1. 1 University of Wisconsin Center for Cooperatives 11 th Annual Farmer Cooperatives Conference Dave Swanson Dorsey & Whitney LLP (612) 343.8275 swanson.dave@dorsey.com Legal Challenges and Solutions November 18-19, 2008 St. Paul, Minnesota

2. November 18-19, 2008 University of Wisconsin Center for Cooperatives 2008 Farmer Cooperative Conference 2 I. Managing Exposure for Subsidiary and Affiliate Obligations Piercing the Corporate Veil Claims An Equitable Principle with Varying Standards Among the States and Fact Intensive Criteria Often Articulated as a Consideration of Factors Test, Focused on Observance of Corporate Formalities and Adequate Capitalization at Time of Commencement Commonly Stated as Requiring Owner Control Exercised in an Improper Manner [Including Fraud or Injustice] This Leads to Uncertainty Even Though Most States Express the Principle That Piercing the Corporate Veil is the Exception Rather than the Rule (to be applied only in extraordinary cases).

3. November 18-19, 2008 University of Wisconsin Center for Cooperatives 2008 Farmer Cooperative Conference 3 Managing Exposure for Subsidiary and Affiliate Obligations Piercing the Corporate Veil Claims Claims Most Often Arise in Insolvency Situations Successful Claims Typically Involve: –Undercapitalization at Business Commencement –Asset-Stripping or Beneficial Dealings –Undue Continuation of a Failing Business Claims are Less Likely to Succeed in Commercial Transactions Than When Tort-like Nonconsensual Matters are at Stake Claims More Likely to Succeed When Small Closely Held Companies or Controlled Subsidiaries are Involved

4. November 18-19, 2008 University of Wisconsin Center for Cooperatives 2008 Farmer Cooperative Conference 4 Managing Exposure for Subsidiary and Affiliate Obligations Piercing the Corporate Veil Claims There are Many Statutory Exceptions, Such As: –Employee Benefit Plans –Employer Tax Withholding Obligations –Statutory Environmental Liabilities –Consumer Regulations There May Be Contractual Exceptions, Too—Parental Guarantees of Debt and Major Contracts Are LLC Owners Subject to Veil-Piercing Claims? Most Certainly “Yes”.

5. November 18-19, 2008 University of Wisconsin Center for Cooperatives 2008 Farmer Cooperative Conference 5 Managing Exposure for Subsidiary and Affiliate Obligations Some Practical Considerations to Limit Risk: –Develop Credible Business Plans for a Sub’s Activities (Including Capitalization Levels) –Establish Policies to Ensure Business Activities Between Owner and Sub are Commercially Reasonable, and Properly Documented –Establish Policies to Ensure the Sub’s Trade Creditors are Fully Informed –Establish Policies to Ensure Legal Compliance and Ethics –When Feasible, Use Independent Boards and Management –Maintain Adequate D&O and Business Risk Insurance Coverage –Observe Corporate Formalities (separate board meetings, separate bank accounts) –Obtain Legal Advice in Establishing Affiliates and in Its Contractual Arrangements

6. November 18-19, 2008 University of Wisconsin Center for Cooperatives 2008 Farmer Cooperative Conference 6 II. Credit Relationships After September, 2008 Some Take-Aways From Recent Experience Evaluate your Lender and Lender Group Evaluate Contract Parties in Commodity Transactions Such as Fuels, Grains, Hedging Transactions Relationship–Based Lenders and Contract Parties v. Institutional Lenders and Contract Parties

7. November 18-19, 2008 University of Wisconsin Center for Cooperatives 2008 Farmer Cooperative Conference 7 Credit Relationships After September, 2008 Some Take-Aways From Recent Experience Focus on Transfer of Credit Commitments in Syndicates and Participations Ability to Replace a “failed” Lender or Administrative Agent Provide Flexibility for Hybrid Products like LOCs Focus on Lender Consent Requirements Focus on Funding Conditions Focus on Timing and Mechanics of Draw Requests Consider the Impact of Failed Guarantees or other Credit Enhancements Avoid, if possible, third-party ratings triggers