Formation Limited Liability Company Agreement

FORMATION AND


LIMITED LIABILITY COMPANY AGREEMENT


OF


BRANDS LLC


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TABLE OF CONTENTS


PAGE
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ARTICLE I

DEFINED TERMS


Section 1.1 Definitions......................................................................... 1 Section 1.2 Headings............................................................................ 9


ARTICLE II


FORMATION AND TERM; CLOSING


Section 2.1 Formation........................................................................... 9 Section 2.2 Name................................................................................ 9 Section 2.3 Term................................................................................ 10 Section 2.4 Registered Agent and Office......................................................... 10 Section 2.5 Principal Place of Business......................................................... 10 Section 2.6 Qualification in Other Jurisdictions................................................ 10 Section 2.7 Closing............................................................................. 10 Section 2.8 Conditions to Closing............................................................... 11 Section 2.9 Liggett Parties'Indemnification Obligation.......................................... 12 Section 2.10 Reasonable Best Efforts............................................................. 13


ARTICLE III


REPRESENTATIONS AND WARRANTIES OF THE LIGGETT PARTIES


Section 3.1 Corporate Authority................................................................. 13 Section 3.2 No Conflict; Required Filings and Consents.......................................... 13 Section 3.3 Intellectual Property............................................................... 14


ARTICLE IV


REPRESENTATIONS AND WARRANTIES OF PM


Section 4.1 Corporate Authority................................................................. 15 Section 4.2 No Conflict; Required Filings and Consents.......................................... 15


ARTICLE V


COVENANTS


Section 5.1 Activities of Liggett Relating to the Brands........................................ 16


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---- Section 5.2 Loan Agreement...................................................................... 16 Section 5.3 HSR Clearance....................................................................... 16 Section 5.4 Tax Basis of Marks.................................................................. 16 Section 5.5 Access to Information............................................................... 16 Section 5.6 Representations and Warranties...................................................... 17 Section 5.7 Retention of Certain Trademarks, etc................................................ 17


ARTICLE VI


PURPOSE AND POWERS OF THE COMPANY


Section 6.1 Purpose............................................................................. 17 Section 6.2 Powers of the Company............................................................... 18


ARTICLE VII


MEMBERS


Section 7.1 Members............................................................................. 18 Section 7.2 Powers of Members................................................................... 18 Section 7.3 Member's Shares..................................................................... 18 Section 7.4 Classes............................................................................. 18 Section 7.5 Partition........................................................................... 19 Section 7.6 Resignation......................................................................... 19 Section 7.7 Member Meetings..................................................................... 19 Section 7.8 Voting.............................................................................. 19 Section 7.9 Quorum.............................................................................. 19 Section 7.10 Notice of Meetings.................................................................. 20 Section 7.11 Action Without a Meeting............................................................ 20


ARTICLE VIII


MANAGEMENT


Section 8.1 Board of Directors.................................................................. 20 Section 8.2 Manager............................................................................. 20 Section 8.3 Officers............................................................................ 21


ARTICLE IX


SHARES AND CAPITAL ACCOUNTS


Section 9.1 Capital Contributions............................................................... 21 Section 9.2 Status of Capital Contributions..................................................... 21 Section 9.3 Capital Accounts.................................................................... 21 Section 9.4 Advances............................................................................ 22


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---- Section 9.5 Redemption of Shares................................................................ 22 Section 9.6 Liggett Parties' Class B Put Option................................................. 23 Section 9.7 Liggett Parties' Class B Conversion Right........................................... 23 Section 9.8 Assignment and Encumbrance of Interests............................................. 23


ARTICLE X


ALLOCATIONS


Section 10.1 Allocation of Gross Income.......................................................... 24 Section 10.2 Allocation of Profits............................................................... 24 Section 10.3 Allocation of Losses................................................................ 24 Section 10.4 Allocation Rules.................................................................... 25 Section 10.5 Regulatory Allocations.............................................................. 25 Section 10.6 Treatment of Regulatory Allocations................................................. 27 Section 10.7 Tax Allocations; sections 704(c) of the Code........................................ 27


ARTICLE XI


DISTRIBUTIONS


Section 11.1 Distributions....................................................................... 28 Section 11.2 Mandatory Distributions............................................................. 28 Section 11.3 Limitations on Distribution......................................................... 28


ARTICLE XII


BOOKS AND RECORDS


Section 12.1 Books, Records and Financial Statements............................................. 29 Section 12.2 Accounting Method................................................................... 29 Section 12.3 Annual Audit........................................................................ 30


ARTICLE XIII


TAX MATTERS


Section 13.1 Tax Matters ........................................................................ 30 Section 13.2 Section 709 Election................................................................ 30 Section 13.3 Taxation as Partnership............................................................. 30


ARTICLE XIV


LIABILITY, EXCULPATION AND INDEMNIFICATION


Section 14.1 Liability........................................................................... 31


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---- Section 14.2 Exculpation......................................................................... 31 Section 14.3 Fiduciary Duty...................................................................... 31 Section 14.4 Indemnification..................................................................... 31 Section 14.5 Expenses............................................................................ 32 Section 14.6 Insurance........................................................................... 32 Section 14.7 Outside Businesses.................................................................. 32 Section 14.8 Third-Party Beneficiaries........................................................... 33


ARTICLE XV


ADDITIONAL MEMBERS


Section 15.1 Admission........................................................................... 33


ARTICLE XVI


ASSIGNMENTS


Section 16.1 Recognition of Assignment by the Company............................................ 33 Section 16.2 Effect of Assignment................................................................ 33


ARTICLE XVII


DISSOLUTION, LIQUIDATION AND TERMINATION


Section 17.1 No Dissolution...................................................................... 33 Section 17.2 Liquidation......................................................................... 34 Section 17.3 Termination......................................................................... 34 Section 17.4 Claims of the Members............................................................... 34


ARTICLE XVIII


MISCELLANEOUS


Section 18.1 Notices............................................................................. 35 Section 18.2 Formation Expenses.................................................................. 36 Section 18.3 Failure to Pursue Remedies.......................................................... 36 Section 18.4 Cumulative Remedies................................................................. 36 Section 18.5 Binding Effect...................................................................... 36 Section 18.6 Interpretation...................................................................... 36 Section 18.7 Severability........................................................................ 37 Section 18.8 Counterparts........................................................................ 37 Section 18.9 Integration......................................................................... 37 Section 18.10 Governing Law....................................................................... 37 Section 18.11 Consent to Jurisdiction............................................................. 37 Section 18.12 Confidentiality..................................................................... 37


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---- Section 18.13 Governmental Notices................................................................ 37 Section 18.14 Prior Agreement..................................................................... 38


ARTICLE XIX


AMENDMENTS


Section 19.1 Amendments.......................................................................... 38


SCHEDULE A Members


EXHIBIT A Form of License Agreement EXHIBIT B Form of Assignment


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FORMATION AND LIMITED LIABILITY COMPANY AGREEMENT


OF


BRANDS LLC


This Formation and Limited Liability Company Agreement (this "AGREEMENT") of Brands LLC (the "COMPANY"), dated as of January 12, 1999, is entered into among Brooke Group Ltd., a Delaware corporation ("Brooke"), Liggett & Myers Inc., a Delaware corporation ("LMI"), Eve Holdings Inc., a Delaware corporation ("Eve"), Liggett Group Inc., a Delaware corporation ("LIGGETT", and, together with Brooke, Eve and LMI, the "LIGGETT PARTIES"), and Philip Morris Incorporated, a Virginia corporation ("PM" and, together with the Liggett Parties, the "PARTIES").


WHEREAS, the Parties intend to form the Company for purposes of the transactions described herein;


WHEREAS, Eve desires to contribute the Marks to the Company in exchange for 100% of the Class A Shares and 100% of the Class B Shares of the Company;


WHEREAS, concurrently with the execution of this Agreement, the Liggett Parties and PM will execute the Class A Option Agreement and the Class B Option Agreement pursuant to which Eve will grant to PM an option to purchase the Class A Shares and Class B Shares, respectively;


WHEREAS, if PM exercises the Class A Option, the Company and PM will enter into the License Agreement, pursuant to which PM and its Affiliates will receive an exclusive, domestic license of the Marks;


NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members hereby agree to form a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act (6 DEL. C. section 18-101, ET SEQ.), as amended from time to time (the "DELAWARE Act"), as provided herein, and hereby agree as follows:


ARTICLE I


DEFINED TERMS


Section 1.1 DEFINITIONS. Unless the context otherwise requires, the terms defined in this Article I shall, for the purposes of this Agreement, have the meanings herein specified.


"ADJUSTED CAPITAL ACCOUNT DEFICIT" shall mean, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments:


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(a) Credit to such Capital Account any amounts which such
Member is deemed to be obligated to restore pursuant to the penultimate
sentence of either of Treasury Regulation sections 1.704-2(g)(1) or
1.704-2(i)(5); and


(b) Debit to such Capital Account the items described in
Treasury Regulation sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6).


The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treasury Regulation section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.


"AFFILIATE" shall mean, with respect to any Person, any direct or indirect subsidiary of such Person, any other Person that directly or through one or more intermediaries, is controlled by, or is under common control with, the specified Person, and, if such a Person is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, the term "CONTROL" (including with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies, whether through ownership of securities or partnership or other ownership interests, by contract or otherwise. Notwithstanding the foregoing, for purposes of this Agreement (i) the Liggett Parties and their Subsidiaries shall not be deemed to be Affiliates of PM, and (ii) PM and its Subsidiaries (including the Company) shall not be deemed to be Affiliates of the Liggett Parties.


"AGREEMENT" shall have the meaning set forth in the recitals hereof.


"ASSIGN" shall mean to, directly or indirectly, sell, assign, transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or in any way encumber, any Shares (and "ASSIGNMENT" shall mean such an act).


"BRANDS" shall mean the "Lark," "Chesterfield" and "L&M" brands produced by the Liggett Parties.


"BROOKE" shall have the meaning set forth in the preamble hereof.


"CAPITAL ACCOUNT" shall mean, with respect to any Member and any Share, the account maintained for such Member and such Share in accordance with the provisions of Section 9.3 hereof.


"CAPITAL CONTRIBUTION" shall mean, with respect to any Member and any Share, the aggregate amount of cash and the initial Gross Asset Value of any property (other than cash) contributed to the Company pursuant to Section 9.1 hereof with respect to such Share, net of any liabilities of such Member that are assumed by the Company in connection with such contribution or that are secured by property so contributed, and shall include the Initial Capital Contribution and any Subsequent Capital Contribution.


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"CERTIFICATE" shall mean the Certificate of Formation of the Company and any and all amendments thereto and restatements thereof filed on behalf of the Company with the office of the Secretary of State of the State of Delaware pursuant to the Delaware Act.


"CLAIMS" shall have the meaning in Section 2.9 of this Agreement.


"CLASS A EXERCISE PRICE" shall have the meaning in Section 2.3 of the Class A Option Agreement.


"CLASS B EXERCISE PRICE" shall have the meaning in Section 2.3 of the Class B Option Agreement.


"CLASS A MEMBER" shall mean a permitted holder of a Class A Share pursuant to this Agreement.


"CLASS B MEMBER" shall mean a permitted holder of a Class B Share pursuant to this Agreement.


"CLASS A OPTION AGREEMENT" shall mean that certain option agreement, dated as the date hereof, pursuant to which PM (or its designee) may purchase from the Liggett Parties the Class A Shares owned by the Liggett Parties and their Affiliates. Such right to purchase the Class A Shares is the "CLASS A OPTION".


"CLASS B OPTION AGREEMENT" shall mean that certain option agreement, dated as of the date hereof, pursuant to which PM (or its designee) may purchase from the Liggett Parties the Class B Shares owned by the Liggett Parties and their Affiliates. Such right to purchase the Class B Shares is the "CLASS B OPTION".


"CLASS A OPTION CONSIDERATION" shall have the meaning set forth in Section 2.1 of the Class A Option Agreement.


"CLASS B OPTION CONSIDERATION" shall have the meaning set forth in Section 2.1 of the Class B Option Agreement.


"CLASS A SHARE" and "CLASS B SHARE" shall have the respective meanings set forth in Section 7.4 hereof.


"CLOSING" shall have the meaning set forth in Section 2.7(a).


"CLOSING DATE" shall mean the date on which the Closing occurs.


"CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any corresponding United States federal tax statute enacted after the date of this Agreement. A reference to a specific section (ss.) of the Code refers not only to such specific section but also to any corresponding provision of any United States federal tax statute enacted after the date of this Agreement, as such specific section or corresponding provision is in effect on the date of application of the provisions of this Agreement containing such reference.


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"COMPANY" shall have the meaning set forth in the preamble hereto.


"COMPANY MINIMUM GAIN" shall have the meaning given the term "partnership minimum gain" in Treasury Regulation section 1.704-2(b)(2) and shall be computed in accordance with Treasury Regulation section 1.704-2(d).


"COVERED PERSON" shall mean any Officer or director of the Company or its Affiliates (but shall not include an officer, director or employee of any Member or their respective Affiliates who is not an Officer of the Company or its Affiliates).


"DELAWARE ACT" shall have the meaning set forth in the preamble hereof.


"DEPRECIATION" shall mean, for each Fiscal Year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such Fiscal Year or other period; PROVIDED, HOWEVER, that, if the Gross Asset Value of an asset differs from its adjusted basis for United States federal income tax purposes at the beginning of such Fiscal Year or other period, Depreciation shall be an amount that bears the same ratio to such beginning Gross Asset Value as the United States federal income tax depreciation, amortization or other cost recovery deduction with respect to such asset for such Fiscal Year or other period bears to such beginning adjusted tax basis; and PROVIDED, FURTHER, that if the United States federal income tax depreciation, amortization or other cost recovery deduction for such Fiscal Year or other period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Manager.


"DISTRIBUTIONS" shall mean distributions of cash or other property made by the Company with respect to the Class A Shares or the Class B Shares. Distributions shall not mean payments of cash or other property to holders of Shares for reasons other than their ownership of such Shares.


"ECONOMIC RISK OF LOSS" shall have the meaning set forth in Treasury Regulation section 1.752-2.


"EVE" shall have the meaning set forth in the preamble hereof.


"FISCAL YEAR" shall mean (a) the period commencing upon the date of this Agreement and ending on December 31, 1999, (b) any subsequent twelve-month period commencing on January 1 and ending on December 31, (c) any other twelve-month period required by the Code or the Treasury Regulations to be used as the taxable year of the Company or (d) any portion of the periods described in clauses (a), (b) or (c) of this sentence for which the Company is required to allocate Profits, Losses and other items of Company income, gain, loss or deduction pursuant to Article X hereof.


"GAAP" means generally accepted accounting principles in the United States as in effect from time to time.


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"GOVERNMENTAL ENTITY" has the meaning set forth in Section 3.2 of this Agreement.


"GROSS ASSET VALUE" means, with respect to any asset, such asset's adjusted basis for United States federal income tax purposes, except as follows:


(a) the initial Gross Asset Value of the Marks shall be as set
forth on Schedule A hereto, and of any other asset contributed by a
Member to the Company shall be the gross fair market value of such
asset, as determined by the Manager;


(b) the Gross Asset Value of all Company assets shall be
adjusted to equal their respective gross fair market values (taking
section 7701(g) of the Code into account), as determined by the
Manager, as of the following times: (i) immediately prior to the
acquisition of an additional Share in the Company by any new or
existing Member in exchange for more th ...