PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Counselors at Law
1301 Avenue of the Americas, 40th Floor New York, New York 10019
Telephone: (212) 554-6000 Facsimile: (212) 554-6001 www.calderwoodharkness.com
INVOICE — STATEMENT FOR PROFESSIONAL SERVICES
Addressed To:
Christine Yeung General Counsel Harrowgate Capital Advisors LLC 600 Lexington Avenue, 38th Floor New York, New York 10022
Client and Matter Information
Client: Harrowgate Private Equity Fund IV, L.P. (EIN: 84-3291067)
Matter Description: Tax opinion services in connection with the proposed pro rata spin-off of Meridian Flow Technologies, Inc. ("Meridian") from Veldran Industries Holdings, Inc. ("Veldran") pursuant to Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code").
Billing Period: June 16, 2022 through July 31, 2022
Summary of Professional Services Rendered
During the billing period of June 16, 2022 through July 31, 2022, Calderwood & Harkness LLP performed the following professional services in connection with the above-referenced matter:
Active Trade or Business Analysis (§ 355(b)). Continued analysis of the active trade or business requirements under Section 355(b) of the Code, including completion of the analysis of Kestrel Precision Controls, Inc. ("Kestrel") under Sections 355(b)(2)(C) and (D). Kestrel was acquired on June 7, 2019 from Rennick Industrial Partners Fund II LP for an aggregate purchase price of approximately $295 million. Kestrel was originally founded on February 12, 2003, and has been continuously engaged in the design, manufacture, and sale of precision flow-control components since that time. The analysis focused on whether Kestrel's acquisition constituted a transaction in which gain or loss was recognized in whole or in part and the implications thereof for satisfaction of the five-year active conduct requirement under Section 355(b)(2)(B). We examined the relevant facts and circumstances, including the business continuity of Kestrel's operations through the anticipated spin-off date, the integration of Kestrel's product lines with Meridian's existing Precision Flow segment, and the treatment of Kestrel's historical trade or business under the applicable Treasury Regulations.
Section 355(e) "Plan" Analysis Memorandum. Preparation and circulation to the engagement team and co-counsel of the first draft of the Section 355(e) "plan" analysis memorandum, dated June 28, 2022 (the "355(e) Memorandum"). The 355(e) Memorandum addresses the critical question of whether the proposed spin-off of Meridian is part of a "plan (or series of related transactions)" within the meaning of Section 355(e) that includes one or more acquisitions of a 50-percent or greater interest in Veldran or Meridian. The memorandum analyzes, in particular, the relationship between HPE Fund IV's acquisition of a 62.4% controlling equity interest in Veldran on September 20, 2019 and the proposed spin-off, including a detailed review of the safe harbor and non-safe harbor factors set forth in Treasury Regulations Section 1.355-7 and the implications of the "super safe harbor" for acquisitions occurring more than two years but fewer than four years before the distribution. The 355(e) Memorandum identifies an estimated federal income tax at risk ranging from approximately $125.3 million to approximately $189.5 million, depending on Meridian's final determined fair market value and certain assumptions regarding the allocation of Veldran's inside tax basis among its assets and subsidiaries. This range reflects sensitivity analysis performed at various valuation points within the preliminary range provided by Brackenridge & Co.
Review of Preliminary Valuation Materials. Receipt and review of the preliminary valuation ranges prepared by Brackenridge & Co. (received June 10, 2022), estimating Meridian's fair market value in the range of $1,396.5 million to $1,702.4 million, based on an enterprise value to EBITDA multiple range of approximately 10.5× to 12.8× applied to Meridian's Precision Flow segment EBITDA of approximately $133 million. We analyzed the valuation assumptions for purposes of our Section 355(e) tax-at-risk estimates and for the Continuity of Interest analysis described below.
Second Draft Representation Letter. Preparation and circulation of the second draft of the factual representation letter (the "Representation Letter") on July 11, 2022, incorporating comments received from Veldran management (Philip Crundell, Chief Financial Officer), Whitfield & Gage LLP (Priya Chandrasekar, transaction counsel to Veldran), and Thornapple McCord LLP (David Ochoa, counsel to the independent directors of Veldran). The second draft reflects revisions to twenty-three representations, including representations concerning historical and projected business purpose, capital investment plans for Meridian post-distribution, intended distributions of Meridian earnings and profits, absence of pre-arranged transactions, and the business reasons underlying the allocation of assets and liabilities between Veldran (the distributing corporation) and Meridian (the controlled corporation). The second draft also adds four new representations requested by our team addressing the treatment of intercompany transactions and the elimination of intercompany obligations in anticipation of the distribution.
Business Purpose Memorandum. Preparation of the first draft of the Business Purpose Memorandum, dated July 18, 2022, analyzing the sufficiency of the articulated corporate-level business purposes for the proposed spin-off. The memorandum evaluates six business purposes identified by Veldran management, including strategic focus and operational efficiency, separate access to capital markets, enhanced management accountability, elimination of regulatory conflicts, customer and supplier perception benefits, and facilitation of equity-based employee compensation programs at Meridian. The memorandum addresses the requirements of Treasury Regulations Section 1.355-2(b), including the requirement that the distribution be motivated in substantial part by one or more corporate business purposes (as distinct from shareholder purposes), and evaluates whether a less complex and less tax-sensitive alternative transaction could achieve substantially the same non-Federal-tax business purposes.
Device Test Analysis Memorandum. Preparation of the Device Test Analysis Memorandum, dated July 25, 2022, analyzing the factors relevant to the determination of whether the proposed distribution will be used principally as a "device" for the distribution of earnings and profits within the meaning of Section 355(a)(1)(B) and Treasury Regulations Section 1.355-2(d). The memorandum gives particular attention to device factors arising from HPE Fund IV's 62.4% controlling equity stake in Veldran, including (i) the nature and extent of HPE Fund IV's ownership interest and its implications for the "pro rata distribution" device factor, (ii) the existence and magnitude of earnings and profits in both Veldran and Meridian, (iii) the absence of a subsequent sale or exchange of distributing or controlled stock that is negotiated or agreed upon at the time of the distribution, and (iv) the nature and use of the assets held by Meridian relative to Veldran. The memorandum also analyzes the applicable non-device factors, including the presence of substantial corporate business purposes and the fact that the distribution is pro rata.
Continuity of Interest and § 368(a)(1)(D) Reorganization Analysis. Continued analysis, dated June 15, 2022, of the Continuity of Interest requirement and the qualification of the transaction as a reorganization under Section 368(a)(1)(D) of the Code, including analysis of the "substantially all" test under Revenue Ruling 57-518 and the relationship between the asset transfers to Meridian and the requirements of Section 368(a)(1)(D)(ii).
State and Local Tax Considerations. Preparation of the State and Local Tax Considerations Summary Memorandum, dated July 20, 2022, addressing the state-level income tax treatment of the proposed spin-off in the three principal operating jurisdictions: Delaware, North Carolina, and Georgia. The memorandum analyzes each state's conformity (or non-conformity) to the federal tax treatment of distributions under Section 355, potential state-level taxable gain recognition, apportionment implications, and transfer tax considerations.
Coordination with Co-Counsel and Advisors. Ongoing correspondence and coordination with Whitfield & Gage LLP (Priya Chandrasekar), transaction counsel to Veldran; Thornapple McCord LLP (David Ochoa), counsel to the independent directors of Veldran; and Pemberton Rathbone LLP (Harold Weiss), tax counsel to the lenders under Veldran's senior secured credit facility. Coordination activities included multiple teleconferences and written exchanges regarding open issues in the Representation Letter, data requests for the Section 355(e) analysis, and the scope of the opinion that the lenders will require as a condition to the release of collateral.
Diligence Review. Continued review of diligence materials received during the billing period, including Veldran's federal and state income tax returns for taxable years 2017 through 2021, Kestrel's federal and state income tax returns for taxable years 2016 through 2019 (pre-acquisition), organizational documents for Veldran and its subsidiaries (including certificates of incorporation, bylaws, and operating agreements), intercompany agreements, and selected board minutes and resolutions.
Internal Conferences and Drafting Sessions. Multiple internal team conferences and working sessions to discuss analytical issues, coordinate drafting responsibilities, and review work product prior to circulation.
Timekeeper Detail — Professional Fees
The following sets forth the professional services rendered by each timekeeper during the billing period of June 16, 2022 through July 31, 2022:
Leonard Cross — Partner
Hourly Rate: $1,650.00
Hours This Period: 23.50
Amount: $38,775.00
Description of Services:
Review and supervision of the first draft of the Section 355(e) "plan" analysis memorandum, including detailed review of the Treasury Regulations Section 1.355-7 safe harbor analysis, the HPE Fund IV acquisition timeline, and the tax-at-risk sensitivity analysis; review and markup of the second draft Representation Letter, with particular attention to the new representations concerning intercompany transactions and the allocation of assets and liabilities; review of the first draft Business Purpose Memorandum, including evaluation of the strength of individual articulated business purposes and the sufficiency of the factual record supporting each; review of the Device Test Analysis Memorandum, including discussion of the treatment of HPE Fund IV's controlling interest under the device factors; strategic guidance and consultations with team members regarding open analytical issues, including the interaction between the Section 355(e) safe harbor period and the anticipated timing of the distribution; multiple telephone conferences and email correspondence with Christine Yeung (General Counsel, Harrowgate Capital Advisors LLC) regarding business purpose concerns, the scope of factual representations required from Veldran management, and the potential range of tax exposure under Section 355(e); coordination with Sylvia Hartwell regarding partnership-level tax consequences for HPE Fund IV's limited partners.
Sylvia Hartwell — Partner
Hourly Rate: $1,550.00
Hours This Period: 12.50
Amount: $19,375.00
Description of Services:
Review of the first draft of the Section 355(e) "plan" analysis memorandum and provision of comments regarding the characterization of the HPE Fund IV acquisition in the context of the regulatory safe harbors; review of the State and Local Tax Considerations Summary Memorandum, including evaluation of North Carolina and Georgia conformity issues and identification of additional research to be conducted regarding Georgia's treatment of corporate reorganizations; analysis of partnership-level tax consequences for HPE Fund IV's limited partners in connection with the proposed spin-off, including consideration of the impact of the distribution on HPE Fund IV's basis in its Veldran equity interests under Subchapter K and the allocation of any recognized gain or loss among the limited partners; participation in internal team conferences; review and approval of billing matters.
Garrett Simmons — Senior Associate
Hourly Rate: $1,050.00
Hours This Period: 48.00
Amount: $50,400.00
Description of Services:
Primary drafting of the first draft of the Section 355(e) "plan" analysis memorandum, including extensive research into the Treasury Regulations Section 1.355-7 safe harbor and non-safe harbor factors, the legislative history of Section 355(e), and relevant administrative guidance, private letter rulings, and case law; preparation of the tax-at-risk sensitivity analysis, incorporating the Brackenridge & Co. preliminary valuation ranges and alternative assumptions regarding Veldran's inside tax basis; primary drafting of the second draft Representation Letter, including incorporation of comments from Veldran management, Whitfield & Gage LLP, and Thornapple McCord LLP, and drafting of four new representations concerning intercompany transactions; primary drafting of the first draft Business Purpose Memorandum, including factual research into each articulated corporate business purpose and analysis of the standard of review under Treasury Regulations Section 1.355-2(b); preparation of the Continuity of Interest and Section 368(a)(1)(D) reorganization analysis memorandum; coordination with Priya Chandrasekar at Whitfield & Gage LLP and David Ochoa at Thornapple McCord LLP regarding open items in the Representation Letter and document requests; review and analysis of diligence materials, including Veldran organizational documents, intercompany agreements, and selected board minutes; participation in multiple internal drafting sessions and team conferences.
Leila Nazari — Associate
Hourly Rate: $850.00
Hours This Period: 42.00
Amount: $35,700.00
Description of Services:
Primary drafting of the Device Test Analysis Memorandum, including research into the device and non-device factors under Treasury Regulations Section 1.355-2(d), analysis of the pro rata distribution factor in the context of HPE Fund IV's 62.4% controlling stake, and evaluation of the nature and relative magnitude of earnings and profits in Veldran and Meridian; preparation of the Section 355(d) disqualified distribution analysis, including determination of whether any shareholder of Veldran holds a "disqualified interest" in either the distributing or controlled corporation as a result of purchases occurring within the five-year period preceding the distribution and the interaction between Section 355(d) and the HPE Fund IV acquisition; primary drafting of the State and Local Tax Considerations Summary Memorandum for Delaware, North Carolina, and Georgia, including statutory and regulatory research into each state's conformity to Section 355 and the potential for state-level gain recognition; research support for the Section 355(e) "plan" analysis memorandum, including preparation of a detailed factual timeline of the HPE Fund IV acquisition and post-acquisition events; continued review and cataloging of diligence materials received, including Veldran and Kestrel historical federal and state income tax returns, and maintenance of the engagement diligence tracker; correspondence with Harold Weiss at Pemberton Rathbone LLP regarding the scope of the lender tax opinion and the lenders' information requests; participation in internal team conferences and drafting sessions.
Fees Summary
Disbursements and Expenses
Invoice Financial Summary
Prior Billing Summary / Account Status
Note: The estimated total engagement fee for the delivery of a tax opinion in connection with the proposed spin-off of Meridian Flow Technologies, Inc. from Veldran Industries Holdings, Inc. is in the range of $850,000 to $1,200,000, as set forth in the engagement letter dated April 11, 2022. Amounts billed to date represent approximately 25.8% to 36.5% of the estimated range. Actual fees may vary depending on the scope of the engagement, the complexity of issues encountered, and changes to the transaction structure or timeline.
Payment Instructions
Payment of this invoice is due within thirty (30) days of the invoice date, on or before August 31, 2022.
Payment should be made by wire transfer to the following account:
Bank Name: Greaves Bancorp ABA Routing Number: 021000021 Account Name: Calderwood & Harkness LLP — Client Trust Operating Account Account Number: 8832-4417-0091 SWIFT Code: CHASUS33 Reference: Invoice No. 22-7831-002 / Engagement No. 1003-00005
Alternatively, payment may be made by check drawn to the order of Calderwood & Harkness LLP and mailed to:
Calderwood & Harkness LLP
Attention: Accounts Receivable
1301 Avenue of the Americas, 40th Floor New York, New York 10019
For billing inquiries, please contact:
Sylvia Hartwell, Billing Partner Telephone: (212) 554-6247
Email: shartwell@calderwoodharkness.com
Terms and Conditions
This invoice is rendered pursuant to, and subject to, the terms and conditions set forth in the engagement letter between Calderwood & Harkness LLP and Harrowgate Private Equity Fund IV, L.P., dated April 11, 2022 (the "Engagement Letter"), as supplemented by any subsequent written amendments thereto. In the event of any conflict between the terms of this invoice and the Engagement Letter, the Engagement Letter shall control.
Invoices not paid within thirty (30) days of the invoice date are subject to a late-payment charge of one and one-half percent (1.5%) per month (or, if lower, the maximum rate permitted by applicable law) on the unpaid balance, as provided in Section 7(c) of the Engagement Letter.
The client reserves the right to dispute any charges set forth on this invoice by providing written notice to the Billing Partner within fifteen (15) days of the invoice date, as provided in Section 7(d) of the Engagement Letter. Undisputed amounts remain due on the original payment date regardless of any pending dispute as to other amounts.
CONFIDENTIALITY NOTICE: This invoice and any accompanying materials contain information that is privileged, confidential, and protected by the attorney-client privilege and/or the work product doctrine. This invoice is intended solely for the use of the addressee(s) identified above. If you are not the intended recipient, or a person authorized to deliver this document to the intended recipient, you are hereby notified that any review, disclosure, copying, distribution, or use of this invoice or its contents is strictly prohibited. If you have received this invoice in error, please notify Calderwood & Harkness LLP immediately at (212) 554-6000 and destroy all copies of this document.
© 2022 Calderwood & Harkness LLP. All rights reserved.
Invoice Number: | 22-7831-002
Invoice Date: | August 1, 2022
Engagement Number: | 1003-00005
Matter Code: | HRW-SPIN-001
Billing Partner: | Sylvia Hartwell
Responsible Partner: | Leonard Cross
Payment Terms: | Net 30 days from date of invoice
Timekeeper | Title | Rate ($/hr) | Hours | Amount ($)
Leonard Cross | Partner | 1,650.00 | 23.50 | 38,775.00
Sylvia Hartwell | Partner | 1,550.00 | 12.50 | 19,375.00
Garrett Simmons | Senior Associate | 1,050.00 | 48.00 | 50,400.00
Leila Nazari | Associate | 850.00 | 42.00 | 35,700.00
Total Professional Fees | 126.00 | $144,250.00
Description | Amount ($)
Electronic legal research services (Westlaw, Tidewater Technologies, CCH) | 575.00
Reproduction and document management costs | 175.00
Total Disbursements | $750.00
Item | Amount ($)
Professional Fees | 144,250.00
Disbursements and Expenses | 750.00
Total Current Invoice (No. 22-7831-002) | $145,000.00
Invoice | Date | Amount ($) | Status
22-7831-001 | June 15, 2022 | 165,000.00 | Paid — received July 12, 2022
22-7831-002 (this invoice) | August 1, 2022 | 145,000.00 | Due — August 31, 2022
Total Billed to Date | $310,000.00