1003-00005 · Veldran Industries Holdings · Tax Analysis

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

MEMORANDUM

CALDERWOOD & HARKNESS LLP 1301 Avenue of the Americas, 40th Floor New York, NY 10019

July 8, 2022

To: File — Matter No. HRW-SPIN-001 (Engagement No. 1003-00005)

From: Leila Nazari, Associate, Tax Department

Reviewed By: Garrett Simmons, Senior Associate, Tax Department

Re: Section 355(d) Disqualified Distribution Analysis — Proposed Pro Rata Distribution of Meridian Flow Technologies, Inc. Common Stock by Veldran Industries Holdings, Inc.

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I. Executive Summary

The purpose of this memorandum is to analyze whether the proposed pro rata distribution by Veldran Industries Holdings, Inc. ("Veldran," "Distributing," or the "Company," EIN 86-1920347), a Delaware corporation, of 100% of the common stock of Meridian Flow Technologies, Inc. ("Meridian," "Controlled," or "SpinCo"), a planned Delaware corporation, to Veldran shareholders would constitute a "disqualified distribution" under Section 355(d) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"). This analysis examines whether the corporate-level gain recognition consequences of Section 355(d) would be triggered by the proposed transaction (the "Spin-Off"), and if so, the magnitude of the resulting tax liability.

The core concern animating this analysis is the significant equity position held by Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV," EIN 84-3291067), a Delaware limited partnership. HPE Fund IV holds approximately 62.4% of the outstanding Veldran common stock, consisting of 46,488,000 of 74,500,000 shares outstanding. This stake was acquired on September 20, 2019 in a negotiated tender offer and subsequent merger squeeze-out of the prior controlling shareholder, Greystone Partners Fund III LP, for aggregate cash consideration of $1,859,520,000, or $40.00 per share. Because the acquisition date of September 20, 2019 falls within the five-year look-back period measured from the anticipated Q4 2022 distribution date, the threshold temporal requirement of Section 355(d) is satisfied.

Preliminary Conclusion. Based on the analysis set forth below, Section 355(d) is implicated by the proposed Spin-Off. HPE Fund IV's 62.4% stake in Veldran was acquired by "purchase" (as defined in Section 355(d)(5) of the Code, cross-referencing Section 338(h)(3) with modifications) within the statutory five-year window, and that purchased stake exceeds the 50%-or-greater interest threshold established by Section 355(d)(4). Unless an applicable exception under Section 355(d)(5)(A) or the regulations promulgated thereunder applies — and, as discussed in detail below, none appears to be available on these facts — the distribution would constitute a "disqualified distribution" within the meaning of Section 355(d)(2). As a consequence, Section 355(c)(2) would not apply to shield the distribution from corporate-level gain recognition, and Veldran would be required to recognize gain on the distribution of Meridian stock in an amount equal to the excess of fair market value over adjusted basis, to the extent attributable to the "disqualified stock." Based on the preliminary Brackenridge & Co. valuation analysis, the estimated built-in gain ranges from approximately $596.5 million to $902.4 million, with a corresponding federal income tax liability of approximately $125.3 million to $189.5 million at the current 21% corporate tax rate.

This analysis should be read in conjunction with the separate Section 355(e) "plan" analysis memorandum dated June 28, 2022, prepared by Garrett Simmons. As discussed at length in Sections VI.A and VII below, there is a critical interplay between Section 355(d) and Section 355(e): both provisions can apply to the same transaction, but Section 355(d)(5)(B) coordinates the overlap to prevent double counting of gain. The paradoxical result is that succeeding on the Section 355(e) plan analysis — that is, concluding that the September 2019 acquisition and the proposed Spin-Off are not part of a "plan" — increases exposure under Section 355(d), and vice versa. In either case, Veldran faces corporate-level gain recognition unless the distribution is deferred beyond the five-year anniversary of HPE Fund IV's acquisition.

II. Scope and Limitations

This memorandum is an internal work-product analysis prepared for the Calderwood & Harkness LLP engagement team in connection with the proposed Spin-Off of the Precision Flow Solutions Division of Veldran Industries Holdings, Inc. This memorandum is not intended for delivery to the client, the Company, HPE Fund IV, Harrowgate Capital Advisors LLC, or any third party. It is protected by the attorney work-product doctrine and the attorney-client privilege to the fullest extent applicable, and no waiver of any privilege is intended by its preparation, internal distribution, or subsequent reference in other work-product documents.

The analysis set forth herein is based on information received by the engagement team to date, including the following key documents and data sources:

(a) the organizational documents of Veldran Industries Holdings, Inc., including its Amended and Restated Certificate of Incorporation (dated September 20, 2019) and Amended and Restated Bylaws (dated September 20, 2019);

(b) the stock purchase records and capitalization table of Veldran, as provided by Veldran's corporate secretary and verified against the Company's transfer agent records (as of June 30, 2022);

(c) the acquisition documentation relating to HPE Fund IV's September 20, 2019 acquisition of Veldran, including the Tender Offer Agreement, the Agreement and Plan of Merger (the "Merger Agreement"), and the co-investment side letter between HPE Fund IV and Prescott Capital Management LP;

(d) the acquisition documentation relating to the June 7, 2019 acquisition of Kestrel Precision Controls, Inc. by Veldran, including the Stock Purchase Agreement between Veldran and Rennick Industrial Partners Fund II LP;

(e) shareholder records of Veldran, including records of equity incentive plan issuances and management stockholder holdings;

(f) the draft Representation Letter (second draft dated July 11, 2022, reflecting comments received from Veldran's in-house tax counsel on July 6, 2022);

(g) the preliminary valuation analysis prepared by Brackenridge & Co. (received June 10, 2022); and

(h) the Section 355(e) "plan" analysis memorandum dated June 28, 2022 (prepared by Garrett Simmons).

This analysis assumes that the proposed transaction will be structured as described in the engagement materials: Veldran will contribute all assets and liabilities of the Precision Flow Solutions Division to Meridian in exchange for 100% of Meridian common stock and assumption of allocated liabilities (the "Contribution"), immediately followed by Veldran's pro rata distribution of all Meridian common stock to Veldran shareholders at a 1:1 ratio (one share of Meridian for each share of Veldran outstanding on the record date) (the "Distribution"). Together, the Contribution and the Distribution constitute the "Spin-Off."

The anticipated distribution date is Q4 2022; the exact date has not yet been determined. The analysis assumes that the distribution will occur during the fourth quarter of calendar year 2022 and evaluates the Section 355(d) implications accordingly. If the actual distribution date differs materially from the assumed time frame, the conclusions herein may need to be revisited, particularly with respect to the five-year look-back calculation.

The applicable law for this analysis consists of IRC Section 355(d), as amended; Treasury Regulation Section 1.355-6 (to the extent finalized and in effect); and relevant legislative history, including the Conference Report to the Revenue Reconciliation Act of 1990 (Pub. L. No. 101-508, H.R. Rep. No. 101-964 (1990)). No private letter ruling has been requested or received from the Internal Revenue Service with respect to the proposed Spin-Off, and no assurance can be given as to how the IRS would apply Section 355(d) to the specific facts described herein.

III. Factual Background

A. Parties and Ownership Structure

Veldran Industries Holdings, Inc. Veldran is a Delaware corporation incorporated on March 14, 2019, with its principal executive office located at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217. Veldran is a diversified industrial products and engineered materials company with operations spanning precision flow solutions, advanced polymer composites, and industrial automation systems. For the fiscal year ended December 31, 2021, Veldran reported consolidated revenue of approximately $2.34 billion and consolidated EBITDA of approximately $418 million. As of the date of this memorandum, Veldran employs approximately 8,200 persons across its various business segments and operates manufacturing and distribution facilities in fifteen states and four international jurisdictions. The Company's senior management team consists of Jonathan Caldecott, Chief Executive Officer; Rita Subramanian, Chief Financial Officer; and Philip Crundell, General Counsel and Corporate Secretary.

Meridian Flow Technologies, Inc. Meridian is a planned Delaware corporation that has not yet been incorporated. Upon incorporation, Meridian will serve as the holding company for the Precision Flow Solutions Division, which Veldran will contribute to Meridian as part of the Contribution. On a pro forma basis for the fiscal year ended December 31, 2021, the Precision Flow Solutions Division generated revenue of approximately $820 million and EBITDA of approximately $133 million. The planned senior management of Meridian consists of Sandra Waverly, planned Chief Executive Officer; and Derek Okonkwo, planned Chief Financial Officer. Meridian's planned principal office will be located at 7100 Northlake Parkway, Suite 300, Tucker, Georgia 30084. The Precision Flow Solutions Division encompasses Veldran's flow control, precision measurement, and fluid management product lines, including the products and operations acquired through the Kestrel Precision Controls acquisition described in Section III.E below.

Harrowgate Private Equity Fund IV, L.P. HPE Fund IV is a Delaware limited partnership managed by Harrowgate Capital Advisors LLC (EIN 83-2756891), a Delaware limited liability company serving as the fund's investment advisor. The general partner of HPE Fund IV is Harrowgate Capital Partners IV GP LLC (EIN 84-3291104), a Delaware limited liability company. HPE Fund IV is a 2018-vintage private equity fund with total committed capital of approximately $6.8 billion, focused on control investments in the North American industrials and business services sectors. The key principals of Harrowgate Capital Advisors LLC include Marcus Adler, Founding Partner and Chairman; Diana Fenn, Managing Partner and Chief Investment Officer (who also serves as Board Chair of Veldran); Tobias Rourke, Partner and Head of Portfolio Operations; and Christine Yeung, General Counsel. HPE Fund IV holds its 62.4% stake in Veldran through its wholly owned subsidiary Harrowgate Veldran Holdings LLC ("HVH," EIN 86-1483920), a Delaware limited liability company that is classified as a disregarded entity for federal income tax purposes.

B. Veldran Capital Structure (Pre-Spin)

As of the date of this memorandum, Veldran's authorized capital stock consists of 100,000,000 shares of common stock, par value $0.01 per share, of which 74,500,000 shares are issued and outstanding. Veldran has no preferred stock authorized or outstanding. The following table summarizes the current ownership of Veldran's outstanding common stock:

The public and institutional float figure of 13,037,500 shares (17.5%) is computed as a residual: 74,500,000 total outstanding shares minus 46,488,000 shares held by HPE Fund IV (through HVH), minus 11,026,000 shares held by Prescott Capital Management LP, minus 3,948,500 shares held by management stockholders.

Prescott Capital Management LP (EIN 13-4928371) is a Delaware limited partnership with its principal office at 277 Park Avenue, 42nd Floor, New York, New York 10172. The fund's Managing Partner is Andrew Kessler. Prescott originally acquired 15,500,000 shares of Veldran common stock at $40.00 per share (aggregate consideration of $620 million) as a co-investor alongside HPE Fund IV in the September 20, 2019 tender offer and merger transaction. Subsequent to the initial acquisition, Prescott sold 4,474,000 shares in a registered secondary offering, reducing its holdings from 15,500,000 to 11,026,000 shares (14.8% of outstanding). The secondary sale was a fully taxable disposition by Prescott and does not retroactively affect the characterization of Prescott's initial acquisition as a "purchase" for Section 355(d) purposes.

Management stockholders. Officers and directors of Veldran collectively hold approximately 3,948,500 shares (5.3%) of outstanding Veldran common stock. These shares were acquired through Veldran's equity incentive plans, including the Veldran Industries Holdings, Inc. 2019 Omnibus Equity Incentive Plan and individual employment-related equity awards. The specific acquisition dates, vesting schedules, and basis determinations for management shares are addressed in Section V.E below.

C. HPE Fund IV's Acquisition of Veldran (September 20, 2019)

On September 20, 2019, HPE Fund IV (through HVH) completed the acquisition of 46,488,000 shares of Veldran common stock, representing approximately 62.4% of the then-outstanding shares. The acquisition was structured as a two-step transaction: first, a negotiated tender offer for outstanding shares of Veldran common stock at $40.00 per share in cash; and second, a merger squeeze-out of the remaining shares not tendered in the offer, pursuant to the Agreement and Plan of Merger among Veldran, HVH (as merger sub), and the prior controlling shareholder, Greystone Partners Fund III LP (EIN 81-2683910), a Delaware limited partnership.

The aggregate purchase price for HPE Fund IV's 46,488,000-share stake was $1,859,520,000 (46,488,000 shares × $40.00 per share). Funding for the acquisition was provided through a combination of HPE Fund IV equity capital contributions (approximately $1.24 billion drawn from HPE Fund IV's committed capital) and a co-investment by Prescott Capital Management LP ($620 million for 15,500,000 shares at $40.00 per share). The co-investment by Prescott was governed by a separate co-investment side letter between HPE Fund IV and Prescott, the terms of which were negotiated contemporaneously with the principal acquisition.

The September 20, 2019 acquisition was a fully taxable transaction. The consideration paid was entirely cash; no equity, notes, or other non-cash consideration was issued by HPE Fund IV or HVH to the selling shareholders. The transaction did not qualify for nonrecognition treatment under Section 351 of the Code, nor was it structured as a reorganization under Section 368 of the Code. HPE Fund IV (through HVH) took a cost basis in the acquired Veldran shares equal to the purchase price of $40.00 per share, as required by Section 1012 of the Code. The prior controlling shareholder, Greystone Partners Fund III LP, recognized gain or loss on its disposition of the Veldran shares in the tender offer and merger.

D. Prescott Capital Management LP's Acquisition

Prescott Capital Management LP acquired its initial position in Veldran common stock simultaneously with HPE Fund IV's acquisition, on September 20, 2019. Prescott purchased 15,500,000 shares at $40.00 per share for aggregate cash consideration of $620 million. Like HPE Fund IV's acquisition, Prescott's acquisition was a fully taxable cash purchase, and Prescott took a cost basis in the acquired shares equal to the purchase price of $40.00 per share.

Subsequent to the September 2019 acquisition, Prescott sold 4,474,000 shares of Veldran common stock in a registered secondary offering, reducing its holdings from 15,500,000 shares to 11,026,000 shares, representing approximately 14.8% of Veldran's outstanding shares. The secondary offering was completed at a price above Prescott's cost basis, and Prescott recognized gain on the disposition of the sold shares.

Prescott's remaining 11,026,000 shares (14.8%) were acquired by "purchase" within the meaning of Section 355(d)(5)(A) on September 20, 2019, which falls within the five-year look-back window measured from the anticipated Q4 2022 distribution date. However, Prescott's 14.8% stake does not independently exceed the 50% threshold required under Section 355(d)(4) to constitute a 50%-or-greater interest. The relevance of Prescott's purchased stake lies in the aggregation analysis under Section 355(d)(7)(A), which is discussed in Section V.D below.

E. Kestrel Precision Controls Acquisition (June 7, 2019)

On June 7, 2019, Veldran acquired all of the outstanding capital stock of Kestrel Precision Controls, Inc. (EIN 58-2847193), a Georgia corporation founded on February 12, 2003, from Rennick Industrial Partners Fund II LP (EIN 82-3017564), a Delaware limited partnership, for aggregate cash consideration of $295 million. The acquisition was structured as a taxable stock acquisition pursuant to a Stock Purchase Agreement dated May 3, 2019. No Section 338 election was made in connection with the Kestrel acquisition.

Kestrel Precision Controls, Inc. is a manufacturer of precision flow control and measurement devices, with operations primarily located in the southeastern United States. Following the acquisition, Kestrel was integrated into Veldran's Precision Flow Solutions Division. For the fiscal year ended December 31, 2021, the former Kestrel operations contributed approximately $287 million in revenue, representing approximately 35% of the total Precision Flow Solutions Division revenue of $820 million.

The Kestrel acquisition is relevant to the Section 355(d) analysis in several respects. First, because Kestrel's operations will be contributed to Meridian as part of the Contribution, the Kestrel acquisition contributed assets and value to the Controlled corporation. To the extent that Veldran's adjusted tax basis in the Contributed Business assets reflects the purchase price paid for the Kestrel stock (subject to the absence of a Section 338 election, Veldran's basis in the Kestrel stock should be $295 million), the built-in gain attributable to the Kestrel operations may factor into the overall gain calculation if Section 355(d) applies. Second, the June 7, 2019 acquisition date falls within the five-year look-back period, although the Kestrel acquisition was an acquisition of stock of a subsidiary (not of Veldran itself) and does not directly implicate the "purchase" of Distributing or Controlled stock under Section 355(d)(3). The primary relevance is to the asset composition of the Controlled corporation and the overall basis determination.

F. Proposed Transaction and Timing

The proposed Spin-Off consists of two integrated steps:

Step 1 — The Contribution. Veldran will transfer all assets and liabilities constituting the Precision Flow Solutions Division to Meridian in exchange for 100% of the newly issued common stock of Meridian and Meridian's assumption of allocated liabilities of the Precision Flow Solutions Division. The Contribution is intended to qualify as a transfer described in Section 351 of the Code or, in the alternative, as a transfer described in Section 368(a)(1)(D) of the Code. The specific allocation of assets and liabilities between Veldran (Remaining Business) and Meridian (SpinCo) is addressed in the draft Separation Agreement and related ancillary agreements.

Step 2 — The Distribution. Immediately following the Contribution, Veldran will distribute all of the outstanding shares of Meridian common stock to Veldran's shareholders on a pro rata basis, at a ratio of one share of Meridian common stock for each share of Veldran common stock outstanding on the record date established for the Distribution. The Distribution is intended to qualify as a tax-free distribution under Section 355(a)(1) of the Code, subject to the corporate-level gain recognition issues addressed in this memorandum.

The anticipated distribution date is Q4 2022, although the exact date has not yet been determined by Veldran's Board of Directors. For purposes of this analysis, we assume that the Distribution will occur on or about October 31, 2022, unless otherwise indicated. The five-year look-back period under Section 355(d)(3)(B) extends from Q4 2017 through the date of the Distribution in Q4 2022.

HPE Fund IV's acquisition date of September 20, 2019 is approximately three years prior to the anticipated Distribution date — well within the five-year statutory window. Even if the Distribution were delayed until the latest possible date in Q4 2022 (i.e., December 31, 2022), the September 20, 2019 acquisition would remain within the five-year period (September 20, 2019 to December 31, 2022 is approximately three years and three months).

G. Valuation Data

Based on the preliminary valuation analysis prepared by Brackenridge & Co. (received June 10, 2022), the estimated aggregate fair market value of Meridian (SpinCo) is in the range of $1,396.5 million to $1,702.4 million. This valuation range is derived from the application of enterprise value to EBITDA multiples of 10.5× to 12.8× to Meridian's pro forma FY2021 EBITDA of $133 million, with adjustments for net debt and other items as described in the Brackenridge report. The Brackenridge analysis is preliminary and is subject to revision upon finalization of the valuation work, which is expected to be completed by August 2022.

Veldran's estimated adjusted tax basis in the assets constituting the Precision Flow Solutions Division is approximately $800 million, based on information provided by Veldran's in-house tax department and subject to verification through the basis confirmation process currently underway. This basis figure reflects Veldran's historical cost basis in the Precision Flow Solutions Division assets, including the $295 million stock basis in Kestrel Precision Controls (which, absent a Section 338 election, carries over as a stock basis rather than a stepped-up asset basis), and other asset basis determinations.

The estimated built-in gain on the Meridian stock to be distributed by Veldran is therefore 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 adjusted tax basis of approximately $800 million.

If Section 355(d) applies and gain is recognized at the corporate level, the estimated federal income tax liability would be approximately $125.3 million to $189.5 million at the current 21% corporate tax rate (i.e., 21% × $596.5 million = $125.3 million; 21% × $902.4 million = $189.5 million). This range corresponds to the same gain and tax estimates set forth in the Section 355(e) analysis memorandum, although the specific gain-recognition mechanics differ between the two provisions, as discussed in Section VII below.

IV. Statutory Framework: IRC § 355(d)

A. Overview of § 355(d)

Section 355(d) was enacted as part of the Revenue Reconciliation Act of 1990 (Pub. L. No. 101-508, § 11321, 104 Stat. 1388 (1990)) and has been in effect for distributions occurring after October 9, 1990 (with certain transition rules for binding contracts in effect on that date). The provision was designed to prevent the use of Section 355 distributions to extract corporate-level gain recognition in the context of a recent "purchase" of stock of the distributing or controlled corporation. Congress was concerned that, absent Section 355(d), a purchaser could acquire a controlling interest in a corporation, cause that corporation to distribute appreciated assets in the form of controlled corporation stock under Section 355, and avoid the corporate-level gain that would have been recognized had the assets been sold directly. The legislative history describes Section 355(d) as targeting transactions in which a "purchase" of stock is used as a substitute for a direct purchase of assets, thereby circumventing the repeal of the General Utilities doctrine.

Section 355(d)(2) provides that a distribution is a "disqualified distribution" if, immediately after the distribution, any person holds "disqualified stock" in either the distributing corporation or any distributed controlled corporation that constitutes a "50-percent or greater interest" in such corporation. The term "disqualified stock" is defined in Section 355(d)(3), and the term "50-percent or greater interest" is defined in Section 355(d)(4). These definitional provisions are discussed in detail below.

The effect of a disqualified distribution is set forth in Section 355(d)(1), which provides that Section 355(c)(2) — the provision that generally permits the distributing corporation to distribute controlled corporation stock without recognizing gain — "shall not apply" to a disqualified distribution. As a consequence, if a distribution is disqualified under Section 355(d), the distributing corporation must recognize gain (but not loss) on the distribution of controlled corporation stock, measured as the excess of the fair market value of the distributed stock over the distributing corporation's adjusted basis therein. It is important to note that Section 355(d) operates solely at the corporate level; it does not affect the tax-free treatment of the distribution at the shareholder level under Section 355(a)(1), provided that all other requirements of Section 355 are otherwise satisfied.

B. "Disqualified Stock" — § 355(d)(3)

Section 355(d)(3) defines "disqualified stock" as any stock in the distributing corporation or the controlled corporation that was "acquired by purchase" (as defined in Section 355(d)(5)) during the five-year period ending on the date of the distribution. The concept of "disqualified stock" is the linchpin of the Section 355(d) analysis: it identifies the stock whose recent acquisition triggers the disqualified distribution rules.

Critically, the definition of "disqualified stock" extends beyond stock of the distributing corporation that was directly purchased. Section 355(d)(3)(B)(ii) provides that stock of the controlled corporation received by a distributee in a Section 355 distribution is treated as "disqualified stock" if the holding of such controlled corporation stock is attributable — by reason of holding disqualified stock of the distributing corporation — to a purchase of distributing corporation stock within the five-year period. In other words, when a shareholder receives controlled corporation stock in a pro rata spin-off, and that shareholder's distributing corporation stock was acquired by "purchase" within the five-year window, the controlled corporation stock received in the distribution inherits the "disqualified" taint of the distributing corporation stock to which it is attributable.

This tracing concept is fundamental to the analysis of the proposed Spin-Off: HPE Fund IV's Meridian shares (received in the 1:1 pro rata distribution) will be treated as disqualified stock in the controlled corporation because they are attributable to HPE Fund IV's "purchased" Veldran shares.

C. "Purchase" — § 355(d)(5)

Section 355(d)(5)(A) defines "purchase" for purposes of Section 355(d) by cross-reference to the definition in Section 338(h)(3), with certain modifications. Under Section 338(h)(3), the term "purchase" means any acquisition of stock, but only if the basis of the stock in the hands of the purchasing corporation is not determined in whole or in part by reference to the adjusted basis of such stock in the hands of the person from whom acquired, and the stock is not acquired in an exchange to which Section 351, Section 354, Section 355, or Section 356 applies.

In practical terms, a "purchase" for Section 355(d) purposes includes the following types of acquisitions:

(a) acquisitions in fully taxable transactions, including cash purchases in open-market transactions, negotiated purchases, tender offers, and taxable mergers;

(b) acquisitions in which the acquiror's basis is determined by reference to the purchase price paid (i.e., cost basis under Section 1012), rather than by reference to the transferor's basis (i.e., a carryover or substituted basis).

Conversely, the following types of acquisitions are specifically excluded from the definition of "purchase":

(a) acquisitions in Section 351 exchanges (contributions to controlled corporations in exchange for stock);

(b) acquisitions in reorganization exchanges described in Section 354 or Section 356;

(d) acquisitions by gift or bequest; and

(e) other acquisitions in which the acquiror's basis is determined by reference to the transferor's basis (carryover-basis transactions).

Application to HPE Fund IV. The September 20, 2019 acquisition by HPE Fund IV (through HVH) of 46,488,000 shares of Veldran common stock was a negotiated tender offer followed by a taxable merger squeeze-out. The consideration paid was entirely cash ($40.00 per share). HPE Fund IV's basis in the acquired shares is a cost basis determined under Section 1012 of the Code, not a basis determined by reference to the transferor's (Greystone Partners Fund III LP's) basis. The transaction was not a Section 351 exchange, a reorganization exchange under Section 354 or Section 356, or any other form of carryover-basis transaction. Accordingly, HPE Fund IV's acquisition is plainly a "purchase" within the meaning of Section 355(d)(5)(A), and there is no basis for excluding it from that definition.

D. 50% Interest Threshold — § 355(d)(4)

Section 355(d)(4) defines a "50-percent or greater interest" as stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote, or at least 50% of the total value of shares of all classes of stock.

HPE Fund IV (through HVH) holds 46,488,000 of the 74,500,000 outstanding shares of Veldran common stock, representing 62.4% of the outstanding shares. Because Veldran has only one class of stock outstanding (common stock), HPE Fund IV's 62.4% share ownership translates directly to 62.4% of the total combined voting power and 62.4% of the total value. This comfortably exceeds the 50% threshold on both a voting-power basis and a value basis, and therefore constitutes a "50-percent or greater interest" within the meaning of Section 355(d)(4).

E. Five-Year Period — § 355(d)(3)(B)

Section 355(d)(3)(B) specifies that the relevant look-back period is the "5-year period ending on the date of the distribution." The starting point of the five-year period is determined by counting backwards five years from the actual distribution date.

Assuming an anticipated Q4 2022 distribution date (e.g., October 31, 2022), the five-year look-back period would extend from approximately October 31, 2017 through October 31, 2022. HPE Fund IV's purchase date of September 20, 2019 falls squarely within this window — approximately three years and one month before the assumed distribution date. Even under the most conservative timing assumptions (a distribution as late as December 31, 2022), the September 20, 2019 acquisition would remain within the five-year period by a margin of approximately twenty-one months.

Conversely, if the distribution were deferred to a date on or after September 21, 2024 — that is, more than five years after the September 20, 2019 acquisition — HPE Fund IV's purchase would fall outside the five-year look-back window and would no longer constitute a purchase within the relevant period for Section 355(d) purposes. The significance of this timing observation is discussed further in Section VI.D below.

V. Application to the Proposed Spin-Off

A. HPE Fund IV's 62.4% Stake — Primary Analysis

The primary Section 355(d) analysis is straightforward on the facts presented. HPE Fund IV acquired 46,488,000 shares of Veldran common stock, representing approximately 62.4% of the outstanding shares, on September 20, 2019, for aggregate cash consideration of $1,859,520,000 in a fully taxable tender offer and merger squeeze-out. We analyze each element of Section 355(d) as applied to this acquisition:

"Purchase" under § 355(d)(5)(A). As discussed in Section IV.C above, HPE Fund IV's acquisition constitutes a "purchase" under Section 355(d)(5)(A). HPE Fund IV's basis in the Veldran shares is a cost basis ($40.00 per share), not determined by reference to the transferor's (Greystone Partners Fund III LP's) adjusted basis. The transaction was not a Section 351 exchange, a reorganization exchange, or any other carryover-basis transaction. No exception to the "purchase" definition is available.

50%-or-greater interest under § 355(d)(4). HPE Fund IV's purchased stake of 62.4% of Veldran's outstanding common stock exceeds the 50% threshold under Section 355(d)(4) on both a voting-power basis and a value basis. As noted above, Veldran has a single class of common stock, so the voting-power and value percentages are identical.

Five-year period under § 355(d)(3)(B). The acquisition date of September 20, 2019 falls within the five-year period ending on the anticipated Q4 2022 distribution date. The acquisition is approximately three years old as of the date of this memorandum and will be approximately three years and one to three months old at the time of the anticipated distribution, well within the statutory five-year window.

Disqualified stock in the controlled corporation. Immediately after the Distribution, HPE Fund IV would hold Meridian common stock received in the 1:1 pro rata distribution. Specifically, HPE Fund IV (through HVH) would receive 46,488,000 shares of Meridian common stock (one Meridian share for each Veldran share held). Under Section 355(d)(3)(B)(ii), this Meridian stock would be treated as "disqualified stock" in the controlled corporation because it is attributable to HPE Fund IV's "purchased" Veldran stock. HPE Fund IV's 46,488,000 shares of Meridian stock would represent 62.4% of the outstanding Meridian stock (assuming the same share count), exceeding the 50%-or-greater interest threshold.

Conclusion. All elements of Section 355(d)(2) are satisfied with respect to HPE Fund IV's stake: a person (HPE Fund IV) holds disqualified stock in the controlled corporation (Meridian) that constitutes a 50%-or-greater interest immediately after the distribution. Absent an applicable exception, the distribution would be a "disqualified distribution" under Section 355(d)(2), and Veldran would recognize gain under Section 355(d)(1).

B. Holding Through Harrowgate Veldran Holdings LLC

HPE Fund IV holds its Veldran shares through its wholly owned subsidiary, Harrowgate Veldran Holdings LLC ("HVH," EIN 86-1483920), a Delaware limited liability company. Because HVH is a single-member LLC owned entirely by HPE Fund IV, HVH is classified as a "disregarded entity" for federal income tax purposes under Treasury Regulation Section 301.7701-3(b)(1)(ii). As a disregarded entity, HVH is not treated as a separate entity from its owner (HPE Fund IV) for federal tax purposes; rather, HVH is treated as a branch or division of HPE Fund IV.

Accordingly, for purposes of Section 355(d), HPE Fund IV is treated as the direct holder of the 46,488,000 shares of Veldran common stock that are nominally held by HVH. The interposition of HVH between HPE Fund IV and the Veldran shares does not alter the Section 355(d) analysis in any respect. HPE Fund IV is the "person" that acquired the Veldran stock by "purchase," and HPE Fund IV is the "person" that would hold the disqualified Meridian stock immediately after the Distribution.

This conclusion is consistent with Section 355(d)(8)(A), which provides that stock held through a partnership or other pass-through entity is attributed to the entity's owners for purposes of determining whether any person holds disqualified stock constituting a 50%-or-greater interest. While HVH is not a partnership (it is a disregarded entity), the same analytical framework applies: the beneficial owner of the stock is HPE Fund IV, and the disregarded entity interposition is transparent for federal tax purposes.

C. Attribution and Aggregation Rules

Section 355(d)(7) and (8) incorporate and modify the constructive ownership rules of Section 318(a) for purposes of the Section 355(d) analysis. Under these rules, stock owned by a partnership is treated as owned proportionately by its partners (Section 318(a)(2)(A)), and stock owned by a corporation, estate, or trust may be attributed to its shareholders, beneficiaries, or other owners under the applicable rules of Section 318(a)(2)(B) and (C).

Attribution from HPE Fund IV to its limited partners. HPE Fund IV is itself a Delaware limited partnership. Under the partnership attribution rule of Section 318(a)(2)(A), the Veldran stock owned by HPE Fund IV could be attributed proportionately to HPE Fund IV's limited partners (the institutional investors and other persons who have committed capital to the fund). However, for purposes of the Section 355(d) analysis, the relevant inquiry under Section 355(d)(2) is whether "any person" holds disqualified stock constituting a 50%-or-greater interest. HPE Fund IV itself is a "person" for this purpose, and HPE Fund IV's direct/beneficial ownership of 62.4% already exceeds the 50% threshold. There is no need to attribute the Veldran stock downward from HPE Fund IV to its limited partners to satisfy the threshold — HPE Fund IV itself satisfies it. Downward attribution to limited partners could theoretically be relevant if the question were whether any individual limited partner holds a 50%-or-greater interest, but no limited partner of HPE Fund IV holds a sufficient partnership interest to receive a 50%-or-greater constructive ownership interest in Veldran through partnership attribution.

Attribution from HPE Fund IV's general partner and investment advisor. Harrowgate Capital Partners IV GP LLC (the general partner of HPE Fund IV) and Harrowgate Capital Advisors LLC (the investment advisor) may be treated as constructive owners of the Veldran stock held by HPE Fund IV under applicable attribution rules. However, because HPE Fund IV's direct/beneficial ownership already exceeds the 50% threshold, any constructive ownership by the general partner or investment advisor is cumulative and does not change the outcome of the analysis. The disqualified distribution determination is already satisfied by HPE Fund IV's direct holdings.

D. Prescott Capital Management LP — Aggregation Consideration

Prescott Capital Management LP acquired 15,500,000 shares of Veldran common stock on September 20, 2019 as a co-investor alongside HPE Fund IV in the same tender offer and merger transaction. Prescott subsequently sold 4,474,000 shares, retaining 11,026,000 shares (14.8% of outstanding). Prescott's acquisition, like HPE Fund IV's, was a fully taxable cash purchase and constitutes a "purchase" under Section 355(d)(5)(A). The acquisition date of September 20, 2019 falls within the five-year look-back window.

Standing alone, Prescott's 14.8% stake does not exceed the 50% threshold under Section 355(d)(4) and would not independently trigger a disqualified distribution. However, Section 355(d)(7)(A) provides that persons acting pursuant to a "plan or arrangement" with respect to acquisitions of stock may be treated as a single person for purposes of determining whether the 50% threshold is satisfied. The relevant question is whether HPE Fund IV and Prescott acted pursuant to a "plan or arrangement" in acquiring their respective stakes in Veldran on September 20, 2019.

The factual record indicates that HPE Fund IV and Prescott did co-invest in the September 2019 acquisition. Their investments were coordinated: they participated in the same tender offer, were parties to a co-investment side letter, and acquired their shares simultaneously at the same price. These facts could support a determination that HPE Fund IV and Prescott acted pursuant to a "plan or arrangement" within the meaning of Section 355(d)(7)(A).

If HPE Fund IV and Prescott are aggregated under Section 355(d)(7)(A), their combined purchased holdings would be:

HPE Fund IV: 46,488,000 shares Prescott: 11,026,000 shares Combined: 57,514,000 shares (77.2% of outstanding)

This combined 77.2% figure exceeds the 50% threshold by an even wider margin than HPE Fund IV's standalone 62.4%.

However, because HPE Fund IV alone exceeds the 50% threshold, the aggregation of Prescott's shares with HPE Fund IV's shares does not change the outcome of the disqualified distribution analysis. The disqualified distribution determination is already triggered by HPE Fund IV's standalone position. The aggregation analysis is noted here for completeness and because it could become relevant in an alternative scenario. Specifically, if HPE Fund IV's stake were somehow reduced below 50% before the distribution — for example, through a dilutive equity issuance by Veldran that reduced HPE Fund IV's percentage below 50% — Prescott's co-investment relationship with HPE Fund IV could trigger the aggregation rule and cause the combined holdings to exceed the 50% threshold even though neither party independently exceeds it.

E. Management Stockholders

Officers and directors of Veldran collectively hold approximately 3,948,500 shares (5.3%) of outstanding Veldran common stock. These shares were acquired through various equity incentive plan grants, including stock option exercises, restricted stock awards, and restricted stock unit vesting events, under the Veldran Industries Holdings, Inc. 2019 Omnibus Equity Incentive Plan and related award agreements.

The question under Section 355(d) is whether any of these management shares were acquired by "purchase" within the five-year window. Stock acquired through compensatory grants — including shares received upon the exercise of stock options or the vesting of restricted stock — may have a basis determined by reference to the fair market value of the stock at the time of exercise or vesting (or, in the case of options, the exercise price paid), rather than by reference to the transferor's (the corporation's) basis. To the extent that management's acquisition of shares is characterized as a "purchase," those shares could be treated as disqualified stock.

However, certain compensatory issuances are excluded from the definition of "purchase" under Section 355(d)(5)(B) and the regulations thereunder, to the extent that the stock is acquired directly from the issuing corporation in connection with the performance of services. The scope of this exclusion is addressed in Treasury Regulation Section 1.355-6(d), which provides rules for determining when compensatory stock issuances constitute "purchases."

In any event, the management stockholders' collective 5.3% stake does not independently implicate the 50% threshold under Section 355(d)(4). Even if all 3,948,500 management shares were treated as acquired by "purchase," the management group would hold only 5.3% of the outstanding stock — far below the 50% threshold.

Furthermore, even if the management shares were aggregated with HPE Fund IV's shares under the "plan or arrangement" test of Section 355(d)(7)(A) — a proposition that would require a factual showing that management and HPE Fund IV acted pursuant to a plan or arrangement in acquiring their respective stakes — the analysis would not change because HPE Fund IV alone already exceeds the 50% threshold. The aggregation of management's 5.3% with HPE Fund IV's 62.4% would yield a combined 67.7%, which does not alter the disqualified distribution determination.

Notwithstanding the conclusion that management's shares do not change the outcome, the engagement team should confirm whether any portion of the management stock (3,948,500 shares / 5.3%) was in fact acquired by "purchase" within the five-year period, as this information may be relevant to the Representation Letter and the tax opinion. This item is flagged as an open item in Section IX.B below.

F. Impact on Distributing Corporation (Veldran)

If the Distribution is a "disqualified distribution" under Section 355(d)(2), the consequence under Section 355(d)(1) is that Section 355(c)(2) — the provision that generally permits the distributing corporation to distribute controlled corporation stock without recognizing gain — "shall not apply." In the absence of the Section 355(c)(2) protection, Veldran would recognize gain on the Distribution of Meridian stock as if Veldran had sold the Meridian stock for its fair market value at the time of the Distribution.

Section 355(d) applies at the corporate level. The gain recognized by Veldran would be computed as the excess of the aggregate fair market value of the Meridian stock distributed over Veldran's adjusted tax basis in the Meridian stock (which, in a Contribution qualifying under Section 351 or Section 368(a)(1)(D), would generally equal Veldran's basis in the contributed assets, subject to adjustments for assumed liabilities and other items). Based on the valuation and basis data set forth in Section III.G above:

Estimated fair market value of Meridian stock: $1,396.5 million to $1,702.4 million

Estimated adjusted tax basis of Meridian stock: approximately $800 million

Estimated built-in gain: $596.5 million to $902.4 million

Estimated federal income tax at 21%: $125.3 million to $189.5 million

It is critical to note that gain recognition under Section 355(d) at the corporate level does not affect the tax-free treatment of the Distribution at the shareholder level. Assuming that all other requirements of Section 355 are satisfied — including the requirements of Section 355(a)(1), the active trade or business requirement of Section 355(b), the "device" test of Section 355(a)(1)(B), the "business purpose" requirement developed under the regulations and case law, and any other applicable requirements — Veldran's shareholders would continue to receive Meridian stock on a tax-free basis. The Section 355(d) gain recognition is borne solely by Veldran at the corporate level.

The practical implications of a $125.3 million to $189.5 million tax liability are significant and should be weighed against the strategic benefits of the Spin-Off. The tax liability would reduce the after-tax value of the combined Veldran/Meridian enterprise and would need to be addressed in the financial modeling, the Form 10 registration statement (if applicable), and the disclosure documents provided to shareholders in connection with the Spin-Off.

VI. Potential Exceptions and Defenses

A. § 355(d)(5)(B) — Coordination with § 355(e)

Section 355(d)(5)(B) provides a coordination rule designed to prevent the double counting of gain under both Section 355(d) and Section 355(e) with respect to the same stock. Specifically, Section 355(d)(5)(B) provides that if stock of a distributing corporation is acquired by a "purchase" within the meaning of Section 355(d)(5)(A), and the same acquisition is also treated as part of a "plan" (or series of related transactions) under Section 355(e), then Section 355(d) does not apply to the extent that Section 355(e) applies to the same stock. The coordination rule thus ensures that the distributing corporation is not required to recognize gain twice — once under Section 355(d) and again under Section 355(e) — with respect to the same acquisition and distribution.

The relevance of this coordination rule to the proposed Spin-Off is direct and significant. If the Section 355(e) "plan" analysis concludes that the September 2019 acquisition by HPE Fund IV and the proposed Q4 2022 Distribution are part of a "plan" (or series of related transactions) within the meaning of Section 355(e)(2)(A), then Section 355(e) would apply to cause Veldran to recognize gain on the Distribution, and Section 355(d) would not independently apply to the same stock. Conversely, if the Section 355(e) "plan" analysis concludes that the September 2019 acquisition and the proposed Distribution are not part of a plan — that is, if the "plan" analysis is resolved favorably — then the Section 355(d)(5)(B) coordination rule does not eliminate the Section 355(d) exposure, and Section 355(d) would apply independently to cause gain recognition.

Cross-reference to the § 355(e) analysis. The Section 355(e) "plan" analysis memorandum dated June 28, 2022, prepared by Garrett Simmons, concluded preliminarily that the September 2019 acquisition and the proposed Spin-Off should not be treated as part of a "plan" within the meaning of Section 355(e). That conclusion was based on an analysis of the applicable safe harbors and factors set forth in Treasury Regulation Section 1.355-7, including the temporal separation of approximately three years between the acquisition and the proposed distribution, the absence of evidence that the Spin-Off was discussed, contemplated, or agreed to at the time of the September 2019 acquisition, and the satisfaction of certain safe harbor conditions.

If the Section 355(e) conclusion holds — that is, if the acquisition and distribution are determined not to be part of a plan — then the coordination rule of Section 355(d)(5)(B) does not apply, and the Section 355(d) exposure remains fully intact. This produces a paradoxical outcome: the more favorable the result under Section 355(e), the more exposed the transaction is under Section 355(d). Conversely, a determination that the acquisition and distribution are part of a plan (an unfavorable result under Section 355(e)) would cause gain recognition under Section 355(e) but would simultaneously eliminate the Section 355(d) exposure through the coordination rule.

The practical consequence is that, on these facts, corporate-level gain recognition appears unavoidable under one provision or the other (or potentially both, if the coordination rule does not fully overlap): either Section 355(d) applies (because no plan exists and the stock was purchased within the five-year window) or Section 355(e) applies (because the acquisition and distribution are part of a plan). The only scenario in which neither provision applies is one in which (a) the acquisition falls outside the five-year Section 355(d) look-back period (requiring a distribution after September 20, 2024) and (b) the acquisition and distribution are not part of a plan for Section 355(e) purposes.

B. § 355(d)(5)(A) Exceptions to the "Purchase" Definition

Section 355(d)(5)(A) provides that acquisitions in transactions described in Section 351, Section 354, Section 355, or Section 356 — that is, nonrecognition transactions in which the acquiror's basis is determined by reference to the transferor's basis — are excluded from the definition of "purchase." If HPE Fund IV's acquisition of the Veldran stock had been effected in one of these nonrecognition transactions (for example, in a Section 351 contribution or a tax-free reorganization exchange), the acquisition would not constitute a "purchase" and would not trigger the disqualified distribution rules.

However, HPE Fund IV's September 2019 acquisition was a cash tender offer followed by a taxable merger squeeze-out. The consideration was entirely cash. There was no Section 351 exchange, no reorganization exchange under Section 368, and no other carryover-basis or substituted-basis transaction. HPE Fund IV received a cost basis in the acquired shares equal to the $40.00 per share purchase price. Accordingly, no exception under Section 355(d)(5)(A) applies to exclude HPE Fund IV's acquisition from the definition of "purchase."

Similarly, the squeeze-out merger of Greystone Partners Fund III LP's remaining shares was a taxable transaction in which the squeezed-out shareholders received cash consideration. To the extent that any Greystone shareholders received cash rather than stock, the merger constituted a fully taxable disposition that does not qualify for any carryover-basis exception.

C. Potential Argument — "Purchased" Stock Reduced by Subsequent Dispositions

Section 355(d)(3) focuses on stock that was "acquired by purchase" and is held by the purchaser at the time of the distribution. If HPE Fund IV had disposed of a portion of its Veldran shares between the September 2019 acquisition and the distribution date, the "disqualified stock" calculation would be based on the shares actually held at the time of the distribution, not the shares originally purchased. A sufficient disposition — reducing HPE Fund IV's holdings below 50% of the outstanding stock — could theoretically moot the Section 355(d) issue.

However, based on information provided by the Company and verified against the transfer agent records, HPE Fund IV has not disposed of any Veldran shares since the September 2019 acquisition. The full 46,488,000 shares (62.4%) remain held by HPE Fund IV through HVH. There has been no reduction in HPE Fund IV's share count or percentage ownership. Accordingly, there is no basis for arguing that the "disqualified stock" held by HPE Fund IV has been reduced through subsequent dispositions.

We note that, even if HPE Fund IV were to sell shares before the distribution to reduce its holdings below 50%, such a sale would need to be analyzed carefully under both Section 355(d) and Section 355(e). A pre-distribution sale of Veldran shares by HPE Fund IV could itself raise issues under Section 355(e) (as evidence of a "plan") or could be subject to challenge under substance-over-form and anti-avoidance principles if the sale were structured primarily to avoid Section 355(d). The engagement team has not been asked to analyze pre-distribution share dispositions as a planning strategy, and we do not address that scenario further in this memorandum.

D. Timing-Based Argument — Distribution After the Five-Year Period

The most straightforward path to eliminating the Section 355(d) exposure is a timing-based solution. If the Distribution date were postponed to a date on or after September 21, 2024 — that is, more than five years after HPE Fund IV's September 20, 2019 acquisition — HPE Fund IV's purchase would fall outside the five-year look-back window of Section 355(d)(3)(B), and the purchase would no longer be treated as an acquisition within the relevant period. In that scenario, HPE Fund IV's 62.4% stake would not constitute "disqualified stock" (because it would not have been acquired by "purchase" within the five-year period), and the distribution would not be a "disqualified distribution" under Section 355(d)(2).

An anticipated Q4 2022 distribution date is approximately three years after the September 2019 acquisition — well within the five-year period, with approximately two additional years remaining. Postponement of the distribution to Q4 2024 or later would add approximately two years to the current timeline.

This timing consideration is particularly noteworthy in light of the current dormancy of the Spin-Off matter. If the Spin-Off is not pursued on the current Q4 2022 timeline and is instead reactivated at a later date, a distribution occurring on or after September 21, 2024 would moot the Section 355(d) issue with respect to HPE Fund IV's original September 2019 purchase. It is important to note, however, that deferral beyond the five-year window would not automatically eliminate all tax risk: the Section 355(e) "plan" analysis would need to be independently evaluated on the facts then existing, and any subsequent acquisitions of Veldran or Meridian stock within the five-year period preceding the deferred distribution date would need to be analyzed under Section 355(d) on their own terms.

Additionally, the same temporal calculation applies to Prescott Capital Management LP's co-investment. Prescott's original purchase is also dated September 20, 2019; therefore, the five-year anniversary of Prescott's purchase is also September 20, 2024 (with the purchase falling outside the look-back window for distributions occurring on or after September 21, 2024). Prescott's secondary sales occurred after the initial purchase date and do not change the starting date of the five-year period for the shares that were originally purchased and continue to be held.

E. Possible Regulatory Exceptions

Treasury Regulation Section 1.355-6 provides additional guidance on the application of Section 355(d), including detailed rules for determining when stock is acquired by "purchase," how the five-year period is computed, and how the aggregation and attribution rules apply. The regulations also provide certain exceptions and modified treatments for specific types of acquisitions, including acquisitions of stock in market transactions, acquisitions in connection with the performance of services, and acquisitions in certain corporate transactions.

The engagement team has reviewed the applicable regulatory exceptions set forth in Treasury Regulation Section 1.355-6 and has not identified any basis for excluding HPE Fund IV's September 2019 acquisition from the definition of "purchase" or otherwise avoiding the disqualified distribution determination. HPE Fund IV's acquisition was a straightforward taxable purchase for cash in a negotiated transaction — the type of acquisition that lies at the very core of the Section 355(d) regime. None of the regulatory exceptions for market-based acquisitions, compensatory acquisitions, or transactions involving carryover or substituted bases are applicable to these facts.

The regulations also address certain redemption-related issues and the treatment of stock rights and convertible securities, none of which are present in the current fact pattern. The engagement team will continue to monitor regulatory developments and will update this analysis if new or amended regulations are issued before the distribution date.

VII. Interplay with § 355(e) Analysis

As discussed in Section VI.A above, the coordination rule in Section 355(d)(5)(B) creates a direct interdependence between the Section 355(d) and Section 355(e) analyses. The practical effect of this coordination rule, applied to the facts of the proposed Spin-Off, is as follows:

Scenario 1: Section 355(e) "plan" analysis concludes that the September 2019 acquisition and the Q4 2022 Spin-Off are part of a "plan." In this scenario, Section 355(e) applies to cause Veldran to recognize gain on the Distribution of Meridian stock. Because the same acquisition is treated as part of a "plan" under Section 355(e), the coordination rule of Section 355(d)(5)(B) provides that Section 355(d) does not apply to the same stock. Gain is recognized under Section 355(e), not Section 355(d). The estimated gain ($596.5 million to $902.4 million) and estimated tax ($125.3 million to $189.5 million at 21%) are the same under this scenario, though the specific mechanics of the gain-recognition computation may differ as described below.

Scenario 2: Section 355(e) "plan" analysis concludes that no "plan" exists. In this scenario, Section 355(e) does not apply because the acquisition and distribution are not part of a plan. Accordingly, the coordination rule of Section 355(d)(5)(B) is not triggered, and Section 355(d) applies independently to cause gain recognition. HPE Fund IV's 62.4% purchased stake constitutes disqualified stock in excess of the 50% threshold, and the distribution is a "disqualified distribution." Gain is recognized under Section 355(d). The estimated gain and tax are the same as in Scenario 1.

Scenario 3: Distribution deferred beyond September 20, 2024, and no "plan" exists under § 355(e). In this scenario, HPE Fund IV's September 2019 purchase falls outside the five-year Section 355(d) l

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
CALDERWOOD & HARKNESS LLP 1301 Avenue of the Americas, 40th Floor New York, NY 10019
July 8, 2022
To: File — Matter No. HRW-SPIN-001 (Engagement No. 1003-00005)
From: Leila Nazari, Associate, Tax Department
Reviewed By: Garrett Simmons, Senior Associate, Tax Department
Re: Section 355(d) Disqualified Distribution Analysis — Proposed Pro Rata Distribution of Meridian Flow Technologies, Inc. Common Stock by Veldran Industries Holdings, Inc.
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I. Executive Summary
The purpose of this memorandum is to analyze whether the proposed pro rata distribution by Veldran Industries Holdings, Inc. ("Veldran," "Distributing," or the "Company," EIN 86-1920347), a Delaware corporation, of 100% of the common stock of Meridian Flow Technologies, Inc. ("Meridian," "Controlled," or "SpinCo"), a planned Delaware corporation, to Veldran shareholders would constitute a "disqualified distribution" under Section 355(d) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"). This analysis examines whether the corporate-level gain recognition consequences of Section 355(d) would be triggered by the proposed transaction (the "Spin-Off"), and if so, the magnitude of the resulting tax liability.
The core concern animating this analysis is the significant equity position held by Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV," EIN 84-3291067), a Delaware limited partnership. HPE Fund IV holds approximately 62.4% of the outstanding Veldran common stock, consisting of 46,488,000 of 74,500,000 shares outstanding. This stake was acquired on September 20, 2019 in a negotiated tender offer and subsequent merger squeeze-out of the prior controlling shareholder, Greystone Partners Fund III LP, for aggregate cash consideration of $1,859,520,000, or $40.00 per share. Because the acquisition date of September 20, 2019 falls within the five-year look-back period measured from the anticipated Q4 2022 distribution date, the threshold temporal requirement of Section 355(d) is satisfied.
Preliminary Conclusion. Based on the analysis set forth below, Section 355(d) is implicated by the proposed Spin-Off. HPE Fund IV's 62.4% stake in Veldran was acquired by "purchase" (as defined in Section 355(d)(5) of the Code, cross-referencing Section 338(h)(3) with modifications) within the statutory five-year window, and that purchased stake exceeds the 50%-or-greater interest threshold established by Section 355(d)(4). Unless an applicable exception under Section 355(d)(5)(A) or the regulations promulgated thereunder applies — and, as discussed in detail below, none appears to be available on these facts — the distribution would constitute a "disqualified distribution" within the meaning of Section 355(d)(2). As a consequence, Section 355(c)(2) would not apply to shield the distribution from corporate-level gain recognition, and Veldran would be required to recognize gain on the distribution of Meridian stock in an amount equal to the excess of fair market value over adjusted basis, to the extent attributable to the "disqualified stock." Based on the preliminary Brackenridge & Co. valuation analysis, the estimated built-in gain ranges from approximately $596.5 million to $902.4 million, with a corresponding federal income tax liability of approximately $125.3 million to $189.5 million at the current 21% corporate tax rate.
This analysis should be read in conjunction with the separate Section 355(e) "plan" analysis memorandum dated June 28, 2022, prepared by Garrett Simmons. As discussed at length in Sections VI.A and VII below, there is a critical interplay between Section 355(d) and Section 355(e): both provisions can apply to the same transaction, but Section 355(d)(5)(B) coordinates the overlap to prevent double counting of gain. The paradoxical result is that succeeding on the Section 355(e) plan analysis — that is, concluding that the September 2019 acquisition and the proposed Spin-Off are not part of a "plan" — increases exposure under Section 355(d), and vice versa. In either case, Veldran faces corporate-level gain recognition unless the distribution is deferred beyond the five-year anniversary of HPE Fund IV's acquisition.
II. Scope and Limitations
This memorandum is an internal work-product analysis prepared for the Calderwood & Harkness LLP engagement team in connection with the proposed Spin-Off of the Precision Flow Solutions Division of Veldran Industries Holdings, Inc. This memorandum is not intended for delivery to the client, the Company, HPE Fund IV, Harrowgate Capital Advisors LLC, or any third party. It is protected by the attorney work-product doctrine and the attorney-client privilege to the fullest extent applicable, and no waiver of any privilege is intended by its preparation, internal distribution, or subsequent reference in other work-product documents.
The analysis set forth herein is based on information received by the engagement team to date, including the following key documents and data sources:
(a) the organizational documents of Veldran Industries Holdings, Inc., including its Amended and Restated Certificate of Incorporation (dated September 20, 2019) and Amended and Restated Bylaws (dated September 20, 2019);
(b) the stock purchase records and capitalization table of Veldran, as provided by Veldran's corporate secretary and verified against the Company's transfer agent records (as of June 30, 2022);
(c) the acquisition documentation relating to HPE Fund IV's September 20, 2019 acquisition of Veldran, including the Tender Offer Agreement, the Agreement and Plan of Merger (the "Merger Agreement"), and the co-investment side letter between HPE Fund IV and Prescott Capital Management LP;
(d) the acquisition documentation relating to the June 7, 2019 acquisition of Kestrel Precision Controls, Inc. by Veldran, including the Stock Purchase Agreement between Veldran and Rennick Industrial Partners Fund II LP;
(e) shareholder records of Veldran, including records of equity incentive plan issuances and management stockholder holdings;
(f) the draft Representation Letter (second draft dated July 11, 2022, reflecting comments received from Veldran's in-house tax counsel on July 6, 2022);
(g) the preliminary valuation analysis prepared by Brackenridge & Co. (received June 10, 2022); and
(h) the Section 355(e) "plan" analysis memorandum dated June 28, 2022 (prepared by Garrett Simmons).
This analysis assumes that the proposed transaction will be structured as described in the engagement materials: Veldran will contribute all assets and liabilities of the Precision Flow Solutions Division to Meridian in exchange for 100% of Meridian common stock and assumption of allocated liabilities (the "Contribution"), immediately followed by Veldran's pro rata distribution of all Meridian common stock to Veldran shareholders at a 1:1 ratio (one share of Meridian for each share of Veldran outstanding on the record date) (the "Distribution"). Together, the Contribution and the Distribution constitute the "Spin-Off."
The anticipated distribution date is Q4 2022; the exact date has not yet been determined. The analysis assumes that the distribution will occur during the fourth quarter of calendar year 2022 and evaluates the Section 355(d) implications accordingly. If the actual distribution date differs materially from the assumed time frame, the conclusions herein may need to be revisited, particularly with respect to the five-year look-back calculation.
The applicable law for this analysis consists of IRC Section 355(d), as amended; Treasury Regulation Section 1.355-6 (to the extent finalized and in effect); and relevant legislative history, including the Conference Report to the Revenue Reconciliation Act of 1990 (Pub. L. No. 101-508, H.R. Rep. No. 101-964 (1990)). No private letter ruling has been requested or received from the Internal Revenue Service with respect to the proposed Spin-Off, and no assurance can be given as to how the IRS would apply Section 355(d) to the specific facts described herein.
III. Factual Background
A. Parties and Ownership Structure
Veldran Industries Holdings, Inc. Veldran is a Delaware corporation incorporated on March 14, 2019, with its principal executive office located at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217. Veldran is a diversified industrial products and engineered materials company with operations spanning precision flow solutions, advanced polymer composites, and industrial automation systems. For the fiscal year ended December 31, 2021, Veldran reported consolidated revenue of approximately $2.34 billion and consolidated EBITDA of approximately $418 million. As of the date of this memorandum, Veldran employs approximately 8,200 persons across its various business segments and operates manufacturing and distribution facilities in fifteen states and four international jurisdictions. The Company's senior management team consists of Jonathan Caldecott, Chief Executive Officer; Rita Subramanian, Chief Financial Officer; and Philip Crundell, General Counsel and Corporate Secretary.
Meridian Flow Technologies, Inc. Meridian is a planned Delaware corporation that has not yet been incorporated. Upon incorporation, Meridian will serve as the holding company for the Precision Flow Solutions Division, which Veldran will contribute to Meridian as part of the Contribution. On a pro forma basis for the fiscal year ended December 31, 2021, the Precision Flow Solutions Division generated revenue of approximately $820 million and EBITDA of approximately $133 million. The planned senior management of Meridian consists of Sandra Waverly, planned Chief Executive Officer; and Derek Okonkwo, planned Chief Financial Officer. Meridian's planned principal office will be located at 7100 Northlake Parkway, Suite 300, Tucker, Georgia 30084. The Precision Flow Solutions Division encompasses Veldran's flow control, precision measurement, and fluid management product lines, including the products and operations acquired through the Kestrel Precision Controls acquisition described in Section III.E below.
Harrowgate Private Equity Fund IV, L.P. HPE Fund IV is a Delaware limited partnership managed by Harrowgate Capital Advisors LLC (EIN 83-2756891), a Delaware limited liability company serving as the fund's investment advisor. The general partner of HPE Fund IV is Harrowgate Capital Partners IV GP LLC (EIN 84-3291104), a Delaware limited liability company. HPE Fund IV is a 2018-vintage private equity fund with total committed capital of approximately $6.8 billion, focused on control investments in the North American industrials and business services sectors. The key principals of Harrowgate Capital Advisors LLC include Marcus Adler, Founding Partner and Chairman; Diana Fenn, Managing Partner and Chief Investment Officer (who also serves as Board Chair of Veldran); Tobias Rourke, Partner and Head of Portfolio Operations; and Christine Yeung, General Counsel. HPE Fund IV holds its 62.4% stake in Veldran through its wholly owned subsidiary Harrowgate Veldran Holdings LLC ("HVH," EIN 86-1483920), a Delaware limited liability company that is classified as a disregarded entity for federal income tax purposes.
B. Veldran Capital Structure (Pre-Spin)
As of the date of this memorandum, Veldran's authorized capital stock consists of 100,000,000 shares of common stock, par value $0.01 per share, of which 74,500,000 shares are issued and outstanding. Veldran has no preferred stock authorized or outstanding. The following table summarizes the current ownership of Veldran's outstanding common stock:
The public and institutional float figure of 13,037,500 shares (17.5%) is computed as a residual: 74,500,000 total outstanding shares minus 46,488,000 shares held by HPE Fund IV (through HVH), minus 11,026,000 shares held by Prescott Capital Management LP, minus 3,948,500 shares held by management stockholders.
Prescott Capital Management LP (EIN 13-4928371) is a Delaware limited partnership with its principal office at 277 Park Avenue, 42nd Floor, New York, New York 10172. The fund's Managing Partner is Andrew Kessler. Prescott originally acquired 15,500,000 shares of Veldran common stock at $40.00 per share (aggregate consideration of $620 million) as a co-investor alongside HPE Fund IV in the September 20, 2019 tender offer and merger transaction. Subsequent to the initial acquisition, Prescott sold 4,474,000 shares in a registered secondary offering, reducing its holdings from 15,500,000 to 11,026,000 shares (14.8% of outstanding). The secondary sale was a fully taxable disposition by Prescott and does not retroactively affect the characterization of Prescott's initial acquisition as a "purchase" for Section 355(d) purposes.
Management stockholders. Officers and directors of Veldran collectively hold approximately 3,948,500 shares (5.3%) of outstanding Veldran common stock. These shares were acquired through Veldran's equity incentive plans, including the Veldran Industries Holdings, Inc. 2019 Omnibus Equity Incentive Plan and individual employment-related equity awards. The specific acquisition dates, vesting schedules, and basis determinations for management shares are addressed in Section V.E below.
C. HPE Fund IV's Acquisition of Veldran (September 20, 2019)
On September 20, 2019, HPE Fund IV (through HVH) completed the acquisition of 46,488,000 shares of Veldran common stock, representing approximately 62.4% of the then-outstanding shares. The acquisition was structured as a two-step transaction: first, a negotiated tender offer for outstanding shares of Veldran common stock at $40.00 per share in cash; and second, a merger squeeze-out of the remaining shares not tendered in the offer, pursuant to the Agreement and Plan of Merger among Veldran, HVH (as merger sub), and the prior controlling shareholder, Greystone Partners Fund III LP (EIN 81-2683910), a Delaware limited partnership.
The aggregate purchase price for HPE Fund IV's 46,488,000-share stake was $1,859,520,000 (46,488,000 shares × $40.00 per share). Funding for the acquisition was provided through a combination of HPE Fund IV equity capital contributions (approximately $1.24 billion drawn from HPE Fund IV's committed capital) and a co-investment by Prescott Capital Management LP ($620 million for 15,500,000 shares at $40.00 per share). The co-investment by Prescott was governed by a separate co-investment side letter between HPE Fund IV and Prescott, the terms of which were negotiated contemporaneously with the principal acquisition.
The September 20, 2019 acquisition was a fully taxable transaction. The consideration paid was entirely cash; no equity, notes, or other non-cash consideration was issued by HPE Fund IV or HVH to the selling shareholders. The transaction did not qualify for nonrecognition treatment under Section 351 of the Code, nor was it structured as a reorganization under Section 368 of the Code. HPE Fund IV (through HVH) took a cost basis in the acquired Veldran shares equal to the purchase price of $40.00 per share, as required by Section 1012 of the Code. The prior controlling shareholder, Greystone Partners Fund III LP, recognized gain or loss on its disposition of the Veldran shares in the tender offer and merger.
D. Prescott Capital Management LP's Acquisition
Prescott Capital Management LP acquired its initial position in Veldran common stock simultaneously with HPE Fund IV's acquisition, on September 20, 2019. Prescott purchased 15,500,000 shares at $40.00 per share for aggregate cash consideration of $620 million. Like HPE Fund IV's acquisition, Prescott's acquisition was a fully taxable cash purchase, and Prescott took a cost basis in the acquired shares equal to the purchase price of $40.00 per share.
Subsequent to the September 2019 acquisition, Prescott sold 4,474,000 shares of Veldran common stock in a registered secondary offering, reducing its holdings from 15,500,000 shares to 11,026,000 shares, representing approximately 14.8% of Veldran's outstanding shares. The secondary offering was completed at a price above Prescott's cost basis, and Prescott recognized gain on the disposition of the sold shares.
Prescott's remaining 11,026,000 shares (14.8%) were acquired by "purchase" within the meaning of Section 355(d)(5)(A) on September 20, 2019, which falls within the five-year look-back window measured from the anticipated Q4 2022 distribution date. However, Prescott's 14.8% stake does not independently exceed the 50% threshold required under Section 355(d)(4) to constitute a 50%-or-greater interest. The relevance of Prescott's purchased stake lies in the aggregation analysis under Section 355(d)(7)(A), which is discussed in Section V.D below.
E. Kestrel Precision Controls Acquisition (June 7, 2019)
On June 7, 2019, Veldran acquired all of the outstanding capital stock of Kestrel Precision Controls, Inc. (EIN 58-2847193), a Georgia corporation founded on February 12, 2003, from Rennick Industrial Partners Fund II LP (EIN 82-3017564), a Delaware limited partnership, for aggregate cash consideration of $295 million. The acquisition was structured as a taxable stock acquisition pursuant to a Stock Purchase Agreement dated May 3, 2019. No Section 338 election was made in connection with the Kestrel acquisition.
Kestrel Precision Controls, Inc. is a manufacturer of precision flow control and measurement devices, with operations primarily located in the southeastern United States. Following the acquisition, Kestrel was integrated into Veldran's Precision Flow Solutions Division. For the fiscal year ended December 31, 2021, the former Kestrel operations contributed approximately $287 million in revenue, representing approximately 35% of the total Precision Flow Solutions Division revenue of $820 million.
The Kestrel acquisition is relevant to the Section 355(d) analysis in several respects. First, because Kestrel's operations will be contributed to Meridian as part of the Contribution, the Kestrel acquisition contributed assets and value to the Controlled corporation. To the extent that Veldran's adjusted tax basis in the Contributed Business assets reflects the purchase price paid for the Kestrel stock (subject to the absence of a Section 338 election, Veldran's basis in the Kestrel stock should be $295 million), the built-in gain attributable to the Kestrel operations may factor into the overall gain calculation if Section 355(d) applies. Second, the June 7, 2019 acquisition date falls within the five-year look-back period, although the Kestrel acquisition was an acquisition of stock of a subsidiary (not of Veldran itself) and does not directly implicate the "purchase" of Distributing or Controlled stock under Section 355(d)(3). The primary relevance is to the asset composition of the Controlled corporation and the overall basis determination.
F. Proposed Transaction and Timing
The proposed Spin-Off consists of two integrated steps:
Step 1 — The Contribution. Veldran will transfer all assets and liabilities constituting the Precision Flow Solutions Division to Meridian in exchange for 100% of the newly issued common stock of Meridian and Meridian's assumption of allocated liabilities of the Precision Flow Solutions Division. The Contribution is intended to qualify as a transfer described in Section 351 of the Code or, in the alternative, as a transfer described in Section 368(a)(1)(D) of the Code. The specific allocation of assets and liabilities between Veldran (Remaining Business) and Meridian (SpinCo) is addressed in the draft Separation Agreement and related ancillary agreements.
Step 2 — The Distribution. Immediately following the Contribution, Veldran will distribute all of the outstanding shares of Meridian common stock to Veldran's shareholders on a pro rata basis, at a ratio of one share of Meridian common stock for each share of Veldran common stock outstanding on the record date established for the Distribution. The Distribution is intended to qualify as a tax-free distribution under Section 355(a)(1) of the Code, subject to the corporate-level gain recognition issues addressed in this memorandum.
The anticipated distribution date is Q4 2022, although the exact date has not yet been determined by Veldran's Board of Directors. For purposes of this analysis, we assume that the Distribution will occur on or about October 31, 2022, unless otherwise indicated. The five-year look-back period under Section 355(d)(3)(B) extends from Q4 2017 through the date of the Distribution in Q4 2022.
HPE Fund IV's acquisition date of September 20, 2019 is approximately three years prior to the anticipated Distribution date — well within the five-year statutory window. Even if the Distribution were delayed until the latest possible date in Q4 2022 (i.e., December 31, 2022), the September 20, 2019 acquisition would remain within the five-year period (September 20, 2019 to December 31, 2022 is approximately three years and three months).
G. Valuation Data
Based on the preliminary valuation analysis prepared by Brackenridge & Co. (received June 10, 2022), the estimated aggregate fair market value of Meridian (SpinCo) is in the range of $1,396.5 million to $1,702.4 million. This valuation range is derived from the application of enterprise value to EBITDA multiples of 10.5× to 12.8× to Meridian's pro forma FY2021 EBITDA of $133 million, with adjustments for net debt and other items as described in the Brackenridge report. The Brackenridge analysis is preliminary and is subject to revision upon finalization of the valuation work, which is expected to be completed by August 2022.
Veldran's estimated adjusted tax basis in the assets constituting the Precision Flow Solutions Division is approximately $800 million, based on information provided by Veldran's in-house tax department and subject to verification through the basis confirmation process currently underway. This basis figure reflects Veldran's historical cost basis in the Precision Flow Solutions Division assets, including the $295 million stock basis in Kestrel Precision Controls (which, absent a Section 338 election, carries over as a stock basis rather than a stepped-up asset basis), and other asset basis determinations.
The estimated built-in gain on the Meridian stock to be distributed by Veldran is therefore 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 adjusted tax basis of approximately $800 million.
If Section 355(d) applies and gain is recognized at the corporate level, the estimated federal income tax liability would be approximately $125.3 million to $189.5 million at the current 21% corporate tax rate (i.e., 21% × $596.5 million = $125.3 million; 21% × $902.4 million = $189.5 million). This range corresponds to the same gain and tax estimates set forth in the Section 355(e) analysis memorandum, although the specific gain-recognition mechanics differ between the two provisions, as discussed in Section VII below.
IV. Statutory Framework: IRC § 355(d)
A. Overview of § 355(d)
Section 355(d) was enacted as part of the Revenue Reconciliation Act of 1990 (Pub. L. No. 101-508, § 11321, 104 Stat. 1388 (1990)) and has been in effect for distributions occurring after October 9, 1990 (with certain transition rules for binding contracts in effect on that date). The provision was designed to prevent the use of Section 355 distributions to extract corporate-level gain recognition in the context of a recent "purchase" of stock of the distributing or controlled corporation. Congress was concerned that, absent Section 355(d), a purchaser could acquire a controlling interest in a corporation, cause that corporation to distribute appreciated assets in the form of controlled corporation stock under Section 355, and avoid the corporate-level gain that would have been recognized had the assets been sold directly. The legislative history describes Section 355(d) as targeting transactions in which a "purchase" of stock is used as a substitute for a direct purchase of assets, thereby circumventing the repeal of the General Utilities doctrine.
Section 355(d)(2) provides that a distribution is a "disqualified distribution" if, immediately after the distribution, any person holds "disqualified stock" in either the distributing corporation or any distributed controlled corporation that constitutes a "50-percent or greater interest" in such corporation. The term "disqualified stock" is defined in Section 355(d)(3), and the term "50-percent or greater interest" is defined in Section 355(d)(4). These definitional provisions are discussed in detail below.
The effect of a disqualified distribution is set forth in Section 355(d)(1), which provides that Section 355(c)(2) — the provision that generally permits the distributing corporation to distribute controlled corporation stock without recognizing gain — "shall not apply" to a disqualified distribution. As a consequence, if a distribution is disqualified under Section 355(d), the distributing corporation must recognize gain (but not loss) on the distribution of controlled corporation stock, measured as the excess of the fair market value of the distributed stock over the distributing corporation's adjusted basis therein. It is important to note that Section 355(d) operates solely at the corporate level; it does not affect the tax-free treatment of the distribution at the shareholder level under Section 355(a)(1), provided that all other requirements of Section 355 are otherwise satisfied.
B. "Disqualified Stock" — § 355(d)(3)
Section 355(d)(3) defines "disqualified stock" as any stock in the distributing corporation or the controlled corporation that was "acquired by purchase" (as defined in Section 355(d)(5)) during the five-year period ending on the date of the distribution. The concept of "disqualified stock" is the linchpin of the Section 355(d) analysis: it identifies the stock whose recent acquisition triggers the disqualified distribution rules.
Critically, the definition of "disqualified stock" extends beyond stock of the distributing corporation that was directly purchased. Section 355(d)(3)(B)(ii) provides that stock of the controlled corporation received by a distributee in a Section 355 distribution is treated as "disqualified stock" if the holding of such controlled corporation stock is attributable — by reason of holding disqualified stock of the distributing corporation — to a purchase of distributing corporation stock within the five-year period. In other words, when a shareholder receives controlled corporation stock in a pro rata spin-off, and that shareholder's distributing corporation stock was acquired by "purchase" within the five-year window, the controlled corporation stock received in the distribution inherits the "disqualified" taint of the distributing corporation stock to which it is attributable.
This tracing concept is fundamental to the analysis of the proposed Spin-Off: HPE Fund IV's Meridian shares (received in the 1:1 pro rata distribution) will be treated as disqualified stock in the controlled corporation because they are attributable to HPE Fund IV's "purchased" Veldran shares.
C. "Purchase" — § 355(d)(5)
Section 355(d)(5)(A) defines "purchase" for purposes of Section 355(d) by cross-reference to the definition in Section 338(h)(3), with certain modifications. Under Section 338(h)(3), the term "purchase" means any acquisition of stock, but only if the basis of the stock in the hands of the purchasing corporation is not determined in whole or in part by reference to the adjusted basis of such stock in the hands of the person from whom acquired, and the stock is not acquired in an exchange to which Section 351, Section 354, Section 355, or Section 356 applies.
In practical terms, a "purchase" for Section 355(d) purposes includes the following types of acquisitions:
(a) acquisitions in fully taxable transactions, including cash purchases in open-market transactions, negotiated purchases, tender offers, and taxable mergers;
(b) acquisitions in which the acquiror's basis is determined by reference to the purchase price paid (i.e., cost basis under Section 1012), rather than by reference to the transferor's basis (i.e., a carryover or substituted basis).
Conversely, the following types of acquisitions are specifically excluded from the definition of "purchase":
(a) acquisitions in Section 351 exchanges (contributions to controlled corporations in exchange for stock);
(b) acquisitions in reorganization exchanges described in Section 354 or Section 356;
(c) acquisitions in Section 355 distributions (tax-free spin-offs, split-offs, or split-ups);
(d) acquisitions by gift or bequest; and
(e) other acquisitions in which the acquiror's basis is determined by reference to the transferor's basis (carryover-basis transactions).
Application to HPE Fund IV. The September 20, 2019 acquisition by HPE Fund IV (through HVH) of 46,488,000 shares of Veldran common stock was a negotiated tender offer followed by a taxable merger squeeze-out. The consideration paid was entirely cash ($40.00 per share). HPE Fund IV's basis in the acquired shares is a cost basis determined under Section 1012 of the Code, not a basis determined by reference to the transferor's (Greystone Partners Fund III LP's) basis. The transaction was not a Section 351 exchange, a reorganization exchange under Section 354 or Section 356, or any other form of carryover-basis transaction. Accordingly, HPE Fund IV's acquisition is plainly a "purchase" within the meaning of Section 355(d)(5)(A), and there is no basis for excluding it from that definition.
D. 50% Interest Threshold — § 355(d)(4)
Section 355(d)(4) defines a "50-percent or greater interest" as stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote, or at least 50% of the total value of shares of all classes of stock.
HPE Fund IV (through HVH) holds 46,488,000 of the 74,500,000 outstanding shares of Veldran common stock, representing 62.4% of the outstanding shares. Because Veldran has only one class of stock outstanding (common stock), HPE Fund IV's 62.4% share ownership translates directly to 62.4% of the total combined voting power and 62.4% of the total value. This comfortably exceeds the 50% threshold on both a voting-power basis and a value basis, and therefore constitutes a "50-percent or greater interest" within the meaning of Section 355(d)(4).
E. Five-Year Period — § 355(d)(3)(B)
Section 355(d)(3)(B) specifies that the relevant look-back period is the "5-year period ending on the date of the distribution." The starting point of the five-year period is determined by counting backwards five years from the actual distribution date.
Assuming an anticipated Q4 2022 distribution date (e.g., October 31, 2022), the five-year look-back period would extend from approximately October 31, 2017 through October 31, 2022. HPE Fund IV's purchase date of September 20, 2019 falls squarely within this window — approximately three years and one month before the assumed distribution date. Even under the most conservative timing assumptions (a distribution as late as December 31, 2022), the September 20, 2019 acquisition would remain within the five-year period by a margin of approximately twenty-one months.
Conversely, if the distribution were deferred to a date on or after September 21, 2024 — that is, more than five years after the September 20, 2019 acquisition — HPE Fund IV's purchase would fall outside the five-year look-back window and would no longer constitute a purchase within the relevant period for Section 355(d) purposes. The significance of this timing observation is discussed further in Section VI.D below.
V. Application to the Proposed Spin-Off
A. HPE Fund IV's 62.4% Stake — Primary Analysis
The primary Section 355(d) analysis is straightforward on the facts presented. HPE Fund IV acquired 46,488,000 shares of Veldran common stock, representing approximately 62.4% of the outstanding shares, on September 20, 2019, for aggregate cash consideration of $1,859,520,000 in a fully taxable tender offer and merger squeeze-out. We analyze each element of Section 355(d) as applied to this acquisition:
"Purchase" under § 355(d)(5)(A). As discussed in Section IV.C above, HPE Fund IV's acquisition constitutes a "purchase" under Section 355(d)(5)(A). HPE Fund IV's basis in the Veldran shares is a cost basis ($40.00 per share), not determined by reference to the transferor's (Greystone Partners Fund III LP's) adjusted basis. The transaction was not a Section 351 exchange, a reorganization exchange, or any other carryover-basis transaction. No exception to the "purchase" definition is available.
50%-or-greater interest under § 355(d)(4). HPE Fund IV's purchased stake of 62.4% of Veldran's outstanding common stock exceeds the 50% threshold under Section 355(d)(4) on both a voting-power basis and a value basis. As noted above, Veldran has a single class of common stock, so the voting-power and value percentages are identical.
Five-year period under § 355(d)(3)(B). The acquisition date of September 20, 2019 falls within the five-year period ending on the anticipated Q4 2022 distribution date. The acquisition is approximately three years old as of the date of this memorandum and will be approximately three years and one to three months old at the time of the anticipated distribution, well within the statutory five-year window.
Disqualified stock in the controlled corporation. Immediately after the Distribution, HPE Fund IV would hold Meridian common stock received in the 1:1 pro rata distribution. Specifically, HPE Fund IV (through HVH) would receive 46,488,000 shares of Meridian common stock (one Meridian share for each Veldran share held). Under Section 355(d)(3)(B)(ii), this Meridian stock would be treated as "disqualified stock" in the controlled corporation because it is attributable to HPE Fund IV's "purchased" Veldran stock. HPE Fund IV's 46,488,000 shares of Meridian stock would represent 62.4% of the outstanding Meridian stock (assuming the same share count), exceeding the 50%-or-greater interest threshold.
Conclusion. All elements of Section 355(d)(2) are satisfied with respect to HPE Fund IV's stake: a person (HPE Fund IV) holds disqualified stock in the controlled corporation (Meridian) that constitutes a 50%-or-greater interest immediately after the distribution. Absent an applicable exception, the distribution would be a "disqualified distribution" under Section 355(d)(2), and Veldran would recognize gain under Section 355(d)(1).
B. Holding Through Harrowgate Veldran Holdings LLC
HPE Fund IV holds its Veldran shares through its wholly owned subsidiary, Harrowgate Veldran Holdings LLC ("HVH," EIN 86-1483920), a Delaware limited liability company. Because HVH is a single-member LLC owned entirely by HPE Fund IV, HVH is classified as a "disregarded entity" for federal income tax purposes under Treasury Regulation Section 301.7701-3(b)(1)(ii). As a disregarded entity, HVH is not treated as a separate entity from its owner (HPE Fund IV) for federal tax purposes; rather, HVH is treated as a branch or division of HPE Fund IV.
Accordingly, for purposes of Section 355(d), HPE Fund IV is treated as the direct holder of the 46,488,000 shares of Veldran common stock that are nominally held by HVH. The interposition of HVH between HPE Fund IV and the Veldran shares does not alter the Section 355(d) analysis in any respect. HPE Fund IV is the "person" that acquired the Veldran stock by "purchase," and HPE Fund IV is the "person" that would hold the disqualified Meridian stock immediately after the Distribution.
This conclusion is consistent with Section 355(d)(8)(A), which provides that stock held through a partnership or other pass-through entity is attributed to the entity's owners for purposes of determining whether any person holds disqualified stock constituting a 50%-or-greater interest. While HVH is not a partnership (it is a disregarded entity), the same analytical framework applies: the beneficial owner of the stock is HPE Fund IV, and the disregarded entity interposition is transparent for federal tax purposes.
C. Attribution and Aggregation Rules
Section 355(d)(7) and (8) incorporate and modify the constructive ownership rules of Section 318(a) for purposes of the Section 355(d) analysis. Under these rules, stock owned by a partnership is treated as owned proportionately by its partners (Section 318(a)(2)(A)), and stock owned by a corporation, estate, or trust may be attributed to its shareholders, beneficiaries, or other owners under the applicable rules of Section 318(a)(2)(B) and (C).
Attribution from HPE Fund IV to its limited partners. HPE Fund IV is itself a Delaware limited partnership. Under the partnership attribution rule of Section 318(a)(2)(A), the Veldran stock owned by HPE Fund IV could be attributed proportionately to HPE Fund IV's limited partners (the institutional investors and other persons who have committed capital to the fund). However, for purposes of the Section 355(d) analysis, the relevant inquiry under Section 355(d)(2) is whether "any person" holds disqualified stock constituting a 50%-or-greater interest. HPE Fund IV itself is a "person" for this purpose, and HPE Fund IV's direct/beneficial ownership of 62.4% already exceeds the 50% threshold. There is no need to attribute the Veldran stock downward from HPE Fund IV to its limited partners to satisfy the threshold — HPE Fund IV itself satisfies it. Downward attribution to limited partners could theoretically be relevant if the question were whether any individual limited partner holds a 50%-or-greater interest, but no limited partner of HPE Fund IV holds a sufficient partnership interest to receive a 50%-or-greater constructive ownership interest in Veldran through partnership attribution.
Attribution from HPE Fund IV's general partner and investment advisor. Harrowgate Capital Partners IV GP LLC (the general partner of HPE Fund IV) and Harrowgate Capital Advisors LLC (the investment advisor) may be treated as constructive owners of the Veldran stock held by HPE Fund IV under applicable attribution rules. However, because HPE Fund IV's direct/beneficial ownership already exceeds the 50% threshold, any constructive ownership by the general partner or investment advisor is cumulative and does not change the outcome of the analysis. The disqualified distribution determination is already satisfied by HPE Fund IV's direct holdings.
D. Prescott Capital Management LP — Aggregation Consideration
Prescott Capital Management LP acquired 15,500,000 shares of Veldran common stock on September 20, 2019 as a co-investor alongside HPE Fund IV in the same tender offer and merger transaction. Prescott subsequently sold 4,474,000 shares, retaining 11,026,000 shares (14.8% of outstanding). Prescott's acquisition, like HPE Fund IV's, was a fully taxable cash purchase and constitutes a "purchase" under Section 355(d)(5)(A). The acquisition date of September 20, 2019 falls within the five-year look-back window.
Standing alone, Prescott's 14.8% stake does not exceed the 50% threshold under Section 355(d)(4) and would not independently trigger a disqualified distribution. However, Section 355(d)(7)(A) provides that persons acting pursuant to a "plan or arrangement" with respect to acquisitions of stock may be treated as a single person for purposes of determining whether the 50% threshold is satisfied. The relevant question is whether HPE Fund IV and Prescott acted pursuant to a "plan or arrangement" in acquiring their respective stakes in Veldran on September 20, 2019.
The factual record indicates that HPE Fund IV and Prescott did co-invest in the September 2019 acquisition. Their investments were coordinated: they participated in the same tender offer, were parties to a co-investment side letter, and acquired their shares simultaneously at the same price. These facts could support a determination that HPE Fund IV and Prescott acted pursuant to a "plan or arrangement" within the meaning of Section 355(d)(7)(A).
If HPE Fund IV and Prescott are aggregated under Section 355(d)(7)(A), their combined purchased holdings would be:
HPE Fund IV: 46,488,000 shares Prescott: 11,026,000 shares Combined: 57,514,000 shares (77.2% of outstanding)
This combined 77.2% figure exceeds the 50% threshold by an even wider margin than HPE Fund IV's standalone 62.4%.
However, because HPE Fund IV alone exceeds the 50% threshold, the aggregation of Prescott's shares with HPE Fund IV's shares does not change the outcome of the disqualified distribution analysis. The disqualified distribution determination is already triggered by HPE Fund IV's standalone position. The aggregation analysis is noted here for completeness and because it could become relevant in an alternative scenario. Specifically, if HPE Fund IV's stake were somehow reduced below 50% before the distribution — for example, through a dilutive equity issuance by Veldran that reduced HPE Fund IV's percentage below 50% — Prescott's co-investment relationship with HPE Fund IV could trigger the aggregation rule and cause the combined holdings to exceed the 50% threshold even though neither party independently exceeds it.
E. Management Stockholders
Officers and directors of Veldran collectively hold approximately 3,948,500 shares (5.3%) of outstanding Veldran common stock. These shares were acquired through various equity incentive plan grants, including stock option exercises, restricted stock awards, and restricted stock unit vesting events, under the Veldran Industries Holdings, Inc. 2019 Omnibus Equity Incentive Plan and related award agreements.
The question under Section 355(d) is whether any of these management shares were acquired by "purchase" within the five-year window. Stock acquired through compensatory grants — including shares received upon the exercise of stock options or the vesting of restricted stock — may have a basis determined by reference to the fair market value of the stock at the time of exercise or vesting (or, in the case of options, the exercise price paid), rather than by reference to the transferor's (the corporation's) basis. To the extent that management's acquisition of shares is characterized as a "purchase," those shares could be treated as disqualified stock.
However, certain compensatory issuances are excluded from the definition of "purchase" under Section 355(d)(5)(B) and the regulations thereunder, to the extent that the stock is acquired directly from the issuing corporation in connection with the performance of services. The scope of this exclusion is addressed in Treasury Regulation Section 1.355-6(d), which provides rules for determining when compensatory stock issuances constitute "purchases."
In any event, the management stockholders' collective 5.3% stake does not independently implicate the 50% threshold under Section 355(d)(4). Even if all 3,948,500 management shares were treated as acquired by "purchase," the management group would hold only 5.3% of the outstanding stock — far below the 50% threshold.
Furthermore, even if the management shares were aggregated with HPE Fund IV's shares under the "plan or arrangement" test of Section 355(d)(7)(A) — a proposition that would require a factual showing that management and HPE Fund IV acted pursuant to a plan or arrangement in acquiring their respective stakes — the analysis would not change because HPE Fund IV alone already exceeds the 50% threshold. The aggregation of management's 5.3% with HPE Fund IV's 62.4% would yield a combined 67.7%, which does not alter the disqualified distribution determination.
Notwithstanding the conclusion that management's shares do not change the outcome, the engagement team should confirm whether any portion of the management stock (3,948,500 shares / 5.3%) was in fact acquired by "purchase" within the five-year period, as this information may be relevant to the Representation Letter and the tax opinion. This item is flagged as an open item in Section IX.B below.
F. Impact on Distributing Corporation (Veldran)
If the Distribution is a "disqualified distribution" under Section 355(d)(2), the consequence under Section 355(d)(1) is that Section 355(c)(2) — the provision that generally permits the distributing corporation to distribute controlled corporation stock without recognizing gain — "shall not apply." In the absence of the Section 355(c)(2) protection, Veldran would recognize gain on the Distribution of Meridian stock as if Veldran had sold the Meridian stock for its fair market value at the time of the Distribution.
Section 355(d) applies at the corporate level. The gain recognized by Veldran would be computed as the excess of the aggregate fair market value of the Meridian stock distributed over Veldran's adjusted tax basis in the Meridian stock (which, in a Contribution qualifying under Section 351 or Section 368(a)(1)(D), would generally equal Veldran's basis in the contributed assets, subject to adjustments for assumed liabilities and other items). Based on the valuation and basis data set forth in Section III.G above:
Estimated fair market value of Meridian stock: $1,396.5 million to $1,702.4 million
Estimated adjusted tax basis of Meridian stock: approximately $800 million
Estimated built-in gain: $596.5 million to $902.4 million
Estimated federal income tax at 21%: $125.3 million to $189.5 million
It is critical to note that gain recognition under Section 355(d) at the corporate level does not affect the tax-free treatment of the Distribution at the shareholder level. Assuming that all other requirements of Section 355 are satisfied — including the requirements of Section 355(a)(1), the active trade or business requirement of Section 355(b), the "device" test of Section 355(a)(1)(B), the "business purpose" requirement developed under the regulations and case law, and any other applicable requirements — Veldran's shareholders would continue to receive Meridian stock on a tax-free basis. The Section 355(d) gain recognition is borne solely by Veldran at the corporate level.
The practical implications of a $125.3 million to $189.5 million tax liability are significant and should be weighed against the strategic benefits of the Spin-Off. The tax liability would reduce the after-tax value of the combined Veldran/Meridian enterprise and would need to be addressed in the financial modeling, the Form 10 registration statement (if applicable), and the disclosure documents provided to shareholders in connection with the Spin-Off.
VI. Potential Exceptions and Defenses
A. § 355(d)(5)(B) — Coordination with § 355(e)
Section 355(d)(5)(B) provides a coordination rule designed to prevent the double counting of gain under both Section 355(d) and Section 355(e) with respect to the same stock. Specifically, Section 355(d)(5)(B) provides that if stock of a distributing corporation is acquired by a "purchase" within the meaning of Section 355(d)(5)(A), and the same acquisition is also treated as part of a "plan" (or series of related transactions) under Section 355(e), then Section 355(d) does not apply to the extent that Section 355(e) applies to the same stock. The coordination rule thus ensures that the distributing corporation is not required to recognize gain twice — once under Section 355(d) and again under Section 355(e) — with respect to the same acquisition and distribution.
The relevance of this coordination rule to the proposed Spin-Off is direct and significant. If the Section 355(e) "plan" analysis concludes that the September 2019 acquisition by HPE Fund IV and the proposed Q4 2022 Distribution are part of a "plan" (or series of related transactions) within the meaning of Section 355(e)(2)(A), then Section 355(e) would apply to cause Veldran to recognize gain on the Distribution, and Section 355(d) would not independently apply to the same stock. Conversely, if the Section 355(e) "plan" analysis concludes that the September 2019 acquisition and the proposed Distribution are not part of a plan — that is, if the "plan" analysis is resolved favorably — then the Section 355(d)(5)(B) coordination rule does not eliminate the Section 355(d) exposure, and Section 355(d) would apply independently to cause gain recognition.
Cross-reference to the § 355(e) analysis. The Section 355(e) "plan" analysis memorandum dated June 28, 2022, prepared by Garrett Simmons, concluded preliminarily that the September 2019 acquisition and the proposed Spin-Off should not be treated as part of a "plan" within the meaning of Section 355(e). That conclusion was based on an analysis of the applicable safe harbors and factors set forth in Treasury Regulation Section 1.355-7, including the temporal separation of approximately three years between the acquisition and the proposed distribution, the absence of evidence that the Spin-Off was discussed, contemplated, or agreed to at the time of the September 2019 acquisition, and the satisfaction of certain safe harbor conditions.
If the Section 355(e) conclusion holds — that is, if the acquisition and distribution are determined not to be part of a plan — then the coordination rule of Section 355(d)(5)(B) does not apply, and the Section 355(d) exposure remains fully intact. This produces a paradoxical outcome: the more favorable the result under Section 355(e), the more exposed the transaction is under Section 355(d). Conversely, a determination that the acquisition and distribution are part of a plan (an unfavorable result under Section 355(e)) would cause gain recognition under Section 355(e) but would simultaneously eliminate the Section 355(d) exposure through the coordination rule.
The practical consequence is that, on these facts, corporate-level gain recognition appears unavoidable under one provision or the other (or potentially both, if the coordination rule does not fully overlap): either Section 355(d) applies (because no plan exists and the stock was purchased within the five-year window) or Section 355(e) applies (because the acquisition and distribution are part of a plan). The only scenario in which neither provision applies is one in which (a) the acquisition falls outside the five-year Section 355(d) look-back period (requiring a distribution after September 20, 2024) and (b) the acquisition and distribution are not part of a plan for Section 355(e) purposes.
B. § 355(d)(5)(A) Exceptions to the "Purchase" Definition
Section 355(d)(5)(A) provides that acquisitions in transactions described in Section 351, Section 354, Section 355, or Section 356 — that is, nonrecognition transactions in which the acquiror's basis is determined by reference to the transferor's basis — are excluded from the definition of "purchase." If HPE Fund IV's acquisition of the Veldran stock had been effected in one of these nonrecognition transactions (for example, in a Section 351 contribution or a tax-free reorganization exchange), the acquisition would not constitute a "purchase" and would not trigger the disqualified distribution rules.
However, HPE Fund IV's September 2019 acquisition was a cash tender offer followed by a taxable merger squeeze-out. The consideration was entirely cash. There was no Section 351 exchange, no reorganization exchange under Section 368, and no other carryover-basis or substituted-basis transaction. HPE Fund IV received a cost basis in the acquired shares equal to the $40.00 per share purchase price. Accordingly, no exception under Section 355(d)(5)(A) applies to exclude HPE Fund IV's acquisition from the definition of "purchase."
Similarly, the squeeze-out merger of Greystone Partners Fund III LP's remaining shares was a taxable transaction in which the squeezed-out shareholders received cash consideration. To the extent that any Greystone shareholders received cash rather than stock, the merger constituted a fully taxable disposition that does not qualify for any carryover-basis exception.
C. Potential Argument — "Purchased" Stock Reduced by Subsequent Dispositions
Section 355(d)(3) focuses on stock that was "acquired by purchase" and is held by the purchaser at the time of the distribution. If HPE Fund IV had disposed of a portion of its Veldran shares between the September 2019 acquisition and the distribution date, the "disqualified stock" calculation would be based on the shares actually held at the time of the distribution, not the shares originally purchased. A sufficient disposition — reducing HPE Fund IV's holdings below 50% of the outstanding stock — could theoretically moot the Section 355(d) issue.
However, based on information provided by the Company and verified against the transfer agent records, HPE Fund IV has not disposed of any Veldran shares since the September 2019 acquisition. The full 46,488,000 shares (62.4%) remain held by HPE Fund IV through HVH. There has been no reduction in HPE Fund IV's share count or percentage ownership. Accordingly, there is no basis for arguing that the "disqualified stock" held by HPE Fund IV has been reduced through subsequent dispositions.
We note that, even if HPE Fund IV were to sell shares before the distribution to reduce its holdings below 50%, such a sale would need to be analyzed carefully under both Section 355(d) and Section 355(e). A pre-distribution sale of Veldran shares by HPE Fund IV could itself raise issues under Section 355(e) (as evidence of a "plan") or could be subject to challenge under substance-over-form and anti-avoidance principles if the sale were structured primarily to avoid Section 355(d). The engagement team has not been asked to analyze pre-distribution share dispositions as a planning strategy, and we do not address that scenario further in this memorandum.
D. Timing-Based Argument — Distribution After the Five-Year Period
The most straightforward path to eliminating the Section 355(d) exposure is a timing-based solution. If the Distribution date were postponed to a date on or after September 21, 2024 — that is, more than five years after HPE Fund IV's September 20, 2019 acquisition — HPE Fund IV's purchase would fall outside the five-year look-back window of Section 355(d)(3)(B), and the purchase would no longer be treated as an acquisition within the relevant period. In that scenario, HPE Fund IV's 62.4% stake would not constitute "disqualified stock" (because it would not have been acquired by "purchase" within the five-year period), and the distribution would not be a "disqualified distribution" under Section 355(d)(2).
An anticipated Q4 2022 distribution date is approximately three years after the September 2019 acquisition — well within the five-year period, with approximately two additional years remaining. Postponement of the distribution to Q4 2024 or later would add approximately two years to the current timeline.
This timing consideration is particularly noteworthy in light of the current dormancy of the Spin-Off matter. If the Spin-Off is not pursued on the current Q4 2022 timeline and is instead reactivated at a later date, a distribution occurring on or after September 21, 2024 would moot the Section 355(d) issue with respect to HPE Fund IV's original September 2019 purchase. It is important to note, however, that deferral beyond the five-year window would not automatically eliminate all tax risk: the Section 355(e) "plan" analysis would need to be independently evaluated on the facts then existing, and any subsequent acquisitions of Veldran or Meridian stock within the five-year period preceding the deferred distribution date would need to be analyzed under Section 355(d) on their own terms.
Additionally, the same temporal calculation applies to Prescott Capital Management LP's co-investment. Prescott's original purchase is also dated September 20, 2019; therefore, the five-year anniversary of Prescott's purchase is also September 20, 2024 (with the purchase falling outside the look-back window for distributions occurring on or after September 21, 2024). Prescott's secondary sales occurred after the initial purchase date and do not change the starting date of the five-year period for the shares that were originally purchased and continue to be held.
E. Possible Regulatory Exceptions
Treasury Regulation Section 1.355-6 provides additional guidance on the application of Section 355(d), including detailed rules for determining when stock is acquired by "purchase," how the five-year period is computed, and how the aggregation and attribution rules apply. The regulations also provide certain exceptions and modified treatments for specific types of acquisitions, including acquisitions of stock in market transactions, acquisitions in connection with the performance of services, and acquisitions in certain corporate transactions.
The engagement team has reviewed the applicable regulatory exceptions set forth in Treasury Regulation Section 1.355-6 and has not identified any basis for excluding HPE Fund IV's September 2019 acquisition from the definition of "purchase" or otherwise avoiding the disqualified distribution determination. HPE Fund IV's acquisition was a straightforward taxable purchase for cash in a negotiated transaction — the type of acquisition that lies at the very core of the Section 355(d) regime. None of the regulatory exceptions for market-based acquisitions, compensatory acquisitions, or transactions involving carryover or substituted bases are applicable to these facts.
The regulations also address certain redemption-related issues and the treatment of stock rights and convertible securities, none of which are present in the current fact pattern. The engagement team will continue to monitor regulatory developments and will update this analysis if new or amended regulations are issued before the distribution date.
VII. Interplay with § 355(e) Analysis
As discussed in Section VI.A above, the coordination rule in Section 355(d)(5)(B) creates a direct interdependence between the Section 355(d) and Section 355(e) analyses. The practical effect of this coordination rule, applied to the facts of the proposed Spin-Off, is as follows:
Scenario 1: Section 355(e) "plan" analysis concludes that the September 2019 acquisition and the Q4 2022 Spin-Off are part of a "plan." In this scenario, Section 355(e) applies to cause Veldran to recognize gain on the Distribution of Meridian stock. Because the same acquisition is treated as part of a "plan" under Section 355(e), the coordination rule of Section 355(d)(5)(B) provides that Section 355(d) does not apply to the same stock. Gain is recognized under Section 355(e), not Section 355(d). The estimated gain ($596.5 million to $902.4 million) and estimated tax ($125.3 million to $189.5 million at 21%) are the same under this scenario, though the specific mechanics of the gain-recognition computation may differ as described below.
Scenario 2: Section 355(e) "plan" analysis concludes that no "plan" exists. In this scenario, Section 355(e) does not apply because the acquisition and distribution are not part of a plan. Accordingly, the coordination rule of Section 355(d)(5)(B) is not triggered, and Section 355(d) applies independently to cause gain recognition. HPE Fund IV's 62.4% purchased stake constitutes disqualified stock in excess of the 50% threshold, and the distribution is a "disqualified distribution." Gain is recognized under Section 355(d). The estimated gain and tax are the same as in Scenario 1.
Scenario 3: Distribution deferred beyond September 20, 2024, and no "plan" exists under § 355(e). In this scenario, HPE Fund IV's September 2019 purchase falls outside the five-year Section 355(d) l

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