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DRAFT — TAX SHARING AGREEMENT: OUTLINE AND KEY TERMS

Prepared by:

Calderwood & Harkness LLP 1301 Avenue of the Americas, 40th Floor New York, NY 10019

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

August 4, 2022

STATUS: DRAFT — OUTLINE STAGE ONLY NOT FOR EXECUTION SUBJECT TO FURTHER NEGOTIATION AND CLIENT REVIEW

This document has been prepared for insertion into or as a companion agreement to the Separation Agreement being drafted by Whitfield & Gage LLP (51 West 52nd Street, New York, NY 10019). This document and its contents are protected by the attorney-client privilege and constitute attorney work product. This document is intended solely for the use of the addressees and their authorized representatives. Any distribution, copying, or disclosure to any other person is strictly prohibited without the prior written consent of Calderwood & Harkness LLP. Receipt of this document by any person other than the intended addressees does not constitute a waiver of any applicable privilege.

ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT

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INTRODUCTORY NOTE FROM COUNSEL

August 4, 2022

MEMORANDUM

FROM: Leonard Cross, Partner, and Garrett Simmons, Associate Calderwood & Harkness LLP 1301 Avenue of the Americas, 40th Floor New York, NY 10019

TO: Christine Yeung, General Counsel Harrowgate Capital Advisors LLC 600 Lexington Avenue, 38th Floor New York, NY 10022

Philip Crundell, General Counsel Veldran Industries Holdings, Inc. 2400 Commerce Park Drive, Suite 500 Charlotte, NC 28217

COPIES TO: Priya Chandrasekar, Partner Whitfield & Gage LLP 51 West 52nd Street New York, NY 10019

David Ochoa, Partner Thornapple McCord LLP 227 West Trade Street, Suite 2000 Charlotte, NC 28202

Sylvia Hartwell

Leila Nazari

RE: Proposed Tax Sharing Agreement — Outline and Key Terms Engagement No. 1003-00005; Matter Code: HRW-SPIN-001

This memorandum accompanies the enclosed outline and key terms for the Tax Sharing Agreement (the "TSA") to be entered into between Veldran Industries Holdings, Inc. ("Distributing" or "Veldran") and Meridian Flow Technologies, Inc. ("Controlled" or "Meridian" or "SpinCo") in connection with the proposed tax-free spin-off of the Precision Flow Solutions Division of Veldran. The Spin-Off is intended to qualify as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"), in conjunction with a reorganization under Section 368(a)(1)(D) of the Code.

We wish to emphasize at the outset that a full-form agreement has not been drafted. The enclosed outline is intended to establish the framework and to identify the principal terms and key open issues that must be resolved through further negotiation among the parties and their respective counsel before the TSA can be prepared in definitive form. The outline reflects our preliminary views as to the appropriate allocation of tax liabilities, responsibilities for tax return preparation and filing, indemnification obligations, post-Distribution restrictive covenants, and related matters. Each of these provisions is subject to further discussion, refinement, and ultimately the approval of all parties.

We note the need for close coordination with Pemberton Rathbone LLP (Harold Weiss, Partner, Tax; One PPG Place, Suite 1600, Pittsburgh, PA 15222), which serves as Veldran's independent auditors and tax-return preparers. Pemberton Rathbone maintains the historical tax positions and computation files that will be essential to determining the allocation of Pre-Distribution tax liabilities, the treatment of Kestrel Precision Controls tax attributes, and the preparation of the illustrative Separate Company Tax Liability computation set forth in Appendix B. We understand that certain information requests remain outstanding with Pemberton Rathbone as of the date of this memorandum, including requests relating to the potential Section 338(h)(10) election in connection with the Kestrel acquisition.

We also note that Dunmore Havens & Associates LLC (Irene Salcedo, Principal; 590 Madison Avenue, 20th Floor, New York, NY 10022) is advising Prescott Capital Management LP, a 14.8% shareholder of Veldran, separately on fund-level tax consequences arising from the Distribution. It is possible that Prescott and its advisors may have comments on the TSA, particularly with respect to the allocation of earnings and profits and the potential impact of any Section 355(d) or Section 355(e) issues on the tax treatment of the Distribution to Veldran shareholders at the fund level. We recommend that any such comments be coordinated through Christine Yeung's office to ensure consistency with the overall transaction structure.

The TSA will be structured as a stand-alone agreement but will be cross-referenced in the Tax Matters provisions of the Separation Agreement. Calderwood & Harkness has separately prepared draft Tax Matters provisions for the Separation Agreement, dated July 28, 2022, which are being reviewed by Whitfield & Gage LLP (Priya Chandrasekar) in connection with the broader Separation Agreement drafting process. The TSA and the Tax Matters provisions of the Separation Agreement should be read together, and certain provisions (particularly the post-Distribution restrictive covenants and the indemnification for Section 355 failure) will need to be harmonized between the two documents.

Finally, we note that Meridian Flow Technologies, Inc. has not yet been incorporated as of the date of this memorandum. The formation of Meridian as a Delaware corporation is expected to occur prior to the Distribution Date, and the TSA will be executed by Meridian promptly following its incorporation but in all events prior to the Distribution Date. Until Meridian is incorporated, the obligations contemplated by the TSA will be binding upon Veldran with respect to the Precision Flow Business assets and operations that are to be contributed to Meridian in the Contribution.

We look forward to discussing this outline with all parties at the next working group meeting. Any questions regarding this memorandum or the enclosed outline should be directed to Leonard Cross (212-555-8400) or Garrett Simmons (212-555-8425) at Calderwood & Harkness LLP.

DRAFT — TAX SHARING AGREEMENT: OUTLINE AND KEY TERMS

ARTICLE I — DEFINITIONS

Section 1.01 — Defined Terms

For purposes of this Tax Sharing Agreement, the following terms shall have the meanings set forth below. All defined terms used but not defined herein shall have the meanings ascribed to them in the Separation Agreement or, if not defined therein, in the Code or the Treasury Regulations, as applicable.

"Active Business" means the active conduct of a trade or business, as that term is defined in Section 355(b)(2) of the Code and the Treasury Regulations promulgated thereunder, including the requirement that the trade or business must have been actively conducted throughout the five-year period ending on the date of the Distribution and must not have been acquired by the distributing corporation or the controlled corporation in a transaction in which gain or loss was recognized, in whole or in part, within such five-year period. For purposes of this TSA, the Active Businesses are the Engineered Coatings Business (with respect to Veldran) and the Precision Flow Business (with respect to Meridian).

"Adjustment" means any change in tax liability, including any increase or decrease in Taxes, any reallocation of income, deductions, credits, or other tax items, and any assessment, deficiency, or refund, resulting from (a) an audit, examination, or other proceeding conducted by the Internal Revenue Service or any other federal, state, local, or foreign taxing authority, (b) the filing of an amended tax return or a claim for refund, (c) a judicial determination by any court of competent jurisdiction, or (d) a closing agreement or similar arrangement with a taxing authority.

"Affiliated Group" means the affiliated group of corporations, within the meaning of Section 1504(a) of the Code, of which Veldran Industries Holdings, Inc. is the common parent corporation, including Meridian Flow Technologies, Inc. and its direct and indirect subsidiaries, for any Pre-Distribution Tax Period during which Meridian (or the entities comprising the Precision Flow Business) was a member of such affiliated group. The Affiliated Group includes, without limitation, Kestrel Precision Controls, Inc. for all periods following its acquisition by Veldran on June 7, 2019.

"Closing of the Books Method" means the method prescribed by Treasury Regulation § 1.1502-76(b)(2)(i) for allocating items of income, deduction, gain, loss, and credit between the portion of a Straddle Period ending on the Distribution Date and the portion of a Straddle Period beginning after the Distribution Date. Under this method, the taxable year of Meridian and its subsidiaries shall be treated as closing at the end of the Distribution Date, and items shall be allocated to the Pre-Distribution portion and the Post-Distribution portion based on the actual results of operations during each such portion.

"Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute. References to specific sections of the Code shall include any predecessor and successor provisions and any applicable Treasury Regulations promulgated thereunder.

"Consolidated Return" means any federal income tax return filed on a consolidated basis by the Affiliated Group pursuant to Section 1501 of the Code and Treasury Regulation § 1.1502-75, for any Pre-Distribution Tax Period or Straddle Period during which Meridian (or the entities comprising the Precision Flow Business) was included in the Affiliated Group.

"Contribution" means the contribution by Veldran to Meridian of all assets and liabilities associated with the Precision Flow Solutions Division (including, without limitation, 100% of the outstanding equity interests in Kestrel Precision Controls, Inc. and all other subsidiaries, assets, contracts, intellectual property, real and personal property, and employee-related obligations comprising the Precision Flow Business), in exchange for all outstanding shares of Meridian common stock and Meridian's assumption of certain allocated liabilities, all as more fully described in the Separation Agreement. The Contribution is intended to qualify as a reorganization under Section 368(a)(1)(D) of the Code.

"Controlled" or "Meridian" means Meridian Flow Technologies, Inc., a Delaware corporation to be incorporated prior to the Distribution Date for the purpose of receiving the Precision Flow Business in the Contribution and serving as the issuer of the shares to be distributed in the Distribution.

"Controlled Group" means Meridian and all of its direct and indirect subsidiaries following the Distribution, including Kestrel Precision Controls, Inc. and any other entity that is transferred to Meridian as part of the Contribution and that remains a subsidiary of Meridian after the Distribution Date.

"Distributing" or "Veldran" means Veldran Industries Holdings, Inc., a Delaware corporation, with employer identification number 86-1920347, the common parent of the Affiliated Group and the entity effecting the Distribution of 100% of the outstanding Meridian common stock to the Veldran shareholders.

"Distributing Group" means Veldran and all of its direct and indirect subsidiaries (other than Meridian and the members of the Controlled Group) following the Distribution. The Distributing Group includes all entities associated with the Engineered Coatings Business and any other business or operations retained by Veldran following the Distribution.

"Distribution" means the pro rata distribution by Veldran of 100% of the outstanding shares of common stock of Meridian to the holders of Veldran common stock as of the Record Date. The Distribution shall be effected on a ratio of one (1) share of Meridian common stock for each one (1) share of Veldran common stock outstanding on the Record Date. As of the date of this outline, there are approximately 74,500,000 shares of Veldran common stock outstanding, such that the Distribution is expected to result in the issuance of approximately 74,500,000 shares of Meridian common stock. The Distribution is intended to qualify as a tax-free distribution under Section 355 of the Code.

"Distribution Date" means the date on which the Distribution is effected, as determined by the Board of Directors of Veldran. The Distribution Date is originally targeted for the fourth quarter of calendar year 2022, subject to satisfaction of all conditions precedent set forth in the Separation Agreement.

"Engineered Coatings Business" means the Engineered Coatings Division of Veldran, comprising all operations, assets, liabilities, and activities associated with Veldran's engineered coatings and surface solutions business, which shall remain with Veldran following the Distribution. For reference purposes, the Engineered Coatings Business generated revenue of approximately $1,520,000,000 and EBITDA of approximately $285,000,000 for the fiscal year ended December 31, 2021.

"Fifty-Percent or Greater Interest" has the meaning ascribed to such term in Section 355(d)(4) of the Code, and generally means stock possessing at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote or at least fifty percent (50%) of the total value of shares of all classes of stock of a corporation.

"Kestrel" means Kestrel Precision Controls, Inc., a Georgia corporation, with employer identification number 58-2847193, founded on February 12, 2003, and acquired by Veldran on June 7, 2019 from Rennick Industrial Partners Fund II LP in a taxable stock acquisition for an aggregate purchase price of $295,000,000. Kestrel operates the precision fluid-control business that forms a component of the Precision Flow Business and is expected to become a subsidiary of Meridian upon consummation of the Contribution.

"Kestrel Tax Attributes" means all tax attributes of Kestrel Precision Controls, Inc., including, without limitation, (a) adjusted tax basis in assets, (b) net operating loss carryforwards and carrybacks, (c) research and development credit carryforwards, (d) general business credit carryforwards, (e) accumulated earnings and profits, (f) any attributes arising from or affected by the June 7, 2019 taxable stock acquisition from Rennick Industrial Partners Fund II LP (including any basis adjustments resulting from a Section 338 election, if applicable), and (g) any limitations on the use of such attributes imposed by Section 382 of the Code or any analogous state or local tax provision.

"Post-Distribution Tax Period" means any taxable period beginning after the Distribution Date. For the avoidance of doubt, the portion of any Straddle Period beginning after the Distribution Date shall be treated as a Post-Distribution Tax Period for purposes of this TSA, with items allocated thereto in accordance with Section 2.04.

"Precision Flow Business" means the Precision Flow Solutions Division of Veldran, comprising all operations, assets, liabilities, and activities associated with Veldran's precision flow solutions, fluid-control, and related technologies business, all of which shall be contributed to Meridian in the Contribution. The Precision Flow Business includes, without limitation, the operations of Kestrel Precision Controls, Inc. and all other subsidiaries, divisions, and business units that are part of the Precision Flow Solutions Division as of the Distribution Date. For reference purposes, the Precision Flow Business generated revenue of approximately $820,000,000 and EBITDA of approximately $133,000,000 for the fiscal year ended December 31, 2021.

"Pre-Distribution Tax Period" means any taxable period ending on or before the Distribution Date. For the avoidance of doubt, the portion of any Straddle Period ending on the Distribution Date shall be treated as a Pre-Distribution Tax Period for purposes of this TSA, with items allocated thereto in accordance with Section 2.04.

"Record Date" means the record date for the Distribution, as established by the Board of Directors of Veldran, which shall be the date on which the holders of Veldran common stock of record shall be determined for purposes of the Distribution.

"Representation Letter" means the representation letter to be executed by authorized officers of Veldran and Harrowgate Capital Advisors LLC in support of the Tax Opinion, in substantially the form circulated in draft on July 11, 2022, as such letter may be revised or supplemented prior to the Distribution Date. The Representation Letter sets forth factual representations regarding the business purposes of the Spin-Off, the continuity of the Active Businesses, the absence of a plan or series of related transactions that would trigger Section 355(e), and other matters relevant to the qualification of the Spin-Off under Section 355 of the Code.

"Separate Company Tax Liability" means, with respect to Veldran or Meridian (as applicable), the hypothetical federal income tax liability of such entity (including its respective subsidiaries) computed as if such entity had filed a separate federal income tax return for the applicable taxable period, rather than being included in the Consolidated Return of the Affiliated Group. The computation of Separate Company Tax Liability shall be performed in accordance with the methodology set forth in Section 2.02 of this TSA.

"Spin-Off" means the Contribution and the Distribution, taken together as an integrated transaction intended to qualify under Sections 355 and 368(a)(1)(D) of the Code.

"Straddle Period" means any taxable period that includes but does not end on the Distribution Date — that is, any taxable period that begins on or before the Distribution Date and ends after the Distribution Date.

"Tax" or "Taxes" means all federal, state, local, and foreign taxes of any kind whatsoever, including, without limitation, income taxes, franchise taxes, excise taxes, property taxes (real and personal), sales taxes, use taxes, value-added taxes, transfer taxes, stamp duties, payroll taxes, employment taxes, withholding taxes, alternative minimum taxes, and any other tax, levy, duty, impost, or assessment, together with all interest, penalties, additions to tax, and additional amounts imposed with respect thereto.

"Tax Benefit" means any reduction in the amount of Taxes that would otherwise be payable by a party, or any increase in the amount of a Tax refund that would otherwise be receivable by a party, resulting from a deduction, credit, loss, or other tax attribute, including any net operating loss carryforward or carryback, tax credit carryforward or carryback, or basis adjustment.

"Tax Detriment" means any increase in the amount of Taxes that would otherwise be payable by a party, or any reduction in the amount of a Tax refund that would otherwise be receivable by a party, resulting from an adjustment, disallowance, reallocation, or other change in income, deductions, credits, or other tax items.

"Tax Opinion" means the opinion of Calderwood & Harkness LLP to be delivered to Veldran and Meridian in connection with the Spin-Off, opining at a "should" level (i.e., that the Spin-Off "should" qualify as a tax-free transaction) that the Contribution qualifies as a reorganization under Section 368(a)(1)(D) of the Code, the Distribution qualifies as a tax-free distribution under Section 355 of the Code, and no gain or loss will be recognized by Veldran, Meridian, or the Veldran shareholders as a result of the Spin-Off (subject to the assumptions, qualifications, and limitations set forth in such opinion).

"Tax Proceeding" means any audit, examination, investigation, claim for refund, administrative appeal, litigation, or judicial or administrative proceeding relating to Taxes, whether initiated by a taxing authority, a taxpayer, or any other party, and whether conducted at the audit, appeals, or litigation level.

"Treasury Regulations" means the regulations promulgated under the Code by the United States Department of the Treasury, as such regulations may be amended, supplemented, or superseded from time to time, including any temporary or proposed regulations to the extent they are relevant to the interpretation of the applicable provisions of the Code.

Section 1.02 — Rules of Construction

The following rules of construction shall apply throughout this TSA:

(a) References to any section or provision of the Code or the Treasury Regulations shall be deemed to include any successor or replacement provision and any applicable temporary or proposed regulations.

(b) Words in the singular shall include the plural and vice versa, and words of one gender shall include the other genders, in each case as the context requires.

(c) The headings and captions contained in this TSA are for reference purposes only and shall not affect in any way the meaning or interpretation of this TSA.

(d) The words "include," "includes," and "including" shall be deemed to be followed by the phrase "without limitation" whether or not so stated.

(e) References to "days" shall mean calendar days unless otherwise specified.

(f) References to a "party" shall mean Veldran or Meridian, as applicable, and references to the "parties" shall mean Veldran and Meridian, collectively.

(g) All dollar amounts are expressed in United States dollars.

(h) Any reference to a "writing" or "written" notice shall include electronic mail (e-mail) to the addresses specified in Section 12.05, provided that the sender receives confirmation of receipt.

ARTICLE II — ALLOCATION OF PRE-DISTRIBUTION TAX LIABILITIES

Section 2.01 — General Allocation Principle

All federal, state, and local income tax liabilities of the Affiliated Group for Pre-Distribution Tax Periods shall be allocated between the Distributing Group and the Controlled Group in accordance with the Separate Company Tax Liability methodology set forth in Section 2.02 below. This allocation methodology is intended to ensure that each of Veldran and Meridian bears a share of the Affiliated Group's consolidated tax liability that is commensurate with the income, deductions, credits, and other tax items attributable to its respective business operations during the Pre-Distribution Tax Period.

Specifically, Veldran shall bear all consolidated federal income tax liabilities of the Affiliated Group for Pre-Distribution Tax Periods to the extent such liabilities exceed Meridian's Separate Company Tax Liability, as computed in accordance with Section 2.02. Meridian shall be responsible for an amount equal to its Separate Company Tax Liability for each Pre-Distribution Tax Period, as so computed. To the extent that Meridian's Separate Company Tax Liability for a given Pre-Distribution Tax Period exceeds or is less than the amount of Taxes actually paid by or on behalf of Meridian (whether through estimated tax payments, withholding, or otherwise), such excess or shortfall shall be settled between the parties in accordance with the payment provisions of Article IX.

Section 2.02 — Separate Company Tax Liability Methodology

The Separate Company Tax Liability of Meridian for each Pre-Distribution Tax Period shall be computed as if Meridian (together with the entities comprising the Precision Flow Business, including Kestrel Precision Controls, Inc.) had filed a separate federal income tax return for such period, rather than being included in the Consolidated Return of the Affiliated Group. The computation shall be performed in accordance with the following principles:

(a) Items Included. The computation shall take into account only the income, deductions, gains, losses, credits, and other tax items that are properly attributable to the Precision Flow Business, as reflected in the books and records of the Precision Flow Solutions Division maintained by Veldran and audited by Pemberton Rathbone LLP.

(b) Tax Rate. The computation shall apply the federal corporate income tax rate in effect for the applicable taxable period. For taxable periods beginning after December 31, 2017, the applicable federal corporate income tax rate is twenty-one percent (21%).

(c) Books and Records. Items shall be attributed to the Precision Flow Business based on the books and records of the Precision Flow Solutions Division as maintained by Veldran in the ordinary course of business and as audited by Pemberton Rathbone LLP. In the event of any ambiguity or dispute as to whether a particular item is properly attributable to the Precision Flow Business or the Engineered Coatings Business, the parties shall resolve such ambiguity in accordance with the dispute resolution procedures set forth in Article XI.

(d) Intercompany Transactions. Intercompany transactions between the Engineered Coatings Business and the Precision Flow Business (including intercompany sales, services, cost-sharing arrangements, licensing arrangements, and management fees) shall be eliminated or adjusted in the Separate Company Tax Liability computation to reflect arm's-length pricing consistent with the principles of Section 482 of the Code and the Treasury Regulations promulgated thereunder. The parties acknowledge that certain intercompany transactions may have been conducted at prices or on terms that differ from arm's-length terms, and the Separate Company Tax Liability methodology is intended to correct for any such disparities.

(e) Consolidated Return Items. Items that arise solely by reason of the consolidated return filing (including, without limitation, intercompany transaction adjustments under Treasury Regulation § 1.1502-13, investment basis adjustments under Treasury Regulation § 1.1502-32, and excess loss account inclusions under Treasury Regulation § 1.1502-19) shall be allocated between Veldran and Meridian in a manner consistent with the regulations governing such items and the Separate Company Tax Liability methodology.

Section 2.03 — Treatment of Kestrel Tax Attributes

The parties acknowledge that Kestrel Precision Controls, Inc. (EIN 58-2847193) was acquired by Veldran on June 7, 2019 in a taxable stock acquisition from Rennick Industrial Partners Fund II LP (EIN 82-3017564) for an aggregate purchase price of $295,000,000. Kestrel was originally founded on February 12, 2003 and has been continuously operating the precision fluid-control business since that date. Following its acquisition by Veldran, Kestrel became a member of the Affiliated Group and was included in Veldran's Consolidated Returns for all taxable periods commencing with the short taxable period beginning June 7, 2019.

The allocation of Kestrel Tax Attributes shall be governed by the following provisions:

(a) Allocation to Meridian. All Kestrel Tax Attributes shall be allocated to Meridian as the entity receiving the Precision Flow Business (including 100% of the equity interests in Kestrel) in the Contribution. After the Distribution Date, Kestrel will be a member of the Controlled Group, and all of its tax attributes shall be available to and the responsibility of the Controlled Group, subject to any applicable limitations.

(b) Tax Basis in Kestrel Assets. The adjusted tax basis in the assets of Kestrel shall be determined based on (i) the original acquisition basis established in connection with the June 7, 2019 taxable stock acquisition (including any adjustments resulting from a Section 338 election, if applicable), plus (ii) subsequent capital expenditures made by Kestrel or on its behalf, less (iii) depreciation, amortization, and any other applicable reductions in basis. The determination of Kestrel's inside asset basis is a critical component of the Separate Company Tax Liability computation and must be verified through review of the acquisition closing documents, the tax returns of Kestrel for taxable years 2017 through 2021, and the work papers of Pemberton Rathbone LLP.

(c) Section 338 Election Analysis. It is an open diligence item, as noted in the Supplemental Information Request dated May 16, 2022 directed to Philip Crundell, whether a Section 338(h)(10) election was made (or could have been made) by Veldran and Rennick Industrial Partners Fund II LP in connection with the Kestrel acquisition. If a Section 338(h)(10) election was made, the inside basis of Kestrel's assets would have been stepped up to fair market value as of the June 7, 2019 acquisition date, which would significantly affect the depreciation and amortization deductions available to Kestrel (and, by extension, the Separate Company Tax Liability of Meridian) for all post-acquisition periods. If no Section 338(h)(10) election was made, the inside basis of Kestrel's assets would remain at their historical carryover basis (subject to any adjustments for post-acquisition capital expenditures and depreciation). Resolution of this diligence item is essential before the Separate Company Tax Liability computation can be finalized.

(d) Pre-Acquisition Tax Attributes. Any tax attributes of Kestrel arising prior to the June 7, 2019 acquisition by Veldran (including, without limitation, pre-acquisition net operating loss carryforwards and pre-acquisition tax credit carryforwards) shall be subject to any applicable limitations under Section 382 of the Code. To the extent such pre-acquisition attributes are subject to a Section 382 annual limitation, they shall be allocated to Meridian only to the extent they are usable by the Controlled Group in accordance with such limitation. The annual Section 382 limitation shall be determined based on the facts and circumstances of the June 7, 2019 ownership change, including the value of Kestrel immediately before the ownership change and the long-term tax-exempt rate in effect for that month.

(e) Relevance to Section 355(b) Analysis. The parties note that Kestrel's continuous operation of the precision fluid-control business since its founding on February 12, 2003 is relevant to the Section 355(b)(2)(D) active-trade-or-business safe harbor analysis for the Spin-Off. Specifically, Kestrel's more-than-five-year operating history provides support for the position that the Precision Flow Business satisfies the active trade or business requirement under Section 355(b), provided that the June 7, 2019 acquisition is not treated as a disqualifying acquisition under Section 355(b)(2)(C) or (D). This analysis, however, also affects the allocation of historical tax attributes, as the pre-acquisition and post-acquisition treatment of Kestrel's items must be consistent with the positions taken in the Tax Opinion and the Representation Letter.

Section 2.04 — Treatment of Straddle Periods

For any Straddle Period (i.e., any taxable period that includes but does not end on the Distribution Date), items of income, deduction, gain, loss, and credit shall be allocated between the Pre-Distribution portion and the Post-Distribution portion using the Closing of the Books Method prescribed by Treasury Regulation § 1.1502-76(b)(2)(i). Under this method, the books of Meridian and its subsidiaries (including Kestrel) shall be deemed closed as of the end of the Distribution Date, and items shall be allocated to the Pre-Distribution portion based on the actual results of operations through the end of the Distribution Date, and to the Post-Distribution portion based on the actual results of operations for the remainder of the taxable period.

Notwithstanding the foregoing, Taxes and tax items that are not susceptible to a closing-of-the-books allocation shall be allocated between the Pre-Distribution portion and the Post-Distribution portion of the Straddle Period on a daily pro rata basis. Items subject to daily pro rata allocation include, without limitation, real property taxes, personal property taxes, annual franchise taxes, and any other Taxes that accrue ratably over the taxable period and are not directly related to specific transactions or events occurring before or after the Distribution Date. For any item allocated on a daily pro rata basis, the Pre-Distribution portion shall be the amount of such item multiplied by a fraction, the numerator of which is the number of days in the Straddle Period ending on and including the Distribution Date, and the denominator of which is the total number of days in the Straddle Period.

Section 2.05 — State and Local Income Tax Allocation

State and local income tax liabilities of the Affiliated Group for Pre-Distribution Tax Periods shall be allocated between the Distributing Group and the Controlled Group using the same Separate Company Tax Liability methodology described in Section 2.02, applied on a state-by-state and jurisdiction-by-jurisdiction basis. Each state and local jurisdiction may have different rules regarding the computation of taxable income, the availability of deductions and credits, the applicable tax rate, and the treatment of intercompany transactions, and the Separate Company Tax Liability computation for each jurisdiction shall take into account the specific rules of that jurisdiction.

The relevant jurisdictions for purposes of this state and local tax allocation include, at a minimum, the following:

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

(b) North Carolina — the state in which Veldran maintains its principal executive offices (2400 Commerce Park Drive, Suite 500, Charlotte, NC 28217);

(c) Georgia — the state in which Meridian is expected to establish its principal executive offices (7100 Northlake Parkway, Suite 300, Tucker, GA 30084) and the state of incorporation and principal operations of Kestrel Precision Controls, Inc.; and

(d) Any other state in which Veldran, the Precision Flow Business, or any member of the Affiliated Group files income tax returns or franchise tax returns, or is otherwise subject to state or local income or franchise taxation by reason of nexus, presence, or filing obligations.

The parties note that North Carolina generally conforms to the federal treatment of Section 355 distributions, such that the Spin-Off should be treated as tax-free for North Carolina income tax purposes to the extent it qualifies under federal Section 355. Georgia, however, may impose additional filing requirements or have non-conformity issues that must be addressed. These state-specific issues are discussed in greater detail in the State and Local Tax Considerations Summary Memorandum prepared by Calderwood & Harkness LLP, dated July 20, 2022.

ARTICLE III — ALLOCATION OF NET OPERATING LOSSES AND TAX CREDITS

Section 3.01 — Federal NOL Allocation

Any consolidated net operating loss carryforwards and carrybacks of the Affiliated Group existing as of the Distribution Date shall be allocated between Veldran and Meridian in accordance with the principles set forth in Treasury Regulation § 1.1502-21 (or any successor regulation). The Treasury Regulations provide a detailed methodology for determining each member's share of a consolidated net operating loss, and the allocation under this TSA shall follow that methodology.

Specifically, each member's (or its predecessor's) share of the consolidated net operating loss for any applicable taxable year shall be determined based on the member's contribution to the consolidated net operating loss, computed under the principles of Treasury Regulation § 1.1502-21(b)(2). To the extent that a member generated a separate return limitation year ("SRLY") net operating loss that is subject to the SRLY limitations of Treasury Regulation § 1.1502-21(c), such SRLY net operating loss shall be allocated to the member that generated it (or its successor) and shall be available for use only by such member (or its successor) in accordance with the SRLY rules.

With respect to Kestrel Precision Controls, Inc., any net operating loss carryforwards of Kestrel (whether arising before or after the June 7, 2019 acquisition) shall be treated as attributable to the Controlled Group (Meridian), as Kestrel will be a member of the Controlled Group following the Distribution. To the extent that any of Kestrel's pre-acquisition net operating losses are subject to limitations under Section 382 of the Code (by reason of the ownership change resulting from the June 7, 2019 acquisition), such limitations shall carry over to Meridian and shall continue to apply to the use of such net operating losses by the Controlled Group after the Distribution.

Section 3.02 — Tax Credit Allocation

Federal and state tax credits of the Affiliated Group existing as of the Distribution Date shall be allocated between Veldran and Meridian based on the entity whose operations generated the underlying credit. The allocation shall be determined in accordance with the following principles:

(a) Credits Attributable to the Precision Flow Business. Tax credits arising from the operations of the Precision Flow Business (including the operations of Kestrel Precision Controls, Inc.) shall be allocated to Meridian. Such credits include, without limitation, research and development credits under Section 41 of the Code generated by research activities conducted within the Precision Flow Business, foreign tax credits under Section 901 of the Code attributable to foreign operations of the Precision Flow Business, and any other credits generated by or properly allocable to the Precision Flow Business.

(b) Credits Attributable to the Engineered Coatings Business. Tax credits arising from the operations of the Engineered Coatings Business shall be allocated to Veldran. Such credits include, without limitation, research and development credits under Section 41 of the Code generated by research activities conducted within the Engineered Coatings Business, foreign tax credits under Section 901 of the Code attributable to foreign operations of the Engineered Coatings Business, and any other credits generated by or properly allocable to the Engineered Coatings Business.

(c) General Credits Not Specifically Attributable. Tax credits (including general business credits under Section 38 of the Code and any other credits) that are not specifically attributable to either the Precision Flow Business or the Engineered Coatings Business shall be allocated between Veldran and Meridian on a pro rata basis, based on the relative revenue of each business for the applicable taxable period. For purposes of this pro rata allocation and based on fiscal year 2021 financial data, the Engineered Coatings Business revenue of $1,520,000,000 and the Precision Flow Business revenue of $820,000,000 yield an allocation ratio of approximately sixty-four and ninety-six hundredths percent (64.96%) to Veldran and thirty-five and four hundredths percent (35.04%) to Meridian, subject to adjustment based on actual revenue figures for the applicable taxable period.

Section 3.03 — Earnings and Profits Allocation

The accumulated earnings and profits of Veldran (including the earnings and profits of all members of the Affiliated Group) as of the Distribution Date shall be allocated between Veldran (the Distributing Group) and Meridian (the Controlled Group) in accordance with the methodology prescribed by Treasury Regulation § 1.312-10. Under this regulation, the earnings and profits of the distributing corporation are allocated between the distributing corporation and the controlled corporation in proportion to the fair market values of the assets retained by the distributing corporation and the assets distributed to the controlled corporation, respectively.

For purposes of this allocation, the fair market value of the Precision Flow Business (which will comprise the assets of Meridian following the Contribution) shall be determined based on the independent valuation prepared by Brackenridge & Co. The preliminary valuation range established by Brackenridge & Co. is $1,396,500,000 to $1,702,400,000, based on an enterprise value to EBITDA multiple of 10.5× to 12.8× applied to the Precision Flow Business's fiscal year 2021 EBITDA of $133,000,000. This valuation range is preliminary and subject to update at or near the Distribution Date based on then-current financial performance, market conditions, and other relevant factors.

The final allocation of earnings and profits shall be computed at or near the Distribution Date, based on the then-current fair market values of the Distributing Group and the Controlled Group as determined by Brackenridge & Co. (or another independent valuation firm acceptable to both parties). The allocation of earnings and profits is significant because it affects the characterization of the Distribution as a dividend (to the extent of earnings and profits) or a return of capital (to the extent earnings and profits are exhausted) for purposes of determining the tax treatment of any boot or other taxable consideration received by Veldran shareholders in connection with the Distribution. The parties shall cooperate in finalizing the earnings and profits allocation and shall engage Pemberton Rathbone LLP to assist in the computation.

ARTICLE IV — RESPONSIBILITY FOR FILING TAX RETURNS

Section 4.01 — Pre-Distribution Consolidated Returns

Veldran shall be responsible for the preparation, execution, and filing of all Consolidated Returns for Pre-Distribution Tax Periods, including the Consolidated Return for any Straddle Period in which Meridian is a member of the Affiliated Group. This responsibility encompasses all federal consolidated income tax returns, and Veldran shall bear the cost of preparing such returns.

Veldran shall engage Pemberton Rathbone LLP (Harold Weiss, Partner, Tax; One PPG Place, Suite 1600, Pittsburgh, PA 15222) as the preparer of all Consolidated Returns, unless Veldran and Meridian mutually agree to engage another qualified tax-return preparer. Any change in tax-return preparer shall require the approval of Meridian, which approval shall not be unreasonably withheld, conditioned, or delayed.

Meridian shall cooperate fully with Veldran and Pemberton Rathbone LLP in connection with the preparation of Consolidated Returns, including by providing all financial information, tax data, work papers, schedules, and other information reasonably necessary for the accurate and timely preparation of such returns. Meridian's cooperation obligations shall extend to making available the employees, officers, and agents of the Controlled Group as may reasonably be required to address questions, provide clarifications, or sign any documents necessary for the preparation and filing of the Consolidated Returns.

Section 4.02 — Post-Distribution Separate Returns

Following the Distribution Date, each party shall be independently responsible for the preparation, execution, and filing of its own federal, state, and local income tax returns:

(a) Meridian. Meridian shall be responsible for preparing and filing all federal, state, and local income tax returns for the Controlled Group for all Post-Distribution Tax Periods. Meridian may engage the tax-return preparer of its choice for such purpose and shall bear the cost of such preparation.

(b) Veldran. Veldran shall be responsible for preparing and filing all federal, state, and local income tax returns for the Distributing Group for all Post-Distribution Tax Periods. Veldran may continue to engage Pemberton Rathbone LLP or any other qualified tax-return preparer of its choice for such purpose and shall bear the cost of such preparation.

Section 4.03 — Straddle Period Returns

With respect to any tax return covering a Straddle Period (i.e., a taxable period that begins on or before the Distribution Date and ends after the Distribution Date), Veldran shall be responsible for the preparation and filing of such return, consistent with its responsibilities under Section 4.01. However, because a portion of the Straddle Period falls after the Distribution Date and involves the operations of the Controlled Group as an independent entity, the following additional procedures shall apply:

(a) Allocation Method. All Straddle Period returns shall be prepared using the Closing of the Books Method for purposes of allocating items between the Pre-Distribution portion and the Post-Distribution portion, as described in Section 2.04 of this TSA.

(b) Meridian Review and Approval. Prior to filing any Straddle Period return, Veldran shall provide Meridian with a copy of the return (or the portions thereof attributable to the Controlled Group) for Meridian's review and approval. Meridian's approval shall not be unreasonably withheld, conditioned, or delayed, and Meridian shall respond to Veldran's request for approval within the time period specified in Section 4.04.

(c) Cooperation. Both parties shall cooperate in the preparation of Straddle Period returns, and each party shall provide the other with all information necessary for the accurate allocation of items between the Pre-Distribution and Post-Distribution portions.

Section 4.04 — Review Rights

Each party shall have the right to review and comment on any tax return prepared by the other party to the extent that such return includes items attributable to the reviewing party's business or could reasonably be expected to affect the reviewing party's tax liability, including any Separate Company Tax Liability computation, indemnification obligation, or tax sharing payment under this TSA.

The reviewing party's review period shall be thirty (30) days from the date of receipt of the return (or the relevant portions thereof) from the preparing party. In the event that the applicable filing deadline does not permit a thirty-day review period, the review period shall be such shorter period as the filing deadline permits, but in no event less than fifteen (15) days. The preparing party shall use reasonable efforts to provide the return to the reviewing party as far in advance of the filing deadline as practicable.

If the reviewing party has objections or comments regarding the return, it shall communicate such objections or comments to the preparing party in writing within the review period. The parties shall endeavor to resolve any such objections in good faith. If the parties are unable to resolve the objections prior to the filing deadline, the preparing party shall file the return in the manner it deems appropriate, and the reviewing party's objections shall be preserved for purposes of the dispute resolution procedures set forth in Article XI.

ARTICLE V — TAX INDEMNIFICATION

Section 5.01 — General Indemnification by Veldran

Veldran shall indemnify, defend, and hold harmless Meridian and each member of the Controlled Group from and against any and all Taxes (including any penalties, interest, additions to tax, and reasonable professional fees, including fees of accountants, attorneys, and other tax advisors) attributable to or arising from:

(a) The operations of the Distributing Group (including the Engineered Coatings Business and any other operations retained by Veldran following the Distribution) for any Pre-Distribution Tax Period, to the extent such Taxes exceed Meridian's Separate Company Tax Liability;

(b) Any increase in Taxes imposed on Meridian or any member of the Controlled Group resulting from an action, omission, or breach by the Distributing Group (including any breach of a representation, warranty, or covenant made by Veldran under this TSA, the Separation Agreement, or the Representation Letter);

(c) Any failure by Veldran to timely and properly prepare, file, and pay Taxes shown due on any Consolidated Return or Straddle Period return for which Veldran is responsible under Article IV; and

(d) Any Tax Proceeding relating to the operations of the Distributing Group for which Veldran has control under Article VI, to the extent the resolution of such Tax Proceeding results in an increase in Taxes for which Meridian or the Controlled Group would otherwise be liable.

Section 5.02 — General Indemnification by Meridian

Meridian shall indemnify, defend, and hold harmless Veldran and each member of the Distributing Group from and against any and all Taxes (including any penalties, interest, additions to tax, and reasonable professional fees, including fees of accountants, attorneys, and other tax advisors) attributable to or arising from:

(a) The operations of the Controlled Group (including the Precision Flow Business and the operations of Kestrel Precision Controls, Inc.) for any Pre-Distribution Tax Period, but only to the extent of Meridian's Separate Company Tax Liability as computed under Section 2.02;

(b) Any increase in Taxes imposed on Veldran or any member of the Distributing Group resulting from an action, omission, or breach by the Controlled Group (including any breach of a representation, warranty, or covenant made by Meridian under this TSA, the Separation Agreement, or the Representation Letter);

(c) Any failure by Meridian to timely and properly prepare, file, and pay Taxes shown due on any tax return for which Meridian is responsible under Article IV; and

(d) Any Tax Proceeding relating to the operations of the Controlled Group for Post-Distribution Tax Periods, to the extent the resolution of such Tax Proceeding results in an increase in Taxes for which Veldran or the Distributing Group would otherwise be liable.

Section 5.03 — Indemnification for Failure of Spin-Off to Qualify Under § 355

This is a critical provision and is expected to be the subject of significant negotiation among the parties. The following sets forth the proposed framework for allocation of liability in the event that the Spin-Off fails to qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code.

In the event that the Spin-Off fails to qualify under Section 355 of the Code and/or Section 368(a)(1)(D) of the Code, and such failure results in the recognition of taxable gain by Veldran on the Distribution of Meridian stock to the Veldran shareholders (including gain at the corporate level under Section 311(b) of the Code or recognition of gain by Veldran shareholders who receive Meridian stock in the Distribution), the allocation of the resulting tax liability shall be determined as follows:

(a) Fault-Based Allocation.

(i) Veldran at Fault. If the failure of the Spin-Off to qualify under Section 355 and/or Section 368(a)(1)(D) is attributable to a breach of any representation, warranty, or covenant made by Veldran or any member of the Distributing Group in the Representation Letter, the Separation Agreement, or this TSA, then Veldran shall bear one hundred percent (100%) of the resulting tax liability, including any corporate-level gain recognition tax imposed on Veldran, any penalties and interest thereon, and any resulting increase in Taxes imposed on Meridian or the Controlled Group.

(ii) Meridian at Fault. If the failure of the Spin-Off to qualify under Section 355 and/or Section 368(a)(1)(D) is attributable to a breach of any representation, warranty, or covenant made by Meridian or any member of the Controlled Group in the Representation Letter, the Separation Agreement, or this TSA, or is attributable to any post-Distribution action taken by Meridian or the Controlled Group that is inconsistent with the Tax Opinion, then Meridian shall bear one hundred percent (100%) of the resulting tax liability, including any corporate-level gain recognition tax imposed on Veldran (to the extent caused by Meridian's breach or action), any penalties and interest thereon, and any resulting increase in Taxes imposed on Veldran or the Distributing Group.

(b) Non-Fault / Change-in-Law Allocation.

If the failure of the Spin-Off to qualify under Section 355 and/or Section 368(a)(1)(D) is not attributable to a breach by either party — for example, if the failure results from a change in law enacted after the Distribution Date, a change in the interpretation of existing law by the Internal Revenue Service, a judicial decision that alters the applicable legal standards, or any other cause that is not the result of a breach by either party — then the resulting tax liability shall be allocated between Veldran and Meridian as follows:

[OPEN — TO BE NEGOTIATED]: The parties have identified two potential approaches for the allocation of non-fault Section 355 failure liability, and this issue requires further negotiation:

Option A: Fifty percent (50%) to Veldran and fifty percent (50%) to Meridian.

Option B: In proportion to the relative fair market values of the Distributing Group and the Controlled Group as of the Distribution Date (based on the valuations prepared by Brackenridge & Co. or another independent valuation firm).

The selection between these approaches (or any alternative approach) is a fundamental economic term of the TSA and must be resolved through negotiation among Veldran, Meridian, and Harrowgate Capital Advisors LLC before the TSA can be finalized.

Section 5.04 — Specific Indemnification for § 355(e) Gain Recognition

In the event that the Distribution triggers gain recognition by Veldran under Section 355(e) of the Code (the "anti-Morris Trust" provision), the following provisions shall apply. Section 355(e) provides that if the Distribution is part of a "plan (or series of related transactions)" pursuant to which one or more persons acquire, directly or indirectly, a Fifty-Percent or Greater Interest in either Veldran (the distributing corporation) or Meridian (the controlled corporation), then Veldran shall recognize gain on the Distribution as if Veldran had sold the Meridian stock for its fair market value.

Estimated Tax at Risk. Based on preliminary estimates, the corporate-level tax liability resulting from Section 355(e) gain recognition could be in the range of $125,300,000 to $189,500,000, computed as follows:

The parties acknowledge that the foregoing estimates are preliminary and based on the Brackenridge & Co. preliminary valuation range and an estimated adjusted tax basis in the Precision Flow Division assets of approximately $800,000,000. The actual tax liability would depend on the fair market value of Meridian and the adjusted tax basis as finally determined at the time of any Section 355(e) triggering event.

(a) § 355(e) Triggered by the September 2019 HPE Fund IV Acquisition.

If Section 355(e) is triggered by reason of the September 20, 2019 acquisition of a 62.4% stake in Veldran by HPE Fund IV (an investment fund managed by Harrowgate Capital Advisors LLC), in which HPE Fund IV acquired 46,488,000 shares of Veldran common stock at $40.00 per share for an aggregate purchase price of $1,859,520,000, and such acquisition is deemed to be part of a "plan (or series of related transactions)" with the Distribution, the allocation of the resulting corporate-level tax liability shall be determined as follows:

[OPEN — HARROWGATE/VELDRAN NEGOTIATION POINT]: This is a critical open issue. Veldran has proposed that any Section 355(e) liability arising from the 2019 HPE Fund IV acquisition should be allocated to Harrowgate Capital Advisors LLC (or HPE Fund IV) via a separate indemnity obligation from HPE Fund IV, on the basis that Harrowgate was the acquirer and any "plan" connecting the 2019 acquisition to the Distribution originated with Harrowgate's investment thesis. Meridian's position is that it should not bear any portion of this cost, as the 2019 acquisition was a Veldran/Harrowgate transaction in which Meridian (which did not yet exist as a separate entity) had no involvement. The alternative position is that Veldran should bear this liability as a cost of effecting the Spin-Off. Resolution of this issue requires direct negotiation between Harrowgate and Veldran (and potentially HPE Fund IV), with input from Meridian's designated management team.

(b) § 355(e) Triggered by Post-Distribution Acquisition.

If Section 355(e) is triggered by an acquisition of a Fifty-Percent or Greater Interest in Meridian or Veldran occurring within the two-year period following the Distribution Date (or any longer period during which the Distribution and the acquisition are deemed to be part of a plan under Section 355(e) and the Treasury Regulations promulgated thereunder), then the party whose stock was acquired (or whose actions facilitated the acquisition) shall bear one hundred percent (100%) of the resulting corporate-level tax liability imposed on Veldran.

Specifically:

(i) If the triggering acquisition involves Meridian stock, Meridian shall indemnify Veldran for the full amount of the resulting tax liability (including penalties, interest, and reasonable professional fees).

(ii) If the triggering acquisition involves Veldran stock, Veldran shall bear the full amount of the resulting tax liability and Meridian shall have no obligation with respect thereto.

This provision shall be read in conjunction with the post-Distribution restrictive covenants set forth in Article VIII and the Tax Matters provisions of the Separation Agreement, which impose two-year restrictions on stock issuances, mergers, asset sales, and cessation of active business designed to minimize the risk of a Section 355(e) triggering event.

Section 5.05 — Specific Indemnification for § 355(d) Disqualified Distribution

In the event that the Distribution is treated as a "disqualified distribution" under Section 355(d) of the Code, the following provisions shall apply. Section 355(d) provides that if, immediately after the Distribution, any person holds disqualified stock in either Veldran or Meridian that constitutes a Fifty-Percent or Greater Interest, and such stock was acquired by purchase during the five-year period ending on the Distribution Date, then Veldran shall recognize gain on the Distribution as if the distributed Meridian stock were sold for its fair market value.

The parties acknowledge that HPE Fund IV's 62.4% stake in Veldran was acquired by purchase on September 20, 2019, which is within the five-year look-back period applicable to a Distribution occurring in 2022 or early 2023. Accordingly, the Section 355(d) analysis is directly implicated by the facts of this transaction, and the risk of a disqualified distribution determination must be carefully evaluated.

The allocation of any Section 355(d) tax liability shall follow the same fault-based framework set forth in Section 5.03, with the additional provision that to the extent Section 355(d) liability arises solely from HPE Fund IV's September 20, 2019 purchase of its 62.4% stake in Veldran, the allocation of such liability as between Veldran and Harrowgate Capital Advisors LLC (or HPE Fund IV) shall be governed by the same negotiation principles described in Section 5.04(a).

[OPEN — SAME NEGOTIATION DYNAMIC AS § 355(e)]: The allocation of Section 355(d) liability arising from the HPE Fund IV acquisition is subject to the same open negotiation points as the Section 355(e) allocation described in Section 5.04(a). Meridian's position remains that it should not bear any portion of this cost.

The parties further acknowledge that the Section 355(d) and Section 355(e) analyses overlap in significant respects, and the TSA shall contain a provision preventing the double-counting of the same built-in gain under both sections. To the extent that Veldran recognizes gain on the Distribution under both Section 355(d) and Section 355(e), the indemnification obligations under Sections 5.04 and 5.05 shall apply to the aggregate gain recognized (and not separately to the gain under each section), so that the total indemnification obligation does not exceed the total tax liability actually imposed on Veldran.

Section 5.06 — Indemnification Procedures

The following procedures shall govern the assertion and payment of indemnification claims under this Article V:

(a) Notice. The party seeking indemnification (the "Indemnified Party") shall

DRAFT — TAX SHARING AGREEMENT: OUTLINE AND KEY TERMS
Prepared by:
Calderwood & Harkness LLP 1301 Avenue of the Americas, 40th Floor New York, NY 10019
Engagement Number: 1003-00005 Matter Code: HRW-SPIN-001
August 4, 2022
STATUS: DRAFT — OUTLINE STAGE ONLY NOT FOR EXECUTION SUBJECT TO FURTHER NEGOTIATION AND CLIENT REVIEW
This document has been prepared for insertion into or as a companion agreement to the Separation Agreement being drafted by Whitfield & Gage LLP (51 West 52nd Street, New York, NY 10019). This document and its contents are protected by the attorney-client privilege and constitute attorney work product. This document is intended solely for the use of the addressees and their authorized representatives. Any distribution, copying, or disclosure to any other person is strictly prohibited without the prior written consent of Calderwood & Harkness LLP. Receipt of this document by any person other than the intended addressees does not constitute a waiver of any applicable privilege.
ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
Right-click to update Table of Contents
INTRODUCTORY NOTE FROM COUNSEL
August 4, 2022
MEMORANDUM
FROM: Leonard Cross, Partner, and Garrett Simmons, Associate Calderwood & Harkness LLP 1301 Avenue of the Americas, 40th Floor New York, NY 10019
TO: Christine Yeung, General Counsel Harrowgate Capital Advisors LLC 600 Lexington Avenue, 38th Floor New York, NY 10022
Philip Crundell, General Counsel Veldran Industries Holdings, Inc. 2400 Commerce Park Drive, Suite 500 Charlotte, NC 28217
COPIES TO: Priya Chandrasekar, Partner Whitfield & Gage LLP 51 West 52nd Street New York, NY 10019
David Ochoa, Partner Thornapple McCord LLP 227 West Trade Street, Suite 2000 Charlotte, NC 28202
Sylvia Hartwell
Leila Nazari
RE: Proposed Tax Sharing Agreement — Outline and Key Terms Engagement No. 1003-00005; Matter Code: HRW-SPIN-001
This memorandum accompanies the enclosed outline and key terms for the Tax Sharing Agreement (the "TSA") to be entered into between Veldran Industries Holdings, Inc. ("Distributing" or "Veldran") and Meridian Flow Technologies, Inc. ("Controlled" or "Meridian" or "SpinCo") in connection with the proposed tax-free spin-off of the Precision Flow Solutions Division of Veldran. The Spin-Off is intended to qualify as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"), in conjunction with a reorganization under Section 368(a)(1)(D) of the Code.
We wish to emphasize at the outset that a full-form agreement has not been drafted. The enclosed outline is intended to establish the framework and to identify the principal terms and key open issues that must be resolved through further negotiation among the parties and their respective counsel before the TSA can be prepared in definitive form. The outline reflects our preliminary views as to the appropriate allocation of tax liabilities, responsibilities for tax return preparation and filing, indemnification obligations, post-Distribution restrictive covenants, and related matters. Each of these provisions is subject to further discussion, refinement, and ultimately the approval of all parties.
We note the need for close coordination with Pemberton Rathbone LLP (Harold Weiss, Partner, Tax; One PPG Place, Suite 1600, Pittsburgh, PA 15222), which serves as Veldran's independent auditors and tax-return preparers. Pemberton Rathbone maintains the historical tax positions and computation files that will be essential to determining the allocation of Pre-Distribution tax liabilities, the treatment of Kestrel Precision Controls tax attributes, and the preparation of the illustrative Separate Company Tax Liability computation set forth in Appendix B. We understand that certain information requests remain outstanding with Pemberton Rathbone as of the date of this memorandum, including requests relating to the potential Section 338(h)(10) election in connection with the Kestrel acquisition.
We also note that Dunmore Havens & Associates LLC (Irene Salcedo, Principal; 590 Madison Avenue, 20th Floor, New York, NY 10022) is advising Prescott Capital Management LP, a 14.8% shareholder of Veldran, separately on fund-level tax consequences arising from the Distribution. It is possible that Prescott and its advisors may have comments on the TSA, particularly with respect to the allocation of earnings and profits and the potential impact of any Section 355(d) or Section 355(e) issues on the tax treatment of the Distribution to Veldran shareholders at the fund level. We recommend that any such comments be coordinated through Christine Yeung's office to ensure consistency with the overall transaction structure.
The TSA will be structured as a stand-alone agreement but will be cross-referenced in the Tax Matters provisions of the Separation Agreement. Calderwood & Harkness has separately prepared draft Tax Matters provisions for the Separation Agreement, dated July 28, 2022, which are being reviewed by Whitfield & Gage LLP (Priya Chandrasekar) in connection with the broader Separation Agreement drafting process. The TSA and the Tax Matters provisions of the Separation Agreement should be read together, and certain provisions (particularly the post-Distribution restrictive covenants and the indemnification for Section 355 failure) will need to be harmonized between the two documents.
Finally, we note that Meridian Flow Technologies, Inc. has not yet been incorporated as of the date of this memorandum. The formation of Meridian as a Delaware corporation is expected to occur prior to the Distribution Date, and the TSA will be executed by Meridian promptly following its incorporation but in all events prior to the Distribution Date. Until Meridian is incorporated, the obligations contemplated by the TSA will be binding upon Veldran with respect to the Precision Flow Business assets and operations that are to be contributed to Meridian in the Contribution.
We look forward to discussing this outline with all parties at the next working group meeting. Any questions regarding this memorandum or the enclosed outline should be directed to Leonard Cross (212-555-8400) or Garrett Simmons (212-555-8425) at Calderwood & Harkness LLP.
DRAFT — TAX SHARING AGREEMENT: OUTLINE AND KEY TERMS
ARTICLE I — DEFINITIONS
Section 1.01 — Defined Terms
For purposes of this Tax Sharing Agreement, the following terms shall have the meanings set forth below. All defined terms used but not defined herein shall have the meanings ascribed to them in the Separation Agreement or, if not defined therein, in the Code or the Treasury Regulations, as applicable.
"Active Business" means the active conduct of a trade or business, as that term is defined in Section 355(b)(2) of the Code and the Treasury Regulations promulgated thereunder, including the requirement that the trade or business must have been actively conducted throughout the five-year period ending on the date of the Distribution and must not have been acquired by the distributing corporation or the controlled corporation in a transaction in which gain or loss was recognized, in whole or in part, within such five-year period. For purposes of this TSA, the Active Businesses are the Engineered Coatings Business (with respect to Veldran) and the Precision Flow Business (with respect to Meridian).
"Adjustment" means any change in tax liability, including any increase or decrease in Taxes, any reallocation of income, deductions, credits, or other tax items, and any assessment, deficiency, or refund, resulting from (a) an audit, examination, or other proceeding conducted by the Internal Revenue Service or any other federal, state, local, or foreign taxing authority, (b) the filing of an amended tax return or a claim for refund, (c) a judicial determination by any court of competent jurisdiction, or (d) a closing agreement or similar arrangement with a taxing authority.
"Affiliated Group" means the affiliated group of corporations, within the meaning of Section 1504(a) of the Code, of which Veldran Industries Holdings, Inc. is the common parent corporation, including Meridian Flow Technologies, Inc. and its direct and indirect subsidiaries, for any Pre-Distribution Tax Period during which Meridian (or the entities comprising the Precision Flow Business) was a member of such affiliated group. The Affiliated Group includes, without limitation, Kestrel Precision Controls, Inc. for all periods following its acquisition by Veldran on June 7, 2019.
"Closing of the Books Method" means the method prescribed by Treasury Regulation § 1.1502-76(b)(2)(i) for allocating items of income, deduction, gain, loss, and credit between the portion of a Straddle Period ending on the Distribution Date and the portion of a Straddle Period beginning after the Distribution Date. Under this method, the taxable year of Meridian and its subsidiaries shall be treated as closing at the end of the Distribution Date, and items shall be allocated to the Pre-Distribution portion and the Post-Distribution portion based on the actual results of operations during each such portion.
"Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute. References to specific sections of the Code shall include any predecessor and successor provisions and any applicable Treasury Regulations promulgated thereunder.
"Consolidated Return" means any federal income tax return filed on a consolidated basis by the Affiliated Group pursuant to Section 1501 of the Code and Treasury Regulation § 1.1502-75, for any Pre-Distribution Tax Period or Straddle Period during which Meridian (or the entities comprising the Precision Flow Business) was included in the Affiliated Group.
"Contribution" means the contribution by Veldran to Meridian of all assets and liabilities associated with the Precision Flow Solutions Division (including, without limitation, 100% of the outstanding equity interests in Kestrel Precision Controls, Inc. and all other subsidiaries, assets, contracts, intellectual property, real and personal property, and employee-related obligations comprising the Precision Flow Business), in exchange for all outstanding shares of Meridian common stock and Meridian's assumption of certain allocated liabilities, all as more fully described in the Separation Agreement. The Contribution is intended to qualify as a reorganization under Section 368(a)(1)(D) of the Code.
"Controlled" or "Meridian" means Meridian Flow Technologies, Inc., a Delaware corporation to be incorporated prior to the Distribution Date for the purpose of receiving the Precision Flow Business in the Contribution and serving as the issuer of the shares to be distributed in the Distribution.
"Controlled Group" means Meridian and all of its direct and indirect subsidiaries following the Distribution, including Kestrel Precision Controls, Inc. and any other entity that is transferred to Meridian as part of the Contribution and that remains a subsidiary of Meridian after the Distribution Date.
"Distributing" or "Veldran" means Veldran Industries Holdings, Inc., a Delaware corporation, with employer identification number 86-1920347, the common parent of the Affiliated Group and the entity effecting the Distribution of 100% of the outstanding Meridian common stock to the Veldran shareholders.
"Distributing Group" means Veldran and all of its direct and indirect subsidiaries (other than Meridian and the members of the Controlled Group) following the Distribution. The Distributing Group includes all entities associated with the Engineered Coatings Business and any other business or operations retained by Veldran following the Distribution.
"Distribution" means the pro rata distribution by Veldran of 100% of the outstanding shares of common stock of Meridian to the holders of Veldran common stock as of the Record Date. The Distribution shall be effected on a ratio of one (1) share of Meridian common stock for each one (1) share of Veldran common stock outstanding on the Record Date. As of the date of this outline, there are approximately 74,500,000 shares of Veldran common stock outstanding, such that the Distribution is expected to result in the issuance of approximately 74,500,000 shares of Meridian common stock. The Distribution is intended to qualify as a tax-free distribution under Section 355 of the Code.
"Distribution Date" means the date on which the Distribution is effected, as determined by the Board of Directors of Veldran. The Distribution Date is originally targeted for the fourth quarter of calendar year 2022, subject to satisfaction of all conditions precedent set forth in the Separation Agreement.
"Engineered Coatings Business" means the Engineered Coatings Division of Veldran, comprising all operations, assets, liabilities, and activities associated with Veldran's engineered coatings and surface solutions business, which shall remain with Veldran following the Distribution. For reference purposes, the Engineered Coatings Business generated revenue of approximately $1,520,000,000 and EBITDA of approximately $285,000,000 for the fiscal year ended December 31, 2021.
"Fifty-Percent or Greater Interest" has the meaning ascribed to such term in Section 355(d)(4) of the Code, and generally means stock possessing at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote or at least fifty percent (50%) of the total value of shares of all classes of stock of a corporation.
"Kestrel" means Kestrel Precision Controls, Inc., a Georgia corporation, with employer identification number 58-2847193, founded on February 12, 2003, and acquired by Veldran on June 7, 2019 from Rennick Industrial Partners Fund II LP in a taxable stock acquisition for an aggregate purchase price of $295,000,000. Kestrel operates the precision fluid-control business that forms a component of the Precision Flow Business and is expected to become a subsidiary of Meridian upon consummation of the Contribution.
"Kestrel Tax Attributes" means all tax attributes of Kestrel Precision Controls, Inc., including, without limitation, (a) adjusted tax basis in assets, (b) net operating loss carryforwards and carrybacks, (c) research and development credit carryforwards, (d) general business credit carryforwards, (e) accumulated earnings and profits, (f) any attributes arising from or affected by the June 7, 2019 taxable stock acquisition from Rennick Industrial Partners Fund II LP (including any basis adjustments resulting from a Section 338 election, if applicable), and (g) any limitations on the use of such attributes imposed by Section 382 of the Code or any analogous state or local tax provision.
"Post-Distribution Tax Period" means any taxable period beginning after the Distribution Date. For the avoidance of doubt, the portion of any Straddle Period beginning after the Distribution Date shall be treated as a Post-Distribution Tax Period for purposes of this TSA, with items allocated thereto in accordance with Section 2.04.
"Precision Flow Business" means the Precision Flow Solutions Division of Veldran, comprising all operations, assets, liabilities, and activities associated with Veldran's precision flow solutions, fluid-control, and related technologies business, all of which shall be contributed to Meridian in the Contribution. The Precision Flow Business includes, without limitation, the operations of Kestrel Precision Controls, Inc. and all other subsidiaries, divisions, and business units that are part of the Precision Flow Solutions Division as of the Distribution Date. For reference purposes, the Precision Flow Business generated revenue of approximately $820,000,000 and EBITDA of approximately $133,000,000 for the fiscal year ended December 31, 2021.
"Pre-Distribution Tax Period" means any taxable period ending on or before the Distribution Date. For the avoidance of doubt, the portion of any Straddle Period ending on the Distribution Date shall be treated as a Pre-Distribution Tax Period for purposes of this TSA, with items allocated thereto in accordance with Section 2.04.
"Record Date" means the record date for the Distribution, as established by the Board of Directors of Veldran, which shall be the date on which the holders of Veldran common stock of record shall be determined for purposes of the Distribution.
"Representation Letter" means the representation letter to be executed by authorized officers of Veldran and Harrowgate Capital Advisors LLC in support of the Tax Opinion, in substantially the form circulated in draft on July 11, 2022, as such letter may be revised or supplemented prior to the Distribution Date. The Representation Letter sets forth factual representations regarding the business purposes of the Spin-Off, the continuity of the Active Businesses, the absence of a plan or series of related transactions that would trigger Section 355(e), and other matters relevant to the qualification of the Spin-Off under Section 355 of the Code.
"Separate Company Tax Liability" means, with respect to Veldran or Meridian (as applicable), the hypothetical federal income tax liability of such entity (including its respective subsidiaries) computed as if such entity had filed a separate federal income tax return for the applicable taxable period, rather than being included in the Consolidated Return of the Affiliated Group. The computation of Separate Company Tax Liability shall be performed in accordance with the methodology set forth in Section 2.02 of this TSA.
"Spin-Off" means the Contribution and the Distribution, taken together as an integrated transaction intended to qualify under Sections 355 and 368(a)(1)(D) of the Code.
"Straddle Period" means any taxable period that includes but does not end on the Distribution Date — that is, any taxable period that begins on or before the Distribution Date and ends after the Distribution Date.
"Tax" or "Taxes" means all federal, state, local, and foreign taxes of any kind whatsoever, including, without limitation, income taxes, franchise taxes, excise taxes, property taxes (real and personal), sales taxes, use taxes, value-added taxes, transfer taxes, stamp duties, payroll taxes, employment taxes, withholding taxes, alternative minimum taxes, and any other tax, levy, duty, impost, or assessment, together with all interest, penalties, additions to tax, and additional amounts imposed with respect thereto.
"Tax Benefit" means any reduction in the amount of Taxes that would otherwise be payable by a party, or any increase in the amount of a Tax refund that would otherwise be receivable by a party, resulting from a deduction, credit, loss, or other tax attribute, including any net operating loss carryforward or carryback, tax credit carryforward or carryback, or basis adjustment.
"Tax Detriment" means any increase in the amount of Taxes that would otherwise be payable by a party, or any reduction in the amount of a Tax refund that would otherwise be receivable by a party, resulting from an adjustment, disallowance, reallocation, or other change in income, deductions, credits, or other tax items.
"Tax Opinion" means the opinion of Calderwood & Harkness LLP to be delivered to Veldran and Meridian in connection with the Spin-Off, opining at a "should" level (i.e., that the Spin-Off "should" qualify as a tax-free transaction) that the Contribution qualifies as a reorganization under Section 368(a)(1)(D) of the Code, the Distribution qualifies as a tax-free distribution under Section 355 of the Code, and no gain or loss will be recognized by Veldran, Meridian, or the Veldran shareholders as a result of the Spin-Off (subject to the assumptions, qualifications, and limitations set forth in such opinion).
"Tax Proceeding" means any audit, examination, investigation, claim for refund, administrative appeal, litigation, or judicial or administrative proceeding relating to Taxes, whether initiated by a taxing authority, a taxpayer, or any other party, and whether conducted at the audit, appeals, or litigation level.
"Treasury Regulations" means the regulations promulgated under the Code by the United States Department of the Treasury, as such regulations may be amended, supplemented, or superseded from time to time, including any temporary or proposed regulations to the extent they are relevant to the interpretation of the applicable provisions of the Code.
Section 1.02 — Rules of Construction
The following rules of construction shall apply throughout this TSA:
(a) References to any section or provision of the Code or the Treasury Regulations shall be deemed to include any successor or replacement provision and any applicable temporary or proposed regulations.
(b) Words in the singular shall include the plural and vice versa, and words of one gender shall include the other genders, in each case as the context requires.
(c) The headings and captions contained in this TSA are for reference purposes only and shall not affect in any way the meaning or interpretation of this TSA.
(d) The words "include," "includes," and "including" shall be deemed to be followed by the phrase "without limitation" whether or not so stated.
(e) References to "days" shall mean calendar days unless otherwise specified.
(f) References to a "party" shall mean Veldran or Meridian, as applicable, and references to the "parties" shall mean Veldran and Meridian, collectively.
(g) All dollar amounts are expressed in United States dollars.
(h) Any reference to a "writing" or "written" notice shall include electronic mail (e-mail) to the addresses specified in Section 12.05, provided that the sender receives confirmation of receipt.
ARTICLE II — ALLOCATION OF PRE-DISTRIBUTION TAX LIABILITIES
Section 2.01 — General Allocation Principle
All federal, state, and local income tax liabilities of the Affiliated Group for Pre-Distribution Tax Periods shall be allocated between the Distributing Group and the Controlled Group in accordance with the Separate Company Tax Liability methodology set forth in Section 2.02 below. This allocation methodology is intended to ensure that each of Veldran and Meridian bears a share of the Affiliated Group's consolidated tax liability that is commensurate with the income, deductions, credits, and other tax items attributable to its respective business operations during the Pre-Distribution Tax Period.
Specifically, Veldran shall bear all consolidated federal income tax liabilities of the Affiliated Group for Pre-Distribution Tax Periods to the extent such liabilities exceed Meridian's Separate Company Tax Liability, as computed in accordance with Section 2.02. Meridian shall be responsible for an amount equal to its Separate Company Tax Liability for each Pre-Distribution Tax Period, as so computed. To the extent that Meridian's Separate Company Tax Liability for a given Pre-Distribution Tax Period exceeds or is less than the amount of Taxes actually paid by or on behalf of Meridian (whether through estimated tax payments, withholding, or otherwise), such excess or shortfall shall be settled between the parties in accordance with the payment provisions of Article IX.
Section 2.02 — Separate Company Tax Liability Methodology
The Separate Company Tax Liability of Meridian for each Pre-Distribution Tax Period shall be computed as if Meridian (together with the entities comprising the Precision Flow Business, including Kestrel Precision Controls, Inc.) had filed a separate federal income tax return for such period, rather than being included in the Consolidated Return of the Affiliated Group. The computation shall be performed in accordance with the following principles:
(a) Items Included. The computation shall take into account only the income, deductions, gains, losses, credits, and other tax items that are properly attributable to the Precision Flow Business, as reflected in the books and records of the Precision Flow Solutions Division maintained by Veldran and audited by Pemberton Rathbone LLP.
(b) Tax Rate. The computation shall apply the federal corporate income tax rate in effect for the applicable taxable period. For taxable periods beginning after December 31, 2017, the applicable federal corporate income tax rate is twenty-one percent (21%).
(c) Books and Records. Items shall be attributed to the Precision Flow Business based on the books and records of the Precision Flow Solutions Division as maintained by Veldran in the ordinary course of business and as audited by Pemberton Rathbone LLP. In the event of any ambiguity or dispute as to whether a particular item is properly attributable to the Precision Flow Business or the Engineered Coatings Business, the parties shall resolve such ambiguity in accordance with the dispute resolution procedures set forth in Article XI.
(d) Intercompany Transactions. Intercompany transactions between the Engineered Coatings Business and the Precision Flow Business (including intercompany sales, services, cost-sharing arrangements, licensing arrangements, and management fees) shall be eliminated or adjusted in the Separate Company Tax Liability computation to reflect arm's-length pricing consistent with the principles of Section 482 of the Code and the Treasury Regulations promulgated thereunder. The parties acknowledge that certain intercompany transactions may have been conducted at prices or on terms that differ from arm's-length terms, and the Separate Company Tax Liability methodology is intended to correct for any such disparities.
(e) Consolidated Return Items. Items that arise solely by reason of the consolidated return filing (including, without limitation, intercompany transaction adjustments under Treasury Regulation § 1.1502-13, investment basis adjustments under Treasury Regulation § 1.1502-32, and excess loss account inclusions under Treasury Regulation § 1.1502-19) shall be allocated between Veldran and Meridian in a manner consistent with the regulations governing such items and the Separate Company Tax Liability methodology.
Section 2.03 — Treatment of Kestrel Tax Attributes
The parties acknowledge that Kestrel Precision Controls, Inc. (EIN 58-2847193) was acquired by Veldran on June 7, 2019 in a taxable stock acquisition from Rennick Industrial Partners Fund II LP (EIN 82-3017564) for an aggregate purchase price of $295,000,000. Kestrel was originally founded on February 12, 2003 and has been continuously operating the precision fluid-control business since that date. Following its acquisition by Veldran, Kestrel became a member of the Affiliated Group and was included in Veldran's Consolidated Returns for all taxable periods commencing with the short taxable period beginning June 7, 2019.
The allocation of Kestrel Tax Attributes shall be governed by the following provisions:
(a) Allocation to Meridian. All Kestrel Tax Attributes shall be allocated to Meridian as the entity receiving the Precision Flow Business (including 100% of the equity interests in Kestrel) in the Contribution. After the Distribution Date, Kestrel will be a member of the Controlled Group, and all of its tax attributes shall be available to and the responsibility of the Controlled Group, subject to any applicable limitations.
(b) Tax Basis in Kestrel Assets. The adjusted tax basis in the assets of Kestrel shall be determined based on (i) the original acquisition basis established in connection with the June 7, 2019 taxable stock acquisition (including any adjustments resulting from a Section 338 election, if applicable), plus (ii) subsequent capital expenditures made by Kestrel or on its behalf, less (iii) depreciation, amortization, and any other applicable reductions in basis. The determination of Kestrel's inside asset basis is a critical component of the Separate Company Tax Liability computation and must be verified through review of the acquisition closing documents, the tax returns of Kestrel for taxable years 2017 through 2021, and the work papers of Pemberton Rathbone LLP.
(c) Section 338 Election Analysis. It is an open diligence item, as noted in the Supplemental Information Request dated May 16, 2022 directed to Philip Crundell, whether a Section 338(h)(10) election was made (or could have been made) by Veldran and Rennick Industrial Partners Fund II LP in connection with the Kestrel acquisition. If a Section 338(h)(10) election was made, the inside basis of Kestrel's assets would have been stepped up to fair market value as of the June 7, 2019 acquisition date, which would significantly affect the depreciation and amortization deductions available to Kestrel (and, by extension, the Separate Company Tax Liability of Meridian) for all post-acquisition periods. If no Section 338(h)(10) election was made, the inside basis of Kestrel's assets would remain at their historical carryover basis (subject to any adjustments for post-acquisition capital expenditures and depreciation). Resolution of this diligence item is essential before the Separate Company Tax Liability computation can be finalized.
(d) Pre-Acquisition Tax Attributes. Any tax attributes of Kestrel arising prior to the June 7, 2019 acquisition by Veldran (including, without limitation, pre-acquisition net operating loss carryforwards and pre-acquisition tax credit carryforwards) shall be subject to any applicable limitations under Section 382 of the Code. To the extent such pre-acquisition attributes are subject to a Section 382 annual limitation, they shall be allocated to Meridian only to the extent they are usable by the Controlled Group in accordance with such limitation. The annual Section 382 limitation shall be determined based on the facts and circumstances of the June 7, 2019 ownership change, including the value of Kestrel immediately before the ownership change and the long-term tax-exempt rate in effect for that month.
(e) Relevance to Section 355(b) Analysis. The parties note that Kestrel's continuous operation of the precision fluid-control business since its founding on February 12, 2003 is relevant to the Section 355(b)(2)(D) active-trade-or-business safe harbor analysis for the Spin-Off. Specifically, Kestrel's more-than-five-year operating history provides support for the position that the Precision Flow Business satisfies the active trade or business requirement under Section 355(b), provided that the June 7, 2019 acquisition is not treated as a disqualifying acquisition under Section 355(b)(2)(C) or (D). This analysis, however, also affects the allocation of historical tax attributes, as the pre-acquisition and post-acquisition treatment of Kestrel's items must be consistent with the positions taken in the Tax Opinion and the Representation Letter.
Section 2.04 — Treatment of Straddle Periods
For any Straddle Period (i.e., any taxable period that includes but does not end on the Distribution Date), items of income, deduction, gain, loss, and credit shall be allocated between the Pre-Distribution portion and the Post-Distribution portion using the Closing of the Books Method prescribed by Treasury Regulation § 1.1502-76(b)(2)(i). Under this method, the books of Meridian and its subsidiaries (including Kestrel) shall be deemed closed as of the end of the Distribution Date, and items shall be allocated to the Pre-Distribution portion based on the actual results of operations through the end of the Distribution Date, and to the Post-Distribution portion based on the actual results of operations for the remainder of the taxable period.
Notwithstanding the foregoing, Taxes and tax items that are not susceptible to a closing-of-the-books allocation shall be allocated between the Pre-Distribution portion and the Post-Distribution portion of the Straddle Period on a daily pro rata basis. Items subject to daily pro rata allocation include, without limitation, real property taxes, personal property taxes, annual franchise taxes, and any other Taxes that accrue ratably over the taxable period and are not directly related to specific transactions or events occurring before or after the Distribution Date. For any item allocated on a daily pro rata basis, the Pre-Distribution portion shall be the amount of such item multiplied by a fraction, the numerator of which is the number of days in the Straddle Period ending on and including the Distribution Date, and the denominator of which is the total number of days in the Straddle Period.
Section 2.05 — State and Local Income Tax Allocation
State and local income tax liabilities of the Affiliated Group for Pre-Distribution Tax Periods shall be allocated between the Distributing Group and the Controlled Group using the same Separate Company Tax Liability methodology described in Section 2.02, applied on a state-by-state and jurisdiction-by-jurisdiction basis. Each state and local jurisdiction may have different rules regarding the computation of taxable income, the availability of deductions and credits, the applicable tax rate, and the treatment of intercompany transactions, and the Separate Company Tax Liability computation for each jurisdiction shall take into account the specific rules of that jurisdiction.
The relevant jurisdictions for purposes of this state and local tax allocation include, at a minimum, the following:
(a) Delaware — the state of incorporation for both Veldran and Meridian (to be incorporated);
(b) North Carolina — the state in which Veldran maintains its principal executive offices (2400 Commerce Park Drive, Suite 500, Charlotte, NC 28217);
(c) Georgia — the state in which Meridian is expected to establish its principal executive offices (7100 Northlake Parkway, Suite 300, Tucker, GA 30084) and the state of incorporation and principal operations of Kestrel Precision Controls, Inc.; and
(d) Any other state in which Veldran, the Precision Flow Business, or any member of the Affiliated Group files income tax returns or franchise tax returns, or is otherwise subject to state or local income or franchise taxation by reason of nexus, presence, or filing obligations.
The parties note that North Carolina generally conforms to the federal treatment of Section 355 distributions, such that the Spin-Off should be treated as tax-free for North Carolina income tax purposes to the extent it qualifies under federal Section 355. Georgia, however, may impose additional filing requirements or have non-conformity issues that must be addressed. These state-specific issues are discussed in greater detail in the State and Local Tax Considerations Summary Memorandum prepared by Calderwood & Harkness LLP, dated July 20, 2022.
ARTICLE III — ALLOCATION OF NET OPERATING LOSSES AND TAX CREDITS
Section 3.01 — Federal NOL Allocation
Any consolidated net operating loss carryforwards and carrybacks of the Affiliated Group existing as of the Distribution Date shall be allocated between Veldran and Meridian in accordance with the principles set forth in Treasury Regulation § 1.1502-21 (or any successor regulation). The Treasury Regulations provide a detailed methodology for determining each member's share of a consolidated net operating loss, and the allocation under this TSA shall follow that methodology.
Specifically, each member's (or its predecessor's) share of the consolidated net operating loss for any applicable taxable year shall be determined based on the member's contribution to the consolidated net operating loss, computed under the principles of Treasury Regulation § 1.1502-21(b)(2). To the extent that a member generated a separate return limitation year ("SRLY") net operating loss that is subject to the SRLY limitations of Treasury Regulation § 1.1502-21(c), such SRLY net operating loss shall be allocated to the member that generated it (or its successor) and shall be available for use only by such member (or its successor) in accordance with the SRLY rules.
With respect to Kestrel Precision Controls, Inc., any net operating loss carryforwards of Kestrel (whether arising before or after the June 7, 2019 acquisition) shall be treated as attributable to the Controlled Group (Meridian), as Kestrel will be a member of the Controlled Group following the Distribution. To the extent that any of Kestrel's pre-acquisition net operating losses are subject to limitations under Section 382 of the Code (by reason of the ownership change resulting from the June 7, 2019 acquisition), such limitations shall carry over to Meridian and shall continue to apply to the use of such net operating losses by the Controlled Group after the Distribution.
Section 3.02 — Tax Credit Allocation
Federal and state tax credits of the Affiliated Group existing as of the Distribution Date shall be allocated between Veldran and Meridian based on the entity whose operations generated the underlying credit. The allocation shall be determined in accordance with the following principles:
(a) Credits Attributable to the Precision Flow Business. Tax credits arising from the operations of the Precision Flow Business (including the operations of Kestrel Precision Controls, Inc.) shall be allocated to Meridian. Such credits include, without limitation, research and development credits under Section 41 of the Code generated by research activities conducted within the Precision Flow Business, foreign tax credits under Section 901 of the Code attributable to foreign operations of the Precision Flow Business, and any other credits generated by or properly allocable to the Precision Flow Business.
(b) Credits Attributable to the Engineered Coatings Business. Tax credits arising from the operations of the Engineered Coatings Business shall be allocated to Veldran. Such credits include, without limitation, research and development credits under Section 41 of the Code generated by research activities conducted within the Engineered Coatings Business, foreign tax credits under Section 901 of the Code attributable to foreign operations of the Engineered Coatings Business, and any other credits generated by or properly allocable to the Engineered Coatings Business.
(c) General Credits Not Specifically Attributable. Tax credits (including general business credits under Section 38 of the Code and any other credits) that are not specifically attributable to either the Precision Flow Business or the Engineered Coatings Business shall be allocated between Veldran and Meridian on a pro rata basis, based on the relative revenue of each business for the applicable taxable period. For purposes of this pro rata allocation and based on fiscal year 2021 financial data, the Engineered Coatings Business revenue of $1,520,000,000 and the Precision Flow Business revenue of $820,000,000 yield an allocation ratio of approximately sixty-four and ninety-six hundredths percent (64.96%) to Veldran and thirty-five and four hundredths percent (35.04%) to Meridian, subject to adjustment based on actual revenue figures for the applicable taxable period.
Section 3.03 — Earnings and Profits Allocation
The accumulated earnings and profits of Veldran (including the earnings and profits of all members of the Affiliated Group) as of the Distribution Date shall be allocated between Veldran (the Distributing Group) and Meridian (the Controlled Group) in accordance with the methodology prescribed by Treasury Regulation § 1.312-10. Under this regulation, the earnings and profits of the distributing corporation are allocated between the distributing corporation and the controlled corporation in proportion to the fair market values of the assets retained by the distributing corporation and the assets distributed to the controlled corporation, respectively.
For purposes of this allocation, the fair market value of the Precision Flow Business (which will comprise the assets of Meridian following the Contribution) shall be determined based on the independent valuation prepared by Brackenridge & Co. The preliminary valuation range established by Brackenridge & Co. is $1,396,500,000 to $1,702,400,000, based on an enterprise value to EBITDA multiple of 10.5× to 12.8× applied to the Precision Flow Business's fiscal year 2021 EBITDA of $133,000,000. This valuation range is preliminary and subject to update at or near the Distribution Date based on then-current financial performance, market conditions, and other relevant factors.
The final allocation of earnings and profits shall be computed at or near the Distribution Date, based on the then-current fair market values of the Distributing Group and the Controlled Group as determined by Brackenridge & Co. (or another independent valuation firm acceptable to both parties). The allocation of earnings and profits is significant because it affects the characterization of the Distribution as a dividend (to the extent of earnings and profits) or a return of capital (to the extent earnings and profits are exhausted) for purposes of determining the tax treatment of any boot or other taxable consideration received by Veldran shareholders in connection with the Distribution. The parties shall cooperate in finalizing the earnings and profits allocation and shall engage Pemberton Rathbone LLP to assist in the computation.
ARTICLE IV — RESPONSIBILITY FOR FILING TAX RETURNS
Section 4.01 — Pre-Distribution Consolidated Returns
Veldran shall be responsible for the preparation, execution, and filing of all Consolidated Returns for Pre-Distribution Tax Periods, including the Consolidated Return for any Straddle Period in which Meridian is a member of the Affiliated Group. This responsibility encompasses all federal consolidated income tax returns, and Veldran shall bear the cost of preparing such returns.
Veldran shall engage Pemberton Rathbone LLP (Harold Weiss, Partner, Tax; One PPG Place, Suite 1600, Pittsburgh, PA 15222) as the preparer of all Consolidated Returns, unless Veldran and Meridian mutually agree to engage another qualified tax-return preparer. Any change in tax-return preparer shall require the approval of Meridian, which approval shall not be unreasonably withheld, conditioned, or delayed.
Meridian shall cooperate fully with Veldran and Pemberton Rathbone LLP in connection with the preparation of Consolidated Returns, including by providing all financial information, tax data, work papers, schedules, and other information reasonably necessary for the accurate and timely preparation of such returns. Meridian's cooperation obligations shall extend to making available the employees, officers, and agents of the Controlled Group as may reasonably be required to address questions, provide clarifications, or sign any documents necessary for the preparation and filing of the Consolidated Returns.
Section 4.02 — Post-Distribution Separate Returns
Following the Distribution Date, each party shall be independently responsible for the preparation, execution, and filing of its own federal, state, and local income tax returns:
(a) Meridian. Meridian shall be responsible for preparing and filing all federal, state, and local income tax returns for the Controlled Group for all Post-Distribution Tax Periods. Meridian may engage the tax-return preparer of its choice for such purpose and shall bear the cost of such preparation.
(b) Veldran. Veldran shall be responsible for preparing and filing all federal, state, and local income tax returns for the Distributing Group for all Post-Distribution Tax Periods. Veldran may continue to engage Pemberton Rathbone LLP or any other qualified tax-return preparer of its choice for such purpose and shall bear the cost of such preparation.
Section 4.03 — Straddle Period Returns
With respect to any tax return covering a Straddle Period (i.e., a taxable period that begins on or before the Distribution Date and ends after the Distribution Date), Veldran shall be responsible for the preparation and filing of such return, consistent with its responsibilities under Section 4.01. However, because a portion of the Straddle Period falls after the Distribution Date and involves the operations of the Controlled Group as an independent entity, the following additional procedures shall apply:
(a) Allocation Method. All Straddle Period returns shall be prepared using the Closing of the Books Method for purposes of allocating items between the Pre-Distribution portion and the Post-Distribution portion, as described in Section 2.04 of this TSA.
(b) Meridian Review and Approval. Prior to filing any Straddle Period return, Veldran shall provide Meridian with a copy of the return (or the portions thereof attributable to the Controlled Group) for Meridian's review and approval. Meridian's approval shall not be unreasonably withheld, conditioned, or delayed, and Meridian shall respond to Veldran's request for approval within the time period specified in Section 4.04.
(c) Cooperation. Both parties shall cooperate in the preparation of Straddle Period returns, and each party shall provide the other with all information necessary for the accurate allocation of items between the Pre-Distribution and Post-Distribution portions.
Section 4.04 — Review Rights
Each party shall have the right to review and comment on any tax return prepared by the other party to the extent that such return includes items attributable to the reviewing party's business or could reasonably be expected to affect the reviewing party's tax liability, including any Separate Company Tax Liability computation, indemnification obligation, or tax sharing payment under this TSA.
The reviewing party's review period shall be thirty (30) days from the date of receipt of the return (or the relevant portions thereof) from the preparing party. In the event that the applicable filing deadline does not permit a thirty-day review period, the review period shall be such shorter period as the filing deadline permits, but in no event less than fifteen (15) days. The preparing party shall use reasonable efforts to provide the return to the reviewing party as far in advance of the filing deadline as practicable.
If the reviewing party has objections or comments regarding the return, it shall communicate such objections or comments to the preparing party in writing within the review period. The parties shall endeavor to resolve any such objections in good faith. If the parties are unable to resolve the objections prior to the filing deadline, the preparing party shall file the return in the manner it deems appropriate, and the reviewing party's objections shall be preserved for purposes of the dispute resolution procedures set forth in Article XI.
ARTICLE V — TAX INDEMNIFICATION
Section 5.01 — General Indemnification by Veldran
Veldran shall indemnify, defend, and hold harmless Meridian and each member of the Controlled Group from and against any and all Taxes (including any penalties, interest, additions to tax, and reasonable professional fees, including fees of accountants, attorneys, and other tax advisors) attributable to or arising from:
(a) The operations of the Distributing Group (including the Engineered Coatings Business and any other operations retained by Veldran following the Distribution) for any Pre-Distribution Tax Period, to the extent such Taxes exceed Meridian's Separate Company Tax Liability;
(b) Any increase in Taxes imposed on Meridian or any member of the Controlled Group resulting from an action, omission, or breach by the Distributing Group (including any breach of a representation, warranty, or covenant made by Veldran under this TSA, the Separation Agreement, or the Representation Letter);
(c) Any failure by Veldran to timely and properly prepare, file, and pay Taxes shown due on any Consolidated Return or Straddle Period return for which Veldran is responsible under Article IV; and
(d) Any Tax Proceeding relating to the operations of the Distributing Group for which Veldran has control under Article VI, to the extent the resolution of such Tax Proceeding results in an increase in Taxes for which Meridian or the Controlled Group would otherwise be liable.
Section 5.02 — General Indemnification by Meridian
Meridian shall indemnify, defend, and hold harmless Veldran and each member of the Distributing Group from and against any and all Taxes (including any penalties, interest, additions to tax, and reasonable professional fees, including fees of accountants, attorneys, and other tax advisors) attributable to or arising from:
(a) The operations of the Controlled Group (including the Precision Flow Business and the operations of Kestrel Precision Controls, Inc.) for any Pre-Distribution Tax Period, but only to the extent of Meridian's Separate Company Tax Liability as computed under Section 2.02;
(b) Any increase in Taxes imposed on Veldran or any member of the Distributing Group resulting from an action, omission, or breach by the Controlled Group (including any breach of a representation, warranty, or covenant made by Meridian under this TSA, the Separation Agreement, or the Representation Letter);
(c) Any failure by Meridian to timely and properly prepare, file, and pay Taxes shown due on any tax return for which Meridian is responsible under Article IV; and
(d) Any Tax Proceeding relating to the operations of the Controlled Group for Post-Distribution Tax Periods, to the extent the resolution of such Tax Proceeding results in an increase in Taxes for which Veldran or the Distributing Group would otherwise be liable.
Section 5.03 — Indemnification for Failure of Spin-Off to Qualify Under § 355
This is a critical provision and is expected to be the subject of significant negotiation among the parties. The following sets forth the proposed framework for allocation of liability in the event that the Spin-Off fails to qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code.
In the event that the Spin-Off fails to qualify under Section 355 of the Code and/or Section 368(a)(1)(D) of the Code, and such failure results in the recognition of taxable gain by Veldran on the Distribution of Meridian stock to the Veldran shareholders (including gain at the corporate level under Section 311(b) of the Code or recognition of gain by Veldran shareholders who receive Meridian stock in the Distribution), the allocation of the resulting tax liability shall be determined as follows:
(a) Fault-Based Allocation.
(i) Veldran at Fault. If the failure of the Spin-Off to qualify under Section 355 and/or Section 368(a)(1)(D) is attributable to a breach of any representation, warranty, or covenant made by Veldran or any member of the Distributing Group in the Representation Letter, the Separation Agreement, or this TSA, then Veldran shall bear one hundred percent (100%) of the resulting tax liability, including any corporate-level gain recognition tax imposed on Veldran, any penalties and interest thereon, and any resulting increase in Taxes imposed on Meridian or the Controlled Group.
(ii) Meridian at Fault. If the failure of the Spin-Off to qualify under Section 355 and/or Section 368(a)(1)(D) is attributable to a breach of any representation, warranty, or covenant made by Meridian or any member of the Controlled Group in the Representation Letter, the Separation Agreement, or this TSA, or is attributable to any post-Distribution action taken by Meridian or the Controlled Group that is inconsistent with the Tax Opinion, then Meridian shall bear one hundred percent (100%) of the resulting tax liability, including any corporate-level gain recognition tax imposed on Veldran (to the extent caused by Meridian's breach or action), any penalties and interest thereon, and any resulting increase in Taxes imposed on Veldran or the Distributing Group.
(b) Non-Fault / Change-in-Law Allocation.
If the failure of the Spin-Off to qualify under Section 355 and/or Section 368(a)(1)(D) is not attributable to a breach by either party — for example, if the failure results from a change in law enacted after the Distribution Date, a change in the interpretation of existing law by the Internal Revenue Service, a judicial decision that alters the applicable legal standards, or any other cause that is not the result of a breach by either party — then the resulting tax liability shall be allocated between Veldran and Meridian as follows:
[OPEN — TO BE NEGOTIATED]: The parties have identified two potential approaches for the allocation of non-fault Section 355 failure liability, and this issue requires further negotiation:
Option A: Fifty percent (50%) to Veldran and fifty percent (50%) to Meridian.
Option B: In proportion to the relative fair market values of the Distributing Group and the Controlled Group as of the Distribution Date (based on the valuations prepared by Brackenridge & Co. or another independent valuation firm).
The selection between these approaches (or any alternative approach) is a fundamental economic term of the TSA and must be resolved through negotiation among Veldran, Meridian, and Harrowgate Capital Advisors LLC before the TSA can be finalized.
Section 5.04 — Specific Indemnification for § 355(e) Gain Recognition
In the event that the Distribution triggers gain recognition by Veldran under Section 355(e) of the Code (the "anti-Morris Trust" provision), the following provisions shall apply. Section 355(e) provides that if the Distribution is part of a "plan (or series of related transactions)" pursuant to which one or more persons acquire, directly or indirectly, a Fifty-Percent or Greater Interest in either Veldran (the distributing corporation) or Meridian (the controlled corporation), then Veldran shall recognize gain on the Distribution as if Veldran had sold the Meridian stock for its fair market value.
Estimated Tax at Risk. Based on preliminary estimates, the corporate-level tax liability resulting from Section 355(e) gain recognition could be in the range of $125,300,000 to $189,500,000, computed as follows:
The parties acknowledge that the foregoing estimates are preliminary and based on the Brackenridge & Co. preliminary valuation range and an estimated adjusted tax basis in the Precision Flow Division assets of approximately $800,000,000. The actual tax liability would depend on the fair market value of Meridian and the adjusted tax basis as finally determined at the time of any Section 355(e) triggering event.
(a) § 355(e) Triggered by the September 2019 HPE Fund IV Acquisition.
If Section 355(e) is triggered by reason of the September 20, 2019 acquisition of a 62.4% stake in Veldran by HPE Fund IV (an investment fund managed by Harrowgate Capital Advisors LLC), in which HPE Fund IV acquired 46,488,000 shares of Veldran common stock at $40.00 per share for an aggregate purchase price of $1,859,520,000, and such acquisition is deemed to be part of a "plan (or series of related transactions)" with the Distribution, the allocation of the resulting corporate-level tax liability shall be determined as follows:
[OPEN — HARROWGATE/VELDRAN NEGOTIATION POINT]: This is a critical open issue. Veldran has proposed that any Section 355(e) liability arising from the 2019 HPE Fund IV acquisition should be allocated to Harrowgate Capital Advisors LLC (or HPE Fund IV) via a separate indemnity obligation from HPE Fund IV, on the basis that Harrowgate was the acquirer and any "plan" connecting the 2019 acquisition to the Distribution originated with Harrowgate's investment thesis. Meridian's position is that it should not bear any portion of this cost, as the 2019 acquisition was a Veldran/Harrowgate transaction in which Meridian (which did not yet exist as a separate entity) had no involvement. The alternative position is that Veldran should bear this liability as a cost of effecting the Spin-Off. Resolution of this issue requires direct negotiation between Harrowgate and Veldran (and potentially HPE Fund IV), with input from Meridian's designated management team.
(b) § 355(e) Triggered by Post-Distribution Acquisition.
If Section 355(e) is triggered by an acquisition of a Fifty-Percent or Greater Interest in Meridian or Veldran occurring within the two-year period following the Distribution Date (or any longer period during which the Distribution and the acquisition are deemed to be part of a plan under Section 355(e) and the Treasury Regulations promulgated thereunder), then the party whose stock was acquired (or whose actions facilitated the acquisition) shall bear one hundred percent (100%) of the resulting corporate-level tax liability imposed on Veldran.
Specifically:
(i) If the triggering acquisition involves Meridian stock, Meridian shall indemnify Veldran for the full amount of the resulting tax liability (including penalties, interest, and reasonable professional fees).
(ii) If the triggering acquisition involves Veldran stock, Veldran shall bear the full amount of the resulting tax liability and Meridian shall have no obligation with respect thereto.
This provision shall be read in conjunction with the post-Distribution restrictive covenants set forth in Article VIII and the Tax Matters provisions of the Separation Agreement, which impose two-year restrictions on stock issuances, mergers, asset sales, and cessation of active business designed to minimize the risk of a Section 355(e) triggering event.
Section 5.05 — Specific Indemnification for § 355(d) Disqualified Distribution
In the event that the Distribution is treated as a "disqualified distribution" under Section 355(d) of the Code, the following provisions shall apply. Section 355(d) provides that if, immediately after the Distribution, any person holds disqualified stock in either Veldran or Meridian that constitutes a Fifty-Percent or Greater Interest, and such stock was acquired by purchase during the five-year period ending on the Distribution Date, then Veldran shall recognize gain on the Distribution as if the distributed Meridian stock were sold for its fair market value.
The parties acknowledge that HPE Fund IV's 62.4% stake in Veldran was acquired by purchase on September 20, 2019, which is within the five-year look-back period applicable to a Distribution occurring in 2022 or early 2023. Accordingly, the Section 355(d) analysis is directly implicated by the facts of this transaction, and the risk of a disqualified distribution determination must be carefully evaluated.
The allocation of any Section 355(d) tax liability shall follow the same fault-based framework set forth in Section 5.03, with the additional provision that to the extent Section 355(d) liability arises solely from HPE Fund IV's September 20, 2019 purchase of its 62.4% stake in Veldran, the allocation of such liability as between Veldran and Harrowgate Capital Advisors LLC (or HPE Fund IV) shall be governed by the same negotiation principles described in Section 5.04(a).
[OPEN — SAME NEGOTIATION DYNAMIC AS § 355(e)]: The allocation of Section 355(d) liability arising from the HPE Fund IV acquisition is subject to the same open negotiation points as the Section 355(e) allocation described in Section 5.04(a). Meridian's position remains that it should not bear any portion of this cost.
The parties further acknowledge that the Section 355(d) and Section 355(e) analyses overlap in significant respects, and the TSA shall contain a provision preventing the double-counting of the same built-in gain under both sections. To the extent that Veldran recognizes gain on the Distribution under both Section 355(d) and Section 355(e), the indemnification obligations under Sections 5.04 and 5.05 shall apply to the aggregate gain recognized (and not separately to the gain under each section), so that the total indemnification obligation does not exceed the total tax liability actually imposed on Veldran.
Section 5.06 — Indemnification Procedures
The following procedures shall govern the assertion and payment of indemnification claims under this Article V:
(a) Notice. The party seeking indemnification (the "Indemnified Party") shall

DRAFT — TAX SHARING AGREEMENT: OUTLINE AND KEY TERMS

ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT

INTRODUCTORY NOTE FROM COUNSEL

MEMORANDUM

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