1. COOPERATIVE INNOVATION * * * * * * * * * SOME CHALLENGES AND OPPORTUNITIES 7 th Annual Farmer Cooperatives Conference University of Wisconsin - Center for Cooperatives November 1, 2004 Dave Swanson (612) 343-8275 swanson.dave@dorsey.com Dave Swanson (612) 343-8275 swanson.dave@dorsey.com

2. 2 Effective Member Communication Conflicting Duties: Duty of Confidentiality v. Disclosure to Members

3. 3 EFFECTIVE MEMBER COMMUNICATION Why Worry About Confidentiality? Proprietary informationProprietary information Inconsistent or incomplete information can lead to misinformationInconsistent or incomplete information can lead to misinformation Securities laws, antitrust laws, privacy lawsSecurities laws, antitrust laws, privacy laws Third party confidentiality agreementsThird party confidentiality agreements

4. 4 Effective Member Communication What is Confidential Information? Trade secrets, pricing and customer information, etc.Trade secrets, pricing and customer information, etc. Strategic plans in processStrategic plans in process Board deliberations and negotiations on important or sensitive topicsBoard deliberations and negotiations on important or sensitive topics Traditional equity coops v. “new generation” coopsTraditional equity coops v. “new generation” coops

5. 5 Effective Member Communication Some Securities Law Concepts Consistent, timely disclosure of financial and other important informationConsistent, timely disclosure of financial and other important information No selective disclosureNo selective disclosure Answering member questionsAnswering member questions

6. 6 Effective Member Communication Some Suggestions to Handle These Conflicts Establish board and management policiesEstablish board and management policies Use a websiteUse a website Discuss and reach consensus on major mattersDiscuss and reach consensus on major matters Avoid third party confidentiality agreementsAvoid third party confidentiality agreements

7. 7 Alternatives to Attract Capital Member CapitalMember Capital –Permanent capital – fast, limited pool –Revolving capital – slow, expectation of revolvement Use of Joint VenturesUse of Joint Ventures –A new or discrete activity v. the core business (or entire business) –Operating coop v. start-up enterprise

8. 8 Alternatives to Attract Capital Preferred Stock or Similar InterestsPreferred Stock or Similar Interests –CHS Preferred Stock Program –8% dividend limitation –Investor’s rights Long-Term DebtLong-Term Debt –Leverage member relationships

9. 9 Alternatives to Attract Capital Consolidate with other coopsConsolidate with other coops Expand the definition of patronExpand the definition of patron Convert to an LLC or C-CorpConvert to an LLC or C-Corp

10. 10 Alternatives to Attract Capital Decision-Making Framework Each situation is uniqueEach situation is unique Identify goals and examine all the optionsIdentify goals and examine all the options Focus on:Focus on: –Potential for conflict –Decision-making/Governance –Exit Strategy –Preserving the patronage relationship –Preserving political and social aspects of coop enterprise