1003-00005 · Veldran Industries Holdings · Tax Analysis

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

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

MEMORANDUM

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

FROM: Garrett Simmons (Lead Associate, Tax Department)

REVIEWED BY: Leonard Cross (Responsible Partner); Sylvia Hartwell (Billing Partner)

DATE: June 28, 2022

RE: IRC § 355(e) "Plan" Analysis — Proposed Spin-Off of Meridian Flow Technologies, Inc. from Veldran Industries Holdings, Inc.

STATUS: FIRST DRAFT — For Internal Discussion Only; Subject to Revision

CLIENT: Harrowgate Private Equity Fund IV, L.P. (EIN: 84-3291067)

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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. ("Distributing" or "Veldran") of 100% of the outstanding common stock of Meridian Flow Technologies, Inc. ("Controlled," "SpinCo," or "Meridian") to Veldran's shareholders is part of a "plan (or series of related transactions)" within the meaning of Section 355(e) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), that includes the September 20, 2019 acquisition by Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV" or "Harrowgate") of approximately 62.4% of the outstanding common stock of Veldran. That acquisition was effected through a negotiated tender offer followed by a merger squeeze-out and involved the purchase of 46,488,000 shares of Veldran common stock at a price of $40.00 per share, for an aggregate purchase price of $1,859,520,000. The September 2019 acquisition constituted a change of control of Veldran — i.e., a change in ownership of more than 50% of Veldran's voting stock — that is the type of transaction to which § 355(e) is directed.

Preliminary Conclusion. Based on the facts currently available to us, and subject to the significant caveats and open items described below and in Section VII of this memorandum, the September 2019 acquisition and the proposed spin-off should not be treated as part of a "plan (or series of related transactions)" within the meaning of IRC § 355(e). The approximately three-year temporal gap between the acquisition and the anticipated Q4 2022 distribution date places the acquisition outside the two-year rebuttable presumption period established under Treasury Regulation § 1.355-7(b)(2), and we have not identified any documentary evidence or factual indication that a spin-off of the Precision Flow Solutions Division (or any other Veldran business segment) was discussed, contemplated, or agreed to at any time prior to or contemporaneous with the September 2019 acquisition. Nor have we identified any evidence of a pre-existing agreement, understanding, arrangement, or course of substantial negotiations regarding a separation transaction that predated the acquisition.

However, the factual record supporting the absence of pre-acquisition discussions regarding a spin-off is thin and requires substantial supplementation before a "should" level opinion can be supported. We have not yet received or reviewed critical documentary evidence, including (without limitation) HPE Fund IV's investment committee memoranda, Veldran board minutes from the September 2019 acquisition period, or pre-acquisition communications between Harrowgate and its advisors concerning the Veldran investment thesis. Until such time as these documents are reviewed and detailed factual representations are obtained from both Harrowgate and Veldran management, the preliminary conclusion set forth in this memorandum remains subject to material revision.

Estimated Tax at Risk. If IRC § 355(e) were determined to apply to the proposed spin-off, Veldran would be required to recognize gain on the distribution of the Meridian stock as if such stock had been sold at fair market value on the distribution date. Based on Brackenridge & Co.'s preliminary valuation of Meridian (aggregate estimated fair market value of approximately $1.4 billion to $1.7 billion) and Veldran's estimated adjusted tax basis in the Precision Flow Solutions Division assets of approximately $800 million, the estimated built-in gain on the Meridian stock ranges from approximately $600 million to $900 million. At the current statutory federal corporate income tax rate of 21%, the estimated federal income tax liability arising from the application of § 355(e) would be approximately $125.4 million to $189.5 million. Additional state-level tax liability may apply. The magnitude of this potential tax cost underscores the importance of developing a complete and reliable factual record.

Key Concern. The approximately three-year temporal gap between the September 2019 acquisition and the anticipated Q4 2022 distribution date falls outside the two-year statutory safe harbor (i.e., the rebuttable presumption under Treasury Regulation § 1.355-7(b)(2)) but remains within the broader four-year "plan" analysis window contemplated by IRC § 355(e)(2)(B) and the facts-and-circumstances test of Treasury Regulation § 1.355-7(b). There is no bright-line statutory or regulatory safe harbor that automatically excludes an acquisition occurring more than two years (but less than four years) before a distribution from the scope of § 355(e). The IRS retains authority to assert the existence of a "plan" based on the totality of the facts and circumstances, regardless of the temporal distance between the acquisition and the distribution.

II. Factual Background

The following facts are based on information obtained from the client, from Harrowgate's legal counsel (Whitfield & Gage LLP), from Veldran's corporate counsel (Thornapple McCord LLP), and from publicly available sources. Where indicated, certain facts remain subject to confirmation through documentary evidence or formal representations. All facts set forth below are stated as of the date of this memorandum unless otherwise indicated.

A. The Harrowgate Acquisition of Veldran

On September 20, 2019, HPE Fund IV acquired 62.4% of the outstanding common stock of Veldran Industries Holdings, Inc. through a negotiated tender offer followed by a merger squeeze-out of the prior controlling shareholder, Greystone Partners Fund III LP (EIN: 81-2683910). Specifically, HPE Fund IV acquired 46,488,000 of the 74,500,000 shares of Veldran common stock then outstanding, at a price of $40.00 per share, for an aggregate acquisition price of $1,859,520,000.

The acquisition was structured in two steps. First, HPE Fund IV (through its wholly owned subsidiary, Harrowgate Veldran Holdings LLC ("HVH"), a Delaware limited liability company (EIN: 86-1483920)) commenced a negotiated tender offer for Veldran shares held by Greystone Partners Fund III LP and certain other shareholders. Second, following consummation of the tender offer, a short-form merger was effected to eliminate the remaining Greystone minority interest. Upon completion of these steps, HPE Fund IV (through HVH) held 46,488,000 shares of Veldran common stock, representing approximately 62.4% of total shares outstanding. The remaining 28,012,000 shares (approximately 37.6%) were held by various other shareholders, including certain members of Veldran management and Prescott Capital Management LP (discussed below).

HPE Fund IV is a Delaware limited partnership (EIN: 84-3291067), managed by its general partner, Harrowgate Capital Partners IV GP LLC (EIN: 84-3291104), a Delaware limited liability company. The investment advisor to the fund is Harrowgate Capital Advisors LLC (EIN: 83-2756891), a Delaware limited liability company with principal offices at 345 Park Avenue, 30th Floor, New York, New York 10154. HPE Fund IV is a private equity fund with a vintage year of 2018 and total committed capital of approximately $6.8 billion. Key investment professionals at Harrowgate Capital Advisors LLC include Marcus Adler (Managing Partner and Chief Executive Officer), Diana Fenn (Managing Partner and Chief Investment Officer), Christine Yeung (General Counsel), and Tobias Rourke (Partner, Head of Portfolio Operations).

HPE Fund IV holds its entire stake in Veldran through HVH. HVH is treated as a disregarded entity for federal income tax purposes, and accordingly, for purposes of this analysis, HPE Fund IV is treated as the direct owner of the Veldran shares held by HVH.

The acquisition was funded through a combination of: (i) equity capital contributed by HPE Fund IV in the amount of approximately $1.24 billion; and (ii) a co-investment by Prescott Capital Management LP (EIN: 13-4928371), a New York-based institutional investor, in the amount of $620,000,000, which was used to acquire 15,500,000 shares of Veldran common stock at $40.00 per share. Prescott's co-investment was made pursuant to a Co-Investment Agreement dated September 5, 2019 (the "Prescott Co-Investment Agreement") between HPE Fund IV and Prescott. We understand that the Prescott Co-Investment Agreement contained customary co-investment terms, including tag-along and drag-along rights, but did not contain any provisions relating to a potential spin-off, separation, or divestiture of any Veldran business segment. We have not yet reviewed the Prescott Co-Investment Agreement and will need to do so as part of the § 355(e) factual diligence.

Subsequent to the closing of the September 2019 acquisition, Prescott Capital Management LP sold 4,474,000 shares of Veldran common stock in a registered secondary offering. As a result of this sale, Prescott's holdings were reduced from 15,500,000 shares to 11,026,000 shares, representing approximately 14.8% of the outstanding Veldran common stock. We understand that the secondary offering was effected in the ordinary course and was not related to any planned or contemplated spin-off. The managing partner of Prescott Capital Management LP is Andrew Kessler.

For purposes of IRC § 355(e), the September 20, 2019 acquisition by HPE Fund IV constituted a "change of control" of Veldran — i.e., an acquisition by one or more persons of stock representing a 50% or greater interest (by vote or value) in Veldran. This is the predicate event that triggers the § 355(e) inquiry with respect to the proposed spin-off of Meridian.

B. Pre-Acquisition Ownership Structure

Prior to the September 2019 acquisition, Veldran was controlled by Greystone Partners Fund III LP (EIN: 81-2683910), a private equity fund managed by Greystone Capital Management LLC. We understand that Greystone acquired its controlling stake in Veldran (or its predecessor entity) in a transaction that closed in 2015. Greystone's interest in Veldran was fully eliminated through the merger squeeze-out component of the September 2019 acquisition. Greystone received cash consideration in exchange for its shares and retained no continuing equity interest in Veldran following the closing.

Veldran Industries Holdings, Inc. was incorporated on March 14, 2019 in the State of Delaware (EIN: 86-1920347) as a holding company in connection with the structuring of the HPE Fund IV acquisition. Prior to that date, the business operations currently conducted by Veldran were operated under a predecessor entity structure, the details of which are not material to this analysis but are described in the § 355(b) active trade or business memorandum prepared separately. For purposes of this memorandum, references to "Veldran" include the predecessor entity to the extent contextually appropriate.

C. Veldran's Business and Segment Structure

Veldran Industries Holdings, Inc. is a diversified industrial products and engineered materials company headquartered at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217. Veldran operates through two principal business segments:

1. Engineered Coatings Division. This segment manufactures and distributes high-performance industrial coatings, protective surface treatments, and specialty chemical formulations for applications in aerospace, defense, oil and gas, and general industrial markets. For the fiscal year ended December 31, 2021 ("FY2021"), the Engineered Coatings Division reported revenue of approximately $1.52 billion and EBITDA of approximately $285 million. Following the proposed spin-off, the Engineered Coatings Division will remain with Veldran (the Distributing corporation).

2. Precision Flow Solutions Division. This segment designs, manufactures, and distributes precision fluid-handling equipment, flow-control instrumentation, and related components for applications in pharmaceutical manufacturing, semiconductor fabrication, water treatment, and specialty chemical processing. For FY2021, the Precision Flow Solutions Division reported revenue of approximately $820 million and EBITDA of approximately $133 million. The Precision Flow Solutions Division will be contributed to Meridian Flow Technologies, Inc. (SpinCo) and distributed to Veldran shareholders in the proposed spin-off.

On a consolidated basis, Veldran reported aggregate FY2021 revenue of approximately $2.34 billion and aggregate EBITDA of approximately $418 million.

Veldran's current senior management team includes: Jonathan Caldecott, Chief Executive Officer; Rita Subramanian, Chief Financial Officer; Philip Crundell, Executive Vice President and General Counsel; and David Thornberry, Executive Vice President and Chief Operating Officer. The Board of Directors of Veldran is chaired by Diana Fenn, who serves as a Harrowgate designee on the board in her capacity as Managing Partner and Chief Investment Officer of Harrowgate Capital Advisors LLC. The board also includes representatives from Harrowgate, Prescott, and independent directors.

D. The Kestrel Acquisition

On June 7, 2019, Veldran (through its predecessor entity structure) acquired 100% 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). The aggregate acquisition price was $295 million in cash, and the transaction was structured as a taxable stock acquisition under IRC § 1001. Kestrel was a manufacturer of precision flow-control components and actuator systems for the pharmaceutical and semiconductor industries.

At the time of its acquisition, Kestrel comprised approximately 35% of the revenue of the Precision Flow Solutions Division. Following the acquisition, Kestrel's operations were integrated into the Precision Flow Solutions Division. The Kestrel acquisition is separately analyzed under IRC § 355(b)(2)(C) and (D) in a memorandum dated June 1, 2022 (the "Active Trade or Business Memorandum"), prepared by this firm. However, the Kestrel acquisition is relevant to the § 355(e) "plan" analysis for two reasons. First, the timing of the Kestrel acquisition — approximately three months prior to the HPE Fund IV acquisition — may constitute circumstantial evidence bearing on whether a spin-off was contemplated at the time of the HPE Fund IV acquisition, inasmuch as an argument could be made that the Kestrel acquisition was undertaken to "prepare" or "build up" the Precision Flow Solutions Division in anticipation of a later separation. Second, the fact that the Kestrel acquisition was initiated under Greystone's ownership, prior to HPE Fund IV's involvement, is potentially favorable to the § 355(e) analysis because it suggests an accumulation strategy rather than a separation strategy. These points are further discussed in Section V.E below.

E. The Proposed Spin-Off Transaction

The proposed spin-off will be effected in two steps:

Step 1 — Contribution. Veldran will contribute to Meridian Flow Technologies, Inc. all of the assets and liabilities associated with the Precision Flow Solutions Division (the "Contribution"), in exchange for all of the outstanding common stock of Meridian and Meridian's assumption of certain allocated liabilities. The Contribution is intended to qualify as a transfer described in IRC § 351 or as part of a reorganization under IRC § 368(a)(1)(D).

Step 2 — Distribution. Immediately following the Contribution, Veldran will distribute 100% of the outstanding common stock of Meridian to the holders of Veldran common stock on a pro rata basis (the "Distribution"). The distribution ratio will be 1:1, meaning that each holder of Veldran common stock will receive one share of Meridian common stock for each share of Veldran common stock held as of the record date. Based on 74,500,000 shares of Veldran common stock currently outstanding, Meridian will have 74,500,000 shares of common stock outstanding immediately following the Distribution.

The Contribution and Distribution, taken together, are intended to qualify as a tax-free reorganization under IRC § 368(a)(1)(D) and as a tax-free distribution under IRC § 355(a). No boot or other non-stock consideration will be distributed to Veldran shareholders in connection with the Distribution. However, Meridian may assume certain liabilities and may issue debt to Veldran in connection with the Contribution, which will need to be analyzed separately under IRC § 355(g) and § 361(b).

The anticipated record date and distribution date have not yet been fixed, but the current plan contemplates a distribution in Q4 2022 — most likely in October or November 2022. For purposes of the temporal analysis in this memorandum, we assume a distribution date of approximately October or November 2022, which would place the distribution approximately three years and one to two months after the September 20, 2019 acquisition.

Following the Distribution, each existing Veldran shareholder will hold one share of Veldran common stock and one share of Meridian common stock for each share of Veldran common stock held prior to the spin-off. Accordingly, the post-spin ownership structure of Meridian will mirror the pre-spin ownership structure of Veldran. Specifically, HPE Fund IV (through HVH) will hold approximately 62.4% of the outstanding Meridian common stock, and Prescott Capital Management LP will hold approximately 14.8% of the outstanding Meridian common stock.

No private letter ruling from the Internal Revenue Service will be sought in connection with the proposed spin-off. The Calderwood & Harkness tax opinion will serve as the sole tax assurance for the transaction. This is consistent with prevailing market practice for PE-backed spin-offs, as the IRS no longer issues advance rulings on § 355(e) issues in most cases.

Meridian Flow Technologies, Inc. has not yet been incorporated as of the date of this memorandum. The planned state of incorporation is Delaware. The planned principal office is at 7100 Northlake Parkway, Suite 300, Tucker, Georgia 30084, which is the current site of the Precision Flow Solutions Division's administrative headquarters. The planned initial senior management of Meridian includes Sandra Waverly as Chief Executive Officer and Derek Okonkwo as Chief Financial Officer. Both Ms. Waverly and Mr. Okonkwo are currently employees of Veldran serving in leadership roles within the Precision Flow Solutions Division.

F. Key Participants and Advisors

The following law firms, financial advisors, and key individuals are involved in the proposed spin-off and are referenced throughout this memorandum:

• Calderwood & Harkness LLP (1301 Avenue of the Americas, 40th Floor, New York, New York 10019): tax counsel to Harrowgate and Veldran for the proposed spin-off; responsible partner: Leonard Cross; billing partner: Sylvia Hartwell; lead associate: Garrett Simmons. Calderwood & Harkness will issue the tax opinion on the spin-off.

• Whitfield & Gage LLP (51 West 52nd Street, New York, New York 10019): corporate and M&A counsel to Harrowgate; lead counsel: Priya Chandrasekar, Partner; senior counsel: Nathan Whitfield, Senior Partner. Whitfield & Gage represented Harrowgate in connection with the September 2019 acquisition and is the lead deal counsel for the spin-off.

• Thornapple McCord LLP (227 West Trade Street, Suite 2000, Charlotte, North Carolina 28202): corporate counsel to Veldran Industries Holdings, Inc.; lead counsel: David Ochoa, Partner. Thornapple McCord has served as Veldran's corporate counsel since the 2019 acquisition.

• Brackenridge & Co. (383 Madison Avenue, New York, New York 10179): financial advisor and investment bank to Veldran for the proposed spin-off; key contact: Samuel Ng, Managing Director. Brackenridge & Co. provided the preliminary valuation ranges for Meridian referenced in this memorandum, which were received on June 10, 2022.

The preliminary valuation ranges provided by Brackenridge & Co. estimate the aggregate fair market value of Meridian at $1.4 billion to $1.7 billion. This range was derived by applying an enterprise value-to-EBITDA multiple of 10.5× to 12.8× to the Precision Flow Solutions Division's FY2021 EBITDA of $133 million (low: $133 million × 10.5 = $1,396.5 million; high: $133 million × 12.8 = $1,702.4 million). These are preliminary estimates and are subject to refinement as the transaction progresses and as additional financial analysis is completed. The final valuation will be relevant to the computation of built-in gain and tax at risk discussed in Section VI below.

III. Statement of the Legal Issue

IRC § 355(e)(1) provides that if a distribution to which § 355(a) applies is part of a "plan (or series of related transactions)" pursuant to which one or more persons acquire directly or indirectly stock representing a 50-percent or greater interest (within the meaning of IRC § 355(d)(4)) in the distributing corporation or any controlled corporation, then the distributing corporation shall recognize gain on the distribution as if the stock of the controlled corporation were sold at its fair market value on the date of the distribution. Section 355(e) was enacted as part of the Taxpayer Relief Act of 1997 and is commonly referred to as the "anti-Morris Trust" provision, reflecting its purpose of preventing taxpayers from using the combination of a tax-free spin-off under § 355 and a subsequent (or prior) acquisition to effectuate what is economically a taxable disposition of an appreciated business without recognizing gain at the corporate level.

The specific legal issue addressed by this memorandum is as follows:

Does the proposed Q4 2022 pro rata distribution by Veldran of 100% of the outstanding common stock of Meridian constitute part of a "plan (or series of related transactions)" that includes the September 20, 2019 acquisition by HPE Fund IV of approximately 62.4% of the outstanding common stock of Veldran?

If the answer to this question is "yes" — i.e., if the distribution and the acquisition are determined to be part of a plan — then IRC § 355(e) would cause Veldran to recognize gain on the Distribution equal to the excess of the fair market value of the Meridian stock distributed over Veldran's adjusted tax basis in the assets contributed to Meridian (as determined under IRC § 361(c) and related provisions). Although the Distribution would still qualify as tax-free to Veldran's shareholders under § 355(a) and (c) (assuming the other requirements of § 355 are satisfied), the corporate-level gain recognition to Veldran would result in a substantial federal income tax liability, estimated at $125.4 million to $189.5 million, as discussed in Section VI below.

If the answer is "no" — i.e., if the distribution and the acquisition are not part of a plan — then § 355(e) would not apply, and Veldran would not recognize gain on the Distribution (subject to the separate analysis under § 355(d), which is addressed in a companion memorandum).

The resolution of this issue depends on the application of the "plan" concept as developed in the Treasury Regulations under § 1.355-7, including the safe harbors, the rebuttable presumptions, and the multi-factor facts-and-circumstances test. Each of these analytical frameworks is described in Section IV below and applied to the facts of the proposed transaction in Section V.

IV. Statutory and Regulatory Framework

A. IRC § 355(e) — Overview

IRC § 355(e) was enacted in 1997 as Section 1012 of the Taxpayer Relief Act of 1997, Public Law 105-34, 111 Stat. 788 (August 5, 1997). The provision was a direct legislative response to the Tax Court's decision in Commissioner v. Morris Trust, 367 F.2d 794 (4th Cir. 1966), which had held that a spin-off followed by an acquisition of the distributing corporation (or the controlled corporation) could qualify for tax-free treatment under § 355 and § 368(a)(1)(A), respectively, even though the combined effect of the two transactions was the separation and disposition of an appreciated business to a third-party acquiror. Congress concluded that the Morris Trust result was inconsistent with the policy of § 355 — which was intended to permit the tax-free division of existing businesses among existing shareholders, not to facilitate tax-free dispositions to outside acquirors — and accordingly enacted § 355(e) to impose corporate-level gain recognition in such circumstances.

The operative provision is IRC § 355(e)(2)(A), which provides that a distribution to which § 355(a) applies is treated as part of a "plan" if the distribution is made pursuant to a plan (or series of related transactions) under which one or more persons acquire directly or indirectly stock representing a 50-percent or greater interest (by vote or value) in the distributing corporation or any controlled corporation. The relevant measurement period is set forth in IRC § 355(e)(2)(B), which provides a four-year window: the plan is deemed to encompass acquisitions occurring during the period beginning two years before the date of the distribution and ending two years after the date of the distribution. However, as discussed below, the "plan" concept under the Treasury Regulations is not strictly limited to acquisitions falling within this four-year window; rather, the statutory window establishes a frame of reference within which the facts-and-circumstances analysis is most probative.

It is important to note that § 355(e) does not disqualify the distribution under § 355(a). The distribution may still be tax-free to the shareholders of the distributing corporation. Rather, § 355(e) operates solely at the corporate level, requiring the distributing corporation to recognize gain on the distributed stock as if such stock had been sold at fair market value. The provision thus preserves shareholder-level nonrecognition while imposing a corporate-level tax on the built-in gain in the distributed stock.

B. Treasury Regulation § 1.355-7 — The "Plan" Regulations

The Treasury Department promulgated final regulations under § 355(e) in Treasury Regulation § 1.355-7 (T.D. 9198, 70 Fed. Reg. 20,279 (April 19, 2005)). These regulations provide the primary analytical framework for determining whether a distribution and an acquisition are part of a "plan (or series of related transactions)" within the meaning of § 355(e). The regulations establish a general rule based on all relevant facts and circumstances, a set of non-exclusive factors that tend to show the existence or absence of a plan, a rebuttable presumption for acquisitions occurring within two years of a distribution, and several safe harbors.

1. General Rule — Treas. Reg. § 1.355-7(b)

Treasury Regulation § 1.355-7(b)(1) provides the overarching principle: a distribution and an acquisition are part of a plan if the distribution was made "in connection with" or "in furtherance of" the acquisition, or vice versa. More specifically, a distribution and an acquisition will be treated as part of a plan if, at some point during the two-year period ending on the date of the distribution, there was an agreement, understanding, arrangement, or substantial negotiations regarding the acquisition or the distribution. The determination is made based on all relevant facts and circumstances.

Treasury Regulation § 1.355-7(b)(2) establishes a rebuttable presumption: if an acquisition occurs within the two-year period beginning on the date of a distribution, or if a distribution occurs within the two-year period beginning on the date of an acquisition, the distribution and the acquisition are presumed to be part of a plan. This presumption may be rebutted by establishing that the distribution and the acquisition are not part of a plan based on the facts and circumstances, including (but not limited to) application of the safe harbors described in Treasury Regulation § 1.355-7(d).

Treasury Regulation § 1.355-7(b)(3) sets forth six non-exclusive factors that tend to show the existence of a plan:

(i) The distribution was motivated by a business purpose to facilitate the acquisition or a similar acquisition.

(ii) The acquisition was agreed to or discussed by one or more officers, directors, or controlling shareholders of the distributing corporation or the controlled corporation, or by another person or persons with the implicit or explicit permission of one or more of such officers, directors, or controlling shareholders, during the two-year period ending on the date of the distribution.

(iii) The distribution was agreed to or discussed by one or more officers, directors, or controlling shareholders of the distributing corporation or the controlled corporation, or by another person or persons with the implicit or explicit permission of one or more of such officers, directors, or controlling shareholders, during the two-year period ending on the date of the acquisition.

(iv) The distribution was permitted, was agreed to, or was the subject of an understanding, arrangement, or substantial negotiations during the two-year period ending on the date of the acquisition.

(v) The acquisition occurred during a period in which there was a significant change in ownership or control of the distributing corporation or the controlled corporation.

(vi) The distribution was effected to facilitate the acquisition or a similar acquisition.

Treasury Regulation § 1.355-7(b)(4) sets forth three non-exclusive factors that tend to show the absence of a plan:

(i) In the case of an acquisition after a distribution, at the time of the distribution, the distributing corporation reasonably expected that the distribution would not be part of a transaction or series of transactions that would result in a change in ownership of the distributing or controlled corporation.

(ii) The distribution was motivated in whole or in substantial part by a corporate business purpose (other than a business purpose to facilitate the acquisition or a similar acquisition), and the acquisition occurred more than six months after the distribution.

(iii) There was no discussion or agreement regarding the acquisition or a similar acquisition at the time of the distribution, and the acquisition occurred more than six months after the distribution.

These factors are explicitly non-exclusive. The regulations emphasize that no single factor is determinative and that the analysis must take into account the totality of the relevant facts and circumstances. The weight to be given to any particular factor depends on the specific facts of the transaction.

2. Safe Harbors — Treas. Reg. § 1.355-7(d)

Treasury Regulation § 1.355-7(d) provides several safe harbors under which a distribution and an acquisition will not be treated as part of a plan. Two of these safe harbors are particularly relevant to the present analysis:

Safe Harbor I — Treas. Reg. § 1.355-7(d)(1) (Post-Distribution Acquisition). An acquisition occurring after a distribution will not be treated as part of a plan if: (a) the distribution was not motivated by a business purpose to facilitate the acquisition or a similar acquisition; (b) at the time of the distribution, there was no discussion or agreement regarding the acquisition; and (c) the acquisition was not discussed by the distributing corporation, the controlled corporation, or any of their officers, directors, or controlling shareholders (or any person acting with their permission) within one year after the distribution.

Safe Harbor II — Treas. Reg. § 1.355-7(d)(2) (Pre-Distribution Acquisition). An acquisition occurring before a distribution will not be treated as part of a plan if, at the time of the acquisition, there was no agreement, understanding, arrangement, or substantial negotiations regarding the distribution or a similar distribution.

Safe Harbor II is the critical safe harbor for purposes of this analysis. If, at the time of the September 20, 2019 acquisition by HPE Fund IV, there was no agreement, understanding, arrangement, or substantial negotiations regarding the proposed spin-off of the Precision Flow Solutions Division (or any similar separation transaction), then Safe Harbor II would apply, and the acquisition and the distribution would not be treated as part of a plan regardless of any other facts or circumstances.

The operative question under Safe Harbor II is a factual one: at the time of the September 20, 2019 acquisition, was there any agreement, understanding, arrangement, or substantial negotiations regarding the distribution? As discussed in Section V.B below, we have not identified any evidence that such discussions or negotiations occurred, but the factual record on this point is incomplete and requires supplementation.

Additional safe harbors are provided for certain acquisitions involving publicly traded stock (Treas. Reg. § 1.355-7(d)(5)), certain acquisitions by employees (Treas. Reg. § 1.355-7(d)(6)), and certain acquisitions by retirement plans (Treas. Reg. § 1.355-7(d)(7)). None of these additional safe harbors is directly applicable to the present analysis, as the HPE Fund IV acquisition was a negotiated private transaction, not a public market acquisition. However, we note them here for completeness.

3. The Two-Year Presumption

As noted above, Treasury Regulation § 1.355-7(b)(2) provides that if an acquisition occurs within the two-year period preceding or following a distribution, there is a rebuttable presumption that the distribution and the acquisition are part of a plan. The converse is also significant: if the acquisition falls outside the two-year window, the rebuttable presumption does not apply, and there is no automatic inference of a plan.

For the present transaction, the September 20, 2019 acquisition occurred approximately three years before the anticipated Q4 2022 distribution date. The acquisition therefore falls outside the two-year presumption window, which is a favorable fact. However, as discussed in the following subsection, the absence of the presumption does not create an affirmative safe harbor.

C. Absence of a Statutory Safe Harbor at Exactly Three Years

It is important to emphasize a significant gap in the regulatory framework: there is no bright-line statutory or regulatory safe harbor for acquisitions occurring more than two years but less than four years before a distribution. The two-year rebuttable presumption established by Treasury Regulation § 1.355-7(b)(2) applies only to acquisitions occurring within two years of a distribution; when the presumption does not apply (as here), the taxpayer is neither burdened by the presumption nor protected by a "reverse presumption" of no plan. The regulations do not create a corresponding safe harbor or presumption at the three-year mark or at any other interval beyond the two-year window.

The statutory four-year window of IRC § 355(e)(2)(B) — which encompasses acquisitions occurring during the period beginning two years before the distribution and ending two years after the distribution — provides a frame of reference for the "plan" analysis but does not establish an outer boundary beyond which a "plan" cannot exist as a matter of law. The Treasury Regulations' facts-and-circumstances test, by its nature, is not limited to any fixed temporal period. Accordingly, the IRS retains the authority to assert that a plan exists based on the totality of the facts and circumstances, even when the acquisition occurs more than two years (or more than four years) before the distribution, although as a practical matter, the evidentiary burden on the government increases significantly with the passage of time.

The legislative history of § 355(e) and the preamble to the final regulations indicate that Congress and the Treasury Department intended greater temporal distance between an acquisition and a distribution to reduce the risk of plan treatment. The regulations' safe harbors, presumptions, and factors collectively reflect the principle that transactions occurring in close temporal proximity to one another are more likely to be part of a plan than transactions separated by significant intervals. Nonetheless, temporal distance is merely one factor among many, and a taxpayer cannot rely on the passage of time alone to establish the absence of a plan if other facts and circumstances suggest that the transactions were linked.

V. Application to the Proposed Spin-Off

This section applies the statutory and regulatory framework described in Section IV to the facts of the proposed spin-off transaction, as set forth in Section II. We analyze the temporal relationship between the acquisition and the distribution, the applicability of Safe Harbor II, the non-exclusive factors under the facts-and-circumstances test, the significance of intervening events, the relevance of the Kestrel acquisition, and the implications of HPE Fund IV's status as a private equity sponsor.

A. Temporal Analysis

The HPE Fund IV acquisition of Veldran closed on September 20, 2019. The proposed distribution of Meridian common stock is anticipated to occur in Q4 2022 — for purposes of this analysis, we assume a distribution date of approximately October or November 2022. The approximate temporal gap between the two events is therefore three years and one to two months.

This temporal gap has several implications under the regulatory framework:

First, the acquisition falls outside the two-year rebuttable presumption period of Treasury Regulation § 1.355-7(b)(2). Because the acquisition occurred more than two years before the anticipated distribution date, the rebuttable presumption that the acquisition and the distribution are part of a plan does not apply. This is a favorable fact, as it means the IRS bears the burden of establishing the existence of a plan based on the totality of the facts and circumstances rather than relying on the regulatory presumption.

Second, the acquisition falls within the four-year window of IRC § 355(e)(2)(B), which encompasses acquisitions occurring during the period beginning two years before the distribution and ending two years after the distribution. Because the distribution is anticipated to occur in Q4 2022, the four-year window begins in approximately Q4 2020 and ends in approximately Q4 2024. The September 2019 acquisition falls before the beginning of this window. However, as noted above, the four-year window provides a frame of reference but does not establish an absolute boundary beyond which a "plan" cannot exist.

Third, the three-year-plus temporal gap is significant because, as a matter of practical tax administration, the IRS has generally been less aggressive in asserting plan treatment for acquisitions occurring well outside the two-year presumption window. The greater the temporal distance between an acquisition and a distribution, the more difficult it becomes for the IRS to establish the factual predicates of a plan — i.e., that the two transactions were part of a unified course of action conceived at or before the time of the earlier transaction. Nonetheless, the three-year gap does not, by itself, establish the absence of a plan as a matter of law. The analysis must proceed to the specific facts and circumstances.

B. Safe Harbor II Analysis — Treas. Reg. § 1.355-7(d)(2)

Safe Harbor II provides that an acquisition occurring before a distribution will not be treated as part of a plan if, at the time of the acquisition, there was no agreement, understanding, arrangement, or substantial negotiations regarding the distribution or a similar distribution. If Safe Harbor II applies to the HPE Fund IV acquisition, the § 355(e) issue would be definitively resolved in the taxpayer's favor, regardless of any other facts or circumstances.

The application of Safe Harbor II turns on a single factual question: at the time of the September 20, 2019 acquisition, was there any agreement, understanding, arrangement, or substantial negotiations regarding a potential spin-off, separation, or other distribution of the Precision Flow Solutions Division (or any other Veldran business segment)?

Factual record currently available. Based on initial discussions with Christine Yeung (General Counsel, Harrowgate Capital Advisors LLC) and Tobias Rourke (Partner, Head of Portfolio Operations, Harrowgate Capital Advisors LLC), Harrowgate's investment thesis for the September 2019 acquisition was to acquire Veldran as a unified entity and to grow both business segments — the Engineered Coatings Division and the Precision Flow Solutions Division — through a combination of operational improvements, capital investment, and strategic bolt-on acquisitions. The stated investment thesis did not contemplate a spin-off or other separation of any business segment.

Furthermore, there is no documentary evidence identified to date — in the form of memoranda, board presentations, email communications, or other written records — of any pre-acquisition discussion or deliberation at Harrowgate, Veldran, or any of their respective advisors regarding a potential spin-off of the Precision Flow Solutions Division or any other division. The Kestrel acquisition, which closed on June 7, 2019 (approximately three months before the HPE Fund IV acquisition), is more consistent with an accumulation strategy (building up the Precision Flow Solutions Division within Veldran) than a separation strategy.

However, the factual record on this critical point is thin and must be substantially supplemented before Safe Harbor II can be confirmed. Specifically, we have not yet received or reviewed the following materials:

(a) Investment committee memoranda prepared by or for HPE Fund IV or Harrowgate Capital Advisors LLC in connection with the evaluation and approval of the September 2019 Veldran acquisition. These memoranda would be expected to set forth the investment thesis, the anticipated value-creation strategy, and the contemplated exit plan. If the memoranda discuss a potential spin-off or separation as part of the value-creation or exit strategy, Safe Harbor II would not apply.

(b) Board minutes from Veldran (or its predecessor entity) from the period surrounding the September 2019 acquisition (i.e., from approximately June 2019 through December 2019). These minutes would reflect any board-level discussions regarding the future strategic direction of Veldran, including any discussion of a potential spin-off or separation.

(c) Communications between Harrowgate and its advisors — including Whitfield & Gage LLP (corporate/M&A counsel) and Brackenridge & Co. (financial advisor) — from the pre-acquisition period. If any of these communications reference a potential spin-off or separation of the Precision Flow Solutions Division, Safe Harbor II would not apply.

(d) Diligence materials prepared by or for HPE Fund IV in connection with the Veldran acquisition, including any strategic assessment or value-creation plan prepared by Harrowgate's portfolio operations team.

(e) Communications between Harrowgate and Greystone Partners Fund III LP (the selling shareholder) in connection with the acquisition, to confirm that no discussion of a potential spin-off or separation occurred as part of the sale negotiations.

Critical open item. Before this memorandum is finalized, and before a "should" level opinion on the § 355(e) issue can be supported, we require written confirmation — in the form of detailed, specific factual representations in the Representation Letter — that no officer, director, controlling shareholder, employee, or advisor of Harrowgate, HPE Fund IV, Veldran, or any of their respective affiliates discussed, proposed, contemplated, or negotiated a spin-off or other separation of the Precision Flow Solutions Division (or any other Veldran business segment) at any time prior to or on September 20, 2019. The representations must cover all relevant persons, including without limitation: Marcus Adler, Diana Fenn, Christine Yeung, and Tobias Rourke at Harrowgate; Jonathan Caldecott, Rita Subramanian, Philip Crundell, and David Thornberry at Veldran; Priya Chandrasekar and Nathan Whitfield at Whitfield & Gage LLP; Samuel Ng at Brackenridge & Co.; and Andrew Kessler at Prescott Capital Management LP.

Until these representations are obtained and the supporting documentary evidence is reviewed, we cannot confirm the applicability of Safe Harbor II. If Safe Harbor II is ultimately confirmed, it would provide the strongest basis for concluding that § 355(e) does not apply to the proposed spin-off. If Safe Harbor II cannot be confirmed — for example, because the documentary record reveals pre-acquisition discussions about a potential spin-off — the analysis must proceed under the general facts-and-circumstances test, which entails greater uncertainty and risk.

C. Facts-and-Circumstances Analysis Under Treas. Reg. § 1.355-7(b)

Even if Safe Harbor II is ultimately confirmed, it is prudent to analyze the proposed transaction under the general facts-and-circumstances test, both as a secondary line of defense and to identify any factual vulnerabilities that could undermine the overall § 355(e) position. We address each of the six "plan" factors and three "no-plan" factors in turn.

1. Factors Tending to Show the Existence of a Plan

Factor (i): Distribution motivated by business purpose to facilitate the acquisition. There is no evidence — and no logical basis — for concluding that the proposed spin-off was designed to "facilitate" the September 2019 acquisition. The acquisition was a complete buyout of the prior controlling shareholder (Greystone Partners Fund III LP) through a negotiated tender offer and merger squeeze-out. A spin-off of the Precision Flow Solutions Division would not have facilitated that acquisition in any meaningful sense; to the contrary, a spin-off prior to the acquisition would have reduced the scope of the business being acquired and would presumably have required a different deal structure and purchase price. There is no indication that the spin-off was a condition to, or was in any way related to, the acquisition negotiations. Accordingly, this factor weighs against plan treatment.

Factor (ii): Acquisition discussed during the two-year period ending on the distribution date. The two-year period ending on the anticipated distribution date (assumed to be Q4 2022) would begin in approximately Q4 2020. The HPE Fund IV acquisition closed on September 20, 2019, which is outside this two-year window. The relevant inquiry under this factor is not whether the acquisition itself was discussed during this period (the acquisition was a completed historical event and would necessarily have been referenced in various corporate contexts), but rather whether the acquisition and the distribution were linked in discussions during this period — i.e., whether the distribution was discussed in connection with or as a consequence of the acquisition.

Based on preliminary information obtained from Harrowgate and Veldran, the spin-off was first substantively discussed in early 2022, approximately January through February 2022. The Calderwood & Harkness engagement was opened on April 11, 2022. We understand that the spin-off concept emerged in early 2022 in response to the diverging growth trajectories and capital-allocation needs of the two business segments, and not as a continuation of or logical extension of the acquisition rationale. If this timeline is confirmed, the relevant discussions would have commenced approximately two years and three to four months after the acquisition — well outside any period of temporal proximity that would suggest a link between the acquisition and the distribution.

However, we need to determine with greater specificity when the spin-off was first discussed, by whom, and in what context. It is possible that informal or exploratory discussions occurred earlier than January 2022, and if such discussions can be traced to the acquisition rationale or to a pre-existing exit strategy, this factor could become adverse. On balance, based on the information currently available, this factor is neutral to favorable.

Factor (iii): Distribution discussed during the two-year period ending on the acquisition date. The two-year period ending on September 20, 2019 would begin on September 20, 2017. Based on the information currently available, there is no evidence that a spin-off or other separation of the Precision Flow Solutions Division was discussed during this period. To the contrary, the evidence from this period suggests that the business strategy was one of accumulation and growth rather than separation. The Kestrel acquisition, which was initiated under Greystone's ownership and closed on June 7, 2019, involved the purchase of a business that would form part of the very division now proposed to be spun off — a fact that is inconsistent with a contemporaneous plan to separate that division.

Moreover, the HPE Fund IV acquisition was Harrowgate's first involvement with Veldran. It would be unusual for an acquiring private equity sponsor to have discussed a potential spin-off of a target company's business segment during the two-year period before its acquisition of the target, particularly when the acquisition had not yet been contemplated during the earlier portion of that two-year period. Harrowgate's involvement with Veldran appears to have commenced in approximately mid-2019, only a few months before the September 2019 closing.

This factor weighs against plan treatment. However, we emphasize that this conclusion is based on limited factual information and is subject to revision if the documentary record reveals otherwise.

Factor (iv): Pre-existing agreement, understanding, arrangement, or substantial negotiations. There is no evidence of any pre-existing agreement, understanding, arrangement, or course of substantial negotiations regarding a spin-off or other separation of the Precision Flow Solutions Division. No written agreement or memorandum of understanding has been identified, and no oral agreement or informal understanding has been disclosed to us. This factor weighs against plan treatment. The same caveat regarding the need for additional factual diligence applies.

Factor (v): Acquisition during a period of significant ownership change. The HPE Fund IV acquisition itself was the "significant ownership change" — the acquisition resulted in a change of more than 50% of the outstanding Veldran common stock. This factor is inherently present in any § 355(e) analysis, because § 355(e) is only relevant where there has been a qualifying acquisition (i.e., a 50-percent-or-greater change in ownership). If this factor were given independent weight, it would create a circular inference: § 355(e) applies because of the change in ownership, and the change in ownership is treated as evidence of a plan. We believe the better view is that this factor should not be given significant independent weight in the analysis, and its presence should not be treated as establishing or even suggesting the existence of a plan. This factor is neutral.

Factor (vi): Distribution effected to facilitate the acquisition. This factor is the mirror image of Factor (i) and is not applicable to the present facts. The Distribution will occur approximately three years after the acquisition and does not facilitate the acquisition in any meaningful sense. The acquisition has been completed, and the Distribution does not enhance, enable, or advance the acquisition in any way. This factor weighs against plan treatment.

Summary of "plan" factors. Of the six factors tending to show the existence of a plan, five weigh against plan treatment and one (Factor (v)) is neutral. No factor affirmatively supports a finding that the acquisition and the distribution are part of a plan.

2. Factors Tending to Show the Absence of a Plan

Factor (i): Distribution motivated by corporate business purpose other than to facilitate the acquisition. Two preliminary business purposes for the proposed spin-off have been identified: (a) enabling independent capital-allocation strategies for the two businesses, each of which has different capital needs, growth profiles, and risk characteristics; and (b) enhancing management focus and operational efficiency by allowing each business segment to operate under dedicated management teams with direct accountability to their respective boards and shareholders.

These are, on their face, legitimate corporate-level business purposes of Veldran — not purposes of HPE Fund IV or its limited partners. If these purposes are adequately established and documented, this factor would weigh strongly against plan treatment.

However, as noted in a preliminary draft of the Business Purpose Memorandum (first draft dated July 18, 2022, currently in preparation), there is a concern that the stated business purposes may be viewed by the IRS as primarily serving HPE Fund IV's fund-level objectives rather than the corporate-level objectives of Veldran. Specifically, the IRS could argue that the spin-off is motivated by HPE Fund IV's desire to facilitate the separate monetization of the two business segments — for example, by enabling an IPO, sale, or other disposition of Meridian that would be more difficult or less value-maximizing if Meridian remained part of Veldran. Such a purpose would be a "shareholder purpose" rather than a "corporate purpose" and would not satisfy the business purpose requirement of § 355 or the "anti-plan" factor under § 1.355-7(b)(4)(i).

The business purpose articulation is therefore critical not only to the § 355(a) analysis but also to the § 355(e) "plan" analysis. If the business purposes are established as genuine, independent corporate-level purposes of Veldran, this factor would weigh strongly against plan treatment. If the business purposes are viewed as pretextual or as primarily serving sponsor-level monetization objectives, this factor would be weakened or could even cut against the taxpayer. The current status of this factor is uncertain pending resolution of the business-purpose articulation issues identified in the Business Purpose Memorandum.

Factor (ii): Distribution motivated by corporate business purpose and acquisition occurred more than six months before the distribution. The temporal element of this factor is clearly satisfied: the September 2019 acquisition occurred approximately three years before the anticipated Q4 2022 distribution, well exceeding the six-month threshold. If the corporate business purpose is established (per the discussion of Factor (i) above), this factor would weigh strongly against plan treatment. The combination of a genuine corporate business purpose and the passage of more than six months between the acquisition and the distribution is one of the strongest indicators of the absence of a plan under the regulatory framework.

Factor (iii): No discussion or agreement regarding the acquisition at the time of the distribution, and the acquisition occurred more than six months before the distribution. The temporal element is satisfied (acquisition more than six months before distribution). The question of whether there were "discussions or agreements regarding the acquisition at the time of the distribution" is somewhat unusual in the present context because the acquisition is a completed historical event. We interpret this factor as asking whether, at the time of the distribution, there were ongoing discussions or arrangements relating to the acquisition that would suggest a continuing link between the two transactions. There is no indication of any such ongoing discussions or arrangements. This factor is favorable.

Summary of "no-plan" factors. All three factors tending to show the absence of a plan weigh in the taxpayer's favor, although the strength of Factor (i) depends on the resolution of the business-purpose articulation issues.

D. Analysis of Intervening Events

The significance of events occurring between the September 20, 2019 acquisition and the anticipated Q4 2022 distribution date is an important component of the facts-and-circumstances analysis. Intervening events that were not foreseeable at the time of the acquisition and that contributed to the decision to effect the spin-off tend to support the conclusion that the acquisition and the spin-off are independent transactions that were not part of a unified plan.

Several significant events and developments occurred during the approximately three-year interval between the acquisition and the proposed distribution:

COVID-19 pandemic. The COVID-19 pandemic, which began to affect the United States in early 2020, caused widespread disruption to industrial markets and supply chains. Veldran's two business segments were affected differently: the Engineered Coatings Division experienced a temporary revenue decline due to reduced demand from the oil and gas and general industrial sectors, while the Precision Flow Solutions Division experienced relative resilience and, in some product lines, increased demand due to growth in pharmaceutical manufacturing and semiconductor fabrication. The divergent impact of the pandemic on the two business segments is reported to have contributed to the recognition that the two segments have fundamentally different growth profiles and capital-allocation needs — a recognition that, in turn, contributed to the decision to explore a spin-off. To the extent that the spin-off concept was catalyzed by the pandemic's differential impact on the two segments, this fact supports the conclusion that the spin-off was not contemplated at the time of the September 2019 acquisition.

Operational improvements and strategic evolution. Following the September 2019 acquisition, Harrowgate implemented a comprehensive operational improvement program at Veldran under the direction of Tobias Rourke (Partner, Head of Portfolio Operations, Harrowgate Capital Advisors LLC). This program involved the recruitment of new management talent, the optimization of manufacturing processes, the rationalization of the supply chain, and the deployment of capital expenditures to expand production capacity. These activities are consistent with Harrowgate's stated investment thesis of acquiring and operating Veldran as a unified entity and growing both business segments. The evolution from an integration-and-growth strategy to a separation strategy appears to have occurred gradually over the course of 2021 and early 2022, as the diverging trajectories of the two segments became more pronounced.

Diverging growth trajectories. As noted above, the two business segments have experienced divergent growth trajectories since the acquisition, with the Precision Flow Solutions Division growing more rapidly than the Engineered Coatings Division and attracting different types of capital and strategic interest. We understand that this divergence was not anticipated at the time of the September 2019 acquisition and became apparent only after the pandemic-era disruptions and the subsequent recovery. The recognition that the two segments would benefit from independent capital structures, dedicated management teams, and distinct public-market valuations appears to have been the primary driver of th

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 1301 Avenue of the Americas, 40th Floor New York, New York 10019
MEMORANDUM
TO: File — Matter No. HRW-SPIN-001 (Engagement No. 1003-00005)
FROM: Garrett Simmons (Lead Associate, Tax Department)
REVIEWED BY: Leonard Cross (Responsible Partner); Sylvia Hartwell (Billing Partner)
DATE: June 28, 2022
RE: IRC § 355(e) "Plan" Analysis — Proposed Spin-Off of Meridian Flow Technologies, Inc. from Veldran Industries Holdings, Inc.
STATUS: FIRST DRAFT — For Internal Discussion Only; Subject to Revision
CLIENT: Harrowgate Private Equity Fund IV, L.P. (EIN: 84-3291067)
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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. ("Distributing" or "Veldran") of 100% of the outstanding common stock of Meridian Flow Technologies, Inc. ("Controlled," "SpinCo," or "Meridian") to Veldran's shareholders is part of a "plan (or series of related transactions)" within the meaning of Section 355(e) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), that includes the September 20, 2019 acquisition by Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV" or "Harrowgate") of approximately 62.4% of the outstanding common stock of Veldran. That acquisition was effected through a negotiated tender offer followed by a merger squeeze-out and involved the purchase of 46,488,000 shares of Veldran common stock at a price of $40.00 per share, for an aggregate purchase price of $1,859,520,000. The September 2019 acquisition constituted a change of control of Veldran — i.e., a change in ownership of more than 50% of Veldran's voting stock — that is the type of transaction to which § 355(e) is directed.
Preliminary Conclusion. Based on the facts currently available to us, and subject to the significant caveats and open items described below and in Section VII of this memorandum, the September 2019 acquisition and the proposed spin-off should not be treated as part of a "plan (or series of related transactions)" within the meaning of IRC § 355(e). The approximately three-year temporal gap between the acquisition and the anticipated Q4 2022 distribution date places the acquisition outside the two-year rebuttable presumption period established under Treasury Regulation § 1.355-7(b)(2), and we have not identified any documentary evidence or factual indication that a spin-off of the Precision Flow Solutions Division (or any other Veldran business segment) was discussed, contemplated, or agreed to at any time prior to or contemporaneous with the September 2019 acquisition. Nor have we identified any evidence of a pre-existing agreement, understanding, arrangement, or course of substantial negotiations regarding a separation transaction that predated the acquisition.
However, the factual record supporting the absence of pre-acquisition discussions regarding a spin-off is thin and requires substantial supplementation before a "should" level opinion can be supported. We have not yet received or reviewed critical documentary evidence, including (without limitation) HPE Fund IV's investment committee memoranda, Veldran board minutes from the September 2019 acquisition period, or pre-acquisition communications between Harrowgate and its advisors concerning the Veldran investment thesis. Until such time as these documents are reviewed and detailed factual representations are obtained from both Harrowgate and Veldran management, the preliminary conclusion set forth in this memorandum remains subject to material revision.
Estimated Tax at Risk. If IRC § 355(e) were determined to apply to the proposed spin-off, Veldran would be required to recognize gain on the distribution of the Meridian stock as if such stock had been sold at fair market value on the distribution date. Based on Brackenridge & Co.'s preliminary valuation of Meridian (aggregate estimated fair market value of approximately $1.4 billion to $1.7 billion) and Veldran's estimated adjusted tax basis in the Precision Flow Solutions Division assets of approximately $800 million, the estimated built-in gain on the Meridian stock ranges from approximately $600 million to $900 million. At the current statutory federal corporate income tax rate of 21%, the estimated federal income tax liability arising from the application of § 355(e) would be approximately $125.4 million to $189.5 million. Additional state-level tax liability may apply. The magnitude of this potential tax cost underscores the importance of developing a complete and reliable factual record.
Key Concern. The approximately three-year temporal gap between the September 2019 acquisition and the anticipated Q4 2022 distribution date falls outside the two-year statutory safe harbor (i.e., the rebuttable presumption under Treasury Regulation § 1.355-7(b)(2)) but remains within the broader four-year "plan" analysis window contemplated by IRC § 355(e)(2)(B) and the facts-and-circumstances test of Treasury Regulation § 1.355-7(b). There is no bright-line statutory or regulatory safe harbor that automatically excludes an acquisition occurring more than two years (but less than four years) before a distribution from the scope of § 355(e). The IRS retains authority to assert the existence of a "plan" based on the totality of the facts and circumstances, regardless of the temporal distance between the acquisition and the distribution.
II. Factual Background
The following facts are based on information obtained from the client, from Harrowgate's legal counsel (Whitfield & Gage LLP), from Veldran's corporate counsel (Thornapple McCord LLP), and from publicly available sources. Where indicated, certain facts remain subject to confirmation through documentary evidence or formal representations. All facts set forth below are stated as of the date of this memorandum unless otherwise indicated.
A. The Harrowgate Acquisition of Veldran
On September 20, 2019, HPE Fund IV acquired 62.4% of the outstanding common stock of Veldran Industries Holdings, Inc. through a negotiated tender offer followed by a merger squeeze-out of the prior controlling shareholder, Greystone Partners Fund III LP (EIN: 81-2683910). Specifically, HPE Fund IV acquired 46,488,000 of the 74,500,000 shares of Veldran common stock then outstanding, at a price of $40.00 per share, for an aggregate acquisition price of $1,859,520,000.
The acquisition was structured in two steps. First, HPE Fund IV (through its wholly owned subsidiary, Harrowgate Veldran Holdings LLC ("HVH"), a Delaware limited liability company (EIN: 86-1483920)) commenced a negotiated tender offer for Veldran shares held by Greystone Partners Fund III LP and certain other shareholders. Second, following consummation of the tender offer, a short-form merger was effected to eliminate the remaining Greystone minority interest. Upon completion of these steps, HPE Fund IV (through HVH) held 46,488,000 shares of Veldran common stock, representing approximately 62.4% of total shares outstanding. The remaining 28,012,000 shares (approximately 37.6%) were held by various other shareholders, including certain members of Veldran management and Prescott Capital Management LP (discussed below).
HPE Fund IV is a Delaware limited partnership (EIN: 84-3291067), managed by its general partner, Harrowgate Capital Partners IV GP LLC (EIN: 84-3291104), a Delaware limited liability company. The investment advisor to the fund is Harrowgate Capital Advisors LLC (EIN: 83-2756891), a Delaware limited liability company with principal offices at 345 Park Avenue, 30th Floor, New York, New York 10154. HPE Fund IV is a private equity fund with a vintage year of 2018 and total committed capital of approximately $6.8 billion. Key investment professionals at Harrowgate Capital Advisors LLC include Marcus Adler (Managing Partner and Chief Executive Officer), Diana Fenn (Managing Partner and Chief Investment Officer), Christine Yeung (General Counsel), and Tobias Rourke (Partner, Head of Portfolio Operations).
HPE Fund IV holds its entire stake in Veldran through HVH. HVH is treated as a disregarded entity for federal income tax purposes, and accordingly, for purposes of this analysis, HPE Fund IV is treated as the direct owner of the Veldran shares held by HVH.
The acquisition was funded through a combination of: (i) equity capital contributed by HPE Fund IV in the amount of approximately $1.24 billion; and (ii) a co-investment by Prescott Capital Management LP (EIN: 13-4928371), a New York-based institutional investor, in the amount of $620,000,000, which was used to acquire 15,500,000 shares of Veldran common stock at $40.00 per share. Prescott's co-investment was made pursuant to a Co-Investment Agreement dated September 5, 2019 (the "Prescott Co-Investment Agreement") between HPE Fund IV and Prescott. We understand that the Prescott Co-Investment Agreement contained customary co-investment terms, including tag-along and drag-along rights, but did not contain any provisions relating to a potential spin-off, separation, or divestiture of any Veldran business segment. We have not yet reviewed the Prescott Co-Investment Agreement and will need to do so as part of the § 355(e) factual diligence.
Subsequent to the closing of the September 2019 acquisition, Prescott Capital Management LP sold 4,474,000 shares of Veldran common stock in a registered secondary offering. As a result of this sale, Prescott's holdings were reduced from 15,500,000 shares to 11,026,000 shares, representing approximately 14.8% of the outstanding Veldran common stock. We understand that the secondary offering was effected in the ordinary course and was not related to any planned or contemplated spin-off. The managing partner of Prescott Capital Management LP is Andrew Kessler.
For purposes of IRC § 355(e), the September 20, 2019 acquisition by HPE Fund IV constituted a "change of control" of Veldran — i.e., an acquisition by one or more persons of stock representing a 50% or greater interest (by vote or value) in Veldran. This is the predicate event that triggers the § 355(e) inquiry with respect to the proposed spin-off of Meridian.
B. Pre-Acquisition Ownership Structure
Prior to the September 2019 acquisition, Veldran was controlled by Greystone Partners Fund III LP (EIN: 81-2683910), a private equity fund managed by Greystone Capital Management LLC. We understand that Greystone acquired its controlling stake in Veldran (or its predecessor entity) in a transaction that closed in 2015. Greystone's interest in Veldran was fully eliminated through the merger squeeze-out component of the September 2019 acquisition. Greystone received cash consideration in exchange for its shares and retained no continuing equity interest in Veldran following the closing.
Veldran Industries Holdings, Inc. was incorporated on March 14, 2019 in the State of Delaware (EIN: 86-1920347) as a holding company in connection with the structuring of the HPE Fund IV acquisition. Prior to that date, the business operations currently conducted by Veldran were operated under a predecessor entity structure, the details of which are not material to this analysis but are described in the § 355(b) active trade or business memorandum prepared separately. For purposes of this memorandum, references to "Veldran" include the predecessor entity to the extent contextually appropriate.
C. Veldran's Business and Segment Structure
Veldran Industries Holdings, Inc. is a diversified industrial products and engineered materials company headquartered at 2400 Commerce Park Drive, Suite 500, Charlotte, North Carolina 28217. Veldran operates through two principal business segments:
1. Engineered Coatings Division. This segment manufactures and distributes high-performance industrial coatings, protective surface treatments, and specialty chemical formulations for applications in aerospace, defense, oil and gas, and general industrial markets. For the fiscal year ended December 31, 2021 ("FY2021"), the Engineered Coatings Division reported revenue of approximately $1.52 billion and EBITDA of approximately $285 million. Following the proposed spin-off, the Engineered Coatings Division will remain with Veldran (the Distributing corporation).
2. Precision Flow Solutions Division. This segment designs, manufactures, and distributes precision fluid-handling equipment, flow-control instrumentation, and related components for applications in pharmaceutical manufacturing, semiconductor fabrication, water treatment, and specialty chemical processing. For FY2021, the Precision Flow Solutions Division reported revenue of approximately $820 million and EBITDA of approximately $133 million. The Precision Flow Solutions Division will be contributed to Meridian Flow Technologies, Inc. (SpinCo) and distributed to Veldran shareholders in the proposed spin-off.
On a consolidated basis, Veldran reported aggregate FY2021 revenue of approximately $2.34 billion and aggregate EBITDA of approximately $418 million.
Veldran's current senior management team includes: Jonathan Caldecott, Chief Executive Officer; Rita Subramanian, Chief Financial Officer; Philip Crundell, Executive Vice President and General Counsel; and David Thornberry, Executive Vice President and Chief Operating Officer. The Board of Directors of Veldran is chaired by Diana Fenn, who serves as a Harrowgate designee on the board in her capacity as Managing Partner and Chief Investment Officer of Harrowgate Capital Advisors LLC. The board also includes representatives from Harrowgate, Prescott, and independent directors.
D. The Kestrel Acquisition
On June 7, 2019, Veldran (through its predecessor entity structure) acquired 100% 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). The aggregate acquisition price was $295 million in cash, and the transaction was structured as a taxable stock acquisition under IRC § 1001. Kestrel was a manufacturer of precision flow-control components and actuator systems for the pharmaceutical and semiconductor industries.
At the time of its acquisition, Kestrel comprised approximately 35% of the revenue of the Precision Flow Solutions Division. Following the acquisition, Kestrel's operations were integrated into the Precision Flow Solutions Division. The Kestrel acquisition is separately analyzed under IRC § 355(b)(2)(C) and (D) in a memorandum dated June 1, 2022 (the "Active Trade or Business Memorandum"), prepared by this firm. However, the Kestrel acquisition is relevant to the § 355(e) "plan" analysis for two reasons. First, the timing of the Kestrel acquisition — approximately three months prior to the HPE Fund IV acquisition — may constitute circumstantial evidence bearing on whether a spin-off was contemplated at the time of the HPE Fund IV acquisition, inasmuch as an argument could be made that the Kestrel acquisition was undertaken to "prepare" or "build up" the Precision Flow Solutions Division in anticipation of a later separation. Second, the fact that the Kestrel acquisition was initiated under Greystone's ownership, prior to HPE Fund IV's involvement, is potentially favorable to the § 355(e) analysis because it suggests an accumulation strategy rather than a separation strategy. These points are further discussed in Section V.E below.
E. The Proposed Spin-Off Transaction
The proposed spin-off will be effected in two steps:
Step 1 — Contribution. Veldran will contribute to Meridian Flow Technologies, Inc. all of the assets and liabilities associated with the Precision Flow Solutions Division (the "Contribution"), in exchange for all of the outstanding common stock of Meridian and Meridian's assumption of certain allocated liabilities. The Contribution is intended to qualify as a transfer described in IRC § 351 or as part of a reorganization under IRC § 368(a)(1)(D).
Step 2 — Distribution. Immediately following the Contribution, Veldran will distribute 100% of the outstanding common stock of Meridian to the holders of Veldran common stock on a pro rata basis (the "Distribution"). The distribution ratio will be 1:1, meaning that each holder of Veldran common stock will receive one share of Meridian common stock for each share of Veldran common stock held as of the record date. Based on 74,500,000 shares of Veldran common stock currently outstanding, Meridian will have 74,500,000 shares of common stock outstanding immediately following the Distribution.
The Contribution and Distribution, taken together, are intended to qualify as a tax-free reorganization under IRC § 368(a)(1)(D) and as a tax-free distribution under IRC § 355(a). No boot or other non-stock consideration will be distributed to Veldran shareholders in connection with the Distribution. However, Meridian may assume certain liabilities and may issue debt to Veldran in connection with the Contribution, which will need to be analyzed separately under IRC § 355(g) and § 361(b).
The anticipated record date and distribution date have not yet been fixed, but the current plan contemplates a distribution in Q4 2022 — most likely in October or November 2022. For purposes of the temporal analysis in this memorandum, we assume a distribution date of approximately October or November 2022, which would place the distribution approximately three years and one to two months after the September 20, 2019 acquisition.
Following the Distribution, each existing Veldran shareholder will hold one share of Veldran common stock and one share of Meridian common stock for each share of Veldran common stock held prior to the spin-off. Accordingly, the post-spin ownership structure of Meridian will mirror the pre-spin ownership structure of Veldran. Specifically, HPE Fund IV (through HVH) will hold approximately 62.4% of the outstanding Meridian common stock, and Prescott Capital Management LP will hold approximately 14.8% of the outstanding Meridian common stock.
No private letter ruling from the Internal Revenue Service will be sought in connection with the proposed spin-off. The Calderwood & Harkness tax opinion will serve as the sole tax assurance for the transaction. This is consistent with prevailing market practice for PE-backed spin-offs, as the IRS no longer issues advance rulings on § 355(e) issues in most cases.
Meridian Flow Technologies, Inc. has not yet been incorporated as of the date of this memorandum. The planned state of incorporation is Delaware. The planned principal office is at 7100 Northlake Parkway, Suite 300, Tucker, Georgia 30084, which is the current site of the Precision Flow Solutions Division's administrative headquarters. The planned initial senior management of Meridian includes Sandra Waverly as Chief Executive Officer and Derek Okonkwo as Chief Financial Officer. Both Ms. Waverly and Mr. Okonkwo are currently employees of Veldran serving in leadership roles within the Precision Flow Solutions Division.
F. Key Participants and Advisors
The following law firms, financial advisors, and key individuals are involved in the proposed spin-off and are referenced throughout this memorandum:
• Calderwood & Harkness LLP (1301 Avenue of the Americas, 40th Floor, New York, New York 10019): tax counsel to Harrowgate and Veldran for the proposed spin-off; responsible partner: Leonard Cross; billing partner: Sylvia Hartwell; lead associate: Garrett Simmons. Calderwood & Harkness will issue the tax opinion on the spin-off.
• Whitfield & Gage LLP (51 West 52nd Street, New York, New York 10019): corporate and M&A counsel to Harrowgate; lead counsel: Priya Chandrasekar, Partner; senior counsel: Nathan Whitfield, Senior Partner. Whitfield & Gage represented Harrowgate in connection with the September 2019 acquisition and is the lead deal counsel for the spin-off.
• Thornapple McCord LLP (227 West Trade Street, Suite 2000, Charlotte, North Carolina 28202): corporate counsel to Veldran Industries Holdings, Inc.; lead counsel: David Ochoa, Partner. Thornapple McCord has served as Veldran's corporate counsel since the 2019 acquisition.
• Brackenridge & Co. (383 Madison Avenue, New York, New York 10179): financial advisor and investment bank to Veldran for the proposed spin-off; key contact: Samuel Ng, Managing Director. Brackenridge & Co. provided the preliminary valuation ranges for Meridian referenced in this memorandum, which were received on June 10, 2022.
The preliminary valuation ranges provided by Brackenridge & Co. estimate the aggregate fair market value of Meridian at $1.4 billion to $1.7 billion. This range was derived by applying an enterprise value-to-EBITDA multiple of 10.5× to 12.8× to the Precision Flow Solutions Division's FY2021 EBITDA of $133 million (low: $133 million × 10.5 = $1,396.5 million; high: $133 million × 12.8 = $1,702.4 million). These are preliminary estimates and are subject to refinement as the transaction progresses and as additional financial analysis is completed. The final valuation will be relevant to the computation of built-in gain and tax at risk discussed in Section VI below.
III. Statement of the Legal Issue
IRC § 355(e)(1) provides that if a distribution to which § 355(a) applies is part of a "plan (or series of related transactions)" pursuant to which one or more persons acquire directly or indirectly stock representing a 50-percent or greater interest (within the meaning of IRC § 355(d)(4)) in the distributing corporation or any controlled corporation, then the distributing corporation shall recognize gain on the distribution as if the stock of the controlled corporation were sold at its fair market value on the date of the distribution. Section 355(e) was enacted as part of the Taxpayer Relief Act of 1997 and is commonly referred to as the "anti-Morris Trust" provision, reflecting its purpose of preventing taxpayers from using the combination of a tax-free spin-off under § 355 and a subsequent (or prior) acquisition to effectuate what is economically a taxable disposition of an appreciated business without recognizing gain at the corporate level.
The specific legal issue addressed by this memorandum is as follows:
Does the proposed Q4 2022 pro rata distribution by Veldran of 100% of the outstanding common stock of Meridian constitute part of a "plan (or series of related transactions)" that includes the September 20, 2019 acquisition by HPE Fund IV of approximately 62.4% of the outstanding common stock of Veldran?
If the answer to this question is "yes" — i.e., if the distribution and the acquisition are determined to be part of a plan — then IRC § 355(e) would cause Veldran to recognize gain on the Distribution equal to the excess of the fair market value of the Meridian stock distributed over Veldran's adjusted tax basis in the assets contributed to Meridian (as determined under IRC § 361(c) and related provisions). Although the Distribution would still qualify as tax-free to Veldran's shareholders under § 355(a) and (c) (assuming the other requirements of § 355 are satisfied), the corporate-level gain recognition to Veldran would result in a substantial federal income tax liability, estimated at $125.4 million to $189.5 million, as discussed in Section VI below.
If the answer is "no" — i.e., if the distribution and the acquisition are not part of a plan — then § 355(e) would not apply, and Veldran would not recognize gain on the Distribution (subject to the separate analysis under § 355(d), which is addressed in a companion memorandum).
The resolution of this issue depends on the application of the "plan" concept as developed in the Treasury Regulations under § 1.355-7, including the safe harbors, the rebuttable presumptions, and the multi-factor facts-and-circumstances test. Each of these analytical frameworks is described in Section IV below and applied to the facts of the proposed transaction in Section V.
IV. Statutory and Regulatory Framework
A. IRC § 355(e) — Overview
IRC § 355(e) was enacted in 1997 as Section 1012 of the Taxpayer Relief Act of 1997, Public Law 105-34, 111 Stat. 788 (August 5, 1997). The provision was a direct legislative response to the Tax Court's decision in Commissioner v. Morris Trust, 367 F.2d 794 (4th Cir. 1966), which had held that a spin-off followed by an acquisition of the distributing corporation (or the controlled corporation) could qualify for tax-free treatment under § 355 and § 368(a)(1)(A), respectively, even though the combined effect of the two transactions was the separation and disposition of an appreciated business to a third-party acquiror. Congress concluded that the Morris Trust result was inconsistent with the policy of § 355 — which was intended to permit the tax-free division of existing businesses among existing shareholders, not to facilitate tax-free dispositions to outside acquirors — and accordingly enacted § 355(e) to impose corporate-level gain recognition in such circumstances.
The operative provision is IRC § 355(e)(2)(A), which provides that a distribution to which § 355(a) applies is treated as part of a "plan" if the distribution is made pursuant to a plan (or series of related transactions) under which one or more persons acquire directly or indirectly stock representing a 50-percent or greater interest (by vote or value) in the distributing corporation or any controlled corporation. The relevant measurement period is set forth in IRC § 355(e)(2)(B), which provides a four-year window: the plan is deemed to encompass acquisitions occurring during the period beginning two years before the date of the distribution and ending two years after the date of the distribution. However, as discussed below, the "plan" concept under the Treasury Regulations is not strictly limited to acquisitions falling within this four-year window; rather, the statutory window establishes a frame of reference within which the facts-and-circumstances analysis is most probative.
It is important to note that § 355(e) does not disqualify the distribution under § 355(a). The distribution may still be tax-free to the shareholders of the distributing corporation. Rather, § 355(e) operates solely at the corporate level, requiring the distributing corporation to recognize gain on the distributed stock as if such stock had been sold at fair market value. The provision thus preserves shareholder-level nonrecognition while imposing a corporate-level tax on the built-in gain in the distributed stock.
B. Treasury Regulation § 1.355-7 — The "Plan" Regulations
The Treasury Department promulgated final regulations under § 355(e) in Treasury Regulation § 1.355-7 (T.D. 9198, 70 Fed. Reg. 20,279 (April 19, 2005)). These regulations provide the primary analytical framework for determining whether a distribution and an acquisition are part of a "plan (or series of related transactions)" within the meaning of § 355(e). The regulations establish a general rule based on all relevant facts and circumstances, a set of non-exclusive factors that tend to show the existence or absence of a plan, a rebuttable presumption for acquisitions occurring within two years of a distribution, and several safe harbors.
1. General Rule — Treas. Reg. § 1.355-7(b)
Treasury Regulation § 1.355-7(b)(1) provides the overarching principle: a distribution and an acquisition are part of a plan if the distribution was made "in connection with" or "in furtherance of" the acquisition, or vice versa. More specifically, a distribution and an acquisition will be treated as part of a plan if, at some point during the two-year period ending on the date of the distribution, there was an agreement, understanding, arrangement, or substantial negotiations regarding the acquisition or the distribution. The determination is made based on all relevant facts and circumstances.
Treasury Regulation § 1.355-7(b)(2) establishes a rebuttable presumption: if an acquisition occurs within the two-year period beginning on the date of a distribution, or if a distribution occurs within the two-year period beginning on the date of an acquisition, the distribution and the acquisition are presumed to be part of a plan. This presumption may be rebutted by establishing that the distribution and the acquisition are not part of a plan based on the facts and circumstances, including (but not limited to) application of the safe harbors described in Treasury Regulation § 1.355-7(d).
Treasury Regulation § 1.355-7(b)(3) sets forth six non-exclusive factors that tend to show the existence of a plan:
(i) The distribution was motivated by a business purpose to facilitate the acquisition or a similar acquisition.
(ii) The acquisition was agreed to or discussed by one or more officers, directors, or controlling shareholders of the distributing corporation or the controlled corporation, or by another person or persons with the implicit or explicit permission of one or more of such officers, directors, or controlling shareholders, during the two-year period ending on the date of the distribution.
(iii) The distribution was agreed to or discussed by one or more officers, directors, or controlling shareholders of the distributing corporation or the controlled corporation, or by another person or persons with the implicit or explicit permission of one or more of such officers, directors, or controlling shareholders, during the two-year period ending on the date of the acquisition.
(iv) The distribution was permitted, was agreed to, or was the subject of an understanding, arrangement, or substantial negotiations during the two-year period ending on the date of the acquisition.
(v) The acquisition occurred during a period in which there was a significant change in ownership or control of the distributing corporation or the controlled corporation.
(vi) The distribution was effected to facilitate the acquisition or a similar acquisition.
Treasury Regulation § 1.355-7(b)(4) sets forth three non-exclusive factors that tend to show the absence of a plan:
(i) In the case of an acquisition after a distribution, at the time of the distribution, the distributing corporation reasonably expected that the distribution would not be part of a transaction or series of transactions that would result in a change in ownership of the distributing or controlled corporation.
(ii) The distribution was motivated in whole or in substantial part by a corporate business purpose (other than a business purpose to facilitate the acquisition or a similar acquisition), and the acquisition occurred more than six months after the distribution.
(iii) There was no discussion or agreement regarding the acquisition or a similar acquisition at the time of the distribution, and the acquisition occurred more than six months after the distribution.
These factors are explicitly non-exclusive. The regulations emphasize that no single factor is determinative and that the analysis must take into account the totality of the relevant facts and circumstances. The weight to be given to any particular factor depends on the specific facts of the transaction.
2. Safe Harbors — Treas. Reg. § 1.355-7(d)
Treasury Regulation § 1.355-7(d) provides several safe harbors under which a distribution and an acquisition will not be treated as part of a plan. Two of these safe harbors are particularly relevant to the present analysis:
Safe Harbor I — Treas. Reg. § 1.355-7(d)(1) (Post-Distribution Acquisition). An acquisition occurring after a distribution will not be treated as part of a plan if: (a) the distribution was not motivated by a business purpose to facilitate the acquisition or a similar acquisition; (b) at the time of the distribution, there was no discussion or agreement regarding the acquisition; and (c) the acquisition was not discussed by the distributing corporation, the controlled corporation, or any of their officers, directors, or controlling shareholders (or any person acting with their permission) within one year after the distribution.
Safe Harbor II — Treas. Reg. § 1.355-7(d)(2) (Pre-Distribution Acquisition). An acquisition occurring before a distribution will not be treated as part of a plan if, at the time of the acquisition, there was no agreement, understanding, arrangement, or substantial negotiations regarding the distribution or a similar distribution.
Safe Harbor II is the critical safe harbor for purposes of this analysis. If, at the time of the September 20, 2019 acquisition by HPE Fund IV, there was no agreement, understanding, arrangement, or substantial negotiations regarding the proposed spin-off of the Precision Flow Solutions Division (or any similar separation transaction), then Safe Harbor II would apply, and the acquisition and the distribution would not be treated as part of a plan regardless of any other facts or circumstances.
The operative question under Safe Harbor II is a factual one: at the time of the September 20, 2019 acquisition, was there any agreement, understanding, arrangement, or substantial negotiations regarding the distribution? As discussed in Section V.B below, we have not identified any evidence that such discussions or negotiations occurred, but the factual record on this point is incomplete and requires supplementation.
Additional safe harbors are provided for certain acquisitions involving publicly traded stock (Treas. Reg. § 1.355-7(d)(5)), certain acquisitions by employees (Treas. Reg. § 1.355-7(d)(6)), and certain acquisitions by retirement plans (Treas. Reg. § 1.355-7(d)(7)). None of these additional safe harbors is directly applicable to the present analysis, as the HPE Fund IV acquisition was a negotiated private transaction, not a public market acquisition. However, we note them here for completeness.
3. The Two-Year Presumption
As noted above, Treasury Regulation § 1.355-7(b)(2) provides that if an acquisition occurs within the two-year period preceding or following a distribution, there is a rebuttable presumption that the distribution and the acquisition are part of a plan. The converse is also significant: if the acquisition falls outside the two-year window, the rebuttable presumption does not apply, and there is no automatic inference of a plan.
For the present transaction, the September 20, 2019 acquisition occurred approximately three years before the anticipated Q4 2022 distribution date. The acquisition therefore falls outside the two-year presumption window, which is a favorable fact. However, as discussed in the following subsection, the absence of the presumption does not create an affirmative safe harbor.
C. Absence of a Statutory Safe Harbor at Exactly Three Years
It is important to emphasize a significant gap in the regulatory framework: there is no bright-line statutory or regulatory safe harbor for acquisitions occurring more than two years but less than four years before a distribution. The two-year rebuttable presumption established by Treasury Regulation § 1.355-7(b)(2) applies only to acquisitions occurring within two years of a distribution; when the presumption does not apply (as here), the taxpayer is neither burdened by the presumption nor protected by a "reverse presumption" of no plan. The regulations do not create a corresponding safe harbor or presumption at the three-year mark or at any other interval beyond the two-year window.
The statutory four-year window of IRC § 355(e)(2)(B) — which encompasses acquisitions occurring during the period beginning two years before the distribution and ending two years after the distribution — provides a frame of reference for the "plan" analysis but does not establish an outer boundary beyond which a "plan" cannot exist as a matter of law. The Treasury Regulations' facts-and-circumstances test, by its nature, is not limited to any fixed temporal period. Accordingly, the IRS retains the authority to assert that a plan exists based on the totality of the facts and circumstances, even when the acquisition occurs more than two years (or more than four years) before the distribution, although as a practical matter, the evidentiary burden on the government increases significantly with the passage of time.
The legislative history of § 355(e) and the preamble to the final regulations indicate that Congress and the Treasury Department intended greater temporal distance between an acquisition and a distribution to reduce the risk of plan treatment. The regulations' safe harbors, presumptions, and factors collectively reflect the principle that transactions occurring in close temporal proximity to one another are more likely to be part of a plan than transactions separated by significant intervals. Nonetheless, temporal distance is merely one factor among many, and a taxpayer cannot rely on the passage of time alone to establish the absence of a plan if other facts and circumstances suggest that the transactions were linked.
V. Application to the Proposed Spin-Off
This section applies the statutory and regulatory framework described in Section IV to the facts of the proposed spin-off transaction, as set forth in Section II. We analyze the temporal relationship between the acquisition and the distribution, the applicability of Safe Harbor II, the non-exclusive factors under the facts-and-circumstances test, the significance of intervening events, the relevance of the Kestrel acquisition, and the implications of HPE Fund IV's status as a private equity sponsor.
A. Temporal Analysis
The HPE Fund IV acquisition of Veldran closed on September 20, 2019. The proposed distribution of Meridian common stock is anticipated to occur in Q4 2022 — for purposes of this analysis, we assume a distribution date of approximately October or November 2022. The approximate temporal gap between the two events is therefore three years and one to two months.
This temporal gap has several implications under the regulatory framework:
First, the acquisition falls outside the two-year rebuttable presumption period of Treasury Regulation § 1.355-7(b)(2). Because the acquisition occurred more than two years before the anticipated distribution date, the rebuttable presumption that the acquisition and the distribution are part of a plan does not apply. This is a favorable fact, as it means the IRS bears the burden of establishing the existence of a plan based on the totality of the facts and circumstances rather than relying on the regulatory presumption.
Second, the acquisition falls within the four-year window of IRC § 355(e)(2)(B), which encompasses acquisitions occurring during the period beginning two years before the distribution and ending two years after the distribution. Because the distribution is anticipated to occur in Q4 2022, the four-year window begins in approximately Q4 2020 and ends in approximately Q4 2024. The September 2019 acquisition falls before the beginning of this window. However, as noted above, the four-year window provides a frame of reference but does not establish an absolute boundary beyond which a "plan" cannot exist.
Third, the three-year-plus temporal gap is significant because, as a matter of practical tax administration, the IRS has generally been less aggressive in asserting plan treatment for acquisitions occurring well outside the two-year presumption window. The greater the temporal distance between an acquisition and a distribution, the more difficult it becomes for the IRS to establish the factual predicates of a plan — i.e., that the two transactions were part of a unified course of action conceived at or before the time of the earlier transaction. Nonetheless, the three-year gap does not, by itself, establish the absence of a plan as a matter of law. The analysis must proceed to the specific facts and circumstances.
B. Safe Harbor II Analysis — Treas. Reg. § 1.355-7(d)(2)
Safe Harbor II provides that an acquisition occurring before a distribution will not be treated as part of a plan if, at the time of the acquisition, there was no agreement, understanding, arrangement, or substantial negotiations regarding the distribution or a similar distribution. If Safe Harbor II applies to the HPE Fund IV acquisition, the § 355(e) issue would be definitively resolved in the taxpayer's favor, regardless of any other facts or circumstances.
The application of Safe Harbor II turns on a single factual question: at the time of the September 20, 2019 acquisition, was there any agreement, understanding, arrangement, or substantial negotiations regarding a potential spin-off, separation, or other distribution of the Precision Flow Solutions Division (or any other Veldran business segment)?
Factual record currently available. Based on initial discussions with Christine Yeung (General Counsel, Harrowgate Capital Advisors LLC) and Tobias Rourke (Partner, Head of Portfolio Operations, Harrowgate Capital Advisors LLC), Harrowgate's investment thesis for the September 2019 acquisition was to acquire Veldran as a unified entity and to grow both business segments — the Engineered Coatings Division and the Precision Flow Solutions Division — through a combination of operational improvements, capital investment, and strategic bolt-on acquisitions. The stated investment thesis did not contemplate a spin-off or other separation of any business segment.
Furthermore, there is no documentary evidence identified to date — in the form of memoranda, board presentations, email communications, or other written records — of any pre-acquisition discussion or deliberation at Harrowgate, Veldran, or any of their respective advisors regarding a potential spin-off of the Precision Flow Solutions Division or any other division. The Kestrel acquisition, which closed on June 7, 2019 (approximately three months before the HPE Fund IV acquisition), is more consistent with an accumulation strategy (building up the Precision Flow Solutions Division within Veldran) than a separation strategy.
However, the factual record on this critical point is thin and must be substantially supplemented before Safe Harbor II can be confirmed. Specifically, we have not yet received or reviewed the following materials:
(a) Investment committee memoranda prepared by or for HPE Fund IV or Harrowgate Capital Advisors LLC in connection with the evaluation and approval of the September 2019 Veldran acquisition. These memoranda would be expected to set forth the investment thesis, the anticipated value-creation strategy, and the contemplated exit plan. If the memoranda discuss a potential spin-off or separation as part of the value-creation or exit strategy, Safe Harbor II would not apply.
(b) Board minutes from Veldran (or its predecessor entity) from the period surrounding the September 2019 acquisition (i.e., from approximately June 2019 through December 2019). These minutes would reflect any board-level discussions regarding the future strategic direction of Veldran, including any discussion of a potential spin-off or separation.
(c) Communications between Harrowgate and its advisors — including Whitfield & Gage LLP (corporate/M&A counsel) and Brackenridge & Co. (financial advisor) — from the pre-acquisition period. If any of these communications reference a potential spin-off or separation of the Precision Flow Solutions Division, Safe Harbor II would not apply.
(d) Diligence materials prepared by or for HPE Fund IV in connection with the Veldran acquisition, including any strategic assessment or value-creation plan prepared by Harrowgate's portfolio operations team.
(e) Communications between Harrowgate and Greystone Partners Fund III LP (the selling shareholder) in connection with the acquisition, to confirm that no discussion of a potential spin-off or separation occurred as part of the sale negotiations.
Critical open item. Before this memorandum is finalized, and before a "should" level opinion on the § 355(e) issue can be supported, we require written confirmation — in the form of detailed, specific factual representations in the Representation Letter — that no officer, director, controlling shareholder, employee, or advisor of Harrowgate, HPE Fund IV, Veldran, or any of their respective affiliates discussed, proposed, contemplated, or negotiated a spin-off or other separation of the Precision Flow Solutions Division (or any other Veldran business segment) at any time prior to or on September 20, 2019. The representations must cover all relevant persons, including without limitation: Marcus Adler, Diana Fenn, Christine Yeung, and Tobias Rourke at Harrowgate; Jonathan Caldecott, Rita Subramanian, Philip Crundell, and David Thornberry at Veldran; Priya Chandrasekar and Nathan Whitfield at Whitfield & Gage LLP; Samuel Ng at Brackenridge & Co.; and Andrew Kessler at Prescott Capital Management LP.
Until these representations are obtained and the supporting documentary evidence is reviewed, we cannot confirm the applicability of Safe Harbor II. If Safe Harbor II is ultimately confirmed, it would provide the strongest basis for concluding that § 355(e) does not apply to the proposed spin-off. If Safe Harbor II cannot be confirmed — for example, because the documentary record reveals pre-acquisition discussions about a potential spin-off — the analysis must proceed under the general facts-and-circumstances test, which entails greater uncertainty and risk.
C. Facts-and-Circumstances Analysis Under Treas. Reg. § 1.355-7(b)
Even if Safe Harbor II is ultimately confirmed, it is prudent to analyze the proposed transaction under the general facts-and-circumstances test, both as a secondary line of defense and to identify any factual vulnerabilities that could undermine the overall § 355(e) position. We address each of the six "plan" factors and three "no-plan" factors in turn.
1. Factors Tending to Show the Existence of a Plan
Factor (i): Distribution motivated by business purpose to facilitate the acquisition. There is no evidence — and no logical basis — for concluding that the proposed spin-off was designed to "facilitate" the September 2019 acquisition. The acquisition was a complete buyout of the prior controlling shareholder (Greystone Partners Fund III LP) through a negotiated tender offer and merger squeeze-out. A spin-off of the Precision Flow Solutions Division would not have facilitated that acquisition in any meaningful sense; to the contrary, a spin-off prior to the acquisition would have reduced the scope of the business being acquired and would presumably have required a different deal structure and purchase price. There is no indication that the spin-off was a condition to, or was in any way related to, the acquisition negotiations. Accordingly, this factor weighs against plan treatment.
Factor (ii): Acquisition discussed during the two-year period ending on the distribution date. The two-year period ending on the anticipated distribution date (assumed to be Q4 2022) would begin in approximately Q4 2020. The HPE Fund IV acquisition closed on September 20, 2019, which is outside this two-year window. The relevant inquiry under this factor is not whether the acquisition itself was discussed during this period (the acquisition was a completed historical event and would necessarily have been referenced in various corporate contexts), but rather whether the acquisition and the distribution were linked in discussions during this period — i.e., whether the distribution was discussed in connection with or as a consequence of the acquisition.
Based on preliminary information obtained from Harrowgate and Veldran, the spin-off was first substantively discussed in early 2022, approximately January through February 2022. The Calderwood & Harkness engagement was opened on April 11, 2022. We understand that the spin-off concept emerged in early 2022 in response to the diverging growth trajectories and capital-allocation needs of the two business segments, and not as a continuation of or logical extension of the acquisition rationale. If this timeline is confirmed, the relevant discussions would have commenced approximately two years and three to four months after the acquisition — well outside any period of temporal proximity that would suggest a link between the acquisition and the distribution.
However, we need to determine with greater specificity when the spin-off was first discussed, by whom, and in what context. It is possible that informal or exploratory discussions occurred earlier than January 2022, and if such discussions can be traced to the acquisition rationale or to a pre-existing exit strategy, this factor could become adverse. On balance, based on the information currently available, this factor is neutral to favorable.
Factor (iii): Distribution discussed during the two-year period ending on the acquisition date. The two-year period ending on September 20, 2019 would begin on September 20, 2017. Based on the information currently available, there is no evidence that a spin-off or other separation of the Precision Flow Solutions Division was discussed during this period. To the contrary, the evidence from this period suggests that the business strategy was one of accumulation and growth rather than separation. The Kestrel acquisition, which was initiated under Greystone's ownership and closed on June 7, 2019, involved the purchase of a business that would form part of the very division now proposed to be spun off — a fact that is inconsistent with a contemporaneous plan to separate that division.
Moreover, the HPE Fund IV acquisition was Harrowgate's first involvement with Veldran. It would be unusual for an acquiring private equity sponsor to have discussed a potential spin-off of a target company's business segment during the two-year period before its acquisition of the target, particularly when the acquisition had not yet been contemplated during the earlier portion of that two-year period. Harrowgate's involvement with Veldran appears to have commenced in approximately mid-2019, only a few months before the September 2019 closing.
This factor weighs against plan treatment. However, we emphasize that this conclusion is based on limited factual information and is subject to revision if the documentary record reveals otherwise.
Factor (iv): Pre-existing agreement, understanding, arrangement, or substantial negotiations. There is no evidence of any pre-existing agreement, understanding, arrangement, or course of substantial negotiations regarding a spin-off or other separation of the Precision Flow Solutions Division. No written agreement or memorandum of understanding has been identified, and no oral agreement or informal understanding has been disclosed to us. This factor weighs against plan treatment. The same caveat regarding the need for additional factual diligence applies.
Factor (v): Acquisition during a period of significant ownership change. The HPE Fund IV acquisition itself was the "significant ownership change" — the acquisition resulted in a change of more than 50% of the outstanding Veldran common stock. This factor is inherently present in any § 355(e) analysis, because § 355(e) is only relevant where there has been a qualifying acquisition (i.e., a 50-percent-or-greater change in ownership). If this factor were given independent weight, it would create a circular inference: § 355(e) applies because of the change in ownership, and the change in ownership is treated as evidence of a plan. We believe the better view is that this factor should not be given significant independent weight in the analysis, and its presence should not be treated as establishing or even suggesting the existence of a plan. This factor is neutral.
Factor (vi): Distribution effected to facilitate the acquisition. This factor is the mirror image of Factor (i) and is not applicable to the present facts. The Distribution will occur approximately three years after the acquisition and does not facilitate the acquisition in any meaningful sense. The acquisition has been completed, and the Distribution does not enhance, enable, or advance the acquisition in any way. This factor weighs against plan treatment.
Summary of "plan" factors. Of the six factors tending to show the existence of a plan, five weigh against plan treatment and one (Factor (v)) is neutral. No factor affirmatively supports a finding that the acquisition and the distribution are part of a plan.
2. Factors Tending to Show the Absence of a Plan
Factor (i): Distribution motivated by corporate business purpose other than to facilitate the acquisition. Two preliminary business purposes for the proposed spin-off have been identified: (a) enabling independent capital-allocation strategies for the two businesses, each of which has different capital needs, growth profiles, and risk characteristics; and (b) enhancing management focus and operational efficiency by allowing each business segment to operate under dedicated management teams with direct accountability to their respective boards and shareholders.
These are, on their face, legitimate corporate-level business purposes of Veldran — not purposes of HPE Fund IV or its limited partners. If these purposes are adequately established and documented, this factor would weigh strongly against plan treatment.
However, as noted in a preliminary draft of the Business Purpose Memorandum (first draft dated July 18, 2022, currently in preparation), there is a concern that the stated business purposes may be viewed by the IRS as primarily serving HPE Fund IV's fund-level objectives rather than the corporate-level objectives of Veldran. Specifically, the IRS could argue that the spin-off is motivated by HPE Fund IV's desire to facilitate the separate monetization of the two business segments — for example, by enabling an IPO, sale, or other disposition of Meridian that would be more difficult or less value-maximizing if Meridian remained part of Veldran. Such a purpose would be a "shareholder purpose" rather than a "corporate purpose" and would not satisfy the business purpose requirement of § 355 or the "anti-plan" factor under § 1.355-7(b)(4)(i).
The business purpose articulation is therefore critical not only to the § 355(a) analysis but also to the § 355(e) "plan" analysis. If the business purposes are established as genuine, independent corporate-level purposes of Veldran, this factor would weigh strongly against plan treatment. If the business purposes are viewed as pretextual or as primarily serving sponsor-level monetization objectives, this factor would be weakened or could even cut against the taxpayer. The current status of this factor is uncertain pending resolution of the business-purpose articulation issues identified in the Business Purpose Memorandum.
Factor (ii): Distribution motivated by corporate business purpose and acquisition occurred more than six months before the distribution. The temporal element of this factor is clearly satisfied: the September 2019 acquisition occurred approximately three years before the anticipated Q4 2022 distribution, well exceeding the six-month threshold. If the corporate business purpose is established (per the discussion of Factor (i) above), this factor would weigh strongly against plan treatment. The combination of a genuine corporate business purpose and the passage of more than six months between the acquisition and the distribution is one of the strongest indicators of the absence of a plan under the regulatory framework.
Factor (iii): No discussion or agreement regarding the acquisition at the time of the distribution, and the acquisition occurred more than six months before the distribution. The temporal element is satisfied (acquisition more than six months before distribution). The question of whether there were "discussions or agreements regarding the acquisition at the time of the distribution" is somewhat unusual in the present context because the acquisition is a completed historical event. We interpret this factor as asking whether, at the time of the distribution, there were ongoing discussions or arrangements relating to the acquisition that would suggest a continuing link between the two transactions. There is no indication of any such ongoing discussions or arrangements. This factor is favorable.
Summary of "no-plan" factors. All three factors tending to show the absence of a plan weigh in the taxpayer's favor, although the strength of Factor (i) depends on the resolution of the business-purpose articulation issues.
D. Analysis of Intervening Events
The significance of events occurring between the September 20, 2019 acquisition and the anticipated Q4 2022 distribution date is an important component of the facts-and-circumstances analysis. Intervening events that were not foreseeable at the time of the acquisition and that contributed to the decision to effect the spin-off tend to support the conclusion that the acquisition and the spin-off are independent transactions that were not part of a unified plan.
Several significant events and developments occurred during the approximately three-year interval between the acquisition and the proposed distribution:
COVID-19 pandemic. The COVID-19 pandemic, which began to affect the United States in early 2020, caused widespread disruption to industrial markets and supply chains. Veldran's two business segments were affected differently: the Engineered Coatings Division experienced a temporary revenue decline due to reduced demand from the oil and gas and general industrial sectors, while the Precision Flow Solutions Division experienced relative resilience and, in some product lines, increased demand due to growth in pharmaceutical manufacturing and semiconductor fabrication. The divergent impact of the pandemic on the two business segments is reported to have contributed to the recognition that the two segments have fundamentally different growth profiles and capital-allocation needs — a recognition that, in turn, contributed to the decision to explore a spin-off. To the extent that the spin-off concept was catalyzed by the pandemic's differential impact on the two segments, this fact supports the conclusion that the spin-off was not contemplated at the time of the September 2019 acquisition.
Operational improvements and strategic evolution. Following the September 2019 acquisition, Harrowgate implemented a comprehensive operational improvement program at Veldran under the direction of Tobias Rourke (Partner, Head of Portfolio Operations, Harrowgate Capital Advisors LLC). This program involved the recruitment of new management talent, the optimization of manufacturing processes, the rationalization of the supply chain, and the deployment of capital expenditures to expand production capacity. These activities are consistent with Harrowgate's stated investment thesis of acquiring and operating Veldran as a unified entity and growing both business segments. The evolution from an integration-and-growth strategy to a separation strategy appears to have occurred gradually over the course of 2021 and early 2022, as the diverging trajectories of the two segments became more pronounced.
Diverging growth trajectories. As noted above, the two business segments have experienced divergent growth trajectories since the acquisition, with the Precision Flow Solutions Division growing more rapidly than the Engineered Coatings Division and attracting different types of capital and strategic interest. We understand that this divergence was not anticipated at the time of the September 2019 acquisition and became apparent only after the pandemic-era disruptions and the subsequent recovery. The recognition that the two segments would benefit from independent capital structures, dedicated management teams, and distinct public-market valuations appears to have been the primary driver of th

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