PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
TO:
Dr. Fiona Gallagher, Chief Executive Officer, Solstice Biomedical Devices Ltd.
Conor Muldoon, Chief Financial Officer, Solstice Biomedical Devices Ltd.
Helena Byrne, Executive Vice President, Corporate Development & Strategy, Solstice Biomedical Devices Ltd.
Patrick Lennox, General Counsel & Company Secretary, Solstice Biomedical Devices Ltd.
FROM:
Leonard Cross, Specialist Partner, Tax, Calderwood & Harkness LLP
In coordination with Eleanor Voss, Tax Partner, Brindoval & Albright LLP
DATE: July 29, 2024
RE: Tax Structure Analysis — Joint Section 338(h)(10) Election and Irish Holding Structure Considerations in Connection with the Proposed Acquisition of Meridian Surgical Technologies, Inc.
Matter No.: 1037-00006
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I. Executive Summary
The purpose of this memorandum is to analyze in detail the U.S. federal, state, and cross-border tax implications of the proposed acquisition by Solstice Biomedical, Inc. ("SBI"), a wholly owned Delaware subsidiary of Solstice Biomedical Devices Ltd. (Ireland; CRO No. 648217) ("Solstice" or the "Parent"), of one hundred percent (100%) of the outstanding common stock and vested options of Meridian Surgical Technologies, Inc. (a Delaware corporation; EIN 84-3192057) ("Meridian" or the "Target"), for maximum aggregate consideration of Two Hundred Fifty-Five Million Dollars ($255,000,000), consisting of a base purchase price of Two Hundred Twenty Million Dollars ($220,000,000) in all-cash consideration (no stock component) plus up to Thirty-Five Million Dollars ($35,000,000) in contingent earnout payments tied to FDA 510(k) regulatory milestones for the ArthroNav robotic-assisted arthroscopy platform (collectively, the "Transaction").
Central Recommendation. It is our recommendation that SBI and the Sellers (as defined below) execute a joint election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), and Treasury Regulations Section 1.338(h)(10)-1 (the "Section 338(h)(10) Election"), to treat the stock purchase as a deemed asset acquisition for U.S. federal income tax purposes. This election is the single most impactful tax structuring decision available in connection with the Transaction and should be incorporated as a binding covenant in the Stock Purchase Agreement (the "SPA").
Key Benefits. The Section 338(h)(10) Election provides SBI and the post-closing Meridian entity with a stepped-up tax basis in all of Meridian's assets, including goodwill and identified intangible assets. This step-up generates significant annual amortization and depreciation deductions flowing to the Buyer group post-closing, with an estimated net present value ("NPV") of approximately $29–33 million over the fifteen-year amortization period for Section 197 intangibles. The election also avoids the double taxation that would otherwise be inherent in certain stock purchase structures and ensures a clean and efficient integration of Meridian into the Solstice group from a tax perspective.
Key Trade-Offs. The election accelerates gain recognition at the Seller level: the transaction is recharacterized as a deemed asset sale by Meridian, followed by a deemed liquidating distribution to the Sellers, triggering immediate taxable gain for the Sellers. Additionally, the election eliminates Meridian's remaining federal net operating loss ("NOL") carryforwards of approximately $1.1 million (as "old" Meridian ceases to exist for tax purposes), creates potential state tax exposure at the Seller level in Pennsylvania and New Jersey, and requires careful documentation and coordination among multiple parties. As discussed at length in Section IV of this memorandum, the loss of the remaining NOLs is de minimis—valued at approximately $231,000 in forgone federal tax benefit—relative to the estimated $29–33 million NPV of the step-up benefit.
Coordination Note. This memorandum was prepared in coordination with Eleanor Voss, Tax Partner, at Brindoval & Albright LLP (200 Park Avenue, Suite 4100, New York, NY 10166), who provided independent tax advisory analysis on the Section 338(h)(10) election mechanics, Irish holding structure considerations, and transfer pricing implications. Ms. Voss's analysis has been integrated into the relevant sections of this memorandum with her concurrence.
Transaction Timeline. The Transaction is structured as an all-cash stock purchase governed by Delaware law. The parties anticipate execution of the SPA on or about August 20, 2024, with closing expected on or about October 31, 2024, subject to satisfaction of customary closing conditions, including Hart-Scott-Rodino Act clearance and the absence of any material adverse effect.
II. Transaction Structure Overview
A. Parties and Ownership Chain
The Transaction involves a multi-layered corporate structure spanning Ireland and the United States. The ownership chain and principal parties are as follows:
Ultimate Parent (Buyer). Solstice Biomedical Devices Ltd. is an Irish private limited company registered under the Companies Act 2014, headquartered at Solstice House, 14 Fitzwilliam Place, Dublin 2, D02 YF82, Ireland. Solstice is a global leader in the design, manufacture, and distribution of biomedical devices, with particular strength in orthopedic and cardiovascular platforms. For fiscal year 2023, Solstice reported annual revenue of approximately $3.1 billion and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $620 million. Solstice is listed on the Irish Stock Exchange (Euronext Dublin) and maintains operations across 14 countries through a network of subsidiaries and distribution partners.
Acquisition Vehicle (Direct Buyer). Solstice Biomedical, Inc. ("SBI") is a Delaware corporation formed on April 22, 2024 (Delaware File No. 7203841; EIN 93-4017625) as a special-purpose entity to serve as the direct acquisition vehicle for the Transaction. SBI's sole director is Helena Byrne, Executive Vice President, Corporate Development & Strategy of Solstice. SBI's officers are as follows: Helena Byrne (President), Conor Muldoon (Treasurer), and Patrick Lennox (Secretary). SBI has 1,000 shares of common stock authorized at a par value of $0.01 per share, all 1,000 of which have been issued and are held one hundred percent (100%) by Solstice Biomedical Devices Ltd. SBI's registered agent in Delaware is Capitol Corporate Services, Inc., 1209 Orange Street, Wilmington, Delaware 19801. SBI will serve as the direct purchaser of all shares and the entity making the Section 338(h)(10) Election jointly with the Sellers.
Target. Meridian Surgical Technologies, Inc. is a Delaware corporation (Delaware File No. 5819734; EIN 84-3192057) headquartered at 780 Keystone Boulevard, Suite 200, King of Prussia, Pennsylvania 19406. Meridian operates a manufacturing facility at 45 Forge Creek Road, Exton, Pennsylvania 19341. Meridian designs, manufactures, and distributes advanced surgical instruments and robotic-assisted platforms for orthopedic and arthroscopic surgical applications. Meridian's flagship development-stage product, the ArthroNav robotic-assisted arthroscopy platform, is currently undergoing pre-submission activities with the U.S. Food and Drug Administration ("FDA") in anticipation of a 510(k) clearance application.
Sellers. The Sellers of Meridian's outstanding common stock and vested options are as follows:
In addition, there are 550,000 shares of common stock subject to vested options under the Meridian 2019 Equity Incentive Plan (the "Plan"), with a weighted-average exercise price of $4.80 per share.
Capitalization. Meridian's authorized capital consists of 10,000,000 shares of common stock, of which 7,450,000 shares are issued and outstanding. Together with the 550,000 shares subject to vested options, the fully diluted share count is 8,000,000 shares.
B. Consideration Structure
The consideration payable in the Transaction is structured as follows:
Base Purchase Price. Two Hundred Twenty Million Dollars ($220,000,000), payable in immediately available funds at closing. The consideration is entirely cash; there is no stock or equity component.
Per-Share Merger Consideration. On a fully diluted basis (8,000,000 shares), the per-share consideration equals $220,000,000 ÷ 8,000,000 = $27.50 per share.
Option Cancellation Consideration. Each holder of vested options under the Plan will receive, in lieu of the exercise and sale of shares, a cash payment equal to the per-share merger consideration ($27.50) minus the applicable exercise price ($4.80), resulting in a net payment of $22.70 per option. The aggregate option cancellation payments are calculated as follows: 550,000 options × $22.70 = $12,485,000.
Aggregate Consideration to Common Stockholders. After deducting the aggregate option cancellation payments from the base purchase price, the consideration available to holders of outstanding common stock is $220,000,000 − $12,485,000 = $207,515,000, resulting in an approximate per-share price of $27.8545 to common stockholders (after reflecting the cashless cancellation of the options).
Earnout. In addition to the base purchase price, the Sellers are eligible to receive contingent earnout payments of up to $35,000,000 in the aggregate, payable upon the achievement of the following FDA regulatory milestones:
Milestone 1: Twenty Million Dollars ($20,000,000), payable upon receipt of FDA 510(k) clearance of the ArthroNav Generation 1.0 robotic-assisted arthroscopy platform on or before December 31, 2026.
Milestone 2: Fifteen Million Dollars ($15,000,000), payable upon receipt of FDA 510(k) clearance of the ArthroNav Software Module for Real-Time Cartilage Mapping on or before June 30, 2027.
The maximum aggregate consideration under the Transaction (base purchase price plus earnout) is therefore $255,000,000.
Escrow Arrangements. The SPA provides for the following escrow arrangements:
Indemnity Escrow: Twenty-Six Million Four Hundred Thousand Dollars ($26,400,000), representing 12% of the base purchase price, to be held by Keystone Escrow Services, Inc. (the "Escrow Agent") in a segregated escrow account for indemnification purposes, subject to the terms and release schedule set forth in the SPA.
Earnout Escrow Reserve: Two Million Five Hundred Thousand Dollars ($2,500,000), funded by the Buyer at closing and held by the Escrow Agent in a separate sub-account, to secure a portion of the potential earnout obligations.
C. Financing
The acquisition will be financed through a combination of third-party debt and equity contributed by Solstice as follows:
Term Loan A. One Hundred Thirty Million Dollars ($130,000,000) in senior secured term loan financing from Tidewater Atlantic Bank, N.A. (the "Lender"), under a five-year credit agreement bearing interest at SOFR plus 2.25% per annum. The credit agreement is anticipated to be executed on or about October 25, 2024, with funding occurring at closing.
Revolving Credit Facility. Fifty Million Dollars ($50,000,000) in a revolving credit facility from the Lender, with a five-year term and interest at SOFR plus 2.00% per annum. The revolving facility is expected to remain undrawn at closing and is intended to provide working capital and general corporate purposes flexibility post-closing.
Equity Contribution. Solstice Biomedical Devices Ltd. will contribute equity capital of approximately $86,125,177.84 to SBI in connection with the closing, representing the balance of the acquisition consideration, transaction expenses, and escrow funding requirements not funded by Term Loan A.
III. Section 338(h)(10) Election Analysis
A. Statutory Framework
Overview of IRC Section 338 Generally. Section 338 of the Code provides an elective mechanism by which a purchasing corporation that makes a "qualified stock purchase" ("QSP") of a target may elect to treat the stock purchase as an asset acquisition for U.S. federal income tax purposes. A QSP is defined under Section 338(d)(3) as the acquisition by a purchasing corporation of stock of another corporation possessing at least 80 percent of the total combined voting power and at least 80 percent of the total value of such corporation's stock, by purchase (as defined in Section 338(h)(3)), within a twelve-month acquisition period. In the present Transaction, SBI will acquire 100% of Meridian's outstanding stock in a single closing, easily satisfying the QSP threshold.
Distinction Between Section 338(g) and Section 338(h)(10). It is critical to distinguish between the two principal forms of Section 338 elections:
Section 338(g) Election. Under a unilateral Section 338(g) election, the purchasing corporation alone elects to treat the stock purchase as a deemed asset acquisition. The consequence is a "double tax": the target ("old target") is treated as having sold all of its assets at fair market value, recognizing corporate-level gain, and the selling shareholders separately recognize gain on the stock sale. The two levels of taxation render this election generally unattractive in most circumstances.
Section 338(h)(10) Election. Under the joint Section 338(h)(10) election, the purchasing corporation and the selling shareholders jointly elect to recharacterize the transaction. The stock sale is disregarded, and instead the target is treated as having sold all of its assets in a single deemed transaction at the close of the acquisition date for the "aggregate deemed sale price" ("ADSP"), followed by a deemed distribution of the proceeds to the selling shareholders in complete liquidation. The result is a single level of tax: gain is recognized at the shareholder level (on the deemed liquidating distribution), and the purchasing corporation (through "new target") receives a stepped-up basis in all of the target's assets. There is no double taxation. This is the election recommended for the Transaction.
Treasury Regulations Section 1.338(h)(10)-1. The requirements for a valid joint Section 338(h)(10) election are set forth in Treasury Regulations Section 1.338(h)(10)-1. The election requires the mutual consent and signatures of both the purchasing corporation (here, SBI) and the selling shareholders. The election is available in three circumstances: (i) the target is a member of a selling consolidated group; (ii) the target is a selling affiliate of the selling consolidated group; or (iii) the target is an S corporation (with the election made by the S corporation shareholders).
Applicability to the Present Transaction. We note that Meridian is a C corporation and is not a member of any consolidated group; nor is it an S corporation. The availability of the Section 338(h)(10) election for a non-consolidated, non-S corporation target requires careful analysis. Under Treasury Regulations Section 1.338(h)(10)-1(c), the election is available where the target is a "selling affiliate"—defined generally as a domestic corporation that, on the acquisition date, is a member of a selling group or is affiliated with a selling consolidated group. In this case, the Sellers collectively own 100% of Meridian's stock and will sell 100% in a qualified stock purchase. Pursuant to the regulations, the election is available because the selling shareholders, acting collectively, can be treated as making the election jointly with the purchasing corporation, provided all parties execute the requisite election forms. We have confirmed the availability of this election under the applicable regulations and relevant IRS guidance, and the Sellers have agreed to participate in the election as a negotiated term of the Transaction.
Filing Requirements. The Section 338(h)(10) Election is made by filing IRS Form 8023 (Elections Under Section 338 for Corporations Making Qualified Stock Purchases) with the Internal Revenue Service. The form must be filed by the fifteenth (15th) day of the ninth (9th) month beginning after the month in which the acquisition date falls. For a closing date of October 31, 2024, the filing deadline is July 15, 2025. The form must be signed by both SBI (as the purchasing corporation) and the Sellers' Representative (Dr. Marcus Ellsworth, acting on behalf of all Sellers pursuant to the authority granted in the SPA).
State Conformity. Both Pennsylvania and New Jersey, the two primary states in which Meridian conducts business, generally conform to the federal Section 338(h)(10) election. Specifically:
Pennsylvania: The Commonwealth of Pennsylvania follows the federal Section 338(h)(10) election for purposes of the Corporate Net Income Tax ("CNIT"). No separate state election form is required; Pennsylvania automatically follows the federal election.
New Jersey: The State of New Jersey's Corporation Business Tax ("CBT") also conforms to the federal Section 338(h)(10) election. Similarly, no separate state filing is required.
A more detailed discussion of state tax implications is provided in Section V of this memorandum.
B. Deemed Asset Sale — Mechanics
Under the Section 338(h)(10) Election, Meridian is treated as having sold all of its assets in a single transaction at the close of the acquisition date (October 31, 2024) for the aggregate deemed sale price ("ADSP"). The key mechanics of this deemed sale are as follows:
ADSP Calculation. The ADSP is generally equal to the total amount realized by the Sellers on the deemed sale of Meridian's stock, grossed up to reflect the liabilities of Meridian that are assumed by the purchaser. Specifically:
ADSP = Purchase Price ($220,000,000) + Liabilities of Meridian assumed by Buyer + Other Relevant Adjustments
Meridian's assumed liabilities include, among other items, the payoff of the existing Ironclad Capital Partners credit facility in the amount of $7,341,822.16 and other accrued liabilities as reflected on the closing balance sheet (to be determined pursuant to the closing working capital adjustment provisions of the SPA). The precise ADSP will be finalized based on the closing balance sheet, but for purposes of this memorandum, we estimate the ADSP to be in the range of $230–235 million.
Treatment of Contingent Consideration (Earnout). The $35,000,000 maximum earnout presents specific complications for the ADSP calculation. Contingent consideration creates a potential increase to ADSP if and when the milestones are achieved and payments become due. Under the installment sale rules and open-transaction principles, Sellers will recognize additional gain as earnout payments are received, and the ADSP may be adjusted upward in the taxable year in which the earnout is earned. This treatment is discussed in greater detail in Section IX of this memorandum.
"New Target" — Adjusted Grossed-Up Basis (AGUB). Following the deemed asset sale, "new" Meridian (i.e., the entity treated as having acquired the assets) is treated as acquiring all assets at fair market value. The total basis in the assets is the "adjusted grossed-up basis" or "AGUB," which is generally calculated as:
AGUB = Amount paid for the target's stock (on a grossed-up basis to reflect a 100% purchase) + Liabilities of "new target" + Other relevant adjustments
In practice, the AGUB and ADSP should be approximately equal in a transaction where 100% of the target's stock is acquired for cash consideration.
Allocation Among Asset Classes. The AGUB must be allocated among Meridian's assets in accordance with IRC Section 1060 and the residual method prescribed therein. The allocation follows the seven-class hierarchy established in Treasury Regulations Section 1.338-6:
Class I: Cash and cash equivalents.
Class II: Actively traded personal property (as defined in Section 1092(d)(1)), certificates of deposit, and foreign currency.
Class III: Accounts receivable, mortgages, and credit card receivables that arise in the ordinary course of business.
Class IV: Inventory (stock in trade of the target, or other property of a kind that would properly be included in inventory if on hand at the close of the taxable year).
Class V: All assets not classified in Classes I, II, III, IV, VI, or VII. This class includes tangible personal property (manufacturing equipment, furniture, fixtures, and leasehold improvements), as well as intangible assets not described in Class VI or VII.
Class VI: Section 197 intangibles (as defined in Section 197) other than goodwill and going concern value. This includes patents, trademarks, trade names, customer relationships, proprietary technology, know-how, and in-process research and development.
Class VII: Goodwill and going concern value (the residual class).
The AGUB is allocated first to Class I assets (at their fair market value), then to Class II, and so on through Class VII, with any excess allocated to goodwill and going concern value as the residual.
C. Step-Up in Basis — Quantification and Tax Benefits
The principal economic benefit of the Section 338(h)(10) Election is the stepped-up tax basis in all of Meridian's assets obtained by "new" Meridian (wholly owned by SBI). Without the election, SBI would acquire Meridian's stock at a cost basis equal to the purchase price, but Meridian's internal asset bases would remain at their historical (carryover) levels—which are significantly below fair market value. With the election, the carryover basis is eliminated and replaced with a fair market value basis (the AGUB), generating substantial amortization and depreciation deductions that would not otherwise be available.
Preliminary Asset Allocation. Based on our review of Meridian's audited financial statements, management projections, due diligence materials, and preliminary valuation analyses, we estimate the following AGUB allocation among asset classes:
The identified intangible assets in Class VI are of particular significance and include:
• Patent Portfolio: Fourteen (14) issued U.S. utility patents, including U.S. Patent No. 11,432,887 (covering robotic-assisted arthroscopic navigation systems), three (3) pending U.S. patent applications, and six (6) granted European patents. The patent portfolio represents Meridian's core proprietary technology and is essential to the commercial viability of the ArthroNav platform and the PrecisionBlade instrument line.
• Registered Trademarks: The "Meridian Surgical" word mark (U.S. Registration No. 5,412,789), the "ArthroNav" word and design mark (U.S. Registration No. 6,118,331), and the "PrecisionBlade" word mark (U.S. Registration No. 5,890,224), each of which carries significant brand equity in the orthopedic surgical market.
• Customer Relationships: Established relationships with over 340 hospital systems and ambulatory surgical centers across the United States, representing a stable recurring revenue base with high switching costs.
• Technology and Know-How: Proprietary manufacturing processes, software algorithms for robotic navigation, and trade secrets embodied in Meridian's engineering and R&D organization.
• In-Process Research and Development: The ArthroNav platform, currently in pre-submission discussions with the FDA, represents a significant in-process R&D asset with commercial potential upon regulatory clearance.
Annual Amortization Deductions. Assuming combined Section 197 intangible assets and goodwill in the range of $160–200 million (the sum of Classes VI and VII), the annual amortization deductions under the fifteen-year straight-line amortization method prescribed by Section 197 are estimated at approximately $12–15 million per year. Additional depreciation deductions from the stepped-up basis of tangible fixed assets (Class V) will supplement these amortization deductions, though the tangible asset step-up is comparatively smaller.
For modeling purposes, we have used an estimated annual amortization figure of approximately $13.5 million per year as the midpoint of the range.
Present Value of Tax Benefit. The tax savings generated by these deductions are substantial:
• Combined effective tax rate: Approximately 25.5%, reflecting the 21% federal corporate income tax rate plus a blended state effective rate (primarily Pennsylvania and New Jersey) of approximately 4.5%.
• Annual tax savings: $13.5 million × 25.5% = approximately $3.4 million per year.
• Net present value of amortization benefit over 15 years: Using a discount rate of 8% (reflecting SBI's weighted average cost of capital), the NPV of the annual tax savings stream is estimated at approximately $29–33 million.
Comparison to Non-Election Scenario. Without the Section 338(h)(10) Election, SBI would acquire Meridian's stock, and Meridian's assets would retain their historical (carryover) tax basis. There would be no step-up and therefore no incremental amortization or depreciation deductions attributable to the acquisition premium. The after-tax cost of the acquisition would be significantly higher, and the Transaction's internal rate of return to the Buyer would be materially reduced. The difference in NPV between the election and non-election scenarios—approximately $29–33 million—is the quantifiable economic case for making the election.
The step-up benefit is the primary driver of our recommendation to proceed with the election.
D. Impact on Sellers
Under the Section 338(h)(10) Election, the stock sale is disregarded for U.S. federal income tax purposes. Instead, the Sellers are treated as if Meridian sold all of its assets for the ADSP and then distributed the net proceeds to the Sellers in a complete liquidation of the corporation. The tax consequences to the Sellers are as follows:
Individual Sellers. Dr. Marcus Ellsworth, Catherine Pryor, and the other individual management and employee shareholders (as well as the vested option holders who receive option cancellation payments) will recognize capital gain on the deemed liquidating distribution. For shareholders who have held their Meridian shares for more than one year, the gain will be characterized as long-term capital gain, eligible for preferential rates under Section 1(h) of the Code (currently a maximum rate of 20%, plus the 3.8% net investment income tax under Section 1411, for a maximum combined federal rate of 23.8%). The gain for each individual Seller equals the deemed liquidation proceeds received minus such Seller's adjusted tax basis in his or her Meridian shares.
Entity Sellers. Pennfield Growth Partners, LP, a limited partnership, and Arch Hill Ventures Fund II, LLC, a limited liability company, are both pass-through entities for federal income tax purposes. The deemed liquidating distribution will be recognized at the entity level, and the resulting gain—with capital gain character preserved—will flow through to the respective partners and members on their individual Schedule K-1s. The ultimate tax burden will depend on each partner's or member's individual tax situation, holding period, and applicable rate.
Comparison of Seller Tax Burden Under Election vs. Stock Sale. It is important to note that the aggregate tax burden on the Sellers under the Section 338(h)(10) Election is generally comparable to the burden that would arise under a straight stock sale without the election. This is because Meridian is a C corporation: in a standard stock sale, the Sellers would recognize capital gain on the sale of their Meridian shares, and the gain would be measured as the stock sale proceeds minus their adjusted basis in the shares. Under the Section 338(h)(10) Election, the stock sale is recharacterized as a deemed asset sale followed by a deemed liquidation, but the deemed liquidation collapses to a single level of tax at the shareholder level—effectively mirroring the economic result of a stock sale. There is no additional corporate-level tax under the election (unlike a Section 338(g) election, where double tax would apply).
Sellers' Consent. The Sellers have agreed, as a negotiated term of the Transaction, to make the Section 338(h)(10) Election jointly with SBI. This agreement will be documented as a binding covenant in the SPA. Sellers' counsel—Whitmore Crane & Pfeiffer LLP, under the leadership of Jonathan Whitmore—has been informed of the election and its implications for the Sellers, and has confirmed the Sellers' willingness to participate. Dr. Marcus Ellsworth, in his capacity as the Sellers' Representative under the SPA, will have the authority to execute the election forms on behalf of all Sellers.
Premium Allocation. The Sellers' participation in the election is incentivized, in part, by the structure of the purchase price, which reflects the Buyer's willingness to pay a premium attributable to the anticipated tax benefits of the step-up. The allocation of this benefit between Buyer and Sellers is a commercial matter that has been addressed in the purchase price negotiations and is reflected in the agreed-upon base purchase price of $220,000,000.
E. Treatment of Earnout Payments
The contingent earnout consideration of up to $35,000,000 raises specific and important questions regarding tax treatment under the Section 338(h)(10) Election framework.
Characterization Under the Election. Under the election, the earnout is treated as additional consideration for the deemed asset sale. When and if the milestones are achieved and the earnout payments are made, the payments increase the ADSP (and correspondingly, the AGUB).
Treatment for Sellers. The Sellers will treat the earnout payments as additional amounts realized on the deemed asset sale and deemed liquidating distribution. The payments will be reported under the installment method of accounting (IRC Section 453), recognizing gain ratably as payments are received, or under the open-transaction doctrine if the fair market value of the earnout cannot be reasonably ascertained at closing (which may be the case given the regulatory contingency). The long-term capital gain character of the gain is preserved under either method.
Treatment for Buyer. Earnout payments, when made, increase the AGUB. The additional AGUB is allocated among the asset classes under the residual method of IRC Section 1060. Given that the identified tangible and intangible assets will have already been allocated at the initial AGUB, the incremental amounts are expected to be allocated predominantly to goodwill (Class VII), resulting in additional Section 197 amortization deductions.
Quantification. If both milestones are achieved—Milestone 1 ($20,000,000) by December 31, 2026, and Milestone 2 ($15,000,000) by June 30, 2027—the full $35,000,000 increases the AGUB. Assuming allocation to goodwill and fifteen-year amortization, the additional annual amortization deduction is approximately $35,000,000 ÷ 15 = $2.33 million per year, generating additional annual tax savings of approximately $595,000 at a 25.5% effective tax rate. The commencement of the amortization period for each earnout tranche begins in the taxable year in which the payment is made.
IV. Impact on Meridian's Net Operating Loss Carryforwards
A. Current NOL Position
During the course of our tax due diligence review—conducted jointly by Leonard Cross (Calderwood & Harkness LLP) and Eleanor Voss (Brindoval & Albright LLP), in coordination with Meridian's independent auditors, Dunfield & Associates, P.C. (led by Howard Dunfield, CPA)—we confirmed that, as of the close of fiscal year 2023, Meridian had utilized approximately $4.3 million of its accumulated federal net operating loss carryforwards. The remaining federal NOL carryforward balance is approximately $1.1 million.
State NOL positions have also been reviewed and confirmed. Meridian's Pennsylvania Corporate Net Income Tax NOL position and its New Jersey Corporation Business Tax NOL position are consistent with the federal position and are similarly de minimis.
B. Section 382 Limitations
Independently of the Section 338(h)(10) Election analysis, the acquisition of 100% of Meridian's stock by SBI constitutes an "ownership change" under IRC Section 382. An ownership change occurs when there is a more-than-50-percentage-point increase in ownership by "5-percent shareholders" (as defined in Section 382(g)) over a three-year testing period. Here, SBI (through Solstice) is acquiring 100% of Meridian from a diverse group of shareholders, clearly exceeding the 50-percentage-point threshold.
Section 382 Annual Limitation. Following an ownership change, the target's ability to use pre-change NOLs is limited to an annual ceiling (the "Section 382 limitation"), calculated as the product of the fair market value of the target's equity immediately before the ownership change multiplied by the applicable long-term tax-exempt rate published by the IRS.
Estimated Section 382 annual limitation:
$220,000,000 (equity value) × approximately 4.5% (illustrative long-term tax-exempt rate for October 2024) = approximately $9.9 million per year
However, the remaining NOLs are only approximately $1.1 million. As a practical matter, the Section 382 annual limitation ($9.9 million) far exceeds the remaining NOL balance ($1.1 million), meaning the limitation would not be binding even if the NOLs were otherwise available—the entire $1.1 million could be absorbed within the first annual limitation period.
Interaction with Section 338(h)(10) Election. The more pertinent consideration is the interaction of the NOLs with the Section 338(h)(10) Election. Under the deemed asset sale framework, "old" Meridian is treated as having sold all of its assets and distributed the proceeds in complete liquidation. "Old" Meridian ceases to exist for tax purposes. As a consequence, the NOLs of "old" Meridian are effectively eliminated—they cannot be carried forward to "new" Meridian because "new" Meridian is treated as a new taxpayer that acquired assets rather than inheriting the tax attributes of "old" Meridian.
Net Impact Assessment. The loss of the remaining $1.1 million in NOL carryforwards represents a forgone federal tax benefit of approximately:
$1,100,000 × 21% (federal rate) = approximately $231,000
This is a de minimis amount relative to the estimated NPV of the step-up benefit of $29–33 million. The step-up benefit exceeds the lost NOL benefit by a factor of approximately 125:1 to 143:1.
Conclusion. The Section 338(h)(10) Election is overwhelmingly favorable despite the forfeiture of the remaining NOLs. The trade-off is not even remotely close, and the NOL forfeiture should not be considered a meaningful impediment to making the election.
C. State NOL Considerations
Pennsylvania. Meridian's remaining Pennsylvania state NOLs are subject to similar ownership-change limitations under the Commonwealth's conformity rules. Additionally, Pennsylvania imposes a 70% NOL deduction cap in any given taxable year, further limiting the utility of any pre-change state NOLs. The remaining state NOLs are similarly de minimis and do not alter the analysis.
New Jersey. New Jersey's Corporation Business Tax conforms to IRC Section 382, and the remaining New Jersey NOLs are also immaterial in amount. No adverse state NOL impact results from the election.
In summary, there is no meaningful adverse state NOL consequence arising from the Section 338(h)(10) Election.
V. State and Local Tax Considerations
A. Pennsylvania
Meridian is headquartered in King of Prussia, Pennsylvania, and operates its primary manufacturing facility in Exton, Pennsylvania. As such, Meridian has substantial nexus with the Commonwealth and is subject to the Pennsylvania Corporate Net Income Tax ("CNIT"). The current CNIT rate is 8.99%, though we note that recent legislation enacted in Pennsylvania provides for a phased reduction of the CNIT rate over several years, which will benefit the post-closing Meridian entity.
Conformity with Section 338(h)(10) Election. As noted above, Pennsylvania conforms to the federal Section 338(h)(10) election. The deemed asset sale is recognized for PA CNIT purposes, and the gain (and step-up) computed at the federal level flows through to the state return.
Gain Allocation — Sellers. The Sellers' deemed gain on the deemed asset sale will be subject to Pennsylvania tax to the extent apportionable to Pennsylvania under the Commonwealth's apportionment formula. Individual Sellers who are Pennsylvania residents will include the gain in their Pennsylvania personal income tax returns at the applicable rate (currently 3.07% for individuals). Non-resident individual Sellers and entity Sellers will be subject to Pennsylvania tax only to the extent the gain is sourced to Pennsylvania under applicable sourcing rules.
Post-Closing Step-Up — Buyer. Following the closing, "new" Meridian will benefit from the stepped-up asset basis for PA CNIT purposes, mirroring the federal treatment. The annual amortization and depreciation deductions flowing from the step-up will reduce Meridian's Pennsylvania taxable income, thereby reducing its PA CNIT liability.
Pennsylvania Sales and Use Tax. An important clarification: the deemed asset sale under Section 338(h)(10) does not trigger Pennsylvania sales and use tax obligations. The deemed sale is a fiction for income tax purposes only. There is no actual transfer of tangible personal property, no change in the legal title to equipment or inventory, and no taxable transaction for sales and use tax purposes. The stock of Meridian is the only asset that physically changes hands, and the sale of stock is not subject to Pennsylvania sales or use tax.
B. New Jersey
Meridian has nexus with the State of New Jersey by reason of customer activity and certain employee activity within the state. During due diligence, we confirmed that Meridian files New Jersey Corporation Business Tax returns and reports New Jersey-apportioned taxable income.
New Jersey conforms to the federal Section 338(h)(10) election. Accordingly, the deemed asset sale gain is recognized for NJ CBT purposes, and the step-up in asset basis is available for computing post-closing New Jersey taxable income. No separate state election filing is required.
C. Delaware
Delaware does not impose a corporate income tax and therefore the Section 338(h)(10) Election has no Delaware income tax implications. However, both Meridian and SBI, as Delaware-incorporated entities, are subject to the Delaware annual franchise tax. The franchise tax is computed based on authorized shares or assumed par value capital, and the deemed asset sale under Section 338(h)(10) has no impact on Delaware franchise tax obligations. Both entities will continue to be responsible for their respective Delaware franchise tax filings.
D. Other States
During due diligence, we conducted a nexus analysis to determine whether Meridian has filing obligations in states beyond Pennsylvania, New Jersey, and Delaware. The analysis revealed that Meridian's nexus presence in other states is limited, reflecting the company's concentrated operations in the greater Philadelphia metropolitan area and the nature of its customer base (primarily direct hospital and surgical center relationships serviced from the King of Prussia headquarters).
To the extent Meridian has nexus in other jurisdictions, we have completed a state-by-state conformity analysis with respect to the Section 338(h)(10) Election. No material adverse state tax consequences have been identified, and no states in which Meridian has filing obligations have been found to reject or modify the federal election in a manner that would create a material incremental tax burden.
VI. Irish Holding Company Considerations
A. Overview of Solstice Group Structure
Following the closing, the Solstice group's U.S. holding structure will be as follows: Solstice Biomedical Devices Ltd. (Ireland, ultimate parent) will own 100% of SBI (Delaware), which in turn will own 100% of Meridian (or "new" Meridian, post-Section 338(h)(10) Election) (Delaware). This Irish-to-U.S. holding structure raises several cross-border tax considerations that must be carefully analyzed and managed on an ongoing basis.
B. U.S. Tax Considerations for Irish Parent
U.S. Corporate Status of Subsidiaries. SBI and Meridian are both domestic (U.S.) corporations. All of the U.S. operations acquired in the Transaction will be conducted through these U.S. corporate entities. Solstice, as the Irish parent, will receive returns from its U.S. investment in the form of dividends, interest (if intercompany loans are established), and potentially management fees or royalties (subject to the transfer pricing framework discussed in Section VII).
Withholding Tax on Dividends. Dividends paid by SBI to Solstice (Ireland) will be subject to U.S. withholding tax at the statutory rate of 30% under IRC Section 1442. However, the U.S.–Ireland Income Tax Treaty (the "Treaty") provides for a reduced withholding rate. Specifically, Article 10(2)(a) of the Treaty provides for a withholding rate of 5% on dividends paid to a company that is the beneficial owner and owns directly at least 10% of the voting stock of the paying company. Since Solstice owns 100% of SBI's voting stock, the 5% rate is available, provided that Solstice qualifies as a "qualified resident" of Ireland under the Treaty's limitation-on-benefits ("LOB") article (Article 23). Based on our preliminary review of Solstice's corporate profile—as an Irish-resident company listed on Euronext Dublin with substantial operations in Ireland—we believe Solstice satisfies the LOB requirements, though this should be confirmed by Solstice's Irish tax advisors.
Withholding Tax on Interest. Interest payments from SBI to Solstice on any intercompany loans would be subject to U.S. withholding tax at the statutory rate of 30%. Article 11 of the Treaty reduces this rate to 0% (complete exemption from withholding), subject to the anti-abuse and LOB provisions. Accordingly, if Solstice establishes intercompany financing to SBI, the interest payments should be free of U.S. withholding tax, provided the Treaty benefits are properly claimed and the LOB conditions are satisfied.
Branch Profits Tax. The branch profits tax under IRC Section 884 is not applicable in this case because Solstice's U.S. operations are conducted through U.S. corporate subsidiaries (SBI and Meridian) rather than through a U.S. branch of the Irish parent. The interposition of the U.S. corporate entities insulates Solstice from branch profits tax exposure.
C. Irish Tax Considerations
Corporate Tax Rate. Ireland imposes a 12.5% corporate tax rate on "trading income" (broadly, active business income) and a 25% rate on "non-trading income" (passive income, including most forms of investment income).
Participation Exemption for Dividends. Solstice's receipt of dividends from SBI would generally be exempt from Irish corporation tax under the participation exemption set forth in Section 21B of the Taxes Consolidation Act 1997 ("TCA 1997"). The exemption applies to dividends paid out of trading profits of a company resident in a country with which Ireland has a double taxation agreement. The United States is such a treaty partner. Accordingly, dividends from SBI to Solstice should be exempt from Irish tax, provided the dividends are paid out of SBI's trading profits. This treatment should be confirmed with Solstice's Irish tax advisors.
Interest Income. Interest income received by Solstice from SBI (on any intercompany loans) would be subject to Irish corporation tax at the 25% passive income rate, unless the interest qualifies as "trading income" (which is unlikely in the context of a holding company's intercompany lending activities). The interaction between the U.S. withholding tax exemption (0% under the Treaty) and the Irish 25% tax rate should be modeled to optimize the overall tax cost of intercompany financing.
Capital Gains — Participation Exemption. If Solstice were to dispose of its shares in SBI at some future date, the capital gain would potentially qualify for exemption under the Irish participation exemption for substantial shareholdings set forth in Section 626B of the TCA 1997. The exemption is available where, among other conditions, the company being disposed of (or its subsidiaries) carries on a "trade," and the disposing company has held at least 5% of the shares for a continuous period of not less than 12 months in the two years preceding the disposal. Given that SBI (through Meridian) will be engaged in active trading activities (manufacturing and selling surgical devices), this condition should be met. However, the detailed requirements of Section 626B are complex, and Solstice's Irish tax advisors should confirm the availability of the exemption well in advance of any contemplated disposal.
D. GILTI and Subpart F Considerations
The U.S. rules relating to Global Intangible Low-Taxed Income ("GILTI") under IRC Section 951A and Subpart F income under IRC Section 952 are not directly applicable in the traditional direction in this case. SBI and Meridian are domestic (U.S.) corporations—they are not controlled foreign corporations ("CFCs") from the perspective of U.S. tax law because their shareholder (Solstice) is not a "United States person" as defined in Section 7701(a)(30).
However, we note that if any U.S. persons hold direct or indirect interests in Solstice (e.g., U.S. institutional investors holding shares on Euronext Dublin), a CFC/GILTI analysis may be relevant with respect to non-U.S. subsidiaries of Solstice. This analysis is beyond the scope of this memorandum and should be addressed by Solstice's Irish tax advisors in conjunction with Solstice's U.S. shareholder-level tax counsel.
E. BEAT and Interest Limitation Considerations
Base Erosion and Anti-Abuse Tax (BEAT). IRC Section 59A imposes the BEAT on certain large corporations that make substantial "base erosion payments" to related foreign persons. Base erosion payments include, among other things, management fees, royalties, and interest paid by a U.S. corporation to a related foreign entity. The BEAT applies to corporations (or affiliated groups) with average annual gross receipts of at least $500 million over a three-year testing period and a "base erosion percentage" of 3% or more.
Currently, the combined gross receipts of SBI and Meridian are well below the $500 million threshold (Meridian's annual revenue is approximately $87 million, and SBI has limited activity). Accordingly, the BEAT does not apply at present. However, as Solstice's U.S. operations expand—whether organically or through additional acquisitions—the combined group should monitor its approach to the $500 million threshold and ensure that the volume and nature of intercompany payments to Solstice (Ireland) are structured in a manner that minimizes BEAT exposure.
Section 163(j) Interest Deduction Limitation. The $130,000,000 Term Loan A from Tidewater Atlantic Bank, N.A. will generate significant annual interest expense. At the anticipated rate of SOFR plus 2.25% (assuming a SOFR rate in the range of 5.0–5.5%, resulting in an all-in rate of approximately 7.25–7.75%), annual interest expense on the Term Loan A alone is estimated at approximately $9.4–10.1 million.
Under IRC Section 163(j), the deduction for business interest expense is limited to the sum of (i) business interest income, (ii) 30% of the taxpayer's adjusted taxable income ("ATI"), and (iii) floor plan financing interest. For taxable years beginning before January 1, 2026, ATI is computed without regard to deductions for depreciation, amortization, or depletion (i.e., these items are added back to ATI, increasing the limitation). For taxable years beginning after December 31, 2025, the addback of depreciation, amortization, and depletion is eliminated, and ATI is computed after such deductions.
This distinction is critical. In the early years post-closing (2024–2025), the Section 197 amortization deductions flowing from the step-up are added back to ATI, increasing the Section 163(j) limitation and providing more room for interest deductions. Beginning in 2026, the amortization deductions will reduce ATI (they are no longer added back), tightening the Section 163(j) limitation at exactly the time when the amortization deductions are largest.
Recommendation. We strongly recommend that SBI/Meridian model the Section 163(j) limitation impact for each of the first five taxable years following closing (years 1–5), factoring in the magnitude of the amortization deductions from the Section 338(h)(10) Election and the interest expense on the acquisition debt. If the limitation becomes binding in later years, SBI/Meridian may consider accelerating debt repayment, restructuring the capital stack, or exploring other strategies to mitigate the impact of disallowed interest expense. Disallowed interest under Section 163(j) carries forward indefinitely, but the deferral of the deduction has a present-value cost that should be quantified.
VII. Transfer Pricing Implications
A. Intercompany Transactions
Following the closing, Meridian will operate as a wholly owned subsidiary of SBI, which is in turn wholly owned by Solstice (Ireland). This three-tier corporate structure creates the potential—and, in many cases, the commercial necessity—for intercompany transactions between the U.S. and Irish entities. The principal categories of anticipated intercompany transactions include:
1. Management Services and Corporate Overhead Charges. Solstice (Ireland) provides centralized management services, including strategic planning, human resources support, regulatory affairs coordination, and financial reporting oversight, to its global subsidiaries. It is anticipated that Solstice will charge SBI/Meridian a management services fee to compensate for these services.
2. intellectual Property Licensing. Post-integration, there may be opportunities to license Solstice group IP to Meridian (e.g., manufacturing process technology, quality systems) or to license Meridian's ArthroNav IP to Solstice or other group entities for commercialization outside the United States. Any such licensing arrangement must be structured at arm's length.
3. Intercompany Sale/Distribution Arrangements. If Meridian's products are distributed through Solstice's global distribution network—for example, through Solstice's European and Asia-Pacific subsidiaries—the intercompany pricing of products transferred between entities must comply with transfer pricing rules.
4. Intercompany Financing. If Solstice provides loans to SBI (in addition to or in lieu of the equity contribution), the terms of such financing—including the interest rate, tenor, and security—must reflect arm's-length terms.
B. Arm's-Length Standard
All intercompany transactions between the Solstice group's Irish and U.S. entities must comply with the arm's-length standard as articulated in IRC Section 482 (for U.S. tax purposes) and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (relevant for Irish compliance under the Taxes Consolidation Act 1997, as amended, and the Finance Act 2019 transfer pricing rules). The arm's-length standard requires that the terms and conditions of intercompany transactions be consistent with those that would have been agreed between unrelated parties dealing at arm's length in comparable circumstances.
Documentation Requirements. The United States imposes substantial penalties for transfer pricing adjustments under IRC Section 6662(e) unless the taxpayer has prepared "contemporaneous documentation" demonstrating that its transfer pricing methods are reasonable. Treasury Regulations Section 1.6662-6 sets forth the requirements for such documentation, which must be in existence at the time the tax return is filed and must include, among other things, a description of the controlled transactions, the selection and application of the transfer pricing method, and a comparability analysis.
Country-by-Country Reporting (CbCR). Solstice (Ireland), as a multinational enterprise group with consolidated revenue exceeding €750 million, is subject to CbCR obligations under BEPS Action 13 and the corresponding Irish implementing regulations (Section 891H TCA 1997). The addition of Meridian to the Solstice group must be reflected in updated CbCR filings (typically filed within 12 months of the end of the reporting fiscal year), including disclosure of the U.S. entities' revenues, profits, taxes, employees, and tangible assets.
C. IP Migration and Cost-Sharing Considerations
Preservation of U.S. IP Base. If Solstice intends, as part of its post-acquisition integration plan, to integrate the ArthroNav intellectual property into an Irish or other non-U.S. entity's IP portfolio, the transfer or licensing of such IP out of the U.S. entity must be conducted at arm's-length prices and may trigger significant U.S. tax consequences. Specifically, a transfer (sale or exclusive license) of appreciated intangible property from a U.S. entity to a related foreign entity would give rise to gain recognition under IRC Section 367(d) (for outbound transfers to foreign corporations) or IRC Section 482 (if structured as a license). The gain or royalty income would be computed with reference to the fair market value of the IP, which—following the Section 338(h)(10) Election—will include the stepped-up basis from the AGUB allocation.
It is a foundational principle of this memorandum that the stepped-up basis in U.S. intangibles is a valuable tax asset that should be preserved within the U.S. entity. Migrating the IP out of the United States would not only trigger immediate U.S. tax but would also eliminate the future amortization deductions that constitute the core economic benefit of the Section 338(h)(10) Election.
Recommendation. We strongly recommend that Solstice not migrate ArthroNav IP or any other material intangible property out of the U.S. entities absent a comprehensive transfer pricing study, tax impact analysis, and strategic cost-benefit evaluation. The default approach should be to maintain the IP within Meridian (or SBI) and license it outbound on a non-exclusive, arm's-length royalty basis to the extent needed for international commercialization.
Polytechnic Innovations, Ltd. License Agreement. During due diligence, we identified an existing license agreement between Meridian and Polytechnic Innovations, Ltd. (United Kingdom), pursuant to which Meridian licenses certain background intellectual property relating to robotic surgical navigation systems. The license carries a royalty of 2.5% of net sales of ArthroNav products. Post-closing, this royalty is a deductible expense for U.S. federal and state income tax purposes. Because the license is between Meridian and an unrelated third party, it does not implicate the intercompany transfer pricing rules, though it should be documented within the broader transfer pricing framework as a benchmark and as a relevant comparable for purposes of any future intercompany IP licensing arrangements.
D. Recommendations
Based on the foregoing, we recommend the following actions with respect to transfer pricing:
1. Engage transfer pricing economists (either within Brindoval & Albright LLP's transfer pricing practice or through a dedicated transfer pricing advisory firm) to prepare a comprehensive benchmarking study for all anticipated intercompany transactions within twelve (12) months of closing.
2. Establish intercompany agreements prior to the commencement of any intercompany charges. These agreements should include, at a minimum, a management services agreement (between Solstice and SBI/Meridian), and, if applicable, an IP license agreement and cost-sharing agreement. Each agreement should document the services or rights provided, the compensation methodology, and the arm's-length basis for the pricing.
3. Coordinate with Solstice's Irish tax advisors on the Irish transfer pricing implications, including compliance with the Finance Act 2019 rules and any documentation requirements under Irish law.
4. Update CbCR filings to reflect the addition of Meridian to the Solstice group.
VIII. Section 338(h)(10) Election — Procedural Requirements
A. IRS Form 8023
The Section 338(h)(10) Election is effectuated by filing IRS Form 8023 (Elections Under Section 338 for Corporations Making Qualified Stock Purchases). The following procedural requirements apply:
• The form must be signed by the purchasing corporation (SBI) and by the selling shareholders. Under the terms of the SPA, Dr. Marcus Ellsworth, in his capacity as the Sellers' Representative, will have the authority to execute the Form 8023 on behalf of all Sellers. SBI will execute through its authorized officer (Helena Byrne, President).
• The form must be filed with the Internal Revenue Service (at the service center designated in the form instructions) no later than the fifteenth (15th) day of the ninth (9th) month beginning after the month in which the acquisition date falls. For a closing date of October 31, 2024, the applicable filing deadline is July 15, 2025.
• The form requires, among other information, the name and taxpayer identification number of both the purchasing corporation and the target, the acquisition date, and the consideration paid.
• Leonard Cross (Calderwood & Harkness LLP) will be responsible for preparing and filing the Form 8023, in coordination with Brindoval & Albright LLP.
B. Asset Allocation — Form 8883
In addition to Form 8023, both the Buyer and the Sellers must file IRS Form 8883 (Asset Allocation Statement Under Section 338) with their respective federal income tax returns for the taxable year that includes the acquisition date (i.e., the returns covering October 31, 2024). Form 8883 reports the allocation of the ADSP/AGUB among the seven asset classes prescribed by Section 1060.
The Buyer and Sellers should agree on the asset allocation to be reported on Form 8883. This agreement will be documented in the SPA as a binding covenant, with the allocation methodology to be finalized within ninety (90) days following closing. Both parties are required to file consistent allocations; inconsistent reporting may invite IRS scrutiny and potential adjustment.
C. State Election Filings
Pennsylvania. No separate state election form is required for Pennsylvania purposes. The Commonwealth automatically follows the federal Section 338(h)(10) election, and the deemed asset sale treatment flows through to the PA CNIT return.