PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
To: File — Matter No. HRW-SPIN-001 (Engagement No. 1003-00005)
From: Garrett Simmons and Leila Nazari
Reviewed by: Leonard Cross
Date: May 20, 2022
Re: Comprehensive Analysis of Proposed Pro Rata Distribution by Veldran Industries Holdings, Inc. of 100% of the Common Stock of Meridian Flow Technologies, Inc. under IRC §§ 355 and 368(a)(1)(D)
Status: FIRST DRAFT — For Internal Discussion Purposes Only; Not for Client Distribution Without Partner Approval
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I. Executive Summary
Calderwood & Harkness LLP has been engaged by Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV"), a Delaware limited partnership managed by Harrowgate Capital Advisors LLC, to render a "should" level tax opinion in connection with the proposed separation of Veldran Industries Holdings, Inc. ("Veldran" or "Distributing"), a Delaware corporation (EIN 86-1920347), into two independent publicly traded entities. This memorandum sets forth our comprehensive preliminary analysis of the proposed transaction under Internal Revenue Code ("IRC" or "Code") §§ 355 and 368(a)(1)(D) and identifies the principal legal and factual issues that must be resolved before a tax opinion can be issued.
The proposed transaction involves a pro rata distribution by Veldran of 100% of the common stock of Meridian Flow Technologies, Inc. ("Meridian" or "SpinCo" or "Controlled"), a Delaware corporation to be incorporated, to all Veldran shareholders on a 1:1 basis (one share of Meridian for each share of Veldran outstanding on the record date) (the "Distribution"). Immediately prior to the Distribution, Veldran will contribute to Meridian all assets and liabilities associated with its Precision Flow Solutions Division (the "Contributed Business") in exchange for all outstanding Meridian common stock and Meridian's assumption of certain allocated liabilities (the "Contribution"). The Contribution, together with the pro rata Distribution, is collectively referred to herein as the "Spin-Off."
The Spin-Off is intended to qualify as a tax-free reorganization under IRC § 368(a)(1)(D) (as to the Contribution) and a tax-free distribution under IRC § 355 (as to the Distribution). If these provisions are satisfied, the Spin-Off would be tax-free at three levels: (i) Veldran would not recognize gain on the Contribution of assets to Meridian (§ 361), (ii) Veldran would not recognize gain on the Distribution of Meridian stock to its shareholders (§ 355(c)), and (iii) Veldran's shareholders would not recognize gain on their receipt of Meridian stock (§ 355(a)). This three-level non-recognition treatment is the core objective of the proposed structure.
The anticipated record date and distribution date are in Q4 2022 (currently targeting a same-day record and distribution date, or a T+1 structure). The exact date has not yet been determined and will depend on various corporate, regulatory, and market-timing considerations.
We have been informed that no private letter ruling will be sought from the Internal Revenue Service ("IRS") in connection with the Spin-Off. Accordingly, the Calderwood & Harkness tax opinion will serve as the sole tax assurance for the transaction. This places particular importance on the thoroughness and rigor of our analysis, as neither the IRS nor any court will have passed upon the tax treatment of the Spin-Off prior to its consummation.
Preliminary Overall Conclusion. Based on our analysis to date, it is our preliminary view that the Spin-Off "should" qualify under IRC §§ 355 and 368(a)(1)(D), subject to the resolution of two significant open issues and additional factual development. The two primary concerns are as follows:
First, the § 355(b)(2)(C) active-trade-or-business issue arising from Veldran's June 7, 2019 taxable acquisition of Kestrel Precision Controls, Inc. (the "Kestrel Acquisition"). The Kestrel Acquisition was a taxable stock acquisition that closed within the five-year look-back period from the anticipated Q4 2022 distribution date. Kestrel represents approximately 35% of the Precision Flow Solutions Division's FY2021 revenue. The availability of the § 355(b)(2)(D) safe harbor is critical to the active-trade-or-business analysis for Controlled (Meridian), and while preliminary indications are favorable, the analysis requires further diligence.
Second, the § 355(e) "plan" risk arising from the temporal proximity of HPE Fund IV's September 20, 2019 acquisition of a 62.4% controlling stake in Veldran to the anticipated Q4 2022 Distribution. The approximately three-year gap between the acquisition and the Distribution places the analysis outside the two-year presumption window of Treasury Regulation § 1.355-7(b)(2), but does not provide an automatic safe harbor. The factual record regarding the absence of pre-acquisition spin-off discussions is thin, and the estimated tax exposure if § 355(e) applies is substantial — approximately $125.3 million to $189.5 million in corporate-level tax, based on preliminary valuations.
Additionally, the articulation of corporate-level business purposes for the Spin-Off requires further development. The two preliminary business purposes identified to date — independent capital-allocation strategies and management focus — are facially plausible but have not been supported with sufficient factual detail to demonstrate that they are genuine corporate-level (as distinguished from PE-sponsor-level) purposes.
This memorandum addresses each of the statutory and judicial requirements for tax-free treatment under §§ 355 and 368(a)(1)(D) in turn, identifies open issues, and sets forth a recommended work plan for further analysis.
II. Factual Background
A. The Parties
1. Harrowgate Private Equity Fund IV, L.P. (Client / Controlling Shareholder). Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV") is a Delaware limited partnership with its registered address at 1209 Orange Street, Wilmington, Delaware 19801, and its principal office at 600 Lexington Avenue, 38th Floor, New York, New York 10022. HPE Fund IV's Employer Identification Number is 84-3291067.
HPE Fund IV is a private equity fund with a total committed capital of $6.8 billion (vintage 2018). The fund is managed by Harrowgate Capital Advisors LLC, a Delaware limited liability company (EIN 83-2756891), which serves as the fund's investment advisor and manager. The general partner of HPE Fund IV is Harrowgate Capital Partners IV GP LLC, a Delaware limited liability company (EIN 84-3291104).
The key principals of the Harrowgate organization relevant to this matter are:
• Marcus Adler — Founding Partner and Chairman of Harrowgate Capital Advisors LLC;
• Diana Fenn — Managing Partner and Chief Investment Officer of Harrowgate Capital Advisors LLC; also serves as Board Chair of Veldran Industries Holdings, Inc.;
• Tobias Rourke — Partner, Head of Portfolio Operations at Harrowgate Capital Advisors LLC; and
• Christine Yeung — General Counsel of Harrowgate Capital Advisors LLC.
HPE Fund IV holds approximately 62.4% of the outstanding common stock of Veldran Industries Holdings, Inc. (46,488,000 shares of 74,500,000 total shares outstanding). This interest is held through HPE Fund IV's wholly owned subsidiary, Harrowgate Veldran Holdings LLC ("HVH"), a Delaware limited liability company (EIN 86-1483920). HVH was formed as a special-purpose acquisition vehicle for purposes of the September 2019 acquisition of the Veldran stake, as discussed in Section II.D below.
HPE Fund IV's status as a financial sponsor with a controlling position in Veldran is a central fact throughout this analysis, affecting the device test (Section IV.C), the business purpose analysis (Section IV.E), the § 355(d) analysis (Section IV.G), and the § 355(e) analysis (Section IV.H).
2. Veldran Industries Holdings, Inc. (Distributing Corporation). Veldran Industries Holdings, Inc. ("Veldran" or "Distributing") is a Delaware corporation incorporated on March 14, 2019, with its registered address at 1209 Orange Street, Wilmington, Delaware 19801, and its principal office at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217. Veldran's Employer Identification Number is 86-1920347.
Veldran is a diversified industrial products and engineered materials company. For the fiscal year ended December 31, 2021, Veldran reported consolidated revenue of approximately $2.34 billion, consolidated EBITDA of approximately $418 million, and employed approximately 8,200 people across its domestic and international operations.
The current senior management and board composition relevant to this analysis are as follows:
• Jonathan Caldecott — Chief Executive Officer;
• Rita Subramanian — Chief Financial Officer;
• Philip Crundell — General Counsel and Secretary; and
• Diana Fenn — Chair of the Board of Directors (Harrowgate designee).
Veldran operates through two principal divisions, which constitute the two businesses that will be separated in the proposed Spin-Off:
Engineered Coatings Division (to remain with Veldran post-spin). The Engineered Coatings Division designs, manufactures, and distributes advanced surface coatings and engineered materials for aerospace, automotive, and general industrial applications. For FY2021, the Engineered Coatings Division reported revenue of approximately $1.52 billion and EBITDA of approximately $285 million, representing an EBITDA margin of approximately 18.75%. This division will constitute the continuing operations of Veldran following the Spin-Off.
Precision Flow Solutions Division (to be contributed to and operated by Meridian post-spin). The Precision Flow Solutions Division designs, manufactures, and sells precision fluid-control systems for industrial, petrochemical, and water-infrastructure end markets. For FY2021, the Precision Flow Solutions Division reported revenue of approximately $820 million and EBITDA of approximately $133 million, representing an EBITDA margin of approximately 16.22%. This division will constitute the sole line of business of Meridian (Controlled) following the Spin-Off.
Veldran's current capital structure (pre-spin) is as follows:
• Common Stock: 100,000,000 shares authorized; 74,500,000 shares issued and outstanding. No other classes of stock are outstanding.
• First Lien Term Loan B: $1.1 billion aggregate principal amount outstanding, under a senior secured credit agreement with a syndicate of lenders led by Ashfield National Bank, N.A. (100 Federal Street, Boston, Massachusetts 02110; key contact: Margaret Tsao, Managing Director, Leveraged Finance). The credit agreement contains customary covenants and restrictions on asset dispositions and distributions, which will need to be analyzed for spin-off compliance (see Section VI.C).
• 6.250% Senior Unsecured Notes due 2027: $450 million aggregate principal amount outstanding, issued pursuant to an indenture with Colton Trust Company as indenture trustee (10 South LaSalle Street, Chicago, Illinois 60603). The indenture will similarly need to be reviewed for spin-off covenant implications.
3. Meridian Flow Technologies, Inc. (Controlled Corporation / SpinCo). Meridian Flow Technologies, Inc. ("Meridian" or "SpinCo" or "Controlled") is a Delaware corporation that has not yet been incorporated as of the date of this memorandum. Meridian will be formed prior to the Contribution as a wholly owned subsidiary of Veldran for the purpose of receiving the assets and liabilities of the Precision Flow Solutions Division.
The planned registered address of Meridian is 1209 Orange Street, Wilmington, Delaware 19801. Its planned principal office will be located at 7100 Northlake Parkway, Suite 300, Tucker, Georgia 30084, which is the current headquarters of the Precision Flow Solutions Division.
The planned senior management of Meridian post-spin is as follows:
• Sandra Waverly — planned Chief Executive Officer. Ms. Waverly currently serves as President of the Precision Flow Solutions Division of Veldran.
• Derek Okonkwo — planned Chief Financial Officer. Mr. Okonkwo currently serves as Vice President of Finance of the Precision Flow Solutions Division of Veldran.
On a pro forma basis (reflecting FY2021 financials of the Precision Flow Solutions Division), Meridian would have had revenue of approximately $820 million and EBITDA of approximately $133 million. The Meridian business encompasses the design, manufacture, and sale of precision fluid-control systems for industrial, petrochemical, and water-infrastructure end markets, including the operations of Kestrel Precision Controls, Inc. (discussed in Section II.C below).
4. Other Veldran Shareholders. In addition to HPE Fund IV (through HVH), the following shareholders hold significant positions in Veldran common stock:
Prescott Capital Management LP. Prescott Capital Management LP ("Prescott Capital") is a New York-based institutional investor with its principal office at 277 Park Avenue, 42nd Floor, New York, New York 10172. Its managing partner is Andrew Kessler. Prescott Capital's Employer Identification Number is 13-4928371. Prescott Capital currently holds approximately 14.8% of Veldran common stock (11,026,000 shares). Prescott Capital originally co-invested alongside HPE Fund IV in the September 2019 acquisition of Veldran, purchasing 15,500,000 shares at $40.00 per share for a total investment of $620 million. Subsequent to the initial acquisition, Prescott Capital sold 4,474,000 shares in a secondary offering, reducing its position from 15,500,000 shares to 11,026,000 shares. Prescott Capital's tax advisor is Dunmore Havens & Associates LLC (Irene Salcedo; 590 Madison Avenue, 20th Floor, New York, New York 10022), which should be consulted regarding Prescott Capital's tax considerations in connection with the Spin-Off.
Veldran Management Stockholders. Officers and directors of Veldran collectively hold approximately 5.3% of Veldran common stock (3,948,500 shares) under various equity incentive plans, including restricted stock units, stock options, and direct share purchases. The treatment of equity awards in the Spin-Off (including anti-dilution adjustments and award modifications) will be addressed separately and may have discrete tax consequences that are beyond the scope of this memorandum.
Remaining Public / Institutional Float. The remaining approximately 17.5% of Veldran common stock (13,037,500 shares) is held by various public and institutional shareholders. This float was established through the secondary offering in which Prescott Capital sold down its position, as well as other market transactions.
For the avoidance of doubt, the sum of all outstanding shares is confirmed as follows: 46,488,000 (HPE Fund IV / HVH) + 11,026,000 (Prescott Capital) + 3,948,500 (management) + 13,037,500 (public float) = 74,500,000 shares.
B. Transaction Structure
The proposed Spin-Off will be implemented in two principal steps, as follows:
Step 1 — The Contribution. Veldran will transfer to Meridian (a newly incorporated, wholly owned subsidiary) all of the assets and liabilities associated with the Precision Flow Solutions Division, including all tangible and intangible assets, contracts, permits, intellectual property, employee obligations, and other items specifically identified in the Separation Agreement and related ancillary agreements. In exchange for this transfer, Veldran will receive 100% of the outstanding common stock of Meridian, and Meridian will assume certain allocated liabilities of the Precision Flow Solutions Division, as specified in the Separation Agreement. Immediately after the Contribution (and before the Distribution), Veldran will own 100% of the issued and outstanding stock of Meridian.
The asset and liability allocation between Veldran (retaining the Engineered Coatings Division) and Meridian (receiving the Precision Flow Solutions Division) will be governed by the Separation Agreement and the Employee Matters Agreement, which are currently being drafted by Whitfield & Gage LLP and Thornapple McCord LLP. The specific allocation of liabilities — including the allocation of debt obligations, pension liabilities, environmental liabilities, and contingent liabilities — may have significant tax implications and will need to be reviewed in detail as part of the overall tax analysis.
Step 2 — The Distribution. Veldran will distribute pro rata to all of its shareholders of record as of the record date all of the outstanding Meridian common stock. The distribution ratio will be 1:1 — each Veldran shareholder will receive one share of Meridian common stock for each share of Veldran common stock held on the record date. Based on 74,500,000 shares of Veldran common stock outstanding, Meridian will issue 74,500,000 shares of common stock in the Distribution.
Post-Spin Ownership. Immediately following the completion of the Distribution, each existing Veldran shareholder will hold one share of Veldran common stock (representing an interest in the Engineered Coatings Division and related assets) and one share of Meridian common stock (representing an interest in the Precision Flow Solutions Division and related assets) for each share of Veldran common stock that such shareholder held immediately before the Distribution. HPE Fund IV (through HVH) will hold 62.4% of both Veldran and Meridian; Prescott Capital will hold 14.8% of both; management stockholders will hold 5.3% of both; and the public float will comprise 17.5% of both.
Anticipated Record Date and Distribution Date. The anticipated record date and distribution date are in Q4 2022. The current plan contemplates either a same-day record and distribution date or a T+1 structure (distribution one business day following the record date). The exact dates have not yet been determined and will be subject to corporate, regulatory, SEC registration, and market-timing considerations.
C. The Kestrel Acquisition (Historical — Relevant to § 355(b) Analysis)
On June 7, 2019, Veldran Industries Holdings, Inc. completed its acquisition of 100% of the outstanding stock of Kestrel Precision Controls, Inc. ("Kestrel"), a Georgia corporation (EIN 58-2847193) (the "Kestrel Acquisition"). The Kestrel Acquisition is of central importance to the § 355(b) active-trade-or-business analysis, and accordingly, the key facts are set forth in detail.
Target. Kestrel Precision Controls, Inc. was a Georgia corporation founded on February 12, 2003. Kestrel was a designer and manufacturer of precision fluid-control systems, with particular expertise in high-pressure valve assemblies and flow-measurement instruments for industrial and petrochemical applications. At the time of the acquisition, Kestrel had been in continuous operation for approximately sixteen years.
Seller. The seller of the Kestrel stock was Rennick Industrial Partners Fund II LP, a Delaware limited partnership (EIN 82-3017564), which was the controlling shareholder of Kestrel at the time of the acquisition. Rennick Industrial Partners is a middle-market private equity fund specializing in industrial and engineered-products companies.
Acquiror. Veldran Industries Holdings, Inc. was the direct acquiror of 100% of the outstanding Kestrel stock.
Purchase Price. The aggregate purchase price for the Kestrel stock was $295 million, paid entirely in cash. No equity consideration was issued.
Structure. The Kestrel Acquisition was structured as a taxable stock acquisition. Gain or loss was recognized by the seller (Rennick Industrial Partners Fund II LP) on the disposition of its Kestrel stock. A § 338(h)(10) election was not made. Accordingly, Kestrel retained its historic tax attributes, including its adjusted tax basis in its assets, and Veldran's basis in the Kestrel stock was its purchase price of $295 million.
Post-Acquisition Integration. Following the Kestrel Acquisition, Kestrel was integrated into the Precision Flow Solutions Division of Veldran. As of FY2021, the former Kestrel operations comprised approximately 35% of the Precision Flow Solutions Division's revenue (approximately $287 million of $820 million total divisional revenue). This is a significant proportion, and the implications for the § 355(b) analysis are discussed in detail in Section IV.B below.
Relevance to § 355(b). The five-year look-back period from an anticipated Q4 2022 distribution date reaches back to approximately Q4 2017. The Kestrel Acquisition closed on June 7, 2019, which falls squarely within this five-year window. Because the acquisition was a taxable transaction (gain or loss was recognized by the seller), § 355(b)(2)(C) is directly implicated — the Kestrel trade or business was acquired by Veldran in a transaction in which gain or loss was recognized in whole or in part within the five-year period. This triggers the need for a § 355(b)(2)(D) safe harbor analysis, which is one of the two primary concerns identified in this memorandum.
D. HPE Fund IV's Acquisition of the Veldran Stake
On September 20, 2019, HPE Fund IV (through its wholly owned subsidiary, Harrowgate Veldran Holdings LLC) completed its acquisition of 62.4% of the outstanding common stock of Veldran Industries Holdings, Inc. (46,488,000 shares). The key facts of this acquisition are as follows:
Acquisition Price. The aggregate purchase price for HPE Fund IV's 62.4% stake was $1,859,520,000, computed as $40.00 per share multiplied by 46,488,000 shares.
Structure. The acquisition was structured as a negotiated tender offer for the outstanding Veldran common stock, followed by a merger squeeze-out of the prior controlling shareholder, Greystone Partners Fund III LP, a Delaware limited partnership (EIN 81-2683910). Greystone Partners had held a controlling position in Veldran prior to the HPE Fund IV acquisition. The tender offer and merger resulted in a complete change of control of Veldran from Greystone Partners to HPE Fund IV.
Funding. The acquisition was funded by a combination of (i) equity capital from HPE Fund IV (approximately $1.24 billion) and (ii) a co-investment from Prescott Capital Management LP ($620 million for 15,500,000 shares at $40.00 per share). The co-investment by Prescott Capital was made pursuant to a co-investment agreement between HPE Fund IV and Prescott Capital, the terms of which should be reviewed for any provisions relating to exit strategy, put/call rights, or other arrangements that could be relevant to the § 355(e) "plan" analysis.
Relevance to § 355(e). The September 20, 2019 acquisition constituted a change of control of Veldran — HPE Fund IV acquired a 50-percent-or-greater interest in Veldran (specifically, a 62.4% interest). If the proposed Spin-Off is part of a "plan (or series of related transactions)" that includes the September 2019 acquisition, § 355(e) would apply and Veldran would be required to recognize gain on the Distribution of the Meridian stock. The temporal gap between the acquisition (September 20, 2019) and the anticipated Distribution (Q4 2022) is approximately three years. This places the analysis outside the two-year presumption window of Treasury Regulation § 1.355-7(b)(2), but within the broader "plan" analysis framework. The § 355(e) "plan" risk is the second of the two primary concerns identified in this memorandum and is discussed in detail in Section IV.H.
Relevance to § 355(d). The September 2019 acquisition was a "purchase" within the meaning of § 355(d)(5), and HPE Fund IV's 62.4% stake constitutes a 50-percent-or-greater interest acquired within the five-year period. This implicates § 355(d) independently of § 355(e), and the interaction between the two provisions requires careful analysis. See Section IV.G.
E. Valuation and Built-In Gain Estimates
Per a preliminary valuation analysis prepared by Brackenridge & Co. (received June 10, 2022; prepared by Samuel Ng, Managing Director, Industrials Group, 383 Madison Avenue, New York, New York 10179), the estimated aggregate fair market value of Meridian (the Precision Flow Solutions Division) at the anticipated time of Distribution falls within a range of $1,396.5 million to $1,702.4 million. This valuation range is based on an enterprise value-to-EBITDA multiple of 10.5× to 12.8× applied to Meridian's FY2021 EBITDA of $133 million, with adjustments for net debt, working capital, and other items.
Veldran's estimated adjusted tax basis in the assets of the Precision Flow Solutions Division is approximately $800 million. This estimate is preliminary and is based on information provided by Pemberton Rathbone LLP (Harold Weiss) from Veldran's historical tax returns and asset schedules. The basis estimate requires further verification and refinement, including confirmation of the basis step-up (if any) resulting from the Kestrel Acquisition and the treatment of post-acquisition capital expenditures and depreciation.
Based on these preliminary figures, the estimated built-in gain in the Precision Flow Solutions Division assets is in the range of $596.5 million to $902.4 million (computed as the fair market value range of $1,396.5 million to $1,702.4 million minus the estimated $800 million adjusted tax basis).
If § 355(e) were to apply to the Spin-Off (i.e., if the Distribution were treated as part of a "plan" including the September 2019 acquisition by HPE Fund IV), Veldran would recognize this built-in gain as though the Meridian stock were sold at fair market value. The resulting corporate-level tax liability, at the current 21% corporate tax rate, would be approximately $125.3 million to $189.5 million. This represents a significant financial exposure and underscores the importance of the § 355(e) analysis.
It should be noted that the Brackenridge & Co. valuation is preliminary and is based on FY2021 financial data. The valuation may be updated as interim 2022 financial data becomes available, and market conditions at the time of the Distribution may affect the actual fair market value of Meridian. Any material change in the estimated built-in gain would correspondingly affect the tax-at-risk calculation.
F. Advisors. The following advisors are engaged in connection with the proposed Spin-Off and are relevant to the preparation of this memorandum and the ultimate tax opinion:
Calderwood & Harkness LLP (tax counsel to HPE Fund IV in connection with the Spin-Off). 1301 Avenue of the Americas, 40th Floor, New York, New York 10019. Professionals assigned to this matter:
• Leonard Cross — Responsible Partner, Tax Department
• Sylvia Hartwell — Billing Partner, Tax Department
• Garrett Simmons — Lead Associate, Tax Department
• Leila Nazari — Working Associate, Tax Department
Whitfield & Gage LLP (corporate and M&A counsel to Harrowgate Capital Advisors LLC and HPE Fund IV). 51 West 52nd Street, New York, New York 10019. Professionals:
• Priya Chandrasekar — Lead Partner
• Nathan Whitfield — Partner
• Ross Halverson — Associate
Thornapple McCord LLP (corporate counsel to Veldran Industries Holdings, Inc.). 227 West Trade Street, Suite 2000, Charlotte, North Carolina 28202. Professionals:
• David Ochoa — Lead Partner
• Elaine Thornapple — Partner
Brackenridge & Co. (financial advisor and investment bank). 383 Madison Avenue, New York, New York 10179. Key contact: Samuel Ng, Managing Director, Industrials Group. Brackenridge & Co. has been engaged to provide financial advisory services in connection with the Spin-Off, including the preliminary valuation of Meridian discussed in Section II.E.
Pemberton Rathbone LLP (independent auditors and tax-return preparers for Veldran). One PPG Place, Suite 1600, Pittsburgh, Pennsylvania 15222. Key contacts:
• Lisa Engstrom — Audit Partner
• Harold Weiss — Tax Partner
Dunmore Havens & Associates LLC (tax advisor to Prescott Capital Management LP). 590 Madison Avenue, 20th Floor, New York, New York 10022. Key contact: Irene Salcedo. Dunmore Havens should be consulted regarding Prescott Capital's independent tax considerations, including Prescott Capital's own § 355(d) and § 355(e) exposure.
III. Applicable Legal Framework
A. Overview of IRC § 355 and § 368(a)(1)(D)
The federal income tax treatment of the proposed Spin-Off is governed principally by two Code provisions: Section 355, which governs the tax treatment of distributions of controlled corporation stock by a distributing corporation to its shareholders, and Section 368(a)(1)(D), which governs the reorganization treatment of the preceding asset transfer (the Contribution).
In a divisive D reorganization of the type proposed here, the transaction is structured in two integrated steps. First, the distributing corporation (Veldran) transfers part of its assets to a newly formed or existing controlled corporation (Meridian) in exchange for stock of the controlled corporation and the assumption by the controlled corporation of certain liabilities (the Contribution). Second, the distributing corporation distributes the stock of the controlled corporation to its shareholders (the Distribution). Both the Contribution and the Distribution must independently qualify under the applicable Code provisions in order for the overall transaction to receive tax-free treatment.
The Contribution is intended to qualify as a reorganization described in § 368(a)(1)(D). Under this provision, a reorganization includes a transfer by a corporation of all or part of its assets to another corporation if, immediately after the transfer, the transferor or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in "control" of the transferee corporation (within the meaning of § 368(c)), provided that, in pursuance of the plan, stock or securities of the transferee are distributed in a transaction which qualifies under § 354, § 355, or § 356.
The Distribution is intended to qualify as a tax-free distribution under § 355. Section 355(a)(1) provides that if a distributing corporation distributes to its shareholders stock of a corporation that it "controls" (as defined in § 368(c)) immediately before the distribution, the distribution will not be treated as a distribution of property to which § 301 applies (i.e., a taxable dividend), provided that certain statutory requirements are satisfied.
If both the Contribution and the Distribution qualify, the Spin-Off achieves tax-free treatment at three levels:
(1) No gain to Distributing on the Contribution. Under § 361(a), no gain or loss is recognized by Veldran on the transfer of assets to Meridian in exchange for Meridian stock, provided the transfer is pursuant to a plan of reorganization described in § 368(a)(1)(D).
(2) No gain to Distributing on the Distribution. Under § 355(c)(1), no gain or loss is recognized by Veldran on the distribution of the Meridian stock to its shareholders, provided the distribution qualifies under § 355(a). (Note, however, that § 355(c)(2) provides that if Distributing distributes property other than "qualified property" — generally, stock or securities in Controlled — gain may be recognized. In this case, only Meridian common stock is being distributed, so § 355(c)(2) should not apply.)
(3) No gain to shareholders on receipt of Controlled stock. Under § 355(a)(1), no gain or loss is recognized by Veldran's shareholders on their receipt of the Meridian common stock in the Distribution.
The tax-free treatment at all three levels is contingent upon the satisfaction of each of the statutory and judicial requirements discussed below. Failure to satisfy any one requirement could result in full or partial recognition of gain at one or more of these levels.
B. Enumeration of Requirements
The following requirements must each be satisfied in order for the proposed Spin-Off to receive tax-free treatment under §§ 355 and 368(a)(1)(D). Each is addressed in detail in Section IV of this memorandum:
1. Control immediately before the distribution — § 368(c). Distributing must "control" Controlled immediately before the Distribution, where "control" means ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock.
2. Active trade or business — § 355(b). Both Distributing and Controlled must be engaged, immediately after the Distribution, in the active conduct of a trade or business that has been actively conducted throughout the five-year period ending on the date of the Distribution. The five-year active-trade-or-business requirement is subject to important limitations under § 355(b)(2)(C) (prohibiting reliance on businesses acquired in taxable transactions within the five-year period) and exceptions under § 355(b)(2)(D) (permitting reliance on businesses acquired through stock acquisitions where the acquired corporation itself satisfies the five-year requirement).
3. Not a device for distribution of earnings and profits — § 355(a)(1)(B). The Distribution must not be used principally as a "device" for the distribution of the earnings and profits of Distributing, Controlled, or both. The device test is analyzed under a facts-and-circumstances framework set forth in Treasury Regulation § 1.355-2(d).
4. Distribution of all stock or securities in Controlled, or distribution of "control" with establishment of non-tax-avoidance purpose for retention — § 355(a)(1)(D). Distributing must distribute all of its stock and securities in Controlled, or, alternatively, must distribute an amount of stock constituting "control" (within the meaning of § 368(c)) and establish to the satisfaction of the Secretary that the retention of any remaining stock or securities is not in pursuance of a plan having tax avoidance as one of its principal purposes.
5. Business purpose — judicial/regulatory requirement (Treas. Reg. § 1.355-2(b)). The Distribution must be motivated, in whole or substantial part, by one or more real and substantial non-federal-tax corporate business purposes. This is a judicially developed requirement incorporated into the Treasury Regulations.
6. Continuity of interest — Treas. Reg. § 1.355-2(c). One or more persons who, directly or indirectly, were owners of the enterprise prior to the Distribution must maintain a continuing interest in the modified corporate form(s) after the Distribution.
7. Not a disqualified distribution — § 355(d). The Distribution must not be a "disqualified distribution" within the meaning of § 355(d), which applies where, immediately after the distribution, any person holds "disqualified stock" (generally, stock acquired by purchase within the five-year period) constituting a 50-percent-or-greater interest in Distributing or Controlled.
8. Not part of a plan involving a 50% change of control — § 355(e). The Distribution must not be 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 in Distributing or Controlled (the "Anti-Morris Trust" rule).
9. Not a distribution of stock of a disqualified investment corporation — § 355(g). Section 355 does not apply if either Distributing or Controlled is a "disqualified investment corporation" — generally, a corporation whose investment assets constitute two-thirds or more of the fair market value of all of its assets — immediately after the Distribution.
In addition, the Contribution must independently satisfy the requirements for reorganization treatment under § 368(a)(1)(D), including the continuity-of-business-enterprise requirement of Treasury Regulation § 1.368-1(d). These requirements are addressed in Section V of this memorandum.
IV. Analysis of Statutory and Judicial Requirements
A. Control Immediately Before the Distribution — IRC § 368(c)
1. Legal Standard. Section 368(c) defines "control" as ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. This definition of control is referenced by § 355(a)(1)(A), which requires that Distributing "control" (within the meaning of § 368(c)) Controlled immediately before the Distribution.
The control test is applied immediately before the Distribution and after the Contribution — that is, at the moment when Distributing holds the stock of Controlled that it is about to distribute. For purposes of § 355, the control requirement ensures that the distributing corporation has a genuine ownership interest in the controlled corporation that is being distributed, rather than distributing stock that it does not meaningfully own.
2. Application to the Proposed Spin-Off. Immediately prior to the Distribution (and immediately after the Contribution), Veldran will own 100% of the outstanding common stock of Meridian. Meridian will have only one class of stock outstanding — common stock — all of which will be held by Veldran. This constitutes ownership of 100% of the total combined voting power of all classes of stock entitled to vote and 100% of the total number of shares of all classes of stock of Meridian.
This level of ownership far exceeds the 80% threshold required by § 368(c). There is no fractional ownership, no outstanding options or warrants in the hands of third parties, and no other classes of stock that could dilute Veldran's control of Meridian at the relevant measurement time.
Conclusion: The control requirement of § 368(c), as incorporated by § 355(a)(1)(A), is clearly and unambiguously satisfied. No issues have been identified, and no further analysis is required with respect to this requirement.
B. Active Trade or Business — IRC § 355(b)
1. Legal Standard. The active-trade-or-business ("ATB") requirement is one of the most significant substantive requirements for tax-free treatment under § 355. It serves the policy objective of ensuring that § 355 is used to divide genuine operating businesses, rather than to distribute investment assets or recently acquired businesses in a disguised sale.
Section 355(b)(1) provides that § 355 applies to a distribution only if both Distributing and Controlled are "engaged immediately after the distribution in the active conduct of a trade or business." This requirement is applied at the entity level — both the distributing corporation (Veldran, post-spin) and the controlled corporation (Meridian, post-spin) must independently satisfy it.
Section 355(b)(2) elaborates on the meaning of "active conduct of a trade or business." A corporation is treated as engaged in the active conduct of a trade or business if and only if:
(A) it is engaged in the active conduct of a trade or business;
(B) such trade or business has been "actively conducted" throughout the five-year period ending on the date of distribution;
(C) such trade or business was not acquired within the five-year period in a transaction in which gain or loss was recognized in whole or in part; and
(D) control of a corporation which (at the time of acquisition of control) was conducting such trade or business — (i) was not acquired by any distributee corporation directly (or through one or more corporations), and was not acquired by the distributing corporation directly (or through one or more corporations), within the five-year period, or (ii) was acquired by any such corporation within the five-year period but such control was acquired only by reason of transactions in which gain or loss was not recognized in whole or in part, or only by reason of such transactions combined with acquisitions before the beginning of such period.
The critical provision for this analysis is § 355(b)(2)(C), which prohibits reliance on a trade or business that was acquired in a taxable transaction within the five-year period. However, § 355(b)(2)(D) provides a safe harbor: if the trade or business was conducted by a separate corporation whose control was acquired by the distributing corporation (or a member of its affiliated group) within the five-year period, the trade or business may still qualify if the acquired corporation itself had actively conducted the business throughout the five-year period. This safe harbor is available regardless of whether the stock acquisition was taxable, provided that the acquired corporation's independent five-year history is established.
The five-year look-back period is measured from the date of the distribution. For an anticipated Q4 2022 distribution date, the look-back period extends back to approximately Q4 2017.
2. Analysis — Engineered Coatings Division (Remaining with Veldran). Post-spin, Veldran will retain the Engineered Coatings Division as its sole operating business. The Engineered Coatings Division is a substantial, operating industrial business with FY2021 revenue of approximately $1.52 billion and EBITDA of approximately $285 million, employing thousands of workers across multiple manufacturing facilities.
The Engineered Coatings Division has been operated continuously by Veldran since at least the formation of Veldran in March 2019. However, the five-year look-back period for a Q4 2022 distribution extends back to approximately Q4 2017, which predates Veldran's incorporation by approximately fifteen months. It is therefore necessary to trace the pre-2019 operating history of the Engineered Coatings business to its predecessor entities.
Preliminary diligence indicates that the Engineered Coatings business was operated by predecessor entities that were rolled into Veldran at or around the time of Veldran's formation in March 2019. The critical question is the nature of the transactions through which the Engineered Coatings assets were brought into Veldran — specifically, whether those transactions were taxable (which would implicate § 355(b)(2)(C)) or tax-free (which would permit the predecessor's operating history to be tacked for purposes of the five-year requirement).
If the Engineered Coatings business was transferred to Veldran in a tax-free transaction (e.g., a § 351 exchange or a reorganization under § 368(a)), the predecessor entity's active-conduct history would carry over to Veldran, and the five-year requirement would be satisfied provided that the predecessor had actively conducted the Engineered Coatings business since at least Q4 2017. If, however, the transfer was taxable, additional analysis would be required under § 355(b)(2)(C) and (D).
Open Item: We must confirm the five-year trade-or-business history for the Engineered Coatings Division, including the nature of the transactions that brought the Engineered Coatings assets into Veldran in 2019, the identity of the predecessor entities, and the active conduct of the business by such predecessors during the relevant five-year period. This diligence should be conducted in coordination with Pemberton Rathbone LLP (Harold Weiss) and Veldran management (Rita Subramanian, Philip Crundell). Based on preliminary information, we expect this issue to be resolvable through further diligence, but it must be confirmed before a tax opinion can be issued.
3. Analysis — Precision Flow Solutions Division (To Be Contributed to Meridian). Post-spin, Meridian (Controlled) will operate the Precision Flow Solutions Division as its sole business. The ATB analysis for Meridian is more complex than for Veldran because the Precision Flow Solutions Division includes both (a) organically developed precision flow operations that have been part of Veldran (and its predecessors) for an extended period, and (b) the operations of Kestrel Precision Controls, Inc., which was acquired by Veldran on June 7, 2019 in a taxable stock acquisition for $295 million.
The Kestrel Issue. The Kestrel Acquisition closed on June 7, 2019, which is within the five-year look-back window from an anticipated Q4 2022 distribution date. Because the Kestrel Acquisition was structured as a taxable stock acquisition — gain or loss was recognized by the seller, Rennick Industrial Partners Fund II LP, on the disposition of the Kestrel stock — § 355(b)(2)(C) is directly implicated. Under § 355(b)(2)(C), a trade or business is not treated as meeting the five-year active-conduct requirement if it was acquired in a transaction in which gain or loss was recognized in whole or in part within the five-year period. The Kestrel trade or business was acquired by Veldran in precisely such a transaction.
If § 355(b)(2)(C) were the end of the inquiry, Meridian would be unable to rely on the Kestrel business to satisfy the ATB requirement, and, given that Kestrel represents approximately 35% of Meridian's pro forma revenue (approximately $287 million of $820 million), the ATB qualification of Controlled would be in serious jeopardy. Although the remaining organic precision flow operations (approximately 65% of divisional revenue) may independently satisfy the ATB requirement — and we believe they likely would — the loss of 35% of the division's revenue base from the ATB analysis would raise questions about whether the remaining business constitutes a separate, viable "trade or business" for § 355(b) purposes, and would require careful analysis of the relationship between the Kestrel operations and the organic operations.
Application of § 355(b)(2)(D) Safe Harbor. Fortunately, § 355(b)(2)(D) provides a safe harbor that should be available on these facts. This safe harbor applies when:
(i) the trade or business was conducted by a separate corporation (here, Kestrel Precision Controls, Inc.);
(ii) control of that corporation was acquired by the distributing corporation or a member of its affiliated group (here, Veldran acquired 100% of the Kestrel stock); and
(iii) the acquired corporation itself had actively conducted the trade or business throughout the five-year period ending on the date of the distribution.
Applying these elements to the facts:
Element (i) — Separate Corporation. Kestrel Precision Controls, Inc. was a separate Georgia corporation at the time of its acquisition by Veldran. This element is satisfied.
Element (ii) — Control Acquisition. Veldran acquired 100% of the outstanding stock of Kestrel on June 7, 2019. This far exceeds the 80% "control" threshold of § 368(c). This element is satisfied.
Element (iii) — Active Conduct Throughout Five-Year Period. Kestrel was incorporated on February 12, 2003 as a Georgia corporation and has been in continuous operation in the precision fluid-control systems business since its inception — a period of over nineteen years as of the anticipated Q4 2022 distribution date, and well in excess of the five-year requirement. Based on preliminary information, Kestrel has been actively engaged in the design, manufacture, and sale of precision fluid-control systems (including high-pressure valve assemblies and flow-measurement instruments) throughout the entirety of its existence. This element should be satisfied, subject to confirmation through diligence.
Accordingly, the § 355(b)(2)(D) safe harbor should apply to the Kestrel business, notwithstanding the taxable nature of the Kestrel Acquisition. If the safe harbor applies, the Kestrel trade or business can be treated as meeting the five-year active-conduct requirement for purposes of § 355(b), and Meridian's (Controlled's) ATB qualification should be established.
Additional Considerations. We note that the application of the § 355(b)(2)(D) safe harbor requires that the Kestrel trade or business was conducted by Kestrel as a separate corporation throughout the five-year period. If Kestrel itself acquired any significant component of its business in a taxable transaction within the five-year period, a further layer of § 355(b)(2)(C)/(D) analysis would be required with respect to that component. Preliminary information does not indicate any such acquisitions by Kestrel during the relevant period, but this should be confirmed through review of Kestrel's historical records.
Furthermore, following the Kestrel Acquisition, the Kestrel operations were integrated into the broader Precision Flow Solutions Division of Veldran. It is important to ensure that the Kestrel business was not so thoroughly merged with the organic precision flow operations that the Kestrel trade or business lost its separate identity for § 355(b) purposes. Under the regulations, the focus is on whether the trade or business — rather than the corporate entity — meets the five-year requirement. If the Kestrel operations were absorbed into a single, undifferentiated precision flow business, it could be argued that the relevant "trade or business" for § 355(b) purposes is the combined precision flow business, which would need to satisfy the five-year requirement in its combined form. This issue requires further analysis and is one reason why a separate, detailed ATB memorandum is recommended.
Preliminary Conclusion. Both the Engineered Coatings Division (Veldran) and the Precision Flow Solutions Division (Meridian) should satisfy the five-year active-trade-or-business requirement of § 355(b), subject to two open items: (i) confirmation of the Engineered Coatings Division's pre-2019 operating history and the nature of the transactions that brought those assets into Veldran, and (ii) verification that Kestrel Precision Controls, Inc. satisfies all conditions of the § 355(b)(2)(D) safe harbor, including continuous active conduct of its trade or business for the full five-year period and the absence of any disqualifying sub-acquisitions by Kestrel. This is identified as one of the two primary concerns in this analysis, not because we believe the ATB requirement will ultimately fail, but because the Kestrel issue is central to the ATB qualification of Controlled and requires detailed factual verification.
Recommendation: A separate, more detailed memorandum on the § 355(b) ATB analysis with respect to the Kestrel Acquisition should be prepared, focusing on the availability of the § 355(b)(2)(D) safe harbor, the pre-2019 history of the Engineered Coatings Division, and any integration issues arising from the post-acquisition combination of the Kestrel and organic precision flow operations. This memorandum is scheduled for completion on June 1, 2022, and has been assigned to Leila Nazari, with review by Garrett Simmons and Leonard Cross.
C. Device Test — IRC § 355(a)(1)(B)
1. Legal Standard. Section 355(a)(1)(B) provides that § 355 applies to a distribution only if "the transaction was not used principally as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation or both." This requirement, commonly referred to as the "device test," is designed to prevent taxpayers from using § 355 as a mechanism to convert what would otherwise be a taxable dividend into a tax-free distribution.
The device test is inherently a facts-and-circumstances inquiry. Treasury Regulation § 1.355-2(d) provides a framework for this analysis, identifying certain factors that are evidence of device ("device factors") and certain factors that are evidence of non-device ("non-device factors"). The regulation also identifies certain categories of transactions that are "ordinarily" not considered to be a device — most notably, transactions in which both Distributing and Controlled are publicly traded immediately after the distribution.
Device Factors. The regulations identify the following principal device factors:
(i) Pro rata distribution. A pro rata (or substantially pro rata) distribution is evidence of device because it is the functional equivalent of a dividend — each shareholder receives a proportionate distribution of corporate value without altering relative ownership. Treas. Reg. § 1.355-2(d)(2)(ii).
(ii) Subsequent sale or exchange. A sale or exchange of Distributing or Controlled stock after the distribution (particularly a sale that is negotiated, agreed upon, or substantially certain to occur at the time of the distribution) is evidence of device. The greater the percentage of stock sold, the stronger the evidence. Treas. Reg. § 1.355-2(d)(2)(iii).
(iii) Nature and use of assets. The presence of assets not used in a trade or business (i.e., investment assets, cash, or other liquid assets) in either Distributing or Controlled is evidence of device, because the distribution may be a mechanism for separating investment assets from operating assets to facilitate a subsequent tax-favored disposition. Treas. Reg. § 1.355-2(d)(2)(iv).
Non-Device Factors. The regulations identify the following principal non-device factors:
(i) Corporate business purpose. The existence of a strong corporate business purpose for the distribution is evidence that the distribution is not a device. A corporate business purpose is the single most important non-device factor. Treas. Reg. § 1.355-2(d)(3)(ii).
(ii) Publicly traded stock. If the stock of Distributing or Controlled is traded on an established securities market after the distribution, this is evidence of non-device because a shareholder can achieve a "device" objective (i.e., extracting value at capital gains rates) simply by selling publicly traded stock on the open market, without the need for a § 355 distribution. Treas. Reg. § 1.355-2(d)(3)(iii).
(iii) Absence of earnings and profits. If neither Distributing nor Controlled has significant accumulated earnings and profits, the distribution is less likely to be a device because there are no (or minimal) earnings and profits to distribute. Treas. Reg. § 1.355-2(d)(3)(iv).
The device determination is made based on the totality of the facts and circumstances, with the device factors and non-device factors weighed against each other. No single factor is dispositive.
2. Application. ##### a. Device Factors
Pro rata distribution. The proposed Distribution is fully pro rata — each Veldran shareholder will receive one share of Meridian common stock for each share of Veldran common stock held on the record date, resulting in identical ownership percentages in both Veldran and Meridian post-spin. This is a device factor under Treas. Reg. § 1.355-2(d)(2)(ii). However, many successful § 355 distributions have been structured as pro rata distributions, and the IRS and the courts have long recognized that a pro rata distribution is not per se a device. The regulations state that a pro rata distribution "presents the greatest potential for the use of a distribution as a device" but also acknowledge that pro rata distributions frequently serve legitimate corporate purposes and are common in the case of publicly traded companies. The weight of this factor depends on the totality of the circumstances, including the strength of the non-device factors.
Subsequent sale or exchange. Based on information gathered to date, no agreement, understanding, arrangement, or plan for a post-spin sale or merger of either Veldran or Meridian stock has been identified. Neither Harrowgate, Veldran management, nor any of the other shareholders have entered into any agreement or understanding regarding the disposition of their shares in either entity following the Distribution. This is a favorable fact under Treas. Reg. § 1.355-2(d)(2)(iii).
However, this factor requires careful attention in light of the PE-sponsor dynamic. HPE Fund IV is a private equity fund, and private equity funds, by their nature, are structured with a finite life and are expected to eventually realize the value of their portfolio investments through sales, initial public offerings, secondary offerings, recapitalizations, or other monetization events. The typical fund life for a private equity fund is ten to twelve years, with an initial investment period of five to six years and a subsequent realization period. HPE Fund IV has a vintage year of 2018, placing it approximately four years into the fund life as of the anticipated Q4 2022 distribution date. While this timeline is consistent with continued ownership rather than an imminent exit, the inherent nature of a PE fund's structure creates a backdrop against which any subsequent sale of Distributing or Controlled stock could be viewed as having been contemplated or anticipated at the time of the Distribution.
The absence of a specific plan, agreement, or timeline for a post-spin exit by HPE Fund IV mitigates this concern significantly, but the Representation Letter must include detailed, specific representations confirming the absence of any such arrangement. We should also inquire whether HPE Fund IV or Harrowgate Capital Advisors has made any representations to its limited partners regarding the expected timeline or method of exit from the Veldran investment, as any such representations could be relevant to the device analysis.
Nature and use of assets. Both the Engineered Coatings Division (remaining with Veldran) and the Precision Flow Solutions Division (to be held by Meridian) are active operating businesses with substantial revenues, EBITDA, and tangible operating assets (manufacturing plants, equipment, inventory, receivables, and intellectual property). Based on preliminary information, neither division holds significant non-business or investment-type assets relative to the value of its operating assets. The nature-and-use-of-assets factor is therefore neutral or slightly favorable. This assessment is subject to confirmation based on the final asset allocation in the Separation Agreement.
##### b. Non-Device Factors
Corporate business purpose. A strong corporate business purpose is widely recognized as the most significant non-device factor. As discussed in detail in Section IV.E below, two preliminary business purposes have been identified for the Spin-Off: (i) enabling independent capital-allocation strategies tailored to each division's distinct end markets and capital intensity profiles, and (ii) enhancing management focus and operational efficiency by allowing each management team to concentrate exclusively on the strategic priorities and competitive challenges of a single business.
These purposes are facially plausible and, if developed with sufficient factual support, could serve as strong non-device factors. However, as of the date of this memorandum, the articulation of these business purposes remains undeveloped. The concern, discussed at length in Section IV.E, is that the true impetus for the Spin-Off may be HPE Fund IV's fund-level monetization objectives rather than genuine corporate-level business needs. A weak or insufficiently supported business purpose would diminish the force of this non-device factor and would make the overall device analysis more difficult.
Publicly traded stock. Post-spin, both Veldran and Meridian are expected to be publicly traded on a recognized national securities exchange. The presence of publicly traded stock is a significant non-device factor under Treas. Reg. § 1.355-2(d)(3)(iii). The rationale is straightforward: if shareholders can sell their stock at any time on the open market (and receive capital gains treatment on the sale), the § 355 distribution does not provide them with any "device" benefit that they could not achieve through an ordinary market sale. This factor weighs in favor of non-device treatment.
Indeed, the regulations state that a distribution is "ordinarily" not considered to be a device where both Distributing and Controlled are publicly traded after the distribution. See Treas. Reg. § 1.355-2(d)(5)(iv). While this "ordinarily not a device" provision does not create an absolute safe harbor, it provides meaningful comfort and suggests that the IRS would not typically challenge such a distribution on device grounds absent unusual circumstances.
Earnings and profits. Both Veldran and Meridian are expected to have substantial accumulated earnings and profits ("E&P") post-spin. The Engineered Coatings Division has bee