1. ANATOMY OF AN AGRIBUSINESS PURCHASE AND SALE AGREEMENT Agriculture Law March 18, 2016 James W. Standard, Jr. Hall Booth Smith, P.C. jstandard@hallboothsmith.com

2. Purpose of the Purchase and Sale Agreement (PSA) Document the agreement between the Buyer and Seller –The terms of a written agreement are much easier to establish and prove than the terms of an oral agreement –A final definitive agreement helps establish that there has been a “meeting of the minds” Comply with the Statute of Frauds – O.C.G.A. §13-5-30 –Certain obligations must be in writing to be enforceable, including: “Any contract for sale of lands, or any interest in, or concerning lands” “Any agreement that is not to be performed within one year from the making thereof” “Any commitment to lend money” Allocate risk among the parties –There is often times informational asymmetry among Buyer and Seller –Numerous mechanisms available to account for unknowns and unanticipated occurrences and circumstances

3. Preliminary Agreements (before the PSA) Nondisclosure and confidentiality agreement (NDA) –Provides Seller with protection that information disclosed to Buyer before closing will be used only for purposes of evaluating transaction And will not be used for any other purpose, such as obtaining Seller’s trade secrets or other confidential information –Allows Buyer a “look under the hood” prior to committing to buy This will be of the utmost importance for the Buyer’s due diligence Letter of Intent (LOI) –Not required, and generally creates no binding contract –Helpful to establish the basic components of what the parties are willing to agree to –Will generally set forth the structure of the acquisition, contemplated purchase price and financing

4. Due Diligence – In General Essential process whereby Buyer acquires an understanding of what it is he or she is (and is not) buying –What is the quality of the assets the Buyer is acquiring? –Are there any hidden liabilities associated with the business or assets? –Are there any third party or governmental consents or approvals which will be acquired to consummate the purchase? Will inform basic aspects of and structure of the PSA –Will there need to be an adjustment to the purchase price? –Will there need to be a portion of the purchase price held back in recognition of contingent liabilities? –Will there need to be special indemnification procedures in recognition of contingent liabilities?

5. Due Diligence - Legal Real Property –Chain of Title –Encumbrances Mortgages and deeds to secure debt Right of way, utility and use easements Licenses and rights granted to third parties Tax liens and materialman’s liens –Zoning More likely to be an issue if property close to a population center –Environmental Issues Phase I and Phase II Investigations –Access to and from parcels –Soil Suitability for intended purpose –Water Quality, access and irrigation

6. Due Diligence - Legal Equipment –Ownership Does Seller own equipment, or is it leased? Is equipment financed and subject to a security interest? Are the leases and financing agreements assignable? –Liens UCC liens, tax liens, judgment liens Material Contracts –These may include Contracts with suppliers of raw materials Contracts with vendors of supplies and services Contracts with customers Contracts with distributors Future contracts and hedging instruments –Contract terms – are they favorable and can they be renegotiated? –Are the contracts assignable?

7. Due Diligence - Legal Employment –Who handles the day-to-day work on the property? Employees or contractors? Term contracts or at-will employment? Use of migrant laborers? –Employee benefit plans Are there any? Have they been managed appropriately? –Key employees Will Buyer need to retain certain employees? Do certain employees possess critical knowledge, relationships or skills? –Restrictive covenants Are these indicated to preserve value of acquisition? Non-compete, non-solicitation and confidentiality agreements

8. Due Diligence - Legal Intellectual Property (IP) –Does Buyer own valuable IP, such as patents or know-how? –Does Buyer use a third party’s IP? Litigation and Claims –Labor and employment FLSA – overtime and minimum wage issues Migrant laborer issues –Land use and access Licensing and Permitting –Does current use, and will intended use, comply with local laws?

9. Due Diligence - Financial Historical financial performance –Balance sheet, profit and loss statement, statement of cash flows Expected future financial performance –Macroeconomic factors such as market and industry conditions and trends –Ability to capitalize on synergies and economies of scale Supply chain management –Contracts and leverage with suppliers, distributors and customers Ability to hedge against market and price fluctuations –Futures and forwards contracts Return on investment –Year-over-year sales growth –Free cash flow and earnings before interest, taxes depreciation and amortization (EBITDA) –Weighted average cost of capital (WACC)

10. Structuring the Acquisition – Asset Purchase Typically preferred by Buyer Buyer can “cherry pick” assets and leave behind unwanted assets and liabilities Buyer receives a “step up” in the basis of the assets purchased –This give Buyer the ability to take advantage of greater depreciation deductions –Depreciation deductions will reduce Buyer’s taxable income If Seller is a Subchapter C corporation, the “double tax” may be triggered –Corporation taxed on gain from sale (favorable long term capital gains rates may apply) –Shareholders also taxed on distributions Ordinary income to extent of corporation’s earnings and profits (E&P) Tax-free return of capital to extent of investment Capital gain to extent in excess of E&P and investment

11. Structuring the Acquisition – Asset Purchase Exception to “cherry picking” of liabilities: De facto Merger Doctrine –Continuity of enterprise Continuity of management, personnel, location, assets and business operations –Continuity of ownership Buyer pays for assets with its own stock, with Seller’s owners ultimately owning this stock –Cessation of Seller’s business Seller ceases operations, liquidates and dissolves shortly after transaction –Buyer’s assumption ordinary liabilities Those necessary for continued business operations of Seller –Perimeter Realty v. GAPI, Inc., 243 Ga. App. 584 (2000) Doctrine most often applied in context of product, environmental or employment liabilities

12. Structuring the Acquisition – Stock Purchase Typically preferred by Seller Seller typically retains no liabilities of transferred company If Seller is a Subchapter C corporation, no “double tax” because only stock is being sold –Instead of Company selling assets, followed by a distribution Buyer typically acquires all assets and liabilities Buyer receives no “step up” in basis of assets –Deprives Buyer of valuable depreciation deductions –Company assets retain their adjusted basis immediately prior to transaction

13. Structuring the Acquisition – Stock Purchase Transaction costs may be lower for stock purchase than asset purchase In asset purchase, numerous collateral transaction documents may need to be executed and/or recorded –Deeds to real property, title to assets, assignments of contracts and intangibles –Licenses and permits In stock purchase, collateral transactions reduced –No transfer of assets, only ownership interest in company owning assets Caution: Must review major contracts to ensure “change of control” clause not triggered Caution: Licenses and permits may not automatically transfer with company when acquired by new ownership

14. Structuring the Acquisition – Like-Kind Exchanges IRC §1031 permits a Seller to defer recognition of gain in like-kind exchanges –Useful if Seller Finds or is approached by a third party who wants to acquire Seller’s property, such as farm land, and Seller desires to continue in business of farming land on other suitable property Allows deferral of gain that would otherwise be recognized on initial disposition until there exists a final taxable disposition Justification –While the form of the investment has changed, there has been insufficient change in the substance of the investment for purposes of gain recognition

15. Structuring the Acquisition – Like-Kind Exchanges §1031 Requirements –Exchange Deferral of gain applies only to exchanges, and not sales, of property Receipt of “boot” (e.g. cash) will not disqualify transaction from deferral of gain Three party exchanges, or use of intermediaries, can bring Buyer and Seller together Timing requirements for exchange property and replacement property must be adhered to –Like-Kind Property Considerable flexibility in the case of real property No distinction between improved and unimproved real property No distinction between urban and rural real property Less flexibility in the case of personal property –Property must be held for productive use or investment Personal use property does not qualify

16. Basic Anatomy of a PSA Purchase and Sale – what is being bought and sold, and what is not Purchase Price – including terms of payment Representations and Warranties – of Buyer and Seller Pre-closing covenants Conditions to closing Post-closing covenants Indemnification Miscellaneous provisions

17. Purchase and Sale Identification of: –Purchased assets –Excluded assets –Assumed liabilities –Excluded liabilities Purchase price allocation –IRC §1060 –Buyer and Seller must allocate purchase price to all assets being sold –Buyer and Seller generally should try to agree on this allocation –Buyer will generally want to allocate greater portion of purchase price to assets which are depreciable, and which are subject to accelerated depreciation

18. Purchase Price Identification of total consideration –May be cash or non-cash payment Earnest money deposit –Often required while property “locked up” and Seller cannot seek other buyers –Define circumstances under which deposit is refundable, and in what amount Financing –Will purchase price be paid in one lump-sum, or in installments? –Will deferred payments be financed by Seller or third party? –Promissory notes and security agreements provide security for deferred payments –Consider the credit risk and appropriate collateral

19. Purchase Price Adjustments to Purchase Price –Closing occurs at a point in time, and is akin to a “snapshot” –However, the life of a business is ongoing, and more akin to a “movie” –Various assumptions made to arrive at the purchase price may not be accurate –Accordingly, post-closing adjustments to purchase price may be necessary Common purchase price adjustments –Working capital –Employee expenses –Tax liabilities –Inventory

20. Purchase Price Earn-Outs –Purchase price may be based on Seller’s pro forma financial statements Predictions (often optimistic) about future growth, cash flows and profitability These predictions may or may not come to fruition –Earn-Out provisions contemplate that a portion of the purchase price will be paid only upon the business meeting certain specified financial or operational goals If goals not met, no payment due –Earn-Out provisions may be staggered over several years –Particularly useful where key employees retained by Buyer during transition period Alignment of interests Serves similar purpose as an incentive bonus

21. Representations and warranties (R&Ws) Seller generally gives more extensive R&Ws than Buyer –Most of Buyer’s obligations satisfied upon payment of purchase price –Information asymmetry: Buyer will generally have more knowledge about assets than Buyer –Seller provides affirmative R&Ws about business and assets to “guarantee” Buyer is getting the “benefit of the bargain” –Backed by Seller’s obligation to indemnify Buyer if a R&W proves to be inaccurate R&Ws should supplement, not replace, due diligence

22. R&Ws - Seller Typical Seller R&Ws include –Organization and good standing of Seller and authority to enter into agreement –No conflicts with organizational documents or contracts with third parties –No consents required from third parties or governmental agencies –Accuracy of financial statements provided to Buyer –Seller holds good title to assets, free and clear of encumbrances –Description and condition of assets, real and person, tangible and intangible –Status of Seller’s intellectual property –Description and status of Seller’s material contracts with suppliers, vendors, distributors and customers –Description and status of labor and employee relations, including management of employment benefits –Description and status of Seller’s tax liabilities

23. R&Ws - Seller Typical Seller R&Ws include (continued) –Historic and current litigation and claims –Laws and regulations applicable to Seller, and Seller’s compliance with same –Seller’s compliance with health, environmental and safety laws Exceptions to the R&Ws typically set forth in disclosure schedules Sellers typically try to qualify R&Ws –Knowledge qualifiers –Materiality qualifiers Survival –Buyer will want R&Ws to survive closing for as long as possible –Seller will want to place limitations on how long these survive after closing

24. Pre-Closing Covenants Again, these will generally be more extensive for Seller than Buyer Particularly important where closing occurs after signing Typical pre-closing covenants include –Conduct of business Seller to operate business in ordinary course until closing –“No shop” provisions Seller will not enter into negotiations for sale of business of others Buyer does not want to be placed into situation where Seller is able to “auction” sale of business to the highest bidder –Consents Seller to work diligently to obtain necessary third party consents where required –Payoff of indebtedness and release of liens Seller to work diligently to obtain amount of money necessary to pay off creditors holding a security interest in assets being sold Often times, portion of purchase price will be applied to paying off this indebtedness

25. Conditions to Closing Relevant where closing occurs at a time subsequent to signing of PSA –Buyer may want to “lock down” Seller with a PSA –But, Not finished with its investigation of Seller’s assets Needs more time to arrange for financing Needs more time to obtain approvals or consents from regulators or third parties Circumstances may change between signing and closing –Buyer may not be satisfied with findings during due diligence –Buyer may not obtain needed financing –There may be material adverse changes to Seller’s business Failure of these conditions to be satisfied at or before closing may provide Buyer with an “out”

26. Post-Closing Covenants Buyer will want these to ensure a smooth transition of ownership Typical post-closing covenants include –Non-competition Limited to certain types of employees and owners Generally not enforceable against “rank and file” employees Generally must be reasonable in duration, geographic reach, and scope of prohibited activities Specific requirements for enforceability set forth in O.C.G.A. §13-8-50 et seq. –Non-solicitation Prohibition less-restrictive than non-competition Generally prohibits Seller from seeking to solicit business from customer with whom Seller had material contact while working in the business Specific requirements for enforceability set forth in O.C.G.A. §13-8-50 et seq. –Confidentiality Prohibits Seller from disclosing or using certain information obtained while working in the business, or otherwise acquired from Buyer May include information which is considered a “trade secret” and other information which is otherwise confidential, proprietary or gives Buyer a competitive advantage

27. Indemnification Provision whereby either Buyer or Seller agrees to indemnify the other in the event of certain contingencies Typical “triggers” for indemnification include –R&W proves not to be accurate –One party suffers a loss as a result of an occurrence or event which took place or arose out of circumstances existing while the business was under the other party’s control May include a direct loss to the aggrieved party May included a party’s liability to a third party or governmental agency (such as the IRS) PSAs typically provide for detailed procedures for handling indemnity obligations, particularly in context of claims by third parties

28. Indemnification Indemnity holdbacks –A portion of the purchase price may be held back by Buyer (or placed in escrow) to provide a fund for the payment of Seller’s indemnity obligations –How much is held back, and for how long, are negotiated items and depend on the risk Indemnity caps –Place a maximum indemnity exposure for which a party (typically the Seller) will be liable Indemnity baskets –Place a minimum amount of loss which a party (typically the Buyer) must suffer before a claim for indemnity may be made –Once the threshold is reached, indemnity obligation may either be for all losses or only losses in excess of threshold

29. Miscellaneous This is the “boilerplate” –But, these provisions can be very important and should not be overlooked Typical provisions include –Choice of law and venue –Arbitrability of disputes –Assignability –Merger clause –Procedure for amending PSA –Waivers –Procedure for giving notices