TABLE OF CONTENTS

 

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LIST OF EXHIBITS	5
AGREEMENT AND PLAN OF MERGER	6
PREAMBLE	6
ARTICLE 1 TRANSACTIONS AND TERMS OF MERGER	6
1.1 Merger	6
1.2 Time and Place of Closing	6
1.3 Effective Time	6
1.4 Restructure of Transaction	7
ARTICLE 2 TERMS OF MERGER	7
2.1 Articles of Incorporation	7
2.2 Bylaws	7
2.3 Directors and Officers	7
ARTICLE 3 MANNER OF CONVERTING SHARES	8
3.1 Effect on Seller Common Stock	8
3.2 Election and Proration Procedures	8
3.3 Exchange Procedures	10
3.4 Effect on Buyer Common Stock	11
3.5 Seller Options	11
3.6 Bank Merger	12
3.7 Rights of Former Seller Shareholders	12
3.8 Fractional Shares	13
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER	13
4.1 Organization, Standing, and Power	13
4.2 Authority of Seller; No Breach By Agreement	13
4.3 Capital Stock	14
4.4 Seller Subsidiaries	14
4.5 Exchange Act Filings; Securities Offerings; Financial Statements	15
4.6 Absence of Undisclosed Liabilities	16
4.7 Absence of Certain Changes or Events	16
4.8 Tax Matters	17
4.9 Allowance for Loan Losses; Loan and Investment Portfolio, etc.	19
4.10 Assets	20
4.11 Intellectual Property	20
4.12 Environmental Matters	21
4.13 Compliance with Laws	22
4.14 Labor Relations	22
4.15 Employee Benefit Plans	23
4.16 Material Contracts	26

 

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4.17 Privacy of Customer Information	27
4.18 Legal Proceedings	27
4.19 Reports	27
4.20 Books and Records	27
4.21 Loans to Executive Officers and Directors	28
4.22 Certain Actions	28
4.23 State Takeover Laws	28
4.24 Brokers and Finders; Opinion of Financial Advisor	28
4.25 Board Recommendation	28
4.26 Statements True and Correct	28
4.27 Delivery of Seller Disclosure Memorandum	29
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER	29
5.1 Organization, Standing, and Power	29
5.2 Authority of Buyer; No Breach By Agreement	29
5.3 Capital Stock	30
5.4 Buyer Subsidiaries	31
5.5 Exchange Act Filings; Securities Offerings; Financial Statements	31
5.6 Absense of Undisclosed Liabilities	32
5.7 Absence of Certain Changes or Events	32
5.8 Tax Matters	33
5.9 Allowance for Loan Losses; Loan and Investment Portfolio, etc.	35
5.10 Assets	36
5.11 Intellectual Property	36
5.12 Environmental Matters	37
5.13 Compliance with Laws	38
5.14 Labor Relations	38
5.15 Employee Benefit Plans	39
5.16 Material Contract	41
5.17 Privacy of Customer Information	42
5.18 Legal Proceedings	42
5.19 Reports	42
5.20 Books and Records	43
5.21 Loans to Executive Officers and Directors	43
5.22 Certain Actions	43
5.23 State Takeover Laws	43
5.24 Brokers and Finders	43
5.25 Board Recommendation	43
5.26 Available Consideration	44
5.27 Statements True and Correct	44
5.28 Delivery of Buyer Disclosure Memorandum	44
ARTICLE 6 CONDUCT OF BUSINESS PENDING CONSUMMATION	44
6.1 Affirmative Covenants	44
6.2 Negative Covenants of Seller	45
6.3 Adverse Changes in Condition	47
6.4 Reports	48
ARTICLE 7 ADDITIONAL AGREEMENTS	48

 

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7.1 Shareholder Approvals	48
7.2 Registration of Buyer Common Stock	49
7.3 Other Offers, etc.	50
7.4 Consents of Regulatory Authorities	51
7.5 Agreement as to Efforts to Consummate	51
7.6 Investigation and Confidentiality	51
7.7 Press Releases	52
7.8 Charter Provisions	52
7.9 Employee Benefits and Contracts	52
7.10 Section 16 Matters	53
7.11 Affiliate Claims Letters	53
7.12 Indemnification	54
ARTICLE 8 CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE	55
8.1 Conditions to Obligations of Each Party	55
8.2 Conditions to Obligations of Buyer	56
8.3 Conditions to Obligations of Seller	57
ARTICLE 9 TERMINATION	58
9.1 Termination	58
9.2 Effect of Termination	61
9.3 Termination Fee	61
9.4 Non-Survival of Representations and Covenants	62
ARTICLE 10 MISCELLANEOUS	62
10.1 Definitions	62
10.2 Expenses	71
10.3 Brokers and Finders	71
10.4 Entire Agreement	71
10.5 Amendments	71
10.6 Waivers	72
10.7 Assignment	72
10.8 Notices	72
10.9 Governing Law	73
10.10 Counterparts	73
10.11 Captions; Articles and Sections	73
10.12 Interpretations	73
10.13 Enforcement of Agreement	73
10.14 Severability	73

 

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LIST OF EXHIBITS

 

Exhibit		Description
A		Form of Support Agreement
B		Form of Claims Letter
C		Form of Non-Compete Agreement
D		Form of Settlement Agreement

 

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AGREEMENT AND PLAN OF MERGER

 

THIS AGREEMENT AND PLAN OF MERGER (this “ Agreement ”) dated as of September 9, 2008 is by and between Yadkin Valley Financial Corporation, a North Carolina corporation (the “ Buyer ”), and American Community Bancshares, Inc., a North Carolina corporation (the “ Seller ”).

 

Preamble

 

This Agreement provides for the merger of the Seller with and into the Buyer (the “ Merger ”).  At the Effective Time of the Merger, the outstanding shares of the capital stock of the Seller shall be converted into the right to receive shares of the common stock of the Buyer and/or cash (as provided herein and subject to certain terms and conditions).  As a result, certain shareholders of the Seller shall become shareholders of the Buyer.  The transaction described in this Agreement is subject to the approvals of the shareholders of the Seller and the Buyer, respectively, regulatory agencies, and the satisfaction of certain other conditions described in this Agreement.  It is the intention of the Parties to this Agreement that the Merger for federal income tax purposes shall qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986.

 

Certain terms used in this Agreement are defined in Section 10.1 of this Agreement.

 

NOW, THEREFORE , in consideration of the above and the mutual warranties, representations, covenants, and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the Parties, intending to be legally bound, agree as follows:

 

ARTICLE 1
TRANSACTIONS AND TERMS OF MERGER

 

1.1   Merger.

 

Subject to the terms and conditions of this Agreement, at the Effective Time, the Seller shall be merged with and into the Buyer pursuant to and with the effect provided in Section 55-11-01 of the North Carolina General Statutes, and the Buyer shall be the Surviving Corporation resulting from the Merger and shall continue to be governed by the Laws of the State of North Carolina.  The Merger shall be consummated pursuant to the terms of this Agreement, which has been approved and adopted by the respective Boards of Directors of the Seller and the Buyer.

 

1.2   Time and Place of Closing.

 

The closing of the transactions contemplated hereby (the “ Closing ”) will take place at 11:00 A.M. Eastern Time on the date that the Effective Time occurs (or the immediately preceding day if the Effective Time is earlier than 11:00 A.M. Eastern Time), or at such other time as the Parties, acting through their authorized officers, may mutually agree.  The Closing shall be held at such location as may be mutually agreed upon by the Parties and may be effected by electronic or other transmission of signature pages, as mutually agreed upon.

 

1.3   Effective Time.

 

The Merger and other transactions contemplated by this Agreement shall become effective on the date and time the Articles of Merger (the “ Articles of Merger ”) reflecting the Merger shall be filed and become effective with the North Carolina Secretary of State (the “ Effective Time ”).  Subject to the terms and conditions hereof, unless otherwise mutually agreed upon in writing by the authorized officers of each Party, the Parties shall use their reasonable efforts to cause the Effective Time to occur on December 

 

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15, 2008 or, if later, on the last day or the first day of a calendar month immediately following the last of the following dates to occur: (i) the effective date (including expiration of any applicable waiting period) of the last required Consent of any Regulatory Authority having authority over and approving or exempting the Merger, (ii) the date on which the shareholders of the Seller approve this Agreement, and (iii) the date on which shareholders of the Buyer approve this Agreement.

 

1.4   Restructure of Transaction.

 

The Buyer shall have the right to revise the structure of the Merger contemplated by this Agreement by merging the Seller with and into a wholly-owned subsidiary of the Buyer, provided, that no such revision to the structure of the Merger (i) shall result in any changes in the amount or type of the consideration which the holders of shares of Seller Common Stock or Seller Options are entitled to receive under this Agreement, (ii) shall unreasonably impede or delay consummation of the Merger, or (iii) shall impose any less favorable terms or conditions on the Bank or the Seller.  The Buyer shall give written notice to the Seller of any such change in the manner provided in Section 10.8, which notice shall be in the form of an amendment to this Agreement or in the form of a proposed amendment to this Agreement or in the form of an Amended and Restated Agreement and Plan of Merger, and which shall be accompanied by such other exhibits hereto as are reasonably necessary or appropriate to effect such change.

 

ARTICLE 2
TERMS OF MERGER

 

2.1   Articles of Incorporation.

 

The Articles of Incorporation of the Buyer in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation until otherwise duly amended or repealed.

 

2.2   Bylaws.

 

The Bylaws of the Buyer in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation until otherwise duly amended or repealed.

 

2.3   Directors and Officers.

 

(a)    The directors of the Buyer in office immediately prior to the Effective Time, together with such additional persons as may thereafter be elected, shall serve as the directors of the Surviving Corporation from and after the Effective Time in accordance with the Surviving Corporation’s Bylaws, until the earlier of their resignation or removal or otherwise ceasing to be a director.  Immediately prior to the Effective Time, the Buyer shall take all action necessary, including but not limited to the amendment of the Surviving Corporation’s Bylaws, to appoint five individuals who were directors of the Seller on the date hereof and who are chosen by the Buyer after consultation with the Seller (one of whom shall be Randy P. Helton and each of whom shall be compensated as a director in the same manner as all other directors of the Buyer) to the board of directors of the Buyer, to be effective as soon as practicable following the Effective Time, and cause each such individual to be nominated as a management nominee for election by the shareholders to the board of directors of the Buyer at the next annual meeting of shareholders of the Buyer following such individual’s appointment to the board of directors of the Buyer (provided however that Randy P. Helton shall be nominated for a term of approximately one year ending on or before the Buyer’s 2010 annual meeting of shareholders).  The officers of the Buyer in office immediately prior to the Effective Time, together with such additional persons as may thereafter be elected, shall serve as the officers of the Surviving Corporation from and after the Effective Time in

 

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accordance with the Surviving Corporation’s Bylaws, until the earlier of their resignation or removal or otherwise ceasing to be an officer.

 

(b)    It is anticipated that the directors of American Community Bank (the “ Bank ”), the Seller’s wholly owned subsidiary, in office immediately prior to the Effective Time, shall serve as members of Yadkin Valley Bank and Trust Company’s Charlotte regional board of advisors.

 

ARTICLE 3
MANNER OF CONVERTING SHARES

 

3.1   Effect on Seller Common Stock.

 

(a)    At the Effective Time, in each case subject to Sections 3.1(d) and 3.2, by virtue of the Merger and without any action on the part of the Parties, each share of Seller Common Stock that is issued and outstanding immediately prior to the Effective Time (other than shares of Seller Common Stock held by either Party or any Subsidiary of either Party (in each case other than shares of Seller Common Stock held on behalf of third parties or held by any Buyer Entity or the Seller Entity as a result of debts previously contracted)) shall be converted into the right to receive one of the following: (i) cash in the amount of $12.35 less any applicable withholding Taxes (the “Cash Consideration”); (ii) a number of shares of Buyer Common Stock equal to the Fixed Exchange Ratio (the “Stock Consideration”); or (iii) a combination of the Cash Consideration and Stock Consideration in such proportions as requested by the Seller shareholder to the extent available after the proration of the total Merger Consideration to 80.5% Stock Consideration and 19.5% Cash Consideration (the “Mixed Consideration”) (items (i), (ii), or (iii) are referred to herein individually as the “Per Share Purchase Price” and collectively as the “Merger Consideration”).  The “Fixed Exchange Ratio” shall be 12.35/14.50, or .8517, shares of Buyer Common Stock.

 

(b)  At the Effective Time, all shares of Seller Common Stock shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist as of the Effective Time, and each certificate previously representing any such shares of Seller Common Stock (the “ Certificates ”) shall thereafter represent only the right to receive the Per Share Purchase Price.

 

(c)    If, prior to the Effective Time, the outstanding shares of Seller Common Stock or Seller Options, or the outstanding shares of Buyer Common Stock or any rights with respect to Buyer Common Stock pursuant to stock options granted by the Buyer (the “ Buyer Options ”), shall have been increased, decreased, changed into or exchanged for a different number or kind of shares or securities as a result of a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar change in capitalization, then an appropriate and proportionate adjustment shall be made to the Per Share Purchase Price.

 

(d)  Each share of Seller Common Stock issued and outstanding immediately prior to the Effective Time and owned by any of the Parties or their respective Subsidiaries (in each case other than shares of Seller Common Stock held on behalf of third parties or as a result of debts previously contracted) shall, by virtue of the Merger and without any action on the part of the holder thereof, cease to be outstanding, shall be cancelled and retired without payment of any consideration, and shall cease to exist (the “ Excluded Shares ”).

 

3.2   Election and Proration Procedures.

 

(a)        An election form (an “ Election Form ”) shall be mailed to each holder of Seller Common Stock on or about two weeks prior to the mailing of the transmittal materials referred to in Section 3.3 below which shall be mailed to each holder of Seller Common Stock of record at the Effective Time.  The

 

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Seller shall provide to the exchange agent selected by the Buyer (the “ Exchange Agent ”) all information reasonably necessary for it to perform its obligations as specified herein.

 

(b)        Each Election Form shall entitle the holder of Seller Common Stock (or the beneficial owner through appropriate and customary documentation and instructions) to elect to receive (i) the Stock Consideration for all of such holder’s shares (a “ Stock Election ”), (ii) the Cash Consideration for all of such holder’s shares (a “ Cash Election ”), (iii) the Mixed Consideration for all of such holder’s shares (a “ Mixed Election ”) or (iv) make no election (a “ Non-Election ”).  Holders of record of Seller Common Stock who hold such shares as nominees, trustees or in other representative capacity (a “ Holder Representative ”) may submit multiple Election Forms, provided that such Holder Representative certifies that each such Election Form covers all of the shares of Seller Common Stock held by that Holder Representative for a particular beneficial owner.  The shares of Seller Common Stock as to which a Stock Election has been made (including pursuant to a Mixed Election) are referred to herein as “ Stock Election Shares ” and the aggregate number thereof is referred to herein as the “ Stock Election Number .”  The shares of Seller Common Stock as to which a Cash Election has been made (including pursuant to a Mixed Election) are referred to herein as “ Cash Election Shares ” and the aggregate number thereof is referred to as the “ Cash Election Number ”.  Shares of Seller Common Stock as to which no election has been made (or as to which an Election Form is not properly completed or returned in a timely fashion) are referred to as “ Non-Election Shares .”

 

(c)        To be effective, a properly completed Election Form must be received by the Exchange Agent on or before 4:00 p.m., local time on such date as the Parties may mutually agree (the “ Election Deadline ”).  An election shall have been properly made only if the Exchange Agent shall have actually received a properly completed Election Form by the Election Deadline.  An Election Form shall be deemed properly completed only if accompanied by one or more certificates representing all shares of Seller Common Stock covered by such Election Form, or the guaranteed delivery of such certificates (or customary affidavits and, if required by the Buyer, indemnification regarding the loss or destruction of such certificates), together with duly completed transmittal materials.  For the holders of Seller Common Stock who make a Non-Election, subject to Section 3.2(e), the Exchange Agent shall have the authority to determine the type of consideration constituting the Per Share Purchase Price to be exchanged for the Non-Election Shares.  Any Seller shareholder may at any time prior to, but not after, the Election Deadline change his or her election by written notice received by the Exchange Agent prior to the Election Deadline accompanied by a properly completed and signed revised Election Form.  Any Seller shareholder may, at any time prior to the Election Deadline, revoke his or her election by written notice received by the Exchange Agent prior to the Election Deadline or by withdrawal prior to the Election Deadline of his or her certificates, or of the guarantee of delivery of such certificates.  All elections shall be revoked automatically if the Exchange Agent is notified in writing by either party that this Agreement has been terminated.  If a shareholder either (i) does not submit a properly completed Election Form by the Election Deadline or (ii) revokes its Election Form prior to the Election Deadline but does not submit a new properly executed Election Form prior to the Election Deadline, the shares of Seller Common Stock held by such shareholder shall be designated as Non-Election Shares.  Subject to the terms of this Agreement and the Election Form, the Exchange Agent shall have reasonable discretion to determine whether any election, revocation or change has been properly made and to disregard immaterial defects in any Election Form, and any good faith decisions of the Exchange Agent regarding such matters shall be binding and conclusive.

 

(d)        The number of shares of Seller Common Stock to be converted into the right to receive the Cash Consideration shall be equal to 19.5% of the number of shares of Seller Common Stock outstanding immediately prior to the Effective Time (the “ Aggregate Cash Limit ”) and the number of shares of Seller Common Stock to be converted into the right to receive the Stock Consideration shall be

 

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equal to 80.5% of the number of shares of Seller Common Stock outstanding immediately prior to the Effective Time (the “ Aggregate Stock Limit ”).

 

(e)        Within ten business days after the later to occur of the Election Deadline or the Effective Time, the Buyer shall cause the Exchange Agent to effect the allocation among holders of Seller Common Stock of rights to receive the Per Share Purchase Price and to distribute such as follows:

 

(i)         if the Stock Election Number exceeds the Aggregate Stock Limit, then all Cash Election Shares and all Non-Election Shares shall be converted into the right to receive the Cash Consideration, and each Stock Election Share shall be converted into the right to receive (A) the Stock Consideration in respect of that number of Stock Election Shares equal to the product obtained by multiplying (1) the number of Stock Election Shares held by such holder by (2) a fraction, the numerator of which is the Aggregate Stock Limit and the denominator of which is the Stock Election Number and (B) the Cash Consideration in respect of the remaining number of such Stock Election Shares;

 

(ii)         if the Cash Election Number exceeds the Aggregate Cash Limit, then all Stock Election Shares and all Non-Election Shares shall be converted into the right to receive the Stock Consideration, and each Cash Election Share shall be converted into the right to receive (A) the Cash Consideration in respect of that number of Cash Election Shares equal to the product obtained by multiplying (1) the number of Cash Election Shares held by such holder by (2) a fraction, the numerator of which is the Aggregate Cash Limit and the denominator of which is the Cash Election Number and (B) the Stock Consideration in respect of the remaining number of such Cash Election Shares; and

 

(iii)        if the Stock Election Number and the Cash Election Number do not exceed the Aggregate Stock Limit and the Aggregate Cash Limit, respectively, then (i) all Cash Election Shares shall be converted into the right to receive the Cash Consideration, (ii) all Stock Election Shares shall be converted into the right to receive the Stock Consideration, and (iii) all Non-Election Shares shall be converted into the right to receive the Cash Consideration and/or the Stock Consideration such that the aggregate number of shares of Seller Common Stock entitled to receive the Cash Consideration is equal to the Aggregate Cash Limit and the aggregate number of shares of Seller Common Stock entitled to receive the Stock Consideration is equal to the Aggregate Stock Limit.

 

3.3 Exchange Procedures.

 

(a)    As soon as reasonably practicable after the Effective Time, the Buyer shall cause the Exchange Agent to mail to the former shareholders of the Seller appropriate transmittal materials (which shall specify that delivery shall be effected, and risk of loss and title to the certificates or other instruments theretofore representing shares of Seller Common Stock shall pass, only upon proper delivery of such certificates or other instruments to the Exchange Agent).  The certificate or certificates of Seller Common Stock so surrendered shall be duly endorsed as the Exchange Agent may reasonably require.  In the event of a transfer of ownership of shares of Seller Common Stock represented by one or more certificates that are not registered in the transfer records of the Seller, the Per Share Purchase Price payable for such shares as provided in Sections 3.1 and 3.2 may be issued to a transferee if the certificate or certificates representing such shares are delivered to the Exchange Agent, accompanied by all documents required to evidence such transfer and by evidence reasonably satisfactory to the Exchange Agent that such transfer is proper and that any applicable stock transfer taxes have been paid.   In the event any certificate representing Seller Common Stock certificate shall have been lost, mutilated, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate to be lost, mutilated, stolen,

 

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or destroyed and the posting by such person of a bond in such amount as the Buyer may reasonably direct as indemnity against any claim that may be made against it with respect to such certificate, the Exchange Agent shall issue in exchange for such lost, mutilated, stolen, or destroyed certificate the Per Share Purchase Price as provided for in Sections 3.1 and 3.2.  The Exchange Agent may establish such other reasonable and customary rules and procedures in connection with its duties as it may deem appropriate.  The Buyer shall pay all charges and expenses, including those of the Exchange Agent in connection with the distribution of the Per Share Purchase Price as provided in Sections 3.1and 3.2.  The Buyer or its Exchange Agent will maintain a book entry list of Buyer Common Stock to which each former holder of Seller Common Stock is entitled.  Certificates evidencing Buyer Common Stock into which Seller Common Stock has been converted will not be issued.

 

(b)    After the Effective Time, each holder of shares of Seller Common Stock (other than Excluded Shares) issued and outstanding at the Effective Time shall surrender the Certificate or Certificates representing such shares to the Exchange Agent and shall promptly upon surrender thereof receive in exchange therefor the consideration provided in Sections 3.1 and 3.2, without interest, pursuant to this Section 3.3.  The Buyer shall not be obligated to deliver the consideration to which any former holder of Seller Common Stock is entitled as a result of the Merger until such holder surrenders such holder’s Certificate or Certificates for exchange as provided in this Section 3.3.  Any other provision of this Agreement notwithstanding, neither any Buyer Entity, nor any Seller Entity, nor the Exchange Agent shall be liable to any holder of Seller Common Stock for any amounts paid or properly delivered in good faith to a public official pursuant to any applicable abandoned property, escheat, or similar Law.

 

(c)    Each of the Buyer and the Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Seller Common Stock and Seller Options such amounts, if any, as it is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local, or foreign Tax Law or by any Taxing Authority or Governmental Authority.  To the extent that any amounts are so withheld by the Buyer, the Surviving Corporation, or the Exchange Agent, as the case may be, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Seller Common Stock, as applicable in respect of which such deduction and withholding was made by the Buyer, the Surviving Corporation, or the Exchange Agent, as the case may be.

 

(d)    Adoption of this Agreement by the shareholders of the Seller shall constitute ratification of the appointment of the Exchange Agent.

 

3.4   Effect on Buyer Common Stock.

 

At and after the Effective Time, each share of Buyer Common Stock issued and outstanding immediately prior to the Effective Time shall remain an issued and outstanding share of common stock of the Surviving Corporation and shall not be affected by the Merger.

 

3.5   Seller Options.

 

(a)            At the Effective Time, all rights with respect to Seller Common Stock pursuant to stock options granted by the Seller (the “ Seller Options ”) which are outstanding at the Effective Time, whether or not exercisable, shall be converted into and become rights with respect to Buyer Common Stock, and the Buyer shall assume each Seller Option in accordance with the terms of the applicable Seller option plan and the stock option agreement by which it is evidenced (the “ Converted Options ”); provided , however , that each holder of Seller Options may elect to cancel, immediately prior to the Effective Time, any Seller Options held by such Person as of the date hereof, in exchange for a cash payment at Closing equal to the product obtained by multiplying (1) the number of shares of Seller Common Stock underlying such Person’s Seller Options by (2) the Cash Consideration less the exercise price per share

 

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under such option.  The Seller will use its commercially reasonable efforts to obtain from each current member of the Seller’s board of directors who holds any options, and deliver to the Buyer prior to the Closing, a written agreement in a form specified by the Buyer confirming and agreeing to the surrender or roll-over of such director’s options as described above.  From and after the Effective Time, (i) each Seller Option assumed by the Buyer may be exercised solely for shares of Buyer Common Stock, (ii) the number of shares of Buyer Common Stock subject to each Seller Option shall be equal to the product of the number of shares of Seller Common Stock subject to such Seller Option immediately prior to the Effective Time multiplied by the Fixed Exchange Ratio, provided , that any fractional shares of Buyer Common Stock subject to the Converted Options shall be exchanged for cash (without interest) in an amount equal to such fractional part of a share of Buyer Common Stock multiplied by Final Buyer Stock Price less the exercise price of such Converted Option, and (iii) the per share exercise price under each such Seller Option shall be adjusted by dividing the per share exercise price under each such Seller Option by the Fixed Exchange Ratio and rounding down to the nearest cent.

 

(b)    Before the Effective Time, the Buyer will take all corporate action necessary to reserve for future issuance a sufficient additional number of shares of Buyer Common Stock to provide for the satisfaction of its obligations with respect to the Converted Options.

 

(c)     The Seller’s board of directors and its compensation committee shall not make any new grants of Seller Options following the execution of this Agreement.

 

(d)    The Seller’s board of directors or its compensation committee shall make any adjustments or amendments to or make such determinations with respect to the Seller Options necessary to effect the foregoing provisions of this Section 3.5.

 

(e)     Within 10 business days after the Effective Time, the Buyer shall file a registration statement on Form S-8 with respect to Converted Options that are eligible for registration on Form S-8 and the Buyer shall use its reasonable best efforts to maintain the current status of the prospectus or prospectuses contained therein for so long as such options remain outstanding.

 

3.6   Bank Merger.

 

The Buyer anticipates that concurrently with or as soon as practicable after the execution and delivery of this Agreement, Yadkin Valley Bank and Trust Company, a wholly owned subsidiary of the Buyer, and the Bank, a wholly owned subsidiary of the Seller, shall enter into the Plan of Bank Merger, in a form mutually acceptable to both parties, pursuant to which the Bank will merge with and into Yadkin Valley Bank and Trust Company (the “ Bank Merger ”).  The Plan of Bank Merger shall provide that the directors of Yadkin Valley Bank and Trust Company as the surviving entity of the Bank Merger shall be (a) all the directors of Yadkin Valley Bank and Trust Company serving immediately prior to the Bank Merger and (b) the five individuals who are appointed to the board of directors of the Buyer pursuant to Section 2.3(a).  The Buyer anticipates that American Community Bank will operate as American Community Bank, a division of Yadkin Valley Bank and Trust Company after the Bank Merger.  The Parties anticipate that the Bank Merger will become effective simultaneously with or immediately following the Effective Time.

 

3.7   Rights of Former Seller Shareholders.

 

At the Effective Time, the stock transfer books of the Seller shall be closed as to holders of Seller Common Stock and no transfer of Seller Common Stock by any holder of such shares shall thereafter be made or recognized.  Until surrendered for exchange in accordance with the provisions of Section 3.3, each Certificate theretofore representing shares of Seller Common Stock (other than certificates

 

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representing Excluded Shares), shall from and after the Effective Time represent for all purposes only the right to receive the Per Share Purchase Price, without interest, as provided in Article 3.

 

3.8   Fractional Shares.

 

Notwithstanding any other provision of this Agreement, each holder of shares of Seller Common Stock exchanged pursuant to the Merger, who would otherwise have been entitled to receive a fraction of a share of Buyer Common Stock (after taking into account all certificates delivered by such holder), shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of Buyer Common Stock multiplied by Final Buyer Stock Price.  No such holder will be entitled to dividends, voting rights, or any other rights as a shareholder in respect of any fractional shares.

 

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SELLER

 

The Seller represents and warrants to the Buyer, except as set forth on the Seller Disclosure Memorandum with respect to each such Section below, as follows:

 

4.1   Organization, Standing, and Power.

 

The Seller is a corporation duly organized, validly existing, and in good standing under the Laws of the State of North Carolina and is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “ BHCA ”).  The Bank is a banking corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina.  Each of the Seller and the Bank has the corporate power and authority to carry on its business as now conducted and to own, lease, and operate its Assets.  Each of the Seller and the Bank is duly qualified or licensed to transact business as a foreign corporation in good standing in the states of the United States and foreign jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions where the failure to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a Seller Material Adverse Effect.  The minute book and other organizational documents for each of the Seller and the Bank have been made available to the Buyer for its review and, except as disclosed in Section 4.1 of the Seller Disclosure Memorandum, are true and complete in all material respects as in effect as of the date of this Agreement and accurately reflect in all material respects all amendments thereto and all proceedings of the respective board of directors (including any committees of the board of directors) and shareholders thereof.  The Bank is an “insured institution” as defined in the Federal Deposit Insurance Act and applicable regulations thereunder, and the deposits held by the Bank are insured, up to applicable limits, by the FDIC’s Deposit Insurance Fund.

 

4.2   Authority of Seller; No Breach By Agreement.

 

(a)       The Seller has the corporate power and authority necessary to execute, deliver, and, other than with respect to the Merger, perform this Agreement, and with respect to the Merger, upon the approval of the Merger, as required by Sections 8.1(b) and 8.1(c) and by the Seller’s shareholders in accordance with this Agreement and the NCBCA, to perform its obligations under this Agreement and to consummate the transactions contemplated hereby.  The execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated herein, including the Merger, have been duly and validly authorized by all necessary corporate action in respect thereof on the part of the Seller, subject to the approval of this Agreement by the holders of majority of the outstanding shares of Seller Common Stock, which is the only Seller shareholder vote required for approval of this Agreement and consummation of the Merger.  Subject to any necessary approvals referred to in Sections 8.1(b) and 8.1(c) and receipt of such requisite shareholder approval, this Agreement represents a legal, valid, and binding obligation of the Seller, enforceable against the Seller in accordance with its terms (except in all cases as such

 

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enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar Laws affecting the enforcement of creditors’ rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought).

 

(b)      Neither the execution and delivery of this Agreement by the Seller, nor the consummation by the Seller and the Bank of the transactions contemplated hereby, nor compliance by the Seller and the Bank with any of the provisions hereof, will (i) conflict with or result in a breach of any provision of the Seller’s articles of incorporation or bylaws or the articles of incorporation or bylaws of the Bank or any resolution adopted by the board of directors or the shareholders of any Seller Entity, or (ii) except as disclosed in Section 4.2 of the Seller Disclosure Memorandum, constitute or result in a Default under, or require any Consent pursuant to, or result in the creation of any Lien on any Asset of any Seller Entity under, any Contract or Permit of any Seller Entity or, (iii) subject to receipt of the requisite Consents referred to in Section 8.1(b) and (c), constitute or result in a Default under, or require any Consent pursuant to, any Law or Order applicable to any Seller Entity or any of their respective material Assets (including any Buyer Entity or any Seller Entity becoming subject to or liable for the payment of any Tax on any of the Assets owned by any Buyer Entity or any Seller Entity being reassessed or revalued by any Regulatory Authority).

 

(c)       Other than in connection or compliance with the provisions of the Securities Laws and applicable state corporate and securities Laws, and other than Consents required from Regulatory Authorities, and other than notices to or filings with the IRS or the Pension Benefit Guaranty Corporation with respect to any employee benefit plans, no notice to, filing with, or Consent of, any Governmental Authority is necessary for the consummation by the Seller of the Merger and the other transactions contemplated in this Agreement.

 

4.3   Capital Stock.

 

(a)       The authorized capital stock of the Seller consists of 25,000,000 shares of Seller Common Stock, of which 6,559,792 shares are issued and outstanding as of the date of this Agreement, and, assuming that all of the issued and outstanding Seller Options had been exercised, not more than an additional 465,577 shares, with a per share weighted average exercise price of $7.08, would be issued and outstanding at the Effective Time, and 1,000,000 shares of the Seller preferred stock, of which no shares are issued and outstanding as of the date of this Agreement.  All of the issued and outstanding shares of capital stock of the Seller are duly and validly issued and outstanding and are fully paid and nonassessable.  None of the outstanding shares of capital stock of the Seller has been issued in violation of any preemptive rights of the current or past shareholders of the Seller.

 

(b)      Except for the 465,577 shares of Seller Common Stock reserved for issuance pursuant to outstanding Seller Options or as disclosed in Section 4.3 of the Seller Disclosure Memorandum, there are no shares of capital stock or other equity securities of the Seller reserved for issuance and no outstanding Rights relating to the capital stock of the Seller.

 

(c)       Except as specifically set forth in this Section 4.3, there are no shares of the Seller capital stock or other equity securities of the Seller outstanding and there are no outstanding Rights with respect to any Seller securities or any right or privilege (whether pre-emptive or contractual) capable of becoming a Contract or Right for the purchase, subscription, exchange or issuance of any securities of the Seller.

 

4.4   Seller Subsidiaries.

 

The Seller has no Subsidiaries except as set forth in Section 4.4 of the Seller Disclosure Memorandum and, except as set forth in Section 4.4 of the Seller Disclosure Memorandum, the Seller owns all of the equity interests in each of its Subsidiaries.  No capital stock (or other equity interest) of any such Subsidiary is or may become required to be issued (other than to another Seller Entity) by reason

 

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of any Rights, and there are no Contracts by which any such Subsidiary is bound to issue (other than to another Seller Entity) additional shares of its capital stock (or other equity interests) or Rights or by which any Seller Entity is or may be bound to transfer any shares of the capital stock (or other equity interests) of any such Subsidiary (other than to another Seller Entity).  There are no Contracts relating to the rights of any Seller Entity to vote or to dispose of any shares of the capital stock (or other equity interests) of any such Subsidiary.  All of the shares of capital stock (or other equity interests) of each Subsidiary are fully paid and nonassessable and are owned directly or indirectly by the Seller free and clear of any Lien (except, in the case of the Bank, to the extent provided in Section 53- 42 of the North Carolina General Statutes).  Each Subsidiary is duly qualified or licensed to transact business as a foreign entity in good standing in the States of the United States and foreign jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions in which the failure to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a Seller Material Adverse Effect.  The minute books and other organizational documents for each Subsidiary have been made available to the Buyer for its review, and, except as disclosed in Section 4.4 of the Seller Disclosure Memorandum, are true and complete in all material respects as in effect as of the date of this Agreement and accurately reflect in all material respects all amendments thereto and all proceedings of the board of directors and shareholders thereof.

 

4.5   Exchange Act Filings; Securities Offerings; Financial Statements.

 

(a)       Except as disclosed in Section 4.5 of the Seller Disclosure Memorandum, the Seller has timely filed and made available to the Buyer all Exchange Act Documents required to be filed by the Seller since January 1, 2003 (the “ Seller Exchange Act Reports ”).  Seller Exchange Act Reports (i) at the time filed, (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) complied in all material respects with the applicable requirements of the Securities Laws and other applicable Laws and (ii) did not, at the time they were filed (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Seller Exchange Act Reports or necessary in order to make the statements in such Seller Exchange Act Reports not misleading.  Each offering or sale of securities by the Seller (i) was either registered under the Securities Act or made pursuant to a valid exemption from registration, (ii) complied in all material respects with the applicable requirements of the Securities Laws and other applicable Laws, except for immaterial late “blue sky” filings, including disclosure and broker/dealer registration requirements, and (iii) was made pursuant to offering documents which did not, at the time of the offering (or, in the case of registration statements, at the effective date thereof) contain any untrue statement of a material fact or omit to state a material fact required to be stated in the offering documents or necessary in order to make the statements in such documents not misleading.  The Seller has delivered or made available to the Buyer all comment letters received by the Seller from the staff of the SEC and all responses to such comment letters by or on behalf of the Seller with respect to all filings under the Securities Laws.  The Seller’s principal executive officer and principal financial officer have made the certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act and the rules and regulations of the Exchange Act thereunder with respect to the Seller Exchange Act Reports to the extent such rules or regulations applied at the time of the filing.  For purposes of the preceding sentence, “principal executive officer” and “principal financial officer” shall have the meanings given to such terms in the Sarbanes—Oxley Act.  Such certifications contain no qualifications or exceptions to the matters certified therein and have not been modified or withdrawn; and neither the Seller nor any of its officers has received notice from any Regulatory Authority questioning or challenging the accuracy, completeness, content, form, or manner of filing or submission of such certifications.  No Seller Subsidiary is required to file any Exchange Act Documents.

 

(b)      Each of Seller Financial Statements (including, in each case, any related notes) that are contained in Seller Exchange Act Reports, including any Seller Exchange Act Reports filed after the date of this Agreement until the Effective Time, complied, or will comply, as to form in all material respects

 

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with the Exchange Act, was, or will be, prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited interim statements, as permitted by Form 10-Q of the Exchange Act), fairly presented the consolidated financial position of the Seller and the Bank as of the respective dates and the consolidated results of operations and cash flows for the periods indicated, including the fair values of the assets and liabilities shown therein, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount or effect, and were certified to the extent required by the Sarbanes-Oxley Act.

 

(c)       The Seller’s independent public accountants, which have expressed their opinion with respect to the Financial Statements of the Seller and its Subsidiaries whether or not included in the Seller’s Exchange Act Reports (including the related notes), are and have been throughout the periods covered by such Financial Statements (x) a registered public accounting firm (as defined in Section 2(a)(12) of the Sarbanes-Oxley Act) (to the extent applicable during such period), (y) “independent” with respect to the Seller within the meaning of Regulation S-X, and (z) with respect to the Seller, in compliance with subsections (g) through (l) of Section 10A of the Exchange Act and related Securities Laws.  Section 4.5(c) of the Seller Disclosure Memorandum lists all non-audit services preformed by the Seller’s independent public accountants for the Seller or the Bank.

 

(d)      The Seller maintains disclosure controls and procedures as required by Rule 13a-15 or 15d-15 under the Exchange Act, and such controls and procedures are effective to ensure that all material information relating to the Seller and its Subsidiaries is made known on a timely basis to the Seller’s principal executive officer and the Seller’s principal financial officer.

 

4.6   Absence of Undisclosed Liabilities.

 

No Seller Entity has any Liabilities required under GAAP to be set forth on a consolidated balance sheet or in the notes thereto that are reasonably likely to have, individually or in the aggregate, a Seller Material Adverse Effect, except Liabilities which are (i) accrued or reserved against in the consolidated balance sheet of the Seller as of June 30, 2008, included in Seller Financial Statements delivered prior to the date of this Agreement or reflected in the notes thereto, (ii) incurred in the ordinary course of business consistent with past practices, or (iii) incurred in connection with the transactions contemplated by this Agreement.  Section 4.6 of the Seller Disclosure Memorandum lists, and the Seller has attached and delivered to the Buyer copies of the documentation creating or governing, all securitization transactions and “ off-balance sheet arrangements ” (as defined in Item 303(a)(4) of Regulation S-K of the Exchange Act) effected by the Seller or its Subsidiaries other than letters of credit and unfunded loan commitments or credit lines.  Except as disclosed in Section 4.6 of the Seller Disclosure Memorandum or as reflected on the Seller’s balance sheet at June 30, 2008, no Seller Entity is directly or indirectly liable, by guarantee, indemnity, or otherwise, upon or with respect to, or obligated, by discount or repurchase agreement or in any other way, to provide funds in respect to, or obligated to guarantee or assume any Liability of any Person for any amount in excess of $50,000 and any amounts, whether or not in excess of $50,000 that, in the aggregate, exceed $100,000.  Except (x) as reflected in the Seller’s balance sheet at June 30, 2008 or liabilities described in any notes thereto (or liabilities for which neither accrual nor footnote disclosure is required pursuant to GAAP or any applicable Regulatory Authority) or (y) for liabilities incurred in the ordinary course of business since June 30, 2008 consistent with past practice or in connection with this Agreement or the transactions contemplated hereby, neither the Seller nor any of its Subsidiaries has any Material Liabilities or obligations of any nature.

 

4.7   Absence of Certain Changes or Events.

 

Except as disclosed in Seller Financial Statements delivered prior to the date of this Agreement or as disclosed in Section 4.7 of the Seller Disclosure Memorandum, (i) there have been no events, changes, or occurrences which have had, or are reasonably likely to have, individually or in the aggregate, a Seller

 

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Material Adverse Effect, (ii)  none of Seller Entities has taken any action, or failed to take any action, prior to the date of this Agreement, which action or failure, if taken after the date of this Agreement, would represent or result in a material breach or violation of any of the covenants and agreements of the Seller provided in this Agreement, and (iii) since December 31, 2007, Seller Entities have conducted their respective businesses in the ordinary course of business consistent with past practice.

 

4.8   Tax Matters.

 

(a)    All Seller Entities have timely filed with the appropriate Taxing Authorities, all Tax Returns in all jurisdictions in which Tax Returns are required to be filed, and such Tax Returns are correct and complete in all material respects.  None of Seller Entities is the beneficiary of any extension of time within which to file any Tax Return.  All Taxes of Seller Entities (whether or not shown on any Tax Return) have been fully and timely paid.  There are no Liens for any Taxes (other than a Lien for current real property or ad valorem Taxes not yet due and payable) on any of the Assets of any Seller Entity.  No claim has ever been made by an authority in a jurisdiction where any Seller Entity does not file a Tax Return that such Seller Entity may be subject to Taxes by that jurisdiction.

 

(b)    None of Seller Entities has received any notice of assessment or proposed assessment in connection with any Taxes, and there are no threatened or pending disputes, claims, audits, or examinations regarding any Taxes of any Seller Entity or the assets of any Seller Entity.  No officer or employee responsible for Tax matters of any Seller Entity expects any Taxing Authority to assess any additional Taxes for any period for which Tax Returns have been filed.  No issue has been raised by a Taxing Authority in any prior examination of the Seller which, by application of the same or similar principles, could be expected to result in a deficiency for any subsequent taxable period. None of Seller Entities has waived any statute of limitations in respect of any Taxes or agreed to a Tax assessment or deficiency.

 

(c)    Each Seller Entity has complied in all material respects with all applicable Laws relating to the withholding of Taxes and the payment thereof to appropriate authorities, including Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee or independent contractor, and Taxes required to be withheld and paid pursuant to Sections 1441 and 1442 of the Code or similar provisions under foreign Law.

 

(d)    The unpaid Taxes of each Seller Entity (i) did not, as of the most recent fiscal month end, materially exceed the reserve for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) included in the most recent balance sheet (rather than in any notes thereto) for such Seller Entity and (ii) do not materially exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with past custom and practice of Seller Entities in filing their Tax Returns.

 

(e)    Except as described in Section 4.8(e) of the Seller Disclosure Memorandum, none of Seller Entities is a party to any Tax allocation or sharing agreement and none of Seller Entities has been a member of an affiliated group filing a consolidated federal income Tax Return or has any Tax Liability of any Person under Treasury Regulation Section 1.1502-6 or any similar provision of state, local or foreign Law, or as a transferee or successor, by contract or otherwise.

 

(f)     During the five-year period ending on the date hereof, none of Seller Entities was a “distributing corporation” or a “controlled corporation” as defined in, and in a transaction intended to be governed by Section 355 of the Code.

 

(g)    Except as disclosed in Section 4.8(g) of the Seller Disclosure Memorandum, none of Seller Entities has made any payments, is obligated to make any payments, or is a party to any contract that could obligate it to make any payments that could be disallowed as a deduction under Section 280G or 162(m) of the Code, or which would be subject to withholding under Section 4999 of the Code.  None

 

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of Seller Entities has been or will be required to include any adjustment in taxable income for any Tax period (or portion thereof) pursuant to Section 481 of the Code or any comparable provision under state or foreign Tax Laws as a result of transactions or events occurring prior to the Closing.  There is no taxable income of the Seller that will be required under applicable tax law to be reported by the Buyer, for a taxable period beginning after the Closing Date which taxable income was realized prior to the Closing Date.  Any net operating losses of Seller Entities disclosed in Section 4.8(g) of the Seller Disclosure Memorandum are not subject to any limitation on their use under the provisions of Sections 382 or 269 of the Code or, to the best of Seller’s Knowledge, any other provisions of the Code or the Treasury Regulations dealing with the utilization of net operating losses other than any such limitations as may arise as a result of the consummation of the transactions contemplated by this Agreement.

 

(h)    Each Seller Entity is in compliance in all material respects with, and its records contain all information and documents (including properly completed IRS Forms W-9) necessary to comply with, all applicable information reporting and Tax withholding requirements under federal, state, and local Tax Laws, and such records identify with specificity all accounts subject to backup withholding under Section 3406 of the Code.

 

(i)     No Seller Entity is subject to any private letter ruling of the IRS or comparable rulings of any Taxing Authority.

 

(j)     No property owned by any Seller Entity is (i) property required to be treated as being owned by another Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986, (ii) “tax-exempt use property” within the meaning of Section 168(h)(1) of the Code, (iii) “tax-exempt bond financed property” within the meaning of Section 168(g) of the Code, (iv) “limited use property” within the meaning of Rev. Proc. 76-30, (v) subject to Section 168(g)(1)(A) of the Code, or (vi) subject to any provision of state, local or foreign Law comparable to any of the provisions listed above.

 

(k)    No Seller Entity has any “corporate acquisition indebtedness” within the meaning of Section 279 of the Code.

 

(l)     The Seller has disclosed on its federal income Tax Returns all positions taken therein that are reasonably believed to give rise to substantial understatement of federal income tax within the meaning of Section 6662 of the Code.

 

(m)   No Seller Entity has participated in any reportable transaction, as defined in Treasury Regulation Section 1.6011-4(b)(1), or a transaction substantially similar to a reportable transaction.

 

(n)    The Seller has made available to the Buyer complete copies of (i) all federal, state, local and foreign income or franchise Tax Returns of Seller Entities relating to the taxable periods since inception and (ii) any audit report issued within the last four years relating to any Taxes due from or with respect to Seller Entities.

 

(o)    No Seller Entity nor any other Person on its behalf has (i) filed a consent pursuant to Section 341(f) of the Code (as in effect prior to the repeal under the Jobs and Growth Tax Reconciliation Act of 2003) or agreed to have Section 341(f)(2) of the Code (as in effect prior to the repeal under the Jobs and Growth Tax Reconciliation Act of 2003) apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by any Seller Entities, (ii) executed or entered into a closing agreement pursuant to Section 7121 of the Code or any similar provision of Law with respect to Seller Entities, or (iii) granted to any Person any power of attorney that is currently in force with respect to any Tax matter.

 

(p)    No Seller Entity has, or ever had, a permanent establishment in any country other than the United States, or has engaged in a trade or business in any country other than the United States that subjected it to tax in such country.

 

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For purposes of this Section 4.8, any reference to the Seller or any Seller Entity shall be deemed to include any Person which merged with or was liquidated into or otherwise combined with the Seller or a Seller Entity.

 

4.9   Allowance for Loan Losses; Loan and Investment Portfolio, etc.

 

(a)       The Seller’s allowance for loan, lease, or credit losses (the “ Allowance ”) shown on the balance sheets of the Seller included in the most recent Seller Financial Statements dated prior to the date of this Agreement was, and the Allowance shown on the balance sheets of the Seller included in Seller Financial Statements as of dates subsequent to the execution of this Agreement will be, as of the dates thereof, adequate (within the meaning of GAAP and applicable regulatory requirements or guidelines) to provide for all known or reasonably anticipated losses relating to or inherent in the loan, lease and securities portfolios (including accrued interest receivables, letters of credit, and commitments to make loans or extend credit), by Seller Entities as of the dates thereof.  Seller Financial Statements fairly present the values of all loans, leases, tangible and intangible assets and liabilities, and any impairments thereof on the bases set forth therein.

 

(b)      As of the date hereof, all loans, discounts and leases (in which any Seller Entity is lessor) reflected on Seller Financial Statements were in all material respects, and with respect to the consolidated balance sheets delivered as of the dates subsequent to the execution of this Agreement will in all material respects be as of the dates thereof, (a) at the time and under the circumstances in which made, made for good, valuable and adequate consideration in the ordinary course of business and are the legal and binding obligations of the obligors thereof, (b) evidenced by genuine notes, agreements, or other evidences of indebtedness, and (c) to the extent secured, have been secured, to the Knowledge of the Seller, by valid liens and security interests which have been perfected.  Accurate lists of all loans, discounts and financing leases as of July 31, 2008 and on a monthly basis thereafter, and of the investment portfolios of each Seller Entity as of such date, have been and will be made available to the Buyer concurrently with the Seller Disclosure Memorandum.  Except as specifically set forth in Section 4.9(b) of the Seller Disclosure Memorandum, neither the Seller nor the Bank is a party to any written or oral loan agreement, note, or borrowing arrangement, including any loan guaranty, that was, as of the most recent month-end (i) delinquent by more than 30 days in the payment of principal or interest, (ii) to the Seller’s Knowledge, otherwise in material default for more than 30 days, (iii) classified as “substandard,” “doubtful,” “loss,” “other assets especially mentioned” or any comparable classification by the Seller or by any applicable Regulatory Authority, (iv) an obligation of any director, executive officer or 10% shareholder of any Seller Entity who is subject to Regulation O of the Federal Reserve Board (12 C.F.R. Part 215), or any person, corporation or enterprise controlling, controlled by or under common control with any of the foregoing, or (v) in material violation of any Law.

 

(c)       Section 4.9 of the Seller Disclosure Memorandum includes a listing of all securities owned, of record or beneficially, by any of the Seller Entities as of June 30, 2008. All securities owned, of record or beneficially, by any of the Seller Entities as of the date hereof are held free and clear of all mortgages, liens, pledges, encumbrances or any other restriction or rights of any other person or entity, whether contractual or statutory (other than customary pledges to secure public funds deposits, and sales of securities under agreements to repurchase, entered into by the Seller in the ordinary course of its business with its customers, and restrictions imposed by and the rights of the issuers of such securities), which would materially impair the ability of any of the Seller Entities to dispose freely of any such security and/or otherwise to realize the benefits of ownership at any time. There are no voting trusts or other agreements or undertakings to which any of the Seller Entities is a party with respect to the voting of any such securities.  With respect to all repurchase agreements under which any Seller Entity has “purchased” securities under agreement to resell, it has a valid, perfected first lien or security interest in the government securities or other collateral securing the repurchase agreement, and the value of the collateral securing each such repurchase agreement equals or exceeds the amount of the debt owed to it

 

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which is secured by such collateral. Since June 30, 2008, there has been no material deterioration or adverse change in the quality, or any material decrease in the value, of the Seller Entities securities portfolios as a whole.

 

4.10                Assets.

 

(a)       To the Seller’s Knowledge, except as disclosed in Section 4.10 of the Seller Disclosure Memorandum or as disclosed or reserved against in Seller Financial Statements delivered prior to the date of this Agreement, Seller Entities have good and marketable title, free and clear of all Liens, to all of their respective Assets that they own.  In addition, to the Seller’s Knowledge, all tangible properties used in the businesses of Seller Entities are in good condition, reasonable wear and tear excepted, and are usable in the ordinary course of business consistent with the Seller’s past practices.

 

(b)      All Assets which are material to the Seller’s business, held under leases or subleases by any of Seller Entities, are held under valid Contracts enforceable in accordance with their respective terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar Laws affecting the enforcement of creditors’ rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought), and each such Contract is in full force and effect.

 

(c)       Seller Entities currently maintain insurance, including bankers’ blanket bonds, with insurers of recognized financial responsibility, in amounts, scope, and coverage that are reasonable and customary for North Carolina community banks with under $750 million in assets.  None of Seller Entities has received notice from any insurance carrier that (i) any policy of insurance will be canceled or that coverage thereunder will be reduced or eliminated, (ii) premium costs with respect to such policies of insurance will be substantially increased, or (iii) similar coverage will be denied or limited or not extended or renewed with respect to any Seller Entity, any act or occurrence, or that any Asset, officer, director, employee or agent of any Seller Entity will not be covered by such insurance or bond.  There are presently no claims for amounts exceeding $25,000 individually or in the aggregate pending under such policies of insurance or bonds, and no notices of claims in excess of such amount have been given by any Seller Entity under such policies.  The Seller has made no claims, and no claims are contemplated to be made, under its directors’ and officers’ errors and omissions or bankers’ blanket bond.

 

(d)      The Assets of Seller Entities include all Assets required by Seller Entities to operate the business of Seller Entities as presently conducted.

 

4.11                Intellectual Property.

 

Except as disclosed in Section 4.11 of the Seller Disclosure Memorandum, each Seller Entity owns or has a license to use all of the Intellectual Property used by such Seller Entity in the course of its business, including sufficient rights in each copy possessed by each Seller Entity.  Each Seller Entity is the owner of or has a license, with the right to sublicense, to any Intellectual Property sold or licensed to a third party by such Seller Entity in connection with such Seller Entity’s business operations, and such Seller Entity has the right to convey by sale or license any Intellectual Property so conveyed.  To Seller’s Knowledge, no Seller Entity is in Default under any of its Intellectual Property licenses.  To the Seller’s Knowledge, no proceedings have been instituted, or are pending or to the Knowledge of the Seller threatened, which challenge the rights of any Seller Entity with respect to Intellectual Property used, sold, or licensed by such Seller Entity in the course of its business, nor has any person claimed or alleged any rights to such Intellectual Property.  To the Seller’s Knowledge, the conduct of the business of Seller Entities does not infringe any Intellectual Property of any other person.  Except as disclosed in Section 4.11 of the

 

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Seller Disclosure Memorandum, no Seller Entity is obligated to pay any recurring royalties to any Person with respect to any such Intellectual Property.  Except as disclosed in Section 4.11 of the Seller Disclosure Memorandum, the Seller does not have any Contracts with its directors, officers, or employees which require such officer, director, or employee to assign any interest in any Intellectual Property to a Seller Entity and to keep confidential any trade secrets, proprietary data, customer information, or other business information of a Seller Entity, and to the Seller’s Knowledge, no such officer, director, or employee is party to any Contract with any Person other than a Seller Entity which requires such officer, director or employee to assign any interest in any Intellectual Property to any Person other than a Seller Entity or to keep confidential any trade secrets, proprietary data, customer information, or other business information of any Person other than a Seller Entity.  To the Seller’s Knowledge, no officer, director, or employee of any Seller Entity is party to any confidentiality, non-solicitation, non-competition, or other Contract for the benefit of any Person other than a Seller Entity which restricts or prohibits such officer, director, or employee from engaging in activities competitive with any Person, including any Seller Entity.

 

4.12                Environmental Matters.

 

(a)       The Seller has delivered, or caused to be delivered or made available to the Buyer, true and complete copies of, all environmental site assessments, test results, analytical data, boring logs, permits for storm water, wetlands fill, or other environmental permits for construction of any building, parking lot or other improvement, and other environmental reports and studies in the possession of any Seller Entity relating to its Participation Facilities and Operating Properties.  To the Seller’s Knowledge, there are no material violations of Environmental Laws on properties that secure loans made by the Seller or Bank.

 

(b)      To the Seller’s Knowledge, each Seller Entity, its Participation Facilities, and its Operating Properties are, and have been, in compliance with all Environmental Laws, except for violations which are not reasonably likely to have, individually or in the aggregate, a Seller Material Adverse Effect.

 

(c)       There is no Litigation pending, and to the Seller’s Knowledge there is no environmental enforcement action, investigation, or litigation threatened before any Governmental Authority or other forum in which any Seller Entity or any of its Operating Properties or Participation Facilities (or the Seller in respect of such Operating Property or Participation Facility) has been or, with respect to threatened Litigation, may be named as a defendant (i) for alleged noncompliance (including by any predecessor) with or Liability under any Environmental Law or (ii) relating to the release, discharge, spillage, or disposal into the environment of any Hazardous Material, whether or not occurring at, on, under, adjacent to, or affecting (or potentially affecting) a site currently or formerly owned, leased, or operated by any Seller Entity or any of its Operating Properties or Participation Facilities.

 

(d)      During the period of (i) any Seller Entity’s ownership or operation of any of their respective current properties, (ii) any Seller Entity’s participation in the management of any Participation Facility, or (iii) any Seller Entity’s holding of a security interest in any Operating Property, there have been no releases, discharges, spillages, or disposals of Hazardous Material in, on, under, adjacent to, or affecting (or potentially affecting) such properties.  Prior to the period of (i) any Seller Entity’s ownership or operation of any of their respective current properties, (ii) any Seller Entity’s participation in the management of any Participation Facility, or (iii) any Seller Entity’s holding of a security interest in any Operating Property, to the Seller’s Knowledge, there were no releases, discharges, spillages, or disposals of Hazardous Material in, on, under, or affecting any such property, Participation Facility or Operating Property.  During and prior to the period of (i) the Seller Entity’s ownership or operation of any of their respective current properties, (ii) any Seller Entity’s participation in the management of any Participation Facility, or (iii) any Seller Entity’s holding of a security interest in any Operating Property, there have been no violations of any Environmental Laws, including but not limited to unauthorized alterations of wetlands.

 

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4.13                Compliance with Laws.

 

(a)       The Seller is a bank holding company duly registered and in good standing as such with the Federal Reserve.

 

(b)    Compliance with Permits, Laws and Orders.

 

(i)     To the Seller’s Knowledge, each of Seller Entities has in effect all Permits and has made all filings, applications, and registrations with Governmental Authorities that are required for it to own, lease, or operate its assets and to carry on its business as now conducted, and there has occurred no Default under any such Permit applicable to their respective businesses or employees conducting their respective businesses.

 

(ii)    To the Seller’s Knowledge, none of Seller Entities is in Default under any Laws or Orders applicable to its business or employees conducting its business.

 

(iii)   None of Seller Entities has received any notification or communication from any Governmental Authority (A) asserting that the Seller or any of its Subsidiaries is in Default under any of the Permits, Laws, or Orders which such Governmental Authority enforces, (B) threatening to revoke any Permits, or (C) requiring the Seller or any of its Subsidiaries (x) to enter into or consent to the issuance of a cease and desist order, formal agreement, directive, commitment, or memorandum of understanding, or (y) to adopt any resolution of its board of directors or similar undertaking.

 

(iv)   There (A) is no unresolved violation, criticism, or exception by any Governmental Authority with respect to any report or statement relating to any examinations or inspections of the Seller or any of its Subsidiaries, (B) are no notices or correspondence received by the Seller with respect to formal or informal inquiries by, or disagreements or disputes with, any Governmental Authority with respect to the Seller’s or any of the Seller’s Subsidiaries’ business, operations, policies, or procedures since its inception, and (C) is not any pending or, to the Seller’s Knowledge, threatened, nor has any Governmental Authority indicated an intention to conduct any, investigation, or review of it or any of its Subsidiaries.

 

(v)    None of the Seller Entities nor any of its directors, officers, employees, or Representatives acting on its behalf has offered, paid, or agreed to pay any Person, including any Government Authority, directly or indirectly, any thing of value for the purpose of, or with the intent of obtaining or retaining any business in violation of applicable Laws, including (1) using any corporate funds for any unlawful contribution, gift, entertainment, or other unlawful expense relating to political activity, (2) making any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds, (3) violating any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (4) making any bribe, rebate, payoff, influence payment, kickback, or other unlawful payment.

 

(vi)   Each Seller Entity has complied in all material respects with all requirements of Law under the Bank Secrecy Act and the USA Patriot Act, and each Seller Entity has timely filed all reports of suspicious activity, including those required under 12 C.F.R. § 353.3.

 

4.14                Labor Relations.

 

(a)       No Seller Entity is the subject of any Litigation asserting that it or any other Seller Entity has committed an unfair labor practice (within the meaning of the National Labor Relations Act or comparable state Law) or other violation of state or federal labor Law or seeking to compel it or any other Seller Entity to bargain with any labor organization or other employee representative as to wages or conditions of employment, nor is any Seller Entity party to any collective bargaining agreement or subject to any bargaining order, injunction, or other Order relating to the Seller’s relationship or dealings with its employees, any labor organization or any other employee representative.  There is no strike, slowdown, lockout, or other job action or labor dispute involving any Seller Entity pending or threatened and there

 

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have been no such actions or disputes in the past five years.  To the Seller’s Knowledge, there has not been any attempt by any Seller Entity employees or any labor organization or other employee representative to organize or certify a collective bargaining unit or to engage in any other union organization activity with respect to the workforce of any Seller Entity.  Except as disclosed in Section 4.14 of the Seller Disclosure Memorandum, employment of each employee and the engagement of each independent contractor of each Seller Entity is terminable at will by the relevant Seller Entity without (i) any penalty, liability, or severance obligation incurred by any Seller Entity, (ii) and in all cases without prior consent by any Governmental Authority.  No Seller Entity will owe any amounts to any of its employees or independent contractors as of the Closing Date, including any amounts incurred for any wages, bonuses, vacation pay, sick leave, contract notice periods, change of control payments, or severance obligations except as disclosed in Section 4.14 of the Seller Disclosure Memorandum.

 

(b)      To the Seller’s Knowledge, all of the employees employed in the United States are either United States citizens or are legally entitled to work in the United States under the Immigration Reform and Control Act of 1986, as amended, other United States immigration Laws and the Laws related to the employment of non-United States citizens applicable in the state in which the employees are employed .

 

(c)       No Seller Entity has effectuated (i) a “plant closing” (as defined in the Worker Adjustment and Retraining Notification Act (the “ WARN Act ”)) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of any Seller Entity; or (ii) a “mass layoff” (as defined in the WARN Act) affecting any site of employment or facility of any Seller Entity; and no Seller Entity has been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any similar state or local Law.  None of any Seller Entity’s employees has suffered an “employment loss” (as defined in the WARN Act) since six months prior to the Closing Date.

 

(d)      Section 4.14 of the Seller Disclosure Memorandum contains a list of all independent contractors of each Seller Entity (separately listed by Seller Entity) and each such Person meets the standard for an independent contractor under all Laws (including Treasury Regulations under the Code and federal and state labor and employment Laws) and no such Person is an employee of any Seller Entity under any applicable Law.

 

4.15                Employee Benefit Plans.

 

(a)       The Seller has disclosed in Section 4.15 of the Seller Disclosure Memorandum, and has delivered or made available to the Buyer prior to the execution of this Agreement, (i) copies of each Employee Benefit Plan currently adopted, maintained by, sponsored in whole or in part by, or contributed or required to be contributed to by any Seller Entity or ERISA Affiliate thereof for the benefit of employees, former employees, retirees, dependents, spouses, directors, independent contractors, or other beneficiaries or under which employees, retirees, former employees, dependents, spouses, directors, independent contractors, or other beneficiaries are eligible to participate (each, a “ Seller Benefit Plan ,” and collectively, the “ Seller Benefit Plans ”) and (ii) a list of each Employee Benefit Plan that is not identified in (i) above (e.g., former Employee Benefit Plans) but for which any Seller Entity or ERISA Affiliate has or reasonably could have any obligation or Liability.  Any of the Seller Benefit Plans which is an “employee pension benefit plan,” as that term is defined in ERISA Section 3(2), is referred to herein as a “ Seller ERISA Plan .”  Each Seller ERISA Plan which is also a “defined benefit plan” (as defined in Code Section 414(j)) is referred to herein as a “ Seller Pension Plan ,” and is identified as such in Section 4.15 of the Seller Disclosure Memorandum.

 

(b)      The Seller has delivered or made available to the Buyer prior to the execution of this Agreement (i) all trust agreements or other funding arrangements for all Employee Benefit Plans, (ii) all determination letters, rulings, opinion letters, information letters, or advisory opinions issued by the United States Internal Revenue Service (“ IRS ”), the United States Department of Labor (“ DOL ”) or the

 

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Pension Benefit Guaranty Corporation during this calendar year or any of the preceding three calendar years, (iii) any filing or documentation (whether or not filed with the IRS) where corrective action was taken in connection with the IRS EPCRS program set forth in Revenue Procedure 2001-17 (or its predecessor or successor rulings), (iv) annual reports or returns, audited or unaudited financial statements, actuarial reports, and valuations prepared for any Employee Benefit Plan for the current plan year and the three preceding plan years, and (v) the most recent summary plan descriptions and any material modifications thereto.

 

(c)       Each Seller Benefit Plan is in material compliance with the terms of such Seller Benefit Plan, in material compliance with the applicable requirements of the Code, in material compliance with the applicable requirements of ERISA, and in material compliance with any other applicable Laws.  Each Seller ERISA Plan which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter or opinion from the IRS that is still in effect and applies to the Seller ERISA Plan as amended and as administered or, within the time permitted under Code Section 401(b), has timely applied for a favorable determination letter which when issued will apply retroactively to the Seller ERISA Plan as amended and as administered.  The Seller is not aware of any circumstances likely to result in revocation of any such favorable determination letter.  The Seller has not received any communication (written or unwritten) from any Governmental Authority questioning or challenging the compliance of any Seller Benefit Plan with applicable Laws.  No Seller Benefit Plan is currently being audited by any Governmental Authority for compliance with applicable Laws or has been audited with a determination by any Governmental Authority that the Employee Benefit Plan failed to comply with applicable Laws.

 

(d)      There has been no material oral or written representation or communication with respect to any aspect of the Employee Benefit Plans made to employees of the Seller which is not in accordance with the written or otherwise preexisting terms and provisions of such plans.  To the Seller’s Knowledge, neither the Seller nor any administrator or fiduciary of any Seller Benefit Plan (or any agent of any of the foregoing) has engaged in any transaction, or acted or failed to act in any manner, which could subject the Seller or the Buyer to any direct or indirect Liability (by indemnity or otherwise) for breach of any fiduciary, co-fiduciary, or other duty under ERISA.  To the Seller’s Knowledge, there are no unresolved claims or disputes under the terms of, or in connection with, the Seller Benefit Plans other than claims for benefits which are payable in the ordinary course of business and no action, proceeding, prosecution, inquiry, hearing, or investigation has been commenced with respect to any Seller Benefit Plan.

 

(e)       All Seller Benefit Plan documents and annual reports or returns, audited or unaudited financial statements, actuarial valuations, summary annual reports, and summary plan descriptions issued with respect to the Seller Benefit Plans are correct and complete in all material respects, have been timely filed with the IRS or the DOL, and distributed to participants of the Seller Benefit Plans (as required by Law), and there have been no changes in the information set forth therein.

 

(f)       To the Seller’s Knowledge, no “ party in interest ” (as defined in ERISA Section 3(14)) or “ disqualified person ” (as defined in Code Section 4975(e)(2)) of any Seller Benefit Plan has engaged in any nonexempt “ prohibited transaction ” (described in Code Section 4975(c) or ERISA Section 406).

 

(g)      No Seller Entity has, or ever has had, a Seller Pension Plan, or any plan that is or was subject to Code Section 412 or ERISA Section 302 or Title IV of ERISA.  There is no Lien nor is there expected to be a Lien under Code Section 412(n) or ERISA Section 302(f) or Tax under Code Section 4971 applicable to any Seller Entity or any Seller Entity’s Assets.  Neither the Seller nor any of its ERISA Affiliates is subject to or can reasonably be expected to become subject to a Lien under Code Section 401(a)(29).  All premiums required to be paid under ERISA Section 4006, if any, have been timely paid by the Seller and by its ERISA Affiliates.

 

(h)      No Liability under Title IV of ERISA has been or is expected to be incurred by the Seller or its ERISA Affiliates and no event has occurred that could reasonably result in Liability under Title IV of

 

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ERISA being incurred by the Seller or its ERISA Affiliates with respect to any ongoing, frozen, terminated, or other single-employer plan of the Seller or the single-employer plan of any ERISA Affiliate.  There has been no “ reportable event ,” within the meaning of ERISA Section 4043, for which the 30-day reporting requirement has not been waived by any ongoing, frozen, terminated or other single employer plan of the Seller or of an ERISA Affiliate.

 

(i)        Except as disclosed in Section 4.15 of the Seller Disclosure Memorandum, no Seller Entity has any Liability for retiree health or life benefits under any of the Seller Benefit Plans, or other plan or arrangement, and there are no restrictions on the rights of such Seller Entity to amend or terminate any such retiree health or benefit Plan without incurring any Liability thereunder except to the extent required under Part 6 of Title I of ERISA or Code Section 4980B.  No Tax under Code Sections 4980B or 5000 has been incurred with respect to any Seller Benefit Plan, or other plan or arrangement, and no circumstance exists which could give rise to such Taxes.

 

(j)        Except as disclosed in Section 4.15 of the Seller Disclosure Memorandum, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including severance, unemployment compensation, golden parachute, or otherwise) becoming due to any director or any employee of any Seller Entity from any Seller Entity under any Seller Benefit Plan or otherwise, (ii) increase any benefits otherwise payable under any Seller Benefit Plan, or (iii) result in any acceleration of the time of payment or vesting of any such benefit, or any benefit under any life insurance owned by any Seller Entity or the rights of any Seller Entity in, to or under any insurance on the life of any current or former officer, director, or employee of any Seller Entity, or change any rights or obligations of any Seller Entity with respect to such insurance.

 

(k)       Section 4.15 of the Seller Disclosure Memorandum sets forth the following:  (A) the maximum amount of all payments and benefits to which each individual set forth on such Seller Disclosure Memorandum is entitled to receive, pursuant to all employment, salary continuation, bonus, change in control, and all other agreements, plans and arrangements, in connection with a termination of employment before or following, or otherwise in connection with or contingent upon, the transactions contemplated under this Agreement (each such total amount in respect of each such individual, the “ Change in Control Benefit ”), other than the payment any such individual shall otherwise be entitled to receive as a gross-up payment in respect of any excise tax imposed on the individual pursuant to Section 4999 of the Code as calculated pursuant to the applicable agreement (each such payment, a “ Gross-Up Payment ”); (B) the amount of any Gross-Up Payment payable to each such individual; and (C) the maximum aggregate amount of all Change in Control Benefits and Gross-Up Payments.

 

(l)        Except as disclosed in Section 4.15 of the Seller Disclosure Memorandum, no Seller Benefit Plan is or has been funded by, associated with, or related to a “voluntary employee’s beneficiary association” within the meaning of Section 501(c)(9) of the Code, a “welfare benefit fund” within the meaning of Section 419 of the Code, a “qualified asset account” within the meaning of Section 419A of the Code or a “multiple employer welfare arrangement” within the meaning of Section 3(40) of ERISA.  The actuarial present values of all accrued deferred compensation entitlements (including entitlements under any executive compensation, supplemental retirement, or employment agreement) of employees and former employees of any Seller Entity and their respective beneficiaries, other than entitlements accrued pursuant to funded retirement plans, whether or not subject to the provisions of Code Section 412 or ERISA Section 302, have been fully reflected on Seller Financial Statements to the extent required by and in accordance with GAAP.

 

(m)      Each Seller Benefit Plan which is a “nonqualified deferred compensation plan” (within the meaning of Section 409A of the Code) has been operated in compliance with Section 409A of the Code and the guidance issued by the IRS with respect to such plans or is not required to comply therewith due to its grandfathered status under Section 409A of the Code.

 

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(n)      All individuals who render services to any Seller Entity and who are authorized to participate in a Seller Benefit Plan pursuant to the terms of such Seller Benefit Plan are in fact eligible to and authorized to participate in such Seller Benefit Plan.

 

(o)      Neither the Seller nor any of its ERISA Affiliates has had an “obligation to contribute” (as defined in ERISA Section 4212) to, or other obligations or Liability in connection with, a “multiemployer plan” (as defined in ERISA Sections 4001(a)(3) or 3(37)(A)).

 

(p)      Except as disclosed in Section 4.15 of the Seller Disclosure Memorandum, there are no payments or changes in terms due to any insured person as a result of this Agreement, the Merger or the transactions contemplated herein, under any bank-owned, corporate-owned split dollar life insurance, other life insurance, or similar arrangement or Contract, and the Successor Corporation shall, upon and after the Effective Time, succeed to and have all the rights in, to and under such life insurance Contracts as the Seller presently holds.  Each Seller Entity will, upon the execution and delivery of this Agreement, and will continue to have, notwithstanding this Agreement or the consummation of the transaction contemplated hereby, all ownership rights and interest in all corporate or bank-owned life insurance.

 

4.16                Material Contracts.

 

(a)       Except as disclosed in Section 4.16 of the Seller Disclosure Memorandum or otherwise reflected in Seller Financial Statements, none of Seller Entities, nor any of their respective Assets, businesses, or operations, is a party to, or is bound or affected by, or receives benefits under, (i) any employment, severance, termination, consulting, or retirement Contract providing for aggregate payments to any Person in any calendar year in excess of $25,000, (ii) any Contract relating to the borrowing of money by any Seller Entity or the guarantee by any Seller Entity of any such obligation (other than Contracts evidencing the creation of deposit liabilities, purchases of federal funds, advances from the Federal Reserve Bank or Federal Home Loan Bank, entry into repurchase agreements fully secured by U.S. government securities or U.S. government agency securities, advances of depository institution Subsidiaries incurred in the ordinary course of the Seller’s business, and trade payables and Contracts relating to borrowings or guarantees made in the ordinary course of the Seller’s business), (iii) any Contract which prohibits or restricts any Seller Entity or any personnel of a Seller Entity from engaging in any business activities in any geographic area, line of business or otherwise in competition with any other Person, (iv) any Contract involving Intellectual Property (other than Contracts entered into in the ordinary course with customers or “shrink-wrap” software licenses), (v) any Contract relating to the provision of data processing, network communication, or other technical services to or by any Seller Entity, (vi) any Contract relating to the purchase or sale of any goods or services (other than Contracts entered into in the ordinary course of business and involving payments under any individual Contract or series of contracts not in excess of $25,000), (vii) any exchange-traded or over-the-counter swap, forward, future, option, cap, floor, or collar financial Contract, or any other interest rate or foreign currency protection Contract or any Contract that is a combination thereof not included on its balance sheet, and (viii) any other Contract that would be required to be filed as an exhibit to a Form 10-K filed by the Seller as of the date of this Agreement pursuant to the reporting requirements of the Exchange Act (together with all Contracts referred to in Sections 4.11 and 4.15(a), the “ Seller Contracts ” ).

 

(b)      With respect to each Seller Contract and except as disclosed in Section 4.16(b) of the Seller Disclosure Memorandum:  (i) the Contract is in full force and effect; (ii) no Seller Entity is in Default thereunder; (iii) no Seller Entity has repudiated or waived any material provision of any such Contract; (iv) no other party to any such Contract is, to the Seller’s Knowledge, in Default in any respect or has repudiated or waived any material provision thereunder; and (v) no consent which has not been or will not be obtained is required by a Contract for the execution, delivery, or performance of this Agreement, the consummation of the Merger or the other transactions contemplated hereby.  Section 4.16(b) of the Seller Disclosure Memorandum lists every Consent required by any Contract involving an amount in excess of $50,000.  All of the indebtedness of any Seller Entity for money borrowed is prepayable at any time by

 

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such Seller Entity without penalty, premium or charge, except as specified in Section 4.16(b) of the Seller Disclosure Memorandum.

 

4.17                Privacy of Customer Information.

 

(a)    Each Seller Entity is the sole owner of all individually identifiable personal information relating to an identifiable or identified natural person (“ IIPI ”), relating to customers, former customers, and prospective customers that will be transferred to the Buyer and Buyer Entities pursuant to this Agreement.

 

(b)    Each Seller Entity’s collection and use of such IIPI, the transfer of such IIPI to the Buyer and Buyer Entities, and the use of such IIPI by Buyer Entities as contemplated by this Agreement, complies with the Seller’s privacy policy, the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, and all other applicable privacy Laws, and any Seller Entity Contract and industry standards relating to privacy.

 

4.18                Legal Proceedings.

 

Except as disclosed in Section 4.18 of the Seller Disclosure Memorandum, there is no Litigation instituted or pending, or, to the Knowledge of the Seller, threatened (or unasserted but considered probable of assertion) against any Seller Entity, or to the Seller’s Knowledge, against any director, officer, employee, or agent of any Seller Entity in their capacities as such or with respect to any service to or on behalf of any Employee Benefit Plan or any other Person at the request of a Seller Entity or Employee Benefit Plan of any Seller Entity, or against any Asset, interest, or right of any of them, nor are there any Orders or judgments outstanding against any Seller Entity.  No claim for indemnity has been made or, to the Seller’s Knowledge, threatened by any director, officer, employee, independent contractor, or agent to any Seller Entity and to the Seller’s Knowledge, no basis for any such claim exists.

 

4.19                Reports.

 

Except as disclosed in Section 4.19 of the Seller Disclosure Memorandum, since July 1, 2003, each Seller Entity has timely filed all reports and statements, together with any amendments required to be made with respect thereto, that it was required to file with Governmental Authorities.  As of their respective dates, each of such reports and documents, including the financial statements, exhibits, and schedules thereto, complied in all material respects with all applicable Laws.  As of their respective dates, such reports and documents did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading.  Notwithstanding the foregoing provisions of this Section 4.19, Seller Entities may have made immaterial late filings, which are disclosed in Section 4.19 of the Seller Disclosure Memorandum.

 

4.20                Books and Records.

 

The Seller and each Seller Entity maintains accurate books and records reflecting its Assets and Liabilities and maintains proper and adequate internal accounting controls which provide assurance that (a) transactions are executed with management’s authorization; (b) transactions are recorded as necessary to permit preparation of the consolidated financial statements of the Seller and to maintain accountability for the Seller’s consolidated Assets; (c) access to the Seller’s Assets is permitted only in accordance with management’s authorization; (d) the reporting of the Seller’s Assets is compared with existing Assets at regular intervals; and (e) accounts, notes, and other receivables and inventory are recorded accurately, and proper and adequate procedures are implemented to effect the collection thereof on a current and timely basis.

 

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4.21                Loans to Executive Officers and Directors.

 

Except as disclosed in Section 4.21 of the Seller Disclosure Memorandum, the Seller has not, since its inception, extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof) of the Seller, except as permitted by Section 13(k) of the Exchange Act and Federal Reserve Regulation O.  Section 4.21 of the Seller Disclosure Memorandum identifies any loan or extension of credit maintained by the Seller after January 1, 2003 to which the second sentence of Section 13(k)(1) of the Exchange Act applies or would apply if the Seller were subject to such Section.

 

4.22                Certain Actions.

 

No Seller Entity or, to the Seller’s Knowledge, any Affiliate thereof has taken or agreed to take any action or has any Knowledge of any fact or circumstance that is reasonably likely to materially impede or delay receipt of any required Consents or result in the imposition of a condition or restriction of the type referred to in the last sentence of Section 8.1(b).

 

4.23                State Takeover Laws.

 

Except as disclosed in Section 4.23 of the Seller Disclosure Memorandum, each Seller Entity has taken all necessary action, if any, to exempt the transactions contemplated by this Agreement from, or if necessary to challenge the validity or applicability of, any applicable “moratorium,” “fair price,” “business combination,” “control share,” or other anti-takeover Laws, (collectively, “ Takeover Laws ”).

 

4.24                Brokers and Finders; Opinion of Financial Advisor.

 

Except for Seller Financial Advisor, neither the Seller nor its Subsidiaries, or any of their respective officers, directors, employees, or Representatives, has employed any broker, finder, or investment banker or incurred any Liability for any financial advisory fees, investment bankers fees, brokerage fees, commissions, or finder’s or other such fees in connection with this Agreement or the transactions contemplated hereby.  The Seller has received the written opinion of Seller Financial Advisor, dated the date of this Agreement, to the effect that the consideration to be received in the Merger by the holders of Seller Common Stock is fair, from a financial point of view, to such holders, a signed copy of which has been or will be delivered to the Buyer.

 

4.25                Board Recommendation.

 

The board of directors of the Seller, at a meeting duly called and held, has by unanimous vote of the directors present (i) determined that this Agreement and the transactions contemplated hereby, including the Merger and the transactions contemplated hereby and thereby, taken together, are fair to and in the best interests of the Seller’s shareholders and (ii) resolved, subject to the terms of this Agreement, to recommend that the holders of the shares of Seller Common Stock approve this Agreement, the Merger, and the related transactions and to call and hold a meeting of the Seller’s shareholders to consider this Agreement, the Merger, and the related transactions.

 

4.26                Statements True and Correct.

 

(a)       No statement, certificate, instrument, or other writing furnished or to be furnished by any Seller Entity or any Affiliate thereof to the Buyer pursuant to this Agreement or any other document, agreement, or instrument referred to herein contains or will contain any untrue statement of material fact or will omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

 

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(b)      None of the information supplied or to be supplied by any Seller Entity or any Affiliate thereof for inclusion in the Registration Statement to be filed by the Buyer with the SEC will, when the Registration Statement becomes effective, be false or misleading with respect to any material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.  None of the information supplied or to be supplied by any Seller Entity or any Affiliate thereof for inclusion in any Joint Proxy Statement/Prospectus to be mailed to the Seller’s and the Buyer’s shareholders in connection with the Seller’s and Buyer’s Shareholders’ Meetings, and any other documents to be filed by any Seller Entity or any Affiliate thereof with the SEC or any other Regulatory Authority in connection with the transactions contemplated hereby, will, at the respective time such documents are filed, and with respect to the Joint Proxy Statement/Prospectus, when first mailed to the shareholders of the Seller be false or misleading with respect to any material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or, in the case of the Joint Proxy Statement/Prospectus or any amendment thereof or supplement thereto, at the time of the Seller’s Shareholders’ Meeting be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for the Seller’s Shareholders’ Meeting.

 

(c)       All documents that any Seller Entity or any Affiliate thereof is responsible for filing with any Governmental Authority in connection with the transactions contemplated hereby will comply as to form in all material respects with the provisions of applicable Law.

 

4.27                Delivery of Seller Disclosure Memorandum.

 

The Seller has delivered to the Buyer a complete Seller Disclosure Memorandum.

 

ARTICLE 5  
REPRESENTATIONS AND WARRANTIES OF BUYER

 

The Buyer represents and warrants to the Seller, except as set forth on the Buyer Disclosure Memorandum with respect to each such Section below, as follows:

 

5.1 Organization, Standing, and Power.

 

The Buyer is a corporation duly organized, validly existing, and in good standing under the Laws of the State of North Carolina and is a bank holding company within the meaning of the BHCA.  Yadkin Valley Bank and Trust Company is a banking corporation duly registered, validly existing and in good standing under the laws of the State of North Carolina.  Each of the Buyer and Yadkin Valley Bank and Trust Company has the corporate power and authority to carry on its business as now conducted and to own, lease, and operate its Assets.  Each of the Buyer and Yadkin Valley Bank and Trust Company is duly qualified or licensed to transact business as a foreign corporation in good standing in the states of the United States and foreign jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions where the failure to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a Buyer Material Adverse Effect. Yadkin Valley Bank and Trust Company is an “insured institution” as defined in the Federal Deposit Insurance Act and applicable regulations thereunder, and the deposits held by Yadkin Valley Bank and Trust Company are insured, up to the applicable limits, by the FDIC’s Deposit Insurance Fund.

 

5.2 Authority of Buyer; No Breach By Agreement.

 

(a)       The Buyer has the corporate power and authority necessary to execute, deliver, and, other than with respect to the Merger, perform this Agreement, and with respect to the Merger, upon the approval of the Merger, as required by Sections 8.1(b) and 8.1(c) and by the Buyer’s shareholders in accordance with

 

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this Agreement and the NCBCA, to perform its obligations under this Agreement and to consummate the transactions contemplated hereby.  The execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated herein, including the Merger, have been duly and validly authorized by all necessary corporate action in respect thereof on the part of the Buyer, subject to the approval of this Agreement by the holders of a majority of the outstanding shares of the Buyer Common Stock, which is the only Buyer shareholder vote required for approval of this Agreement and consummation of the Merger.  Subject to any necessary approvals referred to in Sections 8.1(b) and 8.1(c) and receipt of such requisite shareholder approval, this Agreement represents a legal, valid, and binding obligation of the Buyer, enforceable against the Buyer in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar Laws affecting the enforcement of creditors’ rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought).

 

(b)      Neither the execution and delivery of this Agreement by the Buyer, nor the consummation by the Buyer and Yadkin Valley Bank and Trust Company of the transactions contemplated hereby, nor compliance by the Buyer and Yadkin Valley Bank and Trust Company with any of the provisions hereof, will (i) conflict with or result in a breach of any provision of the Buyer’s articles of incorporation or bylaws or the articles of incorporation or bylaws of Yadkin Valley Bank and Trust Company or any resolution adopted by the board of directors or the shareholders of any Buyer Entity, or (ii) except as disclosed in Section 5.2 of the Buyer Disclosure Memorandum, constitute or result in a Default under, or require any Consent pursuant to, or result in the creation of any Lien on any Asset of any Buyer Entity under, any Contract or Permit of any Buyer Entity or, (iii) subject to receipt of the requisite Consents referred to in Section 8.1(b) and (c), constitute or result in a Default under, or require any Consent pursuant to, any Law or Order applicable to any Buyer Entity or any of their respective material Assets (including any Buyer Entity or any Buyer Entity becoming subject to or liable for the payment of any Tax on any of the Assets owned by any Buyer Entity or any Buyer Entity being reassessed or revalued by any Regulatory Authority).

 

  (c)       Other than in connection or compliance with the provisions of the Securities Laws and applicable state corporate and securities Laws, and other than Consents required from Regulatory Authorities, and other than notices to or filings with the IRS or the Pension Benefit Guaranty Corporation with respect to any employee benefit plans, no notice to, filing with, or Consent of, any Governmental Authority is necessary for the consummation by the Buyer of the Merger and the other transactions contemplated in this Agreement.

 

5.3   Capital Stock.

 

(a)       The authorized capital stock of the Buyer consists of 20,000,000 shares of the Buyer Common Stock, of which 11,531,919 shares are issued and outstanding as of the date of this Agreement, 482,165 shares are reserved for issuance pursuant to outstanding Buyer Options, and 1,000,000 shares of the Buyer preferred stock, of which no shares are issued and outstanding as of the date of this Agreement.  All of the issued and outstanding shares of capital stock of the Buyer are duly and validly issued and outstanding and are fully paid and nonassessable.  None of the outstanding shares of capital stock of the Buyer has been issued in violation of any preemptive rights of the current or past shareholders of the Buyer.

 

(b)      Except as specifically set forth in this Section 5.3, there are no shares of the Buyer capital stock or other equity securities of the Buyer outstanding and there are no outstanding Rights with respect to any the Seller securities or any right or privilege (whether pre-emptive or contractual) capable of becoming a Contract or Right for the purchase, subscription, exchange or issuance of any securities of the Buyer.

 

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5.4   Buyer Subsidiaries.

 

The Buyer has no Subsidiaries except as set forth in Section 5.4 of the Buyer Disclosure Memorandum and the Buyer owns all of the equity interests in each of its Subsidiaries.  No capital stock (or other equity interest) of any such Subsidiary is or may become required to be issued (other than to another Buyer Entity) by reason of any Rights, and there are no Contracts by which any such Subsidiary is bound to issue (other than to another Buyer Entity) additional shares of its capital stock (or other equity interests) or Rights or by which any Buyer Entity is or may be bound to transfer any shares of the capital stock (or other equity interests) of any such Subsidiary (other than to another Buyer Entity).  There are no Contracts relating to the rights of any Buyer Entity to vote or to dispose of any shares of the capital stock (or other equity interests) of any such Subsidiary.  All of the shares of capital stock (or other equity interests) of each Subsidiary are fully paid and nonassessable and are owned directly or indirectly by the Buyer free and clear of any Lien (except, in the case of Yadkin Valley Bank and Trust Company, to the extent provided in Section 53- 42 of the North Carolina General Statutes).  Each Subsidiary is duly qualified or licensed to transact business as a foreign entity in good standing in the States of the United States and foreign jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions in which the failure to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a Buyer Material Adverse Effect.

 

5.5   Exchange Act Filings; Securities Offerings; Financial Statements.

 

(a)       Except as disclosed in Section 5.5 of the Buyer Disclosure Memorandum, the Buyer has timely filed and made available to the Seller all Exchange Act Documents required to be filed by the Buyer since January 1, 2003 (the “ the Buyer Exchange Act Reports ”).  The Buyer Exchange Act Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Laws and other applicable Laws and (ii) did not, at the time they were filed (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Buyer Exchange Act Reports or necessary in order to make the statements in such Buyer Exchange Act Reports not misleading.  Each offering or sale of securities by the Buyer (i) was either registered under the Securities Act or made pursuant to a valid exemption from registration, (ii) complied in all material respects with the applicable requirements of the Securities Laws and other applicable Laws, except for immaterial late “blue sky” filings, including disclosure and broker/dealer registration requirements, and (iii) was made pursuant to offering documents which did not, at the time of the offering (or, in the case of registration statements, at the effective date thereof) contain any untrue statement of a material fact or omit to state a material fact required to be stated in the offering documents or necessary in order to make the statements in such documents not misleading.  The Buyer’s principal executive officer and principal financial officer have made the certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act and the rules and regulations of the Exchange Act thereunder with respect to the Buyer Exchange Act Reports to the extent such rules or regulations applied at the time of the filing.  For purposes of the preceding sentence, “principal executive officer” and “principal financial officer” shall have the meanings given to such terms in the Sarbanes–Oxley Act.  Such certifications contain no qualifications or exceptions to the matters certified therein and have not been modified or withdrawn; and neither the Buyer nor any of its officers has received notice from any Regulatory Authority questioning or challenging the accuracy, completeness, content, form, or manner of filing or submission of such certifications.  No Buyer Subsidiary is required to file any Exchange Act Documents.

 

(b)      Each of the Buyer Financial Statements (including, in each case, any related notes) that are contained in the Buyer Exchange Act Reports, including any Seller Exchange Act Reports filed after the date of this Agreement until the Effective Time, complied, or will comply, as to form in all material respects with the Exchange Act, was, or will be, prepared in accordance with GAAP applied on a

 

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consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited interim statements, as permitted by Form 10-Q of the Exchange Act), fairly presented the consolidated financial position of the Buyer and Yadkin Valley Bank and Trust Company as of the respective dates and the consolidated results of operations and cash flows for the periods indicated, including the fair values of the assets and liabilities shown therein, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount or effect, and were certified to the extent required by the Sarbanes-Oxley Act.

 

(c)       The Buyer’s independent public accountants, which have expressed their opinion with respect to the Financial Statements of the Buyer and its Subsidiaries whether or not included in the Buyer’s Exchange Act Reports (including the related notes), are and have been throughout the periods covered by such Financial Statements (x) a registered public accounting firm (as defined in Section 2(a)(12) of the Sarbanes-Oxley Act) (to the extent applicable during such period), (y) “independent” with respect to the Buyer within the meaning of Regulation S-X, and (z) with respect to the Buyer, in compliance with subsections (g) through (l) of Section 10A of the Exchange Act and related Securities Laws.  Section 5.5(c) of the Buyer Disclosure Memorandum lists all non-audit services performed by the Buyer’s independent public accountants for the Buyer or Yadkin Valley Bank and Trust Company.

 

(d)    The Buyer maintains disclosure controls and procedures as required by Rule 13a-15 or 15d-15 under the Exchange Act, and such controls and procedures are effective to ensure that all material information relating to the Buyer and its Subsidiaries is made known on a timely basis to the Buyer’s principal executive officer and the Buyer’s principal financial officer.

 

5.6   Absence of Undisclosed Liabilities.

 

No Buyer Entity has any Liabilities required under GAAP to be set forth on a consolidated balance sheet or in the notes thereto that are reasonably likely to have, individually or in the aggregate, a Buyer Material Adverse Effect, except Liabilities which are (i) accrued or reserved against in the consolidated balance sheet of the Buyer as of June 30, 2008, included in the Buyer Financial Statements delivered prior to the date of this Agreement or reflected in the notes thereto, (ii) incurred in the ordinary course of business consistent with past practices, or (iii) incurred in connection with the transactions contemplated by this Agreement.  Section 5.6 of the Buyer Disclosure Memorandum lists, and the Buyer has attached and delivered to the Seller copies of the documentation creating or governing, all securitization transactions and “ off-balance sheet arrangements ” (as defined in Item 303(a)(4) of Regulation S-K of the Exchange Act) effected by the Buyer or its Subsidiaries other than letters of credit and unfunded loan commitments or credit lines.  Except as disclosed in Section 5.6 of the Buyer Disclosure Memorandum or as reflected on the Buyer’s balance sheet at June 30, 2008, no Buyer Entity is directly or indirectly liable, by guarantee, indemnity, or otherwise, upon or with respect to, or obligated, by discount or repurchase agreement or in any other way, to provide funds in respect to, or obligated to guarantee or assume any Liability of any Person for any amount in excess of $50,000 and any amounts, whether or not in excess of $50,000 that, in the aggregate, exceed $100,000.  Except (x) as reflected in the Buyer’s balance sheet at June 30, 2008 or liabilities described in any notes thereto (or liabilities for which neither accrual nor footnote disclosure is required pursuant to GAAP or any applicable Regulatory Authority) or (y) for liabilities incurred in the ordinary course of business since June 30, 2008 consistent with past practice or in connection with this Agreement or the transactions contemplated hereby, neither the Buyer nor any of its Subsidiaries has any Material Liabilities or obligations of any nature.

 

5.7   Absence of Certain Changes or Events.

 

Except as disclosed in the Buyer Financial Statements delivered prior to the date of this Agreement or as disclosed in Section 5.7 of the Buyer Disclosure Memorandum, (i) there have been no events, changes, or occurrences which have had, or are reasonably likely to have, individually or in the aggregate, a Buyer

 

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Material Adverse Effect, (ii)  none of the Buyer Entities has taken any action, or failed to take any action, prior to the date of this Agreement, which action or failure, if taken after the date of this Agreement, would represent or result in a material breach or violation of any of the covenants and agreements of the Buyer provided in this Agreement, and (iii) since December 31, 2007, the Buyer Entities have conducted their respective businesses in the ordinary course of business consistent with past practice.

 

5.8   Tax Matters.

 

(a)    All Buyer Entities have timely filed with the appropriate Taxing Authorities, all Tax Returns in all jurisdictions in which Tax Returns are required to be filed, and such Tax Returns are correct and complete in all material respects.  None of the Buyer Entities is the beneficiary of any extension of time within which to file any Tax Return.  All Taxes of the Buyer Entities (whether or not shown on any Tax Return) have been fully and timely paid.  There are no Liens for any Taxes (other than a Lien for current real property or ad valorem Taxes not yet due and payable) on any of the Assets of any Buyer Entity.  No claim has ever been made by an authority in a jurisdiction where any Buyer Entity does not file a Tax Return that such Buyer Entity may be subject to Taxes by that jurisdiction.

 

(b)    None of the Buyer Entities has received any notice of assessment or proposed assessment in connection with any Taxes, and there are no threatened or pending disputes, claims, audits, or examinations regarding any Taxes of any Buyer Entity or the assets of any Buyer Entity.  No officer or employee responsible for Tax matters of any Buyer Entity expects any Taxing Authority to assess any additional Taxes for any period for which Tax Returns have been filed.  No issue has been raised by a Taxing Authority in any prior examination of the Buyer which, by application of the same or similar principles, could be expected to result in a deficiency for any subsequent taxable period. None of the Buyer Entities has waived any statute of limitations in respect of any Taxes or agreed to a Tax assessment or deficiency.

 

(c)    Each Buyer Entity has complied in all material respects with all applicable Laws relating to the withholding of Taxes and the payment thereof to appropriate authorities, including Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee or independent contractor, and Taxes required to be withheld and paid pursuant to Sections 1441 and 1442 of the Code or similar provisions under foreign Law.

 

(d)    The unpaid Taxes of each Buyer Entity (i) did not, as of the most recent fiscal month end, exceed the reserve for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) included in the most recent balance sheet (rather than in any notes thereto) for such Buyer Entity and (ii) do not materially exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with past custom and practice of the Buyer Entities in filing their Tax Returns.

 

(e)    Except as described in Section 5.8(e) of the Buyer Disclosure Memorandum, none of the Buyer Entities is a party to any Tax allocation or sharing agreement and none of the Buyer Entities has been a member of an affiliated group filing a consolidated federal income Tax Return or has any Tax Liability of any Person under Treasury Regulation Section 1.1502-6 or any similar provision of state, local or foreign Law, or as a transferee or successor, by contract or otherwise.

 

(f)     During the five-year period ending on the date hereof, none of the Buyer Entities was a “distributing corporation” or a “controlled corporation” as defined in, and in a transaction intended to be governed by Section 355 of the Code.

 

(g)    Except as disclosed in Section 5.8(g) of the Buyer Disclosure Memorandum, none of the Buyer Entities has made any payments, is obligated to make any payments, or is a party to any contract that could obligate it to make any payments that could be disallowed as a deduction under Section 280G or 162(m) of the Code, or which would be subject to withholding under Section 4999 of the Code.  None

 

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of the Buyer Entities has been or will be required to include any adjustment in taxable income for any Tax period (or portion thereof) pursuant to Section 481 of the Code or any comparable provision under state or foreign Tax Laws as a result of transactions or events occurring prior to the Closing.  There is no taxable income of the Buyer that will be required under applicable tax law to be reported by the Buyer, for a taxable period beginning after the Closing Date which taxable income was realized prior to the Closing Date.  Any net operating losses of the Buyer Entities disclosed in Section 5.8(g) of the Buyer Disclosure Memorandum are not subject to any limitation on their use under the provisions of Sections 382 or 269 of the Code, to the best of the Buyer’s knowledge, or any other provisions of the Code or the Treasury Regulations dealing with the utilization of net operating losses other than any such limitations as may arise as a result of the consummation of the transactions contemplated by this Agreement.

 

(h)    Each Buyer Entity is in compliance in all material respects with, and its records contain all information and documents (including properly completed IRS Forms W-9) necessary to comply with, all applicable information reporting and Tax withholding requirements under federal, state, and local Tax Laws, and such records identify with specificity all accounts subject to backup withholding under Section 3406 of the Code.

 

(i)     No Buyer Entity is subject to any private letter ruling of the IRS or comparable rulings of any Taxing Authority.

 

(j)     No property owned by any Buyer Entity is (i) property required to be treated as being owned by another Person pursuant to the provisions of Section 168(f)(8) of the Internal Re