We will generally indemnify, or reimburse, any of our officers, members or managers, and former officers, members or managers against expenses actually and
reasonably incurred by such person in
connection with the defense of an action, suit or proceeding, civil or criminal, in which such person is made a party by reason of being or having been an officer, member or manager, with us. Also,
none of our officers, members or managers shall generally be liable to us or our members for monetary damages for an act or omission in such person's capacity as an officer, member or manager.
However, an officer, member, or manager will not be entitled to indemnification and may be liable to us or our members if the person is found liable for any of the following:
•
breaching
his or her duty of loyalty to us or our members;
•
an
act or omission not in good faith that constitutes a breach of duty to us or our members or an act or omission that involves gross negligence,
intentional misconduct or a known violation of the law;
•
a
transaction from which the person received an improper benefit whether or not the benefit resulted from an action taken within the scope of the person's
office or duties; or
•
an
act or omission for which the liability of the person is expressly provided for by applicable statute.
The
South Dakota Limited Liability Company Act provides no specific limitations on indemnification of officers, managers or members of limited liability companies, although the duty
of loyalty, duty of care and obligation of good faith and fair dealing of any officer, manager or member may not be waived. In the opinion of the Securities and Exchange Commission, indemnification
for liabilities arising under the Securities Act of 1933 is against public policy and unenforceable.
Disposition of Capital Units; Restrictions on Transfer
You will not be permitted to freely transfer or sell your capital units. All transfers must be approved by the Board of Managers and must comply with our
Capital Unit Transfer System, which is designed to conform to certain tax regulations that are important for us to maintain our single-level tax status. To find out more about the restrictions, see
"Federal Income Tax Consequences—Publicly Traded Partnership Rules" below. If any member or unit holder transfers his capital units in violation of the publicly traded partnership rules or
without our prior written consent, the transfer will be null and void and we will have the option to redeem the capital units subject to the attempted transfer.
The
Board of Managers will not approve any sale or transfer of capital units unless it is registered under the Securities Act of 1933, as amended, and any applicable state securities
laws or we have determined that it is exempt from registration under those laws. In addition, the Board of Managers will not approve any sale or transfer that would result in the loss of our
partnership status within the meaning of the tax code.
Bankruptcy of a Member
If any member becomes bankrupt or subject to insolvency proceedings as described in the Operating Agreement, we will have the right to offer the bankrupt
member's capital units for sale through the Capital Units Transfer System, and if such a sale is not completed within 240 days, we will have the option to redeem and cancel the bankrupt
member's capital units at a purchase price of $.20 per capital unit or the lowest amount which may be approved by the bankruptcy court.
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Redemption
We may redeem your capital units at a price of $.20 per capital unit upon any of the following events:
•
if
you try to transfer your capital units without following the procedures required by the Operating Agreement;
•
if
you or anyone who acquires your capital units does not become a member within a year after acquiring capital units;
•
if
you become the beneficial owner of less than 2,500 capital units and do not remedy such failure to meet the minimum investment requirement within
240 days;
•
if
the Board by resolutions finds that you have intentionally or repeatedly violated any of the provisions of the Articles or Operating Agreement, breached
any contract with the LLC, remained indebted to the LLC for 90 days after the indebtedness first becomes payable, or willfully obstructed any lawful purpose or activity of the LLC;
•
if
you become bankrupt and we are not able to sell your capital units within 240 days through the Capital Units Transfer System, or
•
if
you and any of your affiliates collectively acquire and hold more than 1.5% of the issued and outstanding capital units.
Capital Accounts
In accordance with the tax regulations discussed in greater detail under "Federal Income Tax Consequences," we will establish a capital account for each
member. The initial capital account balance will be equal to the member's deemed capital contribution, i.e., the fair market value of such member's equity share in the Cooperative, which we estimate
would have been approximately $1.87 per share on November 30, 2001, based upon the appraisal we received and our November 30, 2001 balance sheet. The capital account will be increased by
the member's share of income and decreased by distributions and the member's share of net losses and deductions. The capital accounts will be used to determine relative distributions upon liquidation,
as set forth below. You will not be entitled to the return of any part of your contribution or to be paid interest in respect of either your capital account or your capital contributions. If you
transfer your capital units, your capital account balance with respect to the transferred units will be credited to the new owner of the capital units at its then current balance, regardless of the
price paid in the transfer.
Liability of Members
You will not be personally liable for a debt, obligation, or liability of the new LLC solely by reason of being a member.
Sinking Fund Provisions
There are no sinking fund provisions.
Further Calls or Assessments
You will not be liable for further calls or assessments by the new LLC.
Liquidation upon Dissolution
The new LLC's voluntary dissolution may be effected only upon the prior receipt of the affirmative vote of two-thirds of our members. In the event
of a voluntary or involuntary dissolution and
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liquidation, our assets will be applied and distributed as follows: first, to our creditors in the order of priority as provided by law, and then to our members and any other capital unit holders in
proportion to the positive balance in their respective capital accounts (which will correspond to the number of capital units owned by each member). To the extent that a deficit, if any, in the
capital account of any member resulted from or was attributable to deductions or losses of the new LLC (including non-cash items such as depreciation), or distributions of money pursuant
to the terms of the Operating Agreement to all members in proportion to the number of capital units owned by each member, upon dissolution of the new LLC such deficit would not be an asset of the new
LLC and such member would not be obligated to contribute such amount to the new LLC to bring the balance of his capital accounts to zero.
COMPARISON OF RIGHTS OF EQUITY OWNERS
The rights of members are currently governed by South Dakota law and the Articles of Incorporation and Bylaws of the Cooperative. Upon completion of the
reorganization, the rights of members will be governed by South Dakota law and the Articles of Organization and Operating Agreement of Soybean Processors, LLC. The following is a summary of the
material differences between the shares of the Cooperative and the capital units of the new LLC. A copy of the Articles of Organization and form of Operating Agreement is attached as Appendix B
to this document. The Articles of Incorporation and Bylaws of South Dakota Soybean Processors may be obtained from South Dakota Soybean Processors, without charge, by contacting the Cooperative's
Secretary at 100 Caspian Avenue, Post Office Box 500, Volga, South Dakota, 57071.
Shares of South Dakota
Soybean Processors
Capital Units of
Soybean Processors, LLC
Taxation
South Dakota Soybean Processors is exempt from taxation at the cooperative level under Subchapter T of the tax code so long as it distributes at least 20% of patronage distributions to its members in cash. Each member is subject to income tax
based on the amount of patronage and dividends distributed to the member.
The new LLC will be treated as a partnership for federal income tax purposes. The new LLC will pay no tax on its net income. Rather, each member will be subject to income tax based on the member's allocable share of income, gain, loss, deduction and
credits, whether or not any cash is actually distributed to the member.
Limited Liability
Members are not personally liable for the debts, obligations and liabilities of the Cooperative.
Under South Dakota law and the Operating Agreement, members will not be personally liable for the debts, obligations and liabilities of the new LLC.
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Distribution Requirements
The Cooperative is required under the tax code to distribute 20% of its annual net income to members based on patronage.
Under the Operating Agreement, the new LLC will be required to distribute not less than 30% of the Company's annual net income to members in proportion to their ownership percentages, unless annual net income does not exceed $500,000. The Board may
vote to make additional distributions in its sole discretion. No distribution shall be made if it would violate or cause a default under the terms of any debt financing or other credit facilities, cause the new LLC to become insolvent, or is
otherwise prohibited by law.
Soybean Delivery
Each member under the terms of the uniform marketing agreement of the Cooperative is responsible for delivering soybeans based on the current year call from the Board of Directors. The 2001 call is two bushels for each share of equity
owned.
The LLC will have no soybean delivery requirement.
Authorized and Outstanding Capital
The Cooperative's Articles of Incorporation provide for authorized capital stock consisting of 2,500 shares of common stock with a par value of $100.00 and 80,000 shares of preferred stock with a par value of $100.00, and 59,500,000 shares of equity
units of participation with a par value of $.50.
The Operating Agreement provides authorized capital consisting of 14,129,250 Class A capital units to be issued to the Cooperative in the reorganization. It also allows the Board to create and issue additional capital units, including capital units
with different rights, powers and duties. There are currently no capital units issued and outstanding.
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Membership Interests
Each equity share represents the right and obligation to deliver soybeans to the Cooperative and receive patronage dividends. Each common stock share represents the right to vote on those matters on which the Cooperative's members are entitled to
vote. The Cooperative is a closed-end cooperative, which means that new members may only be admitted by purchasing shares from existing members.
Under the Operating Agreement, all cash or other distributions to members will be made proportionately based upon the number of capital units owned, but each member receives one vote on each matter brought to a vote of the members, regardless of the
number of capital units owned. Initially, only members of the Cooperative may become members in the reorganization, and only if such member agrees to be bound by the Operating Agreement. If a unit holder owns less than 2,500 capital units or more
than 1.5% of the outstanding capital units, the new LLC may redeem the unit holder's capital units.
Liquidity and Transferability
There is no public trading market for the Cooperative's stock. Its Bylaws allow for the Board or members to impose restrictions on the transfer of shares and allow for the transfer of shares to certain family members and others. Members may only
transfer their shares to other agricultural producers.
There is no public trading market for the capital units. The Operating Agreement imposes strict transfer restrictions to preserve the new LLC's partnership tax status. The Board must approve all transfers. The Board will generally approve sales or
gifts to qualified family members and transfers upon death. The new LLC will also operate a matching service, through which you may be able to sell your capital units. New members do not need to be agricultural producers to own shares.
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Voting Rights
Under the Cooperative's Articles, each holder of common stock is entitled to one vote, regardless of the number of shares owned. A holder of common stock may cast one vote for each director's position to be filled in the district in which the member
resides.
The Cooperative's Bylaws prohibit voting by proxies.
Under the Operating Agreement, each member is entitled to one vote on each matter brought to a vote of the members, regardless of the number of capital units owned. Each member must have paid an administrative fee of $200 (or transferred existing
common stock cost for current members), signed the operating agreement to qualify for voting privileges, and consented to termination of the member agreement held by the Cooperative. The Operating Agreement prohibits voting by proxies.
Termination of Membership
The Cooperative's Bylaws provide that the Board, in its sole discretion, may terminate a member's membership if the member:
• has become ineligible for membership;
• has failed to patronize the Cooperative for a period of 1 year or more;
• has moved outside the territory served by the Cooperative;
• has violated any of the provisions of the Articles or Bylaws;
• breaches any contract with the Cooperative;
• remains indebted to the Cooperative for 90 days after the indebtedness first becomes payable; or
• willfully obstructs any lawful purpose or activity of the Cooperative.
In general, a member's membership interest will terminate upon a duly authorized redemption, sale or transfer of the membership interest.
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Redemption
Under the Cooperative's Bylaws, the stock may be redeemed in the sole discretion of the Board for either the par value of the shares or the book value of the shares, if less than par value.
Capital units may be redeemed at a price of $.20 per unit if:
• a member transfers or attempts to transfer capital units other than as required by the Operating Agreement;
• a unit holder does not become a member within one year of acquiring capital units;
• a member becomes the beneficial owner of less than 2,500 capital units and the minimum number of capital units are not acquired within 240 days;
• the Board by resolution finds that a member has intentionally or repeatedly violated any of the provisions of the Articles or Operating Agreement, breached any contract with the LLC, remained indebted to the LLC for 90 days after the
indebtedness first becomes payable, or willfully obstructed any lawful purpose or activity of the LLC;
• a member becomes bankrupt and the member's capital units are not able to be sold within 240 days through the Capital Units Transfer System; or
• a member exceeds 1.5% ownership limit.
Annual meetings
The Cooperative's Bylaws provide that the annual meeting of members shall be held within 180 days of the close of the fiscal year.
The Operating Agreement provides that the Board of Managers shall determine the date of the annual meeting of members. Failure to hold an annual meeting at the designated time will not cause the new LLC to dissolve.
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Vote on Extraordinary Transactions
South Dakota law requires that a merger, consolidation or division of a Cooperative must be approved by a majority of any quorum of members entitled to vote on such transaction and that any disposal of all or substantially all of the Cooperative's
fixed assets or its voluntary dissolution must be approved by three-fourths of the members. The Cooperative's Articles of Incorporation and Bylaws do not contain voting requirements for extraordinary transactions.
A merger or consolidation of the new LLC with another business entity, a sale of substantially all of the new LLC's assets and its voluntary dissolution must be approved by the affirmative vote of two-thirds of the members.
Amendment of Governing Documents
Under South Dakota law, the Cooperative may amend its Articles by majority vote of members, and may amend its Bylaws if the amendment is approved by the Board of Directors or by a majority of members present at a duly called meeting.
Only the members of the new LLC may amend the Articles of Organization. The members or the Board of the new LLC may amend the Operating Agreement by majority vote, subject to certain restrictions in the Operating Agreement and provided that any
amendment by the Board is subsequently approved by the members.
Preemptive Rights
Because the Cooperative is a closed Cooperative, it will not issue any additional shares under any circumstances. Accordingly, preemptive rights are not applicable to the Cooperative's members.
Members have no preemptive rights to participate in any later securities offerings of the new LLC under its Operating Agreement, Articles of Organization or South Dakota law.
Appraisal Rights of Dissenting Members
Neither the South Dakota law nor the Cooperative's Articles or Bylaws grants appraisal rights. This means that if a member does not vote to approve a decision, such as a merger, and the proposed merger is approved by other members, the dissenting
member has no right to demand that his or her shares be appraised and receive that amount.
Neither South Dakota law nor the Operating Agreement grants appraisal rights. This means that if a member does not vote to approve a decision, such as a merger, and the proposed merger is approved by other members, the dissenting member has no right
to demand that his or her capital units be appraised and receive that amount.
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