University of Wisconsin
Center for Cooperatives
11th 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
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University of Wisconsin Center for Cooperatives
2008 Farmer Cooperative Conference
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).
November 18-19, 2008
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University of Wisconsin Center for Cooperatives
2008 Farmer Cooperative Conference
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
November 18-19, 2008
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University of Wisconsin Center for Cooperatives
2008 Farmer Cooperative Conference
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”.
November 18-19, 2008
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University of Wisconsin Center for Cooperatives
2008 Farmer Cooperative Conference
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
November 18-19, 2008
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University of Wisconsin Center for Cooperatives
2008 Farmer Cooperative Conference
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
November 18-19, 2008
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University of Wisconsin Center for Cooperatives
2008 Farmer Cooperative Conference
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
November 18-19, 2008
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