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DRAFT — TAX MATTERS PROVISIONS FOR SEPARATION AGREEMENT

Prepared by Calderwood & Harkness LLP for insertion into the Separation Agreement being drafted by Whitfield & Gage LLP

July 28, 2022

Engagement Number: 1003-00005 Matter Code: HRW-SPIN-001

Prepared by: Garrett Simmons and Leila Nazari, Calderwood & Harkness LLP

Reviewed by: Leonard Cross, Responsible Partner, Tax Department, Calderwood & Harkness LLP

Distribution:

PRIVILEGED AND CONFIDENTIAL — SUBJECT TO REVIEW BY WHITFIELD & GAGE LLP, THORNAPPLE McCORD LLP, AND CLIENT — NOT FOR EXECUTION

COVER MEMORANDUM

July 28, 2022

MEMORANDUM

FROM: Leonard Cross, Calderwood & Harkness LLP

TO: Priya Chandrasekar, Whitfield & Gage LLP; David Ochoa, Thornapple McCord LLP

RE: Draft Tax Matters Provisions — Separation Agreement between Veldran Industries Holdings, Inc. ("Distributing" or "Veldran") and Meridian Flow Technologies, Inc. ("Controlled" or "Meridian" or "SpinCo")

ENGAGEMENT: 1003-00005 / HRW-SPIN-001

Priya and David:

Enclosed please find draft provisions prepared by Calderwood & Harkness LLP for incorporation as Article [__] (Tax Matters) of the Separation Agreement between Veldran Industries Holdings, Inc. ("Distributing" or "Veldran") and Meridian Flow Technologies, Inc. ("Controlled" or "Meridian" or "SpinCo"). These provisions are intended to be inserted into the master Separation Agreement currently being drafted by Whitfield & Gage LLP and should be read in conjunction with the overall structure and defined terms of that agreement.

The enclosed provisions have been designed to accomplish two principal objectives. First, these provisions are structured to preserve the intended tax-free qualification of the Distribution under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code"). Given the particular factual circumstances of this transaction — most notably, the September 20, 2019 acquisition of approximately 62.4% of Veldran's common stock by Harrowgate Private Equity Fund IV, L.P. and the June 7, 2019 acquisition of Kestrel Precision Controls, Inc. — the provisions include detailed representations, covenants, and restrictions that are tailored to address the heightened scrutiny that this spin-off will receive under Sections 355(d), 355(e), and the "plan" regulations under Treasury Regulation Section 1.355-7. Second, these provisions establish a comprehensive framework for allocating tax liabilities and responsibilities between Veldran and Meridian following the separation, including indemnification obligations in the event the spin-off fails to achieve tax-free qualification.

These provisions are in draft form and assume a pro rata distribution by Veldran of 100% of the common stock of Meridian to Veldran shareholders at a 1:1 distribution ratio — that is, one share of Meridian common stock for each of the 74,500,000 shares of Veldran common stock outstanding on the Record Date. To the extent that the distribution mechanics, distribution ratio, or any other structural assumption changes, these provisions will need to be revised accordingly.

I want to flag specifically that certain provisions — particularly the Section 355(e) indemnification allocation set forth in Section [__].5(c) — are subject to significant commercial negotiation between Harrowgate and Veldran management and will require input from David and the Thornapple McCord team as separate counsel to Veldran. We have presented two alternative allocation frameworks (Alternative A and Alternative B) in that subsection, together with our preliminary recommendation. The estimated tax at risk under a Section 355(e) gain recognition event is substantial — in the range of $125.3 million to $189.5 million — and the allocation of that potential liability between Distributing and Controlled is among the most commercially sensitive aspects of the overall separation structure.

We request that Whitfield & Gage integrate these provisions into the master Separation Agreement structure and conform defined terms as appropriate. Certain terms defined in these provisions (e.g., "Distribution," "Contribution," "Controlled," "Distributing") may need to be reconciled with the corresponding definitions in the master agreement. We have endeavored to use terminology consistent with the preliminary term sheet circulated by Whitfield & Gage on July 14, 2022, but we anticipate that further conforming work will be required.

These provisions should also be read in conjunction with the separate Tax Sharing Agreement being prepared in parallel by Calderwood & Harkness. The outline and key terms of the Tax Sharing Agreement are dated August 4, 2022; the full agreement has not yet been drafted. Several provisions in this Article cross-reference the Tax Sharing Agreement, and the two documents will need to be finalized in tandem to ensure consistency. We expect to circulate a first draft of the Tax Sharing Agreement within approximately three weeks of receipt of comments on the enclosed provisions.

Finally, we note that several open issues and bracketed items remain in the enclosed draft and are compiled in Appendix B for ease of reference. We would welcome the opportunity to discuss these items at the next working group call and to receive any initial comments from your respective teams at your earliest convenience.

Please do not hesitate to contact me, Garrett Simmons, or Leila Nazari with any questions.

Best regards,

Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1301 Avenue of the Americas, 40th Floor New York, NY 10019 Direct: (212) 555-7400 lcross@calderwoodharkness.com

ARTICLE [____]

TAX MATTERS

Section [____].1 — Definitions

For purposes of this Article [__], the following terms shall have the meanings set forth below. Capitalized terms used but not otherwise defined in this Article shall have the meanings ascribed to them in the master Separation Agreement.

(a) "Active Trade or Business" means any trade or business conducted by Distributing or Controlled (or any direct or indirect subsidiary of either) within the meaning of Section 355(b)(2) of the Code and the Treasury Regulations promulgated thereunder, including (i) with respect to Distributing, the Engineered Coatings Division, and (ii) with respect to Controlled, the Precision Flow Solutions Division.

(b) "Closing Date" means the date on which the Distribution is consummated.

(c) "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute. References to specific provisions of the Code shall include any corresponding provision of any successor statute and the Treasury Regulations promulgated thereunder.

(d) "Contribution" means the transfer by Distributing to Controlled of all assets and liabilities associated with the Precision Flow Solutions Division (the "Contributed Business"), including all assets and liabilities of Kestrel Precision Controls, Inc. and its subsidiaries, in exchange for all outstanding shares of common stock of Controlled and the assumption by Controlled of certain allocated liabilities, all as more fully described in Article [__] of this Agreement.

(e) "Controlled" or "SpinCo" means Meridian Flow Technologies, Inc., a Delaware corporation, and, where the context requires, all direct and indirect subsidiaries of Meridian Flow Technologies, Inc. following the Distribution.

(f) "Controlled Group" means Controlled and each of its direct and indirect subsidiaries following the Distribution.

(g) "Distributing" means Veldran Industries Holdings, Inc., a Delaware corporation (Employer Identification Number: 86-1920347), and, where the context requires, all direct and indirect subsidiaries of Veldran Industries Holdings, Inc. other than members of the Controlled Group.

(h) "Distributing Group" means Distributing and each of its direct and indirect subsidiaries other than the members of the Controlled Group.

(i) "Distribution" means the pro rata distribution by Distributing of 100% of the outstanding shares of common stock of Controlled to the holders of record of Distributing common stock on the Record Date, at a ratio of one (1) share of Controlled common stock for each share of Distributing common stock held on the Record Date. As of the date of this Agreement, Distributing has 74,500,000 shares of common stock outstanding.

(j) "Distribution Date" means the date on which the Distribution is effected, which is originally targeted for the fourth quarter of 2022. The Distribution Date and the Closing Date are intended to refer to the same date.

(k) "Engineered Coatings Division" means the business segment of Distributing consisting of engineered coatings products and related operations, including surface treatment, thermal barrier coating, and advanced material application operations, which will be retained by Distributing following the Distribution. For reference purposes, the Engineered Coatings Division generated revenue of approximately $1,520,000,000 and EBITDA of approximately $285,000,000 for the fiscal year ended December 31, 2021.

(l) "Group" means either the Distributing Group or the Controlled Group, as the context requires, and "Groups" means both the Distributing Group and the Controlled Group.

(m) "IRS" means the Internal Revenue Service, a bureau of the United States Department of the Treasury, or any successor thereto.

(n) "Kestrel Acquisition" means the acquisition by Distributing of all of the outstanding capital stock of Kestrel Precision Controls, Inc. (a Georgia corporation, Employer Identification Number: 58-2847193) from Rennick Industrial Partners Fund II LP, completed on June 7, 2019, for aggregate consideration of $295,000,000 in cash.

(o) "Merger/Acquisition Transaction" means any merger, consolidation, statutory share exchange, acquisition of assets or stock, issuance of stock (including any primary issuance or secondary sale), business combination, recapitalization, or similar transaction, whether effected directly or indirectly, involving either Distributing or Controlled (or any member of either Group), or any agreement, understanding, arrangement, or substantial negotiations (whether or not binding) with respect to any of the foregoing.

(p) "Opinion" means the tax opinion to be delivered by Calderwood & Harkness LLP to Distributing and Controlled, at a "should" level of comfort (i.e., a confidence level of at least 70%), to the effect that the Contribution and the Distribution, taken together, will qualify as a reorganization within the meaning of Section 368(a)(1)(D) of the Code and that the Distribution will qualify as a tax-free distribution under Section 355 of the Code to Distributing, Controlled, and the shareholders of Distributing, subject to the assumptions, qualifications, and limitations set forth in such opinion.

(q) "Precision Flow Solutions Division" means the business segment of Distributing consisting of precision fluid-control systems and related products and services for industrial, petrochemical, and water-infrastructure end markets, including all operations of Kestrel Precision Controls, Inc. and its subsidiaries, which will be contributed to Controlled in connection with the Contribution. For reference purposes, the Precision Flow Solutions Division generated revenue of approximately $820,000,000 and EBITDA of approximately $133,000,000 for the fiscal year ended December 31, 2021.

(r) "Pre-Distribution Tax Period" means any taxable period (or portion thereof) ending on or before the Distribution Date.

(s) "Post-Distribution Tax Period" means any taxable period (or portion thereof) beginning after the Distribution Date.

(t) "Prohibited Action" has the meaning set forth in Section [__].4 of this Article.

(u) "Record Date" means the record date established by the Board of Directors of Distributing for purposes of determining the holders of Distributing common stock entitled to receive shares of Controlled common stock in the Distribution.

(v) "Representation Letter" means, collectively, (i) the written representations made by officers of Distributing and (ii) the written representations made by officers or authorized representatives of Harrowgate Capital Advisors LLC, in each case, upon which the Opinion is based and which are delivered to Calderwood & Harkness LLP in connection with the issuance of the Opinion.

(w) "Restricted Period" means the period commencing on the Distribution Date and ending on the second (2nd) anniversary of the Distribution Date.

(x) "Separation" or "Spin-Off" means, collectively, the Contribution and the Distribution, taken together as a single integrated transaction.

(y) "Tax" or "Taxes" means any and all federal, state, local, and foreign taxes of any kind whatsoever, whether imposed directly or through withholding, on or measured by income, gross receipts, profits, capital, capital gains, franchise, value added, ad valorem, employment, payroll, transfer, sales, use, excise, customs, stamp, registration, or other taxes, duties, assessments, fees, levies, imposts, or charges of any nature, including any interest, penalty, or addition thereto, imposed by any Taxing Authority. For purposes of the indemnification provisions of this Article, the term "Tax" shall include corporate income tax at the applicable rate (currently twenty-one percent (21%) for United States federal corporate income tax purposes).

(z) "Tax Benefit" means any refund, credit, offset, reduction, or other decrease in Tax liability (including any reduction in estimated tax payments) realized or received by either party or any member of its Group.

(aa) "Tax Proceeding" means any audit, examination, investigation, review, contest, claim, assessment, litigation, appeal, or other proceeding with or against any Taxing Authority or before any court or administrative tribunal relating to Taxes.

(bb) "Tax Sharing Agreement" means the separate Tax Sharing Agreement between Distributing and Controlled, to be executed concurrently with this Agreement on or prior to the Distribution Date, which shall set forth, among other things, the allocation of consolidated, combined, and unitary Tax liabilities and Tax Benefits between the Distributing Group and the Controlled Group for Pre-Distribution Tax Periods and the transition period.

(cc) "Taxing Authority" means any governmental authority (whether federal, state, local, or foreign) responsible for the imposition, assessment, administration, collection, or enforcement of any Tax, including the IRS, any state department of revenue, and any comparable foreign governmental authority.

(dd) "Treasury Regulations" means the regulations promulgated by the United States Department of the Treasury under the Code, including any temporary and proposed regulations and any successor regulations.

Section [____].2 — Tax Representations and Warranties

(a) Representations of Distributing (Veldran)

Distributing hereby represents and warrants to Controlled that, as of the Distribution Date, each of the following statements is true and correct in all material respects:

(i) Active Trade or Business — Engineered Coatings Division. Distributing has been engaged, and is engaged as of the Distribution Date, in the active conduct of the Engineered Coatings Division trade or business within the meaning of Section 355(b)(2) of the Code for the entire five (5)-year period ending on the Distribution Date. The activities conducted by Distributing with respect to the Engineered Coatings Division satisfy each of the requirements of Section 355(b)(2)(A) through (D) of the Code and the Treasury Regulations promulgated thereunder.

(ii) Separate Active Trade or Business. The Engineered Coatings Division constitutes a separate Active Trade or Business that has been conducted directly by Distributing (or by one or more qualified subsidiaries of Distributing within the meaning of the Treasury Regulations under Section 355(b)) throughout the five (5)-year period ending on the Distribution Date. The Engineered Coatings Division is not and has not been operated as a division or unit of the Precision Flow Solutions Division, and the two business segments have been managed, operated, and reported separately throughout such period.

(iii) Corporate Business Purpose. The Contribution and the Distribution are being undertaken for one or more substantial corporate business purposes within the meaning of Treasury Regulation Section 1.355-2(b), which are genuine, non-tax business purposes at the Distributing corporate level. Without limiting the generality of the foregoing, the corporate business purposes for the Spin-Off include (A) enabling Distributing and Controlled to pursue independent capital allocation strategies appropriate to their respective business profiles, end markets, and growth trajectories, and (B) enhancing management focus and operational efficiency by allowing each entity to concentrate its management resources and strategic attention on a single, distinct business segment. The corporate business purposes for the Spin-Off are not driven primarily by the fund-level objectives of Harrowgate Private Equity Fund IV, L.P. (including, without limitation, portfolio monetization objectives, fund-life considerations, or distributions to limited partners), and such fund-level objectives do not constitute the primary motivation for the Spin-Off.

(iv) Device Test. The Distribution is not being used principally as a device for the distribution of the earnings and profits of Distributing or Controlled within the meaning of Section 355(a)(1)(B) of the Code and Treasury Regulation Section 1.355-2(d). The Distribution is motivated by the corporate business purposes described in clause (iii) above, and neither Distributing nor Controlled has a plan or intention to sell, exchange, transfer, or dispose of shares of Controlled common stock or Distributing common stock in a manner that would constitute evidence that the Distribution is being used principally as such a device, except as otherwise contemplated by this Agreement.

(v) No Plan or Intention — Section 355(e). As of the date hereof and as of the Distribution Date, Distributing has no plan or intention to engage in any Merger/Acquisition Transaction following the Distribution that, together with the Distribution, would result in one or more persons acquiring, directly or indirectly, a fifty-percent (50%) or greater interest (by vote or value) in Distributing or Controlled within the meaning of Section 355(e) of the Code and Treasury Regulation Section 1.355-7. For the avoidance of doubt, Distributing has not engaged in, and as of the Distribution Date is not engaged in, any substantial negotiations with respect to any such transaction.

(vi) Representation Letter. The representations set forth in the Representation Letter delivered by officers of Distributing to Calderwood & Harkness LLP in connection with the issuance of the Opinion are true, correct, and complete in all material respects as of the date on which the Representation Letter was delivered and will be true, correct, and complete in all material respects as of the Distribution Date. Distributing is not aware of any fact, circumstance, or event that would cause any such representation to be untrue, incorrect, or incomplete in any material respect.

(vii) HPE Fund IV Acquisition — No Plan. The acquisition of approximately 62.4% of the outstanding common stock of Distributing (46,488,000 shares at $40.00 per share for aggregate consideration of $1,859,520,000) by Harrowgate Private Equity Fund IV, L.P. on September 20, 2019 (the "HPE Acquisition") was not undertaken as part of a plan or series of related transactions that includes the Spin-Off within the meaning of Section 355(e) of the Code and Treasury Regulation Section 1.355-7. At the time of the HPE Acquisition, neither Distributing nor Harrowgate Private Equity Fund IV, L.P. had a plan or intention to effect a separation or distribution of the Precision Flow Solutions Division, and the decision to pursue the Spin-Off was made subsequent to and independent of the HPE Acquisition.

(viii) Tax Basis in Contributed Assets. Distributing's adjusted tax basis in the assets of the Precision Flow Solutions Division (including the assets of Kestrel Precision Controls, Inc. and its subsidiaries) is approximately Eight Hundred Million Dollars ($800,000,000) as of the date hereof, as determined in accordance with the Code and applicable Treasury Regulations. Distributing will provide to Controlled a schedule of the adjusted tax basis of the contributed assets as of the Distribution Date promptly following the Distribution.

(b) Representations of Controlled (Meridian)

Controlled hereby represents and warrants to Distributing that, as of the Distribution Date, each of the following statements is true and correct in all material respects:

(i) Active Trade or Business — Precision Flow Solutions Division. The Precision Flow Solutions Division has been engaged in the active conduct of a trade or business within the meaning of Section 355(b)(2) of the Code for the entire five (5)-year period ending on the Distribution Date. The activities conducted with respect to the Precision Flow Solutions Division satisfy each of the requirements of Section 355(b)(2)(A) through (D) of the Code and the Treasury Regulations promulgated thereunder, including with respect to the operations of Kestrel Precision Controls, Inc. as described in clause (ii) below.

(ii) Kestrel Precision Controls, Inc. — Section 355(b)(2)(D) Compliance. With respect to the Kestrel Acquisition (the acquisition by Distributing of all outstanding capital stock of Kestrel Precision Controls, Inc. (a Georgia corporation, Employer Identification Number: 58-2847193) from Rennick Industrial Partners Fund II LP for $295,000,000 in cash, completed on June 7, 2019): (A) Kestrel Precision Controls, Inc. was incorporated and commenced operations in the State of Georgia on February 12, 2003; (B) Kestrel continuously operated the precision flow controls business from the date of its incorporation through the date of the Kestrel Acquisition and thereafter through the Distribution Date; (C) the Kestrel Acquisition satisfied the requirements of Section 355(b)(2)(C) and (D) of the Code (i.e., control of Kestrel was not acquired in a transaction in which gain or loss was recognized, in whole or in part, and no gain or loss was recognized in any transaction as part of a plan or series of related transactions by which control of Kestrel was acquired); and (D) the Kestrel business has been continuously operated as an integral part of the Precision Flow Solutions Division from the date of the Kestrel Acquisition through the Distribution Date.

(iii) Kestrel Revenue Contribution. At the time of the Kestrel Acquisition, the Kestrel business comprised approximately thirty-five percent (35%) of the total revenue of the Precision Flow Solutions Division, and the Kestrel business has been continuously operated as part of the Precision Flow Solutions Division since June 7, 2019. As of the most recent fiscal year end, the Kestrel business continues to represent a material component of the revenue and operations of the Precision Flow Solutions Division.

(iv) Continuation of Business. Controlled intends to, and following the Distribution shall, continue actively conducting the Precision Flow Solutions Division business (including the Kestrel operations) in substantially the same manner as such business has been conducted prior to the Distribution. Controlled does not have any plan or intention to discontinue, sell, dispose of, or otherwise cease the active conduct of the Precision Flow Solutions Division or any material portion thereof.

(v) No Plan or Intention — Merger/Acquisition. Controlled has no plan or intention, as of the Distribution Date, to engage in any Merger/Acquisition Transaction during the Restricted Period that could reasonably be expected to jeopardize the tax-free qualification of the Spin-Off under Section 355 of the Code or result in the application of Section 355(e) of the Code to the Distribution. Controlled has not engaged in, and as of the Distribution Date is not engaged in, any substantial negotiations with respect to any such transaction.

(vi) Representation Letter. The representations set forth in the Representation Letter delivered to Calderwood & Harkness LLP that are attributable to Controlled or the Precision Flow Solutions Division are true, correct, and complete in all material respects as of the date on which the Representation Letter was delivered and will be true, correct, and complete in all material respects as of the Distribution Date. Controlled is not aware of any fact, circumstance, or event that would cause any such representation to be untrue, incorrect, or incomplete in any material respect.

Section [____].3 — Covenants Regarding Tax-Free Qualification

(a) General Covenant

Each of Distributing and Controlled hereby covenants and agrees that it shall not take or fail to take any action, and shall not permit any member of its Group to take or fail to take any action, that would, or would reasonably be expected to, cause the Spin-Off to fail to qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code. Without limiting the foregoing, each party shall use commercially reasonable efforts to preserve the tax-free status of the Spin-Off, including cooperating with the other party in connection with any actions necessary to maintain such qualification and refraining from any action that could reasonably be expected to create a material risk that the Spin-Off would not so qualify. The covenants set forth in this Section [__].3 and in Section [__].4 are intended to protect and preserve the tax-free qualification of the Spin-Off and shall be interpreted and applied in a manner consistent with that objective.

(b) Consistency with Representations

Each party shall ensure that the facts, representations, and covenants set forth in the Representation Letter delivered to Calderwood & Harkness LLP and in this Article [__] remain true and correct in all material respects through and including the end of the Restricted Period. In the event that either party becomes aware of any fact, circumstance, event, or change in condition that could reasonably be expected to cause any representation made in the Representation Letter or in this Article to become untrue, incorrect, or incomplete in any material respect, such party shall provide prompt written notice to the other party (and in any event within ten (10) business days of becoming aware of such fact, circumstance, event, or change). Such notice shall include a reasonably detailed description of the relevant fact, circumstance, event, or change and the representation or covenant that may be affected thereby.

Section [____].4 — Restrictions on Post-Spin Actions (Prohibited Actions During the Restricted Period)

Each of Distributing and Controlled hereby covenants and agrees that, during the Restricted Period, it shall not, and shall not permit any member of its Group to, take any of the following actions (each, a "Prohibited Action") without satisfying the conditions specified below:

(a) Stock Issuances

During the Restricted Period, neither Distributing nor Controlled shall issue, sell, or otherwise dispose of, or authorize or agree to issue, sell, or otherwise dispose of, any shares of its capital stock (including common stock, preferred stock, or any other class of equity securities), options, warrants, rights to acquire shares of capital stock, or convertible or exchangeable securities, that, individually or in the aggregate with all other issuances during the Restricted Period, would represent more than [25]% of the total outstanding shares of such party's capital stock (determined immediately after the Distribution), without the prior written consent of the other party.

Provided, however, that the foregoing restriction shall not apply to issuances of shares of capital stock (or options, restricted stock units, or other equity awards) pursuant to employee equity incentive plans in the ordinary course of business, consistent with past practice, so long as such issuances do not, in the aggregate, result in a change of control or a shift in ownership that would be treated as part of a plan under Section 355(e) of the Code and Treasury Regulation Section 1.355-7.

Notwithstanding the foregoing, any issuance, sale, or disposition of shares of capital stock of either Distributing or Controlled that could reasonably be expected to result in one or more persons acquiring, directly or indirectly, a fifty-percent (50%) or greater interest (by vote or value) in such party within the meaning of Section 355(e) of the Code is absolutely prohibited during the Restricted Period without both (A) the prior written consent of the other party and (B) a supplemental tax opinion or IRS private letter ruling satisfying the requirements of Section [__].10.

[Note: The percentage threshold of [25]% is a placeholder subject to negotiation. Calderwood & Harkness recommends [25]% as consistent with IRS safe harbors and prevailing market practice in tax-free spin-off transactions. See Appendix B, Item 1.]

(b) Mergers and Acquisitions

During the Restricted Period, neither Distributing nor Controlled shall enter into, approve, recommend, permit, or consummate any merger, consolidation, statutory share exchange, or other business combination in which such party (or any member of its Group) is a party or target, or that would result in one or more persons acquiring, directly or indirectly, a fifty-percent (50%) or greater interest (by vote or value) in either Distributing or Controlled within the meaning of Section 355(e) of the Code, without the prior written consent of the other party.

Exception: The foregoing restriction shall not apply to a Merger/Acquisition Transaction for which a supplemental tax opinion at a "should" level of comfort (i.e., a confidence level of at least 70%) is obtained from nationally recognized tax counsel (which counsel shall be reasonably acceptable to both Distributing and Controlled) confirming that the proposed transaction would not cause the Spin-Off to fail to qualify as a tax-free transaction under Section 355 of the Code and would not result in the application of Section 355(e) of the Code to the Distribution. Such supplemental tax opinion shall be delivered to both parties prior to the execution of any definitive agreement with respect to such Merger/Acquisition Transaction.

During the Restricted Period, neither Distributing nor Controlled shall sell, transfer, lease, license, exchange, or otherwise dispose of (in one transaction or a series of related transactions) assets constituting more than [30]% of the gross assets (determined by fair market value as of the Distribution Date) of the Active Trade or Business conducted by such party immediately following the Distribution, without the prior written consent of the other party.

The foregoing restriction is intended to preserve the continuity of business enterprise for both Distributing and Controlled as required under Treasury Regulation Section 1.368-1(d) and the related principles applicable to divisive reorganizations under Section 368(a)(1)(D) of the Code. Sales or dispositions of assets in the ordinary course of business (including sales of inventory, obsolete equipment, and surplus materials) shall not be aggregated for purposes of this threshold.

[Note: The percentage threshold of [30]% is a placeholder subject to negotiation. Calderwood & Harkness recommends [30]% as consistent with continuity-of-business-enterprise principles. See Appendix B, Item 2.]

(d) Cessation of Active Business

During the Restricted Period, neither Distributing nor Controlled shall discontinue, sell, or otherwise cease the active conduct of its respective Active Trade or Business, and each party shall continue to actively conduct such business in substantially the same manner as it has been conducted prior to the Distribution.

For Distributing: The Engineered Coatings Division shall be actively conducted by Distributing throughout the Restricted Period.

For Controlled: The Precision Flow Solutions Division (including the Kestrel operations formerly conducted by Kestrel Precision Controls, Inc.) shall be actively conducted by Controlled throughout the Restricted Period.

Note regarding Kestrel: Because the Kestrel business comprises approximately thirty-five percent (35%) of the Precision Flow Solutions Division revenue, the cessation, material curtailment, or disposition of the Kestrel operations during the Restricted Period could undermine the Section 355(b) active trade or business qualification for the Precision Flow Solutions Division. Controlled shall not, and shall not permit any member of the Controlled Group to, discontinue, materially curtail, sell, transfer, or otherwise dispose of the Kestrel operations during the Restricted Period without the prior written consent of Distributing and a supplemental tax opinion confirming that such action would not jeopardize the Section 355(b) qualification.

(e) Liquidations and Dissolutions

During the Restricted Period, neither Distributing nor Controlled shall liquidate or partially liquidate, or adopt, approve, or recommend any plan of complete or partial liquidation or dissolution, whether or not pursuant to Sections 331, 332, or 336 of the Code, without the prior written consent of the other party and a supplemental tax opinion.

(f) Redemptions and Repurchases

During the Restricted Period, neither Distributing nor Controlled shall redeem or repurchase, or authorize or agree to redeem or repurchase, any shares of its capital stock (whether through open-market purchases, tender offers, privately negotiated transactions, or otherwise), without the prior written consent of the other party and, if reasonably requested by the other party, a supplemental tax opinion.

Provided, however, that the foregoing restriction shall not apply to repurchases of shares from employees, directors, or consultants in de minimis amounts in connection with the administration of employee equity incentive plans (including repurchases to satisfy tax withholding obligations upon vesting of restricted stock units or exercise of options), so long as such repurchases are in the ordinary course of business, consistent with past practice, and do not, individually or in the aggregate, exceed $5,000,000 in any calendar year.

(g) Amendment of Organizational Documents

During the Restricted Period, neither Distributing nor Controlled shall amend, modify, or restate its certificate of incorporation, bylaws, or other equivalent organizational documents in any manner that could affect the number, class, series, par value, voting rights, or relative rights, preferences, or limitations of its outstanding shares of capital stock, or that could result in a reclassification, recapitalization, or similar restructuring of its equity capital, without the prior written consent of the other party. For the avoidance of doubt, routine amendments that do not affect the capital structure of such party shall not be subject to this restriction.

Section [____].5 — Tax Indemnification

(a) General Indemnification by Distributing (Veldran)

Distributing shall indemnify, defend, and hold harmless Controlled and each member of the Controlled Group, and their respective officers, directors, employees, agents, and representatives, from and against any and all Taxes, losses, liabilities, damages, claims, costs, and expenses (including reasonable and documented attorneys' fees and expenses, and reasonable and documented fees and expenses of accountants and other advisors) arising from or relating to:

(i) Any failure of the Spin-Off to qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code, to the extent such failure is attributable to, caused by, or results from a breach by Distributing (or any member of the Distributing Group) of any representation, warranty, or covenant of Distributing set forth in this Article [__] or in the Representation Letter, including any action or failure to act by Distributing that constitutes a Prohibited Action;

(ii) Any Taxes imposed on, assessed against, or required to be paid by any member of the Distributing Group for Pre-Distribution Tax Periods, as allocated in accordance with the methodology set forth in the Tax Sharing Agreement, including the allocated share of consolidated, combined, or unitary Tax liabilities attributable to the Distributing Group for such periods; and

(iii) Any Taxes arising under Section 355(d) of the Code that are attributable to the treatment of the Distribution as a "disqualified distribution" (as defined in Section 355(d)(2) of the Code) by reason of the acquisition by Harrowgate Private Equity Fund IV, L.P. of approximately 62.4% (46,488,000 shares) of the outstanding common stock of Distributing on September 20, 2019, including any gain recognized by Distributing as if the stock of Controlled were sold at fair market value on the Distribution Date.

(b) General Indemnification by Controlled (Meridian)

Controlled shall indemnify, defend, and hold harmless Distributing and each member of the Distributing Group, and their respective officers, directors, employees, agents, and representatives, from and against any and all Taxes, losses, liabilities, damages, claims, costs, and expenses (including reasonable and documented attorneys' fees and expenses, and reasonable and documented fees and expenses of accountants and other advisors) arising from or relating to:

(i) Any failure of the Spin-Off to qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code, to the extent such failure is attributable to, caused by, or results from a breach by Controlled (or any member of the Controlled Group) of any representation, warranty, or covenant of Controlled set forth in this Article [__] or in the Representation Letter, including any action or failure to act by Controlled that constitutes a Prohibited Action;

(ii) Any Taxes imposed on, assessed against, or required to be paid by any member of the Controlled Group for Post-Distribution Tax Periods, as determined on a separate-company basis or as otherwise allocated in accordance with the Tax Sharing Agreement; and

(iii) Any Prohibited Action taken by Controlled (or any member of the Controlled Group) during the Restricted Period, including any Merger/Acquisition Transaction, stock issuance, asset disposition, cessation of business, liquidation, redemption, or amendment of organizational documents undertaken by Controlled in violation of Section [__].4, and any and all Taxes, losses, liabilities, damages, costs, and expenses resulting therefrom, including any gain recognition tax imposed on Distributing under Section 355(e) or any other provision of the Code as a consequence of such Prohibited Action.

[Note: This subsection is subject to significant commercial negotiation and represents one of the most sensitive provisions of this Article. The estimated tax exposure and the allocation framework described below have been presented by Calderwood & Harkness for discussion between Harrowgate Capital Advisors LLC, Veldran management and its independent directors, and Thornapple McCord LLP as separate counsel to Veldran. This subsection should not be considered final or agreed upon by any party.]

In the event that the Distribution is determined (whether by the IRS, any other Taxing Authority, or a court of competent jurisdiction) to be part of a "plan (or series of related transactions)" within the meaning of Section 355(e) of the Code that includes the September 20, 2019 acquisition by Harrowgate Private Equity Fund IV, L.P. of approximately 62.4% of the outstanding common stock of Distributing, the resulting gain recognition tax shall be allocated between Distributing and Controlled as set forth below.

Estimated Tax at Risk. The estimated tax exposure under Section 355(e) of the Code is in the range of One Hundred Twenty-Five Million Three Hundred Thousand Dollars ($125,300,000) to One Hundred Eighty-Nine Million Five Hundred Thousand Dollars ($189,500,000), computed as follows:

The estimated fair market value range set forth above is based on preliminary valuation analyses provided by Brackenridge & Co. (financial advisor to Distributing) and is subject to change based on market conditions and final valuation as of the Distribution Date.

Allocation Framework. Calderwood & Harkness presents two alternative allocation frameworks for consideration by the parties:

Alternative A — Distributing Bears the Risk. Under this alternative, Distributing shall bear one hundred percent (100%) of any Section 355(e) gain recognition tax resulting from a determination that the Distribution is part of a plan or series of related transactions that includes the HPE Acquisition. The rationale for this allocation is that the acquisition that gives rise to the Section 355(e) risk was the acquisition of the Distributing corporation's stock by Harrowgate Private Equity Fund IV, L.P. — a transaction that was initiated, negotiated, and consummated by or on behalf of the Distributing corporation's controlling shareholder — and that Controlled should not bear the economic burden of a tax liability arising from an acquisition history in which Controlled played no role. Under this alternative, if a post-Distribution action by Controlled independently triggers Section 355(e) (e.g., a change-of-control transaction involving Controlled during the Restricted Period), the gain recognition tax attributable to such post-Distribution action would be borne by Controlled under Section [__].5(b)(iii).

Alternative B — Shared Responsibility / Relative Fault. Under this alternative, the Section 355(e) gain recognition tax would be allocated between Distributing and Controlled based on the relative contribution of each party's actions (or the actions of their respective controlling shareholders) to the triggering of Section 355(e):

(A) If Section 355(e) is triggered solely by a post-Distribution action by Controlled (e.g., a Merger/Acquisition Transaction involving Controlled during the three-year window following the Distribution), Controlled shall bear one hundred percent (100%) of the resulting gain recognition tax.

(B) If Section 355(e) is triggered solely by the pre-Distribution HPE Acquisition history (i.e., a determination that the HPE Acquisition and the Distribution are part of a single plan or series of related transactions, without any contributing post-Distribution action by Controlled), Distributing shall bear one hundred percent (100%) of the resulting gain recognition tax.

(C) If Section 355(e) is triggered by a combination of factors attributable to both the pre-Distribution HPE Acquisition history and a post-Distribution action by Controlled (or the interplay between the two), the resulting gain recognition tax shall be allocated between Distributing and Controlled proportionally based on the relative significance of each party's contributing actions, as reasonably determined by independent tax counsel retained by both parties for such purpose.

Calderwood & Harkness Preliminary Recommendation. Calderwood & Harkness's preliminary recommendation is that Alternative B provides the stronger incentive alignment between both parties to avoid triggering Section 355(e) and is more consistent with market practice in private equity-sponsored spin-off transactions. Alternative B places appropriate economic consequences on each party for its own actions (or the actions of its controlling shareholders) while avoiding the potentially inequitable result under Alternative A of imposing one hundred percent of the risk on Distributing even in circumstances where a post-Distribution action by Controlled is a contributing cause. We note, however, that Alternative A has been adopted in certain precedent transactions where the distributing corporation's private equity sponsor has agreed to bear the entirety of the Section 355(e) risk as a condition of the spin-off.

[Note: Harrowgate's position (as controlling shareholder of Distributing through HPE Fund IV) on this allocation is pending. The allocation of Section 355(e) liability is expected to be a significant point of negotiation between Harrowgate and Veldran management / independent directors, with input from Thornapple McCord LLP as separate counsel to Veldran. See Appendix B, Item 3.]

(d) Allocation of Section 355(d) Liability

In the event that the Distribution is treated as a "disqualified distribution" under Section 355(d) of the Code, by reason of Harrowgate Private Equity Fund IV, L.P.'s acquisition of approximately 62.4% of the outstanding common stock of Distributing (46,488,000 shares) within the five-year period preceding the Distribution Date (the HPE Acquisition having occurred on September 20, 2019), any resulting gain recognition tax imposed on Distributing (as if the stock of Controlled distributed in the Distribution were sold at its fair market value on the Distribution Date) shall be borne entirely by Distributing, and Distributing shall indemnify and hold harmless Controlled and the Controlled Group from and against any and all liability arising therefrom.

Note: The Section 355(d) analysis overlaps in significant respects with the Section 355(e) analysis, and the interplay between the two provisions must be carefully addressed to avoid double counting of any gain recognition tax. In general, Section 355(d) applies to distributions of stock of a "disqualified corporation" to a "disqualified shareholder" and can trigger gain recognition at the Distributing level regardless of whether the distribution is part of a plan. Section 355(e), by contrast, requires a "plan or series of related transactions" connecting the distribution to a change-of-control acquisition. To the extent both provisions are applicable, the parties agree that the aggregate gain recognition tax shall not exceed the amount that would be payable under the provision producing the greater Tax liability, and the allocation framework set forth in this Section [__].5 shall be applied to avoid duplicative indemnification obligations.

(e) Indemnification Procedures

(i) Notice of Claim. Any party seeking indemnification under this Section [__].5 (the "Indemnified Party") shall provide written notice of the claim to the party from whom indemnification is sought (the "Indemnifying Party") within sixty (60) days of the date on which the Indemnified Party first becomes aware (or reasonably should have become aware) of the facts, circumstances, or events giving rise to the claim for indemnification. Such notice shall include a reasonably detailed description of the claim, the basis for indemnification, the estimated amount of the claim (to the extent reasonably determinable), and copies of any relevant correspondence from a Taxing Authority. The failure to provide timely notice shall not relieve the Indemnifying Party of its indemnification obligations, except to the extent that the Indemnifying Party is materially prejudiced by such failure.

(ii) Right to Dispute. The Indemnifying Party shall have thirty (30) days following receipt of the notice of claim to dispute the claim in writing, setting forth in reasonable detail the basis for its dispute. If the Indemnifying Party does not dispute the claim within such thirty (30)-day period, the claim shall be deemed accepted.

(iii) Resolution of Disputes. Disputes regarding indemnification claims under this Section [__].5 shall be resolved through the dispute resolution mechanism set forth in Article [__] of the master Separation Agreement (to be drafted by Whitfield & Gage LLP). Pending resolution of any dispute, the Indemnified Party shall be entitled to take all reasonable actions to protect its interests, including contesting any assessment or proposed adjustment by a Taxing Authority.

(iv) Tax Treatment of Indemnification Payments. Indemnification payments made pursuant to this Section [__].5 shall be treated by the parties as adjustments to the consideration exchanged in connection with the Distribution for all Tax purposes, to the extent permitted by applicable law. Each party agrees to file all Tax returns and take all other actions consistent with such treatment unless otherwise required by a final determination (within the meaning of Section 1313 of the Code).

Section [____].6 — Cooperation and Information Sharing

(a) General Cooperation Obligation

Each of Distributing and Controlled shall (and shall cause each member of its respective Group to) cooperate fully and in good faith with the other party in connection with (i) the preparation and filing of any Tax return (including any amended return, claim for refund, or information return) relating to the Distributing Group, the Controlled Group, or any member thereof for any Pre-Distribution Tax Period or any Straddle Period (as defined in the Tax Sharing Agreement), (ii) any Tax Proceeding relating to the Spin-Off, the Contribution, the Distribution, or any Pre-Distribution Tax Period, and (iii) any determination of a Tax liability or Tax Benefit relating to the Spin-Off, the Contribution, the Distribution, or any Pre-Distribution Tax Period. Such cooperation shall include, without limitation, providing information, executing documents, making employees and representatives available as witnesses or for interviews, and taking such other actions as may be reasonably requested by the other party.

(b) Access to Information

Each party shall (and shall cause each member of its respective Group to) make available to the other party, upon reasonable request and at the requesting party's expense (limited to reasonable out-of-pocket costs of copying and delivery), all information, records, documents, data, and work papers relating to Taxes that are in such party's possession, custody, or control, to the extent reasonably necessary for the preparation or filing of any Tax return, the conduct of any Tax Proceeding, or the determination of any Tax liability or Tax Benefit. Without limiting the foregoing, such information shall include:

(i) Federal and state income tax returns of Veldran Industries Holdings, Inc. (Employer Identification Number: 86-1920347) and Kestrel Precision Controls, Inc. (Employer Identification Number: 58-2847193) for all relevant tax years, including all schedules, attachments, elections, and supporting statements;

(ii) Working papers, schedules, analyses, and supporting documentation prepared by Pemberton Rathbone LLP (Distributing's independent auditors and tax-return preparers), to the extent such materials are in the possession or control of the requesting party's Group and subject to any confidentiality obligations owed to Pemberton Rathbone LLP;

(iii) Records relating to the Kestrel Acquisition (June 7, 2019), including the stock purchase agreement between Distributing and Rennick Industrial Partners Fund II LP, all closing documents, tax basis step-up computations (including any Section 338 election analyses), historical Kestrel tax returns for all periods prior to the Kestrel Acquisition, and post-acquisition integration records relevant to Tax matters;

(iv) Records relating to the HPE Acquisition (September 20, 2019), including the stock purchase agreement, closing documents, and any materials relevant to the Section 355(e) and Section 355(d) analyses; and

(v) Any other information reasonably requested by the other party in connection with its Tax compliance, reporting, or planning obligations.

Each party shall (and shall cause each member of its respective Group to) retain all Tax-related records, documents, and information (including Tax returns, supporting schedules, work papers, and correspondence with Taxing Authorities) for a period of at least seven (7) years following the Distribution Date, or if longer, until the expiration of the applicable statute of limitations (including any extensions, waivers, or tolling periods) for the assessment or collection of any Tax to which such records may be relevant. Neither party shall destroy, discard, or dispose of any Tax-related records without providing at least ninety (90) days' prior written notice to the other party and a reasonable opportunity for the other party to copy, take possession of, or otherwise preserve such records at its own expense.

(d) Confidentiality. All Tax information exchanged between the parties pursuant to this Section [__].6 shall be subject to the confidentiality provisions set forth in Article [__] of the master Separation Agreement. Each party acknowledges that certain information exchanged under this Section may be subject to attorney-client privilege, work product protection, tax practitioner privilege under Section 7525 of the Code, or other applicable privileges, and the exchange of such information between the parties in connection with the obligations set forth in this Article shall not be deemed a waiver of any such privilege. Each party agrees to use reasonable efforts to preserve the confidentiality of, and any applicable privilege attaching to, all Tax information received from the other party and to limit the disclosure of such information to those individuals who have a need to know in connection with the purposes described in this Article.

(e) Third-Party Advisors

Each party shall coordinate, as applicable and as reasonably necessary, with the following advisors in connection with the Tax matters addressed in this Article:

(i) Calderwood & Harkness LLP — Tax counsel to Distributing and Controlled for purposes of the Spin-Off (Engagement Number: 1003-00005; responsible partner: Leonard Cross; associates: Garrett Simmons, Leila Nazari);

(ii) Pemberton Rathbone LLP — Independent auditors and tax-return preparers for Distributing (contacts: Lisa Engstrom, Harold Weiss);

(iii) Whitfield & Gage LLP — Corporate and mergers & acquisitions counsel to Harrowgate Capital Advisors LLC (contact: Priya Chandrasekar);

(iv) Thornapple McCord LLP — Corporate counsel to Distributing (contact: David Ochoa); and

(v) Dunmore Havens & Associates LLC — Tax advisor to Prescott Capital Management LP (contact: Irene Salcedo). The obligation to cooperate with Dunmore Havens & Associates LLC shall be limited to the provision of information reasonably necessary for Prescott Capital Management LP to evaluate the fund-level tax consequences of the Distribution to Prescott and its limited partners, and shall not extend to the provision of competitively sensitive or proprietary information of either Distributing or Controlled.

Section [____].7 — Control of Tax Proceedings

(a) Pre-Distribution Tax Periods

Distributing shall have the sole right to control, manage, settle, compromise, and resolve any Tax Proceeding with respect to any consolidated, combined, or unitary Tax return of the Distributing Group for Pre-Distribution Tax Periods, including the right to select counsel, make all decisions regarding the conduct of such proceeding, and determine the litigation strategy. Distributing shall keep Controlled reasonably informed of the progress and status of any such Tax Proceeding to the extent it relates to the Precision Flow Solutions Division, the Contributed Business, Kestrel Precision Controls, Inc., or any other matter that could result in a Tax liability allocated to Controlled under the Tax Sharing Agreement. Controlled shall have the right to participate (at Controlled's own expense) in any such Tax Proceeding to the extent it relates to the Contributed Business or could reasonably be expected to result in a Tax liability or obligation allocated to Controlled under this Article or the Tax Sharing Agreement, including the right to attend meetings with the relevant Taxing Authority, review and comment on submissions and correspondence, and consult with Distributing regarding settlement discussions.

(b) Post-Distribution Tax Periods

Controlled shall have the sole right to control, manage, settle, compromise, and resolve any Tax Proceeding with respect to Tax returns of the Controlled Group (or any member thereof) for Post-Distribution Tax Periods, including the right to select counsel, make all decisions regarding the conduct of such proceeding, and determine the litigation strategy. Controlled shall keep Distributing reasonably informed of any such Tax Proceeding to the extent it could reasonably be expected to affect the Tax liabilities or Tax Benefits of the Distributing Group or the tax-free qualification of the Spin-Off.

In the event of any Tax Proceeding in which the IRS or any other Taxing Authority challenges the qualification of the Spin-Off under Sections 355 and 368(a)(1)(D) of the Code, or asserts that the Distribution is subject to gain recognition under Section 355(d) or Section 355(e) of the Code (a "Spin-Off Qualification Proceeding"), the following procedures shall apply:

(i) Distributing's Control Right. Distributing shall have the primary right to control, manage, and direct the defense of any Spin-Off Qualification Proceeding, as the Distributing corporation under Section 355 of the Code. Distributing shall select lead counsel for any such proceeding and shall make all strategic decisions regarding the conduct of the defense, subject to the participation and consent rights of Controlled set forth below.

(ii) Controlled's Participation Right. Controlled shall have the right to participate in any Spin-Off Qualification Proceeding at Controlled's own expense, including the right to retain separate counsel, attend all meetings and hearings, review and comment on all submissions and correspondence with the Taxing Authority, and consult with Distributing regarding all material aspects of the proceeding.

(iii) Settlement. No settlement, compromise, or other disposition of a Spin-Off Qualification Proceeding shall be entered into or agreed to by Distributing without the prior written consent of Controlled, to the extent that such settlement could result in a Tax liability, obligation, or cost allocated to Controlled under this Article or the Tax Sharing Agreement. Such consent shall not be unreasonably withheld, conditioned, or delayed. Similarly, no settlement, compromise, or other disposition of a Spin-Off Qualification Proceeding shall be entered into or agreed to by Controlled without the prior written consent of Distributing. For the avoidance of doubt, neither party may settle a Spin-Off Qualification Proceeding on terms that impose a disproportionate economic burden on the other party without such party's written consent.

(iv) Engagement of Counsel. In connection with any Spin-Off Qualification Proceeding, both parties shall engage, or cause to be engaged, nationally recognized tax counsel with substantial experience in Section 355 matters to defend any such proceeding. The costs and expenses of shared counsel engaged by both parties shall be allocated equally between Distributing and Controlled unless the parties otherwise agree in writing.

(d) Notification. Each party shall promptly, and in any event within fifteen (15) business days, notify the other party in writing upon receipt of any written notice, correspondence, or communication from any Taxing Authority (including any notice of proposed adjustment, statutory notice of deficiency, information document request, or subpoena) relating to (i) the Spin-Off (including the Contribution and the Distribution), (ii) any Pre-Distribution Tax Period, or (iii) any matter that could reasonably be expected to affect the tax-free qualification of the Distribution under Sectio

DRAFT — TAX MATTERS PROVISIONS FOR SEPARATION AGREEMENT
Prepared by Calderwood & Harkness LLP for insertion into the Separation Agreement being drafted by Whitfield & Gage LLP
July 28, 2022
Engagement Number: 1003-00005 Matter Code: HRW-SPIN-001
Prepared by: Garrett Simmons and Leila Nazari, Calderwood & Harkness LLP
Reviewed by: Leonard Cross, Responsible Partner, Tax Department, Calderwood & Harkness LLP
Distribution:
PRIVILEGED AND CONFIDENTIAL — SUBJECT TO REVIEW BY WHITFIELD & GAGE LLP, THORNAPPLE McCORD LLP, AND CLIENT — NOT FOR EXECUTION
COVER MEMORANDUM
July 28, 2022
MEMORANDUM
FROM: Leonard Cross, Calderwood & Harkness LLP
TO: Priya Chandrasekar, Whitfield & Gage LLP; David Ochoa, Thornapple McCord LLP
RE: Draft Tax Matters Provisions — Separation Agreement between Veldran Industries Holdings, Inc. ("Distributing" or "Veldran") and Meridian Flow Technologies, Inc. ("Controlled" or "Meridian" or "SpinCo")
ENGAGEMENT: 1003-00005 / HRW-SPIN-001
Priya and David:
Enclosed please find draft provisions prepared by Calderwood & Harkness LLP for incorporation as Article [__] (Tax Matters) of the Separation Agreement between Veldran Industries Holdings, Inc. ("Distributing" or "Veldran") and Meridian Flow Technologies, Inc. ("Controlled" or "Meridian" or "SpinCo"). These provisions are intended to be inserted into the master Separation Agreement currently being drafted by Whitfield & Gage LLP and should be read in conjunction with the overall structure and defined terms of that agreement.
The enclosed provisions have been designed to accomplish two principal objectives. First, these provisions are structured to preserve the intended tax-free qualification of the Distribution under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code"). Given the particular factual circumstances of this transaction — most notably, the September 20, 2019 acquisition of approximately 62.4% of Veldran's common stock by Harrowgate Private Equity Fund IV, L.P. and the June 7, 2019 acquisition of Kestrel Precision Controls, Inc. — the provisions include detailed representations, covenants, and restrictions that are tailored to address the heightened scrutiny that this spin-off will receive under Sections 355(d), 355(e), and the "plan" regulations under Treasury Regulation Section 1.355-7. Second, these provisions establish a comprehensive framework for allocating tax liabilities and responsibilities between Veldran and Meridian following the separation, including indemnification obligations in the event the spin-off fails to achieve tax-free qualification.
These provisions are in draft form and assume a pro rata distribution by Veldran of 100% of the common stock of Meridian to Veldran shareholders at a 1:1 distribution ratio — that is, one share of Meridian common stock for each of the 74,500,000 shares of Veldran common stock outstanding on the Record Date. To the extent that the distribution mechanics, distribution ratio, or any other structural assumption changes, these provisions will need to be revised accordingly.
I want to flag specifically that certain provisions — particularly the Section 355(e) indemnification allocation set forth in Section [__].5(c) — are subject to significant commercial negotiation between Harrowgate and Veldran management and will require input from David and the Thornapple McCord team as separate counsel to Veldran. We have presented two alternative allocation frameworks (Alternative A and Alternative B) in that subsection, together with our preliminary recommendation. The estimated tax at risk under a Section 355(e) gain recognition event is substantial — in the range of $125.3 million to $189.5 million — and the allocation of that potential liability between Distributing and Controlled is among the most commercially sensitive aspects of the overall separation structure.
We request that Whitfield & Gage integrate these provisions into the master Separation Agreement structure and conform defined terms as appropriate. Certain terms defined in these provisions (e.g., "Distribution," "Contribution," "Controlled," "Distributing") may need to be reconciled with the corresponding definitions in the master agreement. We have endeavored to use terminology consistent with the preliminary term sheet circulated by Whitfield & Gage on July 14, 2022, but we anticipate that further conforming work will be required.
These provisions should also be read in conjunction with the separate Tax Sharing Agreement being prepared in parallel by Calderwood & Harkness. The outline and key terms of the Tax Sharing Agreement are dated August 4, 2022; the full agreement has not yet been drafted. Several provisions in this Article cross-reference the Tax Sharing Agreement, and the two documents will need to be finalized in tandem to ensure consistency. We expect to circulate a first draft of the Tax Sharing Agreement within approximately three weeks of receipt of comments on the enclosed provisions.
Finally, we note that several open issues and bracketed items remain in the enclosed draft and are compiled in Appendix B for ease of reference. We would welcome the opportunity to discuss these items at the next working group call and to receive any initial comments from your respective teams at your earliest convenience.
Please do not hesitate to contact me, Garrett Simmons, or Leila Nazari with any questions.
Best regards,
Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1301 Avenue of the Americas, 40th Floor New York, NY 10019 Direct: (212) 555-7400 lcross@calderwoodharkness.com
ARTICLE [____]
TAX MATTERS
Section [____].1 — Definitions
For purposes of this Article [__], the following terms shall have the meanings set forth below. Capitalized terms used but not otherwise defined in this Article shall have the meanings ascribed to them in the master Separation Agreement.
(a) "Active Trade or Business" means any trade or business conducted by Distributing or Controlled (or any direct or indirect subsidiary of either) within the meaning of Section 355(b)(2) of the Code and the Treasury Regulations promulgated thereunder, including (i) with respect to Distributing, the Engineered Coatings Division, and (ii) with respect to Controlled, the Precision Flow Solutions Division.
(b) "Closing Date" means the date on which the Distribution is consummated.
(c) "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute. References to specific provisions of the Code shall include any corresponding provision of any successor statute and the Treasury Regulations promulgated thereunder.
(d) "Contribution" means the transfer by Distributing to Controlled of all assets and liabilities associated with the Precision Flow Solutions Division (the "Contributed Business"), including all assets and liabilities of Kestrel Precision Controls, Inc. and its subsidiaries, in exchange for all outstanding shares of common stock of Controlled and the assumption by Controlled of certain allocated liabilities, all as more fully described in Article [__] of this Agreement.
(e) "Controlled" or "SpinCo" means Meridian Flow Technologies, Inc., a Delaware corporation, and, where the context requires, all direct and indirect subsidiaries of Meridian Flow Technologies, Inc. following the Distribution.
(f) "Controlled Group" means Controlled and each of its direct and indirect subsidiaries following the Distribution.
(g) "Distributing" means Veldran Industries Holdings, Inc., a Delaware corporation (Employer Identification Number: 86-1920347), and, where the context requires, all direct and indirect subsidiaries of Veldran Industries Holdings, Inc. other than members of the Controlled Group.
(h) "Distributing Group" means Distributing and each of its direct and indirect subsidiaries other than the members of the Controlled Group.
(i) "Distribution" means the pro rata distribution by Distributing of 100% of the outstanding shares of common stock of Controlled to the holders of record of Distributing common stock on the Record Date, at a ratio of one (1) share of Controlled common stock for each share of Distributing common stock held on the Record Date. As of the date of this Agreement, Distributing has 74,500,000 shares of common stock outstanding.
(j) "Distribution Date" means the date on which the Distribution is effected, which is originally targeted for the fourth quarter of 2022. The Distribution Date and the Closing Date are intended to refer to the same date.
(k) "Engineered Coatings Division" means the business segment of Distributing consisting of engineered coatings products and related operations, including surface treatment, thermal barrier coating, and advanced material application operations, which will be retained by Distributing following the Distribution. For reference purposes, the Engineered Coatings Division generated revenue of approximately $1,520,000,000 and EBITDA of approximately $285,000,000 for the fiscal year ended December 31, 2021.
(l) "Group" means either the Distributing Group or the Controlled Group, as the context requires, and "Groups" means both the Distributing Group and the Controlled Group.
(m) "IRS" means the Internal Revenue Service, a bureau of the United States Department of the Treasury, or any successor thereto.
(n) "Kestrel Acquisition" means the acquisition by Distributing of all of the outstanding capital stock of Kestrel Precision Controls, Inc. (a Georgia corporation, Employer Identification Number: 58-2847193) from Rennick Industrial Partners Fund II LP, completed on June 7, 2019, for aggregate consideration of $295,000,000 in cash.
(o) "Merger/Acquisition Transaction" means any merger, consolidation, statutory share exchange, acquisition of assets or stock, issuance of stock (including any primary issuance or secondary sale), business combination, recapitalization, or similar transaction, whether effected directly or indirectly, involving either Distributing or Controlled (or any member of either Group), or any agreement, understanding, arrangement, or substantial negotiations (whether or not binding) with respect to any of the foregoing.
(p) "Opinion" means the tax opinion to be delivered by Calderwood & Harkness LLP to Distributing and Controlled, at a "should" level of comfort (i.e., a confidence level of at least 70%), to the effect that the Contribution and the Distribution, taken together, will qualify as a reorganization within the meaning of Section 368(a)(1)(D) of the Code and that the Distribution will qualify as a tax-free distribution under Section 355 of the Code to Distributing, Controlled, and the shareholders of Distributing, subject to the assumptions, qualifications, and limitations set forth in such opinion.
(q) "Precision Flow Solutions Division" means the business segment of Distributing consisting of precision fluid-control systems and related products and services for industrial, petrochemical, and water-infrastructure end markets, including all operations of Kestrel Precision Controls, Inc. and its subsidiaries, which will be contributed to Controlled in connection with the Contribution. For reference purposes, the Precision Flow Solutions Division generated revenue of approximately $820,000,000 and EBITDA of approximately $133,000,000 for the fiscal year ended December 31, 2021.
(r) "Pre-Distribution Tax Period" means any taxable period (or portion thereof) ending on or before the Distribution Date.
(s) "Post-Distribution Tax Period" means any taxable period (or portion thereof) beginning after the Distribution Date.
(t) "Prohibited Action" has the meaning set forth in Section [__].4 of this Article.
(u) "Record Date" means the record date established by the Board of Directors of Distributing for purposes of determining the holders of Distributing common stock entitled to receive shares of Controlled common stock in the Distribution.
(v) "Representation Letter" means, collectively, (i) the written representations made by officers of Distributing and (ii) the written representations made by officers or authorized representatives of Harrowgate Capital Advisors LLC, in each case, upon which the Opinion is based and which are delivered to Calderwood & Harkness LLP in connection with the issuance of the Opinion.
(w) "Restricted Period" means the period commencing on the Distribution Date and ending on the second (2nd) anniversary of the Distribution Date.
(x) "Separation" or "Spin-Off" means, collectively, the Contribution and the Distribution, taken together as a single integrated transaction.
(y) "Tax" or "Taxes" means any and all federal, state, local, and foreign taxes of any kind whatsoever, whether imposed directly or through withholding, on or measured by income, gross receipts, profits, capital, capital gains, franchise, value added, ad valorem, employment, payroll, transfer, sales, use, excise, customs, stamp, registration, or other taxes, duties, assessments, fees, levies, imposts, or charges of any nature, including any interest, penalty, or addition thereto, imposed by any Taxing Authority. For purposes of the indemnification provisions of this Article, the term "Tax" shall include corporate income tax at the applicable rate (currently twenty-one percent (21%) for United States federal corporate income tax purposes).
(z) "Tax Benefit" means any refund, credit, offset, reduction, or other decrease in Tax liability (including any reduction in estimated tax payments) realized or received by either party or any member of its Group.
(aa) "Tax Proceeding" means any audit, examination, investigation, review, contest, claim, assessment, litigation, appeal, or other proceeding with or against any Taxing Authority or before any court or administrative tribunal relating to Taxes.
(bb) "Tax Sharing Agreement" means the separate Tax Sharing Agreement between Distributing and Controlled, to be executed concurrently with this Agreement on or prior to the Distribution Date, which shall set forth, among other things, the allocation of consolidated, combined, and unitary Tax liabilities and Tax Benefits between the Distributing Group and the Controlled Group for Pre-Distribution Tax Periods and the transition period.
(cc) "Taxing Authority" means any governmental authority (whether federal, state, local, or foreign) responsible for the imposition, assessment, administration, collection, or enforcement of any Tax, including the IRS, any state department of revenue, and any comparable foreign governmental authority.
(dd) "Treasury Regulations" means the regulations promulgated by the United States Department of the Treasury under the Code, including any temporary and proposed regulations and any successor regulations.
Section [____].2 — Tax Representations and Warranties
(a) Representations of Distributing (Veldran)
Distributing hereby represents and warrants to Controlled that, as of the Distribution Date, each of the following statements is true and correct in all material respects:
(i) Active Trade or Business — Engineered Coatings Division. Distributing has been engaged, and is engaged as of the Distribution Date, in the active conduct of the Engineered Coatings Division trade or business within the meaning of Section 355(b)(2) of the Code for the entire five (5)-year period ending on the Distribution Date. The activities conducted by Distributing with respect to the Engineered Coatings Division satisfy each of the requirements of Section 355(b)(2)(A) through (D) of the Code and the Treasury Regulations promulgated thereunder.
(ii) Separate Active Trade or Business. The Engineered Coatings Division constitutes a separate Active Trade or Business that has been conducted directly by Distributing (or by one or more qualified subsidiaries of Distributing within the meaning of the Treasury Regulations under Section 355(b)) throughout the five (5)-year period ending on the Distribution Date. The Engineered Coatings Division is not and has not been operated as a division or unit of the Precision Flow Solutions Division, and the two business segments have been managed, operated, and reported separately throughout such period.
(iii) Corporate Business Purpose. The Contribution and the Distribution are being undertaken for one or more substantial corporate business purposes within the meaning of Treasury Regulation Section 1.355-2(b), which are genuine, non-tax business purposes at the Distributing corporate level. Without limiting the generality of the foregoing, the corporate business purposes for the Spin-Off include (A) enabling Distributing and Controlled to pursue independent capital allocation strategies appropriate to their respective business profiles, end markets, and growth trajectories, and (B) enhancing management focus and operational efficiency by allowing each entity to concentrate its management resources and strategic attention on a single, distinct business segment. The corporate business purposes for the Spin-Off are not driven primarily by the fund-level objectives of Harrowgate Private Equity Fund IV, L.P. (including, without limitation, portfolio monetization objectives, fund-life considerations, or distributions to limited partners), and such fund-level objectives do not constitute the primary motivation for the Spin-Off.
(iv) Device Test. The Distribution is not being used principally as a device for the distribution of the earnings and profits of Distributing or Controlled within the meaning of Section 355(a)(1)(B) of the Code and Treasury Regulation Section 1.355-2(d). The Distribution is motivated by the corporate business purposes described in clause (iii) above, and neither Distributing nor Controlled has a plan or intention to sell, exchange, transfer, or dispose of shares of Controlled common stock or Distributing common stock in a manner that would constitute evidence that the Distribution is being used principally as such a device, except as otherwise contemplated by this Agreement.
(v) No Plan or Intention — Section 355(e). As of the date hereof and as of the Distribution Date, Distributing has no plan or intention to engage in any Merger/Acquisition Transaction following the Distribution that, together with the Distribution, would result in one or more persons acquiring, directly or indirectly, a fifty-percent (50%) or greater interest (by vote or value) in Distributing or Controlled within the meaning of Section 355(e) of the Code and Treasury Regulation Section 1.355-7. For the avoidance of doubt, Distributing has not engaged in, and as of the Distribution Date is not engaged in, any substantial negotiations with respect to any such transaction.
(vi) Representation Letter. The representations set forth in the Representation Letter delivered by officers of Distributing to Calderwood & Harkness LLP in connection with the issuance of the Opinion are true, correct, and complete in all material respects as of the date on which the Representation Letter was delivered and will be true, correct, and complete in all material respects as of the Distribution Date. Distributing is not aware of any fact, circumstance, or event that would cause any such representation to be untrue, incorrect, or incomplete in any material respect.
(vii) HPE Fund IV Acquisition — No Plan. The acquisition of approximately 62.4% of the outstanding common stock of Distributing (46,488,000 shares at $40.00 per share for aggregate consideration of $1,859,520,000) by Harrowgate Private Equity Fund IV, L.P. on September 20, 2019 (the "HPE Acquisition") was not undertaken as part of a plan or series of related transactions that includes the Spin-Off within the meaning of Section 355(e) of the Code and Treasury Regulation Section 1.355-7. At the time of the HPE Acquisition, neither Distributing nor Harrowgate Private Equity Fund IV, L.P. had a plan or intention to effect a separation or distribution of the Precision Flow Solutions Division, and the decision to pursue the Spin-Off was made subsequent to and independent of the HPE Acquisition.
(viii) Tax Basis in Contributed Assets. Distributing's adjusted tax basis in the assets of the Precision Flow Solutions Division (including the assets of Kestrel Precision Controls, Inc. and its subsidiaries) is approximately Eight Hundred Million Dollars ($800,000,000) as of the date hereof, as determined in accordance with the Code and applicable Treasury Regulations. Distributing will provide to Controlled a schedule of the adjusted tax basis of the contributed assets as of the Distribution Date promptly following the Distribution.
(b) Representations of Controlled (Meridian)
Controlled hereby represents and warrants to Distributing that, as of the Distribution Date, each of the following statements is true and correct in all material respects:
(i) Active Trade or Business — Precision Flow Solutions Division. The Precision Flow Solutions Division has been engaged in the active conduct of a trade or business within the meaning of Section 355(b)(2) of the Code for the entire five (5)-year period ending on the Distribution Date. The activities conducted with respect to the Precision Flow Solutions Division satisfy each of the requirements of Section 355(b)(2)(A) through (D) of the Code and the Treasury Regulations promulgated thereunder, including with respect to the operations of Kestrel Precision Controls, Inc. as described in clause (ii) below.
(ii) Kestrel Precision Controls, Inc. — Section 355(b)(2)(D) Compliance. With respect to the Kestrel Acquisition (the acquisition by Distributing of all outstanding capital stock of Kestrel Precision Controls, Inc. (a Georgia corporation, Employer Identification Number: 58-2847193) from Rennick Industrial Partners Fund II LP for $295,000,000 in cash, completed on June 7, 2019): (A) Kestrel Precision Controls, Inc. was incorporated and commenced operations in the State of Georgia on February 12, 2003; (B) Kestrel continuously operated the precision flow controls business from the date of its incorporation through the date of the Kestrel Acquisition and thereafter through the Distribution Date; (C) the Kestrel Acquisition satisfied the requirements of Section 355(b)(2)(C) and (D) of the Code (i.e., control of Kestrel was not acquired in a transaction in which gain or loss was recognized, in whole or in part, and no gain or loss was recognized in any transaction as part of a plan or series of related transactions by which control of Kestrel was acquired); and (D) the Kestrel business has been continuously operated as an integral part of the Precision Flow Solutions Division from the date of the Kestrel Acquisition through the Distribution Date.
(iii) Kestrel Revenue Contribution. At the time of the Kestrel Acquisition, the Kestrel business comprised approximately thirty-five percent (35%) of the total revenue of the Precision Flow Solutions Division, and the Kestrel business has been continuously operated as part of the Precision Flow Solutions Division since June 7, 2019. As of the most recent fiscal year end, the Kestrel business continues to represent a material component of the revenue and operations of the Precision Flow Solutions Division.
(iv) Continuation of Business. Controlled intends to, and following the Distribution shall, continue actively conducting the Precision Flow Solutions Division business (including the Kestrel operations) in substantially the same manner as such business has been conducted prior to the Distribution. Controlled does not have any plan or intention to discontinue, sell, dispose of, or otherwise cease the active conduct of the Precision Flow Solutions Division or any material portion thereof.
(v) No Plan or Intention — Merger/Acquisition. Controlled has no plan or intention, as of the Distribution Date, to engage in any Merger/Acquisition Transaction during the Restricted Period that could reasonably be expected to jeopardize the tax-free qualification of the Spin-Off under Section 355 of the Code or result in the application of Section 355(e) of the Code to the Distribution. Controlled has not engaged in, and as of the Distribution Date is not engaged in, any substantial negotiations with respect to any such transaction.
(vi) Representation Letter. The representations set forth in the Representation Letter delivered to Calderwood & Harkness LLP that are attributable to Controlled or the Precision Flow Solutions Division are true, correct, and complete in all material respects as of the date on which the Representation Letter was delivered and will be true, correct, and complete in all material respects as of the Distribution Date. Controlled is not aware of any fact, circumstance, or event that would cause any such representation to be untrue, incorrect, or incomplete in any material respect.
Section [____].3 — Covenants Regarding Tax-Free Qualification
(a) General Covenant
Each of Distributing and Controlled hereby covenants and agrees that it shall not take or fail to take any action, and shall not permit any member of its Group to take or fail to take any action, that would, or would reasonably be expected to, cause the Spin-Off to fail to qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code. Without limiting the foregoing, each party shall use commercially reasonable efforts to preserve the tax-free status of the Spin-Off, including cooperating with the other party in connection with any actions necessary to maintain such qualification and refraining from any action that could reasonably be expected to create a material risk that the Spin-Off would not so qualify. The covenants set forth in this Section [__].3 and in Section [__].4 are intended to protect and preserve the tax-free qualification of the Spin-Off and shall be interpreted and applied in a manner consistent with that objective.
(b) Consistency with Representations
Each party shall ensure that the facts, representations, and covenants set forth in the Representation Letter delivered to Calderwood & Harkness LLP and in this Article [__] remain true and correct in all material respects through and including the end of the Restricted Period. In the event that either party becomes aware of any fact, circumstance, event, or change in condition that could reasonably be expected to cause any representation made in the Representation Letter or in this Article to become untrue, incorrect, or incomplete in any material respect, such party shall provide prompt written notice to the other party (and in any event within ten (10) business days of becoming aware of such fact, circumstance, event, or change). Such notice shall include a reasonably detailed description of the relevant fact, circumstance, event, or change and the representation or covenant that may be affected thereby.
Section [____].4 — Restrictions on Post-Spin Actions (Prohibited Actions During the Restricted Period)
Each of Distributing and Controlled hereby covenants and agrees that, during the Restricted Period, it shall not, and shall not permit any member of its Group to, take any of the following actions (each, a "Prohibited Action") without satisfying the conditions specified below:
(a) Stock Issuances
During the Restricted Period, neither Distributing nor Controlled shall issue, sell, or otherwise dispose of, or authorize or agree to issue, sell, or otherwise dispose of, any shares of its capital stock (including common stock, preferred stock, or any other class of equity securities), options, warrants, rights to acquire shares of capital stock, or convertible or exchangeable securities, that, individually or in the aggregate with all other issuances during the Restricted Period, would represent more than [25]% of the total outstanding shares of such party's capital stock (determined immediately after the Distribution), without the prior written consent of the other party.
Provided, however, that the foregoing restriction shall not apply to issuances of shares of capital stock (or options, restricted stock units, or other equity awards) pursuant to employee equity incentive plans in the ordinary course of business, consistent with past practice, so long as such issuances do not, in the aggregate, result in a change of control or a shift in ownership that would be treated as part of a plan under Section 355(e) of the Code and Treasury Regulation Section 1.355-7.
Notwithstanding the foregoing, any issuance, sale, or disposition of shares of capital stock of either Distributing or Controlled that could reasonably be expected to result in one or more persons acquiring, directly or indirectly, a fifty-percent (50%) or greater interest (by vote or value) in such party within the meaning of Section 355(e) of the Code is absolutely prohibited during the Restricted Period without both (A) the prior written consent of the other party and (B) a supplemental tax opinion or IRS private letter ruling satisfying the requirements of Section [__].10.
[Note: The percentage threshold of [25]% is a placeholder subject to negotiation. Calderwood & Harkness recommends [25]% as consistent with IRS safe harbors and prevailing market practice in tax-free spin-off transactions. See Appendix B, Item 1.]
(b) Mergers and Acquisitions
During the Restricted Period, neither Distributing nor Controlled shall enter into, approve, recommend, permit, or consummate any merger, consolidation, statutory share exchange, or other business combination in which such party (or any member of its Group) is a party or target, or that would result in one or more persons acquiring, directly or indirectly, a fifty-percent (50%) or greater interest (by vote or value) in either Distributing or Controlled within the meaning of Section 355(e) of the Code, without the prior written consent of the other party.
Exception: The foregoing restriction shall not apply to a Merger/Acquisition Transaction for which a supplemental tax opinion at a "should" level of comfort (i.e., a confidence level of at least 70%) is obtained from nationally recognized tax counsel (which counsel shall be reasonably acceptable to both Distributing and Controlled) confirming that the proposed transaction would not cause the Spin-Off to fail to qualify as a tax-free transaction under Section 355 of the Code and would not result in the application of Section 355(e) of the Code to the Distribution. Such supplemental tax opinion shall be delivered to both parties prior to the execution of any definitive agreement with respect to such Merger/Acquisition Transaction.
(c) Asset Sales and Dispositions
During the Restricted Period, neither Distributing nor Controlled shall sell, transfer, lease, license, exchange, or otherwise dispose of (in one transaction or a series of related transactions) assets constituting more than [30]% of the gross assets (determined by fair market value as of the Distribution Date) of the Active Trade or Business conducted by such party immediately following the Distribution, without the prior written consent of the other party.
The foregoing restriction is intended to preserve the continuity of business enterprise for both Distributing and Controlled as required under Treasury Regulation Section 1.368-1(d) and the related principles applicable to divisive reorganizations under Section 368(a)(1)(D) of the Code. Sales or dispositions of assets in the ordinary course of business (including sales of inventory, obsolete equipment, and surplus materials) shall not be aggregated for purposes of this threshold.
[Note: The percentage threshold of [30]% is a placeholder subject to negotiation. Calderwood & Harkness recommends [30]% as consistent with continuity-of-business-enterprise principles. See Appendix B, Item 2.]
(d) Cessation of Active Business
During the Restricted Period, neither Distributing nor Controlled shall discontinue, sell, or otherwise cease the active conduct of its respective Active Trade or Business, and each party shall continue to actively conduct such business in substantially the same manner as it has been conducted prior to the Distribution.
For Distributing: The Engineered Coatings Division shall be actively conducted by Distributing throughout the Restricted Period.
For Controlled: The Precision Flow Solutions Division (including the Kestrel operations formerly conducted by Kestrel Precision Controls, Inc.) shall be actively conducted by Controlled throughout the Restricted Period.
Note regarding Kestrel: Because the Kestrel business comprises approximately thirty-five percent (35%) of the Precision Flow Solutions Division revenue, the cessation, material curtailment, or disposition of the Kestrel operations during the Restricted Period could undermine the Section 355(b) active trade or business qualification for the Precision Flow Solutions Division. Controlled shall not, and shall not permit any member of the Controlled Group to, discontinue, materially curtail, sell, transfer, or otherwise dispose of the Kestrel operations during the Restricted Period without the prior written consent of Distributing and a supplemental tax opinion confirming that such action would not jeopardize the Section 355(b) qualification.
(e) Liquidations and Dissolutions
During the Restricted Period, neither Distributing nor Controlled shall liquidate or partially liquidate, or adopt, approve, or recommend any plan of complete or partial liquidation or dissolution, whether or not pursuant to Sections 331, 332, or 336 of the Code, without the prior written consent of the other party and a supplemental tax opinion.
(f) Redemptions and Repurchases
During the Restricted Period, neither Distributing nor Controlled shall redeem or repurchase, or authorize or agree to redeem or repurchase, any shares of its capital stock (whether through open-market purchases, tender offers, privately negotiated transactions, or otherwise), without the prior written consent of the other party and, if reasonably requested by the other party, a supplemental tax opinion.
Provided, however, that the foregoing restriction shall not apply to repurchases of shares from employees, directors, or consultants in de minimis amounts in connection with the administration of employee equity incentive plans (including repurchases to satisfy tax withholding obligations upon vesting of restricted stock units or exercise of options), so long as such repurchases are in the ordinary course of business, consistent with past practice, and do not, individually or in the aggregate, exceed $5,000,000 in any calendar year.
(g) Amendment of Organizational Documents
During the Restricted Period, neither Distributing nor Controlled shall amend, modify, or restate its certificate of incorporation, bylaws, or other equivalent organizational documents in any manner that could affect the number, class, series, par value, voting rights, or relative rights, preferences, or limitations of its outstanding shares of capital stock, or that could result in a reclassification, recapitalization, or similar restructuring of its equity capital, without the prior written consent of the other party. For the avoidance of doubt, routine amendments that do not affect the capital structure of such party shall not be subject to this restriction.
Section [____].5 — Tax Indemnification
(a) General Indemnification by Distributing (Veldran)
Distributing shall indemnify, defend, and hold harmless Controlled and each member of the Controlled Group, and their respective officers, directors, employees, agents, and representatives, from and against any and all Taxes, losses, liabilities, damages, claims, costs, and expenses (including reasonable and documented attorneys' fees and expenses, and reasonable and documented fees and expenses of accountants and other advisors) arising from or relating to:
(i) Any failure of the Spin-Off to qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code, to the extent such failure is attributable to, caused by, or results from a breach by Distributing (or any member of the Distributing Group) of any representation, warranty, or covenant of Distributing set forth in this Article [__] or in the Representation Letter, including any action or failure to act by Distributing that constitutes a Prohibited Action;
(ii) Any Taxes imposed on, assessed against, or required to be paid by any member of the Distributing Group for Pre-Distribution Tax Periods, as allocated in accordance with the methodology set forth in the Tax Sharing Agreement, including the allocated share of consolidated, combined, or unitary Tax liabilities attributable to the Distributing Group for such periods; and
(iii) Any Taxes arising under Section 355(d) of the Code that are attributable to the treatment of the Distribution as a "disqualified distribution" (as defined in Section 355(d)(2) of the Code) by reason of the acquisition by Harrowgate Private Equity Fund IV, L.P. of approximately 62.4% (46,488,000 shares) of the outstanding common stock of Distributing on September 20, 2019, including any gain recognized by Distributing as if the stock of Controlled were sold at fair market value on the Distribution Date.
(b) General Indemnification by Controlled (Meridian)
Controlled shall indemnify, defend, and hold harmless Distributing and each member of the Distributing Group, and their respective officers, directors, employees, agents, and representatives, from and against any and all Taxes, losses, liabilities, damages, claims, costs, and expenses (including reasonable and documented attorneys' fees and expenses, and reasonable and documented fees and expenses of accountants and other advisors) arising from or relating to:
(i) Any failure of the Spin-Off to qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code, to the extent such failure is attributable to, caused by, or results from a breach by Controlled (or any member of the Controlled Group) of any representation, warranty, or covenant of Controlled set forth in this Article [__] or in the Representation Letter, including any action or failure to act by Controlled that constitutes a Prohibited Action;
(ii) Any Taxes imposed on, assessed against, or required to be paid by any member of the Controlled Group for Post-Distribution Tax Periods, as determined on a separate-company basis or as otherwise allocated in accordance with the Tax Sharing Agreement; and
(iii) Any Prohibited Action taken by Controlled (or any member of the Controlled Group) during the Restricted Period, including any Merger/Acquisition Transaction, stock issuance, asset disposition, cessation of business, liquidation, redemption, or amendment of organizational documents undertaken by Controlled in violation of Section [__].4, and any and all Taxes, losses, liabilities, damages, costs, and expenses resulting therefrom, including any gain recognition tax imposed on Distributing under Section 355(e) or any other provision of the Code as a consequence of such Prohibited Action.
(c) Allocation of Section 355(e) Liability
[Note: This subsection is subject to significant commercial negotiation and represents one of the most sensitive provisions of this Article. The estimated tax exposure and the allocation framework described below have been presented by Calderwood & Harkness for discussion between Harrowgate Capital Advisors LLC, Veldran management and its independent directors, and Thornapple McCord LLP as separate counsel to Veldran. This subsection should not be considered final or agreed upon by any party.]
In the event that the Distribution is determined (whether by the IRS, any other Taxing Authority, or a court of competent jurisdiction) to be part of a "plan (or series of related transactions)" within the meaning of Section 355(e) of the Code that includes the September 20, 2019 acquisition by Harrowgate Private Equity Fund IV, L.P. of approximately 62.4% of the outstanding common stock of Distributing, the resulting gain recognition tax shall be allocated between Distributing and Controlled as set forth below.
Estimated Tax at Risk. The estimated tax exposure under Section 355(e) of the Code is in the range of One Hundred Twenty-Five Million Three Hundred Thousand Dollars ($125,300,000) to One Hundred Eighty-Nine Million Five Hundred Thousand Dollars ($189,500,000), computed as follows:
The estimated fair market value range set forth above is based on preliminary valuation analyses provided by Brackenridge & Co. (financial advisor to Distributing) and is subject to change based on market conditions and final valuation as of the Distribution Date.
Allocation Framework. Calderwood & Harkness presents two alternative allocation frameworks for consideration by the parties:
Alternative A — Distributing Bears the Risk. Under this alternative, Distributing shall bear one hundred percent (100%) of any Section 355(e) gain recognition tax resulting from a determination that the Distribution is part of a plan or series of related transactions that includes the HPE Acquisition. The rationale for this allocation is that the acquisition that gives rise to the Section 355(e) risk was the acquisition of the Distributing corporation's stock by Harrowgate Private Equity Fund IV, L.P. — a transaction that was initiated, negotiated, and consummated by or on behalf of the Distributing corporation's controlling shareholder — and that Controlled should not bear the economic burden of a tax liability arising from an acquisition history in which Controlled played no role. Under this alternative, if a post-Distribution action by Controlled independently triggers Section 355(e) (e.g., a change-of-control transaction involving Controlled during the Restricted Period), the gain recognition tax attributable to such post-Distribution action would be borne by Controlled under Section [__].5(b)(iii).
Alternative B — Shared Responsibility / Relative Fault. Under this alternative, the Section 355(e) gain recognition tax would be allocated between Distributing and Controlled based on the relative contribution of each party's actions (or the actions of their respective controlling shareholders) to the triggering of Section 355(e):
(A) If Section 355(e) is triggered solely by a post-Distribution action by Controlled (e.g., a Merger/Acquisition Transaction involving Controlled during the three-year window following the Distribution), Controlled shall bear one hundred percent (100%) of the resulting gain recognition tax.
(B) If Section 355(e) is triggered solely by the pre-Distribution HPE Acquisition history (i.e., a determination that the HPE Acquisition and the Distribution are part of a single plan or series of related transactions, without any contributing post-Distribution action by Controlled), Distributing shall bear one hundred percent (100%) of the resulting gain recognition tax.
(C) If Section 355(e) is triggered by a combination of factors attributable to both the pre-Distribution HPE Acquisition history and a post-Distribution action by Controlled (or the interplay between the two), the resulting gain recognition tax shall be allocated between Distributing and Controlled proportionally based on the relative significance of each party's contributing actions, as reasonably determined by independent tax counsel retained by both parties for such purpose.
Calderwood & Harkness Preliminary Recommendation. Calderwood & Harkness's preliminary recommendation is that Alternative B provides the stronger incentive alignment between both parties to avoid triggering Section 355(e) and is more consistent with market practice in private equity-sponsored spin-off transactions. Alternative B places appropriate economic consequences on each party for its own actions (or the actions of its controlling shareholders) while avoiding the potentially inequitable result under Alternative A of imposing one hundred percent of the risk on Distributing even in circumstances where a post-Distribution action by Controlled is a contributing cause. We note, however, that Alternative A has been adopted in certain precedent transactions where the distributing corporation's private equity sponsor has agreed to bear the entirety of the Section 355(e) risk as a condition of the spin-off.
[Note: Harrowgate's position (as controlling shareholder of Distributing through HPE Fund IV) on this allocation is pending. The allocation of Section 355(e) liability is expected to be a significant point of negotiation between Harrowgate and Veldran management / independent directors, with input from Thornapple McCord LLP as separate counsel to Veldran. See Appendix B, Item 3.]
(d) Allocation of Section 355(d) Liability
In the event that the Distribution is treated as a "disqualified distribution" under Section 355(d) of the Code, by reason of Harrowgate Private Equity Fund IV, L.P.'s acquisition of approximately 62.4% of the outstanding common stock of Distributing (46,488,000 shares) within the five-year period preceding the Distribution Date (the HPE Acquisition having occurred on September 20, 2019), any resulting gain recognition tax imposed on Distributing (as if the stock of Controlled distributed in the Distribution were sold at its fair market value on the Distribution Date) shall be borne entirely by Distributing, and Distributing shall indemnify and hold harmless Controlled and the Controlled Group from and against any and all liability arising therefrom.
Note: The Section 355(d) analysis overlaps in significant respects with the Section 355(e) analysis, and the interplay between the two provisions must be carefully addressed to avoid double counting of any gain recognition tax. In general, Section 355(d) applies to distributions of stock of a "disqualified corporation" to a "disqualified shareholder" and can trigger gain recognition at the Distributing level regardless of whether the distribution is part of a plan. Section 355(e), by contrast, requires a "plan or series of related transactions" connecting the distribution to a change-of-control acquisition. To the extent both provisions are applicable, the parties agree that the aggregate gain recognition tax shall not exceed the amount that would be payable under the provision producing the greater Tax liability, and the allocation framework set forth in this Section [__].5 shall be applied to avoid duplicative indemnification obligations.
(e) Indemnification Procedures
(i) Notice of Claim. Any party seeking indemnification under this Section [__].5 (the "Indemnified Party") shall provide written notice of the claim to the party from whom indemnification is sought (the "Indemnifying Party") within sixty (60) days of the date on which the Indemnified Party first becomes aware (or reasonably should have become aware) of the facts, circumstances, or events giving rise to the claim for indemnification. Such notice shall include a reasonably detailed description of the claim, the basis for indemnification, the estimated amount of the claim (to the extent reasonably determinable), and copies of any relevant correspondence from a Taxing Authority. The failure to provide timely notice shall not relieve the Indemnifying Party of its indemnification obligations, except to the extent that the Indemnifying Party is materially prejudiced by such failure.
(ii) Right to Dispute. The Indemnifying Party shall have thirty (30) days following receipt of the notice of claim to dispute the claim in writing, setting forth in reasonable detail the basis for its dispute. If the Indemnifying Party does not dispute the claim within such thirty (30)-day period, the claim shall be deemed accepted.
(iii) Resolution of Disputes. Disputes regarding indemnification claims under this Section [__].5 shall be resolved through the dispute resolution mechanism set forth in Article [__] of the master Separation Agreement (to be drafted by Whitfield & Gage LLP). Pending resolution of any dispute, the Indemnified Party shall be entitled to take all reasonable actions to protect its interests, including contesting any assessment or proposed adjustment by a Taxing Authority.
(iv) Tax Treatment of Indemnification Payments. Indemnification payments made pursuant to this Section [__].5 shall be treated by the parties as adjustments to the consideration exchanged in connection with the Distribution for all Tax purposes, to the extent permitted by applicable law. Each party agrees to file all Tax returns and take all other actions consistent with such treatment unless otherwise required by a final determination (within the meaning of Section 1313 of the Code).
Section [____].6 — Cooperation and Information Sharing
(a) General Cooperation Obligation
Each of Distributing and Controlled shall (and shall cause each member of its respective Group to) cooperate fully and in good faith with the other party in connection with (i) the preparation and filing of any Tax return (including any amended return, claim for refund, or information return) relating to the Distributing Group, the Controlled Group, or any member thereof for any Pre-Distribution Tax Period or any Straddle Period (as defined in the Tax Sharing Agreement), (ii) any Tax Proceeding relating to the Spin-Off, the Contribution, the Distribution, or any Pre-Distribution Tax Period, and (iii) any determination of a Tax liability or Tax Benefit relating to the Spin-Off, the Contribution, the Distribution, or any Pre-Distribution Tax Period. Such cooperation shall include, without limitation, providing information, executing documents, making employees and representatives available as witnesses or for interviews, and taking such other actions as may be reasonably requested by the other party.
(b) Access to Information
Each party shall (and shall cause each member of its respective Group to) make available to the other party, upon reasonable request and at the requesting party's expense (limited to reasonable out-of-pocket costs of copying and delivery), all information, records, documents, data, and work papers relating to Taxes that are in such party's possession, custody, or control, to the extent reasonably necessary for the preparation or filing of any Tax return, the conduct of any Tax Proceeding, or the determination of any Tax liability or Tax Benefit. Without limiting the foregoing, such information shall include:
(i) Federal and state income tax returns of Veldran Industries Holdings, Inc. (Employer Identification Number: 86-1920347) and Kestrel Precision Controls, Inc. (Employer Identification Number: 58-2847193) for all relevant tax years, including all schedules, attachments, elections, and supporting statements;
(ii) Working papers, schedules, analyses, and supporting documentation prepared by Pemberton Rathbone LLP (Distributing's independent auditors and tax-return preparers), to the extent such materials are in the possession or control of the requesting party's Group and subject to any confidentiality obligations owed to Pemberton Rathbone LLP;
(iii) Records relating to the Kestrel Acquisition (June 7, 2019), including the stock purchase agreement between Distributing and Rennick Industrial Partners Fund II LP, all closing documents, tax basis step-up computations (including any Section 338 election analyses), historical Kestrel tax returns for all periods prior to the Kestrel Acquisition, and post-acquisition integration records relevant to Tax matters;
(iv) Records relating to the HPE Acquisition (September 20, 2019), including the stock purchase agreement, closing documents, and any materials relevant to the Section 355(e) and Section 355(d) analyses; and
(v) Any other information reasonably requested by the other party in connection with its Tax compliance, reporting, or planning obligations.
(c) Retention of Records
Each party shall (and shall cause each member of its respective Group to) retain all Tax-related records, documents, and information (including Tax returns, supporting schedules, work papers, and correspondence with Taxing Authorities) for a period of at least seven (7) years following the Distribution Date, or if longer, until the expiration of the applicable statute of limitations (including any extensions, waivers, or tolling periods) for the assessment or collection of any Tax to which such records may be relevant. Neither party shall destroy, discard, or dispose of any Tax-related records without providing at least ninety (90) days' prior written notice to the other party and a reasonable opportunity for the other party to copy, take possession of, or otherwise preserve such records at its own expense.
(d) Confidentiality.  All Tax information exchanged between the parties pursuant to this Section [__].6 shall be subject to the confidentiality provisions set forth in Article [__] of the master Separation Agreement. Each party acknowledges that certain information exchanged under this Section may be subject to attorney-client privilege, work product protection, tax practitioner privilege under Section 7525 of the Code, or other applicable privileges, and the exchange of such information between the parties in connection with the obligations set forth in this Article shall not be deemed a waiver of any such privilege. Each party agrees to use reasonable efforts to preserve the confidentiality of, and any applicable privilege attaching to, all Tax information received from the other party and to limit the disclosure of such information to those individuals who have a need to know in connection with the purposes described in this Article.
(e) Third-Party Advisors
Each party shall coordinate, as applicable and as reasonably necessary, with the following advisors in connection with the Tax matters addressed in this Article:
(i) Calderwood & Harkness LLP — Tax counsel to Distributing and Controlled for purposes of the Spin-Off (Engagement Number: 1003-00005; responsible partner: Leonard Cross; associates: Garrett Simmons, Leila Nazari);
(ii) Pemberton Rathbone LLP — Independent auditors and tax-return preparers for Distributing (contacts: Lisa Engstrom, Harold Weiss);
(iii) Whitfield & Gage LLP — Corporate and mergers & acquisitions counsel to Harrowgate Capital Advisors LLC (contact: Priya Chandrasekar);
(iv) Thornapple McCord LLP — Corporate counsel to Distributing (contact: David Ochoa); and
(v) Dunmore Havens & Associates LLC — Tax advisor to Prescott Capital Management LP (contact: Irene Salcedo). The obligation to cooperate with Dunmore Havens & Associates LLC shall be limited to the provision of information reasonably necessary for Prescott Capital Management LP to evaluate the fund-level tax consequences of the Distribution to Prescott and its limited partners, and shall not extend to the provision of competitively sensitive or proprietary information of either Distributing or Controlled.
Section [____].7 — Control of Tax Proceedings
(a) Pre-Distribution Tax Periods
Distributing shall have the sole right to control, manage, settle, compromise, and resolve any Tax Proceeding with respect to any consolidated, combined, or unitary Tax return of the Distributing Group for Pre-Distribution Tax Periods, including the right to select counsel, make all decisions regarding the conduct of such proceeding, and determine the litigation strategy. Distributing shall keep Controlled reasonably informed of the progress and status of any such Tax Proceeding to the extent it relates to the Precision Flow Solutions Division, the Contributed Business, Kestrel Precision Controls, Inc., or any other matter that could result in a Tax liability allocated to Controlled under the Tax Sharing Agreement. Controlled shall have the right to participate (at Controlled's own expense) in any such Tax Proceeding to the extent it relates to the Contributed Business or could reasonably be expected to result in a Tax liability or obligation allocated to Controlled under this Article or the Tax Sharing Agreement, including the right to attend meetings with the relevant Taxing Authority, review and comment on submissions and correspondence, and consult with Distributing regarding settlement discussions.
(b) Post-Distribution Tax Periods
Controlled shall have the sole right to control, manage, settle, compromise, and resolve any Tax Proceeding with respect to Tax returns of the Controlled Group (or any member thereof) for Post-Distribution Tax Periods, including the right to select counsel, make all decisions regarding the conduct of such proceeding, and determine the litigation strategy. Controlled shall keep Distributing reasonably informed of any such Tax Proceeding to the extent it could reasonably be expected to affect the Tax liabilities or Tax Benefits of the Distributing Group or the tax-free qualification of the Spin-Off.
(c) Spin-Off Qualification Proceedings
In the event of any Tax Proceeding in which the IRS or any other Taxing Authority challenges the qualification of the Spin-Off under Sections 355 and 368(a)(1)(D) of the Code, or asserts that the Distribution is subject to gain recognition under Section 355(d) or Section 355(e) of the Code (a "Spin-Off Qualification Proceeding"), the following procedures shall apply:
(i) Distributing's Control Right. Distributing shall have the primary right to control, manage, and direct the defense of any Spin-Off Qualification Proceeding, as the Distributing corporation under Section 355 of the Code. Distributing shall select lead counsel for any such proceeding and shall make all strategic decisions regarding the conduct of the defense, subject to the participation and consent rights of Controlled set forth below.
(ii) Controlled's Participation Right. Controlled shall have the right to participate in any Spin-Off Qualification Proceeding at Controlled's own expense, including the right to retain separate counsel, attend all meetings and hearings, review and comment on all submissions and correspondence with the Taxing Authority, and consult with Distributing regarding all material aspects of the proceeding.
(iii) Settlement. No settlement, compromise, or other disposition of a Spin-Off Qualification Proceeding shall be entered into or agreed to by Distributing without the prior written consent of Controlled, to the extent that such settlement could result in a Tax liability, obligation, or cost allocated to Controlled under this Article or the Tax Sharing Agreement. Such consent shall not be unreasonably withheld, conditioned, or delayed. Similarly, no settlement, compromise, or other disposition of a Spin-Off Qualification Proceeding shall be entered into or agreed to by Controlled without the prior written consent of Distributing. For the avoidance of doubt, neither party may settle a Spin-Off Qualification Proceeding on terms that impose a disproportionate economic burden on the other party without such party's written consent.
(iv) Engagement of Counsel. In connection with any Spin-Off Qualification Proceeding, both parties shall engage, or cause to be engaged, nationally recognized tax counsel with substantial experience in Section 355 matters to defend any such proceeding. The costs and expenses of shared counsel engaged by both parties shall be allocated equally between Distributing and Controlled unless the parties otherwise agree in writing.
(d) Notification.  Each party shall promptly, and in any event within fifteen (15) business days, notify the other party in writing upon receipt of any written notice, correspondence, or communication from any Taxing Authority (including any notice of proposed adjustment, statutory notice of deficiency, information document request, or subpoena) relating to (i) the Spin-Off (including the Contribution and the Distribution), (ii) any Pre-Distribution Tax Period, or (iii) any matter that could reasonably be expected to affect the tax-free qualification of the Distribution under Sectio

DRAFT — TAX MATTERS PROVISIONS FOR SEPARATION AGREEMENT

COVER MEMORANDUM

MEMORANDUM

ENGAGEMENT: 1003-00005 / HRW-SPIN-001

TAX MATTERS

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Parties

Dates

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