Christine,
Attached as a redline against the May 6, 2022 first draft is the second draft of the Representation Letter (engagement no. 1003-00005 / matter code HRW-SPIN-001) in connection with our engagement to render a "should" level tax opinion under IRC §§ 355 and 368(a)(1)(D) regarding the proposed pro rata spin-off of Meridian Flow Technologies, Inc. from Veldran Industries Holdings, Inc. As you know, the Representation Letter is to be executed by Jonathan Caldecott (CEO, Veldran), Rita Subramanian (CFO, Veldran), and Diana Fenn (Managing Partner & CIO, Harrowgate Capital Advisors LLC).
We appreciate the thoughtful comments we received on the first draft from all reviewing parties, and I want to thank Philip, Priya, and David in particular for their detailed input. The second draft incorporates those comments and reflects a number of substantive revisions, which I summarize below. I also identify three principal open items that will need to be resolved before the Representation Letter can be finalized and before we are in a position to deliver the tax opinion.
**I. Summary of Key Changes from First Draft**
The second draft reflects revisions in the following principal areas:
**(a) Business Purpose Representations.** We have revised these representations to articulate corporate-level business purposes for the spin-off, focusing on (i) enabling each of the Engineered Coatings Division and the Precision Flow Solutions Division to pursue independent capital-allocation strategies and (ii) enhancing management focus and operational efficiency across both businesses. These representations have been expanded from the first draft but, as discussed below under Open Issues, still require further strengthening.
**(b) Kestrel Precision Controls — Active Trade or Business History.** The second draft adds detailed representations regarding Kestrel Precision Controls, Inc. (Georgia corporation, EIN 58-2847193), including its founding date of February 12, 2003, its continuous operation of the precision fluid-control systems business since founding, and its acquisition by Veldran on June 7, 2019 from Rennick Industrial Partners Fund II LP in a taxable stock acquisition for $295 million. These representations are critical to the § 355(b)(2)(D) safe harbor analysis — specifically, that Kestrel independently conducted the relevant trade or business for the full five-year period preceding the anticipated distribution date, notwithstanding that the acquisition occurred within the five-year look-back window and implicates § 355(b)(2)(C). As context, approximately 35% of Precision Flow Solutions Division revenue (roughly $287 million of $820 million in FY2021) is attributable to the Kestrel business.
**(c) § 355(e) Plan Representations.** We have updated the representations regarding the September 20, 2019 acquisition by HPE Fund IV of 62.4% of Veldran common stock (46,488,000 shares at $40.00 per share, for aggregate consideration of approximately $1.86 billion) through the negotiated tender offer and merger squeeze-out of the prior controlling shareholder, Greystone Partners Fund III LP. The representations now specifically address the absence of discussions, agreements, or understandings regarding a potential spin-off or separation of the Precision Flow Solutions Division at or prior to the time of the September 2019 acquisition. We have also noted the approximately three-year temporal gap between the September 20, 2019 acquisition and the anticipated Q4 2022 distribution date, which is relevant to the Treas. Reg. § 1.355-7 "plan" analysis.
**(d) Device Test Representations.** We have modified the representations regarding Veldran's dividend history and the absence of any agreement, understanding, or plan for the sale or exchange of Meridian or Veldran stock following the distribution. The draft also addresses the pro rata nature of the distribution — a 1:1 distribution ratio (one share of Meridian common stock for each outstanding share of Veldran common stock, based on 74,500,000 shares outstanding).
**(e) Miscellaneous.** We have updated references throughout to the ownership structure: HPE Fund IV's 62.4% stake held through Harrowgate Veldran Holdings LLC (DE LLC, EIN 86-1483920); Prescott Capital Management LP's 14.8% stake (11,026,000 shares); management's 5.3% stake (3,948,500 shares under equity incentive plans); and the remaining public/institutional float of approximately 17.5% (13,037,500 shares). We have also conformed capitalized terms to align with the draft Separation Agreement being prepared by Whitfield & Gage.
**II. Open Issues Requiring Further Attention**
We have identified three principal open items that must be resolved before the Representation Letter can be finalized and before Calderwood & Harkness can deliver its tax opinion:
**(i) Business Purpose Representations Need Strengthening.** The two articulated business purposes — enabling independent capital-allocation strategies and enhancing management focus and operational efficiency — remain insufficiently developed at the corporate level. As currently drafted, we are concerned that the representations could be read as reflecting primarily HPE Fund IV's fund-level objectives (e.g., facilitating monetization of the Precision Flow investment or returning capital to limited partners) rather than genuine corporate-level business purposes of Veldran Industries Holdings, Inc. A business purpose driven primarily by the PE sponsor's liquidity needs would be vulnerable to IRS challenge under Treas. Reg. § 1.355-2(b). We recommend scheduling a call with Veldran management — specifically Jonathan Caldecott and Sandra Waverly (President, Precision Flow Solutions Division / planned CEO of Meridian) — to develop additional concrete, operational justifications at the Veldran corporate level. I want to be candid that this is a significant impediment to delivering the opinion at the "should" level of comfort, and it is important that we address it thoroughly.
**(ii) § 355(e) Plan Representations Require Additional Factual Support.** The revised representations state that there were no discussions regarding a spin-off prior to the September 20, 2019 acquisition, but the factual record supporting this assertion is thin. We request that Harrowgate and Veldran provide additional detail — including, to the extent available, contemporaneous documentation such as investment committee memos, board minutes, and deal-team correspondence from the 2019 period — confirming that the spin-off concept did not arise until well after the acquisition closed. The significance of this issue warrants emphasis: if the spin-off were treated as part of a "plan" that includes the 2019 change of control, § 355(e) would require Veldran to recognize gain on the distribution of Meridian stock. Based on Brackenridge & Co.'s preliminary valuation of Meridian at $1.4–$1.7 billion and Veldran's estimated adjusted tax basis in the Precision Flow Solutions Division assets of approximately $800 million, the estimated built-in gain is in the range of $600 million to $900 million, resulting in potential corporate-level tax liability of approximately $125 million to $190 million at the 21% federal rate. The safe harbor and presumption framework under Treas. Reg. § 1.355-7 will need to be carefully mapped against the facts.
**(iii) Kestrel Five-Year ATB Representations — Substantially Complete.** In contrast to the two items above, the representations regarding Kestrel's active-trade-or-business history are substantially complete and in good shape. The founding date (February 12, 2003), continuous operation, and nature of the business are well-documented, and our separate § 355(b) analysis memorandum (dated June 1, 2022) concludes that the § 355(b)(2)(D) safe harbor should be satisfied. One remaining item: we request confirmation from Pemberton Rathbone LLP (Harold Weiss) or Veldran management that there were no material changes to Kestrel's business operations or product lines in the five years preceding the anticipated distribution date that could be characterized as the commencement of a "new" trade or business.
**III. Next Steps**
Christine, we would ask that you coordinate with Philip and the Veldran management team to address the business purpose and § 355(e) factual support items identified above. We propose scheduling a working call the week of July 18 to discuss the business purpose articulation in detail — ideally with Jonathan Caldecott and Sandra Waverly participating. Once the Representation Letter is finalized, we will be in a position to circulate the first draft of the tax opinion letter, which the team is currently preparing and which we are targeting for early August.
We ask that any comments on the attached second draft redline be provided by **Friday, July 22**.
Please do not hesitate to reach out if you have any questions or would like to discuss any of the foregoing in advance of the working call.
Best regards,
Leonard Cross
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**Leonard Cross** Partner, Tax Department Calderwood & Harkness LLP 1301 Avenue of the Americas, 40th Floor New York, NY 10019 T: (212) 558-4000 E: lcross@calderwoodharkness.com
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*Attachment: representation-letter-second-draft-redline.docx*
*CONFIDENTIALITY NOTICE: The attached document and the contents of this email are privileged and confidential, prepared in connection with the rendering of a tax opinion by Calderwood & Harkness LLP. This communication is intended solely for the addressees and their professional advisors and should not be distributed beyond these recipients without the prior written consent of Calderwood & Harkness LLP.*