University of Wisconsin Center for Cooperatives 11th Annual Farmer Cooperatives Conference

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University of WisconsinCenter for
Cooperatives11th Annual Farmer Cooperatives
Conference

• Dave SwansonDorsey Whitney LLP(612)
  343.8275swanson.dave_at_dorsey.com

Legal Challenges and Solutions November 18-19,
2008St. Paul, Minnesota
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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).

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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

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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, TooParental
  Guarantees of Debt and Major Contracts
• Are LLC Owners Subject to Veil-Piercing Claims?
  Most Certainly Yes.

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Managing Exposure for Subsidiary and Affiliate
Obligations

• Some Practical Considerations to Limit Risk
• Develop Credible Business Plans for a Subs
  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 Subs Trade
  Creditors are Fully Informed
• Establish Policies to Ensure Legal Compliance and
  Ethics
• When Feasible, Use Independent Boards and
  Management
• Maintain Adequate DO 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

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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
• RelationshipBased Lenders and Contract Parties
  v. Institutional Lenders and Contract Parties

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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