1003-00005 · Veldran Industries Holdings · Tax Analysis

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PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT

MEMORANDUM

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I. Executive Summary

The purpose of this memorandum is to summarize the state and local tax ("SALT") implications of the proposed pro rata distribution by Veldran Industries Holdings, Inc. ("Veldran" or "Distributing"), a Delaware corporation headquartered in Charlotte, North Carolina (principal office: 2400 Commerce Park Drive, Suite 500, Charlotte, NC 28217; registered address: 1209 Orange Street, Wilmington, DE 19801), of 100% of the common stock of Meridian Flow Technologies, Inc. ("Meridian," "SpinCo," or "Controlled"), a Delaware corporation to be incorporated with a planned principal office at 7100 Northlake Parkway, Suite 300, Tucker, GA 30084 and a planned registered address at 1209 Orange Street, Wilmington, DE 19801.

Transaction Overview. As currently contemplated, Veldran will contribute all assets and liabilities of the Precision Flow Solutions Division (the "Contributed Business") to Meridian in exchange for all Meridian common stock and the assumption of allocated liabilities (the "Contribution"). Immediately following the Contribution, Veldran will effect a pro rata distribution of all Meridian stock to the holders of Veldran common stock at a ratio of 1:1 — that is, one share of Meridian common stock for each of the 74,500,000 outstanding shares of Veldran common stock (the "Distribution" and, together with the Contribution, the "Spin-Off").

Federal Tax Treatment. The Spin-Off is intended to qualify as a tax-free reorganization under Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), and as a tax-free distribution under IRC Section 355 at the federal level. Calderwood & Harkness LLP ("Calderwood & Harkness" or the "Firm") is separately engaged to deliver a "should" level federal tax opinion addressing the qualification of the Spin-Off under these provisions. This memorandum does not address the federal tax analysis in detail; rather, it supplements and complements the federal opinion by identifying discrete state and local tax considerations.

Jurisdictional Scope. This memorandum addresses SALT implications in the three principal jurisdictions implicated by the Spin-Off:

(a) Delaware — the state of incorporation for both Veldran and Meridian;

(b) North Carolina — the state in which Veldran maintains its corporate headquarters and the location of its Engineered Coatings Division operations; and

(c) Georgia — the planned headquarters jurisdiction for Meridian and the location of substantial Precision Flow Solutions Division operations, including those of Kestrel Precision Controls, Inc. ("Kestrel"), a Georgia subsidiary of Veldran.

Key Takeaway. Delaware, North Carolina, and Georgia each generally conform to the federal Section 355 treatment of the Spin-Off, though with varying degrees of explicit conformity. Each jurisdiction raises discrete considerations that should be analyzed further if the transaction proceeds. Georgia, in particular, may impose additional filing and disclosure requirements in connection with corporate reorganizations involving Georgia-domiciled entities, and the presence of Kestrel's substantial Georgia operations within the Contributed Business creates Georgia-specific transfer tax and administrative considerations that are not present in the other two jurisdictions.

Scope Limitation. This memorandum is preliminary and limited to the three identified primary jurisdictions. Veldran and Meridian have (or, in Meridian's case, will have) operations, employees, and/or property in additional states that may impose income, franchise, or transfer taxes in connection with the Spin-Off. A comprehensive multi-state analysis encompassing all jurisdictions in which either entity has or may have tax nexus is recommended prior to finalization of any tax opinion or transaction closing.

II. Background and Key Transaction Parameters

This Section II sets forth the key factual background and transaction parameters upon which the analysis in this memorandum is based. The information summarized below has been derived from due diligence materials provided by Harrowgate Capital Advisors LLC, the management of Veldran, and the preliminary valuation analysis prepared by Brackenridge & Co. Unless otherwise noted, financial figures are for fiscal year ended December 31, 2021 ("FY2021").

A. Distributing Corporation — Veldran Industries Holdings, Inc.

Veldran Industries Holdings, Inc. is a Delaware corporation, incorporated on March 14, 2019, with Employer Identification Number 86-1920347. Veldran is a diversified industrial products and engineered materials company with two principal operating divisions. As of the most recently completed fiscal year, Veldran's aggregate revenue was approximately $2.34 billion and its aggregate EBITDA was approximately $418 million.

Veldran's two operating divisions are as follows:

(i) Engineered Coatings Division: This division generates approximately $1.52 billion in annual revenue and approximately $285 million in EBITDA. The Engineered Coatings Division will remain with Veldran following the Spin-Off and constitutes the core continuing business of the Distributing corporation. Its operations are principally located in North Carolina.

(ii) Precision Flow Solutions Division: This division generates approximately $820 million in annual revenue and approximately $133 million in EBITDA. The Precision Flow Solutions Division, including all of its assets, liabilities, employees, and contractual relationships, will constitute the Contributed Business to be transferred to Meridian in connection with the Spin-Off. Its operations are principally located in Georgia and, to a lesser extent, other states.

Veldran employs approximately 8,200 individuals across its two divisions and corporate functions.

Capital Structure. As of the date of this memorandum, Veldran's capital structure consists of the following:

• 74,500,000 shares of common stock outstanding (out of 100,000,000 authorized shares);

• $1.1 billion First Lien Term Loan B facility, with Ashfield National Bank, N.A. serving as administrative agent; and

• $450 million aggregate principal amount of 6.250% Senior Unsecured Notes due 2027, with Colton Trust Company serving as indenture trustee.

Ownership. The ownership of Veldran's outstanding common stock is as follows:

Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV"), the client, is the controlling shareholder of Veldran, holding its interest through its wholly owned subsidiary, Harrowgate Veldran Holdings LLC ("HVH"), a Delaware limited liability company. HPE Fund IV acquired its interest in Veldran on September 20, 2019, a date that is relevant to the Section 355(d) analysis discussed in Section VII.C below.

B. Controlled Corporation — Meridian Flow Technologies, Inc.

Meridian Flow Technologies, Inc. is a planned Delaware corporation that has not yet been incorporated as of the date of this memorandum. Meridian's planned principal office will be located at 7100 Northlake Parkway, Suite 300, Tucker, GA 30084, and its planned registered address in Delaware will be 1209 Orange Street, Wilmington, DE 19801.

Following the Spin-Off, Meridian will operate the Precision Flow Solutions Division business, which encompasses the design, manufacture, and sale of precision fluid-control systems serving industrial, petrochemical, and water-infrastructure end markets.

Pro Forma Financials. On a pro forma basis for FY2021, Meridian's revenue would have been approximately $820 million and its EBITDA would have been approximately $133 million.

Valuation. Based on the preliminary analysis prepared by Brackenridge & Co. and received on June 10, 2022, the estimated fair market value ("FMV") range for Meridian (i.e., the Precision Flow Solutions Division business as a going concern) is $1,396.5 million to $1,702.4 million, based on an enterprise value to EBITDA multiple range of 10.5× to 12.8×.

Tax Basis and Built-in Gain. Veldran's estimated adjusted tax basis in the assets of the Precision Flow Solutions Division is approximately $800 million. Accordingly, the estimated built-in gain inherent in the Contributed Business ranges from approximately $596.5 million to approximately $902.4 million, depending on final valuation. This built-in gain figure is relevant both to the federal tax analysis (particularly under IRC Sections 355(d), 355(e), and 361(c)) and to the state-level gain recognition risk analysis set forth in Section VII of this memorandum.

C. Kestrel Precision Controls, Inc. — Georgia Nexus

Kestrel Precision Controls, Inc. is a Georgia corporation, founded on February 12, 2003, with Employer Identification Number 58-2847193. Kestrel was acquired by Veldran on June 7, 2019 from Rennick Industrial Partners Fund II LP (EIN 82-3017564) in a fully taxable stock acquisition for a purchase price of $295 million, paid entirely in cash. Following the acquisition, Kestrel has operated as a wholly owned subsidiary of Veldran within the Precision Flow Solutions Division.

Kestrel comprises approximately 35% of the Precision Flow Solutions Division's FY2021 revenue, or approximately $287 million of the division's total $820 million in revenue. Kestrel's operations are centered in the State of Georgia, including manufacturing facilities, office space, and a significant employee base located in the greater Atlanta metropolitan area and surrounding counties.

Relevance to SALT Analysis. Kestrel's Georgia presence is the primary driver of the Georgia nexus analysis for the Precision Flow Solutions Division and, consequently, for Meridian post-Spin-Off. Because Kestrel's assets and operations will be included in the Contributed Business transferred to Meridian, the Contribution and Distribution have direct Georgia income and transfer tax implications. The situs of Kestrel's real and tangible personal property in Georgia creates potential exposure to Georgia real estate transfer tax and Georgia sales and use tax in connection with the asset transfer, as discussed in Section V below.

D. Distribution Mechanics

The Distribution is intended to be effected on a pro rata basis at a ratio of 1:1 — that is, each holder of Veldran common stock as of the record date will receive one share of Meridian common stock for each share of Veldran common stock held.

The original target for both the record date and the distribution date was the fourth quarter of calendar year 2022. However, as of the date of this memorandum, the client has communicated that the Spin-Off timeline is now paused indefinitely. An updated communication received on August 22, 2022 (after the initial preparation of this memorandum but prior to its circulation) confirmed the indefinite pause. This memorandum has been finalized notwithstanding the pause in order to preserve the analysis for re-engagement if and when the transaction is reactivated.

Following the Distribution, each former Veldran shareholder will hold one share of Veldran common stock (representing the continuing Engineered Coatings Division business) and one share of Meridian common stock (representing the Precision Flow Solutions Division business).

III. Delaware Tax Considerations

A. Delaware Conformity with Federal Section 355 Treatment

Delaware does not impose a corporate income tax in the traditional sense. Unlike most states, Delaware does not have a broadly applicable corporate net income tax that would require an analysis of conformity with the federal treatment of distributions under IRC Section 355. Instead, Delaware's primary tax on corporate entities takes the form of a franchise tax imposed on corporations incorporated in or qualified to do business in the State of Delaware.

Because Delaware does not tax corporate income as such, there is no separate Delaware income tax code provision to analyze for conformity with the Internal Revenue Code's treatment of tax-free spin-offs. Delaware generally follows federal treatment for purposes of determining the character of corporate transactions in those limited contexts where the character of a transaction is relevant to Delaware tax obligations (e.g., for purposes of the assumed par value capital method of franchise tax calculation). However, the absence of a corporate income tax means that the primary Delaware tax concern in the Spin-Off context is franchise tax and organizational-level fees, not gain recognition on the Distribution.

Key Point. Because Delaware does not tax corporate income, the Spin-Off — even if it were not to qualify as tax-free under federal Section 355 — would not result in gain recognition for Delaware income tax purposes. The Delaware analysis is therefore limited to franchise tax, organizational fees, and transfer tax considerations.

B. Delaware Franchise Tax

Both Veldran (as an existing Delaware corporation) and Meridian (as a planned Delaware corporation) are or will be subject to Delaware's annual franchise tax upon incorporation.

Veldran currently pays Delaware franchise tax computed under either the authorized shares method or the assumed par value capital method, whichever produces a lower tax liability. As noted above, Veldran has 100,000,000 authorized shares of common stock, which places Veldran in a higher bracket under the authorized shares method. Veldran's tax advisors should confirm that the assumed par value capital method produces a more favorable result, as is typical for companies with large authorized share counts but modest par values.

Upon incorporation, Meridian will have its own Delaware franchise tax obligation. The initial filing fee for a Delaware certificate of incorporation will be due at the time of filing, and Meridian's first annual franchise tax payment will be due in the year following incorporation. The amount of Meridian's franchise tax will depend on the authorized share count and par value specified in Meridian's certificate of incorporation. We recommend that the engagement team coordinate with Calderwood & Harkness's Corporate Department on the drafting of Meridian's certificate of incorporation to ensure that the authorized share count and par value are structured in a manner that minimizes the Delaware franchise tax liability, consistent with the business requirements of the transaction.

The Contribution and Distribution themselves should not create an additional or incremental franchise tax event for Veldran. The transfer of assets from Veldran to Meridian in the Contribution may affect the assumed par value capital calculation for Veldran (by reducing Veldran's total assets), but this effect is a natural consequence of the separation of the two businesses and is not a discrete tax cost attributable to the Spin-Off.

C. Delaware Transfer Taxes

Delaware does not impose a general transfer tax on transfers of corporate stock. Accordingly, the Distribution of Meridian stock from Veldran to its shareholders should not be subject to any Delaware stock transfer tax.

With respect to the Contribution, the transfer of assets from Veldran to Meridian raises the question of whether any assets to be transferred are subject to Delaware realty transfer tax. Delaware imposes a realty transfer tax on conveyances of real property located in the state. However, based on the information available as of the date of this memorandum, Veldran's registered address at 1209 Orange Street, Wilmington, Delaware 19801 is a registered agent office only, and the operating assets of the Precision Flow Solutions Division are believed to be located primarily in North Carolina and Georgia rather than in Delaware.

We recommend that the engagement team confirm whether any Precision Flow Solutions Division real property is located in Delaware. If no Delaware-situs real property is included in the Contributed Business, the Delaware realty transfer tax should not apply.

D. Preliminary Conclusion — Delaware

No material Delaware income tax concern exists in connection with the Spin-Off, as Delaware does not impose a corporate income tax. Delaware franchise tax administrative matters associated with Meridian's incorporation are ministerial in nature and are not expected to present a material impediment to the transaction. The risk of Delaware transfer tax is low absent any Delaware-situs real property within the Contributed Business. We recommend confirming the absence of such property as part of the asset situs diligence described in Section IX below.

IV. North Carolina Tax Considerations

A. North Carolina Corporate Income Tax — Conformity with Federal Section 355

North Carolina imposes a corporate income tax on corporations doing business in or deriving income from sources within the state. For taxable years beginning on or after January 1, 2022, the North Carolina corporate income tax rate is 2.5%, a reduction from the prior rate of 2.5% (which was itself the product of a multi-year phasedown from higher historical rates). The North Carolina General Assembly has enacted legislation providing for further reductions in the corporate income tax rate in future years, with the ultimate goal of phasing the tax out entirely, though those future reductions are not relevant to the current analysis.

For purposes of calculating North Carolina taxable income, North Carolina tax law generally conforms to the Internal Revenue Code on a "rolling conformity" basis. Specifically, under N.C. Gen. Stat. Section 105-130.2, "net income" for North Carolina corporate income tax purposes begins with the corporation's federal taxable income as determined under the IRC. This rolling conformity means that North Carolina generally incorporates amendments to the IRC as they are enacted at the federal level, without requiring separate legislative adoption of each amendment.

Because North Carolina starts its income tax computation with federal taxable income, the treatment of the Spin-Off for North Carolina corporate income tax purposes should generally follow the federal treatment. If the Spin-Off qualifies as a tax-free reorganization under IRC Section 368(a)(1)(D) and a tax-free distribution under IRC Section 355 at the federal level — as is intended and as will be addressed in the Calderwood & Harkness federal tax opinion — then no gain should be recognized by Veldran for North Carolina corporate income tax purposes in connection with the Contribution or the Distribution.

Key Qualification. North Carolina's conformity with the IRC is subject to specific North Carolina statutory modifications and adjustments. The North Carolina income tax statutes contain a number of "add-back" and "deduction" provisions that modify federal taxable income to arrive at North Carolina taxable income. We recommend confirming that no North Carolina-specific add-back or modification provision would apply to, or override, the tax-free treatment of a Section 355 distribution. Based on our preliminary review, we are not aware of any such provision, but this should be verified as part of the comprehensive analysis.

Nexus. Veldran is headquartered in Charlotte, North Carolina, and maintains its principal office at 2400 Commerce Park Drive, Suite 500, Charlotte, NC 28217. Veldran has clear and unambiguous corporate income tax nexus in North Carolina by virtue of its headquarters, employees, and operations in the state. The Engineered Coatings Division, which will remain with Veldran post-Spin-Off, is principally based in North Carolina. Post-Spin-Off, Veldran will continue to be a North Carolina taxpayer.

B. Apportionment Considerations

Pre-Spin-Off, Veldran apportions its income among all states in which it has nexus, including North Carolina and Georgia. Veldran's North Carolina apportionment factors (sales, payroll, and/or property, depending on the formula applicable to Veldran's industry) currently reflect the combined operations of both the Engineered Coatings Division and the Precision Flow Solutions Division.

Post-Spin-Off, the separation of the Precision Flow Solutions Division from Veldran will cause a change in Veldran's North Carolina apportionment factors. Specifically, the transfer of the Precision Flow Solutions Division's assets, employees, and sales to Meridian will remove those items from Veldran's apportionment factor calculation. Because the Precision Flow Solutions Division's operations are concentrated in Georgia rather than North Carolina, the removal of the division's factors from Veldran's apportionment calculation may increase Veldran's percentage of income apportioned to North Carolina (as the denominator of the apportionment fraction will decrease by a greater proportion than the numerator, assuming the Engineered Coatings Division's North Carolina-centric factors are relatively larger in the numerator). The net effect on Veldran's North Carolina income tax liability will depend on the interplay of the change in apportioned income and any changes in total income arising from the separation.

Meridian, for its part, will need to establish its own North Carolina apportionment factors if Meridian has nexus in North Carolina. Meridian may have North Carolina nexus through employees, property, or sales in the state, depending on the final allocation of assets, employees, and customer relationships between the two divisions. If Meridian has no North Carolina nexus post-Spin-Off, Meridian would not be subject to North Carolina corporate income tax.

We recommend that the engagement team analyze the impact of the Contribution on Veldran's North Carolina apportionment factor and determine whether Meridian will have nexus in North Carolina following the Spin-Off. This analysis should be part of the comprehensive multi-state nexus study recommended in Section IX.

C. North Carolina Franchise Tax

North Carolina imposes a franchise tax on corporations doing business in the state. The North Carolina franchise tax is calculated based on the greater of (a) the corporation's net worth apportioned to North Carolina or (b) 55% of the appraised value of the corporation's real and tangible personal property located in North Carolina.

The Contribution of Precision Flow Division assets from Veldran to Meridian could affect Veldran's North Carolina franchise tax base by reducing Veldran's net worth (as assets are transferred out of Veldran to Meridian). Conversely, if Meridian has nexus in North Carolina, Meridian will establish its own North Carolina franchise tax obligation based on its net worth apportioned to the state.

These franchise tax considerations are ministerial in nature and are not expected to present a material impediment to the Spin-Off. However, the engagement team should be aware that changes in net worth allocable to North Carolina will affect the franchise tax liability of both entities in the taxable year of the Spin-Off and in subsequent years.

D. North Carolina Transfer and Sales/Use Taxes

Stock Transfer Tax. North Carolina does not impose a general stock transfer tax. Accordingly, the Distribution of Meridian stock from Veldran to its shareholders should not be subject to any North Carolina stock transfer tax.

Deed Transfer Excise Tax. North Carolina imposes a deed transfer excise tax on conveyances of real property located in the state. The tax is imposed at a rate of $1.00 per $500 of consideration (or the value of the property transferred). If any real property located in North Carolina is transferred as part of the Contribution of Precision Flow Division assets to Meridian, the transfer could be subject to this excise tax.

We recommend confirming whether any Precision Flow Solutions Division real property is located in North Carolina. If such property exists, the analysis should address whether the Contribution — which is structured as an intra-group asset transfer in exchange for stock of a newly formed, wholly owned subsidiary — constitutes a "conveyance" subject to the excise tax, and whether any exemption applies for transfers incident to a corporate reorganization. North Carolina's deed transfer excise tax statute contains certain limited exemptions, but the applicability of those exemptions to a Section 368(a)(1)(D) reorganization transfer requires further analysis.

Sales and Use Tax. The transfer of tangible personal property (including machinery, equipment, and inventory) from Veldran to Meridian as part of the Contribution may technically be subject to North Carolina sales and use tax unless an exemption applies. North Carolina imposes sales tax on retail sales of tangible personal property and certain digital property and services. The transfer of assets in the Contribution may not constitute a "retail sale" in the ordinary sense, but the breadth of the North Carolina sales tax base warrants analysis.

North Carolina provides a casual sale exemption that may exclude from sales tax certain transfers of tangible personal property that are not made in the ordinary course of the transferor's business. In addition, North Carolina may provide an exemption or exclusion for transfers of property in connection with a corporate reorganization or a transfer to a related entity. The applicability of these exemptions to the Contribution should be analyzed in detail, particularly with respect to the types and values of tangible personal property to be transferred.

E. Preliminary Conclusion — North Carolina

North Carolina generally conforms to the federal Section 355 treatment of the Spin-Off for corporate income tax purposes. Assuming the Spin-Off qualifies as tax-free under federal Sections 355 and 368(a)(1)(D), no material North Carolina corporate income tax gain recognition should result from the Contribution or the Distribution. Franchise tax and transfer tax implications are manageable but require further diligence to quantify, particularly with respect to the situs of real property and tangible personal property within the Precision Flow Solutions Division.

We recommend confirming the location of all real property and material tangible personal property included in the Contributed Business to determine whether North Carolina deed transfer excise tax or sales/use tax may apply.

V. Georgia Tax Considerations

A. Georgia Corporate Income Tax — Conformity with Federal Section 355

Georgia imposes both a corporate net worth tax and a corporate income tax on corporations doing business in or deriving income from sources within the state. The Georgia corporate income tax rate is currently 5.75%, which is materially higher than the North Carolina rate of 2.5% and underscores the importance of Georgia-specific conformity analysis.

Georgia generally conforms to the Internal Revenue Code for purposes of calculating Georgia taxable income. Under O.C.G.A. Section 48-7-21, Georgia taxable income is computed by starting with the corporation's federal taxable income and making Georgia-specific adjustments. Accordingly, if the Spin-Off qualifies as tax-free under federal Sections 355 and 368(a)(1)(D), it should generally be treated as tax-free for Georgia corporate income tax purposes as well, absent any Georgia-specific adjustment that would override the federal treatment.

Important Caveat — Static Conformity. Unlike North Carolina, which employs a rolling conformity approach, Georgia's conformity with the IRC is "static" — that is, Georgia adopts the IRC as of a specific date enacted by the Georgia General Assembly. This static conformity approach means that Georgia may, at any given time, be conforming to a version of the IRC that is several years behind the current version. Georgia has at times lagged in adopting recent federal amendments.

We recommend confirming that Georgia has adopted the version of IRC Section 355 that is in effect for transactions occurring in 2022. If Georgia's conformity date has not been updated to encompass any material amendments to Section 355 or Section 368(a)(1)(D) that may have been enacted after the date Georgia last adopted, additional analysis would be required to determine whether the Spin-Off would qualify for tax-free treatment under the Georgia-adopted version of those provisions. Based on our preliminary review, we believe that the core provisions of Section 355 relevant to the Spin-Off have not been materially amended in recent years and that Georgia's conformity should encompass the operative provisions, but this should be verified.

Georgia Nexus. Kestrel Precision Controls, Inc., a Georgia corporation (EIN 58-2847193), is a significant Georgia presence within the Precision Flow Solutions Division. Kestrel's assets and operations, which are centered in Georgia, will be part of the Contributed Business transferred to Meridian. Furthermore, Meridian's planned headquarters will be located in Tucker, Georgia, establishing clear Georgia income tax nexus for Meridian post-Spin-Off. Georgia therefore has jurisdiction to impose its corporate income tax on Meridian's income apportioned to the state following the Spin-Off.

B. Georgia Additional Filing and Disclosure Requirements

Georgia may require additional filings in connection with corporate reorganizations, which distinguishes Georgia from both Delaware and North Carolina in terms of administrative complexity. The following filing and disclosure requirements should be anticipated:

(i) Notice of Reorganization. Georgia may require the filing of a notice of reorganization or restructuring with the Georgia Department of Revenue if the transaction results in a change in the entity filing Georgia returns. Currently, Kestrel's Georgia income is reported on Veldran's consolidated Georgia return (or, if Veldran files on a separate-entity basis in Georgia, on Kestrel's own Georgia return as a subsidiary of Veldran). Post-Spin-Off, Kestrel's Georgia income will need to be reported by Meridian (or, if Kestrel is merged into Meridian, by Meridian directly). The Georgia Department of Revenue should be notified of this change in reporting entity to ensure continuity of the state's tax records.

(ii) Foreign Corporation Qualification. Meridian, as a Delaware corporation doing business in Georgia, will need to file a certificate of authority (or comparable qualification document) with the Georgia Secretary of State to qualify as a foreign corporation authorized to transact business in Georgia. If Kestrel is to be merged into Meridian as part of the restructuring, appropriate merger filings with the Georgia Secretary of State will also be required.

(iii) Short-Period Returns. Georgia may require the filing of a Georgia Form 600 (Corporation Tax Return) short-period return for Veldran (or Kestrel) covering the period ending on the Distribution date, and a separate Georgia Form 600 for Meridian covering the period beginning on the Distribution date. The filing deadlines and extension availability for such short-period returns should be confirmed with Georgia counsel.

These filing requirements are administrative in nature and do not, in themselves, create a substantive tax liability. However, failure to comply with Georgia filing and disclosure requirements can result in penalties, interest, and potential loss of good standing. These requirements have been identified as a key distinction from North Carolina and Delaware, where the filing and disclosure burdens associated with the Spin-Off are expected to be less involved.

C. Georgia Net Worth Tax

Georgia imposes a net worth tax on corporations doing business in Georgia. The Georgia net worth tax is calculated on the corporation's net worth apportioned to Georgia, with rates ranging from a minimum of $10 to a maximum of $5,000 depending on the amount of Georgia-apportioned net worth.

Post-Spin-Off, Veldran's Georgia net worth tax base will decrease as the Precision Flow Solutions Division assets (including Kestrel) are transferred to Meridian. Correspondingly, Meridian will establish its own Georgia net worth tax obligation based on its net worth apportioned to Georgia, which will include the former Kestrel assets and any other Georgia-situs assets contributed to Meridian.

The Contribution itself should not trigger a separate net worth tax event — the Georgia net worth tax is an annual tax based on a corporation's net worth as of a specified date, not a transactional tax imposed on asset transfers. However, the establishment of Meridian as a new Georgia taxpayer will create a new annual Georgia net worth tax obligation for Meridian, and the calculation of both Veldran's and Meridian's Georgia net worth tax in the year of the Spin-Off will need to take into account the mid-year separation of the businesses.

D. Georgia Transfer and Stamp Taxes

Stock Transfer Tax. Georgia does not impose a general stock transfer tax. The Distribution of Meridian stock from Veldran to its shareholders should not be subject to any Georgia stock transfer tax.

Real Estate Transfer Tax. Georgia imposes a real estate transfer tax at a rate of $1.00 per $1,000 of value on transfers of real property located in Georgia. If any real property located in Georgia — including, for example, Kestrel manufacturing facilities, office properties, warehouses, or land — is transferred as part of the Contribution of Precision Flow Division assets to Meridian, the transfer could be subject to Georgia real estate transfer tax.

The applicability of this tax to the Contribution requires analysis of whether an exemption is available for transfers in connection with a corporate reorganization. Georgia law provides limited exemptions from the real estate transfer tax, and the scope of these exemptions is narrower than in some other states. A contribution of assets to a wholly owned subsidiary in exchange for stock may or may not qualify for an available exemption, depending on the specific terms and structure of the Contribution and the interpretation of the applicable Georgia statutes and administrative guidance. This is an area that warrants specific attention from Georgia tax counsel.

We recommend that the engagement team confirm the situs and nature of all real property to be transferred as part of the Contribution. If material Georgia-situs real property is included in the Contributed Business, the potential transfer tax exposure should be quantified and factored into the transaction cost analysis. Given that Kestrel's operations are centered in Georgia, it is likely that at least some real property located in Georgia will be included in the Contributed Business.

E. Georgia Sales and Use Tax

The transfer of tangible personal property — including equipment, inventory, machinery, and other physical assets — from Veldran (or Kestrel) to Meridian as part of the Contribution may be subject to Georgia sales and use tax. The Georgia state sales tax rate is 4%, and applicable local option sales taxes can increase the total rate to as high as 8% or more in certain counties. The aggregate value of tangible personal property to be transferred could be substantial, making the sales and use tax exposure a potentially significant transactional cost.

Georgia provides a casual or isolated sale exemption under O.C.G.A. Section 48-8-3 that may apply to certain transfers of tangible personal property that are not made in the ordinary course of the transferor's business. Whether an intra-group reorganization transfer of the type contemplated by the Contribution qualifies as a "casual" or "isolated" sale under Georgia law requires analysis of the statutory language, applicable administrative guidance, and any relevant judicial authority. The exemption was designed primarily for one-time sales by persons not regularly engaged in the business of selling the type of property at issue, and its application to a large-scale asset contribution in a corporate reorganization context is not entirely settled.

We recommend obtaining specific asset-transfer schedules identifying all tangible personal property located in Georgia to be included in the Contributed Business, together with the estimated fair market value of such property, in order to quantify the potential sales and use tax exposure.

F. Preliminary Conclusion — Georgia

Georgia generally conforms to the federal Section 355 treatment of the Spin-Off for corporate income tax purposes. Assuming the Spin-Off qualifies as tax-free under federal Sections 355 and 368(a)(1)(D), no material Georgia corporate income tax gain recognition should result from the Contribution or the Distribution, subject to confirmation that Georgia's static IRC conformity date encompasses the relevant provisions.

Georgia does, however, impose additional filing and disclosure requirements that distinguish it from North Carolina and Delaware. These requirements — including the filing of reorganization notices, qualification filings for Meridian as a foreign corporation, and potential short-period return obligations — must be carefully tracked and managed to avoid penalties.

The potential exposure to Georgia real estate transfer tax and Georgia sales and use tax in connection with the Contribution of Georgia-situs assets warrants further diligence. Given the concentration of Kestrel's operations in Georgia, it is likely that material real property and tangible personal property located in Georgia will be included in the Contributed Business, and the tax implications of those transfers should be fully analyzed before the transaction proceeds.

We recommend a comprehensive Georgia-specific state tax analysis, including engagement of Georgia counsel or Pemberton Rathbone LLP, if the Spin-Off is reactivated.

VI. Other State Considerations — Summary of Further Analysis Required

A. Identification of Additional Jurisdictions

Veldran and the Precision Flow Solutions Division (including Kestrel) may have nexus in additional states beyond Delaware, North Carolina, and Georgia through the presence of employees, owned or leased property, sales into the state, customer relationships, or other nexus-creating activities. This memorandum does not address those additional jurisdictions, and a comprehensive multi-state nexus study should be conducted to identify all states in which either Veldran or Meridian has or will have tax nexus.

For each additional jurisdiction identified through the nexus study, the following categories of tax issues should be analyzed:

(i) Conformity with Federal Section 355. Whether the state conforms to the federal treatment of the Spin-Off as tax-free, and if so, whether the conformity is rolling or static and whether any state-specific modifications or exceptions apply.

(ii) Apportionment Factor Changes. How the separation of the Precision Flow Solutions Division from Veldran will affect each entity's apportionment factors in the state, and whether the change in apportionment will result in a net increase or decrease in state income tax liability.

(iii) Real Property and Personal Property Transfer Taxes. Whether the state imposes a transfer tax on conveyances of real property or transfers of tangible personal property, and whether any exemption is available for transfers in connection with a corporate reorganization.

(iv) Sales and Use Tax on Asset Transfers. Whether the transfer of tangible personal property as part of the Contribution is subject to the state's sales and use tax, and whether a casual sale, isolated transaction, or reorganization exemption is available.

(v) Filing and Disclosure Requirements. Whether the state requires any special filings, notices, or disclosures in connection with corporate reorganizations, changes in reporting entities, or the qualification of new foreign corporations.

B. States with Known Non-Conformity Risks

Certain states present elevated risk of non-conformity with the federal Section 355 treatment. These include states that employ "static" conformity to an older version of the IRC (as Georgia does, though Georgia's conformity is generally current), states that have adopted specific anti-abuse provisions applicable to corporate reorganizations, and states that have unique rules for the treatment of corporate distributions or spin-offs.

States that have historically been identified as potentially non-conforming or requiring special attention in the Section 355 context include, but are not limited to, those that have decoupled from certain federal provisions or that impose their own requirements for tax-free treatment of corporate distributions. A multi-state conformity survey should be conducted if the Spin-Off moves forward, and any states identified as non-conforming should be flagged for more detailed analysis and potential inclusion in the Calderwood & Harkness tax opinion.

C. Shareholder-Level State Tax Considerations

Individual shareholders of Veldran residing in various states may have state-level tax consequences arising from the Distribution, depending on whether their state of residence conforms to federal Section 355 treatment at the shareholder level. If a shareholder's state of residence does not follow the federal treatment of the Distribution as tax-free to shareholders, the shareholder could be required to recognize gain or ordinary income at the state level even though the Distribution is tax-free for federal purposes.

This consideration is particularly relevant for the following categories of Veldran shareholders:

(i) Management Stockholders. Veldran management holds approximately 5.3% of Veldran's outstanding shares (3,948,500 shares). These individuals may reside in North Carolina, Georgia, or other states, and their state-level tax consequences will depend on their respective states of residence and the conformity of those states' tax laws with federal Section 355.

(ii) HPE Fund IV. HPE Fund IV, a Delaware limited partnership, holds 62.4% of Veldran's outstanding shares (46,488,000 shares) through Harrowgate Veldran Holdings LLC. The state-level tax consequences of the Distribution for HPE Fund IV and its limited partners will depend on the states in which HPE Fund IV's partners reside and the treatment of partnership distributions of property under those states' tax laws. We recommend coordinating with Christine Yeung, General Counsel of Harrowgate Capital Advisors LLC, regarding the fund-level and partner-level state tax analysis.

(iii) Prescott Capital Management LP. Prescott Capital Management LP, a New York limited partnership, holds 14.8% of Veldran's outstanding shares (11,026,000 shares). Prescott's tax advisor, Dunmore Havens & Associates LLC, is separately reviewing Prescott's fund-level state tax consequences. We recommend coordinating with Irene Salcedo, Principal at Dunmore Havens, to ensure consistency between the Calderwood & Harkness analysis and Prescott's separate analysis, particularly with respect to New York state tax implications.

VII. Potential State-Level Gain Recognition Risks

This Section VII identifies the principal scenarios under which state-level gain recognition could arise in connection with the Spin-Off. These risks are contingent on the federal tax analysis and are summarized here to illustrate the magnitude of state-level exposure if any of the identified federal risk factors materialize.

A. Risk if Federal Section 355 Qualification Fails

If the Spin-Off fails to qualify as a tax-free distribution under federal Section 355 — for example, due to a failure to satisfy the active trade or business requirement, the business purpose requirement, the device prohibition, or any of the other requirements of Section 355 — Veldran would recognize gain on the distribution of Meridian stock at the federal level. Based on the estimated built-in gain in the Contributed Business, the gain recognized could range from approximately $596.5 million to approximately $902.4 million.

State-level gain recognition would follow in all states where Veldran has income tax nexus, with the recognized gain apportioned among the nexus states according to each state's applicable apportionment formula. The state-level income tax consequences in the three principal jurisdictions analyzed in this memorandum would be as follows:

• North Carolina: The North Carolina corporate income tax rate of 2.5%, applied to the North Carolina-apportioned share of $596.5 million to $902.4 million of recognized gain, could result in material North Carolina income tax liability. The precise amount would depend on Veldran's North Carolina apportionment factor, which is expected to be significant given Veldran's Charlotte headquarters and Engineered Coatings Division operations in the state.

• Georgia: The Georgia corporate income tax rate of 5.75%, applied to the Georgia-apportioned share of the recognized gain, could result in even more material Georgia income tax liability, particularly given the concentration of Precision Flow Solutions Division and Kestrel operations in Georgia. Depending on Veldran's Georgia apportionment factor, the Georgia tax exposure on a full Section 355 failure could be substantial.

The failure of federal Section 355 qualification is the most significant risk scenario for state-level gain recognition. The Calderwood & Harkness federal tax opinion is expected to address the qualification of the Spin-Off at a "should" level of confidence, and the state-level analysis is predicated on the assumption that the Spin-Off will so qualify.

B. Risk if Section 355(e) Applies at State Level

Section 355(e) of the IRC provides that, in certain circumstances involving a "plan or series of related transactions" that results in a 50% or greater change in ownership of either the Distributing or Controlled corporation, gain is recognized by the Distributing corporation on the distribution, notwithstanding otherwise qualifying Section 355 treatment. If Section 355(e) gain recognition is triggered at the federal level, the estimated federal tax at risk is $125.3 million to $189.5 million, based on the estimated built-in gain of $596.5 million to $902.4 million and the 21% federal corporate income tax rate.

Both North Carolina and Georgia generally conform to the Section 355(e) gain recognition rules through their respective IRC conformity provisions. If Section 355(e) gain is recognized at the federal level, conforming states — including North Carolina and Georgia — would also impose their corporate income taxes on the state-apportioned share of the recognized gain. The state-level Section 355(e) tax exposure would be calculated by applying each state's corporate income tax rate to the state-apportioned share of the $596.5 million to $902.4 million of recognized gain.

As a rough estimate, and subject to verification of apportionment factors:

• North Carolina: Apportioned gain × 2.5%

• Georgia: Apportioned gain × 5.75%

The Section 355(e) risk is particularly relevant given HPE Fund IV's 62.4% ownership stake and the potential for the Spin-Off itself, or any subsequent transaction, to constitute part of a "plan" within the meaning of Section 355(e).

C. Risk if Section 355(d) Applies at State Level

Section 355(d) of the IRC provides that a distribution of stock in a controlled corporation is treated as a taxable distribution (rather than a tax-free Section 355 distribution) if, immediately after the distribution, any person holds "disqualified stock" constituting a 50% or greater interest in either the Distributing or Controlled corporation, and the stock was acquired by purchase within the five-year period ending on the date of the distribution. "Disqualified stock" generally means stock acquired by "purchase" (as defined in Section 355(d)(5)) within the five-year look-back period.

HPE Fund IV's 62.4% stake in Veldran was acquired on September 20, 2019, which is within the five-year look-back period preceding the originally targeted Q4 2022 distribution date. The Section 355(d) analysis interacts with the Section 355(e) analysis and is being addressed in the Calderwood & Harkness federal tax opinion.

If Section 355(d) is triggered at the federal level, the same conformity analysis applies: North Carolina and Georgia, as states that generally conform to the IRC for income tax purposes, would impose their respective corporate income taxes on the state-apportioned share of any gain recognized under Section 355(d). The state-level consequences would be parallel to those described in Section VII.A above.

The Section 355(d) risk should be monitored closely, particularly in light of the indefinite pause in the Spin-Off timeline. If the Distribution is delayed beyond September 20, 2024 (five years from HPE Fund IV's acquisition), the Section 355(d) risk would be eliminated with respect to HPE Fund IV's shares, which could have favorable state-level consequences as well.

VIII. Transfer Tax and Transaction Tax Summary Table

The following table summarizes the transfer tax and transaction tax considerations in each of the three principal jurisdictions analyzed in this memorandum:

IX. Recommendations and Next Steps

Based on the analysis set forth in this memorandum, we recommend the following steps in connection with the state and local tax aspects of the proposed Spin-Off:

1. Multi-State Nexus Survey. Conduct a comprehensive nexus study for both Veldran and the Precision Flow Solutions Division (future Meridian) to identify all states in which the Spin-Off may have state income, franchise, transfer, or transactional tax implications. The nexus study should encompass all states in which either entity has employees, owned or leased property, sales or customers, or other nexus-creating activities. The study should also address whether any state has adopted an economic nexus standard that may create filing obligations even in the absence of physical presence.

2. Asset Situs Analysis. Obtain detailed schedules of all real property and material tangible personal property to be transferred in the Contribution, classified by state of situs, in order to quantify potential real estate transfer tax and sales/use tax exposure. This analysis is particularly important for Georgia and North Carolina, where the transfer of real property and tangible personal property may trigger transfer taxes or sales/use taxes that are not exempt under applicable reorganization or casual sale exemptions. The asset schedules should include estimated fair market values, book values, and descriptions sufficient to assess the applicability of any exemptions.

3. Georgia Filing Requirements. Engage Georgia tax counsel or Pemberton Rathbone LLP (Harold Weiss, Partner, Tax) to prepare a detailed Georgia filing checklist covering all filing and disclosure requirements associated with the Spin-Off. The checklist should address, at a minimum, the following items: (a) notice of reorganization or restructuring to the Georgia Department of Revenue; (b) foreign corporation qualification filing for Meridian with the Georgia Secretary of State; (c) short-period return requirements for the period ending on the Distribution date and the period beginning on the Distribution date; and (d) any merger filings with the Georgia Secretary of State if Kestrel is to be merged into Meridian as part of the restructuring.

4. State Conformity Confirmation. Confirm the current IRC conformity dates for Georgia, North Carolina, and any other material nexus states identified through the nexus study, to ensure that each state's IRC conformity encompasses the version of Sections 355 and 368(a)(1)(D) applicable to the anticipated distribution date. This is particularly important for Georgia, which employs a static conformity approach, and for any other states that may not have adopted the most recent version of the IRC.

5. Shareholder-Level Analysis. Coordinate with Dunmore Havens & Associates LLC (Irene Salcedo, Principal) regarding Prescott Capital Management LP's state-level tax consequences, particularly with respect to New York state taxation of the Distribution at the fund and partner level. Separately, advise Harrowgate Capital Advisors LLC (Christine Yeung, General Counsel) on HPE Fund IV's LP-level and partner-level state tax consequences, including the treatment of the Distribution under the laws of the states in which HPE Fund IV's limited partners reside. For management stockholders, identify the states of residence and analyze each state's conformity with federal Section 355 at the individual shareholder level.

6. Integration with Federal Opinion. Confirm that the state and local tax analysis is consistent with and complementary to the Calderwood & Harkness federal tax opinion under Sections 355 and 368(a)(1)(D). Any state-specific qualifications or risk factors that may be material to the overall transaction should be disclosed in the federal opinion or in a separate state tax supplement, as appropriate. The engagement team should determine whether a separate state tax opinion or a state tax section within the federal opinion is warranted.

7. Timing. In light of the current indefinite pause in the Spin-Off timeline (communicated August 22, 2022), further analysis beyond this memorandum should be deferred until the client determines whether to proceed with the transaction. This memorandum provides a sufficient analytical framework for rapid re-engagement if the Spin-Off is reactivated. Upon reactivation, the engagement team should update the analysis to reflect any changes in state tax law, IRC conformity dates, or transaction facts that may have occurred during the intervening period.

X. Limitations and Qualifications

This memorandum is a preliminary summary prepared for internal Calderwood & Harkness LLP use and for discussion with the engagement team. It is not intended as, and should not be relied upon as, a formal state tax opinion. No formal opinion of state tax counsel is expressed or implied by this memorandum, and no such opinion should be inferred from the analysis set forth herein.

The analysis contained in this memorandum is based on currently available information regarding Veldran's and the Precision Flow Solutions Division's state-level operations, nexus, asset locations, and other relevant facts. Material changes in facts — including changes in the structure of the Spin-Off, the composition of the Contributed Business, the situs of assets to be transferred, or the nexus footprint of either entity — could alter the conclusions set forth herein. In addition, the analysis is subject to revision based on receipt of additional information, including detailed asset-transfer schedules, employee location data, and sales/customer data.

State tax law is subject to change by legislative enactment, administrative action, or judicial decision. The analysis in this memorandum reflects the law in effect as of July 20, 2022, the date of this memorandum. No assurance can be given that the law will not change in a manner that would adversely affect the conclusions set forth herein.

This memorandum has been reviewed by Sylvia Hartwell, Partner, Tax Department, Calderwood & Harkness LLP.

Distribution. Distribution of this memorandum is limited to the Calderwood & Harkness LLP engagement team (Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari) and, at the engagement team's discretion, to the client (Harrowgate Capital Advisors LLC, attention: Christine Yeung, General Counsel) and coordinating counsel (Whitfield & Gage LLP, attention: Priya Chandrasekar). This memorandum is not to be distributed to, or relied upon by, any other person or entity without the prior written consent of Calderwood & Harkness LLP.

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees and authorized recipients identified herein. Any unauthorized review, use, disclosure, or distribution is prohibited.

From:	Leila Nazari, Associate, Tax Department, Calderwood & Harkness LLP
Reviewed By:	Sylvia Hartwell, Partner, Tax Department, Calderwood & Harkness LLP
Date:	July 20, 2022
Re:	State and Local Tax Considerations — Proposed Pro Rata Spin-Off of Meridian Flow Technologies, Inc. from Veldran Industries Holdings, Inc.
Client:	Harrowgate Private Equity Fund IV, L.P.
Engagement No.:	1003-00005
Matter Code:	HRW-SPIN-001
Holder	Shares	Percentage
Harrowgate Private Equity Fund IV, L.P. (through Harrowgate Veldran Holdings LLC, EIN 86-1483920)	46,488,000	62.4%
Prescott Capital Management LP	11,026,000	14.8%
Management (various individuals)	3,948,500	5.3%
Public float	13,037,500	~17.5%
Total	74,500,000	100.0%
Tax Type	Delaware	North Carolina	Georgia
Stock Transfer Tax	Not applicable — Delaware does not impose a general stock transfer tax	Not applicable — North Carolina does not impose a general stock transfer tax	Not applicable — Georgia does not impose a general stock transfer tax
Real Property Transfer Tax	No concern absent Delaware-situs real property; unlikely based on current information	Deed transfer excise tax at $1.00 per $500 of consideration if NC-situs real property is transferred; confirm asset situs	Real estate transfer tax at $1.00 per $1,000 of value if GA-situs real property (e.g., Kestrel facilities) is transferred; analyze reorganization exemption
Sales/Use Tax	Not applicable — no transfer of tangible personal property in Delaware expected	Analyze casual sale exemption for transfer of tangible personal property in the Contribution; confirm asset situs	Analyze casual/isolated sale exemption under O.C.G.A. § 48-8-3 for transfer of tangible personal property (state rate 4% + local option taxes); confirm asset situs and values
Franchise / Net Worth Tax	Ministerial — Meridian incorporation will trigger initial filing fees and annual franchise tax; no incremental event for Veldran	Ministerial — net worth reduction for Veldran; new franchise tax obligation for Meridian if NC nexus established	Ministerial — net worth reduction for Veldran; new net worth tax obligation for Meridian
Filing / Disclosure	Standard incorporation filings for Meridian	Standard filings	Elevated — notice of reorganization, foreign corporation qualification for Meridian, possible short-period returns; more involved than DE or NC

PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
MEMORANDUM
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I. Executive Summary
The purpose of this memorandum is to summarize the state and local tax ("SALT") implications of the proposed pro rata distribution by Veldran Industries Holdings, Inc. ("Veldran" or "Distributing"), a Delaware corporation headquartered in Charlotte, North Carolina (principal office: 2400 Commerce Park Drive, Suite 500, Charlotte, NC 28217; registered address: 1209 Orange Street, Wilmington, DE 19801), of 100% of the common stock of Meridian Flow Technologies, Inc. ("Meridian," "SpinCo," or "Controlled"), a Delaware corporation to be incorporated with a planned principal office at 7100 Northlake Parkway, Suite 300, Tucker, GA 30084 and a planned registered address at 1209 Orange Street, Wilmington, DE 19801.
Transaction Overview. As currently contemplated, Veldran will contribute all assets and liabilities of the Precision Flow Solutions Division (the "Contributed Business") to Meridian in exchange for all Meridian common stock and the assumption of allocated liabilities (the "Contribution"). Immediately following the Contribution, Veldran will effect a pro rata distribution of all Meridian stock to the holders of Veldran common stock at a ratio of 1:1 — that is, one share of Meridian common stock for each of the 74,500,000 outstanding shares of Veldran common stock (the "Distribution" and, together with the Contribution, the "Spin-Off").
Federal Tax Treatment. The Spin-Off is intended to qualify as a tax-free reorganization under Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), and as a tax-free distribution under IRC Section 355 at the federal level. Calderwood & Harkness LLP ("Calderwood & Harkness" or the "Firm") is separately engaged to deliver a "should" level federal tax opinion addressing the qualification of the Spin-Off under these provisions. This memorandum does not address the federal tax analysis in detail; rather, it supplements and complements the federal opinion by identifying discrete state and local tax considerations.
Jurisdictional Scope. This memorandum addresses SALT implications in the three principal jurisdictions implicated by the Spin-Off:
(a) Delaware — the state of incorporation for both Veldran and Meridian;
(b) North Carolina — the state in which Veldran maintains its corporate headquarters and the location of its Engineered Coatings Division operations; and
(c) Georgia — the planned headquarters jurisdiction for Meridian and the location of substantial Precision Flow Solutions Division operations, including those of Kestrel Precision Controls, Inc. ("Kestrel"), a Georgia subsidiary of Veldran.
Key Takeaway. Delaware, North Carolina, and Georgia each generally conform to the federal Section 355 treatment of the Spin-Off, though with varying degrees of explicit conformity. Each jurisdiction raises discrete considerations that should be analyzed further if the transaction proceeds. Georgia, in particular, may impose additional filing and disclosure requirements in connection with corporate reorganizations involving Georgia-domiciled entities, and the presence of Kestrel's substantial Georgia operations within the Contributed Business creates Georgia-specific transfer tax and administrative considerations that are not present in the other two jurisdictions.
Scope Limitation. This memorandum is preliminary and limited to the three identified primary jurisdictions. Veldran and Meridian have (or, in Meridian's case, will have) operations, employees, and/or property in additional states that may impose income, franchise, or transfer taxes in connection with the Spin-Off. A comprehensive multi-state analysis encompassing all jurisdictions in which either entity has or may have tax nexus is recommended prior to finalization of any tax opinion or transaction closing.
II. Background and Key Transaction Parameters
This Section II sets forth the key factual background and transaction parameters upon which the analysis in this memorandum is based. The information summarized below has been derived from due diligence materials provided by Harrowgate Capital Advisors LLC, the management of Veldran, and the preliminary valuation analysis prepared by Brackenridge & Co. Unless otherwise noted, financial figures are for fiscal year ended December 31, 2021 ("FY2021").
A. Distributing Corporation — Veldran Industries Holdings, Inc.
Veldran Industries Holdings, Inc. is a Delaware corporation, incorporated on March 14, 2019, with Employer Identification Number 86-1920347. Veldran is a diversified industrial products and engineered materials company with two principal operating divisions. As of the most recently completed fiscal year, Veldran's aggregate revenue was approximately $2.34 billion and its aggregate EBITDA was approximately $418 million.
Veldran's two operating divisions are as follows:
(i) Engineered Coatings Division: This division generates approximately $1.52 billion in annual revenue and approximately $285 million in EBITDA. The Engineered Coatings Division will remain with Veldran following the Spin-Off and constitutes the core continuing business of the Distributing corporation. Its operations are principally located in North Carolina.
(ii) Precision Flow Solutions Division: This division generates approximately $820 million in annual revenue and approximately $133 million in EBITDA. The Precision Flow Solutions Division, including all of its assets, liabilities, employees, and contractual relationships, will constitute the Contributed Business to be transferred to Meridian in connection with the Spin-Off. Its operations are principally located in Georgia and, to a lesser extent, other states.
Veldran employs approximately 8,200 individuals across its two divisions and corporate functions.
Capital Structure. As of the date of this memorandum, Veldran's capital structure consists of the following:
•  74,500,000 shares of common stock outstanding (out of 100,000,000 authorized shares);
•  $1.1 billion First Lien Term Loan B facility, with Ashfield National Bank, N.A. serving as administrative agent; and
•  $450 million aggregate principal amount of 6.250% Senior Unsecured Notes due 2027, with Colton Trust Company serving as indenture trustee.
Ownership. The ownership of Veldran's outstanding common stock is as follows:
Harrowgate Private Equity Fund IV, L.P. ("HPE Fund IV"), the client, is the controlling shareholder of Veldran, holding its interest through its wholly owned subsidiary, Harrowgate Veldran Holdings LLC ("HVH"), a Delaware limited liability company. HPE Fund IV acquired its interest in Veldran on September 20, 2019, a date that is relevant to the Section 355(d) analysis discussed in Section VII.C below.
B. Controlled Corporation — Meridian Flow Technologies, Inc.
Meridian Flow Technologies, Inc. is a planned Delaware corporation that has not yet been incorporated as of the date of this memorandum. Meridian's planned principal office will be located at 7100 Northlake Parkway, Suite 300, Tucker, GA 30084, and its planned registered address in Delaware will be 1209 Orange Street, Wilmington, DE 19801.
Following the Spin-Off, Meridian will operate the Precision Flow Solutions Division business, which encompasses the design, manufacture, and sale of precision fluid-control systems serving industrial, petrochemical, and water-infrastructure end markets.
Pro Forma Financials. On a pro forma basis for FY2021, Meridian's revenue would have been approximately $820 million and its EBITDA would have been approximately $133 million.
Valuation. Based on the preliminary analysis prepared by Brackenridge & Co. and received on June 10, 2022, the estimated fair market value ("FMV") range for Meridian (i.e., the Precision Flow Solutions Division business as a going concern) is $1,396.5 million to $1,702.4 million, based on an enterprise value to EBITDA multiple range of 10.5× to 12.8×.
Tax Basis and Built-in Gain. Veldran's estimated adjusted tax basis in the assets of the Precision Flow Solutions Division is approximately $800 million. Accordingly, the estimated built-in gain inherent in the Contributed Business ranges from approximately $596.5 million to approximately $902.4 million, depending on final valuation. This built-in gain figure is relevant both to the federal tax analysis (particularly under IRC Sections 355(d), 355(e), and 361(c)) and to the state-level gain recognition risk analysis set forth in Section VII of this memorandum.
C. Kestrel Precision Controls, Inc. — Georgia Nexus
Kestrel Precision Controls, Inc. is a Georgia corporation, founded on February 12, 2003, with Employer Identification Number 58-2847193. Kestrel was acquired by Veldran on June 7, 2019 from Rennick Industrial Partners Fund II LP (EIN 82-3017564) in a fully taxable stock acquisition for a purchase price of $295 million, paid entirely in cash. Following the acquisition, Kestrel has operated as a wholly owned subsidiary of Veldran within the Precision Flow Solutions Division.
Kestrel comprises approximately 35% of the Precision Flow Solutions Division's FY2021 revenue, or approximately $287 million of the division's total $820 million in revenue. Kestrel's operations are centered in the State of Georgia, including manufacturing facilities, office space, and a significant employee base located in the greater Atlanta metropolitan area and surrounding counties.
Relevance to SALT Analysis. Kestrel's Georgia presence is the primary driver of the Georgia nexus analysis for the Precision Flow Solutions Division and, consequently, for Meridian post-Spin-Off. Because Kestrel's assets and operations will be included in the Contributed Business transferred to Meridian, the Contribution and Distribution have direct Georgia income and transfer tax implications. The situs of Kestrel's real and tangible personal property in Georgia creates potential exposure to Georgia real estate transfer tax and Georgia sales and use tax in connection with the asset transfer, as discussed in Section V below.
D. Distribution Mechanics
The Distribution is intended to be effected on a pro rata basis at a ratio of 1:1 — that is, each holder of Veldran common stock as of the record date will receive one share of Meridian common stock for each share of Veldran common stock held.
The original target for both the record date and the distribution date was the fourth quarter of calendar year 2022. However, as of the date of this memorandum, the client has communicated that the Spin-Off timeline is now paused indefinitely. An updated communication received on August 22, 2022 (after the initial preparation of this memorandum but prior to its circulation) confirmed the indefinite pause. This memorandum has been finalized notwithstanding the pause in order to preserve the analysis for re-engagement if and when the transaction is reactivated.
Following the Distribution, each former Veldran shareholder will hold one share of Veldran common stock (representing the continuing Engineered Coatings Division business) and one share of Meridian common stock (representing the Precision Flow Solutions Division business).
III. Delaware Tax Considerations
A. Delaware Conformity with Federal Section 355 Treatment
Delaware does not impose a corporate income tax in the traditional sense. Unlike most states, Delaware does not have a broadly applicable corporate net income tax that would require an analysis of conformity with the federal treatment of distributions under IRC Section 355. Instead, Delaware's primary tax on corporate entities takes the form of a franchise tax imposed on corporations incorporated in or qualified to do business in the State of Delaware.
Because Delaware does not tax corporate income as such, there is no separate Delaware income tax code provision to analyze for conformity with the Internal Revenue Code's treatment of tax-free spin-offs. Delaware generally follows federal treatment for purposes of determining the character of corporate transactions in those limited contexts where the character of a transaction is relevant to Delaware tax obligations (e.g., for purposes of the assumed par value capital method of franchise tax calculation). However, the absence of a corporate income tax means that the primary Delaware tax concern in the Spin-Off context is franchise tax and organizational-level fees, not gain recognition on the Distribution.
Key Point. Because Delaware does not tax corporate income, the Spin-Off — even if it were not to qualify as tax-free under federal Section 355 — would not result in gain recognition for Delaware income tax purposes. The Delaware analysis is therefore limited to franchise tax, organizational fees, and transfer tax considerations.
B. Delaware Franchise Tax
Both Veldran (as an existing Delaware corporation) and Meridian (as a planned Delaware corporation) are or will be subject to Delaware's annual franchise tax upon incorporation.
Veldran currently pays Delaware franchise tax computed under either the authorized shares method or the assumed par value capital method, whichever produces a lower tax liability. As noted above, Veldran has 100,000,000 authorized shares of common stock, which places Veldran in a higher bracket under the authorized shares method. Veldran's tax advisors should confirm that the assumed par value capital method produces a more favorable result, as is typical for companies with large authorized share counts but modest par values.
Upon incorporation, Meridian will have its own Delaware franchise tax obligation. The initial filing fee for a Delaware certificate of incorporation will be due at the time of filing, and Meridian's first annual franchise tax payment will be due in the year following incorporation. The amount of Meridian's franchise tax will depend on the authorized share count and par value specified in Meridian's certificate of incorporation. We recommend that the engagement team coordinate with Calderwood & Harkness's Corporate Department on the drafting of Meridian's certificate of incorporation to ensure that the authorized share count and par value are structured in a manner that minimizes the Delaware franchise tax liability, consistent with the business requirements of the transaction.
The Contribution and Distribution themselves should not create an additional or incremental franchise tax event for Veldran. The transfer of assets from Veldran to Meridian in the Contribution may affect the assumed par value capital calculation for Veldran (by reducing Veldran's total assets), but this effect is a natural consequence of the separation of the two businesses and is not a discrete tax cost attributable to the Spin-Off.
C. Delaware Transfer Taxes
Delaware does not impose a general transfer tax on transfers of corporate stock. Accordingly, the Distribution of Meridian stock from Veldran to its shareholders should not be subject to any Delaware stock transfer tax.
With respect to the Contribution, the transfer of assets from Veldran to Meridian raises the question of whether any assets to be transferred are subject to Delaware realty transfer tax. Delaware imposes a realty transfer tax on conveyances of real property located in the state. However, based on the information available as of the date of this memorandum, Veldran's registered address at 1209 Orange Street, Wilmington, Delaware 19801 is a registered agent office only, and the operating assets of the Precision Flow Solutions Division are believed to be located primarily in North Carolina and Georgia rather than in Delaware.
We recommend that the engagement team confirm whether any Precision Flow Solutions Division real property is located in Delaware. If no Delaware-situs real property is included in the Contributed Business, the Delaware realty transfer tax should not apply.
D. Preliminary Conclusion — Delaware
No material Delaware income tax concern exists in connection with the Spin-Off, as Delaware does not impose a corporate income tax. Delaware franchise tax administrative matters associated with Meridian's incorporation are ministerial in nature and are not expected to present a material impediment to the transaction. The risk of Delaware transfer tax is low absent any Delaware-situs real property within the Contributed Business. We recommend confirming the absence of such property as part of the asset situs diligence described in Section IX below.
IV. North Carolina Tax Considerations
A. North Carolina Corporate Income Tax — Conformity with Federal Section 355
North Carolina imposes a corporate income tax on corporations doing business in or deriving income from sources within the state. For taxable years beginning on or after January 1, 2022, the North Carolina corporate income tax rate is 2.5%, a reduction from the prior rate of 2.5% (which was itself the product of a multi-year phasedown from higher historical rates). The North Carolina General Assembly has enacted legislation providing for further reductions in the corporate income tax rate in future years, with the ultimate goal of phasing the tax out entirely, though those future reductions are not relevant to the current analysis.
For purposes of calculating North Carolina taxable income, North Carolina tax law generally conforms to the Internal Revenue Code on a "rolling conformity" basis. Specifically, under N.C. Gen. Stat. Section 105-130.2, "net income" for North Carolina corporate income tax purposes begins with the corporation's federal taxable income as determined under the IRC. This rolling conformity means that North Carolina generally incorporates amendments to the IRC as they are enacted at the federal level, without requiring separate legislative adoption of each amendment.
Because North Carolina starts its income tax computation with federal taxable income, the treatment of the Spin-Off for North Carolina corporate income tax purposes should generally follow the federal treatment. If the Spin-Off qualifies as a tax-free reorganization under IRC Section 368(a)(1)(D) and a tax-free distribution under IRC Section 355 at the federal level — as is intended and as will be addressed in the Calderwood & Harkness federal tax opinion — then no gain should be recognized by Veldran for North Carolina corporate income tax purposes in connection with the Contribution or the Distribution.
Key Qualification. North Carolina's conformity with the IRC is subject to specific North Carolina statutory modifications and adjustments. The North Carolina income tax statutes contain a number of "add-back" and "deduction" provisions that modify federal taxable income to arrive at North Carolina taxable income. We recommend confirming that no North Carolina-specific add-back or modification provision would apply to, or override, the tax-free treatment of a Section 355 distribution. Based on our preliminary review, we are not aware of any such provision, but this should be verified as part of the comprehensive analysis.
Nexus. Veldran is headquartered in Charlotte, North Carolina, and maintains its principal office at 2400 Commerce Park Drive, Suite 500, Charlotte, NC 28217. Veldran has clear and unambiguous corporate income tax nexus in North Carolina by virtue of its headquarters, employees, and operations in the state. The Engineered Coatings Division, which will remain with Veldran post-Spin-Off, is principally based in North Carolina. Post-Spin-Off, Veldran will continue to be a North Carolina taxpayer.
B. Apportionment Considerations
Pre-Spin-Off, Veldran apportions its income among all states in which it has nexus, including North Carolina and Georgia. Veldran's North Carolina apportionment factors (sales, payroll, and/or property, depending on the formula applicable to Veldran's industry) currently reflect the combined operations of both the Engineered Coatings Division and the Precision Flow Solutions Division.
Post-Spin-Off, the separation of the Precision Flow Solutions Division from Veldran will cause a change in Veldran's North Carolina apportionment factors. Specifically, the transfer of the Precision Flow Solutions Division's assets, employees, and sales to Meridian will remove those items from Veldran's apportionment factor calculation. Because the Precision Flow Solutions Division's operations are concentrated in Georgia rather than North Carolina, the removal of the division's factors from Veldran's apportionment calculation may increase Veldran's percentage of income apportioned to North Carolina (as the denominator of the apportionment fraction will decrease by a greater proportion than the numerator, assuming the Engineered Coatings Division's North Carolina-centric factors are relatively larger in the numerator). The net effect on Veldran's North Carolina income tax liability will depend on the interplay of the change in apportioned income and any changes in total income arising from the separation.
Meridian, for its part, will need to establish its own North Carolina apportionment factors if Meridian has nexus in North Carolina. Meridian may have North Carolina nexus through employees, property, or sales in the state, depending on the final allocation of assets, employees, and customer relationships between the two divisions. If Meridian has no North Carolina nexus post-Spin-Off, Meridian would not be subject to North Carolina corporate income tax.
We recommend that the engagement team analyze the impact of the Contribution on Veldran's North Carolina apportionment factor and determine whether Meridian will have nexus in North Carolina following the Spin-Off. This analysis should be part of the comprehensive multi-state nexus study recommended in Section IX.
C. North Carolina Franchise Tax
North Carolina imposes a franchise tax on corporations doing business in the state. The North Carolina franchise tax is calculated based on the greater of (a) the corporation's net worth apportioned to North Carolina or (b) 55% of the appraised value of the corporation's real and tangible personal property located in North Carolina.
The Contribution of Precision Flow Division assets from Veldran to Meridian could affect Veldran's North Carolina franchise tax base by reducing Veldran's net worth (as assets are transferred out of Veldran to Meridian). Conversely, if Meridian has nexus in North Carolina, Meridian will establish its own North Carolina franchise tax obligation based on its net worth apportioned to the state.
These franchise tax considerations are ministerial in nature and are not expected to present a material impediment to the Spin-Off. However, the engagement team should be aware that changes in net worth allocable to North Carolina will affect the franchise tax liability of both entities in the taxable year of the Spin-Off and in subsequent years.
D. North Carolina Transfer and Sales/Use Taxes
Stock Transfer Tax. North Carolina does not impose a general stock transfer tax. Accordingly, the Distribution of Meridian stock from Veldran to its shareholders should not be subject to any North Carolina stock transfer tax.
Deed Transfer Excise Tax. North Carolina imposes a deed transfer excise tax on conveyances of real property located in the state. The tax is imposed at a rate of $1.00 per $500 of consideration (or the value of the property transferred). If any real property located in North Carolina is transferred as part of the Contribution of Precision Flow Division assets to Meridian, the transfer could be subject to this excise tax.
We recommend confirming whether any Precision Flow Solutions Division real property is located in North Carolina. If such property exists, the analysis should address whether the Contribution — which is structured as an intra-group asset transfer in exchange for stock of a newly formed, wholly owned subsidiary — constitutes a "conveyance" subject to the excise tax, and whether any exemption applies for transfers incident to a corporate reorganization. North Carolina's deed transfer excise tax statute contains certain limited exemptions, but the applicability of those exemptions to a Section 368(a)(1)(D) reorganization transfer requires further analysis.
Sales and Use Tax. The transfer of tangible personal property (including machinery, equipment, and inventory) from Veldran to Meridian as part of the Contribution may technically be subject to North Carolina sales and use tax unless an exemption applies. North Carolina imposes sales tax on retail sales of tangible personal property and certain digital property and services. The transfer of assets in the Contribution may not constitute a "retail sale" in the ordinary sense, but the breadth of the North Carolina sales tax base warrants analysis.
North Carolina provides a casual sale exemption that may exclude from sales tax certain transfers of tangible personal property that are not made in the ordinary course of the transferor's business. In addition, North Carolina may provide an exemption or exclusion for transfers of property in connection with a corporate reorganization or a transfer to a related entity. The applicability of these exemptions to the Contribution should be analyzed in detail, particularly with respect to the types and values of tangible personal property to be transferred.
E. Preliminary Conclusion — North Carolina
North Carolina generally conforms to the federal Section 355 treatment of the Spin-Off for corporate income tax purposes. Assuming the Spin-Off qualifies as tax-free under federal Sections 355 and 368(a)(1)(D), no material North Carolina corporate income tax gain recognition should result from the Contribution or the Distribution. Franchise tax and transfer tax implications are manageable but require further diligence to quantify, particularly with respect to the situs of real property and tangible personal property within the Precision Flow Solutions Division.
We recommend confirming the location of all real property and material tangible personal property included in the Contributed Business to determine whether North Carolina deed transfer excise tax or sales/use tax may apply.
V. Georgia Tax Considerations
A. Georgia Corporate Income Tax — Conformity with Federal Section 355
Georgia imposes both a corporate net worth tax and a corporate income tax on corporations doing business in or deriving income from sources within the state. The Georgia corporate income tax rate is currently 5.75%, which is materially higher than the North Carolina rate of 2.5% and underscores the importance of Georgia-specific conformity analysis.
Georgia generally conforms to the Internal Revenue Code for purposes of calculating Georgia taxable income. Under O.C.G.A. Section 48-7-21, Georgia taxable income is computed by starting with the corporation's federal taxable income and making Georgia-specific adjustments. Accordingly, if the Spin-Off qualifies as tax-free under federal Sections 355 and 368(a)(1)(D), it should generally be treated as tax-free for Georgia corporate income tax purposes as well, absent any Georgia-specific adjustment that would override the federal treatment.
Important Caveat — Static Conformity. Unlike North Carolina, which employs a rolling conformity approach, Georgia's conformity with the IRC is "static" — that is, Georgia adopts the IRC as of a specific date enacted by the Georgia General Assembly. This static conformity approach means that Georgia may, at any given time, be conforming to a version of the IRC that is several years behind the current version. Georgia has at times lagged in adopting recent federal amendments.
We recommend confirming that Georgia has adopted the version of IRC Section 355 that is in effect for transactions occurring in 2022. If Georgia's conformity date has not been updated to encompass any material amendments to Section 355 or Section 368(a)(1)(D) that may have been enacted after the date Georgia last adopted, additional analysis would be required to determine whether the Spin-Off would qualify for tax-free treatment under the Georgia-adopted version of those provisions. Based on our preliminary review, we believe that the core provisions of Section 355 relevant to the Spin-Off have not been materially amended in recent years and that Georgia's conformity should encompass the operative provisions, but this should be verified.
Georgia Nexus. Kestrel Precision Controls, Inc., a Georgia corporation (EIN 58-2847193), is a significant Georgia presence within the Precision Flow Solutions Division. Kestrel's assets and operations, which are centered in Georgia, will be part of the Contributed Business transferred to Meridian. Furthermore, Meridian's planned headquarters will be located in Tucker, Georgia, establishing clear Georgia income tax nexus for Meridian post-Spin-Off. Georgia therefore has jurisdiction to impose its corporate income tax on Meridian's income apportioned to the state following the Spin-Off.
B. Georgia Additional Filing and Disclosure Requirements
Georgia may require additional filings in connection with corporate reorganizations, which distinguishes Georgia from both Delaware and North Carolina in terms of administrative complexity. The following filing and disclosure requirements should be anticipated:
(i) Notice of Reorganization. Georgia may require the filing of a notice of reorganization or restructuring with the Georgia Department of Revenue if the transaction results in a change in the entity filing Georgia returns. Currently, Kestrel's Georgia income is reported on Veldran's consolidated Georgia return (or, if Veldran files on a separate-entity basis in Georgia, on Kestrel's own Georgia return as a subsidiary of Veldran). Post-Spin-Off, Kestrel's Georgia income will need to be reported by Meridian (or, if Kestrel is merged into Meridian, by Meridian directly). The Georgia Department of Revenue should be notified of this change in reporting entity to ensure continuity of the state's tax records.
(ii) Foreign Corporation Qualification. Meridian, as a Delaware corporation doing business in Georgia, will need to file a certificate of authority (or comparable qualification document) with the Georgia Secretary of State to qualify as a foreign corporation authorized to transact business in Georgia. If Kestrel is to be merged into Meridian as part of the restructuring, appropriate merger filings with the Georgia Secretary of State will also be required.
(iii) Short-Period Returns. Georgia may require the filing of a Georgia Form 600 (Corporation Tax Return) short-period return for Veldran (or Kestrel) covering the period ending on the Distribution date, and a separate Georgia Form 600 for Meridian covering the period beginning on the Distribution date. The filing deadlines and extension availability for such short-period returns should be confirmed with Georgia counsel.
These filing requirements are administrative in nature and do not, in themselves, create a substantive tax liability. However, failure to comply with Georgia filing and disclosure requirements can result in penalties, interest, and potential loss of good standing. These requirements have been identified as a key distinction from North Carolina and Delaware, where the filing and disclosure burdens associated with the Spin-Off are expected to be less involved.
C. Georgia Net Worth Tax
Georgia imposes a net worth tax on corporations doing business in Georgia. The Georgia net worth tax is calculated on the corporation's net worth apportioned to Georgia, with rates ranging from a minimum of $10 to a maximum of $5,000 depending on the amount of Georgia-apportioned net worth.
Post-Spin-Off, Veldran's Georgia net worth tax base will decrease as the Precision Flow Solutions Division assets (including Kestrel) are transferred to Meridian. Correspondingly, Meridian will establish its own Georgia net worth tax obligation based on its net worth apportioned to Georgia, which will include the former Kestrel assets and any other Georgia-situs assets contributed to Meridian.
The Contribution itself should not trigger a separate net worth tax event — the Georgia net worth tax is an annual tax based on a corporation's net worth as of a specified date, not a transactional tax imposed on asset transfers. However, the establishment of Meridian as a new Georgia taxpayer will create a new annual Georgia net worth tax obligation for Meridian, and the calculation of both Veldran's and Meridian's Georgia net worth tax in the year of the Spin-Off will need to take into account the mid-year separation of the businesses.
D. Georgia Transfer and Stamp Taxes
Stock Transfer Tax. Georgia does not impose a general stock transfer tax. The Distribution of Meridian stock from Veldran to its shareholders should not be subject to any Georgia stock transfer tax.
Real Estate Transfer Tax. Georgia imposes a real estate transfer tax at a rate of $1.00 per $1,000 of value on transfers of real property located in Georgia. If any real property located in Georgia — including, for example, Kestrel manufacturing facilities, office properties, warehouses, or land — is transferred as part of the Contribution of Precision Flow Division assets to Meridian, the transfer could be subject to Georgia real estate transfer tax.
The applicability of this tax to the Contribution requires analysis of whether an exemption is available for transfers in connection with a corporate reorganization. Georgia law provides limited exemptions from the real estate transfer tax, and the scope of these exemptions is narrower than in some other states. A contribution of assets to a wholly owned subsidiary in exchange for stock may or may not qualify for an available exemption, depending on the specific terms and structure of the Contribution and the interpretation of the applicable Georgia statutes and administrative guidance. This is an area that warrants specific attention from Georgia tax counsel.
We recommend that the engagement team confirm the situs and nature of all real property to be transferred as part of the Contribution. If material Georgia-situs real property is included in the Contributed Business, the potential transfer tax exposure should be quantified and factored into the transaction cost analysis. Given that Kestrel's operations are centered in Georgia, it is likely that at least some real property located in Georgia will be included in the Contributed Business.
E. Georgia Sales and Use Tax
The transfer of tangible personal property — including equipment, inventory, machinery, and other physical assets — from Veldran (or Kestrel) to Meridian as part of the Contribution may be subject to Georgia sales and use tax. The Georgia state sales tax rate is 4%, and applicable local option sales taxes can increase the total rate to as high as 8% or more in certain counties. The aggregate value of tangible personal property to be transferred could be substantial, making the sales and use tax exposure a potentially significant transactional cost.
Georgia provides a casual or isolated sale exemption under O.C.G.A. Section 48-8-3 that may apply to certain transfers of tangible personal property that are not made in the ordinary course of the transferor's business. Whether an intra-group reorganization transfer of the type contemplated by the Contribution qualifies as a "casual" or "isolated" sale under Georgia law requires analysis of the statutory language, applicable administrative guidance, and any relevant judicial authority. The exemption was designed primarily for one-time sales by persons not regularly engaged in the business of selling the type of property at issue, and its application to a large-scale asset contribution in a corporate reorganization context is not entirely settled.
We recommend obtaining specific asset-transfer schedules identifying all tangible personal property located in Georgia to be included in the Contributed Business, together with the estimated fair market value of such property, in order to quantify the potential sales and use tax exposure.
F. Preliminary Conclusion — Georgia
Georgia generally conforms to the federal Section 355 treatment of the Spin-Off for corporate income tax purposes. Assuming the Spin-Off qualifies as tax-free under federal Sections 355 and 368(a)(1)(D), no material Georgia corporate income tax gain recognition should result from the Contribution or the Distribution, subject to confirmation that Georgia's static IRC conformity date encompasses the relevant provisions.
Georgia does, however, impose additional filing and disclosure requirements that distinguish it from North Carolina and Delaware. These requirements — including the filing of reorganization notices, qualification filings for Meridian as a foreign corporation, and potential short-period return obligations — must be carefully tracked and managed to avoid penalties.
The potential exposure to Georgia real estate transfer tax and Georgia sales and use tax in connection with the Contribution of Georgia-situs assets warrants further diligence. Given the concentration of Kestrel's operations in Georgia, it is likely that material real property and tangible personal property located in Georgia will be included in the Contributed Business, and the tax implications of those transfers should be fully analyzed before the transaction proceeds.
We recommend a comprehensive Georgia-specific state tax analysis, including engagement of Georgia counsel or Pemberton Rathbone LLP, if the Spin-Off is reactivated.
VI. Other State Considerations — Summary of Further Analysis Required
A. Identification of Additional Jurisdictions
Veldran and the Precision Flow Solutions Division (including Kestrel) may have nexus in additional states beyond Delaware, North Carolina, and Georgia through the presence of employees, owned or leased property, sales into the state, customer relationships, or other nexus-creating activities. This memorandum does not address those additional jurisdictions, and a comprehensive multi-state nexus study should be conducted to identify all states in which either Veldran or Meridian has or will have tax nexus.
For each additional jurisdiction identified through the nexus study, the following categories of tax issues should be analyzed:
(i) Conformity with Federal Section 355. Whether the state conforms to the federal treatment of the Spin-Off as tax-free, and if so, whether the conformity is rolling or static and whether any state-specific modifications or exceptions apply.
(ii) Apportionment Factor Changes. How the separation of the Precision Flow Solutions Division from Veldran will affect each entity's apportionment factors in the state, and whether the change in apportionment will result in a net increase or decrease in state income tax liability.
(iii) Real Property and Personal Property Transfer Taxes. Whether the state imposes a transfer tax on conveyances of real property or transfers of tangible personal property, and whether any exemption is available for transfers in connection with a corporate reorganization.
(iv) Sales and Use Tax on Asset Transfers. Whether the transfer of tangible personal property as part of the Contribution is subject to the state's sales and use tax, and whether a casual sale, isolated transaction, or reorganization exemption is available.
(v) Filing and Disclosure Requirements. Whether the state requires any special filings, notices, or disclosures in connection with corporate reorganizations, changes in reporting entities, or the qualification of new foreign corporations.
B. States with Known Non-Conformity Risks
Certain states present elevated risk of non-conformity with the federal Section 355 treatment. These include states that employ "static" conformity to an older version of the IRC (as Georgia does, though Georgia's conformity is generally current), states that have adopted specific anti-abuse provisions applicable to corporate reorganizations, and states that have unique rules for the treatment of corporate distributions or spin-offs.
States that have historically been identified as potentially non-conforming or requiring special attention in the Section 355 context include, but are not limited to, those that have decoupled from certain federal provisions or that impose their own requirements for tax-free treatment of corporate distributions. A multi-state conformity survey should be conducted if the Spin-Off moves forward, and any states identified as non-conforming should be flagged for more detailed analysis and potential inclusion in the Calderwood & Harkness tax opinion.
C. Shareholder-Level State Tax Considerations
Individual shareholders of Veldran residing in various states may have state-level tax consequences arising from the Distribution, depending on whether their state of residence conforms to federal Section 355 treatment at the shareholder level. If a shareholder's state of residence does not follow the federal treatment of the Distribution as tax-free to shareholders, the shareholder could be required to recognize gain or ordinary income at the state level even though the Distribution is tax-free for federal purposes.
This consideration is particularly relevant for the following categories of Veldran shareholders:
(i) Management Stockholders. Veldran management holds approximately 5.3% of Veldran's outstanding shares (3,948,500 shares). These individuals may reside in North Carolina, Georgia, or other states, and their state-level tax consequences will depend on their respective states of residence and the conformity of those states' tax laws with federal Section 355.
(ii) HPE Fund IV. HPE Fund IV, a Delaware limited partnership, holds 62.4% of Veldran's outstanding shares (46,488,000 shares) through Harrowgate Veldran Holdings LLC. The state-level tax consequences of the Distribution for HPE Fund IV and its limited partners will depend on the states in which HPE Fund IV's partners reside and the treatment of partnership distributions of property under those states' tax laws. We recommend coordinating with Christine Yeung, General Counsel of Harrowgate Capital Advisors LLC, regarding the fund-level and partner-level state tax analysis.
(iii) Prescott Capital Management LP. Prescott Capital Management LP, a New York limited partnership, holds 14.8% of Veldran's outstanding shares (11,026,000 shares). Prescott's tax advisor, Dunmore Havens & Associates LLC, is separately reviewing Prescott's fund-level state tax consequences. We recommend coordinating with Irene Salcedo, Principal at Dunmore Havens, to ensure consistency between the Calderwood & Harkness analysis and Prescott's separate analysis, particularly with respect to New York state tax implications.
VII. Potential State-Level Gain Recognition Risks
This Section VII identifies the principal scenarios under which state-level gain recognition could arise in connection with the Spin-Off. These risks are contingent on the federal tax analysis and are summarized here to illustrate the magnitude of state-level exposure if any of the identified federal risk factors materialize.
A. Risk if Federal Section 355 Qualification Fails
If the Spin-Off fails to qualify as a tax-free distribution under federal Section 355 — for example, due to a failure to satisfy the active trade or business requirement, the business purpose requirement, the device prohibition, or any of the other requirements of Section 355 — Veldran would recognize gain on the distribution of Meridian stock at the federal level. Based on the estimated built-in gain in the Contributed Business, the gain recognized could range from approximately $596.5 million to approximately $902.4 million.
State-level gain recognition would follow in all states where Veldran has income tax nexus, with the recognized gain apportioned among the nexus states according to each state's applicable apportionment formula. The state-level income tax consequences in the three principal jurisdictions analyzed in this memorandum would be as follows:
•  North Carolina: The North Carolina corporate income tax rate of 2.5%, applied to the North Carolina-apportioned share of $596.5 million to $902.4 million of recognized gain, could result in material North Carolina income tax liability. The precise amount would depend on Veldran's North Carolina apportionment factor, which is expected to be significant given Veldran's Charlotte headquarters and Engineered Coatings Division operations in the state.
•  Georgia: The Georgia corporate income tax rate of 5.75%, applied to the Georgia-apportioned share of the recognized gain, could result in even more material Georgia income tax liability, particularly given the concentration of Precision Flow Solutions Division and Kestrel operations in Georgia. Depending on Veldran's Georgia apportionment factor, the Georgia tax exposure on a full Section 355 failure could be substantial.
The failure of federal Section 355 qualification is the most significant risk scenario for state-level gain recognition. The Calderwood & Harkness federal tax opinion is expected to address the qualification of the Spin-Off at a "should" level of confidence, and the state-level analysis is predicated on the assumption that the Spin-Off will so qualify.
B. Risk if Section 355(e) Applies at State Level
Section 355(e) of the IRC provides that, in certain circumstances involving a "plan or series of related transactions" that results in a 50% or greater change in ownership of either the Distributing or Controlled corporation, gain is recognized by the Distributing corporation on the distribution, notwithstanding otherwise qualifying Section 355 treatment. If Section 355(e) gain recognition is triggered at the federal level, the estimated federal tax at risk is $125.3 million to $189.5 million, based on the estimated built-in gain of $596.5 million to $902.4 million and the 21% federal corporate income tax rate.
Both North Carolina and Georgia generally conform to the Section 355(e) gain recognition rules through their respective IRC conformity provisions. If Section 355(e) gain is recognized at the federal level, conforming states — including North Carolina and Georgia — would also impose their corporate income taxes on the state-apportioned share of the recognized gain. The state-level Section 355(e) tax exposure would be calculated by applying each state's corporate income tax rate to the state-apportioned share of the $596.5 million to $902.4 million of recognized gain.
As a rough estimate, and subject to verification of apportionment factors:
•  North Carolina: Apportioned gain × 2.5%
•  Georgia: Apportioned gain × 5.75%
The Section 355(e) risk is particularly relevant given HPE Fund IV's 62.4% ownership stake and the potential for the Spin-Off itself, or any subsequent transaction, to constitute part of a "plan" within the meaning of Section 355(e).
C. Risk if Section 355(d) Applies at State Level
Section 355(d) of the IRC provides that a distribution of stock in a controlled corporation is treated as a taxable distribution (rather than a tax-free Section 355 distribution) if, immediately after the distribution, any person holds "disqualified stock" constituting a 50% or greater interest in either the Distributing or Controlled corporation, and the stock was acquired by purchase within the five-year period ending on the date of the distribution. "Disqualified stock" generally means stock acquired by "purchase" (as defined in Section 355(d)(5)) within the five-year look-back period.
HPE Fund IV's 62.4% stake in Veldran was acquired on September 20, 2019, which is within the five-year look-back period preceding the originally targeted Q4 2022 distribution date. The Section 355(d) analysis interacts with the Section 355(e) analysis and is being addressed in the Calderwood & Harkness federal tax opinion.
If Section 355(d) is triggered at the federal level, the same conformity analysis applies: North Carolina and Georgia, as states that generally conform to the IRC for income tax purposes, would impose their respective corporate income taxes on the state-apportioned share of any gain recognized under Section 355(d). The state-level consequences would be parallel to those described in Section VII.A above.
The Section 355(d) risk should be monitored closely, particularly in light of the indefinite pause in the Spin-Off timeline. If the Distribution is delayed beyond September 20, 2024 (five years from HPE Fund IV's acquisition), the Section 355(d) risk would be eliminated with respect to HPE Fund IV's shares, which could have favorable state-level consequences as well.
VIII. Transfer Tax and Transaction Tax Summary Table
The following table summarizes the transfer tax and transaction tax considerations in each of the three principal jurisdictions analyzed in this memorandum:
IX. Recommendations and Next Steps
Based on the analysis set forth in this memorandum, we recommend the following steps in connection with the state and local tax aspects of the proposed Spin-Off:
1. Multi-State Nexus Survey. Conduct a comprehensive nexus study for both Veldran and the Precision Flow Solutions Division (future Meridian) to identify all states in which the Spin-Off may have state income, franchise, transfer, or transactional tax implications. The nexus study should encompass all states in which either entity has employees, owned or leased property, sales or customers, or other nexus-creating activities. The study should also address whether any state has adopted an economic nexus standard that may create filing obligations even in the absence of physical presence.
2. Asset Situs Analysis. Obtain detailed schedules of all real property and material tangible personal property to be transferred in the Contribution, classified by state of situs, in order to quantify potential real estate transfer tax and sales/use tax exposure. This analysis is particularly important for Georgia and North Carolina, where the transfer of real property and tangible personal property may trigger transfer taxes or sales/use taxes that are not exempt under applicable reorganization or casual sale exemptions. The asset schedules should include estimated fair market values, book values, and descriptions sufficient to assess the applicability of any exemptions.
3. Georgia Filing Requirements. Engage Georgia tax counsel or Pemberton Rathbone LLP (Harold Weiss, Partner, Tax) to prepare a detailed Georgia filing checklist covering all filing and disclosure requirements associated with the Spin-Off. The checklist should address, at a minimum, the following items: (a) notice of reorganization or restructuring to the Georgia Department of Revenue; (b) foreign corporation qualification filing for Meridian with the Georgia Secretary of State; (c) short-period return requirements for the period ending on the Distribution date and the period beginning on the Distribution date; and (d) any merger filings with the Georgia Secretary of State if Kestrel is to be merged into Meridian as part of the restructuring.
4. State Conformity Confirmation. Confirm the current IRC conformity dates for Georgia, North Carolina, and any other material nexus states identified through the nexus study, to ensure that each state's IRC conformity encompasses the version of Sections 355 and 368(a)(1)(D) applicable to the anticipated distribution date. This is particularly important for Georgia, which employs a static conformity approach, and for any other states that may not have adopted the most recent version of the IRC.
5. Shareholder-Level Analysis. Coordinate with Dunmore Havens & Associates LLC (Irene Salcedo, Principal) regarding Prescott Capital Management LP's state-level tax consequences, particularly with respect to New York state taxation of the Distribution at the fund and partner level. Separately, advise Harrowgate Capital Advisors LLC (Christine Yeung, General Counsel) on HPE Fund IV's LP-level and partner-level state tax consequences, including the treatment of the Distribution under the laws of the states in which HPE Fund IV's limited partners reside. For management stockholders, identify the states of residence and analyze each state's conformity with federal Section 355 at the individual shareholder level.
6. Integration with Federal Opinion. Confirm that the state and local tax analysis is consistent with and complementary to the Calderwood & Harkness federal tax opinion under Sections 355 and 368(a)(1)(D). Any state-specific qualifications or risk factors that may be material to the overall transaction should be disclosed in the federal opinion or in a separate state tax supplement, as appropriate. The engagement team should determine whether a separate state tax opinion or a state tax section within the federal opinion is warranted.
7. Timing. In light of the current indefinite pause in the Spin-Off timeline (communicated August 22, 2022), further analysis beyond this memorandum should be deferred until the client determines whether to proceed with the transaction. This memorandum provides a sufficient analytical framework for rapid re-engagement if the Spin-Off is reactivated. Upon reactivation, the engagement team should update the analysis to reflect any changes in state tax law, IRC conformity dates, or transaction facts that may have occurred during the intervening period.
X. Limitations and Qualifications
This memorandum is a preliminary summary prepared for internal Calderwood & Harkness LLP use and for discussion with the engagement team. It is not intended as, and should not be relied upon as, a formal state tax opinion. No formal opinion of state tax counsel is expressed or implied by this memorandum, and no such opinion should be inferred from the analysis set forth herein.
The analysis contained in this memorandum is based on currently available information regarding Veldran's and the Precision Flow Solutions Division's state-level operations, nexus, asset locations, and other relevant facts. Material changes in facts — including changes in the structure of the Spin-Off, the composition of the Contributed Business, the situs of assets to be transferred, or the nexus footprint of either entity — could alter the conclusions set forth herein. In addition, the analysis is subject to revision based on receipt of additional information, including detailed asset-transfer schedules, employee location data, and sales/customer data.
State tax law is subject to change by legislative enactment, administrative action, or judicial decision. The analysis in this memorandum reflects the law in effect as of July 20, 2022, the date of this memorandum. No assurance can be given that the law will not change in a manner that would adversely affect the conclusions set forth herein.
This memorandum has been reviewed by Sylvia Hartwell, Partner, Tax Department, Calderwood & Harkness LLP.
Distribution. Distribution of this memorandum is limited to the Calderwood & Harkness LLP engagement team (Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari) and, at the engagement team's discretion, to the client (Harrowgate Capital Advisors LLC, attention: Christine Yeung, General Counsel) and coordinating counsel (Whitfield & Gage LLP, attention: Priya Chandrasekar). This memorandum is not to be distributed to, or relied upon by, any other person or entity without the prior written consent of Calderwood & Harkness LLP.
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees and authorized recipients identified herein. Any unauthorized review, use, disclosure, or distribution is prohibited.
From: | Leila Nazari, Associate, Tax Department, Calderwood & Harkness LLP
Reviewed By: | Sylvia Hartwell, Partner, Tax Department, Calderwood & Harkness LLP
Date: | July 20, 2022
Re: | State and Local Tax Considerations — Proposed Pro Rata Spin-Off of Meridian Flow Technologies, Inc. from Veldran Industries Holdings, Inc.
Client: | Harrowgate Private Equity Fund IV, L.P.
Engagement No.: | 1003-00005
Matter Code: | HRW-SPIN-001
Holder | Shares | Percentage
Harrowgate Private Equity Fund IV, L.P. (through Harrowgate Veldran Holdings LLC, EIN 86-1483920) | 46,488,000 | 62.4%
Prescott Capital Management LP | 11,026,000 | 14.8%
Management (various individuals) | 3,948,500 | 5.3%
Public float | 13,037,500 | ~17.5%
Total | 74,500,000 | 100.0%
Tax Type | Delaware | North Carolina | Georgia
Stock Transfer Tax | Not applicable — Delaware does not impose a general stock transfer tax | Not applicable — North Carolina does not impose a general stock transfer tax | Not applicable — Georgia does not impose a general stock transfer tax
Real Property Transfer Tax | No concern absent Delaware-situs real property; unlikely based on current information | Deed transfer excise tax at $1.00 per $500 of consideration if NC-situs real property is transferred; confirm asset situs | Real estate transfer tax at $1.00 per $1,000 of value if GA-situs real property (e.g., Kestrel facilities) is transferred; analyze reorganization exemption
Sales/Use Tax | Not applicable — no transfer of tangible personal property in Delaware expected | Analyze casual sale exemption for transfer of tangible personal property in the Contribution; confirm asset situs | Analyze casual/isolated sale exemption under O.C.G.A. § 48-8-3 for transfer of tangible personal property (state rate 4% + local option taxes); confirm asset situs and values
Franchise / Net Worth Tax | Ministerial — Meridian incorporation will trigger initial filing fees and annual franchise tax; no incremental event for Veldran | Ministerial — net worth reduction for Veldran; new franchise tax obligation for Meridian if NC nexus established | Ministerial — net worth reduction for Veldran; new net worth tax obligation for Meridian
Filing / Disclosure | Standard incorporation filings for Meridian | Standard filings | Elevated — notice of reorganization, foreign corporation qualification for Meridian, possible short-period returns; more involved than DE or NC

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