Cooperative Elevator Company, a member of the Company, from 1996confidentiality procedures and guidelines, our members have rights to 2011. Mr. Enstad also serves as one of the Company’s appointed governors to the board of governors of HLBE, as well as the chairman of HLBE. From September 2013 through March 2018 Mr. Enstad served as one of HLBE’s four appointed managers to the board of managers of Agrinatural Gas, LLC, a majority owned subsidiary of HLBE (“Agrinatural”), representing HLBE’s investment interest in Agrinatural. Mr. Enstad was selected as a nominee based on his deep knowledge about the Company and its industry, his valuable leadership to the Company and the Board, and his business experience.
David Forkrud - Nominee. Mr. Forkrud has managed farmer-owned cooperatives for 42 years, recently retiring in 2016. Mr. Forkrud continues to work part-time for Farmer’s Co-op Oil Co. of Echo selling grain handling equipment. He was elected County Commissioner in the fall of 2016 for Redwood County. Mr. Forkrud was and is a promoter of ethanol. Mr. Forkrud was selected as a nominee based on his business knowledge and experiences, in addition to his knowledge of the industry.
Rodney Wilkison - Incumbent Nominee. Mr. Wilkison was initially appointed to a Board seat in December 2006 and was elected as a governor in 2007. Since 1985, Mr. Wilkison has been the owner and chief executive officer of Wilkison Consulting Service, which provides financial consulting, tax preparation, and monthly accounting services for farmers and small businesses. Prior to starting his consulting business, Mr. Wilkison worked for two different banks for more than eleven years. Mr. Wilkison graduated from Pipestone Area Vocational Technical Institute with a degree in agricultural banking. Mr. Wilkison also serves as onereview lists of our appointedmembers and governors, to the board of governors of HLBE, as well as the vice-chairman and chair of the audit committee of HLBE. Mr. Wilkison has served as a member and chairman of the Company’s audit committee since his election as a governor in 2007. Mr. Wilkison was selected as a nominee based on his prior experience with the Company, his business, financial and accounting knowledge, and his ability to serve as an audit committee financial expert.
Marten Goulet - Incumbent Nominee. Mr. Goulet was first elected as a governor in 2012. Since June 2012, Mr. Goulet has been the chief financial officer of Wagner Construction, an underground utility and site development contractor based in International Falls, Minnesota with operations in Arizona, Arkansas, Colorado, Michigan, Minnesota, Montana, South Dakota, North Dakota, and Canada. Prior to joining Wagner Construction, Mr. Goulet spent eight years with Wells Fargo in the Twin Cities managing banking relationships and providing financial services to companies in the construction, manufacturing, wholesaling, and service-related industries with annual revenues of $20 million to $1 billion. Mr. Goulet is the President of Voyageur Capital Group, a private equity fund, and founder of Highland Pellets, which owns and operates a wood pellet plant in Pine Bluff, Arkansas. Mr. Goulet received his Bachelor of Arts in finance from Bemidji State University and his M.B.A. in accounting from the University of St. Thomas in St. Paul, Minnesota. He also serves as onecopies of our appointed governorsarticles/certificate of organization, operating agreements, and tax returns and financial statements for the six most recent fiscal years. Any member may inspect and copy these records during normal business hours if they have a proper purpose reasonably related to the board of governors of HLBE, as welltheir interest as a member of the audit committee of HLBE. Mr. Goulet has servedGFE. Members may also, at their own expense and for a purpose reasonably related to their interest as a member, request copies of the Company’s audit committee since his election as a governor in 2012. He also serves on the Company’s nominating committee. Mr. Goulet was selected as a nominee based on his prior experience with the Company along with his business experiences, his educationlists of our members and governors, our articles/certificate of organization, tax returns, financial acumen,statements and his ability to serve as an audit committee financial expert.
Effect of Your Proxy
There are four nominees and three open seats for governor. You may only mark one voting choice withoperating agreements. With respect to each nominee:obtaining counsel or appraisal services at our expense, the Board did not consider these actions necessary or customary. In deciding not to adopt these additional procedures for access to our company files or to obtain counsel or appraisal services for our members at our expense, the Board also took into account factors such as GFE’s size and the cost of such procedures.
We have not structured the transaction to require the approval of at least a majority of unaffiliated members. Because our affiliated and unaffiliated members will be treated identically in terms of the approval process of the reclassification transaction, the Board believes a special vote is not necessary. In addition, the governors have not retained an unaffiliated representative to act solely on behalf of unaffiliated members. Again, because our affiliated and unaffiliated members will be treated identically in terms of the approval process of the reclassification transaction, the Board believes an unaffiliated representative is unnecessary.
Board Recommendation
Our Board of Governors believes the terms of the reclassification transaction are fair and in the best interests of our unit holders and unanimously recommends that you vote “FOR” or “WITHHOLD/ABSTAIN.” THE BOARD HAS DETERMINED THAT EACH NOMINEE IS QUALIFIED TO SERVE AS A GOVERNOR. FOR EACH PROPERLY EXECUTED PROXY CARD WHERE THE MEMBER DOES NOT MARK ANY CHOICES FOR GOVERNOR, THE PROXIES WILL VOTE FOR THE INCUMBENT GOVERNOR NOMINEES PAUL ENSTAD, MARTEN GOULET, AND RODNEY WILKISON.
Abstentions (voting “WITHHOLD/ABSTAIN”) will not be counted either for or against any nominee because governors are elected by plurality vote, meaning that the person receiving the most votes will be elected. Abstentions will be included when counting membership units to determine whether a sufficient numberReclassification of the voting membership unitsUnits as set forth in this proxy statement. Additionally, our Board of Governors unanimously recommends that you vote “FOR” the adjournment or postponement of the Special Meeting, if necessary or appropriate, for the purpose, among others, of soliciting additional proxies if there are represented to establish a quorum.
If you mark contradicting choices on your proxy card such as both for and abstain for a nominee, yournot sufficient votes will not be counted with respect to the nominee for whom you marked contradicting choices.
If at the time of the 2021Special Meeting to approve the Reclassification.
Purpose and Structure of the Reclassification Transaction
The purposes of the reclassification transaction are to:
| · | Consolidate ownership of our prior Units, which are being reclassified as Class A Units, in less than 300 unit holders of record, which will suspend our SEC reporting requirements and thereby achieve significant cost savings. We estimate that we will be able to reallocate resources and eliminate costs and avoid anticipated future costs of approximately $435,000 on an annual basis by eliminating the requirement to make periodic reports and reducing the expenses of member communications. We will also realize cost savings by avoiding the need to add additional staff and from reduced staff and management time spent on reporting and securities law compliance matters. |
| · | Help protect sensitive business information from required or inadvertent disclosure that might benefit our competitors. |
| · | Allow our management and employees to redirect time and resources spent on SEC reporting obligations and member administrative duties to our core business. |
| · | Reduce the expectation to produce short-term per Unit earnings, thereby increasing management’s flexibility to consider and balance actions between short-term and long-term growth objectives. |
For further background on the reasons for undertaking the reclassification transaction at this time, see “Reclassification and Deregistration—Overview of the Reclassification Transaction” beginning on page 11 and “Reclassification and Deregistration—Reasons for the Reclassification Transaction; Fairness of the Reclassification Transaction; Board Recommendation” beginning on page 15.
The structure of the reclassification transaction will give all our members the opportunity to retain an equity interest in GFE and therefore to participate in any future growth and earnings of the Company. Because we are not cashing out any of our members, this structure minimizes the costs of our becoming a non-SEC reporting company while achieving the goals outlined in this Proxy Statement.
Our Board elected to structure the transaction to take effect at the record unit holder level, meaning that we will look at the number of Units registered in the name of a single holder to determine how that holder’s Units will be reclassified. The Board chose to structure the transaction this way in part because it determined that this method would provide us with the best understanding at the effective time of how many members would receive Class B or Class C Units because we will be able to have a complete and final list of all record unit holders at the effective time of the reclassification. In addition, the Company sent a letter to its members notifying them that they had until [insert date, 2022] to make transfers of Units prior to the proposed reclassification of Units. The purpose of this letter was to allow members the opportunity to make transfers prior to the proposed reclassification so that they could own the requisite number of Units to be in their desired Class, which our Board felt would enhance the substantive fairness of the transaction to all members. Although providing this flexibility generated an element of uncertainty, in that the reclassification, if approved, may not have eliminated as many of our Class A members as anticipated, our Board felt that the threshold ratio of 21 or more units allowed a sufficient margin for members to transfer their Units in or out of street name. Overall, our Board determined that structuring the reclassification transaction as one that would affect members at the record holder level would be the most efficient and cost-effective way to achieve its goals of deregistration, notwithstanding any uncertainty that may have been created by giving members the flexibility to transfer their holdings through [insert date, 2022]. Because the “trading window” ending [insert date, 2022] [is now closed] [alternative language – will close on insert date], we do not expect permitting any further Unit transfers through the date of the Special Meeting. For further background on the alternative structures considered by our Board of Governors please see “Reclassification and Deregistration—Background of the Reclassification Transaction” beginning on page 12 and “Reclassification and Deregistration—Reasons for the Reclassification Transaction; Fairness of the Reclassification Transaction; Board Recommendation” beginning on page 15.
Effects of the Reclassification Transaction on GFE; Plans or Proposals after the Reclassification Transaction
The reclassification transaction will have various positive and negative effects on GFE, which are described below.
Effect of the Proposed Transaction on Our Outstanding Units.
Our current Operating Agreement does not authorize us to issue any additional classes of Units. The amendments to our Operating Agreement will authorize the issuance of three separate and distinct classes of Units, Class A, Class B, and Class C Units. As of the Record Date, the number of outstanding units was 30,606. Based upon our best estimates, if the reclassification transaction had been consummated as of the Record Date, approximately 23,763 Units would be reclassified as Class A Units, approximately 5,051 Units would be reclassified as Class B Units, and approximately 1,792 Units would be reclassified as Class C Units. The total number of Class A holders of record would be approximately 215, the total number of Class B holders of record would be approximately 396 and the total number of Class C holders of record would be approximately 378. We have no other current plans, arrangements or understandings to issue any Units as of the date of this proxy statement.
Termination of Securities Exchange Act Registration and Reporting Requirements
Upon the completion of the reclassification transaction, we expect that our current class of registered Units, which will be reclassified as Class A Units, will be held by fewer than 300 record unit holders and each of the Class B and Class C Units will be held by fewer than 500 record unit holders. Accordingly, our obligation to continue to file periodic reports with the SEC will be suspended pursuant to Rule 12h-3 of the Securities Exchange Act of 1934, as amended.
The suspension of these filing requirements will substantially reduce the information required to be furnished by us to our members and to the SEC. Therefore, we anticipate that we will eliminate costs and avoid future costs associated with these filing requirements, which we estimate to be approximately $435,000 on an annual meetingbasis. These costs are broken down as follows:
| | Accounting and Auditing Expenses | $ | 200,000 | |
| | | | | |
| | SEC Counsel | $ | 120,000 | |
| | | | | |
| | Staff and Executive Time | $ | 88,000 | |
| | | | | |
| | Testing Control Internal Audits | $ | 17,000 | |
| | | | | |
| | Miscellaneous, Including Printing and Mailing | $ | 10,000 | |
| | | | | |
| | Total | $ | 435,000 | |
We will apply for termination of the registration of our Units and suspension of our SEC reporting obligations as soon as practicable following completion of the reclassification transaction. Following completion of the reclassification transaction, we intend to continue to make available to our unit holders annual financial information about GFE.
Potential Registration of the Class B or Class C Units or Discontinuation of our Suspended Duty to Report.
After the reclassification transaction, we anticipate that there will be up to approximately 396 Class B and 378 Class C unit holders of record. If the number of record holders of our Class B Units or our Class C Units exceeds 500 on the last day of any given fiscal year, GFE will be required to register the Class B or Class C Units under Section 12(g) of the Securities Exchange Act. As a result, we would be subject to all of the reporting and disclosure obligations under the Securities Exchange Act and the Sarbanes-Oxley Act to which we are currently subject. For this reason, the proposed amendments to our current Operating Agreement contained in the Seventh Amended and Restated Operating Agreement include a provision that denies the Company the authority to allow any transfer of Class B or Class C Units if it will result in the Class B or Class C Units being held by 500 or more respective holders of record. We do not expect any significant change in the number of record holders of Class B or Class C Units in the near term that will obligate us to register our Class B or Class C Units.
Similarly, if the number of our Class A unit holders of record reaches or exceeds 300 on the last day of any given fiscal year, the suspension of our duty to file reports under Section 15(d) of the Securities Exchange Act would be discontinued, and as a result, we would be again subject to the reporting and disclosure obligations under the Securities Exchange Act and the Sarbanes-Oxley Act to which we are currently subject. For this reason, the Seventh Amended and Restated Operating Agreement also contains a provision that denies the Company the authority to allow any transfer of Class A Units if it will result in the Class A Units being held by 300 or more holders of record. We estimate that following the reclassification transaction, we will have 215 Class A unit holders of record and do not anticipate any significant change in the number of Class A unit holders of record that would obligate us to resume our periodic reporting with the SEC.
Effect on Trading of Units
Our Units are not traded on an exchange and are not otherwise actively traded, although we utilize a qualified matching service on our website, an alternative trading system as defined by the SEC. Persons interested in buying or selling Units first contact the Company offices with notice of their desire to buy or sell Units. Their offer to buy or sell Units is then posted on the Company website with their contact information. Persons interested in buying or selling Units as listed on the website are encouraged to contact the offeror or to negotiate transaction details. Once the terms of the transaction are agreed upon, the member will contact the Company to arrange the transfer of the Units according to the qualified matching service rules and procedures we have put in place at the Company.
Because we will no longer be required to maintain current public information by filing reports with the SEC, and because our Units will only be tradable in privately negotiated transaction, the liquidity of our Units may be reduced following the reclassification transaction. We do expect however that trading of our Units will continue to be facilitated through our qualified matching service on our website following consummation of the reclassification transaction. In order to comply with all tax and securities laws for the continued operation of the qualified matching service, in some cases we may be required to maintain and make available information similar in nature to the information we were required to file with the SEC while we were a reporting company. We may continue to incur expenses to meet these requirements and maintain our qualified matching service. Alternatively, we may instead elect to utilize the services of a third-party alternative trading system/qualified matching service brokerage service.
Financial Effects of the Reclassification Transaction
We expect that the professional fees and other expenses related to the reclassification transaction of approximately $150,000 will not have any material adverse effect on our liquidity, results of operations or cash flow. See “Reclassification and Deregistration—Fees and Expenses” beginning on page 34 for a description of the fees and expenses we expect to incur in connection with the reclassification transaction. See “Reclassification and Deregistration—Financing of the Reclassification Transaction” on page 32 for a description of how the reclassification transaction will be financed.
Effect on Conduct of Business after the Transaction
We expect our business and operations to continue as they are currently being conducted and, except as disclosed below, the transaction is not anticipated to have any effect upon the conduct of our business.
Effect on Our Governors and Executive Officers
It is not anticipated that the reclassification transaction will have any effect on our governors and executive officers, other than with respect to their relative Unit ownership of the various Classes if the reclassification transaction is approved. Units will be issued to our governors and executive officers on the same basis as for our unaffiliated members. Assuming no intervening change to their record ownership of Units, five of our governors beneficially own at the record holder level more than 21 Units, and therefore, such Units will be reclassified as Class A Units if the Reclassification is implemented. Additionally, assuming no intervening change to their record ownership of Units, three of our governors also beneficially own at the record holder level between 10 and 20 Units, and therefore, such Units will be reclassified as Class B Units if the Reclassification is implemented. Two of our governors (including one alternate governor) and one executive officer beneficially own at the record holder level 9 or fewer Units, and therefore, such Units will be reclassified as Class C Units if the Reclassification is implemented.
The percentage of Units retaining the right to vote for governors (i.e., Class A and Class B Units) that will be beneficially owned by governors and executive officers of the Company as a group will increase from approximately 4.91% to approximately 5.17% after the reclassification of Units.
The annual compensation paid by us to our officers and governors will not increase as a result of the reclassification transaction, nor will the reclassification transaction result in any material alterations to any existing employment agreements with our officers.
Plans or Proposals
Other than as described in this Proxy Statement, neither we nor our management have any current plans or proposals to effect any extraordinary corporate transaction, such as a merger, reorganization or liquidation, to sell or transfer any material amount of our assets, to change our Bboard of Governors or management, to change materially our indebtedness or capitalization or otherwise to effect any material change in our corporate structure or business. As stated throughout this proxy statement, we believe there are significant advantages in effecting the reclassification transaction and becoming a non-reporting company. Although our management does not presently have any intention to enter into any transaction described above, there is always a possibility that we may enter into such an arrangement or transaction in the future, including, but not limited to, entering into a merger or acquisition transaction, making a public or private offering of our Units or entering into any other arrangement or transaction the Board may deem appropriate and in the best interests of the Company.
Effects of the Reclassification Transaction on Members of GFE
The general effects of the reclassification transaction on the members of GFE are described below.
Effects of the Reclassification Transaction on Affiliated and Unaffiliated Class A Members
The reclassification transaction will have both positive and negative effects on the Class A members. All of these changes will affect affiliated and unaffiliated Class A members in the same way. The Board of Governors of GFE considered each of the following effects in determining to approve the reclassification transaction.
Benefits:
As a result of the reclassification transaction, the Class A members will:
| · | Realize the potential benefits of termination of registration of our Units, including reduced expenses as a result of no longer being required to comply with reporting requirements under the Exchange Act; |
| · | Be entitled to vote on all matters brought before the members of GFE, except as otherwise provided by the Seventh Amended and Restated Operating Agreement or Minnesota law; |
| · | Be entitled to nominate persons to serve as governors, propose amendments to the Seventh Amended and Restated Operating Agreement and call meetings of members with 20% or more of all Units outstanding; |
| · | Be eligible to serve as the Company’s tax matters member, which is the “tax matters partner” described in Section 6231 of the Internal Revenue Code designated by a partnership to represent it before the Internal Revenue Service in all tax matters for a specific taxable year; |
| · | Be entitled to transfer any number of Units to any person approved by the governors in accordance with the terms of the Seventh Amended and Restated Operating Agreement; and |
| · | Realize enhanced voting control over GFE in comparison to other classes of units due to the voting limitations placed on Class B and Class C members. |
Detriments:
As a result of the reclassification transaction, the Class A members will:
| · | Be required to have their Units reclassified involuntarily as Class A Units, for which they will receive no additional consideration; |
| · | Hold unregistered securities and therefore will lose the benefits of holding Section 12 registered securities, such as access to the information concerning GFE required to be contained in the Company’s periodic reports to the SEC and which the Company may choose not to otherwise distribute to members, the requirement that our officers certify the accuracy of our financial statements, and the benefits derived by the imposition of the requirements of the Sarbanes-Oxley Act of 2002; |
| · | Hold restricted securities which will require an appropriate exemption from registration to be eligible for transfer; |
| · | Be subject to an ownership limitation of 20% of all issued and outstanding Units; |
| · | Bear transfer restrictions as provided in our Seventh Amended and Restated Operating Agreement, such that our governors will be entitled to, at their sole discretion, approve or disallow most proposed transfers of the Class A Units; and |
| · | Bear the risk of a decrease in the market value of the Class A Units due to the reduction in public information concerning the Company as a result of us not being required to file reports under the Exchange Act, which may adversely affect the already limited liquidity of the Units. |
Effects of the Reclassification Transaction on Affiliated and Unaffiliated Class B Members
The reclassification transaction will have both positive and negative effects on the Class B members. All of these changes will affect affiliated and unaffiliated Class B members in the same way. The Board of Governors of GFE considered each of the following effects in determining to approve the reclassification transaction.
Benefits:
As a result of the reclassification transaction, the Class B members will:
| · | Realize the potential benefits of termination of registration of our Units, including reduced expenses as a result of no longer needing to comply with reporting requirements under the Exchange Act; |
| · | Be entitled to vote for governors, amendments to the Operating Agreement that modify the rights of Class B Members, dissolution, merger and dispositions of all or substantially all the Company’s assets and other matters that require a vote of at least a majority of the outstanding Units under Minnesota law; |
| · | Be entitled to nominate persons to serve as governors, propose amendments to the Operating Agreement and call meetings of members, but only if such actions are taken by a specified percentage of Units (10% of the Class B Units to nominate governors and propose amendments to the Operating Agreement, and 25% of all outstanding Units to call a meeting of members); |
| · | Not be subject to ownership limitations; |
| · | Continue to hold an equity interest in GFE and share in our profits, losses and distributions on the same basis as our Class A members; and |
| · | Be entitled to transfer Class B Units without the approval of the Board of Governors, so long as either (i) the Class B Member transfers all such Class B Member’s Class B Units to a single transferee, and following such transfer the transferee does not own or control more than 5% of the outstanding Class B Units, or (ii) the Class B Member transfers Class B Units to another Class B Member, and following such transfer the transferee does not own or control more than 5% of the outstanding Class B Units. |
Detriments:
As a result of the reclassification transaction, the Class B members will:
| · | Be required to have their Units reclassified involuntarily as Class B units, for which they will receive no additional consideration; |
| · | Not be entitled to vote for matters other than those specified above, including other amendments to the Operating Agreement and governor actions requiring the consent of members. These limitations on the voting rights of Class B members relative to Class A members may result in decreased value of the Class B Units relative to Class A Units; |
| · | Not be eligible to serve as the Company’s tax matters member; and |
| · | Hold restricted securities which will require an appropriate exemption from registration to be eligible for transfer. |
Effects of the Reclassification Transaction on Affiliated and Unaffiliated Class C Members
The reclassification transaction will have both positive and negative effects on the Class C members. All of these changes will affect affiliated and unaffiliated Class C members in the same way. The Board of Governors of GFE considered each of the following effects in determining to approve the reclassification transaction.
Benefits:
As a result of the reclassification transaction, the Class C members will:
| · | Realize the potential benefits of termination of registration of our Units, including reduced expenses as a result of no longer needing to comply with reporting requirements under the Exchange Act; |
| · | Be entitled to vote for amendments to the Operating Agreement that modify the rights of Class C Members, dissolution, merger and dispositions of all or substantially all the Company’s assets and other matters that require a vote of at least a majority of the outstanding Units under Minnesota law; |
| · | Be entitled to call meetings of members, but only if such action is taken by 30% of all outstanding Units; |
| · | Not be subject to ownership limitations; |
| · | Be entitled to transfer Class C Units without the approval of the Board of Governors, so long as either (i) the Class C Member transfers all such Class C Member’s Class C Units to a single transferee, and following such transfer the transferee does not own or control more than 5% of the outstanding Class C Units, or (ii) the Class C Member transfers Class C Units to another Class C Member, and following such transfer the transferee does not own or control more than 5% of the outstanding Class C Units; and |
| · | Continue to hold an equity interest in GFE and share in our profits, losses and distributions on the same basis as our Class A members. |
Detriments:
As a result of the reclassification transaction, the Class C members will:
| · | Be required to have their Units reclassified involuntarily as Class C Units, for which they will receive no additional consideration; |
| · | Not be entitled to vote for matters other than those specified above, including voting for governors, other amendments to the Operating Agreement and governor actions requiring the consent of members. These limitations on the voting rights of Class C members relative to Class A members and Class B members may result in decreased value of the Class C Units relative to Class A Units and Class B Units; |
| · | Not be entitled to nominate persons to serve as governors, to propose amendments to the Operating Agreement or to serve as the Company’s tax matters member; and |
| · | Hold restricted securities which will require an appropriate exemption from registration to be eligible for transfer. |
Effects of the Reclassification Transaction on Affiliated Members
In addition to the effects of the reclassification transaction on unit holders generally, which are described in the previous section, the reclassification transaction will have some additional effects on our governors and executive officers. As used in this proxy statement, the term “affiliated members” means any member who is a governor or executive officer of GFE and the term “unaffiliated member” means any member other than an affiliated member.
As a result of the reclassification transaction, our affiliated members will:
| · | Have no further reporting obligations under the Exchange Act. After the reclassification transaction, our Units will not be registered under the Exchange Act. As a result, our executive officers, governors and other affiliates will no longer be subject to many of the reporting requirements and restrictions of the Exchange Act, and information about their compensation and Unit ownership will not be publicly available; and |
| · | Lose the availability of Rule 144. Because our Units will not be registered under the Exchange Act after the reclassification transaction and we will no longer be required to furnish publicly available periodic reports, our executive officers and governors will lose the ability to dispose of their Units under Rule 144 of the Securities Act of 1933, which provides a safe harbor for resales of securities by affiliates of an issuer. |
Record and Beneficial Ownership of Membership Units of GFE
It is important that our members understand how units that are held by them in “street name” will be treated for purposes of the reclassification transaction described in this Proxy Statement. Members who have transferred their units of GFE into a brokerage or custodial account are no longer shown on our membership register as the record holder of these Units. Instead, the brokerage firms or custodians typically hold all units of GFE that its clients have deposited with it through a single nominee; this is what is meant by “street name.” If that single nominee is unablethe Unit holder of record of 21 or declinesmore Units, then the Units registered in that nominee’s name will be reclassified as Class A Units. At the end of this transaction, these beneficial owners will continue to serve,beneficially own the proxiessame number of Units as they did at the start of this transaction. If you hold your Units in “street name,” you should talk to your broker, nominee or agent to determine how they expect the reclassification transaction to affect you. Because other “street name” holders who hold through your broker, agent or nominee may have adjusted their holdings prior to the reclassification transaction, you may have no way of knowing how your Units will be reclassified in the transaction.
Interests of Certain Persons in the Reclassification Transaction
Our governors and executive officers who are also members will participate in the reclassification transaction in the same manner and to the same extent as all of our other members. Assuming no intervening change to their record ownership of Units, five of our governors beneficially own at the record holder level more than 21 Units, and therefore, such Units will be reclassified as Class A Units if the Reclassification is implemented. Additionally, assuming no intervening change to their record ownership of Units, three of our governors beneficially own at the record holder level between 10 and 20 Units, and therefore, such Units will be reclassified as Class B Units if the Reclassification is implemented. Two of our governors (including one alternate governor) and one executive officer beneficially own at the record holder level 9 or fewer Units, and therefore, such Units will be reclassified as Class C Units if the Reclassification is implemented.
Because of the voting restrictions placed on Class B and Class C Units, the governors may experience a larger relative percentage of voting power than they previously held. This represents a potential conflict of interest because our governors unanimously approved the reclassification transaction and are recommending that you approve it. Despite this potential conflict of interest, the Board believes the proposed reclassification transaction is fair to all of our members for the reasons discussed in the proxy statement.
The fact that five of our governors’ percentage ownership of Class A Units will increase relative to such governor’s percentage ownership of all Units prior to the reclassification transaction was not a consideration in the Board’s decision to approve the reclassification transaction or in deciding its terms, including setting the 21 Class A Unit threshold. In this regard, the governors as a group will be treated exactly the same as other members. In addition, the Board determined that any potential conflict of interest created by the governors’ ownership of our Class A Units is relatively insignificant. The increase in each governor’s percentage ownership of our Class A Units resulting from the reclassification transaction relative to such governor’s percentage ownership of all Units prior to the reclassification transaction is expected to be insignificant. As a group, as of the Record Date these governors and executive officers collectively beneficially held and had voting power over approximately 1,502 Units, or 4.91% of our Units. If the reclassification transaction is approved, our governors and executive officers would collectively hold and have voting power over approximately 6.1% of the Class A Units and 5.17% of the total Class A and Class B Units combined. This is very unlikely to have a practical effect on their collective ability to control the Company.
Our Board of Governors was aware of the actual or potential conflicts of interest discussed above and considered them along with the other matters that have been described in this proxy statement under the captions “Reclassification and Deregistration—Background of the Reclassification Transaction” beginning on page 12, “Reclassification and Deregistration—Reasons for the Reclassification Transaction; Fairness of the Reclassification Transaction; Board Recommendation,” beginning on page 15 and “Reclassification and Deregistration—Effects of the Reclassification Transaction on Members of GFE” beginning on page 27.
Except as provided in this paragraph, none of our executive officers or governors has indicated to us that he or she intends to sell some or all of his Units or acquire Units during the period between the public announcement of the reclassification transaction and the effective date of the reclassification transaction. In addition, except as provided in this paragraph, none of these individuals has indicated his or her intention to divide his Units among different record holders, or combine his or her Units in the name of a single record holder, during the period between the public announcement of the reclassification transaction and the effective date of the reclassification transaction.
Our governor, Bruce LaVigne, is the beneficial owner of 500 of our Units, which are attributable to him based on the direct ownership of all 500 Units by his spouse, Debra LaVigne. On August 5, 2022, legal counsel representing Debra LaVigne, provided notice to the Company that she “intends to pursue her substantial claims against the Company pursuant to Minn. Stat. § 322C.0701 for member oppression and Minn. Stat. § 322C.0410 for failure to provide the full information requested thereunder.” Specifically, Ms. LaVigne alleged that she has been oppressed by the Company “for frustrating her reasonable expectations of receiving a return on her investment equity,” as stated in a letter from Ms. LaVigne’s counsel to the Company dated August 5, 2022. The same letter from Ms. LaVigne’s counsel to the Company also alleges specifically that she “has rights to full information regarding the Company’s activities, financial condition, and other circumstances pursuant to Minn. Stat. § 322C.0410, Subd. 2,” which provides that a member may obtain from a LLC and inspect and copy full information regarding the activities, financial condition, and other circumstances as is “just and reasonable” so long as: (1) the member seeks the information for a purpose material to the member’s interest as a member; (2) the member makes a demand in a record received by the company, describing with reasonable particularity the information sought and the purpose for seeking the information; and (3) the information sought is directly connected to the member’s purpose.
The Company responded to Ms. LaVigne’s counsel by letter dated August 24, 2022. The Company generally agreed to provide to provide documents to Ms. LaVigne subject to the following conditions: (1) agreement to a non-disclosure agreement; (2) agreement regarding the specific documents requested by Ms. LaVigne; and (3) agreement that if Ms. LaVigne commences litigation against the Company, she will file the Company’s any documents in support of her litigation under seal. As of the date of this proxy statement, no formal legal proceedings have been commenced with respect to these alleged claims by Ms. LaVigne. However, as the spouse of the potential claimant, our governor, Bruce LaVigne, may have an interest in the reclassification and amendment and restatement of our Current Operating Agreement, arising from any claims pursued by Ms. LaVigne. The Company intends to vigorously defend itself against any claims pursued by Ms. LaVigne.
Financing of the Reclassification Transaction
We estimate that the reclassification transaction will cost approximately $150,000, consisting of professional fees and other expenses payable by or related to the reclassification transaction. See “Reclassification and Deregistration—Fees and Expenses” beginning on page 34 for a breakdown of the expenses associated with the reclassification transaction. We intend to pay the expenses of the reclassification transaction with working capital.
Material Federal Income Tax Consequences of the Reclassification Transaction
The following is a summary of the U.S. federal income tax consequences of the Unit reclassification to the Company and to members of the Company who are U.S. holders (as defined below). The discussion does not purport to consider all aspects of U.S. federal income taxation that might be relevant to particular members. The discussion is based on current law, which is subject to change, possibly with retroactive effect. The discussion applies only to U.S. holders who hold Units as capital assets. This discussion does not apply to certain types of holders (such as U.S. holders who acquired Units under an employee benefit plan, insurance companies, tax-exempt organizations and retirement plans (including, without limitation, 401(k) plans), banks and other financial institutions, traders, broker-dealers, dealers in securities or foreign currencies, S corporations, partnerships or mutual funds, persons who hold or have held Units as part of a straddle or a hedge, integrated constructive sale or conversion transaction for tax purposes, persons subject to alternative minimum tax or persons with a functional currency other than the U.S. dollar) who may be subject to special rules. In addition, this discussion does not address the tax consequences to a member who, for U.S. federal income tax purposes, is not a U.S. holder. Any member who is not a U.S. holder may be subject to different tax consequences than those described below and is urged to consult its tax advisors regarding its tax treatment under U.S. and non-U.S. tax laws. This discussion does not address any state, local or foreign tax consequences of the reclassification of the Units.
For purposes of this discussion, a “U.S. holder” is any individual, corporation, estate or trust that is a beneficial holder of a Unit and that is for U.S. federal income tax purposes:
| · | an individual citizen or resident of the United States; |
| · | a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, that is created or organized under the laws of the United States or any political subdivision thereof; |
| · | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
| · | a trust (1) if a U.S. court is able to exercise primary supervision over the trust’s administration and one or more U.S. |
| · | persons have the authority to control all of the trust’s substantial decisions or (2) which has made an election to be treated as a U.S. person. |
If a partnership or other pass-through entity holds Units, the tax treatment of a partner or owner of such partnership or other pass-through entity generally will depend upon the status of the partner or owner and the activities of the partnership or pass-through entity. Accordingly, we urge partnerships and other pass-through entities that hold Units and partners or owners in such partnerships or pass-through entities to consult their tax advisors regarding the tax consequences to them of the Unit reclassification.
Federal Income Tax Consequences to the Company
The reclassification of Units pursuant to the adoption of the Seventh Amended and Restated Operating Agreement will likely be treated as a tax-free “recapitalization” for federal income tax purposes. As a result, we believe that the reclassification will not have any material federal income tax consequences to the Company. The Unit reclassification will not affect the status of the Company as a partnership for federal income tax purposes.
Federal Income Tax Consequences to Members
The Unit reclassification will have the following federal income tax consequences for most members:
| · | Members will not recognize any gain or loss as a result of the Unit reclassification regardless of whether their Units are reclassified as Class A Units, Class B Units or Class C Units; |
| · | Class A Members, Class B Members and Class C Members will have an adjusted tax basis in their Class A Units, Class B Units or Class C Units, as the case may be, immediately after the reclassification of Units equal to their adjusted tax basis in their original Units immediately before the reclassification, and their holding periods for their Class A Units, Class B Units or Class C Units, as the case may be, will include the period of time they held their original Units; |
| · | A holder of Class A Units, Class B Units or Class C Units will have a capital account balance as a member of the Company immediately after the reclassification in an amount equal to such holder’s capital account balance immediately before the reclassification; and |
| · | There will be no effect on the allocation of profits or losses by the Company in the tax year in which the Unit reclassification is implemented or thereafter. |
The discussion of anticipated material United States federal income tax consequences of the reclassification transaction set forth above is based upon present law, which is subject to change possibly with retroactive effect. You should consult your tax advisor as to the particular federal, state, local, foreign and other tax consequences of the reclassification, in light of your specific circumstances.
Appraisal and Dissenters’ Rights
Under Minnesota law, you do not have appraisal rights in connection with the reclassification transaction. Moreover, pursuant to our current Operating Agreement, you have waived any dissenter’s rights that may have otherwise been available. Other rights or actions under Minnesota law or federal or state securities laws may exist for members who can demonstrate that they have been damaged by the reclassification transaction. Although the nature and extent of these rights or actions are uncertain and may vary depending upon facts or circumstances, member challenges to actions of the Company in general are related to the fiduciary responsibilities of limited liability company officers and governors and to the fairness of limited liability company transactions.
Regulatory Requirements
In connection with the reclassification transaction, we will be required to make a number of filings with, and obtain a number of approvals from, various federal and state governmental agencies, including, complying with federal and state securities laws, which includes filing this Proxy Statement on Schedule 14A and a transaction statement on Schedule 13E-3 with the SEC.
Fees and Expenses
We will be responsible for paying the reclassification transaction related fees and expenses, consisting primarily of fees and expenses of our attorneys, and other related charges. We estimate that our expenses will total approximately $150,000, assuming the reclassification transaction is completed. This amount consists of the following estimated fees:
| Description | Amount |
| | |
| Legal fees and expenses | $100,000 |
| | |
| Printing and mailing | $ 40,000 |
| | |
| Miscellaneous | $ 10,000 |
| | |
| Total | $150,000 |
THE SEVENTH AMENDED AND RESTATED OPERATING AGREEMENT
Overview of Amendments Regarding Unit Reclassification
The Company is organized as a Minnesota limited liability company under Chapter 322C of the Minnesota Revised Uniform Limited Liability Company Act (the “Act”). As such, the principal document establishing the rights and duties of the members of the Company, the provisions under which the Company is governed and operated, the methods used to allocate our profits and losses and maintain members’ capital accounts, the timing and manner in which cash distributions are made to investors, the limitations on members’ ability to transfer their membership interests, the events causing the Company to dissolve and the actions to be taken in that event, along with a number of other matters, are set forth in a document called an operating agreement. The Company adopted the existing operating agreement, which is entitled the “Sixth Amended and Restated Operating Agreement,” on March 23, 2017. We refer to the Company’s Sixth Amended and Restated Operating as the “Current Operating Agreement” or “Operating Agreement” throughout this proxy statement. As the Company issued Units representing membership interests in the Company to persons admitted as members, each of those members became a party to the Operating Agreement and, as such, is bound by the terms of the Operating Agreement. Among other things, the Current Operating Agreement provides that the interests of all members are designated by a single class of membership interest referred to as a “Unit.” As a result, the rights and privileges of all members under the Current Operating Agreement are the same. The principal provisions of the Operating Agreement that relate to the rights and duties of the members and the characteristics of the Units are described below under “Description of Units—Terms of the Existing Units.”
The Unit reclassification would be implemented through a proposed group of interrelated amendments to the Company’s Operating Agreement that, if adopted, will: (a) result in the existing single class of Units being divided into three separate classes of Units, which will be designated Class A Units, Class B Units and Class C Units, (b) establish the distinct rights and obligations of these three classes of Units and (c) provide how the existing class of Units will be reclassified as the new classes of Units. Under the Seventh Amended and Restated Operating Agreement, members receiving Class A Units will retain largely the same rights and be subject to the same restrictions as they currently have as holders of the existing Units. However, the rights of members receiving Class B Units and Class C Units will change substantially and, among other things, they will have more limited voting rights and more limited rights to propose amendments to the operating agreement, nominate governors, and call meetings of members than they currently have as the holders of the existing Units. However, holders of Class B and Class C Units will be subject to less stringent requirements for the transfer of their Units if the Seventh Amended and Restated Operating Agreement is approved and adopted.
The Unit reclassification will not change the rights of any member with respect to cash distributions, rights upon liquidation of the Company, or the allocation of Company profits and losses. Each class of Units created pursuant to the Unit reclassification will have the same right to receive cash distributions from the Company, if any, to receive Company assets upon liquidation of the Company and to be allocated Company profits and losses, on a pro rata basis based on the number of Units held by a member. As a result, each class of Units created as a result of the Unit reclassification will have economic rights which are the same as the existing single class of Units. The specific rights and obligations of the Class A, Class B and Class C Units are described in more detail below under the headings “Description of Units —Terms of the Class A Units,” “Description of Units —Terms of the Class B Units” and “Description of Units —Terms of the Class C Units.”
Description of Amendments Regarding Unit Reclassification
The Unit reclassification would be implemented through a proposed group of interrelated amendments to the Company’s Operating Agreement that, if adopted, will (a) result in the existing single class of Units being divided into three separate classes of Units, which will be designated Class A Units, Class B Units and Class C Units, (b) establish the distinct rights and obligations of these three classes of Units and (c) provide how the existing class of Units will be reclassified as the new classes of Units. Specifically, the amendments regarding the Unit reclassification consist of the following amendments to the Company’s existing Operating Agreement:
| · | the modification of the introductory language reflecting the fact that the members desire to amend and restate the Operating Agreement to, among other things, reclassify the Units into three separate classes; |
| · | the additions of definitions in Section 1 of “Class A Member,” “Class A Unit,” “Class A Unit Holder(s),” “Class B Member,” “Class B Unit,” “Class B Unit Holder(s),” “Class C Member,” “Class C Unit” “Class C Unit Holder(s)”, “Membership Registry” and “Members”, the elimination of the definition of “Majority-in-Interest,” and the modifications to the definitions of “Governance Rights,” “Member,” “Membership Register,” “Unit,” “Units,” “Unit Holder(s)” and “Unit Holders” to reflect the creation and distribution of three classes of Units among the holders of existing Units under the Seventh Amended and Restated Operating Agreement; |
| · | the addition of the definition of “Membership Interest” in Section 1 to reflects its use in other amendments to the Operating Agreement and the elimination of the definition of “Qualified Matching Service Program” to reflect the elimination of this term by the amendment of the definition of “Permitted Transfers” in Section 10.2 of the Seventh Amended and Restated Operating Agreement; |
| · | the amendment of Section 4.1 to reflect the classification of the Units into three separate classes; |
| · | the amendment of Section 4.1(b) to reflect the voting rights given the Class A Members with respect to the issue of Units; |
| · | the amendment of Section 4.3 Maximum Ownership to limit its application to Class A Members; |
| · | the modifications to Section 6.1(d) to provide that only Class A and Class B Members will have the right to take action with respect to a change in the number of governors making up the Board of Governors and that any such action will require the approval of Class A Members and Class B Members holding a majority of both the Class A Units and the Class B Units, voting as a single class; |
| · | the changes in Section 6.1(f) that provide that only Class A and Class B Members will be entitled to vote for the election of the Company’s governors; |
| · | the revisions to Section 6.1(g) that provide that governor nominations may only be made by any Class A Member or by Class B Members who collectively hold an aggregate of not less than 10% of the then outstanding Class B Units and make conforming changes to the nomination procedure; |
| · | the revision of Section 6.1(h) to reflect the revision of Section 6.1(d); |
| · | the revision of Section 6.5 to provide that only Members holding a majority of the Class A Units and Class B Units voting together as a class may, from time to time, remove a Governor, with or without cause; |
| · | the amendments to Section 6.7: |
| o | (a) to provide that the unanimous consent of only Class A Members is required to authorize governors to (i) cause or permit the Company to engage in any activity that is not consistent with the stated purposes of the Company, (ii) knowingly do any act in contravention of the Seventh Amended and Restated Operating Agreement or which would make it impossible to carry on the ordinary business of the Company, or (iii) possess Company property, or assign rights in specific Company property, for other than a Company purpose; |
| o | (b) to provide that only the consent of Class A Members holding a majority of Class A Units is required to authorize governors to cause the Company to (a) issue any Units at a purchase price of less than $1,000, (b) voluntarily take any action that would cause a bankruptcy of the Company, or (c) acquire equity or debt securities of any governor or affiliate of a governor or make a loan to any such person; |
| o | (c) to provide that the consent of members holding a majority of all classes of Units is required to authorize the governors to (i) cause the Company to merge or consolidate with or into another entity, (ii) cause the Company to sell, exchange or otherwise dispose of at one time all or substantially all of the Company’s assets (except for a liquidating sale of such assets in connection with the dissolution of the Company), or (iii) take any other action that requires the consent of at least a majority of the then outstanding Units of all classes, voting as a single class, under the Act to the extent the requirement cannot be varied in an operating agreement; |
| · | the modification of Section 6.17 to provide that only disinterested Class A Member have the right to provide Special Approval of conflicts of interest; |
| · | the addition of new Section 8.1 to create Class A Units, Class B Units and Class C Units and specify the manner in which the existing Units are to be reclassified as the three new classes of Units; |
| · | the addition of new Section 8.2 which summarizes the rights, privileges and limitations of the Class A Units, Class B Units and Class C Units. In addition, Section 8.2(d) provides that the Company will have no authority to issue or allow the transfer of any Units if it will result in the number of Class A Unit Holders being greater than 299, or the number of Class B or Class C Unit Holders being greater than 499 in each case; |
| · | the revisions to old Section 8.1 by new Section 8.2 that provide that (i) amendments to the Operating Agreement may be proposed only by any Class A Member or by Class B Members owning an aggregate of not less than 10% of the then outstanding Class B Units, (ii) that amendments to the Operating Agreement must be approved by a majority of the Class A Units represented at a member meeting, except as provided otherwise in the Seventh Amended and Restated Operating Agreement, and (iii) that Class B and Class C Members are not entitled to vote on amendments to the Operating Agreement other than those that alter the rights, privileges and obligations associated with their class of Units or which adversely affect their limited liability or economic interest in the Company; |
| · | the addition of new Section 8.3 to provide, among other things, that no Member has preemptive rights to acquire additional or newly created Units and that no person shall become a Class A Member without the prior approval of the Board of Governors, but the admission of a Class B or Class C Member acquiring Units in a Permitted Transfer shall not require such approval and various conforming changes; |
| · | the modification of old Section 8.3, new Section 8.5, to provide that only Class A Members holding an aggregate of not less than 20% of all issued and outstanding Units, Class B Members holding an aggregate of not less than 25% of all issued and outstanding Units or Class C Members holding an aggregate of not less than 30% of all issued and outstanding Units may call a meeting of the members; |
| · | the modification of old Section 8.5, new Section 8.7, to provide that notice of each meeting of members shall be provided to every member, whether or not such member is entitled to vote at such meeting; |
| · | the modification of old Section 8.6, new section 8.8, to provide that the quorum for any meeting is established by the presence, in person or by proxy, of at least 40% of the Units held by members actually entitled to vote on the matters being considered rather than at least 40% of the outstanding Units; |
| · | the addition of Section 8.9 to provide that if a quorum is present, the affirmative vote of members holding a majority of the Units represented at a meeting (in person or by proxy) and entitled to vote on a matter shall constitute the act of the members, unless the vote of a greater or lesser proportion or number is otherwise required by the Seventh Amended and Restated Operating Agreement; |
| · | all of the revisions to Section 10 relating to members’ transfer of their Units. In general, Section 10, as amended in the Seventh Amended and Restated Operating Agreement, provides as follows: |
| (i) | Any transfer of a Unit of any class (including pledges of Units) must be made in compliance with the provisions of Section 10 applicable to that class of Unit and any purported transfer of Units that does not comply with Section 10 will be null and void and of no force or effect whatsoever.; |
| (ii) | Except for “Permitted Transfers,” all transfers of Units require the prior approval of the Board of Governors, which the Governors may grant or withhold in their sole discretion for any reason; |
| (iii) | “Permitted Transfers” of all Units include transfers: |
| a. | to a member’s administrator, executor or guardian; |
| b. | involuntarily by operation of law or judicial decree; |
| c. | to a member holding the same class of Units, so long as if the Units being transferred are Class B Units or Class C Units following the transfer, the transferee does not own or control more than 5% of the then outstanding Class B Units or Class C Units; |
| d. | To any person if the Units to be transferred are Class B Units or Class C Units, so long as (i) the transferor is transferring all the transferor’s Class B Units or Class C Units, as applicable, to the transferee and (ii) following the transfer, the transferee does not own or control more than 5% of the then outstanding Class B Units or Class C Units. |
| (iv) | All transfers of Units are subject to the restrictions of Sections 4.3 and 8.2(d) of the Seventh Amended and Restated Operating Agreement on the Maximum Ownership Percentage a Unit Holder is permitted and the number of Unit Holders allowed with respect to each class of Units; |
| (v) | All transfers of Units are subject to the Conditions Precedent to Transfers set forth in Section 10.3; |
| · | the modification to Section 11.4 to provide that the Board may appoint any person as the Company’s partnership (i.e., tax) representative; |
| · | the modification to Section 13.1 to provide that the Company shall dissolve and commence winding up upon the affirmative vote of members holding a 75% supermajority of the Class A Units, Class B Units and Class C Units represented at any annual or special meeting, voting together as a single class, among other events; |
| · | the modifications of Section 14.5 providing that: |
| o | amendments to the Seventh Amended and Restated Operating Agreement may be proposed by (i) the Board of Governors, (ii) any Class A Member or (iii) Class B Members owning an aggregate of not less than ten percent (10%) of the then outstanding Class B Units. Class C Members may not propose amendments to this Agreement. |
| o | except as provided below, a duly proposed amendment shall be adopted and be effective as an amendment upon the approval thereof by Class A Members holding a majority of the Class A Units; |
| o | notwithstanding any provision of Section 14.5 to the contrary, the Seventh Amended and Restated Operating Agreement shall not be amended in any manner that would: |
| (i) | alter the rights, privileges or obligations of the Members holding any class of Units without the consent of the Class A Members described above and the consent of Members holding a majority of such class of Units; or |
| (ii) | modify the limited liability of a Member or alter the Financial Rights of a member without the member’s consent; |
| · | various minor conforming changes and stylistic changes to other Sections of the Operating Agreement not described above or below. |
DESCRIPTION OF UNITS
Terms of the Existing Units
Units represent an ownership interest in the Company. The holders of our Units are each a party to the Company’s Operating Agreement, which establishes the rights and privileges associated with the Units. Under the Current Operating Agreement, there is only one class of Units, and all members have identical rights and privileges.
Our Current Operating Agreement provides that members have the following rights:
| · | a right to receive pro rata distributions of cash if and when declared by the Board of Governors; |
| · | a right to a pro rata allocation of Company profits and losses; |
| · | a right to participate in the distribution of Company assets upon liquidation; |
| · | a right to vote with respect to the election of governors which right does not include the right to cumulate votes; |
| · | a right to nominate persons to serve as governors; |
| · | a right to vote with respect to authorizing the Board to take certain actions, including (a) a merger or consolidation of the Company with or into any other person, (b) a sale, lease, exchange, or other disposition of all or substantially all of the Company’s assets, (c) the issuance of any Units at a purchase price of less than $1,000 per Unit, (d) a change in the business purpose of the Company (f) an acquisition by the Company of any equity or debt securities of a governor or an affiliate of a governor, or a loan by the Company to a governor or an affiliate of a governor unless approved by all the disinterested governors; |
| · | a right to propose amendments to the Operating Agreement and a right to vote with respect to the adoption of such proposed amendments; |
| · | a right to call a special meeting of the members as long as members owning not less than 30% of the outstanding Units make such request together; |
| · | the right to the information provided by the Act; |
| · | eligibility to be appointed as the Company’s tax matters member. |
On the other hand, our Current Operating Agreement imposes certain restrictions on the rights of the members of the Company, which restrictions include the following:
| · | restrictions limiting the ability of members to sell, assign, transfer, pledge or otherwise convey their Units, except for the following Permitted Transfers: |
| o | a transfer by a member and any related persons (as defined in the Internal Revenue Code) in one or more transactions during any thirty (30) calendar day period of interests representing in the aggregate more than two percent (2%) of the total interests in the Company; |
| o | a transfer or series of related transfers by one or more members (acting together) which involves the transfer of fifty percent (50%) or more of the outstanding Units; |
| o | transfers of Units effected through a qualified Matching Services Program; or |
| o | a transfer by gift or bequest only to a spouse or child of such transferring member, or to a trust established for the benefit of such spouse or child, or to an existing member upon ten (10) days prior written notice to the Company of such gift. |
| o | a transfer to the transferor’s executor, personal representative, administrator or trustee to whom the Units are transferred involuntarily by operation of law or |
These restrictions include a requirement that any transfer of Units including a Permitted Transfer be approved in advance by the Board of Governors in its sole discretion. Certificates issued to evidence Units include a restrictive legend that notes these limitations on the ability of a member to transfer the Units.
Terms of the Class A Units
If the Company’s members vote to approve and adopt the Seventh Amended and Restated Operating Agreement, the existing Units held by members owning 21 or more Units on the effective date of the Seventh Amended and Restated Operating Agreement will be reclassified as “Class A Units.” Members holding Class A Units will be referred to as “Class A Members.” The rights and privileges of the Class A Members will be largely the same as those associated with the existing Units and will be set forth in the Seventh Amended and Restated Operating Agreement, the form of which is attached as Exhibit 99.4 to this proxy statement. The following is a summary of the material rights and privileges of the Class A Members. However, this is a summary only and does not purport to be a complete description of the terms of the Seventh Amended and Restated Operating Agreement. We urge you to review the entire Seventh Amended and Restated Operating Agreement prior to returning your proxy.
Cash Distributions. Class A Members will be entitled to receive distributions of Company cash and other property as and when declared by the Board of Governors. A Class A Member will share in such distribution on a pro rata basis with all other members of the Company based on the number of Units such Class A Member holds.
Profits and Losses. Class A Members will be entitled to share in the profits and losses of the Company on a pro rata basis, subject to certain technical adjustments described in the Seventh Amended and Restated Operating Agreement designed to ensure the Company complies with U.S. Treasury regulations applicable to entities treated as partnerships for federal income tax purposes.
Rights upon Liquidation. Upon liquidation of the Company, a Class A Member will be entitled to participate in the distribution of Company assets remaining after the satisfaction of all Company debts and the establishment of any reserves for contingencies to the extent of the positive balance, if any, of the Class A Member’s capital account.
Voting Rights. Class A Members will be entitled to vote on all matters for which member approval is required under the Seventh Amended and Restated Operating Agreement. This includes a right to vote: (1) for the election of governors; (2) on the issue of Units at a purchase price of less than $1,000 per Unit, (3) on the Company’s voluntarily taking any action that would cause a bankruptcy of the Company, (4) on acquiring equity or debt securities of any governor or affiliate of a governor or making a loan to any such substitute nomineeperson; (5) on any future amendments to the Seventh Amended and Restated Operating Agreement; (6) on the merger, dissolution or sale of all or substantially all the assets of the Company; or (7) on any other matters that require a vote of at least a majority of the outstanding Units under the Act to the extent that requirement cannot be varied in the operating agreement. Any amendment to the Seventh Amended and Restated Operating Agreement must be approved by Class A members holding a majority of the Class A Units. Class A Members are entitled to one vote per Class A Unit held on each matter submitted to a vote of the Class A Members. There is no right to cumulate votes with respect to any matter, including the election of governors.
Proposal of Amendments. Any Class A Member will be entitled to propose amendments to the Company’s Seventh Amended and Restated Operating Agreement.
Nomination of Governors. Any Class A Member will be entitled to nominate persons to serve on the Board of Governors. In order to nominate a person to be a governor, a Class A Member must provide written notice of such nomination to the Company’s Secretary not less than 60 days nor more than 90 days prior to the Company’s next annual meeting of members and include in such notice certain specified information regarding the nominating Class A Member and the person being nominated to serve on the Board of Governors, including information relating to all arrangements or understandings between the nominating Class A Member and the person being nominated and any other person or persons pursuant to which the nomination was made.
Call Members’ Meetings. Class A Members holding in the aggregate at least 20% of the total outstanding Units will be entitled to require the Board of Governors to call a special meeting of the members by making a written demand to the Board of Governors.
Transferability. Class A Members will be subject to restrictions on their ability to sell, assign, pledge or otherwise convey Class A Units. Except for Permitted Transfers, Class A Units may not be transferred without the prior approval of the Board of Governors, which may be withheld in the Board’s sole discretion. A Member must submit a written application for the transfer of any Class A Units, other than Permitted Transfers, to the Board of Governors in such form as the Board determines to be appropriate from time to time. Unless otherwise provided in its action to approve a transfer, the Board’s approval of a transfer will also operate as the Board’s approval of the admission of the transferee as a Class A Member of the Company. The Board may recommend. withhold approval for any reason.
Permitted Transfers of Class A Units will consist of transfers to a member’s administrator, executor or guardian, transfers involuntarily by operation of law or judicial decree, and transfers to any other member holding Class A Units. In order to transfer Class A Units in a Permitted Transfer, a Class A Member must provide a written notice of the transfer to the Company at least five business days prior to the transfer. The admission as a Class A Member of a person acquiring Class A Units in a Permitted Transfer requires the approval of the Board.
Any transfer of Class A Units must satisfy the conditions precedent to transfer described in Section 10.3 prior to the transfer and must not result in the number of record holders of Class A Units exceeding 299 or result in the transferee owning more than 20% of the Units of the Company.
OurInspection Rights. Any Class A Member will have the right to all the information provided by the Act.
Maximum Ownership Limitations. A Class A Member may not own or control more than 20% of the issued and outstanding Units at any time, unless such Class A Member’s ownership percentage exceeds 20% due solely to an involuntary transfer of units by operation of law or inadvertent company action, e.g., the redemption of Units. If a Class A Member and its related parties and affiliates own more than 20% of the issued and outstanding Units, they will not be able to vote more than 20%, in the aggregate, of the outstanding Class A Units, Class B Units, or Class C Units.
Tax Representative. Any person is eligible to serve as the Company’s tax representative which is the “partnership representative” described in Section 6223(a) of the Internal Revenue Code. A partnership representative is designated by a partnership to represent it before the Internal Revenue Service in income tax matters. The Company is treated as a partnership for federal income tax purposes and the Board has no reason of Governors designates the partnership representative.
Terms of the Class B Units
If the Company’s members vote to believe that any substitute nominee(s)approve and adopt the Seventh Amended and Restated Operating Agreement, a new class of Units will be required.created and designated as “Class B Units.” The existing Units will be reclassified as Class B Units with respect to each member who is the record holder of at least 10 but no more than 20 Units on the effective date of the Seventh Amended and Restated Operating Agreement. Such members will be referred to as “Class B Members.” The rights and privileges of the Class B Members will be set forth in the Seventh Amended and Restated Operating Agreement. These rights and privileges will be materially different from the rights and privileges of the existing Units. The following is a summary of the material rights and privileges of the Class B Members. However, this is a summary only and does not purport to be a complete description of the terms of the Seventh Amended and Restated Operating Agreement. We urge you to review the entire Seventh Amended and Restated Operating Agreement prior to returning your proxy.
