterprise requirements, and the anti-abuse provisions of §§ 355(d), 355(e), and 355(g). None of these requirements, by their terms, address or are implicated by the refinancing of the Distributing corporation's existing third-party debt.

Boot Analysis Under § 355(a)(3). Section 355(a)(3)(A) provides that if, in connection with a distribution described in § 355(a)(1), the Distributing corporation distributes property other than qualified stock of the Controlled corporation ("boot"), then the transaction is not disqualified, but the recipient shareholders recognize gain to the extent of the boot received. Under § 355(a)(3)(B), if the Distributing corporation receives property other than stock of the Controlled corporation in the exchange (i.e., in the § 368(a)(1)(D) reorganization step), such property constitutes boot at the corporate level.

The current transaction structure contemplates a "clean" spin — that is, Veldran contributes the Precision Flow Division assets and liabilities to Meridian in exchange solely for Meridian common stock, and then distributes that stock pro rata to Veldran shareholders. No debt is to be "pushed down" to Meridian beyond the liabilities specifically allocated to the Precision Flow Division as part of the Contributed Business.

However, if the refinancing negotiations (particularly under Scenario 2 or Scenario 3) result in a structure in which Meridian issues new debt and remits the proceeds thereof to Veldran — for example, in order to fund a partial paydown of the existing Term Loan B — such proceeds could constitute "boot" under § 355(a)(3)(B). This would occur because Meridian (Controlled) would be transferring property (cash proceeds of new debt) to Veldran (Distributing) in connection with the Contribution, in addition to the Meridian stock. The receipt of such cash by Veldran could result in gain recognition at the corporate level.

Assumption of Liabilities Under § 357. Under § 357(a), the assumption of liabilities by Meridian in connection with the Contribution step generally would not be treated as "boot" or as money received by Veldran, provided that the liabilities are assumed for bona fide business purposes (i.e., the liabilities are genuine liabilities associated with the Contributed Business) and that the transaction does not have tax avoidance as a principal purpose. Under § 357(b), if the assumption of liabilities by Meridian was made with a principal purpose of tax avoidance or was not for a bona fide business purpose, the full amount of the assumed liabilities would be treated as boot. Under § 357(c), if the aggregate liabilities assumed by Meridian exceed the aggregate adjusted basis of the property transferred to Meridian in the Contribution, the excess is treated as gain from the sale or exchange of a capital asset (or, in certain cases, ordinary income).

Veldran's estimated adjusted tax basis in the Precision Flow Division assets is approximately $800,000,000. The liabilities to be allocated to Meridian in the Contribution must be analyzed to ensure that they do not exceed this amount. If the allocated liabilities remain below the $800,000,000 adjusted basis threshold, § 357(c) should not be triggered. The specific liabilities to be assumed by Meridian are the subject of ongoing negotiations among the parties and their respective advisors and have not been finalized as of the date of this memorandum.

Conclusion. A straightforward refinancing at the Veldran level — whether an amendment and waiver (Scenario 1), a full refinancing (Scenario 2), or a partial repayment and amendment (Scenario 3) — should not, in and of itself, affect the qualification of the Spin-Off under § 355. However, if any refinancing structure requires Meridian to issue new debt and remit cash proceeds to Veldran, boot issues under § 355(a)(3)(B) would arise and must be carefully analyzed. Additionally, the aggregate liabilities assumed by Meridian in the Contribution must be monitored to ensure compliance with § 357(c). These requirements underscore the importance of careful structuring of the allocation of liabilities between Veldran and Meridian in the Separation Agreement and the Tax Sharing Agreement.

B. Taxable Event Analysis — Refinancing of Term Loan B

Debt-for-Debt Exchange Rules. If Veldran refinances the existing $1.1 billion Term Loan B with a new credit facility (Scenario 2 or a component of Scenario 3), the refinancing would generally be treated, for federal income tax purposes, as a retirement of the existing debt instrument and the issuance of a new debt instrument. Under § 1001, if the terms of the new facility differ materially from the terms of the existing Term Loan B — including but not limited to differences in aggregate principal amount, maturity date, interest rate, amortization schedule, or other material terms — the exchange of the old debt for the new debt could be treated as a realization event, giving rise to gain or loss.

Under the Treasury Regulations, a "significant modification" of a debt instrument (within the meaning of Treas. Reg. § 1.1001-3) is treated as an exchange of the old instrument for a new instrument. Changes in the yield, maturity, timing of payments, obligor, or nature of the instrument (among others) may individually or in the aggregate constitute a significant modification. If a significant modification occurs, the Borrower recognizes gain or loss equal to the difference between the adjusted issue price of the old instrument and the amount paid for the new instrument (or, in the case of an exchange, the issue price of the new instrument).

In the context of a leveraged credit agreement, a refinancing that involves the repayment of the existing facility at par and the incurrence of a new facility at par would generally not give rise to gain or loss, because the amount realized on the retirement of the old debt (par) would equal the adjusted issue price of the old debt (par, assuming no original issue discount). However, if the new facility is issued at a discount to par, or if the existing facility is trading at a discount to par and is repaid at a discount, different consequences may result.

Cancellation of Indebtedness Income. If the existing Term Loan B is repaid at a discount to its outstanding principal amount — that is, if the lenders agree to accept less than $1.1 billion in satisfaction of the existing debt — Veldran could recognize cancellation-of-indebtedness ("COD") income under § 61(a)(12) in the amount of the discharged indebtedness. However, based on our understanding of the current facts, repayment of the Term Loan B is expected to be at par value. The Term Loan B is not currently trading at a material discount, and the lenders have not indicated a willingness to accept a below-par repayment. Accordingly, COD income is not expected to be a concern in the present context.

Original Issue discount. If a new credit facility is issued at a discount to its stated principal amount (i.e., with original issue discount, or "OID"), the OID provisions of §§ 1272 through 1275 would apply. OID would be amortized over the term of the new facility and included in the income of the lenders (and deducted by the Borrower) under the constant-yield-to-maturity method. While OID analysis is a routine aspect of any new debt issuance, it is not specific to the Spin-Off and does not bear on the § 355 qualification analysis.

Conclusion. A refinancing of the Term Loan B in connection with the Spin-Off would not constitute a taxable event that affects the § 355 analysis, absent unusual circumstances (such as the issuance of equity-linked instruments, discussed in Section VI.C below, or the receipt of boot by Veldran from Meridian, discussed in Section VI.A above). Any refinancing-related tax consequences — including potential COD income, OID, or gain or loss on the exchange of debt instruments — would be separate from, and would not impair, the tax-free treatment of the Spin-Off under § 355.

C. Impact on § 355(e) Analysis

Refinancing and "Plan" Analysis. Section 355(e) provides that if a distribution described in § 355(a) is part of a "plan" (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, a 50-percent-or-greater interest (by vote or value) in the Distributing corporation or the Controlled corporation, the Distributing corporation recognizes gain on the distribution as if the Controlled stock were sold at fair market value. The "plan" analysis, as elaborated in Treas. Reg. § 1.355-7, examines the facts and circumstances surrounding the distribution to determine whether the distribution and any acquisition are part of a plan.

A refinancing of existing debt — whether at Veldran or at Meridian — is not, by itself, an "acquisition" of stock or a 50-percent-or-greater interest. Debt holders do not acquire equity interests in the Borrower by reason of making loans or refinancing existing loans. Accordingly, a refinancing of the Term Loan B should not implicate § 355(e).

Caveat Regarding Equity-Linked Instruments. If a refinancing were to involve the issuance of equity-linked instruments to the lender group — such as convertible debt, warrants, options, or other instruments that are exercisable for or convertible into equity interests in Veldran or Meridian — such instruments could potentially be treated as an acquisition of stock for § 355(e) purposes, depending on the terms and likelihood of conversion or exercise. As of the date of this memorandum, no such equity-linked instruments are contemplated in connection with any refinancing scenario. If this changes during the course of negotiations with Ashfield National Bank and the lender syndicate, the § 355(e) analysis must be revisited.

Cross-Reference to Full § 355(e) Plan Analysis. The comprehensive § 355(e) plan analysis is set forth in a separate memorandum dated June 28, 2022. That memorandum addresses, among other matters, the September 20, 2019 acquisition by HPE Fund IV of its 62.4% stake in Veldran (aggregate consideration of $1,859,520,000) and the approximately three-year gap between that acquisition and the anticipated Q4 2022 distribution date. The June 28, 2022 memorandum concludes that the HPE Fund IV acquisition falls outside the four-year safe harbor of Treas. Reg. § 1.355-7(b)(2) and must be analyzed under the general facts-and-circumstances test. The estimated corporate-level tax at risk if § 355(e) applies is between $125,300,000 and $189,500,000, computed as follows:

• Estimated Meridian fair market value: $1,396,500,000 to $1,702,400,000

• Minus Veldran's estimated adjusted tax basis in Precision Flow Division assets: approximately $800,000,000

• Estimated built-in gain: $596,500,000 to $902,400,000

• Applicable corporate tax rate: 21%

• Estimated corporate-level tax at risk: $125,265,000 to $189,504,000 (rounded to $125,300,000 to $189,500,000)

The refinancing of the Term Loan B does not alter this analysis.

D. Impact on § 355(d) Analysis

Section 355(d) provides that if, immediately after a distribution described in § 355(a), any person holds "disqualified stock" in the Distributing corporation or the Controlled corporation, the distribution is treated as a taxable exchange. "Disqualified stock" is generally stock that was acquired by "purchase" (within the meaning of § 355(d)(5)) during the five-year period ending on the date of distribution.

The § 355(d) disqualified distribution analysis is the subject of a separate memorandum. That memorandum addresses whether HPE Fund IV's September 20, 2019 purchase of 62.4% of Veldran stock — which occurred within the five-year look-back period relative to a Q4 2022 distribution date — causes the Spin-Off to be a disqualified distribution.

A refinancing of the Term Loan B does not affect the § 355(d) analysis. The § 355(d) analysis focuses on acquisitions of stock by purchase; the refinancing of debt does not involve the acquisition of stock by any person.

E. Collateral Release and Tax Consequences

The release of first-priority liens on the Precision Flow Division assets (including the assets of Kestrel Precision Controls, Inc.) in connection with the Contribution does not give rise to a separate taxable event. A lien is a security interest — a contractual encumbrance on property — and the release of a lien is not a transfer, sale, exchange, or other disposition of property for federal income tax purposes. The release of liens is a matter between Veldran and its lenders under the Credit Agreement and does not involve the transfer of any property interest from one party to another in a manner that would create tax consequences.

Similarly, the release of Kestrel Precision Controls, Inc. and the other Precision Flow Division entities from their guarantor obligations under the Credit Agreement does not create federal income tax consequences. A guarantee is a contractual obligation; the release of a guarantor from a guarantee obligation does not constitute cancellation of indebtedness, because the guarantor's obligation is contingent and secondary to the Borrower's primary obligation. The release of the guarantee simply eliminates the contingent liability of the guarantor entity, without any income realization.

VII. Interaction with Tax Matters Provisions and Tax Sharing Agreement

The draft Tax Matters Provisions, prepared by Calderwood & Harkness for insertion into the Separation Agreement being drafted by Whitfield & Gage LLP, are dated July 28, 2022, and are currently in circulating draft form. The Tax Matters Provisions include post-spin restrictive covenants designed to preserve the qualification of the Spin-Off under § 355 for a period of two (2) years following the distribution date. These restrictive covenants include, among others, restrictions on the following actions by Meridian (and, in certain instances, by Veldran) during the two-year post-spin period:

(i) issuances of stock or equity-linked securities (whether in a public offering, private placement, or otherwise) in excess of specified thresholds;

(ii) mergers, consolidations, or other business combination transactions involving Meridian or Veldran;

(iii) sales, transfers, or dispositions of a substantial portion of Meridian's or Veldran's assets; and

(iv) cessation of the active conduct of the Precision Flow Solutions business (by Meridian) or the Engineered Coatings business (by Veldran).

If a refinancing at the Meridian level is required as a condition to obtaining lender consent for the Spin-Off (e.g., under Scenario 2 or Scenario 3, where Meridian issues new debt to fund a portion of the repayment of the existing Term Loan B), the terms of such Meridian-level refinancing should be reviewed to ensure they do not conflict with the post-spin restrictive covenants. In particular, if the Meridian-level credit facility requires Meridian to issue equity or equity-linked instruments to its lenders (whether as part of the financing terms or as a consent fee), such issuances could conflict with the stock issuance restrictions in the Tax Matters Provisions and could, depending on the magnitude, implicate § 355(e).

In addition, the draft Tax Sharing Agreement outline, dated August 4, 2022, addresses the allocation of pre-spin consolidated federal and state income tax liabilities between Veldran and Meridian. The Tax Sharing Agreement covers, among other matters, the treatment of Kestrel Precision Controls tax attributes (including net operating losses, tax credits, and other tax attributes of Kestrel that were generated prior to Veldran's June 7, 2019 acquisition and that are subject to § 382 limitations). The allocation of any refinancing-related costs — including prepayment penalties payable in connection with the repayment of the Term Loan B, commitment fees payable in connection with new credit facilities, and other issuance costs — between Veldran and Meridian should be addressed in the Tax Sharing Agreement to the extent such costs are deductible or amortizable for federal and state income tax purposes. The deductibility of such costs may depend on, among other factors, the timing of the refinancing relative to the Spin-Off and the entity at which the costs are incurred.

VIII. Summary of Open Items for Tax Opinion Purposes

Based on the analysis set forth herein, the following items remain open and must be resolved before the tax analysis of the Credit Agreement mechanics can be finalized for purposes of the "should" level tax opinion:

1. Refinancing Structure Not Yet Determined. The specific terms of any amendment, waiver, or refinancing of the $1.1 billion Term Loan B have not been negotiated with Ashfield National Bank, N.A. and the lender syndicate. Whether the transaction will proceed under Scenario 1 (amendment and waiver), Scenario 2 (full refinancing), Scenario 3 (partial repayment and amendment), or some alternative structure is unknown at this time. The tax analysis set forth in this memorandum should be updated once the capital structure of the post-spin entities is finalized and the terms of the lender consent or refinancing are determined.

2. Meridian Debt Allocation. It is not yet clear whether Meridian will assume any portion of the existing Veldran debt or will obtain independent financing at the Meridian level. If Meridian issues new debt and remits the proceeds thereof to Veldran (e.g., to fund a partial paydown of the Term Loan B), the boot analysis under § 355(a)(3)(B) and the liability assumption analysis under § 357 must be completed. The aggregate amount of liabilities to be assumed by Meridian must be confirmed and compared against the approximately $800,000,000 adjusted tax basis of the Precision Flow Division assets to determine whether § 357(c) gain is triggered.

3. Representations Required. The Representation Letter to be delivered by Veldran and Meridian in connection with Calderwood & Harkness's tax opinion (second draft circulated July 11, 2022, currently under review by Veldran management and Harrowgate) should include representations confirming the following:

(a) the final structure of any refinancing, amendment, or waiver of the Credit Agreement, including the identity of the obligors, the aggregate principal amounts, the material terms, and the sources and uses of any proceeds;

(b) that no equity-linked instruments (including convertible debt, warrants, options, or other instruments exercisable for or convertible into equity interests) will be issued to lenders or any other person in connection with the refinancing or in consideration for lender consent; and

(c) the fair market value of the liabilities allocated to and to be assumed by Meridian in connection with the Contribution, together with confirmation that such liabilities are assumed for bona fide business purposes and not with a principal purpose of tax avoidance.

4. Coordination with Whitfield & Gage and Thornapple McCord. The corporate covenant compliance analysis under the Credit Agreement is being handled by Whitfield & Gage LLP (contact: Priya Chandrasekar, 51 West 52nd Street, New York, New York 10019) and Thornapple McCord LLP (contact: David Ochoa, 227 West Trade Street, Suite 2000, Charlotte, North Carolina 28202). Calderwood & Harkness should coordinate closely with these firms to ensure that any negotiated amendments, waivers, or refinancing terms are reviewed for tax implications before finalization. In particular, Calderwood & Harkness should be afforded the opportunity to review the terms of any new credit facility (at either the Veldran or Meridian level) to confirm the absence of equity-linked features, the proper allocation of liabilities, and the consistency of the refinancing structure with the assumptions underlying the "should" level tax opinion.

5. Lender Consent Timeline. Given that Margaret Tsao of Ashfield National Bank has indicated that significant negotiation will be required, and potentially a full refinancing of the Term Loan B, the lender consent process may take several months to complete. This timing uncertainty may affect the overall transaction timeline and the feasibility of a Q4 2022 distribution date. If the distribution date is delayed beyond Q4 2022, certain time-dependent elements of the tax analysis — including the § 355(e) "plan" analysis (which measures the gap between the HPE Fund IV acquisition date and the distribution date) and the § 355(d) five-year look-back period — should be reassessed.

IX. Conclusion

Based on the analysis set forth in this memorandum, we reach the following conclusions:

Credit Agreement Implications. The Spin-Off would implicate multiple provisions of Veldran's First Lien Term Loan B Credit Agreement. Specifically, the Spin-Off would (i) constitute a "Disposition" and an "Investment" under the Credit Agreement definitions, (ii) violate the Restricted Payment covenant (because the fair market value of the Meridian stock to be distributed exceeds available basket capacity by a very wide margin), (iii) violate the Asset Sale covenant (because the Spin-Off does not generate cash consideration that could be applied to mandatory prepayment or reinvestment), and (iv) require the release of the Precision Flow Division entities — including Kestrel Precision Controls, Inc. — from their guarantor obligations and from the first-priority liens on their assets. The Change of Control provision is unlikely to be triggered, but this conclusion requires confirmation based on the specific defined terms and thresholds in the Credit Agreement.

Lender Consent or Refinancing Required. Lender consent or, potentially, a full refinancing of the $1.1 billion Term Loan B facility will be required in order for Veldran to consummate the Spin-Off. Margaret Tsao of Ashfield National Bank, N.A., acting in her capacity as Managing Director, Leveraged Finance, and as representative of the Administrative Agent for the lender syndicate, has indicated that the lender group would require significant negotiation and potentially a refinancing. The consent or refinancing process may take several months and could affect the Q4 2022 timeline.

Tax Opinion Perspective. From a tax-opinion perspective, the Credit Agreement mechanics do not present an independent obstacle to the qualification of the Spin-Off under § 355, provided that the following conditions are satisfied:

(a) Any refinancing of the Term Loan B is structured as a straightforward debt-for-debt exchange or repayment and reissuance, without the issuance of equity-linked instruments (convertible debt, warrants, options, or similar instruments) to the lender group or any other person;

(b) Any assumption of liabilities by Meridian in connection with the Contribution complies with § 357 — specifically, the assumed liabilities must be assumed for bona fide business purposes, must not exceed the adjusted tax basis of the Precision Flow Division assets (approx

MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT
To: Leonard Cross, Partner, Tax Department
From: Garrett Simmons, Senior Associate, Tax Department
Date: August 2, 2022
Re: Veldran Industries Holdings, Inc. — Analysis of First Lien Credit Agreement Provisions Implicated by Proposed Spin-Off of Meridian Flow Technologies, Inc.
Matter: HRW-SPIN-001 / Engagement No. 1003-00005
Client: Harrowgate Private Equity Fund IV, L.P.
I. Purpose and Scope of Memorandum
This memorandum is prepared by Calderwood & Harkness LLP (1301 Avenue of the Americas, 40th Floor, New York, NY 10019) in connection with the firm's engagement to render a "should" level tax opinion under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), regarding the proposed pro rata distribution by Veldran Industries Holdings, Inc. ("Veldran," the "Borrower," or "Distributing") of one hundred percent (100%) of the common stock of Meridian Flow Technologies, Inc. ("Meridian," "SpinCo," or "Controlled") to all holders of Veldran common stock. References herein to "sections" or "§" are references to sections of the Code, and references to "Treasury Regulations" or "Treas. Reg." are references to the Treasury Regulations promulgated thereunder, unless otherwise indicated.
The purpose of this memorandum is to analyze the provisions of Veldran's First Lien Term Loan B Credit Agreement, dated as of September 20, 2019, by and among Veldran Industries Holdings, Inc., as Borrower, the subsidiary guarantors party thereto, Ashfield National Bank, N.A., as Administrative Agent and Collateral Agent, and the lenders from time to time party thereto (as amended, restated, supplemented, or otherwise modified from time to time, the "Credit Agreement"), that are implicated by the proposed spin-off transaction (the "Spin-Off"). This analysis focuses in particular on whether:
(a) the Spin-Off triggers consent or waiver requirements under the Credit Agreement;
(b) any required refinancing, amendment, or repayment of the Credit Agreement in connection with the Spin-Off would constitute a taxable event for purposes of the "should" level tax opinion; and
(c) the debt-related mechanics of the Spin-Off could adversely affect the qualification of the transaction as a tax-free distribution under § 355, including but not limited to implications under § 355(a)(3)(B) (boot), § 357 (assumption of liabilities), § 355(d) (disqualified distributions), and § 355(e) (recognition of gain on certain distributions).
This analysis is limited to tax-opinion-related purposes. The analysis is not intended to serve as, and should not be relied upon as, a comprehensive covenant compliance analysis for corporate or commercial lending purposes. A separate, comprehensive covenant compliance analysis for corporate and lending purposes is being conducted by Whitfield & Gage LLP (corporate and M&A counsel to Harrowgate Private Equity Fund IV, L.P.) and Thornapple McCord LLP (corporate counsel to Veldran). Calderwood & Harkness expresses no opinion on matters of compliance or non-compliance under the Credit Agreement from a commercial law perspective, and nothing in this memorandum should be construed as providing such an opinion.
This memorandum has been reviewed by Leonard Cross, Responsible Partner, Tax Department, Calderwood & Harkness LLP.
II. Background — Transaction Overview
A. The Proposed Transaction
The proposed transaction consists of a pro rata distribution by Veldran of one hundred percent (100%) of the common stock of Meridian to all holders of Veldran common stock, on a one-for-one basis — that is, one (1) share of Meridian common stock for each share of Veldran common stock outstanding as of the record date for the distribution. As of the date of this memorandum, there are 74,500,000 shares of Veldran common stock issued and outstanding. Accordingly, 74,500,000 shares of Meridian common stock would be distributed in connection with the Spin-Off.
B. Pre-Spin Internal Restructuring
Immediately prior to the distribution, Veldran will contribute all assets and liabilities of its Precision Flow Solutions Division (the "Contributed Business") to Meridian in exchange for all outstanding shares of Meridian common stock and Meridian's assumption of certain allocated liabilities associated with the Contributed Business (the "Contribution"). Immediately following the Contribution, Veldran will effect the pro rata distribution of all Meridian common stock to the Veldran shareholders (the "Distribution"). The Contribution and the Distribution are collectively referred to herein as the "Spin-Off."
The Spin-Off is intended to qualify as a reorganization under § 368(a)(1)(D) and as a tax-free distribution under § 355. Calderwood & Harkness has been engaged to deliver a "should" level tax opinion that the Spin-Off will so qualify, subject to customary assumptions, qualifications, and representations.
C. Targeted Timeline
The originally targeted timeline for the Spin-Off contemplated both the record date and the distribution date occurring during the fourth quarter of 2022 (Q4 2022). As discussed in Section V below, certain factors — including the lender consent requirements analyzed herein — have introduced uncertainty regarding the feasibility of this timeline.
D. Distributing Corporation — Veldran Industries Holdings, Inc.
Veldran Industries Holdings, Inc. is a corporation organized under the laws of the State of Delaware, with its Employer Identification Number (EIN) 86-1920347. Veldran's principal executive offices are located at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217. The principal officers of Veldran relevant to this engagement are:
•  Chief Executive Officer: Jonathan Caldecott
•  Chief Financial Officer: Rita Subramanian
•  General Counsel: Philip Crundell
Veldran operates through two principal business divisions: (i) the Engineered Coatings Division, which will be retained by Veldran following the Spin-Off, and (ii) the Precision Flow Solutions Division, which will be contributed to Meridian in connection with the Spin-Off. Each division constitutes an active trade or business for purposes of § 355(b), as analyzed in the Active Trade or Business Memorandum dated May 15, 2022.
E. Controlled Corporation — Meridian Flow Technologies, Inc.
Meridian Flow Technologies, Inc. is a planned Delaware corporation that will be formed prior to the Contribution for the purpose of receiving the Precision Flow Solutions Division assets and liabilities. Meridian is expected to be headquartered at 7100 Northlake Parkway, Suite 300, Tucker, Georgia 30084. The planned principal officers of Meridian are:
•  Planned Chief Executive Officer: Sandra Waverly
•  Planned Chief Financial Officer: Derek Okonkwo
As of the date of this memorandum, Meridian has not yet been incorporated. Calderwood & Harkness understands that incorporation will occur at a date to be determined in coordination with the overall Spin-Off timeline, following resolution of the open items identified herein and in related workstreams.
F. Controlling Shareholder — Harrowgate Private Equity Fund IV, L.P.
Harrowgate Private Equity Fund IV, L.P. (EIN: 84-3291067), a Delaware limited partnership ("HPE Fund IV" or "Harrowgate"), is the controlling shareholder of Veldran. HPE Fund IV holds approximately 62.4% of the outstanding Veldran common stock, representing 46,488,000 shares, through its wholly owned subsidiary Harrowgate Veldran Holdings LLC (EIN: 86-1483920), a Delaware limited liability company. HPE Fund IV acquired this controlling stake on September 20, 2019, through a negotiated tender offer followed by a squeeze-out merger, displacing the prior controlling shareholder, Greystone Partners Fund III LP. The acquisition price was $40.00 per share, representing aggregate consideration of approximately $1,859,520,000.
The timing of HPE Fund IV's acquisition of its controlling interest in Veldran — specifically, that such acquisition occurred approximately three years prior to the anticipated Q4 2022 distribution date — is the subject of a separate § 355(e) plan analysis, cross-referenced in Section VI.C below.
G. Other Significant Shareholders
In addition to HPE Fund IV, the following shareholders hold significant positions in Veldran common stock:
III. Overview of Veldran's Debt Capital Structure
An understanding of Veldran's debt capital structure is essential to the analysis of the Credit Agreement provisions implicated by the Spin-Off and the tax implications thereof. Set forth below is a summary of Veldran's outstanding indebtedness as of the date of this memorandum.
A. First Lien Term Loan B Credit Agreement
The Credit Agreement, which is the primary subject of this memorandum, provides for a first lien term loan B facility in an aggregate principal amount of $1,100,000,000 ($1.1 billion). The material terms of the Credit Agreement are summarized as follows:
Facility: First Lien Term Loan B
Aggregate Principal Amount: $1,100,000,000 ($1.1 billion)
Administrative Agent and Collateral Agent: Ashfield National Bank, N.A. (100 Federal Street, Boston, Massachusetts 02110)
Key Contact at Administrative Agent: Margaret Tsao, Managing Director, Leveraged Finance
Borrower: Veldran Industries Holdings, Inc.
Lender Syndicate: A syndicate of institutional lenders, led by Ashfield National Bank, N.A., as lead arranger and bookrunner. The syndicate includes approximately forty-seven (47) institutional lenders holding various participation interests in the facility.
Collateral: First-priority lien on substantially all assets of Veldran and its domestic subsidiaries, including, without limitation, the assets of the Precision Flow Solutions Division and the assets of Kestrel Precision Controls, Inc.
Guarantors: All domestic subsidiaries of Veldran, including, as applicable, Kestrel Precision Controls, Inc. (EIN: 58-2847193), a Georgia corporation that Veldran acquired on June 7, 2019, from Rennick Industrial Partners Fund II LP, for aggregate consideration of approximately $295,000,000.
The Credit Agreement was entered into on September 20, 2019, in connection with HPE Fund IV's acquisition of its controlling stake in Veldran. The proceeds of the Term Loan B were used, in part, to finance the acquisition and to refinance Veldran's then-existing credit facilities.
B. 6.250% Senior Unsecured Notes due 2027
For completeness, Veldran also has outstanding $450,000,000 in aggregate principal amount of 6.250% Senior Unsecured Notes due 2027 (the "Senior Notes"), issued pursuant to an indenture (the "Indenture") between Veldran and Colton Trust Company (10 South LaSalle Street, Chicago, Illinois 60603), as trustee. The Senior Notes bear interest at a fixed rate of 6.250% per annum, payable semi-annually, and mature in 2027.
A separate analysis of the provisions of the Indenture implicated by the Spin-Off has been prepared by Leila Nazari, Associate, Tax Department, Calderwood & Harkness LLP, in a companion memorandum entitled "Indenture Spin-Off Covenant Analysis," dated August 3, 2022. The Senior Notes and the Indenture are not further addressed in this memorandum except to the extent relevant to the aggregate debt and leverage analysis set forth below.
C. Aggregate Debt Summary and Pro Forma Leverage Analysis
Veldran's total funded indebtedness, as of the date of this memorandum, is approximately $1,550,000,000, consisting of:
For purposes of the analysis herein, the following financial data is derived from Veldran's audited consolidated financial statements for the fiscal year ended December 31, 2021 ("FY2021"):
•  Veldran Consolidated FY2021 EBITDA: $418,000,000
•  Net Debt / EBITDA (Consolidated): Approximately 3.7× ($1,550M / $418M)
On a divisional basis, the financial characteristics of the two divisions are as follows:
Following the Spin-Off, if Veldran were to retain the entirety of the existing $1,550,000,000 in funded debt, the pro forma leverage profile would be as follows: based on the remaining Engineered Coatings Division EBITDA of $285,000,000, pro forma total Net Debt / EBITDA would increase to approximately 5.4× ($1,550M / $285M). This significant increase in leverage is a material factor in the lender consent and potential refinancing analysis discussed in Section V below, and informs the economic dynamics of the negotiations with Ashfield National Bank and the lender syndicate.
IV. Credit Agreement Provisions Implicated by the Spin-Off
This Section IV identifies and analyzes the specific provisions of the Credit Agreement that are implicated by the proposed Spin-Off. For each provision, we summarize the relevant covenant language, apply it to the facts of the Spin-Off, and state our conclusion as to whether the Spin-Off would trigger or violate the provision. This analysis is conducted for purposes of identifying potential tax-opinion-related issues; the definitive covenant compliance analysis is being conducted separately by Whitfield & Gage LLP and Thornapple McCord LLP.
A. Definition of "Disposition" / "Asset Sale"
Covenant Summary. The Credit Agreement defines "Disposition" (in certain provisions alternatively referred to as an "Asset Sale") broadly to include any sale, transfer, conveyance, assignment, or other disposition of any property or assets by the Borrower or any Restricted Subsidiary, whether consummated in a single transaction or in a series of related transactions. The definition is drafted expansively, consistent with customary leveraged finance documentation, and contains only limited carve-outs (e.g., dispositions of obsolete equipment in the ordinary course, certain permitted intercompany transfers among Restricted Subsidiaries, and dispositions below a de minimis dollar threshold).
Application to the Spin-Off. The Spin-Off would involve two dispositions within the meaning of this definition. First, the Contribution — in which Veldran transfers the assets and liabilities of the Precision Flow Solutions Division to Meridian — would constitute a transfer and conveyance of a substantial portion of Veldran's assets. Based on FY2021 figures, the Precision Flow Solutions Division represents approximately 35% of Veldran's consolidated revenue ($820M of $2,340M) and approximately 32% of consolidated EBITDA ($133M of $418M). Second, the Distribution — in which Veldran distributes 100% of the Meridian common stock to Veldran shareholders on a pro rata basis — would constitute a disposition of the equity interests in Meridian. Because the Contribution and the Distribution are steps in a single integrated transaction, they would be treated as a series of related transactions for purposes of this definition.
The Contribution and Distribution, taken together, do not fall within any of the enumerated exceptions to the Disposition definition. The Spin-Off is not a disposition in the ordinary course of business; it is not an intercompany transfer among Restricted Subsidiaries that preserves the guarantor and collateral structure; and the value of the assets involved far exceeds any de minimis carve-out.
Conclusion. The Spin-Off would constitute a "Disposition" under the Credit Agreement definition. The Contribution step represents a transfer of assets constituting approximately one-third of the Borrower's consolidated business, and the Distribution step represents a disposition of all Meridian equity interests. This characterization triggers the applicable asset-sale and disposition covenant restrictions discussed in Section IV.D below.
B. Definition of "Investment"
Covenant Summary. The Credit Agreement defines "Investment" to include any direct or indirect advance, loan, or other extension of credit to, or capital contribution to, or purchase or other acquisition of equity interests, debt securities, or other securities of, any Person. The definition is designed to capture the deployment of Borrower or Restricted Subsidiary value into non-guarantor or non-Restricted-Subsidiary entities, and is customary in leveraged credit agreements.
Application to the Spin-Off. The Contribution step of the Spin-Off — in which Veldran transfers the assets and liabilities of the Precision Flow Solutions Division to Meridian in exchange for all outstanding Meridian common stock — could be characterized as a "capital contribution to" Meridian or as a "purchase of equity interests in" Meridian. In either characterization, Veldran would be deploying a substantial portion of its assets (the Precision Flow Division) into a newly formed entity (Meridian) that is not currently a Restricted Subsidiary under the Credit Agreement and that will, following the Distribution, no longer be a subsidiary of Veldran at all.
Although the Contribution is structured as an exchange (assets for stock), the substance of the transaction is that Veldran is capitalizing Meridian with divisional assets. This falls squarely within the "capital contribution" prong of the Investment definition, as Meridian will receive property from Veldran without any cash or other consideration flowing back to Veldran from Meridian (other than the Meridian stock itself, which is immediately distributed to shareholders).
Conclusion. The Contribution step of the Spin-Off would constitute an "Investment" under the Credit Agreement definition. This characterization implicates the Investment covenant restrictions, which generally limit the aggregate amount and types of Investments that the Borrower and Restricted Subsidiaries may make.
C. Restricted Payment Covenant
Covenant Summary. The Credit Agreement contains a negative covenant restricting the ability of the Borrower and its Restricted Subsidiaries to make "Restricted Payments." As defined in the Credit Agreement, "Restricted Payments" include, among other things, dividends and distributions on, or redemptions or repurchases of, equity interests of the Borrower. The Restricted Payment covenant generally prohibits the Borrower from declaring or paying any Restricted Payment, except to the extent permitted by one or more enumerated baskets. These baskets typically include:
(i) a "builder basket" based on a percentage of retained Excess Cash Flow (as defined) accumulated since the closing date;
(ii) a "general basket" permitting Restricted Payments up to a specified dollar amount (typically in the range of $25,000,000 to $75,000,000 for a facility of this size);
(iii) a basket for dividends and distributions customarily paid on preferred stock;
(iv) a basket for repurchases of equity interests held by officers, directors, and employees, subject to an annual cap; and
(v) in some cases, a basket permitting Restricted Payments so long as a specified pro forma leverage ratio is satisfied.
Application to the Spin-Off. The pro rata distribution of Meridian common stock to Veldran shareholders constitutes a dividend in kind — that is, a distribution on Veldran common stock. Even though the Distribution is a non-cash transaction (stock, rather than cash, is distributed), the distribution of property on account of equity interests falls within the definition of a "Restricted Payment" under the Credit Agreement.
The fair market value of the Meridian common stock to be distributed has been estimated by Brackenridge & Co. (383 Madison Avenue, New York, New York 10179; contact: Samuel Ng, Managing Director, Industrials Group), Veldran's financial advisor, at between $1,396,500,000 and $1,702,400,000. This valuation range is based on a range of enterprise value-to-EBITDA multiples of 10.5× to 12.8× applied to the Precision Flow Solutions Division's FY2021 EBITDA of $133,000,000, adjusted for allocated net debt and other customary adjustments.
The distribution value within this range would substantially exceed the aggregate capacity of any available Restricted Payment basket under the Credit Agreement. By way of illustration, even if the builder basket and general basket were fully available (which would depend on cumulative Excess Cash Flow calculations and other conditions), the combined available capacity would be unlikely to exceed $200,000,000 to $300,000,000 — an amount that represents, at most, approximately 15% to 22% of the low end of the estimated Meridian fair market value. Accordingly, the Distribution cannot be effected within the existing Restricted Payment baskets.
Conclusion. The Distribution would constitute a "Restricted Payment" under the Credit Agreement that exceeds any available basket capacity by a very wide margin. Consequently, the Distribution would require either (a) utilization of Restricted Payment basket capacity, which is almost certainly insufficient given the magnitude of the distribution, or (b) an amendment to the Credit Agreement permitting the Distribution or a waiver from the requisite lenders of the Restricted Payment covenant as applied to the Distribution.
D. Asset Disposition / Asset Sale Covenant
Covenant Summary. Separate and apart from the Restricted Payment covenant, the Credit Agreement contains an Asset Sale covenant that restricts dispositions of assets by the Borrower and its Restricted Subsidiaries outside the ordinary course of business. The Asset Sale covenant is designed to ensure that the proceeds of any asset disposition are applied to reduce outstanding indebtedness or are reinvested in productive assets of the business. The Asset Sale covenant typically requires:
(i) that the disposition be made for fair market value consideration (as determined in good faith by the Board of Directors or an authorized officer of the Borrower);
(ii) that a minimum percentage (commonly 75%) of the aggregate consideration received consist of cash or Cash Equivalents (as defined); and
(iii) that the net cash proceeds of any such disposition be applied, within a specified reinvestment period (commonly 365 to 450 days), to either (x) prepayment of term loans under the Credit Agreement (typically through mandatory prepayment mechanics) or (y) reinvestment in assets useful in the Borrower's business.
Application to the Spin-Off. The Spin-Off, as currently structured, involves a pro rata distribution of Meridian common stock to Veldran shareholders for no cash consideration flowing back to Veldran. This structure is fundamentally incompatible with the requirements of the Asset Sale covenant:
Fair Market Value Consideration. The Distribution does not involve the receipt by Veldran of any consideration from any person. The Meridian stock is distributed to Veldran shareholders; Veldran receives nothing in return.
Cash Consideration Requirement. No cash or Cash Equivalents are received by Veldran in connection with the Distribution. The 75% (or other specified percentage) cash consideration requirement cannot be satisfied.
Mandatory Prepayment / Reinvestment. Because Veldran receives no net cash proceeds from the Distribution, there are no proceeds available to apply to prepayment of the Term Loan B or to reinvest in the business. The mandatory prepayment and reinvestment mechanics are inapplicable by their terms.
In addition to the Distribution step, the Contribution step — which involves the transfer of the Precision Flow Division assets to Meridian — may also constitute a separate Asset Sale. Although Veldran receives Meridian common stock in exchange for the Contributed Business, that stock is immediately distributed to shareholders rather than retained as an asset of the Borrower. Accordingly, the receipt of Meridian stock in the Contribution step would not satisfy the cash consideration requirement.
Conclusion. The Spin-Off would trigger the Asset Sale covenant, and Veldran could not comply with the typical mandatory prepayment, reinvestment, and cash consideration mechanics that the covenant prescribes. A waiver or amendment of the Asset Sale covenant, as applied to the Spin-Off, will be required.
E. Change of Control Provision
Covenant Summary. The Credit Agreement contains a Change of Control provision that constitutes an event of default upon the occurrence of certain specified triggering events. Change of Control provisions in leveraged credit agreements typically include multiple prongs, the most common of which are:
(i) a change in the identity or ownership percentage of the controlling shareholder or group (e.g., any person or group acquiring more than a specified percentage of voting stock);
(ii) the existing controlling shareholder ceasing to own a specified minimum percentage of voting stock;
(iii) a change in the composition of the Board of Directors such that a majority of the board does not consist of "continuing directors"; and
(iv) the sale, transfer, or other disposition of all or substantially all of the assets of the Borrower and its subsidiaries, taken as a whole.
Application to the Spin-Off. Two prongs of the Change of Control provision warrant analysis in the context of the Spin-Off.
Equity Control Prong. HPE Fund IV, through Harrowgate Veldran Holdings LLC, currently holds approximately 62.4% of the outstanding Veldran common stock. In a pro rata distribution, each Veldran shareholder (including Harrowgate Veldran Holdings LLC) receives a proportionate distribution of Meridian stock. Accordingly, Harrowgate Veldran Holdings LLC would continue to hold exactly the same percentage of Veldran common stock (62.4%) following the Spin-Off. No change in equity control of Veldran would occur, and the equity control prong of the Change of Control provision would not be triggered.
"Substantially All Assets" Prong. The contribution and distribution of the Precision Flow Solutions Division raises a more nuanced question under the "substantially all assets" prong. The Precision Flow Division represents approximately 35% of Veldran's consolidated revenue and approximately 32% of consolidated EBITDA. Whether the disposition of assets of this magnitude constitutes a transfer of "all or substantially all" of the Borrower's assets depends on the specific defined terms and thresholds in the Credit Agreement, as well as applicable case law and interpretive guidance. As a general matter, courts and practitioners have typically construed "substantially all" to require a disposition of assets representing 50% or more (and in some cases, as much as 70% to 80%) of consolidated asset value, revenue, or earnings. The 32% to 35% metrics here are likely below the threshold required to trigger this prong, but the analysis is inherently fact-specific and depends on the specific language of the Credit Agreement.
Conclusion. The Change of Control provision is unlikely to be triggered by the Spin-Off itself. HPE Fund IV's controlling ownership of Veldran common stock would not change, and the Precision Flow Division assets, while substantial, likely fall below the threshold for "all or substantially all" of Veldran's assets. However, the analysis depends on the specific defined terms and thresholds in the Credit Agreement, and further review of the precise language is warranted in coordination with Whitfield & Gage LLP and Thornapple McCord LLP.
F. Covenant Regarding Subsidiaries / Restricted Subsidiaries
Covenant Summary. The Credit Agreement distinguishes between "Restricted Subsidiaries," which are subject to the affirmative and negative covenants of the Credit Agreement and are required to provide guarantees and grant collateral liens, and "Unrestricted Subsidiaries," which are excluded from the covenant framework and are not required to guarantee the obligations or pledge assets. The designation of a subsidiary as an Unrestricted Subsidiary is typically subject to specific conditions and limitations (e.g., the designation of an Unrestricted Subsidiary may be treated as an Investment or Restricted Payment in an amount equal to the fair market value of the subsidiary's assets).
Veldran's domestic subsidiaries are currently designated as Restricted Subsidiaries and serve as guarantors under the Credit Agreement. These entities have also granted first-priority liens on substantially all of their assets as collateral for the Term Loan B.
Application to the Spin-Off. Among the Restricted Subsidiaries and guarantors under the Credit Agreement are the entities that comprise the Precision Flow Solutions Division, including, most notably, Kestrel Precision Controls, Inc. (EIN: 58-2847193), a Georgia corporation that Veldran acquired on June 7, 2019, from Rennick Industrial Partners Fund II LP for approximately $295,000,000. Kestrel Precision Controls is a material operating subsidiary within the Precision Flow Division and represents a significant component of the collateral and guarantor package.
The Contribution would result in the Precision Flow Division entities — including Kestrel Precision Controls and the other operating subsidiaries of the Precision Flow Division — becoming subsidiaries of Meridian, rather than direct or indirect subsidiaries of Veldran. The subsequent Distribution would result in Meridian (and, through it, the Precision Flow Division entities) ceasing to be subsidiaries of Veldran entirely. As a consequence, these entities would no longer be eligible to serve as Restricted Subsidiaries, guarantors, or collateral grantors under the Credit Agreement.
The release of Restricted Subsidiaries from the guarantor and collateral package — particularly guarantor entities that contribute materially to the credit support for the facility — is not a matter that can be effected unilaterally by the Borrower. Leveraged credit agreements uniformly require affirmative lender consent for the release of guarantors and the release of collateral liens, and certain releases (particularly those involving release of all or substantially all of the collateral) may require unanimous or super-majority lender consent rather than mere majority lender approval.
Conclusion. The Spin-Off would require the release of Precision Flow Division entities, including Kestrel Precision Controls, Inc., from their obligations as guarantors under the Credit Agreement and the release of first-priority liens on their respective assets. This release constitutes a material diminution of the credit support and collateral package available to the lender syndicate, and would require affirmative lender consent under the Credit Agreement. The applicable consent threshold — whether majority lenders, super-majority lenders, or all lenders — should be confirmed through review by Whitfield & Gage LLP and Thornapple McCord LLP.
V. Lender Consent Requirements and Ashfield National Bank Position
A. Summary of Required Consents
Based on the analysis set forth in Section IV above, the Spin-Off would require, at a minimum, the following consents, waivers, or amendments under the Credit Agreement:
(a) A waiver of the Restricted Payment covenant to permit the Distribution of Meridian common stock to Veldran shareholders, the fair market value of which ($1,396,500,000 to $1,702,400,000) far exceeds any available basket capacity;
(b) A waiver of the Asset Sale covenant, which the Spin-Off would trigger and with which Veldran could not comply due to the absence of cash consideration and the inapplicability of the mandatory prepayment and reinvestment mechanics;
(c) Consent to the release of the Precision Flow Division entities (including Kestrel Precision Controls, Inc.) from their guarantor obligations under the Credit Agreement;
(d) Consent to the release of first-priority liens on the assets of the Precision Flow Division entities; and
(e) Potentially, an amendment to the definition of "Restricted Subsidiaries" to remove the Precision Flow Division entities and to reflect the post-spin organizational structure of Veldran and its remaining subsidiaries.
B. Ashfield National Bank Position
Calderwood & Harkness understands from communications relayed by Philip Crundell (Veldran General Counsel) and Priya Chandrasekar (Whitfield & Gage LLP, 51 West 52nd Street, New York, New York 10019) that preliminary discussions have been held with Margaret Tsao, Managing Director, Leveraged Finance, at Ashfield National Bank, N.A., regarding the Spin-Off and the associated Credit Agreement implications. Ms. Tsao has indicated, in substance, that the lender group would require significant negotiation and potentially a full refinancing of the Term Loan B in connection with any spin-off transaction.
This position is not unexpected. From the lenders' perspective, the Spin-Off would result in the removal of approximately one-third of the consolidated revenue and EBITDA from the credit support available to the facility, the release of guarantors and collateral representing a material portion of the collateral package, and a significant increase in pro forma leverage (from approximately 3.7× to approximately 5.4×, assuming Veldran retains all existing debt). The lender group's concerns are economically rational and consistent with customary lender positions in comparable spin-off situations.
C. Potential Refinancing Scenarios
Three principal scenarios for resolving the Credit Agreement constraints have been identified by the working group:
Scenario 1 — Amendment and Waiver. Under this scenario, Veldran would seek to obtain requisite lender consent — typically a majority of lenders by outstanding principal amount, but release of collateral and guarantors may require unanimous consent or super-majority consent depending on the specific provisions of the Credit Agreement — to permit the Spin-Off while leaving the existing $1.1 billion Term Loan B in place at Veldran post-spin. The lenders would waive the Restricted Payment covenant and the Asset Sale covenant as applied to the Spin-Off, and would consent to the release of the Precision Flow Division guarantors and collateral. Under this scenario, the full $1.1 billion of debt would remain at Veldran, supported solely by the Engineered Coatings Division (with pro forma EBITDA of approximately $285,000,000 and pro forma leverage of approximately 3.9× on the $1.1 billion Term Loan B alone, or approximately 5.4× on total funded debt of $1.55 billion). The lenders would likely require amendments to the financial covenants (if any) and potentially a repricing of the facility to reflect the increased credit risk.
Scenario 2 — Full Refinancing. Under this scenario, Veldran would refinance the $1.1 billion Term Loan B with a new credit facility sized to the post-spin Veldran (Engineered Coatings Division) credit profile. The new facility would be smaller in aggregate principal amount, reflecting the reduced asset base and earnings of the post-spin Veldran. Concurrently, Meridian might obtain its own separate credit facility to fund a portion of the refinancing (i.e., Meridian would borrow and remit a portion of the proceeds to Veldran, which Veldran would apply to repay a corresponding portion of the existing Term Loan B). The net effect would be a split of the existing debt between the two post-spin entities, with each entity bearing a level of debt appropriate to its standalone credit profile.
Scenario 3 — Partial Repayment and Amendment. Under this scenario, a partial paydown of the Term Loan B would be effected — either from Veldran's available cash, from proceeds of new Meridian-level financing, or from a combination thereof — with the remaining balance being amended to reflect the post-spin capital structure. This hybrid approach might be necessary if the lender group is unwilling to maintain the full $1.1 billion of debt exposure to the post-spin Veldran but is also unwilling to agree to a complete refinancing.
D. Harrowgate Position on Spin-Off Timing
The uncertainty regarding lender consent was identified by Harrowgate as one of four principal factors contributing to its evaluation of the timing and feasibility of the Spin-Off. This was communicated by Christine Yeung (Senior Vice President, Harrowgate) in correspondence dated August 22, 2022, to the transaction working group. The other three factors identified by Ms. Yeung are addressed in separate workstream memoranda and are not further discussed herein.
VI. Tax Implications of Credit Agreement Mechanics
This Section VI analyzes the tax implications of the Credit Agreement mechanics described above, with particular focus on the impact, if any, on the qualification of the Spin-Off under § 355 and the potential for taxable events arising from any required refinancing.
A. Impact of Potential Refinancing on § 355 Qualification
General Rule. A refinancing of existing debt in connection with a spin-off does not, by itself, disqualify the transaction under § 355 or otherwise impair the tax-free treatment of the distribution. The § 355 qualification analysis focuses on the requirements specified in the statute and the associated Treasury Regulations, including the distribution of Controlled stock, the active-trade-or-business requirement of § 355(b), the business purpose requirement, the device test, the continuity-of-interest and continuity-of-business-enterprise requirements, and the anti-abuse provisions of §§ 355(d), 355(e), and 355(g). None of these requirements, by their terms, address or are implicated by the refinancing of the Distributing corporation's existing third-party debt.
Boot Analysis Under § 355(a)(3). Section 355(a)(3)(A) provides that if, in connection with a distribution described in § 355(a)(1), the Distributing corporation distributes property other than qualified stock of the Controlled corporation ("boot"), then the transaction is not disqualified, but the recipient shareholders recognize gain to the extent of the boot received. Under § 355(a)(3)(B), if the Distributing corporation receives property other than stock of the Controlled corporation in the exchange (i.e., in the § 368(a)(1)(D) reorganization step), such property constitutes boot at the corporate level.
The current transaction structure contemplates a "clean" spin — that is, Veldran contributes the Precision Flow Division assets and liabilities to Meridian in exchange solely for Meridian common stock, and then distributes that stock pro rata to Veldran shareholders. No debt is to be "pushed down" to Meridian beyond the liabilities specifically allocated to the Precision Flow Division as part of the Contributed Business.
However, if the refinancing negotiations (particularly under Scenario 2 or Scenario 3) result in a structure in which Meridian issues new debt and remits the proceeds thereof to Veldran — for example, in order to fund a partial paydown of the existing Term Loan B — such proceeds could constitute "boot" under § 355(a)(3)(B). This would occur because Meridian (Controlled) would be transferring property (cash proceeds of new debt) to Veldran (Distributing) in connection with the Contribution, in addition to the Meridian stock. The receipt of such cash by Veldran could result in gain recognition at the corporate level.
Assumption of Liabilities Under § 357. Under § 357(a), the assumption of liabilities by Meridian in connection with the Contribution step generally would not be treated as "boot" or as money received by Veldran, provided that the liabilities are assumed for bona fide business purposes (i.e., the liabilities are genuine liabilities associated with the Contributed Business) and that the transaction does not have tax avoidance as a principal purpose. Under § 357(b), if the assumption of liabilities by Meridian was made with a principal purpose of tax avoidance or was not for a bona fide business purpose, the full amount of the assumed liabilities would be treated as boot. Under § 357(c), if the aggregate liabilities assumed by Meridian exceed the aggregate adjusted basis of the property transferred to Meridian in the Contribution, the excess is treated as gain from the sale or exchange of a capital asset (or, in certain cases, ordinary income).
Veldran's estimated adjusted tax basis in the Precision Flow Division assets is approximately $800,000,000. The liabilities to be allocated to Meridian in the Contribution must be analyzed to ensure that they do not exceed this amount. If the allocated liabilities remain below the $800,000,000 adjusted basis threshold, § 357(c) should not be triggered. The specific liabilities to be assumed by Meridian are the subject of ongoing negotiations among the parties and their respective advisors and have not been finalized as of the date of this memorandum.
Conclusion. A straightforward refinancing at the Veldran level — whether an amendment and waiver (Scenario 1), a full refinancing (Scenario 2), or a partial repayment and amendment (Scenario 3) — should not, in and of itself, affect the qualification of the Spin-Off under § 355. However, if any refinancing structure requires Meridian to issue new debt and remit cash proceeds to Veldran, boot issues under § 355(a)(3)(B) would arise and must be carefully analyzed. Additionally, the aggregate liabilities assumed by Meridian in the Contribution must be monitored to ensure compliance with § 357(c). These requirements underscore the importance of careful structuring of the allocation of liabilities between Veldran and Meridian in the Separation Agreement and the Tax Sharing Agreement.
B. Taxable Event Analysis — Refinancing of Term Loan B
Debt-for-Debt Exchange Rules. If Veldran refinances the existing $1.1 billion Term Loan B with a new credit facility (Scenario 2 or a component of Scenario 3), the refinancing would generally be treated, for federal income tax purposes, as a retirement of the existing debt instrument and the issuance of a new debt instrument. Under § 1001, if the terms of the new facility differ materially from the terms of the existing Term Loan B — including but not limited to differences in aggregate principal amount, maturity date, interest rate, amortization schedule, or other material terms — the exchange of the old debt for the new debt could be treated as a realization event, giving rise to gain or loss.
Under the Treasury Regulations, a "significant modification" of a debt instrument (within the meaning of Treas. Reg. § 1.1001-3) is treated as an exchange of the old instrument for a new instrument. Changes in the yield, maturity, timing of payments, obligor, or nature of the instrument (among others) may individually or in the aggregate constitute a significant modification. If a significant modification occurs, the Borrower recognizes gain or loss equal to the difference between the adjusted issue price of the old instrument and the amount paid for the new instrument (or, in the case of an exchange, the issue price of the new instrument).
In the context of a leveraged credit agreement, a refinancing that involves the repayment of the existing facility at par and the incurrence of a new facility at par would generally not give rise to gain or loss, because the amount realized on the retirement of the old debt (par) would equal the adjusted issue price of the old debt (par, assuming no original issue discount). However, if the new facility is issued at a discount to par, or if the existing facility is trading at a discount to par and is repaid at a discount, different consequences may result.
Cancellation of Indebtedness Income. If the existing Term Loan B is repaid at a discount to its outstanding principal amount — that is, if the lenders agree to accept less than $1.1 billion in satisfaction of the existing debt — Veldran could recognize cancellation-of-indebtedness ("COD") income under § 61(a)(12) in the amount of the discharged indebtedness. However, based on our understanding of the current facts, repayment of the Term Loan B is expected to be at par value. The Term Loan B is not currently trading at a material discount, and the lenders have not indicated a willingness to accept a below-par repayment. Accordingly, COD income is not expected to be a concern in the present context.
Original Issue discount. If a new credit facility is issued at a discount to its stated principal amount (i.e., with original issue discount, or "OID"), the OID provisions of §§ 1272 through 1275 would apply. OID would be amortized over the term of the new facility and included in the income of the lenders (and deducted by the Borrower) under the constant-yield-to-maturity method. While OID analysis is a routine aspect of any new debt issuance, it is not specific to the Spin-Off and does not bear on the § 355 qualification analysis.
Conclusion. A refinancing of the Term Loan B in connection with the Spin-Off would not constitute a taxable event that affects the § 355 analysis, absent unusual circumstances (such as the issuance of equity-linked instruments, discussed in Section VI.C below, or the receipt of boot by Veldran from Meridian, discussed in Section VI.A above). Any refinancing-related tax consequences — including potential COD income, OID, or gain or loss on the exchange of debt instruments — would be separate from, and would not impair, the tax-free treatment of the Spin-Off under § 355.
C. Impact on § 355(e) Analysis
Refinancing and "Plan" Analysis. Section 355(e) provides that if a distribution described in § 355(a) is part of a "plan" (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, a 50-percent-or-greater interest (by vote or value) in the Distributing corporation or the Controlled corporation, the Distributing corporation recognizes gain on the distribution as if the Controlled stock were sold at fair market value. The "plan" analysis, as elaborated in Treas. Reg. § 1.355-7, examines the facts and circumstances surrounding the distribution to determine whether the distribution and any acquisition are part of a plan.
A refinancing of existing debt — whether at Veldran or at Meridian — is not, by itself, an "acquisition" of stock or a 50-percent-or-greater interest. Debt holders do not acquire equity interests in the Borrower by reason of making loans or refinancing existing loans. Accordingly, a refinancing of the Term Loan B should not implicate § 355(e).
Caveat Regarding Equity-Linked Instruments. If a refinancing were to involve the issuance of equity-linked instruments to the lender group — such as convertible debt, warrants, options, or other instruments that are exercisable for or convertible into equity interests in Veldran or Meridian — such instruments could potentially be treated as an acquisition of stock for § 355(e) purposes, depending on the terms and likelihood of conversion or exercise. As of the date of this memorandum, no such equity-linked instruments are contemplated in connection with any refinancing scenario. If this changes during the course of negotiations with Ashfield National Bank and the lender syndicate, the § 355(e) analysis must be revisited.
Cross-Reference to Full § 355(e) Plan Analysis. The comprehensive § 355(e) plan analysis is set forth in a separate memorandum dated June 28, 2022. That memorandum addresses, among other matters, the September 20, 2019 acquisition by HPE Fund IV of its 62.4% stake in Veldran (aggregate consideration of $1,859,520,000) and the approximately three-year gap between that acquisition and the anticipated Q4 2022 distribution date. The June 28, 2022 memorandum concludes that the HPE Fund IV acquisition falls outside the four-year safe harbor of Treas. Reg. § 1.355-7(b)(2) and must be analyzed under the general facts-and-circumstances test. The estimated corporate-level tax at risk if § 355(e) applies is between $125,300,000 and $189,500,000, computed as follows:
•  Estimated Meridian fair market value: $1,396,500,000 to $1,702,400,000
•  Minus Veldran's estimated adjusted tax basis in Precision Flow Division assets: approximately $800,000,000
•  Estimated built-in gain: $596,500,000 to $902,400,000
•  Applicable corporate tax rate: 21%
•  Estimated corporate-level tax at risk: $125,265,000 to $189,504,000 (rounded to $125,300,000 to $189,500,000)
The refinancing of the Term Loan B does not alter this analysis.
D. Impact on § 355(d) Analysis
Section 355(d) provides that if, immediately after a distribution described in § 355(a), any person holds "disqualified stock" in the Distributing corporation or the Controlled corporation, the distribution is treated as a taxable exchange. "Disqualified stock" is generally stock that was acquired by "purchase" (within the meaning of § 355(d)(5)) during the five-year period ending on the date of distribution.
The § 355(d) disqualified distribution analysis is the subject of a separate memorandum. That memorandum addresses whether HPE Fund IV's September 20, 2019 purchase of 62.4% of Veldran stock — which occurred within the five-year look-back period relative to a Q4 2022 distribution date — causes the Spin-Off to be a disqualified distribution.
A refinancing of the Term Loan B does not affect the § 355(d) analysis. The § 355(d) analysis focuses on acquisitions of stock by purchase; the refinancing of debt does not involve the acquisition of stock by any person.
E. Collateral Release and Tax Consequences
The release of first-priority liens on the Precision Flow Division assets (including the assets of Kestrel Precision Controls, Inc.) in connection with the Contribution does not give rise to a separate taxable event. A lien is a security interest — a contractual encumbrance on property — and the release of a lien is not a transfer, sale, exchange, or other disposition of property for federal income tax purposes. The release of liens is a matter between Veldran and its lenders under the Credit Agreement and does not involve the transfer of any property interest from one party to another in a manner that would create tax consequences.
Similarly, the release of Kestrel Precision Controls, Inc. and the other Precision Flow Division entities from their guarantor obligations under the Credit Agreement does not create federal income tax consequences. A guarantee is a contractual obligation; the release of a guarantor from a guarantee obligation does not constitute cancellation of indebtedness, because the guarantor's obligation is contingent and secondary to the Borrower's primary obligation. The release of the guarantee simply eliminates the contingent liability of the guarantor entity, without any income realization.
VII. Interaction with Tax Matters Provisions and Tax Sharing Agreement
The draft Tax Matters Provisions, prepared by Calderwood & Harkness for insertion into the Separation Agreement being drafted by Whitfield & Gage LLP, are dated July 28, 2022, and are currently in circulating draft form. The Tax Matters Provisions include post-spin restrictive covenants designed to preserve the qualification of the Spin-Off under § 355 for a period of two (2) years following the distribution date. These restrictive covenants include, among others, restrictions on the following actions by Meridian (and, in certain instances, by Veldran) during the two-year post-spin period:
(i) issuances of stock or equity-linked securities (whether in a public offering, private placement, or otherwise) in excess of specified thresholds;
(ii) mergers, consolidations, or other business combination transactions involving Meridian or Veldran;
(iii) sales, transfers, or dispositions of a substantial portion of Meridian's or Veldran's assets; and
(iv) cessation of the active conduct of the Precision Flow Solutions business (by Meridian) or the Engineered Coatings business (by Veldran).
If a refinancing at the Meridian level is required as a condition to obtaining lender consent for the Spin-Off (e.g., under Scenario 2 or Scenario 3, where Meridian issues new debt to fund a portion of the repayment of the existing Term Loan B), the terms of such Meridian-level refinancing should be reviewed to ensure they do not conflict with the post-spin restrictive covenants. In particular, if the Meridian-level credit facility requires Meridian to issue equity or equity-linked instruments to its lenders (whether as part of the financing terms or as a consent fee), such issuances could conflict with the stock issuance restrictions in the Tax Matters Provisions and could, depending on the magnitude, implicate § 355(e).
In addition, the draft Tax Sharing Agreement outline, dated August 4, 2022, addresses the allocation of pre-spin consolidated federal and state income tax liabilities between Veldran and Meridian. The Tax Sharing Agreement covers, among other matters, the treatment of Kestrel Precision Controls tax attributes (including net operating losses, tax credits, and other tax attributes of Kestrel that were generated prior to Veldran's June 7, 2019 acquisition and that are subject to § 382 limitations). The allocation of any refinancing-related costs — including prepayment penalties payable in connection with the repayment of the Term Loan B, commitment fees payable in connection with new credit facilities, and other issuance costs — between Veldran and Meridian should be addressed in the Tax Sharing Agreement to the extent such costs are deductible or amortizable for federal and state income tax purposes. The deductibility of such costs may depend on, among other factors, the timing of the refinancing relative to the Spin-Off and the entity at which the costs are incurred.
VIII. Summary of Open Items for Tax Opinion Purposes
Based on the analysis set forth herein, the following items remain open and must be resolved before the tax analysis of the Credit Agreement mechanics can be finalized for purposes of the "should" level tax opinion:
1.  Refinancing Structure Not Yet Determined. The specific terms of any amendment, waiver, or refinancing of the $1.1 billion Term Loan B have not been negotiated with Ashfield National Bank, N.A. and the lender syndicate. Whether the transaction will proceed under Scenario 1 (amendment and waiver), Scenario 2 (full refinancing), Scenario 3 (partial repayment and amendment), or some alternative structure is unknown at this time. The tax analysis set forth in this memorandum should be updated once the capital structure of the post-spin entities is finalized and the terms of the lender consent or refinancing are determined.
2.  Meridian Debt Allocation. It is not yet clear whether Meridian will assume any portion of the existing Veldran debt or will obtain independent financing at the Meridian level. If Meridian issues new debt and remits the proceeds thereof to Veldran (e.g., to fund a partial paydown of the Term Loan B), the boot analysis under § 355(a)(3)(B) and the liability assumption analysis under § 357 must be completed. The aggregate amount of liabilities to be assumed by Meridian must be confirmed and compared against the approximately $800,000,000 adjusted tax basis of the Precision Flow Division assets to determine whether § 357(c) gain is triggered.
3.  Representations Required. The Representation Letter to be delivered by Veldran and Meridian in connection with Calderwood & Harkness's tax opinion (second draft circulated July 11, 2022, currently under review by Veldran management and Harrowgate) should include representations confirming the following:
(a) the final structure of any refinancing, amendment, or waiver of the Credit Agreement, including the identity of the obligors, the aggregate principal amounts, the material terms, and the sources and uses of any proceeds;
(b) that no equity-linked instruments (including convertible debt, warrants, options, or other instruments exercisable for or convertible into equity interests) will be issued to lenders or any other person in connection with the refinancing or in consideration for lender consent; and
(c) the fair market value of the liabilities allocated to and to be assumed by Meridian in connection with the Contribution, together with confirmation that such liabilities are assumed for bona fide business purposes and not with a principal purpose of tax avoidance.
4.  Coordination with Whitfield & Gage and Thornapple McCord. The corporate covenant compliance analysis under the Credit Agreement is being handled by Whitfield & Gage LLP (contact: Priya Chandrasekar, 51 West 52nd Street, New York, New York 10019) and Thornapple McCord LLP (contact: David Ochoa, 227 West Trade Street, Suite 2000, Charlotte, North Carolina 28202). Calderwood & Harkness should coordinate closely with these firms to ensure that any negotiated amendments, waivers, or refinancing terms are reviewed for tax implications before finalization. In particular, Calderwood & Harkness should be afforded the opportunity to review the terms of any new credit facility (at either the Veldran or Meridian level) to confirm the absence of equity-linked features, the proper allocation of liabilities, and the consistency of the refinancing structure with the assumptions underlying the "should" level tax opinion.
5.  Lender Consent Timeline. Given that Margaret Tsao of Ashfield National Bank has indicated that significant negotiation will be required, and potentially a full refinancing of the Term Loan B, the lender consent process may take several months to complete. This timing uncertainty may affect the overall transaction timeline and the feasibility of a Q4 2022 distribution date. If the distribution date is delayed beyond Q4 2022, certain time-dependent elements of the tax analysis — including the § 355(e) "plan" analysis (which measures the gap between the HPE Fund IV acquisition date and the distribution date) and the § 355(d) five-year look-back period — should be reassessed.
IX. Conclusion
Based on the analysis set forth in this memorandum, we reach the following conclusions:
Credit Agreement Implications. The Spin-Off would implicate multiple provisions of Veldran's First Lien Term Loan B Credit Agreement. Specifically, the Spin-Off would (i) constitute a "Disposition" and an "Investment" under the Credit Agreement definitions, (ii) violate the Restricted Payment covenant (because the fair market value of the Meridian stock to be distributed exceeds available basket capacity by a very wide margin), (iii) violate the Asset Sale covenant (because the Spin-Off does not generate cash consideration that could be applied to mandatory prepayment or reinvestment), and (iv) require the release of the Precision Flow Division entities — including Kestrel Precision Controls, Inc. — from their guarantor obligations and from the first-priority liens on their assets. The Change of Control provision is unlikely to be triggered, but this conclusion requires confirmation based on the specific defined terms and thresholds in the Credit Agreement.
Lender Consent or Refinancing Required. Lender consent or, potentially, a full refinancing of the $1.1 billion Term Loan B facility will be required in order for Veldran to consummate the Spin-Off. Margaret Tsao of Ashfield National Bank, N.A., acting in her capacity as Managing Director, Leveraged Finance, and as representative of the Administrative Agent for the lender syndicate, has indicated that the lender group would require significant negotiation and potentially a refinancing. The consent or refinancing process may take several months and could affect the Q4 2022 timeline.
Tax Opinion Perspective. From a tax-opinion perspective, the Credit Agreement mechanics do not present an independent obstacle to the qualification of the Spin-Off under § 355, provided that the following conditions are satisfied:
(a) Any refinancing of the Term Loan B is structured as a straightforward debt-for-debt exchange or repayment and reissuance, without the issuance of equity-linked instruments (convertible debt, warrants, options, or similar instruments) to the lender group or any other person;
(b) Any assumption of liabilities by Meridian in connection with the Contribution complies with § 357 — specifically, the assumed liabilities must be assumed for bona fide business purposes, must not exceed the adjusted tax basis of the Precision Flow Division assets (approx

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